Page 1 of 4CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING PROBLEMS AUDIT OF LIABILITIES – QUIZZERS PROBLEM NO. 1 Cavaliers Corporation is selling audio and video appliances. The company’s fiscal year ends on March 31. The following information relates to the obligations of the company as of March 31, 2005: Notes payable Cavaliers has signed several long-term notes with financial institutions. The maturities of these notes are given below. The total unpaid interest for all of these notes amounts to P340,000 on March 31, 2005. Due date April 31, 2005 July 31, 2005 September 1, 2005 February 1, 2006 April 1, 2006 – March 31, 2007 Amount 600,000 900,000 450,000 450,000 2,700,000 P 5,100,000 P Estimated warranties Cavaliers has a one-year product warranty on some selected items. The estimated warranty liability on sales made during the 2003 – 2004 fiscal year and still outstanding as of March 31, 2004, amounted to P252,000. The warranty costs on sales made from April 1, 2004 to March 31, 2005, are estimated at P630,000. The actual warranty costs incurred during 2004 – 2005 fiscal year are as follows: Warranty claims honored on 2003 – 2004 sales Warranty claims honored on 2004 – 2005 sales Total P 252,000 285,000 P 537,000 Trade payables Accounts payable for supplies, goods, and services purchases on open account amount to P560,000 as of March 31, 2005. Dividends On March 10, 2005, Cavaliers’ board of directors declared a cash dividend of P0.30 per common share and a 10% common stock dividend. Both dividends were to be distributed on April 5, 2005 to common stockholders on record at the close of business on March 31, 2005. As of March 31, 2005, Cavaliers has 5 million, P2 par value, common shares issued and outstanding. Bonds payable Cavaliers issued P5,000,000, 12% bonds, on October 1, 1999 at 96. The bonds will mature on October 1, 2009. Interest is paid semi-annually on October 1 and April 1. Cavaliers uses the straight line method to amortize bond discount. QUESTIONS: Based on the foregoing information, determine the adjusted balances of the following as of March 31, 2005: 1. Estimated warranty payable a. P252,000 b. P345,000 c. P630,000 d. P882,000 AP-5902Q P108. P46.445.000 b.000 d. were as shown below: Inventory of Premium AM/FM radio Estimated Premium Claims Outstanding Estimated Liability from Warranties QUESTIONS: Based on the above and the result of your audit. determine the amounts that will be shown on the 2005 financial statements for the following: 1.950 c.000 d.000 d. The accrual method is used by Pirates to account for the warranty and premium costs for financial reporting purposes.000 c. P7. P150.000 b.400 d. P5. P6. D.400.000 Premium expense a. P39. P126. P63. P77. P108. B. P80. D. Customers may exchange 200 coupons and P20 for an AM/FM radio. P7.950 b. P36.000 Estimated liability from warranties a. 3.000 from recorded music and sheet music.Page 2 of 4 2. A total of 6. P110.000 d.610. 5.800 136. C. P200.000 c.000 SUGGESTED ANSWERS: B. A.700.800 P39.000 . D. Musical instrument and sound equipment are sold in a one-year warranty for replacement of parts and labor.000 b.000 c. P164. P56. based on past experience.445.000 Total noncurrent liabilities a. P300.000 b. P75. P250. 4.590.600 b. P7.600 b.000 d.950 d.200.000 during 2005. P3. P 75. The estimated warranty cost. D PROBLEM NO.800.000 b.000 Inventory of AM/FM radio a.000 c. Unamortized bond discount a. P0 b.350 Estimated liability for premiums a. P144.450 SUGGESTED ANSWERS: A. 2005. 2.200.000 from musical instrument and sound reproduction equipment and P1.000 d.000 Total current liabilities a. P164. The balance in the accounts related to warranties and premiums on January 1. Pirates pays P34 for each radio and estimates that 60% of the coupons given to customers will be redeemed. P100. Replacement parts and labor for warranty work totaled P164. P80.500. 4. C AP-5902Q . P7. 2 Pirates’ Music Emporium carries a wide variety of music promotion techniques . The premium is offered on the recorded and sheet music.000 Bond interest payable a.105.000 d.P5. P5. P108.000 c.500 AM/FM radio used in the premium program were purchased during the year and there were 1.000 c. P90.000 coupons redeemed in 2005. Pirates’ total sales for 2005 were P7.warranties and premiums – to attract customers. P136.950 44.600 c. is 2% of sales. 5. P183.000 c. Customers receive a coupon for each peso spent on recorded music or sheet music. P44.945. 3. Warranty expense a. 800 d.250. P1.850 78.200 b.050 80.150 22. 2. P344. P0 d. SUGGESTED ANSWERS: B. C PROBLEM NO.645. n/30 and are entered net with the discount entered in the Purchase Discount column of the voucher register. P303.309. P8.950 c.750 b. P2.050 Adjusting journal entry or entries to correct the accounts will include a. You are called to adjust the matter.750* * Voucher Nos. 25-year Bonds Payable. 2001 issue 01/01/2001 CR P 1. the substitute accountant finds that the unpaid vouchers do not agree with the Vouchers Payable control account. P306. P3. C..550 Vouchers Payable (control account) Cash disbursements P1. 12%. all of which are net of discount.100 17. Ginobili Distributors Parker Sales Mohamed Dealers Bowen Merchandising Horry Mercantile Jackson Traders Amount P 78. is presented to you: Date Nov. P6. 4 In your initial audit of Bulls Finance Co. The accountant in charge of the books went on leave to attend to his family based in New Jersey.250 d. At year-end. 27 Dec.Page 3 of 4 PROBLEM NO. 821 and 836 cancelled as goods were returned in December. A schedule of unpaid vouchers as of December 31.000 REQUIRED: Based on the above and the result of your audit.000.750 c.050. 02 11 20 21 22 31 Voucher No. 3 In the audit process. c.600 44. P41.700 Purchase discounts lost on paid vouchers a. P28.400 P340.600.400 19. B. 3. P310.250. Adjusted balance of Vouchers Payable a. compute for the following as of December 31. 2005: 1.500 Purchases journal Purchase returns journal 36. the following data were obtained from the books of the Spurs Company which uses a voucher system. All invoices are subject to term 2/10. 4.000 AP-5902Q . 2005.800 Purchase discounts lost on unpaid vouchers a. A fresh accounting graduate has been assigned to record the transactions. d. A debit to Purchase Discounts Lost of P5. P5.000 b. 797 821 829 836 842 856 865 Supplier Duncan Supply Co. A debit to Purchase Discounts Lost of P11.000 c. you find the following ledger account balances. A credit to Vouchers Payable of P11. A credit to Vouchers Payable of P8. b. 100 gain AP-5902Q .000. A – End of AP-5902Q – d. P18.Page 4 of 4 10/01/2005 CD Treasury Bonds P 216.100 b. P80.800 d.000 c. P1.000 Bond Premium 01/01/2001 CR P 80. P189. 2005 at 105 plus accrued interest.000 b. The adjusted balance of bonds payable as of December 31.000 3.800 d. P188. P18. B. P1.100 loss SUGGESTED ANSWERS: A.400. P1.000 2. 2005 is a. P64. P58. The unamortized bond premium on December 31. C.000 The bonds were redeemed for permanent cancellation on October 1. determine the following: 1.000 96. P1. P1.600.900 loss b.000 d.900 gain c. The total bond interest expense for the year 2005 is a.000 c.000 01/01/2005 07/01/2005 CD CD Bond Interest Expense P 96.900 c.800 4. 2005 is a. P56. P1.000 b. QUESTIONS: Based on the above and the result of your audit. P182. The gain or loss on partial bond redemption is a. P182.384.