Problem no.1 In connection with the audit of the PAKYO COMPANY for the year ended December 31, 2010 you are called upon to verify the accounts payable transactions. You find that the company does not make use of a voucher register but enters all merchandise purchases in a Purchases Journal, from which posting are made to a subsidiary accounts payable ledger. The subsidiary ledger balance of P1,500,000 as of December 31, 2010 agrees with the accounts payable balance in the company’s general ledger. An analysis of the account disclosed the following: Trade creditors, credit balances Trade creditors, debit balances Net Estimated warranty on products sold Customer’s deposits Due to officers and shareholders for advances Goods received on consignment at selling price (offsetting debit made to Purchases)
P 1,363,000 63,000 P 1,300,000 100,000 9,000 50,000 41,000 P 1,500,000
A further analysis of the “Trade Creditors” debit balances indicates: Date
Items Miscellaneous debit balances prior to 2007. No information available due to loss of records in a fire.
Amount P 3,000
03/03/07 Manila Co. –Merchandise returned for credit, but the company is now out of business
8,000
06/10/09 Cebu Corp. – Merchandise returned but Cebu says “never received” 07/10/10 Jolo Distributors – Allowance granted on defective merchandise after the invoice was paid 10/10/10 Bulacan Co – Overpayment of invoice
7,000 5,000
12,000
12/05/10 Advance to Zambales Co. This company agrees to supply certain articles on a cost –plus basis 12/05/10 Goods returned for credit and adjustments on price after the invoices were paid; credit memos from supplier not yet received
24,000
4,000 63,000
Your next step is to check the invoices in both the paid and the unpaid invoice files against ledger accounts. In this connection, you discover an invoice from Atlas Co. of P45,000 dated December 12, 2010 marked “Duplicate”, which was entered in the Purchase Journal in January 2011. Upon inquiry, you discover that the merchandise covered by this invoice was received and sold, but the original invoice apparently has not been received. In the bank reconciliation working papers, there is a notation that five checks totaling P 63,000 were prepared and entered in the Cash Disbursements Journal of December, but these checks were not issued until January 10, 2011. The inventory analysis summary discloses good in transit of P 6,000 at December 31, 2010, not taken up by the company under audit during the year 2010. These goods are included in your adjusted inventory. 1. The Accounts payable – Trade balance at December 31, 2010 should be A. P 1,471,000 C. P 1,214,000
B. P 1,614,000 D. P 1,477,000
2. The net adjustment to Purchases should include a A. Net debit of P 51,000
B. Net credit of P 41,000 C. Net debit of P 10,000 D. Net debit of P 73,000 3. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to A. P 18,000 C. P 35,000
B. P 23,000 D. P 39,000
4. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to A. Miscellaneous losses if P 23,000 B. Advances to suppliers of P 24,000 C. Suppliers to debit balances of P 18,000 D. Purchases of P 21,000 5. Auditor confirmation of accounts payable balances at the end of the reporting period may be necessary because A. There is likely to be other reliable external evidence to support the balances B. Correspondence with the audit clients attorney will reveal all legal action by vendors for non-payment C. This is a duplication of cutoff test D. Accounts payable at the end of reporting period may not be paid before the audit is completed. Problem 2 You were able to obtain the following from the accountant for Maverics Corp. Related to the companys liability as of December 31, 2010. Accounts payable Notes payable – trade Notes payable – bank Wages and salaries payable Interest payable Mortgage notes payable – 10% Mortgage notes payable – 12% Bonds Payable
P 650,000 190,000 800,000 15,000 ? 600,000 1,500,000 2,000,000
The following additional information pertains to these liabilities: a. All trade notes payable are due within six months of the balance sheet date. b. Bank notes payable include two separate notes payable Allied Bank. (1) A P300,000, 8% note issued March 1, 2008, payable on demand. Interest is payable every six months. (2) A 1-year, P500,000, 11 ½% note issued January 2, 2010. On December 30, 2010 Mavericks negotiated a written agreement with Allied Bank to replace the note with 2-year, P500,000, 10% note to be iss7ued January 2, 2011. The interest was paid on December 31, 2010 c. The 10% mortgage note was issued October 1, 2007. With a term of 10 years. Terms of the note give the holder the right to demand immediate payment of the company fails to make a monthly interest payment within 10 days of the date the payment is due. As of December 31, 2010, Mavericks is three months behind in paying its required interest payment. d. The 12% mortgage note was issued may 1, 2001, with a term of 20 years. The current principal amount due is P 1,500,000. Principal and interest payable annually on April 30, A payment of P220,000 is due April 30, 2011. The payment includes interest of P 180,000. e. The bonds payable is 10-year, 8% binds, issued June 30, 2001. Interest is payable semi-annually every June 30 and December 31. Based on the above and the result of your audit, answer the following: 1. Interest payable as of December 31, 2010 is a. P155,000 b. 143,000 c. 203,000 d. 215,000
2.
3.
4.
The portion of the Notes payable – bank to be reported under current liabilities as of December 31, 2010 is a. P 300,000 b. 500,000 c.800,000 d. 0 Total current liabilities as of December 31, 2010 is a. P 3,950,000 b. 4,138,000 c. 3,938,000 d. 3,998,000 Total noncurrent liabilities as of December 31, 2010 is a. P1,760,000 b. 2,560,000 c. 3,960,000 d. 1,960,000
Problem no. 3 In conjunction with your firm’s examination of the financial statements of PISTONS COMPANY as of December 31, 2010, you obtained from the voucher register the information shown in the working paper below. Item no. 1
Entry Date 12.18.10
Voucher Ref. 12-202
2
12.18.10
12-204
3
12.21.10
12-206
4
12.21.10
12-214
5
12.21.10
12-219
6
12.26.10
12-221
7 8
12.28.10 12.28.10
12-230 12-234
9
12.28.10
12-243
10
01.02.11
01-001
11
01.05.11
01-002
12
01.05.11
01-003
13
01.05.11
01-004
14
01.10.11
01-005
15
01.12.11
01-006
16
01.12.11
01-007
Description
Amount
Account Charged
Supplies, purchased FOB destination, 23.26.20; received 12.17.10 Auto insurance, 12.15.10 12.20.11 Repairs services; received 12.20.10 Merchandise, shipped FOB Shipping point, 11.20.10; received 12.04.10 Payroll, 12.06.10 to 12.20.10 (12 working days) Subscription to Tax Reporting Service for 2011 Utilities for December 2010 Merchandise, shipped FOB destination, 12.24.10; received 01.02.11 Merchandise, shipped FOB destination, 12.26.10; received 12.29.10 Legal services; received 12.28.10
P 20,000
Supplies on hand
24,000
Prepaid insurance
24,000 17,000
Repairs and maintenance Inventory
69,000
Salaries and wages
5,000 29,000 111,500
Dues and subscription Utilities expense Inventory
84,000
Inventory
46,000
Legal and professional expense
Medical services for employees for December 2010 Merchandise, shipped FOB shipping point, 12.29.10; received 01.04.11 Payroll, 12.21.10 to 01.05.11 (12 working days in total, 4 working days in Jan. 2011 Merchandise, shipped FOB shipping point, 01.02.11; received 01.05.11 Manufacturing royalties December 2010 Merchandise, shipped FOB destination, 01.03.11; received 01.10.11
25,000
Medical expense
55,000
Inventory
72,000
Salaries and wages
64,000
Inventory
39,000
Manufacturing cost
38,000
Inventory
17
01.13.11
01-008
18
01.14.11
01-009
19
01.15.11
01-010
20
01.15.11
01-011
Maintenance e services; received 01.09.11 Interest on bank loan, 1012-10 to 021.10.11 Manufacturing equipment installed on 12.29.10 Dividends declared, 12.15.10
9,000 30,000 254,000 160,000
Repairs and maintenance Interest Expense Machinery and equipment Dividends payable
Accrues liabilities as December 31, 2010 were as follows: Accrued payroll P 48,000 Accrued interest payable 26,667 Dividends payable 160,000 Accrues royalties payable 39,000 The accrues payroll, accrued interest payable, and accrued royalties payable accounts were reversed on January 1, 2011. REQUIRED: Prepare adjusting entries as of December 31, 2010 based on your review of the data given above. PROBLEM NO 4 FEEL NA FEEL, INC. has been producing quality reusable adult 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 Feel Na Feel as of March 31, 2010. BONDS PAYABLE Feel Na Feel issued P10,000,000 of 10% bonds on July 1, 2008. The prevailing market rate of interest for these bonds was 12% on the date issue. The bonds will mature on July 1, 2018. Interest is paid semiannually on July 1 and January 1. Feel Na Feel uses the effective interest rate method to amortize bond premium or discount NOTES PAYABLE Feel Na Feel 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 of these notes amounts to P600,000 on March 31, 2010 Due Date April 1, 2010 July 1, 2010 October 1, 2010 April 1 2011 - March 31, 2012 April 1, 2012 – March 31, 2013 April 1, 2013 – March 31, 2014 April 1, 2014 – March 31, 2015 April 1, 2015 – March 31, 2016
Amount Due P 400,000 600,000 300,000 300,000 1,200.000 1,000,000 800,000 1,000,000 P 7,000,000
ESTIMATED WARRANTIES Feel Na Feel has a one-year product warranty on some selected items in its product line. The estimated warranty liability on sales made during the 2008-2009 fiscal year and still outstanding as of March 31, 2009 amounted to P180,000. The warranty cost on sales made from April 1 2009, through March 31,2010, are estimated as P520,000. The actual warranty cost incurred during the current 2009-2010 fiscal tear are as follows: Warranty claims honored on 2008-2009 sales P 180,000 Warranty claims honored on 2009-2010 sales 178,000 Total warranty claims honored P 358,000 OTHER INFORMATION 1.
2.
TRADE PAYABLES Accounts payable for supplies, goods and services purchased on open account amount to P740,000 as March 31, 2010 PAYROLL RELATED ITEMS
Merchandise, shipped FOB destination, 12.24.10; received 01.02.11 Accrued Salaries and wages P 300,000 Withholding taxes payable 94,000 Other payroll deductions 10,000 3. MISCELLANEOUS ACCRUALS Other accruals not separately classified amount to P150,000 as of March 31, 2010 4.
DIVIDENDS On march 15, 2010, Feel Na Feel’s board of directors declared a cash dividend of P0.20 per common share and a 10% common stock dividend. Both dividends were to be distributed on April 12, 2010, to the common stockholders of record at the close of business on march 31, 2010. Data regarding Feel Na Feel common stock are as follows: Per Value P 5.00 per share Number of shares issued and outstanding 6,000,000 shares Market Values of Common Stock: March 15, 2010 March 31, 2010 April 12, 2010
P 22.00 per share 21.50 per share 22.50 per
share 1.
2.
3.
How much was received by Feel Na Feel from the bonds issued on July 1, 2008? a. P8,852,960 b. 10,000,000 c. 10,500,000 d. 10,647,040 On March 31, 2010, Feel Na Feel’s statements of financial position would report total current liabilities of a. P5,286,000 b. 4,386,000 c. 5,336,000 d. 5,642,000 On March 31, 201, Feel Na Feel’s statement of financial position would report total noncurrent liabilities of a. P14,389.350 b. 14,352,217 c. 14,370,783 d. 14,252,960
PROBLEM NO. 5 On January 1, 2009, WIZARDS CORPORATION issued 2,000 of its 5-year, P1,000 face value 11% bonds date January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each December 31. Wizards uses the effective interest method of amortization. On December 31, 2010. The 2,000 bonds were extinguished early through acquisition on the Open Market by Wizard for P1,980,000 plus accrued interest. On July 1, 2009, Wizards issued 5,000 of its P1,000 face value, 10% convertible bonds at pat. Interest is payable every June 30 and December 31. On the date of issue, the prevailing market interest rate for similar debt without the conversion option is 12%. On July 1, 2010, an investor in Wizards convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Wizards common stock, which had a fair value of P105 and a par value of P1 at the date of conversion. 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 on the 2,000 5-year, P1,000 face value bonds in January 1, 2009 is a. P2,155.500 b. P2,000,000 c. 1,844,400 d. 2,147,800
2.
The carrying value of the 2,000 5-year, P1,000 face value bonds on December 31, 2009 is a. 1,898,400 b. 2,129,500 c. 2,000,000 d. 2,121,100 The gain on early retirement of bonds on December 31, 2010 is a. P20,000 b. 112,000 c. 121,200 D. 0 The carrying value of the 5,000 6 year, P1,000 face value bonds on December 31, 2009 is
3. 4.
a.
5.
P4,605,800 b. 5,000,000 c. 4,732.875 d. 4,615,400 The conversion of the 1,500 6-years, P1,000 face value bonds on July 1, 2010 will increase APIC by a. P1,485,000 b. 1,374,000 c. 1,415.054 d. P1,377,697
PROBLEM NO. 6 The following data were obtained from the initial audit of BIBI COMPANY: 15%, 10 year, bonds payable, dated January 1, 2009 Debit Balance Cash proceeds from issue on January 1, 2009 Of 1,000, P1,000 bonds. The market rate of Interest on the date of issue was 12% Bond Interest Expense Cash paid, 1/2/10 Cash paid, 7/1/10 Accrual, 12/31/10 Accrued Interest on Bonds Balance, 1/1/10 Accrual, 12/31/10 Treasurer bonds Redemption price and interest to date on 200 bonds permanently retired on 12/31/10 265,000
P 1,172,044
Credit
P1,172.044
P 75,000 75,000 75,000
P 75,000 150,000 225,000 P 75,000 P 75,000 75,000 150,000
P 265,000
Based on the preceding information, determine the following: 1. Carrying value of bonds payable at December 31, 2010 a. P831,110 b. 800,000 c. 1,151,583 921,266 2. Loss on Bond redemption a. P4,683 b. P19,683 c. 15,000 3. Accrued Interest on Bonds at December 31, 2010 a. P75,000 b. 135,000 c. 60,000 4. Bond Interest Expense for the year ended December 31, 2010 a. P150,000 b. 1398,174 c. 69,745
P
d.
d. 34,683 d. 52,500 d. 160,826
PROBLEM 7 NUGGETS CORPORATION manufactures and sells food products and food processing machinery. Its reporting date is December 31. Relevant extracts from its financial statements at December 31, 2009 are as follows: Current liabilities Provision Provision for warranties
P270,000
Noncurrent liabilities Provision Provision for warranties
P180,000
Note 36-Contigent Liabilities NUGGETS is engaged in the litigation with various parties in relation to allergic reaction t o traces of peanuts alleged to have been found in packets of fruit gums. NUGGETS strenuously denies the allegation and , as at the same date authorizing the financial statements for issue, is unable to estimate the financial effect, if any, of any cost or damages that may be [payable to the plaintiffs. The provision for warranties at December 31, 2009 was calculated using the following assumptions: There was no balance carried forward from the prior year.
Estimated cost of repairs – Products with minor defects Estimated cost of repairs – Products with minor defects Expected % of products sold during 2008 having no defects in 2010 Expected & of products sold during 2008 having minor defects in 2010 Expected & of products sold during 2008 having Major defects in 2010 -those with minor defects
P 1,000,000 P 6,000,000 80% 15 % 5% all in
2010 Expected timing of settlement of warranty payments -those with major defects
40%
in 2010 60% in 2010 During the year ended December 31, 2010, the following occurred: 1.
2.
3.
4. 5.
6.
In a relation to the warranty provision of P450,000 at December 31, 2009, 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 2010/ In calculating its warranty provision for December 31, 2010, NUGGETS made the following adjustment to the assumptions used for the prior year: Estimated cost of repairs-products with minor defects no change Estimated cost if repairs – products with major defects P 5,000,000 Expected % of products sold during 209 having no defects in 2011 85% Expected % of products sold during 2009 having minor defects in 2011 13% Expected % of products sold during 2009 having major defects in 2011 2% -those with minor defects all in one 2011 Expected timing of settlement of warranty payments 20% in 2011 -those with major defects 80% in 2012 NUGGETS determined that part of its plant and equipment needed an overhaul – the conveyor belt on one of it s machines would need to be replaced ion about December 2011 at an estimated cost of P250,000. The carrying amount of the conveyor belt at December 31, 2009 was P140,000. Its original cost was P200,000 NUGGETS was unsuccessful in its defense of the peanut allergy case and was ordered to pay P1,5000,000 to the plaintiffs. As at December 31, 2010, NUGGETS had paid P800,000 NUGGETS commenced litigation against one of its adviser for negligent advice given on the original installation of the conveyor belt referred to in (3) above, in October 2010, the court found in favor of NUGGETS. The hearing for damages had not been scheduled as at the date the financial statement for 2010 were authorized for issue. NUGGETS estimated that it would receive about P425,000. NUGGETS signed an agreement with Choko Bank to the effect that NUGGETS would guarantee a loan made by Choko Bank to NUGGETS’ subsiadiary, ChapaChocks Ltd. ChapaChocs’ loan with Choko Bank was P3,200,000 as at December 31, 2010. ChapaChocs was in a strong financial position at 31 December 2010
Based on the above and the result of your audit, answer the following: 1.
2.
3.
4.
The warranty expense in 2010 is a. P100,000 b. 400,000 c. 160,000 d. 230,000 The provision for warranties as of December 31, 2010 is a. P580,000 b. 230,000 c. 480,000 d. 410,000 The provision for warranties to be reported as current liability as of December 31, 2010 is a. 220,000 b. 150,000 c. 400,000 d, 330,000 The provision for warranties to be reported as noncurrent liability as of December 31, 2010 is
a.
5.
P. 80,000 b. P260,000 c. 150,000 d. 330,000 Total provisions to be reported in the statement of financial position as of December 31, 2010 is a. P480,000 b. 410,000 c. 1,180,000 d. 1,360,000
PROBLEM NO 8 Select the best answer for each of the following: 1.
2.
3.
4.
5.
6.
7.
In Auditing accounts payable, an auditor procedures most likely will focus primarily on managements assertion of. a. Existence c. Completeness b. Presentation and disclosure d. Valuation and allocation An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consist of all a. Merchandiser received c. Canceled checks b. Vendor’s invoices d. receiving reports 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. 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. An audit assistant found a purchase order for a regular supplier in the amount P 5,500 the purchase order was date after receipt of goods. The purchasing agent had forgotten to issue the purchase order. Also, a disbursement of P450 for materials did not have 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. When using confirmation to provide evidence about completeness assertion for account 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. Which of the following is a substantive test than 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 prenumbered purchase orders are used and accounted for.
b.
8.
9.
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 know suppliers who have zero balances. Only one of the following four statements which compare confirmation of accounts payable with suppliers and confirmation of accounts receiving with debtors is false. The false statements is that a. Confirmation of accounts receiving with debtors is a more widely accepted auditing procedure than us confirmation of accounts payable with suppliers b. Statistical sampling techniques are more widely accepted in the confirmation of accounts payable than in the confirmation of accounts receivable ] c. As compared with the confirmation of accounts receivable, the confirmation of accounts payable will tend to emphasize accounts with zero balances at the balance sheet date. d. It is less likely that the confirmation request sent to the supplier will show the amount owed than that request sent to the debtor will show the amount date. When title to merchandise in transit has passed to the audit client the auditor engaged in the performance of a purchase cut-off will encounter the greatest difficulty in gaining assurance with respect to the a. Quantity C. Price b. Quality d. Terms
10. Which of liability? a. b. c. d.
the following audit procedures is least likely to detect an unrecorded Analysis and recomputation of interest expense Analysis and recomputation of depreciation expense. Mailing of standard bank confirmation forms. Reading of the minutes of meetings of the board of directors
11. 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 invoice 12. Which of the following audit procedures is best for identifying unrecorded trade accounts payable? a. Reviewing cash disbursement 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, 13. In verifying debits to perpetual inventory records of nonmanufacturing firm, the auditor is most interested in examining the purchase a. Journal c. Order b. Requisitions d. Invoices. 14. Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the clients employees a. Test footings in the accounts payable ledger b. Reconcile unpaid invoices to vendors statements
15.
16.
17.
18.
19.
20.
c. Prepare a schedule of accounts payable d. Mail confirmation for selected account balances An auditors purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning managements assertions about a. Existence c. Completeness b. Presentation and disclosure d. Valuation An auditors program to audit long-term debt should include steps that require a. Examining bond trust indentures b. Inspecting the accounts payable subsidiary ledger c. Investigating credits to the bond interest income account d. Verifying the existence of the bondholders. In an audit of bonds payable, an auditor expects the trust indenture to include the a. Auditee’s debt-to-equity ratio at the same time of issuance b. Effective yield of the bonds issued c. Subscription list d. Description on the collateral In auditing long-term bonds payable, an auditor most likely will a. Perform analytical procedures on the bond premium and discount accounts b. Examine documentation of assets purchased with the bond proceeds or liens c. Com[pare interest with the bond payable amount for reasonableness d. Confirm the existence of individual bondholders at year-end The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because a. Accrued liabilities usually pertain to services of a continuing nature while account payable are the result of completed transaction b. Accrued liability balances are less material than account payable balances. c. Evidence supporting accrued liabilities is nonexistent while evidence supporting account payable is readily available d. Accrued liabilities at year end will become account payable during the following year The auditor is most likely to verify accrued commissions payable in conjunction with the a. Sales cutoff test. b. Verification of contingent liabilities. c. Review of post-balance sheet date disbursements. d. Examination of trade accounts payable
Suggested Answers Problem 1 1. D 2. C 3. A 4. B 5. A Problem 2 1. B 2. A 3. C 4. D Problem 3 Adjusting entries Problem 4 1. A 2. A 3. C Problem 5 1. A 2. B 3. C 4. A 5. B Problem 6 1. D 2. B 3. C 4. C 5. D 6. A 7. C Problem 7 1. C 2. D 3. 4. A 5. B
Problem 8 1. C 2. B 3. C 4. C 5. D 6. A 7. C 8. B 9. B 10. B 11. A 12. A 13. D 14. C 15. D 16. A 17. D 18. C 19. A 20. A
