AUDIT OF LIABILITIES

Problem 1 (Various Transactions)

In conjunction with your December 31, 2023, annual audit of the financial statements of
SweetHeart Company, you have obtained and examined the December 31, 2023, accounts payable
trial balance. Your examination of this trial balance disclosed the following open vouchers:

a. Voucher 761, containing a P380,000 credit to Accounts Payable. This voucher covered a
cash transfer to the factory payroll bank account for the pay period ended December 28, 2023.
The payroll cash transfer was made January 3, 2024, and payroll checks covering this pay
period were distributed to factory employees on January 4, 2024.

b. Voucher 778, containing an P180,000 credit to Accounts Payable. The P180,000 credit
covered the principal and interest due on a ten-year installment loan. The loan was granted to
SweetHeart Company on January 1, 2023. Terms of the loan agreement call for ten equal
annual installment payments of P100,000, each plus interest at 8 percent. Principal and
interest payments are due January 5, 2024 – 2033. The voucher indicated that the Loan
Payable and Interest Expense accounts had been properly charged.

c. Voucher 741, containing a credit to Accounts Payable of P50,000. This voucher covered on
invoice from AC Company for a new computer machine. The computer machine was installed
December 10, 2023, and the Office Equipment account was properly charged.

d. Voucher 775, containing a credit to Accounts Payable in the amount of P65,480. This
voucher covered income taxes withheld from employees during December 2023.

e. Voucher 779, containing a credit to Accounts Payable of P41,460. This credit covered the
total interest and principal due on a 180-day P40,000 note payable to the CJ Company.
Charges to the Note Payable and Interest Expense had been properly handled.

f. Voucher 751, containing a P200,000 charge to Accounts Payable. This voucher represented
a P200,000 advance payment to SS Company for a special order of ten boxes. The P200,000
check was mailed to SS Company on January 2, 2024.

Problem 2 (Current and Noncurrent Liabilities)

Bloomberg, Inc. is a manufacturer and retailer of household furniture. Your udit of the company's
financial statements for the year ended December 31, 2023 discloses the following debt obligations
of the company at the end of its reporting period. Bloomberg's financial statements are authorized
for issuance on March 6, 2024.

a. A P150,000 short-term obligation due on March 1, 2024. Its maturity could be extended to
March 1, 2026 provided Bloomberg agrees to provide additional collateral. On February 12, 2024,
an agreement is reached to extend the loan's maturity to March 1, 2024.

b. A short-term obligation of P3,600,000 in the form of notes payable due February 5, 2024. The
company issued 75,000 ordinary shares for P36 per share on January 25, 2019. The proceeds
from the issuance, plus P900,000 cash, were used to fully settle the debt on February 5, 2024.
c. A long-term obligation of P2,500,000 due December 1, 2033. On November 10, 2023, Bloomberg
breaches a covenant on its debt obligation and the loan becomes payable on demand. An agree-
ment is reached to provide a waiver of the breach on December 11, 2023.

d. A long-term obligation of P4,000,000. The loan is maturing over 4 years in the amount of P1M per
year. The loan is dated September 1, 2023, and the first maturity date is September 1, 2024.

e. A debt obligation of P1,000,000 maturing on December 31, 2026. The debt is callable on demand
by the lender at any time.

Required:
1 What amount of current liabilites should be reported on the December 31, 2023 statement of
financial position?
2 What amount of noncurrent liabilites should be reported on the December 31, 2023 statement of
financial position?

Problem 3 (Purchases)
Bruhaha Corp. records its purchases at gross amounts but wishes to change to recording purchases
net of purchase discounts. Discounts on purchases recorded from January 1 to December 31, 2023
totaled P80,000. Of this amount, P8,000 is still available in the accounts payable balance. The
balances in Bruhaha's accounts as of and for the year ended December 31, 2023, before conversion:
Purchases P 4,000,000
Purchase discounts 32,000
Accounts payable 1,200,000

Required:
1 Purchase discount lost to be recognized
2 Amount of adjustment to accounts payable balance
3 Reduction to purchases account
4 Entry to record the conversion

Poblem 4 (Notes Payable)

On October 1, 2023, Balatong Corp. issued a P500,000, 12-month 12% note to Mung Company in
payment of account. On the same date, the company borrowed P1,000,000 from the Beans Bank
by signing a 12-month, non-interest bearing P1,120,000 note.

Required:
1 Prepare adjusting journal entries at December 31, 2023.
2 The total/net liability to be reported in the December 31, 2023 statement of financial position for:
a. the interest bearing note
b. the non-interest bearing note

Problem 5 (Non-interest Bearing Note)

On December 31, 2021, Biko Co. acquired a piece of equipment from Puto Co. by issuing a P1,200,000
note, payable in full on December 31, 2025. Biko's credit rating permits it to borrow funds from its
several lines of credit at 10%. The equipment is expected to have a 5-year life and a P150,000 salvage
value. The present value of 1 at 10% for 4 periods is 0.68301.
Required:
1 What is the equipment's book value on December 31, 2023?
2 What is the carrrying value of the note at December 31, 2023?

Problem 6 (Provisions)
You are engaged to audit the December 31, 2023 financial statements of Murial Company, a
manufacturer of household appliances. Your audit disclosed the following situations.

a. In June 2023, the company began producing and selling a new line of dishwasher. By the end of the
year, it had sold 120,000 to various dealers for P15,000 each. The product was sold under 1-year
warranty, and the company estimates warranty costs to be P750 per dishwasher. Murial had paid
out P30,000,000 in warranty expenses as of December 31, 2023, which is also the amount shown
as warranty expense in its income statement for the current year.

b. In response to your letter of audit inquiry, Murial's lawyer informed you that the company is involved
in a lawsuit for violating environmental laws regulating hazardous wastes. Although litigation is
pending, Murial's lawyer is certain that Murial will most probably have to pay cleanup costs and
fines of P5,500,000. Murial neither accrued nor disclosed this loss in the financial statements.

c. Murial is the defendant in a patent infringement suit by Magu over Murial's use of hydraulic
compressor in several of its manufactured appliances. Murial's lawyer informed your that if the suit
goes against your client, the loss may be as much as P10M. However, the lawyer believes that the
loss of this suit is only possible. Murial did not in any way disclose this pending litigation in its
financial statements.

Required:

1 What amount of warranty expense should be shown in Murial's income statement for the year
ended December 31, 2023?

2 What amount of warranty liability should be shown on Murial's statement of financial position as
of December 31, 2023?

3 What amount of lawsuit liability should be reported as a provision on Murial's December 31, 2023,
statement of financial position?

Problem 7 (Various Liabilities)

Egregious Corp. has been producing quality disposable diapers for more than two decades. The
company's fiscal year runs from April 1 to March 31. The following information relates to the obligations
of Egregious as of March 31, 2023.

Bonds Payable
Egregious issued P10M of 10% bonds on July 1, 2021. The prevailing market rate of interest for these
bonds was 12% on the date of issue. The bonds will mature on July 1, 2031. Interest is paid semi-
anually on July 1 and January 1. Egregious uses the effective interest rate to amortize bond premium
or discount. The following present value factors are taken from the present value tables:
 PV of 1 at 12% for 10 periods 0.32917
PV of 1 at 6% for 20 periods 0.3118
PV of an ordinary annuity of 1 at 12% for 10 periods 5.65022
PV of an ordinary annuity of 1 at 6% for 20 periods 11.46992

Notes Payable
Egregious has signed several long-term notes with financial institutions. The maturities of these
notes are given in the schedule below. The total unpaid interest for all these notes amounts to
P600,000 on March 31, 2023.

Due Date Amount Due

April 1, 2023 P 400,000
July 1, 2023 600,000
October 1, 2023 300,000
January 1, 2024 300,000
Apr 1, 2024 - Mar 31, 2025 1,200,000
Apr 1, 2025 - Mar 31, 2026 1,000,000
Apr 1, 2026 - Mar 31, 2027 1,400,000
Apr 1, 2027 - Mar 31, 2028 800,000
Apr 1, 2028 - Mar 31, 2029 1,000,000
7,000,000

Estimated Warranties
Egregious has a one-year product warranty on some selected items in its product line. Estimated
warranty liability on sales made during 2021-2022 fiscal year and still outstanding as of March 31,
2022 amounted to P180,000. The warranty costs on sales from April 1, 2022 to March 31, 2023 are
estimated at P520,000. The actual warranty costs incurred during the current fiscal year are:

Warranty claims honored on 2021-2022 sales P 180,000

Warranty claims honored on 2022-2023 sales 178,000
Total warranty claims honored P 358,000

Other information:
a. Trade Payables. Accounts payable for supplies, goods and services purchased on open account
amount to P740,000 as of March 31, 2023.

b. Payroll related items.

Accrued salaries and wages P 300,000

Withholding taxes payable 94,000
Other payroll deductions 10,000
404,000

c. Miscellaneous Accruals. Other accruals not separately classified amount to P150,000 as of

March 31, 2023.
d. Dividends. On March 15, 2023, Egregious board of directors declared a cash dividend of P0.20 per
ordinary share and a 10% share dividend. Both dividends were distributed on April 12, 2023 to
shareholders of record at the close of business on March 31, 2023. Data regarding Egregious
ordinary share capital are as follows:

Par value P 5 per share

No. of shares issued and outstanding 6,000,000 shares
Market values of ordinary shares (per share):
March 15, 2023 P 22.00
March 31, 2023 21.50
April 12, 2023 22.50

Required:
1 How much did Egregious receive from the sale of bonds on July 1, 2021?
2 What is the current portion of notes payable at March 31, 2023?
3 What is the balance of estimated warranties payable at March 31, 2023?
4 On March 31, 2023, how much is the total current liabilities?
5 On March 31, 2023, how much is the total noncurrent liabilities?