CPA REVIEW SCHOOL OF THE PHILIPPINES AP-9002-2

Manila
AUDITING PROBLEMS CPA Review

AUDIT OF LIABILITIES

PROBLEM NO. 1

On January 2, 2020, the Kombert, Inc. issued P2,000,000 of 8% convertible bonds at par. The
bonds will mature on January 1, 2024 and interest is payable annually every January 1. The bond
contract entitles the bondholders to receive 6 shares of P100 par value common stock 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 December 31, 2021, the holders of the bonds with total face value of P1,000,000 exercised
their conversion privilege. In addition, the company reacquired at 110, bonds with a face value
of P500,000.

The balances in the capital accounts as of December 31, 2020 were:

Common stock, P100 par, authorized 50,000 shares,

issued and outstanding, 30,000 shares P3,000,000
Premium on common stock 500,000

Market value of the common stock and bonds were as follows:

Date Bonds Common stock

December 31, 2020 118 40
December 31, 2021 110 42

Questions:

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

1. How much of the proceeds from the issuance of convertible bonds should be allocated to
equity?
A. P634,000 B. P126,816 C. P221,664 D. P0

2. How much is the carrying value of the bonds payable as of December 31, 2020?
A. P2,000,000 B. P1,389,400 C. P1,796,170 D. P1,900,502

3. How much is the interest expense for the year 2021?

A. P160,000 B. P138,940 C. P179,617 D. P190,050

4. The entry to record the conversion on December 31, 2021 will include a credit to APIC of
A. P365,276 B. P400,000 C. P307,893 D. P0

5. How much is the loss on bond reacquisition on December 31, 2021?

A. P50,000 B. P96,053 C. P67,362 D. P0

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CPAR - MANILA AP-9002-2 – AUDIT OF LIABILITIES

PROBLEM NO. 2

In the audit of the Utang Corporation’s financial statements at December 31, 2021, the chief
accountant of the said corporation provided the following information:

Notes payable:
Arising from purchase of goods 304,000
Arising from 5 year-bank loans, on which marketable securities
valued at P600,000 have been pledged as security;
P400,000 due on June 30, 2022; P100,000 due on Dec. 31, 2022 500,000
Arising from advances by officers, due June 30, 2022 50,000
Reserve for general contingencies 400,000
Employees’ income tax withheld 20,000
Advances received from customers on purchase orders 64,000
Containers’ deposit 50,000
Accounts payable arising from purchase of goods,
net of debit balances of P30,000 170,000
Accounts receivable, net of credit balances P40,000 360,000
Cash dividends payable 80,000
Stock dividends payable 100,000
Dividends in arrears on preferred stock, not yet declared 200,000
Convertible bonds, due January 31, 2023 1,000,000
First mortgage serial bonds, payable in semi-annual installments
of P50,000, due April 1 and October 1 of each year 2,000,000
Overdraft with Allied Bank 90,000
Cash in bank balance with PNB 390,000
Estimated damages to be paid as a result of unsatisfactory
performance on a contract 160,000
Estimated expenses on meeting guarantee for service
requirements on merchandise sold 120,000
Estimated premiums payable 75,000
Deferred revenue 87,000
Accrued interest on bonds payable 360,000
Common stock warrants outstanding 120,000
Common stock options outstanding 210,000
Unused letters of credit 400,000
Deficiency VAT assessment being contested 500,000
Notes receivable discounted 200,000

On March 1, 2022, the P400,000 note payable was replaced by an 18-month note for the same
amount. Utang is considering similar action on the P100,000 note payable due on December 31,
2022. The 2021 financial statements were issued on March 31, 2022.

On December 1, 2021, a former employee filed a lawsuit seeking P200,000 for unlawful dismissal.
Utang’s attorneys believe that the suit is without merit. No court date has been set.

On January 15, 2022, the BIR assessed Utang an additional income tax of P300,000 for the 2019
tax year. Utang’s attorneys and tax accountants have stated that it is likely that the BIR will agree
to a P200,000 settlement.

Questions:

Based on the above and the result of your audit, compute the following as of December 31, 2021:

1. Total current liabilities

A. P2,500,000 B. P2,100,000 C. P2,300,000 D. P2,400,000

2. Total noncurrent liabilities

A. P3,300,000 B. P2,900,000 C. P3,000,000 D. P3,400,000
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CPAR - MANILA AP-9002-2 – AUDIT OF LIABILITIES

PROBLEM NO. 3

The following information relates to Debtorade Company’s obligations as of December 31, 2021.
For each of the numbered items, determine the amount if any, that should be reported as current
liability in Debtorade’s December 31, 2021 balance sheet.

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, 2021:

a) A Corp. – P224,000 merchandise shipped on December 31, 2021, FOB destination;

received on January 10, 2022.
b) B, Inc. – P192,000 merchandise shipped on December 26, 2021, FOB shipping point;
received on January 16, 2022.
c) C Co. – P144,000 janitorial services for the three-month period ending January 31, 2022.
d) MERALCO – P67,200 electric bill covering the period Dec. 16, 2021 to January 15, 2022.

On December 28, 2021, a supplier authorized Debtorade to return goods billed at P160,000
and shipped on December 20, 2021. The goods were returned by Debtorade on December
28, 2021, but the P160,000 credit memo was not received until January 6, 2022.

A. P5,923,200 B. P5,712,000 C. P5,601,600 D. P5,841,600

2. Payroll:

Items related to Debtorade’s payroll as of December 31, 2021 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 B. P992,000 C. P832,000 D. P912,000

3. Litigation:

In May 2021, Debtorade became involved in a litigation. The suit is being contested, but
Debtorade’s lawyer believes it is possible that Debtorade 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. P0 B. P2,000,000 C. P3,000,000 D. P2,500,000

4. Bonus obligation:

Debtorade 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. P722,600 B. P395,000 C. 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, 2021. The note is dated October 1, 2020, 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, 2021.
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CPAR - MANILA AP-9002-2 – AUDIT OF LIABILITIES

A. P800,000 B. P908,000 C. P72,000 D. P872,000

6. Purchase commitment:

During 2021, Debtorade entered in a noncancellable commitment to purchase 320,000 units

of inventory at fixed price of P5 per unit, delivery to be made in 2022. On December 31,
2021, 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, 2022.

A. P0 B. P1,600,000 C. P1,408,000 D. P192,000

7. Deferred taxes:

On December 31, 2021, Debtorade’s deferred income tax account has a 2021 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
P772,800 Cr.

A. P772,800 B. P952,000 C. P196,800 D. P0

8. Product warranty:

Debtorade has a one year product warranty on selected items in its product line. The
estimated warranty liability on sales made during 2020, which was outstanding as of
December 31, 2020, amounted to P416,000. The warranty costs on sales made in 2021 are
estimated at P1,504,000. Actual warranty costs incurred during the current
2021 fiscal year are as follows:

Warranty claims honored on 2020 sales P 416,000

Warranty claims honored on 2021 sales 992,000
Total warranty claims honored P1,408,000

A. P0 B. P1,504,000 C. P96,000 D. P512,000

9. Premiums:

To increase sales, Debtorade Company inaugurated a promotional campaign on June 30,

2021. Debtorade 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. Debtorade estimated
that only 60% of the coupons issued will be redeemed. For the six months ended December
31, 2021, the following is available:

Packages of product sold 160,000

Premiums purchased 16,000
Coupons redeemed 64,000

A. P1,728,000 B. P1,152,000 C. P1,600,000 D. P576,000

10. Due to Payb Siks Finance Company:

Debtorade’s accounting records show that as of December 31, 2021, P1,280,000 was due
to Payb Siks Finance Company for advances made against P1,600,000 of trade accounts
receivable assigned to the finance company with recourse.

A. P0 B. P1,600,000 C. P320,000 D. P1,280,000

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CPAR - MANILA AP-9002-2 – AUDIT OF LIABILITIES

PROBLEM NO. 4

Select the best answer for each of the following:

1. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on
management’s assertion of
A. Existence C. Completeness
B. Presentation and disclosure D. Valuation and allocation

2. An auditor performs a test to determine whether all merchandise for which the client was
billed was received. The population for this test consists of all
A. Merchandise received C. Canceled checks
B. Vendors’ invoices D. Receiving reports

3. The primary audit test to determine if accounts payable are valued properly is
A. Confirmation of accounts payable.
B. Vouching accounts payable to supporting documentation.
C. An analytical procedure.
D. Verification that accounts payable was reported as a current liability in the balance sheet.

4. Which of the following procedures is least likely to be performed before the balance sheet
date?
A. Observation of inventory count.
B. Testing of internal control over cash.
C. Search for unrecorded liabilities.
D. Confirmation of receivables.

5. An audit assistant found a purchase order for a regular supplier in the amount of P5,500.
The purchase order was dated after receipt of goods. The purchasing agent had
forgotten to issue the purchase order. Also, a disbursement of P450 for materials did not
have a receiving report. The assistant wanted to select additional purchase orders for
investigation but was unconcerned about lack of receiving report. The audit director
should
A. Agree with the assistant because the amount of the purchase order exception was
considerably larger than the receiving report exception.
B. Agree with the assistant because the cash disbursement clerk had been assured by the
receiving clerk that the failure to fill out a report didn’t happen very often.
C. Disagree with the assistant because two problems have an equal risk of loss associated
with them.
D. Disagree with the assistant because the lack of a receiving report has a greater risk of
loss associated with it.

6. When using confirmation to provide evidence about completeness assertion for accounts
payable, the appropriate population most likely is
A. Vendors with whom the entity has previously done business.
B. Amounts recorded in the accounts payable subsidiary ledger.
C. Payees of checks drawn in the month after the year end.
D. Invoices filed in the entity’s open invoice file.

7. Which of the following is a substantive test that an auditor is most likely to perform to verify
the existence and valuation of recorded accounts payable?
A. Investigating the open purchase order file to ascertain that pre-numbered purchase
orders are used and accounted for.
B. Receiving the client’s mail, unopened, for a reasonable period of time after year end to
search for unrecorded vendor’s invoices.
C. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders
and receiving reports.
D. Confirming accounts payable balances with known suppliers who have zero balances.

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8. Unrecorded liabilities are most likely to be found during the review of which of the
following documents?
A. Unpaid bills C. Bills of lading
B. Shipping records D. Unmatched sales invoices

9. Which of the following audit procedures is best for identifying unrecorded trade accounts
payable?
A. Reviewing cash disbursements recorded subsequent to the balance sheet date to
determine whether the related payables apply to the prior period.
B. Investigating payables recorded just prior to and just subsequent to the balance sheet
date to determine whether they are supported by receiving reports.
C. Examining unusual relationships between monthly accounts payable balances and
recorded cash payments.
D. Reconciling vendors’ statement to the file of receiving reports to identify items received
just prior to the balance sheet date.

10. Which of the following procedures relating to the examination of accounts payable could
the auditor delegate entirely to the client’s employees?
A. Test footings in the accounts payable ledger.
B. Reconcile unpaid invoices to vendors’ statements.
C. Prepare a schedule of accounts payable.
D. Mail confirmations for selected account balances.

END OF 9002-2

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