01.05: Audit of Current Liabilities
BA 123
Part I – I – Determination Determination of Classification In the audit of the Jordan Corporation’s financial statements at December 31, 2003, the chief accountant of the said corporation provided the following information:
Notes payable: Arising from purchase of goods
120,000
Arising from bank loans, on which marketable securities valued at P600,000 have pledged as security, due Dec. 31, 2004
500,000
Arising from advances by officers, due June 30, 2004
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 of P30,000 Accounts receivable, net of credit balances P40,000
goods,
net
of
debit
balances 170,000 360,000
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, 2005
1,000,000
First mortgage serial bonds, payable in semi-annual installments of P50,000, P50,000, due April 1 and October 1 of each year Overdraft with Allied Bank Cash in bank balance with PNB
2,000,000 2,000,000 90,000 390,000
Estimated damages to be paid as a result of unsatisfactory performance performance on a contract
160,000
Estimated expenses on meeting guarantee for service requirements on merchandise sold
120,000
Accrued interest on bonds payable
360,000
Common stock warrants outstanding
120,000
Common stock options outstanding
210,000
Unused letters of credit
80,000
Deficiency Deficiency income tax assessment being contested
500,000
Notes receivable receivable discounted
200,000
REQUIRED:
Based on your audit of the above, compute for the following as of December 31, 2003: 1. 2.
Total current liabilities Total liabilities
01.05: Audit of Current Liabilities
BA 123
Part II – Cut Off Procedures In conjunction with your firm’s examination of the financial statements of Duncan Company as of December 31, 2003, you obtained from the voucher register the information shown in the working paper below.
Item No. 1
Entry Date 12.18.03
Voucher Ref. 12-202
2 3
12.18.03 12.21.03
12-204 12-206
4
12.21.03
12-214
5
12.21.03
12-219
6
12.26.03
12-221
7 8
12.28.03 12.28.03
12-230 12-234
9
12.28.03
12-243
10
01.02.04
01-001
11
01.02.04
01-002
12 13
14 15 16
01.05.04 01.10.04
01.10.04 01.12.04 01.12.04
01-003 01-004
01-005 01-006 01-007
17
01.13.04
01-008
18
01.14.04
01-009
19
01.15.04
01-010
20
01.15.04
01-011
Description Supplies, purchased FOB destination, 12.15.03; received, 12.17.03 Auto insurance, 12.15.03 to 12.15.04 Repair services; received 12.20.03 Merchandise shipped FOB shipping point, 11.20.03; received, 12.4.03 Payroll, 12.6.03 to 12.20.03 (12 working days) Subscription to tax reporting service for 2004 Utilities for December 2003 Merchandise shipped FOB destination, 12.24.03; received, 1.2.04 Merchandise shipped FOB destination, 12.26.03; received, 1.3.04 Legal services, received 12.28.03 Medical services for employees for December 2003 Merchandise shipped FOB shipping point, 12.29.03; received, 1.4.04 Payroll, 12.21.03 to 01.05.04 (12 working days in total, 4 working days in January) Merchandise shipped FOB shipping point, 1.2.04; received, 1.5.04 Manufacturing royalties, Dec. 2003 Merchandise shipped FOB destination, 1.3.04; received, 1.10.04 Maintenance services, received 1.9.04 Interest on bank loan, 10.12.03 to 1.10.04 Manufacturing equipment, installed on 12.29.03 Dividends declared, 12.15.03
Amount 20,000 24,000 24,000
Supplies on hand Prepaid insurance Repairs and maintenance
17,000
Inventory
69,000
Salaries and wages Dues and subscription expense Utilities expense
5,000 29,000 111,500
Inventory
84,000 46,000
Inventory Legal and professional expense
25,000
Medical expense
55,000
Inventory
72,000
Salaries and wages
64,000 39,000
Inventory Manufacturing costs
38,000 9,000
Inventory Repairs and maintenance
30,000 254,000 160,000
Accrued liabilities as of December 31, 2003 were as follows: Accrued payroll Accrued interest payable Dividends payable Accrued royalties payable
Account Charged
48,000 26,667 160,000 39,000
Interest expense Machinery and equipment Dividends payable
01.05: Audit of Current Liabilities
BA 123
The Accrued payroll, Accrued interest payable, and Accrued royalties payable accounts were reversed on January 1, 2004. REQUIRED:
Prepare adjusting entries as of December 31, 2003 based on your review of the data given above.
Part III – Other Current Liabilities Jolina’s Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, and sheet music. The company started operations in January 1, 2010. The following pertain to some of the liabilities of Jolina at year-end 2010.
1.
2.
3. 4.
5.
6. 7.
8.
Cut-off procedures revealed that a Php50,000 advertising bill was received last January 10, 2011, comprising costs of Php37,500 for advertisements in December 2010 and Php12,500 for January 2011. No accrual was posted as of December 31, 2010. A store lease, effective January 1, 2010, calls for fixed rent of Php120,000 per month, payable one month from the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over Php6,000,000 per calendar year is payable every January 31 of the following year. Sales for the year amounted to Php7,500,000. no accrual was made at year end Jolina has a bonus agreement with the company under which she receives 10% of audited net income after bonuses each year. Since net income is yet to be determined, the bonus has not been provided for. The company sold 70,000 units of sheet music. Each s heet music comes with a coupon, which if submitted with Php50, entitles the customer to a free mixed song CD. Jolina pays Php70 for the CDs. Jolina estimates that 70% of the coupons will be redeemed. Actual redemption amounted to 300,000 coupons for the year. The accountant expensed CDs given out as redeemed. For the year, Jolina bought 450,000 mixed song CDs. Musical products are sold with a one-year warranty for replacement parts and labor. The estimated warranty cost is 10% of musical product sales which comprise 40% of total sales. Like coupons, warranty expense of Php64,000 was recorded as replacement parts are requisitioned and as job time tickets of personel are submitted. Sales is for P 7.5 Million. The accounts payable ledger included debits amounting to Php240,000 representing overpayment to a supplier. The unpaid voucher files were examined. The following payables and amounts were traced from the accounts payable GL to the unpaid vouchers: a) A Company – Php224,000 merchandise shipper on December 31, 2010, FOB destination. The inventory was received on January 10,2011. b) B Company –Php192,000; merchandise shipped on December 26,2010, FOB shipping point, received on January 16, 2011. c) C Super Services – Php144,000; for janitorial services over a three month period ending January 31, 2011. d) Meralco – Php67,200; for electric bills covering the period December 15 to January 15, 2011. Unaudited net income, and current liabilities amounted to Php1,000,000 and Php5,350,000 respectively.
Requirements: 1. Proposed audit adjustments from the foregoing data. 2. Audited net income. 3. Schedule indicating adjustments for audited liabilities.
