AUDIT OF LIABILITIES

PROBLEM NO. 1
PUKPOK, INC. is a manufacturer and retailer of household furniture. Your audit of the company’s
financial statements for the year ended December 31, 2020, discloses the following debt
obligations of the company at the end of its reporting period. Pukpok’s financial statements are
authorized for issuance on March 31, 2021.

1. A P1,000,000 short-term obligation due on March 1, 2021. Its maturity could be extended to
March 1, 2023, provided Pukpok agrees to provide additional collateral. On February 12, 2021,
an agreement is reached to extend the loan’s maturity to March 1, 2023.

2. A short-term obligation of P1,350,000 in the form of notes payable due February 5, 2021. The
company issued 7,500 ordinary shares for P120 per share on January 25, 2021. The proceeds
from the issuance, plus P450,000 cash, were used to fully settle the debt on February 5, 2021.

3. A P1,500,000 note payable due July 31, 2021. Pukpok intends to refinance the note by issuing
long-term bonds. On January 10, 2021, the company prepaid P200,000 of the note because
the company temporarily had excess cash. A P2,000,000 bond offering was completed in
March 2021. The proceeds will be used to repay the note payable at maturity.

4. Deferred serial bonds, issued at face value of P5,000,000, and bearing interest at 12%. The
bonds are payable in semiannual installment of P500,000 due April 1 and October 1 of each
year. The last bond is to be paid on October 1, 2026. The interest is also paid semiannually.

5. A long-term obligation of P4,000,000. The loan is maturing over 8 years in the amount of
P500,000 per year. The loan is dated September 1, 2020, and the first maturity date is
September 1, 2021.

6. A debt obligation of P600,000 maturing on December 31, 2023. The debt is callable on
demand by the lender at any time.

7. A P2,000,000,10% mortgage note issued October 1, 2019 with a term of 10 years. The terms
of the note give the holder the right to demand immediate payment if the entity fails to make
a monthly interest payment within 10 days of the date the payment is due. On December 31,
2020, Pukpok is three months behind in making the required interest payment. An agreement
was reached to provide a waiver of the breach on January 31, 2021.

8. Bank notes payable which include two separate notes payable to Beckla Bank:
a. A P3,000,000, 10% note issued March 1, 2019, payable on demand. Interest is payable
every 6 months.
b. A one-year, P5,000,000, 11% note issued January 2, 2020. On December 31, 2020,
Pukpok negotiated a written agreement with Beckla Bank to replace the note with a 5-
year, P5,000,000, 10% note to be issued January 2, 2021.

9. A P4,000,000, 10-year, 8% bonds issued at par on June 30, 2011. Interest is payable annually
on June 30 and December 31.

1. What amount of current liabilities should be reported on the December 31, 2020, statement
of financial position?
A. P13,950,000 B. P14,250,000 C. P10,250,000 D. P15,250,000

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 2. What amount of noncurrent liabilities should be reported on the December 31, 2020,
statement of financial position?
A. P3,500,000 B. P5,000,000 C. P8,500,000 D. P13,500,000
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PROBLEM NO. 2

In conjunction with your firm’s examination of the financial statements of PISTONS Company as
of December 31, 2020, you obtained from the voucher register the information shown in the
working paper below.

Item Entry Voucher

No. Date Ref. Description Amount Account Charged
1 12.18.20 12-202 Supplies, purchased FOB
destination, 12.15.20;
received 12.17.20 P 20,000 Supplies on hand
2 12.18.20 12-204 Auto insurance, 12.15.20
12.15.21 24,000 Prepaid insurance
3 12.21.20 12-206 Repairs services; received Repairs and
12.20.20 24,000 maintenance
4 12.21.20 12-214 Merchandise, shipped FOB
Shipping point, 11.20.20;
received 12.04.20 17,000 Inventory
5 12.21.20 12-219 Payroll, 12.06.20 to 12.20.20 Salaries and
(12 working days) 69,000 wages
6 12.26.20 12-221 Subscription to Industry Dues and
Magazine for 2021 5,000 subscription
7 12.28.20 12-230 Utilities for December 2020 29,000 Utilities expense
8 12.28.20 12-234 Merchandise, shipped FOB
destination, 12.24.20;
received 01.02.21 111,500 Inventory
9 12.28.20 12-243 Merchandise, shipped FOB
destination, 12.26.20;
received 12.29.20 84,000 Inventory
10 01.02.21 01-001 Legal services; received Legal and
12.28.20 46,000 professional
expense
11 01.02.21 01-002 Medical services for employees
for December 2020 25,000 Medical expense
12 01.05.21 01-003 Merchandise, shipped FOB
shipping point, 12.29.20;
received 01.04.21 55,000 Inventory
13 01.10.21 01-004 Payroll, 12.21.20 to 01.05.21
(12 working days in total, 4 Salaries and
working days in Jan. 2021) 72,000 wages
14 01.10.21 01-005 Merchandise, shipped FOB
shipping point, 01.02.21;
received 01.05.21 64,000 Inventory
15 01.12.21 01-007 Merchandise, shipped FOB
destination, 01.03.21;
received 01.10.21 38,000 Inventory
16 01.13.21 01-008 Maintenance services; Repairs and

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 received 01.09.21 9,000 maintenance
17 01.14.21 01-009 Interest on bank loan,
10.12.20 to 01.10.21 30,000 Interest expense
18 01.15.21 01-010 Manufacturing equipment; Machinery
installed on 12.29.20 254,000 and equipment
19 01.15.21 01-011 Dividends declared,
12.15.20 160,000 Dividends payable
Accrued liabilities as of December 31, 2020 were as follows:
Accrued payroll P 48,000
Accrued interest payable 26,667
Dividends payable 160,000

The accrued payroll and accrued interest payable accounts were reversed on January 1, 2021.

REQUIRED:
Prepare adjusting entries as of December 31, 2020 based on your review of the data given above.
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PROBLEM NO. 3
In connection with the audit of the TIKI-TIKI COMPANY for the year ended December 31, 2020,
you are called upon to verify the accounts payable transactions. You find that the company does
not make use of a voucher register but enters all merchandise purchases in a Purchases Journal,
from which postings are made to a subsidiary accounts payable ledger. The subsidiary ledger
balance of P1,500,000 as of December 31, 2020, agrees with the accounts payable balance in
the company’s general ledger. An analysis of the account disclosed the following:

Trade creditors, credit balances P1,363,000

Trade creditors, debit balances 63,000
Net 1,300,000
Estimated warranty on products sold 100,000
Customers’ deposits 9,000
Due to officers and shareholders for advances 50,000
Goods received on consignment at selling price
(offsetting debit made to Purchases) 41,000
P1,500,000

A further analysis of the “Trade Creditors” debit balances indicates:

Date Item Amount

Miscellaneous debit balances prior to 2016.
No information available due to loss of
records in a fire. P 3,000

03/03/18 Manila Co. – Merchandise returned for credit,

but the company is now out of business. 8,000

06/10/19 Cebu Corp. – Merchandise returned, but

Cebu says “never received.” 7,000

07/10/20 Jolo Distributors – Allowance granted on

defective merchandise after the invoice
was paid. 5,000

10/10/20 Bulacan Co. – Overpayment of invoice. 12,000

12/05/20 Advance to Zambales Co. This company agrees

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 to supply certain articles on a cost-plus basis. 24,000

12/05/20 Goods returned for credit and adjustments on

price after the invoices were paid; credit
memos from suppliers not yet received. 4,000
P63,000
Your next step is to check the invoices in both the paid and the unpaid invoices files against
ledger accounts. In this connection, you discover an invoice from Atlas Co. of P45,000 dated
December 12, 2020, marked “Duplicate” which was entered in the Purchases Journal in January
2021. Upon inquiry, you discover that the merchandise covered by this invoice was received and
sold, but that the original invoice apparently has not been received.

In the bank reconciliation working papers, there is a notation that five checks totaling P63,000
were prepared and entered in the Cash Disbursements Journal of December, but these checks
were not issued until January 10, 2021.

The inventory analysis summary discloses goods in transit of P6,000 at December 31, 2020, not
taken up by the company under audit during the year 2020. These goods are included in your
adjusted inventory.

1. The Accounts payable – Trade balance at December 31, 2020, should be

A. P1,471,000 B. P1,614,000 C. P1,214,000 D. P1,477,000

2. The net adjustment to Purchases should include a

A. Net debit of P51,000.
B. Net credit of P41,000.
C. Net debit of P10,000.
D. Net debit of P73,000.

3. The entry to adjust the Accounts payable account for those accounts with debit balances
should include a debit to Miscellaneous losses of
A. P18,000 B. P23,000 C. P35,000 D. P39,000

4. The entry to adjust the Accounts payable account for those accounts with debit balances
should include a debit to
A. Miscellaneous losses of P23,000.
B. Advances to suppliers of P24,000.
C. Suppliers’ debit balances of P18,000.
D. Purchases of P21,000.

5. Auditor confirmation of accounts payable balances at the end of the reporting period may
be unnecessary because
A. There is likely to be other reliable external evidence to support the balances.
B. Correspondence with the audit client’s attorney will reveal all legal action by vendors for
non-payment.
C. This is a duplication of cutoff test.
D. Accounts payable at the end of the reporting period may not be paid before the audit is
completed.
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PROBLEM NO. 4

LAPAYAT CORPORATION, a client, requests that you compute the appropriate balance of its
estimated liability for product warranty account for a statement as of June 30, 2020.

Lapayat Corporation manufactures television components and sells them with a 6-month warranty
under which defective components will be replaced without charge. On December 31, 2019,
Estimated Liability for Product warranty had a balance of P620,000. By June 30, 2020, this balance
had been reduced to P120,400 by debits for estimated net cost of components returned that had
been sold in 2019.

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The corporation started out in 2020 expecting 7% of the peso volume of sales to be returned.
However, due to the introduction of new models during the year, this estimated percentage of
returns was increased to 10% on May 1. It is assumed that no components sold during a given
month are returned in that month. Each component is stamped with a date at time of sale so that
the warranty may be properly administered. The following table of percentages indicates the likely
pattern of sales returns during the 6-month period of the warranty, starting with the month
following the sale of components.
Percentage of Total
Month Following Sale Returns Expected
First 30%
Second 20
Third 20
Fourth through sixth—10% each month 30
100%
Gross sales of components were as follows for the first six months of 2020:
Month Amount Month Amount
January P4,200,000 April P3,250,000
February 4,700,000 May 2,400,000
March 3,900,000 June 1,900,000

The corporation’s warranty also covers the payment of freight cost on defective components
returned and on the new components sent out as replacements. This freight cost runs
approximately 5% of the sales price of the components returned. The manufacturing cost of the
components is roughly 70% of the sales price, and the salvage value of returned components
averages 10% of their sales price. Returned components on hand at December 31, 2019, were
thus valued in inventory at 10% of their original sales price.

Based on the given information, determine the following:

1. Total estimated returns from the sales made during the first 6 months of 2020
A. P1,481,500 B. P1,651,000 C. P1,424,500 D. P1,553,500
2. Total estimated returns subsequent to June 30, 2020
A. P678,250 B. P648,850 C. P591,850 D. P615,950
3. Estimated loss on component replacement (in percentage of sales price)
A. 65% B. 75% C. 70% D. 80%
4. Required Estimated Liability for Product Warranty balance at June 30, 2020
A. P301,353 B. P421,753 C. P120,400 D. P77,847
5. Required adjustment to liability account
A. P301,353 debit C. P421,753 debit
B. P301,353 credit D. P421,753 credit
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