Problem no.

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 P 1,363,000

Trade creditors, debit balances 63,000
Net P 1,300,000
Estimated warranty on products sold 100,000
Customer’s deposits 9,000
Due to officers and shareholders for advances 50,000
Goods received on consignment at selling price
(offsetting debit made to Purchases) 41,000
P 1,500,000

A further analysis of the “Trade Creditors” debit balances indicates:

Date Items Amount

Miscellaneous debit balances prior to 2007.
No information available due to loss
of records in a fire. 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” 7,000
07/10/10 Jolo Distributors – Allowance granted on
defective merchandise after the invoice
was paid 5,000

10/10/10 Bulacan Co – Overpayment of invoice 12,000

12/05/10 Advance to Zambales Co. This company agrees

to supply certain articles on a cost –plus basis 24,000

12/05/10 Goods returned for credit and adjustments on

price after the invoices were paid; credit memos
from supplier not yet received 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 B. P 1,614,000
C. P 1,214,000 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 B. P 23,000
C. P 35,000 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 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 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. 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
3. 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
4. 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 Entry Voucher Description Amount Account Charged

no. Date Ref.
1 12.18.10 12-202 Supplies, purchased FOB P 20,000 Supplies on hand
destination, 23.26.20;
received 12.17.10
2 12.18.10 12-204 Auto insurance, 12.15.10 24,000 Prepaid insurance
12.20.11
3 12.21.10 12-206 Repairs services; 24,000 Repairs and
received 12.20.10 maintenance
4 12.21.10 12-214 Merchandise, shipped 17,000 Inventory
FOB Shipping point,
11.20.10; received
12.04.10
5 12.21.10 12-219 Payroll, 12.06.10 to 69,000 Salaries and
12.20.10 (12 working wages
days)
6 12.26.10 12-221 Subscription to Tax 5,000 Dues and
 Reporting Service for subscription
2011
7 12.28.10 12-230 Utilities for December 29,000 Utilities expense
2010
8 12.28.10 12-234 Merchandise, shipped 111,500 Inventory
FOB destination,
12.24.10; received
01.02.11
9 12.28.10 12-243 Merchandise, shipped 84,000 Inventory
FOB destination,
12.26.10; received
12.29.10
10 01.02.11 01-001 Legal services; received 46,000 Legal and
12.28.10 professional
expense

11 01.05.11 01-002 Medical services for 25,000 Medical expense

employees for December
2010
12 01.05.11 01-003 Merchandise, shipped 55,000 Inventory
FOB shipping point,
12.29.10; received
01.04.11
13 01.05.11 01-004 Payroll, 12.21.10 to 72,000 Salaries and
01.05.11 (12 working wages
days in total, 4 working
days in Jan. 2011
14 01.10.11 01-005 Merchandise, shipped 64,000 Inventory
FOB shipping point,
01.02.11; received
01.05.11
15 01.12.11 01-006 Manufacturing royalties 39,000 Manufacturing cost
December 2010
16 01.12.11 01-007 Merchandise, shipped 38,000 Inventory
FOB destination,
01.03.11; received
01.10.11
17 01.13.11 01-008 Maintenance e services; 9,000 Repairs and
received 01.09.11 maintenance
18 01.14.11 01-009 Interest on bank loan, 10- 30,000 Interest Expense
12-10 to 021.10.11
19 01.15.11 01-010 Manufacturing equipment 254,000 Machinery and
installed on 12.29.10 equipment
20 01.15.11 01-011 Dividends declared, 160,000 Dividends payable
12.15.10

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 Amount Due

April 1, 2010 P 400,000
July 1, 2010 600,000
October 1, 2010 300,000
April 1 2011 - March 31, 2012 300,000
April 1, 2012 – March 31, 2013 1,200.000
April 1, 2013 – March 31, 2014 1,000,000
April 1, 2014 – March 31, 2015 800,000
April 1, 2015 – March 31, 2016 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. TRADE PAYABLES
Accounts payable for supplies, goods and services purchased on open account
amount to P740,000 as March 31, 2010

2. 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 P 22.00 per share
March 31, 2010 21.50 per share
April 12, 2010 22.50 per share

1. 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
2. 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
3. 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
3. The gain on early retirement of bonds on December 31, 2010 is
a. P20,000 b. 112,000 c. 121,200 D. 0
4. The carrying value of the 5,000 6 year, P1,000 face value bonds on December 31,
2009 is
a. P4,605,800 b. 5,000,000 c. 4,732.875 d. 4,615,400
 5. 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 Credit 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% P 1,172,044 P1,172.044

Bond Interest Expense

Cash paid, 1/2/10 P 75,000 P 75,000
Cash paid, 7/1/10 75,000 150,000
Accrual, 12/31/10 75,000 225,000

Accrued Interest on Bonds

Balance, 1/1/10 P 75,000 P 75,000
Accrual, 12/31/10 75,000 150,000
Treasurer bonds
Redemption price and interest to date on
200 bonds permanently retired on 12/31/10 P 265,000 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 d. 921,266
2. Loss on Bond redemption
a. P4,683 b. P19,683 c. 15,000 d. 34,683
3. Accrued Interest on Bonds at December 31, 2010
a. P75,000 b. 135,000 c. 60,000 d. 52,500
4. Bond Interest Expense for the year ended December 31, 2010
a. P150,000 b. 1398,174 c. 69,745 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 P 1,000,000

Estimated cost of repairs – Products with minor defects P 6,000,000
Expected % of products sold during 2008 having no defects in 2010 80%
Expected & of products sold during 2008 having minor defects in 2010 15 %
Expected & of products sold during 2008 having Major defects in 2010 5%
-those with minor defects 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. 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/
2. 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

3. 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
4. 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
5. 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.
6. 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. The warranty expense in 2010 is
a. P100,000 b. 400,000 c. 160,000 d. 230,000
2. The provision for warranties as of December 31, 2010 is
a. P580,000 b. 230,000 c. 480,000 d. 410,000
3. 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
4. The provision for warranties to be reported as noncurrent liability as of December 31,
2010 is
a. P. 80,000 b. P260,000 c. 150,000 d. 330,000
5. 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

Suggested Answers

Problem 1 Problem 8
1. D 1. C
2. C 2. B
3. A 3. C
4. B 4. C
5. A 5. D
Problem 2 6. A
1. B 7. C
2. A 8. B
3. C 9. B
4. D 10. B
Problem 3 11. A
Adjusting entries 12. A
13. D
Problem 4 14. C
1. A 15. D
2. A 16. A
3. C 17. D
18. C
Problem 5 19. A
1. A 20. A
2. B
3. C
4. A
5. B

Problem 6 Problem 7
1. D 1. C
2. B 2. D
3. C 3.
4. C 4. A
5. D 5. B
6. A
7. C