AUDIT OF LIABILITIES

PROBLEM NO. 1 – Current and noncurrent liabilities

You were able to obtain the following from the accountant for ANGONO CORP. related to the
company’s liabilities as of December 31, 2024.

Accounts Payable P 650,000

Notes Payable – trade 190,000
Notes Payable – bank 800,000
Wages and salaries payable 15,000
Interest payable ?
Mortgage notes payable – 10% 600,000
Mortgage notes payable – 12% 1,500,000
Bonds Payable 2,000,000

The following additional information pertains to these liabilities.

a. All trade notes payable are due within six months from the end of the reporting period.
b. Bank notes-payable include two separate notes payable to Allied Bank.
(1) A P300,000, 8% note issued March 1, 2022, payable on demand. Interest is payable every six-
months.
(2) A 1-year, P500,000, 11 ½ % note issued January 2, 2024. On December 30, 2024, Angono
negotiated a written agreement with BPI to replace the note with a 2-year, P500,000, 10% note
to be issued January 2, 2025. The interest was paid on December 31, 2024.
c. The 10% mortgage note was issued October 1, 2021, with a term of 10 years. Terms of the note
give the holder the right to demand immediate payment if the company fails to make a monthly
interest payment within 10 days of the date the payment is due. As of December 31, 2024, Angono
is three months behind in paying its required interest payment.
d. The 12% mortgage note was issued May 1, 2018, with a term of 20 years. The current principal
amount due is P1,500,000. Principal and interest payable annually on April 30. A payment of
P220,000 is due April 30, 2025. The payment includes interest of P180,000.
e. The bonds payable is 10-year, 8% bonds, issued June 30, 2015. Interest is payable semi-annually
every June 30 and December 31.

QUESTIONS:
Based on the above and the result of your audit, answer the following.
1. Interest payable as of December 31, 2024 is
a. P155,000 c. P143,000
b. P203,000 d. P215,000
 2. The portion of the Note Payable-bank to be reported under current liabilities as of December 31,
2024 is
a. P300,000 c. P500,000
b. P800,000 d. P 0

3. Total current liabilities as of December 31, 2024 is

a. P3,950,000 c. P4,138,000
b. P3,938,000 d. P 0

4. Total noncurrent liabilities as of December 31, 2024 is

a. P1,760,000 c. P2,560,000
b. P3,960,000 d. P1,960,000

PROBLEM NO. 2 – Current and noncurrent liabilities

ANGAT 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, 2024:
Notes Payable
Angat 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 P408,000 on March 31, 2024.
Due date Amount
April 31, 2024 P 720,000
July 31, 2024 1,080,000
September 1, 2024 540,000
February 1, 2025 540,000
April 1, 2025 – March 31, 2026 3,240,000
P 6,120,000
Estimated warranties
Angat has a one-year product warranty on some selected items. The estimated warranty liability in sales
made during the 2022-2023 fiscal year and still outstanding as of March 31, 2023, amounted to P302,400.
The warranty costs on sales made from April 1, 2023 to March 31, 2024, are estimated at P756,000. The
actual warranty costs incurred during 2023-2024 fiscal year are as follows:

Warranty claims honored on 2022-2023 sales P 302,400

Warranty claims honored on 2023-2024 sales 342,000
Total P 644,400

Trade payables
Accounts payable for supplies, goods, and services purchases on open account amount to P672,000 as of
March 31, 2024.
Dividends
On March 10, 2024, Angat’s board of directors declared a cash dividend of P0.30 per ordinary share and a
10% ordinary share dividend. Both dividends were to be distributed on April 5, 2024 to shareholders on
record at the close of business on March 31, 2024. As of March 31, 2024 Angat has 6 million, P2 par value,
ordinary shares issued and outstanding.
Bonds payable
Angat issued P6,000,000, 12% bonds, on October 1, 2018 at 96. The bonds will mature on October 1, 2028.
Interest is paid semi-annually on October 1 and April 1. Angat 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 31,2024:
1. Estimated warranty payable
a. P414,000 c. P 302,400
b. P756,000 d. P1,058,400

2. Unamortized bond discount

a. P132,000 c. P 240,000
b. P108,000 d. P 120,000

3. Bond interest payable

a. P360,000 c. P 180,000
b. P300,000 d. P 0

4. Total current liabilities

a. P7,734,000 c. P 6,534,000
b. P6,126,000 d. P 4,734,000

5. Total noncurrent liabilities

a. P9,240,000 c. P 9,108,000
b. P9,132,000 d. P 9,000,000

PROBLEM NO. 3 – Various current liabilities

The following information relates to CANDABA COMPANY’s obligations as of December 31, 2024. For
each of the numbered items, determine the amount if any, that should be reported as current liability in the
Candaba’s December 31, 2024 statement of financial position.

1. Accounts payable:
Accounts payable per general ledger control amounted to P5,440,000, net of P240,000 debit
balances in suppliers’ accounts. The unpaid voucher file included the following items that had not
been recorded as of December 31, 2024:
 a) A Company – P244,000 merchandise shipped on December 31, 2024, FOB destination;
received on January 10, 2025.
b) B, Inc. – P192,000 merchandise shipped on December 26, 2024, FOB shipping point; received
on January 16, 2025.
c) C Super Services – P144,000 janitorial services for the three-month period ending January 31,
2025.
d) MERALCO – P67,200 electric bill covering the period December 16, 2024, to January 15,
2025.

On December 28, 2024, a supplier authorized Candaba to return goods billed at P160,000 and
shipped on December 20, 2024. The goods were returned by Candaba on December 28, 2024, but
the P160,000 credit memo was not received until January 6, 2025.

a. P5,923,200 c. P5,712,000
b. P5,601,600 d. P5,841,600

2. Payroll:
Items related to Candaba’s payroll as of December 31, 2024 are:
Accrued salaries and wages P776,000
Payroll deductions for:
Income taxes withheld 56,000
SSS contributions 64,000
Philhealth contributions 16,000
Advances to employees 80,000

a. P776,000 c. P992,000
b. 832,000 d. P912,000

3. Litigation:

In May, 2024, Candelaria became involved in a litigation. The suit being contested, but
Candelaria’s lawyer believes there is probable that Candaba may be held liable for damages
estimated in the range between P2,000,000 and P3,000,000 and no amount is a better estimate of
potential liability than any other amount.

a. P 0 c. P2,000,000
b. P3,000,000 d. P2,500,000

4. Bonus obligation:
Candaba Company’s president gets an annual bonus of 10% of net income after bonus and income
tax. Assume the tax rate of 30% and the correct income before bonus and tax is P9,600,000. (Ignore
the effects of other given items on net income.)

a. P 722,600 c. P395,000
b. P2,240,000 d. P628,000
5. Note payable:

A note payable to the Bank of the Philippine Islands for P2,400,000 is outstanding on December
31, 2024. The note is dated October 1, 2023, bears interest at 18%, and is payable in three equal
annual installments of P800,000. The first interest and principal payment was made on October 1,
2024.

a. P800,000 c. P908,000
b. P 72,000 d. P872,000

6. Purchase commitment:
During 2024, Candaba entered in a noncancellable commitment to purchase 320,000 units of
inventory at fixed price of P5 per unit, delivery to be made in 2025. On December 31, 2024 the
purchase price of this inventory item had fallen to P4.40 per unit. The goods covered by the
purchase contract were delivered on January 28, 2025.

a. P 0 c. P1,600,000
b. P1,408,000 d. P 192,000

7. Deferred taxes:
On December 31, 2024, Candaba’s deferred income tax account has a 2024 ending credit balance
of P772,800, consisting of the following items:
Caused by temporary differences in accounting Deferred tax
For gross profit on installment sales P376,000 Cr
For depreciation on property and equipment 576,000 Cr
For product warranty expense 179,200 Dr
P772,000 Cr

a. P772,800 c. P952,000
b. P196,800 d. P 0

8. Product warranty:
Candaba has one year product warranty on selected items in its product line. The estimated warranty
liability on sales made during 2023, which was outstanding as of December 31, 2023, amounted to
P416,000. The warranty costs on sales made in 2024 are estimated at P1,504,000. Actual warranty
costs incurred during 2024 are as follows:
Warranty claims honored on 2023 sales P 416,000
Warranty claims honored on 2024 sales 992,000
Total warranty claims honored P 1,408,000

a. P 0 c. P1,504,000
b. P96,000 d. P 512,000

9. Premiums:
To increase sales, Candaba Company inaugurated a promotional campaign on June 30, 2024.
Candaba placed a coupon redeemable for a premium in each package of product sold. Each
 premium costs P100. A premium is offered to customers who send in 5 coupons and a remittance
of P30. The distribution cost per premium is P20. Candaba estimated that only 60% of the coupons
issued will be redeemed. For the six months ended December 31, 2024, the following is available:
Packaged of product sold 160,000
Premiums purchased 16,000
Coupons redeemed 64,000
a. P1,728,000 c. P1,152,000
b. P1,600,000 d. P 576,000

10. Due to Five Six Finance company:

Candaba’s accounting records show that as of December 31, 2024, P1,280,000 was due to Four
Six Finance Company for advances made against P1,600,000 of trade accounts receivable assigned
to the finance company with recourse.
a. P 0 c. P1,600,000
b. P 320,000 d. P1,280,000

PROBLEM NO. 4 Estimated liabilities – warranty and premium

Danao’s Music Emporium carries a wide variety of music promotion techniques – warranties and premiums
– to attract customers.

Musical instrument and sound equipment are sold in a one-year warranty for replacement of parts and labor.
The estimated warranty cost, based on past experience, is 2% of sales.

The premium is offered on the recorded and sheet music. Customers receive a coupon for each peso spent
on recorded music or sheet music. Customers may exchange 200 coupons and P20 for an AM/FM radio.
Danao pays P34 for each radio and estimates that 60% of the coupons given to customers will be redeemed.

Danao’s total sales for 2024 were P57,600,000 – P43,200,000 from musical instrument and sound
reproduction equipment and P14,400,000 from recorded music and sheet music. Replacement parts and
labor for warranty work totaled P1,312,000 during 2024. A total of 52,000 AM/FM radio used in the
premium program were purchased during the year and there were 9,600,000 coupons redeemed in 2024.

The accrual method is used by Dolores to account for the warranty and premium costs for financial reporting
purposes. The balance in the accounts related to warranties and premiums on January 1, 2024, were as
shown below:
Inventory of Premium AM/FM radio P 319,600
Estimated Premium Claims Outstanding 358,000
Estimated Liability from Warranties 1,088,000

QUESTIONS:

Based on the above and the result of your audit, determine the amounts that will be shown on the 2024
financial statements for the following:

1. Warranty expense
 a. P 864,000 c. P1,312,000
b. P1,152,000 d. P 640,000

2. Estimated liability from warranties

a. P 864,000 c. P1,088,000
b. P1,312,000 d. P 640,000

3. Premium expense
a. P 604,800 c. P 864,000
b. P1,468,800 d. P 1,008,000

4. Inventory of AM/FM radio

a. P375,600 c. P 618,800
b. P319,600 d. P 455,600

5. Estimated liability for premiums

a. P604,800 c. P 507,600
b. 291,200 d. P 358,400

PROBLEM NO. 5 – Provisions and contingent liabilities

The following information relates to Alamada Company as of December 31, 2024. Answer the following
questions relating to each of the independent situations as requested.

1. Beginning 2024, Alamada Company began marketing a new beer called “Purple Colt.” To help
promote the product, the management is offering a special beer mug to each customer for every 20
specially marked bottle caps of Purple Colt. Alamada estimates that out of the 300,000 bottles of
Purple Colt sold during 2024 only 50% of the marked bottle caps will be redeemed. For the year
2024, 8,000 mugs were ordered by the company at a total cost of P360,000. A total of 4,500 mugs
were already distributed to customers. What is the amount of the liability that Alamada Company
should report on its December 31, 2024 statement of financial position?
a. P135,000 c. P337,500
b. P202,500 d. P360,000

2. On January 2, 2022, Alamada Company introduced a new line of products that carry a three-year
warranty against factory defects. Estimated warranty costs related to peso sales are as follows: 1%
of sales in the year of sale, 2% in the year after sales and 3% in the second year after sale.
Sales and actual warranty expenditures for the period 2022 to 2024 were as follows:

Sales Actual Warranty Expenditures

2022 P100,000 P 750
2023 250,000 3,750
2024 350,000 11,250
P700,000 P15,750

What amount should Alamada report as warranty expense in 2024?

a. P 3,500 c. P11,500
 b. P 11,250 d. P21,000

3. During 2024, Alamada Company guaranteed a supplier’s P500,000 loan from a bank. On October
1, 2024, Alamada was notifies that the supplier had defaulted on the loan and filed for bankruptcy
protection. Counsel believes Alamada will probably have to pay between P250,000 and P450,000
under its guarantee. As a result of the supplier’s bankruptcy, Alamada entered into a contract in
December 2024 to retool its machines so that Alamada could accept parts from other suppliers.
Retooling costs are estimated to be P300,000. What amount should Alamada report as a liability in
its December 31, 2024, statement of financial position?
a. P250,000 c. P350,000
b. P450,000 d. P650,000

4. A court case decided on December 21 2024 awarded damages against Alamada. The judge has
announced that the amount of damages will be set at a future date, expected to be in March 2015.
Alamada has received advice from its lawyers that the amount of the damages could be anything
between P20,000 and P7,000,000. As of December 31, 2024, how much should be recognized in
the statement of financial position regarding this court case?
a. P 20,000 c. P7,000,000
b. P3,150,000 d. P 0

5. Alabat’s directors decided on 3 November 2024 to restructure the company’s operations as follows:
a) Factory T would be closed down and put on the market for sale.
b) 100 employees working in Factory T would be retrenched effective 30 November 2024 and
would be paid their accumulated entitlements plus 3 months’ wages.
c) The remaining 20 employees working in Factory T would be transferred to Factory X, which
would continue operating.
d) 5-head-office staff would be retrenched effective 31 December 2010 and would be paid their
accumulated entitlements plus 3 month’s wages.

As at 31 December 2010 the following transactions and events had occurred:

• Factory T was shut down on 30 November 2024. An offer of P80M had been received for
Factory T; however there was no binding sales agreement
• The 100 employees had been retrenched, had left and their accumulated entitlements had been
paid, however an amount of P1,520,000, representing a portion of the 3 months’ wages for
the retrenched employees, had still not been paid.
• Costs of P460,000 were expected to be incurred in transferring the 20 employees to their new
work in Factory X. The transfer will occur on 15 January 2025.
• Four of the five-head-office staff had been retrenched, had left and their accumulated
entitlements, including the 3 months’ wages, had been paid. However one employee, D.
Terminator, remained on to complete administrative tasks relating to the closure of Factory T
and the transfer of staff to Factory X. D. Terminator was expected to stay until 31 January
2025. D. Terminator’s salary for January would be P80,000 and his retrenchment package
would be P260,000, all of which would be paid on the day he left. He estimated that he would
spend 60% of his time administering the closure of Factory T, 30% of his time administering
the transfer of staff to Factory X and the remaining 10% on general administration.
 Calculate the amount of the restructuring provision to be recognized in Alabat’s financial
statements as at 31 December 2024.

a. P 116,000 c. P93,000
b. P1,828,000 d. P89,000

PROBLEM NO. 6 – Provisions, contingent liabilities, and contingent assets

BORONGAN CORPORATION, a listed company, is a manufacturer of confectionery and biscuits.

Its end of reporting period is December 31 Relevant extracts from its financial statements at 31
December 2023 are as follows:

Current liabilities

Provision

Provision for warranties P270,000

Non-current liabilities

Provision

Provision for warranties P180,000

Note 36 – Contingent liabilities

Borongan is engaged in litigation with various parties in relation to allergic reactions to

traces of peanuts alleged to have been found in packets of fruit gums. Borongan strenuously
denies the allegations and, as at the date of authorizing the financial statements for issue,
is unable to estimate the financial effect, if any, of any costs or damages that may be
payable to the plaintiffs.

The provision for warranties at December 31, 2023 was calculated using the following
assumptions: There was no balance carried forward from the prior year.

Estimated cost of repairs – products with minor defects P1,000,000

Estimated cost of repairs – products with major defects P6,000,000

Expected % of products sold during 2023 having no

Defects in 2024 80%

Expected % of products sold during 2023 having

Minor defects in 2024 15%

 Expected % of products sold during 2023 having

Major defects in 2024 5%

Expected timing of settlement of warranty payments

- Those with minor defects All in 2024

Expected timing of settlement of warranty payments 40% in 2024

- Those with major defects 60% in 2025

During the year ended December 31, 2024 the following occurred:

1. In relation to the warranty provision of P450,000 at December 31, 2023, P200,000 was paid out of
the provision. Of the amount paid, P150,000 was for products with minor defects and P50,000 was
for products with major defects, all of which related to amounts that had been expected to be paid
in 2024.
2. In calculating its warranty provision for December 31, 2024, Borongan made the following
adjustments to the assumptions used for the prior year:

Estimated cost of repairs – products with minor defects No change

Estimated cost of repairs – products with major defects P5,000,000

Expected % of products sold during 2024 having no

Defects in 2025 85%

Expected % of products sold during 2024 having

Minor defects in 2025 13%

Expected % of products sold during 2024 having

Major defects in 2025 2%

Expected timing of settlement of warranty payments

- Those with minor defects All in 2025

Expected timing of settlement of warranty payments 40% in 2025

- Those with major defects 60% in 2026

 3. Borongan determined that part of its plant and equipment needed an overhaul – the conveyer belt
on one of its machines would need to be replaced in about December 2025 at an estimated cost of
P250,000. The carrying amount of the conveyer belt at December 31, 2023 was P140,000. Its
original cost was P200,000.
4. Borongan was unsuccessful in its defense of the peanut allergy case and was ordered to pay
P1,500,000 to the plaintiffs. As at December 31, 2024 Borongan had paid P800,000.
5. Borongan commenced litigation against one of its advisers for negligent advise given on the original
installation of the conveyers belt referred to in (4) above. In October 2024 the court found in favor
of Borongan. The hearing for damages had not been scheduled as at the date the financial statements
for 2010 were authorized for issue. Borongan estimated that it would receive about P425,000.
6. Borongan signed an agreement with Banco De Oro (BDO) to the e Borongan would guarantee a
loan made by BDO to the subsidiary, Burgis Ltd. Burgis’ loan with BDO P3,200,000 as at December
31, 2024. Burgis was in financial position at December 31, 2024.

QUESTIONS:

Based on the above and the result of your audit, answer the following

1. The warranty expense in 2024 is

a. P100,000 c. P400,000
b. P160,000 d. P230,000

2. The provision for warranties as of December 31, 2024 is

a. P580,000 c. P230,000
b. P480,000 d. P410,000

3. The provision for warranties to be reported as current liabilities on December 31, 2024 is
a. P220,000 c. P150,000
b. P400,000 d. P330,000

4. The provision for warranties to be reported as noncurrent as of December 21, 2024 is

a. P 80,000 c. P260,000
b. P150,000 d. P330,000

5. Total provisions to be reported in the statement of financial position as of December 31, 2024 is
a. P 480,000 c. P 410,000
b. P1,180,000 d. P1,360,000
PROBLEM NO. 7 – Bonds Payable
GAPAN CORPORATION authorized the sale of P2,000,000 of 12%, 10-year debentures on January 1,
2019. Interest is payable on January 1 and July 1. The entire issue was sold on April 1, 2019, at 102 plus
accrued interest. On April 1, 2024, P1,000,000 of the bond issue was reacquired and retired at 99 plus
accrued interest. On June 30, 2024, the remaining bonds were reacquired at 97 plus accrued interest and
refunded with an issue of P1,600,000 of 9% bonds which were sold at 100.
QUESTIONS:
Based on the above and the result of your audit. Determine the following: (Use straight line method to
amortize premium or discount)
1. Total cash receive from the sale of P2 million bonds on April 1, 2019
a. P2,100,000 c. P2,040,000
b. P2,000,000 d. P2,120,000
2. Interest expense for 2019
a. P180,000 c. P 157,241
b. P183, 077 d. P176,923

3. Carrying amount of bonds payable as of December 31, 2019

a. P2,037,241 c. P2,036,923
b. P2,042,759 d. P2,043,077

4. Gain or loss on retirement of P1 million bonds on April 1, 2024

a. P19,744 gain c. P 256 gain
b. P19,744 loss d. P19, 828 gain

5. Gain or loss on retirement of remaining bonds on June 30, 2024

a. P39,231 loss c. P 20,679 gain
b. P39,231 gain d. P39,310 gain

PROBLEM NO. 8 – Bonds payable

In your initial audit of Iba Zambales Finance Co., you find the following ledger account balances.
Debit Credit
12%,25-year Bonds Payable, 2020 issue
01/01/2020 P6,400,000
Treasury Bonds
10/01/2024 P864,000
Bond Premium
01/01/2020 320,000
Bond Interest Expense
01/01/2024 384,000
07/01/2024 384,000
The bonds were redeemed for permanent cancellation on October 1, 2024, at 105 plus accrued interest.
QUESTIONS:
Based on the above and the result of your audit, determine the following: (Use straight line method to
amortize premium or discount)
1. The adjusted balance of bonds payable as of December 31, 2024 is
a. P5,536,000 c. P5,600,000
b. P6,400,000 d. P4,000,000

2. The unamortized bond premium on December 31, 2024 is

a. P320,000 c. P256,000
b. P224,000 d. P235,200

3. The total bond interest expense for the year 2024 is

a. P756,400 c. P731,600
b. P755,200 d. P731,200

4. The gain or loss on partial bond redemption is

a. P7,600 loss c. P7,600 gain
b. P72,400 loss d. P72,400 gain

PROBLEM NO. 9 – Bonds payable

In connection with the audit of the company’s financial statements for the year ended December 31, 2024,
the LA LIBERTAD CORPORATION presented to you, their records. This is the first time the company
has been audited. The company issued serial bonds on April 1, 2021. Your audit showed the following
details of the issue and the accounts as of December 31, 2010:
Total face value P2,000,000
Date of bond March 1, 2021
Total proceeds P2,676,000
Interest rate 12% per annum
Interest payment date March 1
Maturity dates and amount:
Date of maturity Amount
March 1, 2024 P 500,000
March 1, 2025 P 500,000
March 1, 2026 P 500,000
March 1, 2027 P 500,000
P2,000,000
Since the corporation had excess cash, bonds of P500,000 schedule to be retired on March 1, 2012 were
retired on April 1, 2010. The total amount paid was charged to serial bonds payable amount.
Serial Bonds Payable
3/01/2024 VR P500,000 4/01/2021 CR P2,656,000
4/01/2024 VR P495,000

Accrued Interest Payable

01/01/2024 GJ P200,000

Interest Expense
3/01/2024 VR P240,000

QUESTIONS:
Based on the information presented above and the result of your audit, answer the following: (Use
bond outstanding method to amortize premium or discount)
1. The adjusted balance of the bonds payable account as of December 31, 2024 is
a. P2,000,000 c. P1,500,000
b. P1,084,000 d. P1,000,000

2. The unamortized bond premium as of December 31, 2024 should be

a. P66,642 c. P84,000
b. P82,444 d. P104,000

3. The accrued interest payable as of December 31, 2024 is

a. P150,000 c. P100,000
b. P120,000 d. P200,000
4. The bond interest expenses that should be reported by the corporation for the year 2024 is
a. P55,264 c. P63, 801
b. P53,000 d. P59,611

5. The gain on early retirement of bonds is

a. P79,000 c. P81,170
b. P77,722 d. P 0
PROBLEM NO. 10 – Bonds Payable
On January 1, 2023, PILAR CORPORATION issued 5,000 of its 5-year, P1,000 face value, 11%
bonds dated January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each
December 31. Perez uses the effective interest method of amortization. On December 31, 2024,
the 3,000 bonds were extinguished early through acquisition in the open market by Pilar for
P2,970,000 plus accrued interest.
QUESTIONS:
Based on the above and the result of your audit, determine the following: (Round off present
value factors to four decimal places.)
1. The issue price of the bonds on January 1, 2023 is
a. P5,388,835 c. P5,282,135
b. P4,630,655 d. P5,000,000

2. The carrying amount of the bonds on December 31, 2023 is

a. P4,755,930 c. P5,323,830
b. P5,453,840 d. P5,000,000

3. The gain on early retirement of bonds on December 31, 2024 is

a. P116,442 c. P181,785
b. P266,811 d. P 0

PROBLEM NO. 11 – Convertible bonds payable

On January 2, 2023, the MAGALLANES INC. issued P2,000,000 of 8% convertible bonds at par.
The bonds will mature on January 1, 2027, and interest is payable annually every January 1. The
bond contract entitles the bondholders to receive 6, P100 par value, ordinary shares in exchange
for each P1,000 bond. On the date of issue, the prevailing market interest rate for similar debt
without the conversion option is 10%.
On January 1, 2027, the holders of the bonds with total face value of P1,000,000 exercised their
conversion privilege. On that date, the bonds were selling at 110 and the ordinary share at P42.
QUESTIONS:
Based on the above and the result of your audit, answer the following: (Round off present value
factors to 4 decimal places)
1. The proceeds from issuance of convertible bonds to be allocated to the liability component is
a. P1,366,000 c. P1,873,184
b. P1,778,336 d. P2,000,000

2. The proceeds from issuance of convertible bonds to be allocated to the equity component is
a. P634,000 c. P126,816
b. P221,664 d. P 0

3. The carrying amount of the bonds payable on December 31, 2023 is

 a. P2,000,000 c. P1,389,400
b. P1,796,170 d. P1,900,502

4. The interest expense for the year 2024 is

a. P160,000 c. P138,940
b. P179,617 d. P190,050

5. The gain to be recognized on conversion of the bonds is

a. P126,816 c. P463,408
b. P400,000 d. P 0

PROBLEM NO. 12 – Convertible bonds payable

On January 1, 2023, CASTILLA CORPORATION issued a 10 per cent convertible bonds with a
face value of P4,000,000 maturing on December 31, 2028. Each P1,000 bond is convertible into
ordinary shares of Castilla at a conversion price of P25 per share. Interest is payable half-yearly
in cash. At the date of issue, Castilla could have issued nonconvertible debt with a ten-year term
bearing a coupon interest rate of 11 per cent.
On January 1, 2024, the convertible bond has a fair value of P4,400,000. Castilla makes a tender
offer to the holders to repurchase the bonds for P4,400,00. The holders of the P2,000,000 bonds
accepted the offer. At the date of repurchase, Castilla could have issued non-convertible debt with
a five-year term bearing a coupon interest rate of 8 per cent.
On December 31, 2024, to induce the holders of the remaining bonds to convert the bonds
promptly, Castilla reduces the conversion price to P20 if the bonds are converted before March 1,
2011 (i.e. within 2 months). The market price of Castilla’s ordinary shares on the date the terms
are amended is P32 per share.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
(Round off present value factors to 4 decimal places)
1. The proceeds from issuance of convertible bonds to be allocated to the equity component is
a. P235,520 c. P136,760
b. P239,120 d. P 0

2. The carrying amount of the bonds on December 31, 2023 is

a. P3,849,120 c. P3,113,180
b. P3,885,940 d. P4,000,000

3. The amount to be recognized in profit or loss as a result of the repurchase of the bonds on
January 1, 2010 is
a. P200,000 c. P180,400
b. P203,880 d. P237,730
4. The repurchase of the bonds on January 1, 2024 decreased equity by
a. P439,530 c. P76,630
 b. P 37,710 d. P 0
5. The amount to be recognized in profit or loss as a result of the amendment of the terms on
December 31, 2024 is
a. P640,000 c. P64,000
b. P 10,000 d. P 0

PROBLEM NO. 13 – Comprehensive

In connection with your audit of Pagbilao Corporation, you gathered the following liability and equity
account balances as of December 31, 2009:
1% bonds payable, at face value P10,000,000
Premium on bonds payable 704,760
Share Capital 16,000,000
Share Premium 4,590,000
Retained Earnings 4,930,000
Treasury shares, at cost 650,000
Transactions during 2010 and other information relating to the Corporation’s liability and equity accounts
were as follows:
a) The bonds were issued on December 31, 2007, for P10,756,000 to yield 10%. The bonds mature on
Deecember 31, 2022. Interest in payable annually on December 31. The Corporation used the
effective interest method to amortize bond premium.
b) At December 31, 2009, the Corporation had 4,000,000, P10 par, authorized ordinary shares.
c) On January 15, 2010, the Corporation reissued 30,000 of its 50,000 treasury shares for 550,000. The
treasury shares had been acquired on February 28, 2009.
d) On November 2, 2010, the Cooperation borrowed P8,000,000 at 9% evidenced by a note payable to
ABC Bank. The note is payable in five equal annual principal installments of P1,600,000. The first
principal and interest payment is due on November 2, 2011.
e) On December 31, 2010, the Corporation owned 20,000 ordinary shares of Awoo Corp. which
represented a 1% ownership interest. Pagbilao accounts for this as availale for sale securities. The
shares were purchased on May 4, 2009 at P20 per share. The market price was P21 per share on
December 31, 2009, and P18 per share on December 31, 2010.
QUESTIONS:
Based on the above and the results of your audit, answer the following questions:
1. How much is the carrying of the bonds payable on December 31, 2010?
a. P10,675,236 c. P 9,324,764
b. P10,706,760 d. P10,654,360
2. How much is the treasury shares balance as of December 31, 2010?
a. P200,000 c. P260,000
b. P650,000 d. P100,000
3. How much is the noncurrent portion of the note payable to bank as of December 31, 2010?
 a. P6,400,000 c. P8,000,000
b. P1,600,000 d. P 0

4. How much is the 2010 total interest expense?

a. P1,220,000 c. P1,249,524
b. P1,190,476 d. P1,187,236

5. How much is the net unrealized loss on available for sale securities as of December 31, 2010?
a. P60,000 c. P20,000
b. P40,000 d. P 0
PROBLEM NO. 14 – Comprehensive
The noncurrent liabilities of Pitogo Company at December 31, 2009 included the following:
Note Payable, bank P3,600,000
Liability under finance lease 2,623,000
Note payable, supplier 1,500,000
Transactions during 2010 and other information relating to Pitogo’s liabilities were as follows:
a) The note payable to the bank bears interest at 20% and is dated May 1,2009. The principal
amount of P3,600,000 is payable in four equal annual installments of P900,000 beginning May 1,
2010. The first principal and interest payment was made on May 1, 2010.
b) The finance lease is for a ten-year period. Equal annual payments of P750,000 are due on
December 31, of each year. The interest rate implicit in the lease is 18%. The amount of
P2,623,200 represents the present value of the six remaining lease payments (due December 31,
2010 through December 31, 2015) discounted at 18%.
c) The note payable to supplier bears interest at 19% and matures on September 30, 2011. On
February 25, 2011, after the end of the reporting period, but before the 2010 statements were
authorized for issue, Pitogo Company consummated a noncancelable agreement with a lender to
refinance the 19%. P1,500,000 on a long term basis, on readily determinable terms that have not
yet been implemented. Both parties are financially capable of honoring the agreement, and there
have been no violations of the agreement’s provisions.
d) On April 1, 2010, Pitogo issued for P7,005,675, P6,000,000 face amount of its 20%, P100,000
bonds. The bonds were issued to yield 15%. The bonds are dated April 1, 2010 and mature on
April 1, 2015. Interest is payable annually on April 1.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Liability under finance lease as of December 31, 2010
a. P1,873,200 c. P2,017,544
b. P2,345,376 d. P1,123,200
2. Carrying amount of bonds payable as of December 31, 2010
a. P6,893,813 c. P6,856,527
b. P7,417,536 d. P7,117,536
3. Total noncurrent liabilities as of December 31, 2010
 a. P12,211,357 c. P10,711,357
b. P10,154,190 d. P 9,817,014
4. Current portion of long-term liabilities as of December 31, 2010
a. P3,150,000 c. P2,727,832
b. P2,812,824 d. P2,169,864
5. Total interest expense for the year 2010
a. P2,145,314 c. P1,673,139
b. P2,408,028 d. P1,673,139

PROBLEM NO. 15 – Finance lease – Direct financing

Luna Corporation is in the business of leasing new sophisticated computer systems. As a lessor of
computers, Luna purchased a new system on December 31, 2009. The system was delivered the same day
(by prior arrangement) to General Investment Company, a lessee. The corporation accountant revealed
the following information relating to the lease transaction:
Cost of system to Luna P550,000
Estimated useful life and lease term 8 years
Expected residual value (unguaranteed) P40,000
Luna’s implicit rate of interest 12%
General’s incremental borrowing rate 14%
Date of first lease payment December 31, 2009
Additional information is as follows:
(a) At the end of the lease, the system will revert to Luna.
(b) General is aware of Luna’s rate of implicit interest.
(c) The lease rental consists of equal annual payments.
QUESTIONS:
Based on the above and the result of your audit, answer the following: (Round off present value factors to
four decimal places.)
1. The annual lease payment under the lease is
a. P110,717 c. P102,665
b. P95,950 d. P91,664
2. The total financial revenue to be earned by the lessor over the lease
a. P257,600 c. P271,320
b. P52,714 d. P335,736
3. The interest income to be recognized by the lessor in 2010 is
a. P53,680 c. P54,486
b. P52,714 d. P52,547
4. The total expenses related to the lease that will be recognized by the lessee in 2010 is
a. P121,464 c. P112,630
b. P130,792 d. P119,276
 5. The amount to be reported under current liabilities as liability under finance lease as of December
31, 2010 is
a. P60,239 c. P35,715
b. P48,611 d. P64,963

PROBLEM NO. 16 – Finance lease – direct financing

In connection with your audit Nakar Enterprises, you noted that the company has a long-standing
policy of acquiring company equipment by leasing. Early in 2010, the company entered into a lease
for a new milling machine. The lease stipulates that annual payments will be made for 5 years. The
payments are to be made in advance on December 31 of each year. At the end of the 5-year period,
Nakar may purchase the machine. The estimated economic life of the equipment is 12 years. Nakar
uses the calendar year for reporting pusposes and straight-line depreciation for other equipment. In
addition, the following information about the lease is also available:
Annual lease payments (including executory costs of P5,000) P60,000
Purchase option price P25,000
Estimated fair value of machine after 5 years P75,000
Implicit rate 10%
Date of first lease payment Jan. 1, 2010

QUESTIONS:
Based on the foregoing and the result of your audit, compute for the following: (Round off present
value factors to four decimal places.)
1. Amount to be capitalized as an asset for the lease of the milling machine.
a. P229,345 c. P244,868
b. P224,017 d. P275,913
2. Liability under finance lease as of December 31, 2010
a. P130,919 c. P136,780
b. P153,855 d. P189,868
3. Amount to be reported under current liabilities as liability under finance lease as of December
31, 2010
a. P39,614 c. P41,908
b. P41,322 d. P36,013
4. Interest expense for the year 2010
a. P17,435 c. P16,902
b. P18,987 d. P 0
5. Depreciation expense for the year 2010
a. P20,406 c. P18,668
b. P19,112 d. P48,974
PROBLEM NO. 17 – Finance lease – Sales type
Catanauan Incorporated uses leases as a method of selling its products. In early 2009, Catanauan
completed construction of a passenger ferry for use between Quiapo and Guadalupe. On April 1, 2009,
the ferry was leased to the Balik-Balik Ferry line on a contract specifying that ownership of the ferry will
transfer to the lessee at the end of the lease period. The ferry is expected to be economically useful for 25
years. Annual lease payments do not include executory costs. Other terms of the agreement are as
follows:
Original cost of the ferry P1,500,000
Lease payments P 225,000
Estimated residual value P 78,000
Implicit rate 10%
Date of first lease payment April 1, 2009
Lease period 1 year
PV of an ordinary annuity of 1 for 20 periods 10% 8.5136
PV of an annuity due of 1 for 20 periods at 10% 9.3649
PV of 1 for 20 periods at 10% 0.1486

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Total finance income that will be earned by the lessor over the lease term.
a. P2,459,306 c. P2,392,897
b. P2,650,849 d. P2,584,440
2. The profit on sale to be recognized by the lessor
a. P607,103 c. P415,560
b. P427,151 d. P618,694
3. Liability under finance lease to be reported by the lease as of December 31, 2010
a. P1,634,616 c. P1,858,063
b. P1,845,313 d. P1,647,366
4. Amount to be reported under current liabilities as liability under finance lease by the lessee as of
December 31, 2010
a. P61,538 c. P40,469
b. P39,194 d. P60,263
5. Depreciation expense to be recognized by the lessee for the year 2009
a. P61,221 c. P76,091
b. P55,127 d. P60,873

PROBLEM NO. 18 – Finance lease – Sales type

Real Inc. leases equipment to its customers under noncancelable leases. On January 1, 2010.Real
leased equipment costing P4,000,000 to Quezon Co., for nine years. The rental cost was P440,000
payable in advance semiannually (January 1 and July 1), plus P20,000 semiannually for executory
costs. The equipment had an estimated life of 15 years and sold for P5,330,250 with an estimated
unguaranteed residual value of P800,000. The implicit interest rate is 12 percent.
QUESTIONS:
Based on the foregoing and the result of your audit, compute for the following: (Round off present
value factors to four decimal places.)
1.How much is the total interest income from lease that will be earned by Real Inc.?
a. P2,869,988 c. P3,675,616
b. P3,389,748 d. 0
2.Real, Inc. should report profit on the sale at
a. P1,330,252 c. P1,050,012
b. P1,044,384 d. P1,338,492
3.How much should be reported by Quezon Co. as liability under finance lease as of December
31, 2010?
a. P4,143,593 c. P4,273,410
b. P4,446,613 d. P 0
4.How much should be reported by Quezon Co. under current liabilities as liability under finance
lease as of December 31, 2010?
a. P356,798 c. P394,252
b. P378,207 d. P 0
5.How much interest expense should be reported by Quezon Co. in relation to the lease for the
year ended December 31,2010?
a. P508,064 c. P543,398
b. P501,793 d. 0

PROBLEM NO. 19 – Sale and lease back

Guihayangan Co. purchase land and constructs a service station and car wash for a total of
P6,750,000.At January 2,2010, when construction is completed, the facility and land on which it
was constructed are sold to a major oil company for P7,500,000 and immediately leased from the
oil company by Guinayangan. Fair value of the land at time of the sale was P750,000. The lease is
a 10-year,noncancelable lease. The agreement requires equal rental payments at the end of each
year beginning December 31,2010. The interest rate implicit in the lease is 10%. Guinayangan
uses straight-line depreciation for its other various business holdings. The economic life of the
facility is 15 years with zero salvage value. Title to the facility and land will pass to Guinayangan
at termination of the lease.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
(Round off present value factors to four decimal places)
1.The amount of annual lease payment is
a. P1,098,526 c. P 976,467
b. P1,220,584 d. P1,109,632
2.The total lease-related expenses to be recognized by the lessee during 2010 is
a. P1,000,000 c. P1,075,000
b. P1,425,000 d. P1,200,000
3. The total lease-related income to be recognized by the lessee during 2010 is
a. P75,000 c. P750,000
b. P50,000 d. P 0
4. The total lease-related income to be recognized by the lessor during 2010 is
a. P675,000 c. P750,000
b. P600,000 d. P 0
5.The amount to be reported under current liabilities as liability under finance lease as of
December 31,2010 is
a. P517,642 c. P414,114
b. P470,595 d. P465,879

PROBLEM NO. 20 – Pension

The following information relates to the defined benefit pension plan of the Tiaong Company as
of January 1,2009:
Projected benefit obligation (PBO) P16,150,000
Fair value of plan assets 15,135,000
Unrecognized prior service cost 1,050,000
Unrecognized actuarial gain or loss 0
Pension data for the years 2009 and 2010 follows:
2009 2010
Current service cost P 870,000 P1,150,000
Contribution to the plan 1,200,000 1,250,000
Benefits paid to retirees 1,320,000 1,400,000
Actual return on plan assets 263,500 1,800,000
Amortization of past service cost 210,000 186,667
Actuarial change increasing PBO 800,000 -
Settlement interest rate 11% 11%
Long-term expected rate of return on
Plan assets 10% 10%

As of January 1,2010,the remaining expected service life of employee was 5 years.

QUESTIONS:

Based on the above result of your audit, answer the following:

1.What is the 2009 net pension expense?
a. P2,593,000 c. P1,200,000
b. P4,370,000 d. P1,343,000
2.The projected benefit obligation as of December 31,2009 is
a. P18,276,500 c. P17,476,500
b. P16,973,000 d. P16,173,000
3.The prepaid/accrued pension expense on December 31,2009 is
a. P1,358,000 c. P108,000
b. P3,153,000 d. P 0
4.What is the 2010 net pension expense?
a. P1,863,702 c. P1,547,082
b. P1,250,000 d. P1,819,232
5.The prepaid/accrued pension expense on December 31,2010 is
a. P 0 c. P1,655,082
b. P3,143,302 d. P 721,702
PROBLEM NO. 21 – Pension
You gathered the following information related to Jomalig Company’s the defined benefit plan
for the year ended December 31,2010:
• Current service cost of providing benefits for the year to December 31,2010: P54 million
• Average remaining working life of employees: 10 years
• Benefits paid to retired employees in the year: P55.8 million
• Contribution paid to fund: P37.8 million
• Present value of obligation to provide benefits: P3,960 million at January 1,2010, and
P4,500 million at December 31,2010
• Net cumulative unrecognized gains at January 1, 2010: P453.6 million
• Past service cost: P207 million. All of these benefits have vested.
• Discount rates and expected rates of return on plan assets:
1/1/10 1/1/11
Discount rate 5% 6%
Expected rate of return on plan assets 7% 8%

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1.The amount to be recognized in the statement of the financial position as of January 1, 2010 is
a. P633.3 million c. P957.6 million
b. P453.6 million d. P455.4 million
2.The amount of actuarial gain to be recognized in profit or loss for the year ended December
31,2010 is
a. P7.20 million c. P3.60 million
b. P5.76 million d. P 0
3.The net pension expense to be recognized in profit or loss for the year ended December
31,2010 is
a. P188.64 million c. P3.60 million
b. P183.60 million d. P270.00million

4.The unrecognized actuarial gain as of December 31,2010 is

a. P448.2 million c. P604.44 million
 b. P453.6 million d. P 0
5.The amount to be recognized in the statement of financial position as of December 31,2010 is
a. P784.44 million c. P180.00 million
b. P682.20 million d. P455.40 million

PROBLEM NO. 22 – Pension

The following information relates to the defined benefit pension plan of the Lopez Corporation
for the year ended December 31,2010:

Projected benefit obligation, January 1 P13,800,000

Projected benefit obligation, December 31 13,150,000
Fair value of plan assets, January 1 11,500,000
Fair value of plan assets, December 31 13,600,000
Unrecognized past service cost, January 1 500,000
Unrecognized net actuarial loss, January 1 1,300,000
Contribution to the plan 2,000,000
Benefits paid to retirees 1,800,000
Amortization of past service cost 100,000
Actuarial change decreasing PBO 906,000
Present value of available refunds and reductions
in future contribution to the plan 250,000
Expected return on plan
assets 14%
Settlement
rate 12%
Expected average remaining working lives of the
employees participating in the plan 10 years

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1.Current service cost for 2010
a. P400,000 c. P506,000
b. P1,778,000 d. P650,000
2.Actual return on plan assets in 2010
a. P100,000 c. P1,900,000
 b. P1,610,000 d. P2,100,000
3.Unrecognized net actuarial loss as of December 31,2010
a. P104,000 c. P1,904,000
b. P96,000 d. P1,010,000

4.Amount to be recognized in the statement of financial position as of December 31,2010

a. P650,000 c. P954,000
b. P754,000 d. P504,000
5.Net amount to be recognized in 2010 profit or loss
a. P761,000 c. P996,000
b. P546,000 d. P746,000

PROBLEM NO. 23 – Debt restructuring

On December 31,2010, Maca Company was indebted to Lelon Co. onyaears P2,000,000,10% note.
Only interest had been paid to date.Due to its financial difficulties Maca Company has negotiated
a restructuring of its note payable. The parties agreed that Maca Company would settle the debt
on the following terms:
• Settle one-half of the note by transferring land with a recorded value of P800,000 and fair
value of P900,000.
• Settle one-fourth of the note by transferring 200,000 shares of P1 par ordinary shares with
a fair market value of P15 per share.
• Modify the terms of the remaining one-fourth of the note by reducing the interest rate to
5%, extend the due date three years from the date of restructuring and reducing the principal
to P300,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following:
1.Gain on extinguishment of debt on the P1million note
a. P300,000 c. P100,000
b. P200,000 d. P 0
2.Share premium to be recognized on the settlement of P500,000 note by issuing ordinary shares
a. P2,500,000 c. P2,300,000
 b. P300,000 d. P 0
3.Total gain on extinguishment of debt
a. P437,306 c. P550,006
b. P337,306 d. P 0
4.Interest expense in 2011
a. P15,000 c. P7,500
b. P26,269 d. P13,134
5.Carrying amount of the note payable as of December 31,2011
a. P273,963 c. P142,494
b. P262,694 d. P300,000

PROBLEM NO. 24 – Income taxes

The following difference enter into the reconciliation of accounting profit and taxable profit of
Mulanay Company for the year ended December 31,2010, its first year of operations:
Life insurance expense P100,000
Excess tax depreciation 2,000,000
Warranty expense 200,000
Litigation accrual 500,000
Unamortized computer software 3,000,000
Unearned rent income deferred on the books but
appropriately recognized in taxable profit 400,000
Interest income from long-term certificate deposit 200,000

Additional information:
a. On July 1,2010 Mulanay paid insurance premium of P200,000 on the life of an officer with
Mulanay Company as beneficiary.
b. Excess tax depreciation will reverse equally over a four-year period 2011-2014
c. The warranty liability is the estimated warranty cost that was recognized as expense in
2010 but deductible for tax purpose when actually paid.
d. It is estimated that the litigation liability eill be paid in 2014
e. In January 2010, Mulanay Company incurred P4,000,000 of computer software cost.
Considering the technical feasibility of the project, this cost was capitalized and amortized
over 4 years for accounting purposes. However, the total amount was expensed in 2010 for
tax purposes
f. Rent income will be recognized during the last year of the lease, 2014.
 g. Interest income from the from long-term certificate of deposit is expected to be P200,000
each year until their maturity at the end of 2014.
h. Accounting profit for 2010 is P10,000,0000. Tax rate is 35%

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1.Deferred tax liability
a. P1,050,000 c. P2,100,000
b. P1,890,000 d. P1,750,000
2.Deferred tax asset
a. P385,000 c. P245,000
b. P1,085,000 d. P210,000
3.Current tax expense
a. P2,100,000 c. P2,800,000
b. P1,750,000 d. P1,820,000
4.Tax expense
a. P3,535,000 c. P3,465,000
b. P3,500,000 d. P4,830,000

PROBLEM NO. 25 – Income taxes

The accounting profit before tax for the year ended December 31,2010 for Doughty Corporation
amounted to P175,900 and included:
Interest income P11,000
Long-service leave expense 7,000
Doubtful dets expense 4,200
Depreciation - plant (15% p.a) 33,000
Rent expense 22,800
Entertainment expense (non-deductible) 3,900

The draft statement of financial position at December 31,2010 contained the following assets and
liabilities:

2010 2009
 Cash P9,000 P7,500
Accounts
receivable 83,000 76,800
Allowance for doubtful debts (5,000) (3,200)
Inventory 67,100 58,300
Interest receivable 1,000 0
Prepaid rent 2,800 2,400
Plant 220,000 220,000
Accumulated depreciation-`plant (99,000) (66,000)
Deferred tax asset ? 30,600
Accounts payable 71,200 73,600
Provision for long-term service leave 64,000 61,000
Deferred tax
liability ? 720

Additional information
• The tax depreciation rate for plant is 10% p.a, straight line
• The tax rate is 30%
• The company has P15,000 in tax losses carried forward from previous year.

QUESTIONS:
Based on the above and the result of your audit, compute for the following as of and for the year
ended December 31,2010:
1.Current tax liability
a. P51,120 c. P58,260
b. P53,590 d. P53,760
2.Deferred tax liability
a. P1,140 c. P19,200
b. P20,340 d. P11,040
3.Deferred tax asset
a. P24,000 c. P30,600
b. P12,540 d. P11,400
4.Deferred tax expense
a. P180 c. P36,300
b. P6,780 d. P38,580
Answers:1)D; 2)A; 3)C; 4)A

PROBLEM NO. 26 – Substantive audit procedures for liabilities

Select the best answers for each of the following:
1. The auditor will most likely perform extensive test for possible understatement of
a. Revenue c. Liabilities
b. Assets d. Equity

2. In auditing accounts payable, an auditor's procedures most likely will focus primarily on
management's assertion of
a. Existence
b. Completeness
c. Presentation and Disclosure
d. Valuation and allocation

3.Which of the following audit procedures is not appropriate for addressing the assertion of
valuation?
a. Confirm with creditors
b. Test for unrecorded liabilities.
c. Perform analytical procedures.
d. Verify accounts payable trial balance.

4.Which of the following is a substantive test that an auditor most likely would perform to verify
the existence and valuation of recorded accounts payable?
a. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and
receiving reports.
b. Confirming accounts payable balances with known suppliers who have zero balances.
c. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are
used and accounted for.
d. Receiving the client's mail, unopened, for a reasonable period of time after the year-end to search
for unrecorded vendor's invoices.
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. The duplication of cut-off tests.
c. Accounts payable balances at the end of the reporting period may not be paid before the audit is
completed.
d.Correspondence with the audit client's attorney will reveal all legal activity by vendors for
nonpayment.
6. To determine whether accounts payable are complete, an auditor performs a test to verify that
all merchandise received is recorded. The population of documents for this test consists of all
a. Payments vouchers c. Purchase requisitions
b. Receiving reports d. Vendor’s invoices

7. An auditor traced a sample of purchase orders and the related receiving reports to the purchases
journal and the cash disbursement journal. The purpose of the substantive audit procedure most
likely was to
a. Verify that cash disbursements were for goods actually received.
b. Determine that purchases were properly recorded.
c. Test whether payments were for goods actually ordered.
d. Identify unusually large purchases that should be investigated earlier.

8. Which of the following procedures would an auditor most likely perform in searching for
unrecorded payables?
a. Compare cash payments occurring after the end of the reporting period with the accounts payable
trial balance
b. Reconcile receiving reports with related cash payments made just prior to year-end
c. Contrast the ratio of accounts payable to purchases with the prior year’s ratio
d. Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase
orders

9. When an auditor selects a sample of items from the vouchers payable register for the last month
of the period under audit and traces these items to underlying documents, the auditor is gathering
evidence primarily in support of the assertion that
a. Recorded obligations were paid
b. Incurred obligations were recorded in the correct period
c. Recorded obligations were valid
d. Cash disbursements were recorded as incurred obligations

10. In conducting a search for unrecorded liabilities, the auditor should do all but the following:
a. Examine prior year’s audit workpapers to ascertain that adjustments for unrecorded liabilities
have not been overlooked.
b. Examine invoices paid a few days prior to the end of the reporting period.
c. Examine paid invoices for a short period following the end of the reporting period and trace to
client’s year-end adjustments for unrecorded liabilities.

11. An audit procedure applicable to testing the year-end cutoff of liabilities is

a. Reviewing the general journal for unusual entries recorded immediately after year-end
b. Examining vendor invoices received subsequent to year-end for shipment date and terms of
shipment
c. Tracing recorded liabilities to supporting documents
d. Preparing an aging schedule for accounts payable

12. Two months before the year end, the bookkeeper erroneously recorded the receipt of a long
term bank loan by a debit to cash and credit to sales. Which of the following is the most effective
procedure for detecting this type of error?
a. Analyze the notes payable journal
b. Analyze bank confirmation information
c. Prepare a year-end bank reconciliation
d. Prepare a year end bank transfer schedule

13. An auditor usually examines receiving reports to support entries in the

a. Sales journal and sales return journal
b. Check register and sales journal
c. Voucher register and sales journal
d. Vouchers register and sales return journal

14. Which of the following is not used to test overstatements and understatements of accounts
payable?
a. Unmatched receiving reports
b. Canceled vouchers packages
c Cash receipts records
d. Cash disbursement records
15. During the course of an audit, an auditor observes that the recorded interest expense seems
excessive in relation to the balance in long term debt. This observation can lead the auditor to
suspect that
a. Long-term debt is overstated
b. Long-term debt is understated
c. Premium on bonds payable is understated
d. Discounts on bonds payable is overstated

16. An auditor’s program to examine long-term debt most likely would include steps that require
a. Correlating interest expense recorded for the period with outstanding debt
b. Inspecting the accounts payable subsidiary ledger for unrecorded long term debt
c. Comparing the carrying amount of the debt to its year end market value
d. Verifying the existence of the holders of the debt by direct confirmation

17. A CPA analyzes the accrued interest payable accounts for the year, recomputes the amounts
of payments and beginning and ending balances and reconciles to the interest expense account.
Which error or questionable practice below has the best chance of being detected by this specific
audit procedure?
a. Interest paid on an open account was charge to the purchase accounts
b. Interest revenue of P120 on a note receivable was credited against miscellaneous expense
c. A note payable had not been recorded. Interest of P300 on the note was properly paid and charge
to the interest expense accounts
d. There was a violation of a term in the client’s loan agreement prohibiting dividends on common
stocks unless net income available for interest and dividends is at least three times interest,
requirements.
18. During the audit of a publicly held company, the auditor could obtain written confirmation
regarding long term bond transactions from the
a. Bond holders c. Client’s Attorney
b. Internal Auditors d. Trustee

19. During its fiscal year, a company issued, at a discounts, a substantial amount of first mortgage
bonds. When performing audit work, the independent auditors
a. Confirms the existence of the bondholders
b. Receiving the minutes for authorization
c. Traces the net cash received from the issuance to the bonds payable accounts
d. Inspects the records maintained by the bond trustee

20. An auditor’s purpose in reviewing the renewal of note payable shortly after the end of the
reporting period most likely is to obtain evidence concerning management’s assertions about
a. Existence c. Presentation and Disclosure
b. Completeness d. Valuation and Allocation