AP Module 2 Prof. Francis H.

Villamin
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AUDIT OF CURRENT AND NON-CURRENT LIABILITIES

AUDIT OBJECTIVES:

EXISTENCE - to determine whether payables actually exist as of Statement of financial position date.

Audit Procedure:
a. Obtain from the client a listing of the payables as of year-end and reconcile to the general ledger.
b. Vouch recorded liabilities to vendors’ statements
c. Confirm recorded liabilities directly with suppliers and creditors
d. Examine bank confirmations for loans
e. Inspect bonds redeemed and surrendered during the period

RIGHTS AND OBLIGATIONS - to determine whether payables represent valid and legal claims of
third parties from the client.

Audit Procedure:

a. Review documentations in client’s file

b. Examine subsequent payments to creditors
c. Review minutes of Board of Directors’ meetings
d. Review payments and renewals of loan after Statement of financial position date

COMPLETENESS - to determine that all transactions related to payables have been properly
recorded.

Audit Procedure:
a. Perform purchase cut off examination
b. Test for unrecorded liabilities
c. Perform analytical procedures
d. Trace authorization of debts to credits to the long-term liabilities account
e. Vouch borrowing and repayment transactions occurring during the year

VALUATION AND ALLOCATION - to determine whether payables are recorded at proper amounts

Audit Procedure:
a. Vouch accounts payable schedules
b. Test computation of accrued and prepaid interest
c. Ascertain the amount of long-term debt maturing during the year

PRESENTATION AND DISCLOSURE - to determine whether payables are properly presented and
classified in the financial statements in accordance with PAS/PFRS.

Audit Procedure:
a. Determine whether each type of obligation is properly described and classified
b. Determine if contingent liabilities are properly disclosed
c. Obtain client’s representation letter

LIABILITIES
➢ Definition:
Liabilities are present obligations of an entity arising from past transactions or events, the
settlement of which is expected to result in the outflow from the entity of resources
embodying economic benefits.
AP Module 2 Audit of Current and Non-Current Liabilities 2

➢ Measurement:
a. Initial recognition
PFRS 9 provides that an entity shall recognize initially a financial liability at fair value plus
transactions costs that are directly attributable to the issue of the financial liability.

b. Subsequent measurement
Subsequent to initial recognition, a financial liability is measured at amortized cost.

➢ Classification:
Per PAS 1, liabilities are classified as to:
1. Current liabilities
2. Non-current liabilities

➢ Recognition:
A liability is recorded and reported on the Statement of financial position when the following
conditions are met:
1. It is probable that an outflow of resources embodying economic benefits will result from the
settlement of a present obligation.
2. The amount at which the settlement will take place can be measured reliably.

➢ Statement of financial position presentation:

1. Current liabilities
• They are expected to be settled in the normal course of the company’s operating cycle.
• They are held primarily for the purpose of being traded.
• They are due to be settled within twelve months after the Statement of financial position
date.
• The entity does not have unconditional right to defer settlement of the liability for at least
twelve months after the Statement of financial position date or when the refinancing or the
rolling over of the obligation is not at the discretion of the entity.

2. Non-current liabilities
• They are expected to be settled beyond the company's operating cycle
• To be paid by transfer of non-current assets that had been accumulated for the purpose of
liquidating the liability, until such time, the obligation is continued to be classified as non
current.
• They are expected to be settled beyond one year from the Statement of financial position
date

ESTIMATED LIABILITIES:
➢ Definition
They are obligations which exist on Statement of financial position date although their amount
is not definite, the date when the obligation is due is also not definite and the person to whom
they are payable cannot be identified.
➢ Recognition
A provision is recognized as a liability when:
a. An enterprise has a present obligation as a result of past event whether legal or
constructive.
b. It is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation.
c. The amount of obligation can be measured reliably.

➢ Measurement
The amount recognized as provision should be the best estimate of the expenditure required
to settle the obligation at the Statement of financial position date.

CONTINGENT LIABILITIES:
PAS 37 defines contingent liabilities in two ways:
➢ It is a possible obligation that arises from past events and whose existence will be confirmed
only by the occurrence or non occurrence of one or more uncertain future events not wholly
within the control of the enterprise.
➢ It is a present obligation that arises from past event but is not recognized because:
a. it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation
b. or the amount of the obligation cannot be measured reliably.

Treatment of Contingent liability

1. A contingent liability shall not be recognized in the financial and shall only be disclosed.
2. If the contingent liability is remote, no disclosure is necessary.
AP Module 2 Audit of Current and Non-Current Liabilities 3

ACCOUNTING FOR BONDS

➢ Definition
A bond is a formal unconditional promise made under seal, to pay a specified sum of
money at a determinable future date, and to make periodic interest payments at a stated
rate until the principal sum is paid.

➢ Measurement
a. Initial measurement
Bonds are initially recorded at fair values, which is the proceeds received on account of
the face on issue date. Any excess of the issue price over the face value of the bonds
is recorded as a premium and any excess of the face value over the issue price of the
bonds is charged to discount. These differences are amortized over the life of the bond
to the interest expense account using the effective interest method.

b. Subsequent measurement
PFRS 9 provides that bonds payable shall be measured after initial recognition at
amortized cost using the effective interest method.

BONDS WITH DETACHABLE SHARE WARRANTS

Bondholders are given the right to acquire specified number of ordinary shares of the issuing corporation
at a given price within a certain time period. A portion of the proceeds of the bond issuance equal to
the market value of the bonds ex-warrant shall be assigned to the bonds regardless of the market value
of the warrants and the remainder of the issue price to the warrants which is accounted for as a share
premium, termed as Share warrant outstanding.

CONVERTIBLE BONDS
These are bonds which give the holders the right to convert their bond holdings into share capital or
other securities of the issuing company within a specified period of time. They shall be accounted for
as partly liability and partly equity. The issue price shall be allocated between the bonds payable and
the conversion privilege.

METHODS OF AMORTIZING BOND ISSUE COST, PREMIUMS OR DISCOUNT

Effective interest method – PFRS 9 provides that after initial recognition, an entity shall measure
all financial liabilities at amortized cost using the effective interest method. Therefore, the new
standard requires the use of the effective interest method in amortizing discount, premium and bond
issue cost. This method uses a uniform interest rate based on a changing loan balance and provides
an increasing premium or discount amortization each period.

WAYS OF BOND EXTINGUISHMENT PRIOR TO MATURITY

1. Redemption - issuer may purchase the bonds in the open market or by exercising the call
provision.

Redemption may be on:

1. Maturity Date
No gain or loss is computed because any premium, discount or bond issue cost will be fully
amortized on the date of maturity. Therefore, the carrying amount of the bond is equal to the
face value.

2. Before maturity date

The carrying value of the bonds payable is compared against the reacquisition price or
retirement price. The difference is accounted for as gain or loss on retirement.

2. Conversion - bonds may be exchanged with other securities of the issuing corporation.

3. Refunding - using the proceeds from the sale of a new bond issue to retire outstanding bonds.

ACCOUNTING FOR LONG TERM NOTES PAYABLE

Long term notes payable are valued at the present value of its future interest and principal cash flows
with any discount or premium being amortized over the life of the note.
Kinds of notes Present value
1. Note issued solely for cash Cash proceeds
2. Interest bearing note issued for property Purchase price
3. Non interest bearing note issued for property Cash price of property
AP Module 2 Audit of Current and Non-Current Liabilities 4

LOAN IMPAIRMENT
1. The loan is considered impaired when it is probable, based on current information and events that
the creditor will be unable to collect all amounts due (both principal and interest) according to the
contractual terms of the loan.

2. Measurement of Impairment loss

Carrying value of Investment (Principal + Accrued interest)
- Present value of expected future cash flows
Impairment loss

ACCOUNTING FOR TROUBLED DEBT RESTRUCTURING

TROUBLED DEBT RESTRUCTURING

➢ Definition

It is a process by which investors agree to make concessions and revise the original terms of
the debt to permit the issuer to recover from financial problems.

1. ASSET SWAP - Under PFRS 9, asset swap is treated as derecognition of a financial liability or
extinguishment of an obligation. The difference between the carrying amount of the financial
liability and the consideration given shall be recognized in profit or loss.

2. EQUITY SWAP - the debtor issues share capital to the creditor in full settlement of an obligation,
thus the debtor becomes an owner or a stockholder. The standard provides that in case shares
are issued for outstanding liabilities of the issuer, the amount of liabilities set off shall be the
measure for recording.

3. MODIFICATION OF TERMS - this involves modification of either the interest, principal or both.
Comparison must be made between the carrying amount of the old obligation and the present
value of the restructured obligation.

MULTIPLE CHOICE QUESTIONS

THEORY

1. Which of the following is not a major business function associated with the
expenditure/disbursement cycle?
a. Acquisition of resources from employees.
b. Obligations to pay vendors.
c. Billing of customers.
d. Receipt of goods from vendors in exchange for an obligation to pay.

2. A client erroneously recorded a large purchase twice. Which of the following control procedures
would be most likely to detect this error?
a. Footing the purchases journal.
b. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.
c. Tracing totals from the purchases journal to the ledger accounts.
d. Sending written quarterly confirmations to all vendors.

3. In purchasing goods and services over a set amount, governmental units

a. Mandate that the auditor approve the purchases.
b. Must use vendors appearing on a federal list of approved vendors.
c. Often require that competitive bids be sought.
d. Are required to utilize their own employees for the work.

4. An internal control questionnaire indicates that an approved receiving report must accompany every
check request for payment of merchandise. Which of the following procedures provides the greatest
assurance that this control is operating effectively?
a. Select and examine receiving reports and ascertain that the related canceled checks are
dated no earlier than the receiving reports.
b. Select and examine receiving reports and ascertain that the related canceled checks are
dated no later than the receiving reports.
c. Select and examine canceled checks and ascertain that the related receiving reports are
dated no earlier than the checks.
d. Select and examine canceled checks and ascertain that the related receiving reports are
dated no later than the checks.
AP Module 2 Audit of Current and Non-Current Liabilities 5

5. The accounts payable department receives the purchase order to accomplish all of the following
except
a. Compare invoice price to purchase order price.
b. Ensure that the purchase had been properly authorized.
c. Ensure that the party requesting the goods had received the goods.
d. Compare quantity ordered to quantity purchased.

6. For effective internal control purposes, which of the following individuals should be responsible for
mailing signed checks?
a. Receptionist.
b. Treasurer.
c. Accounts payable clerk.
d. Payroll clerk.

7. In considering internal control in the expenditure/disbursement cycle, the auditor is least

influenced by
a. The availability of a company procedures manual describing purchasing and cash
disbursement procedures.
b. The scope and results of work performed by the company's internal auditors in the
expenditure/disbursement cycle.
c. The existence of control procedures that offset deficiencies in the purchasing department.
d. The strength or deficiency of control procedures in other areas, e.g., sales and accounts
receivable.

8. Omitting quantities from copies of purchase orders sent to the receiving department is a control
procedure intended mainly to
a. Ensure that goods received are physically counted by receiving department personnel.
b. Identify and return damaged goods as soon as they are received.
c. Provide a check for verifying the accuracy of perpetual inventory records.
d. Prevent theft of goods by receiving department personnel.

9. Which of the following is not an appropriate activity for the treasurer's department?
a. Prepare checks.
b. Forward checks to vendors.
c. Cancel vouchers.
d. Prepare vouchers.

10. Which of the following internal control deficiencies in cash disbursements is of the least
significance?
a. Only one person signs checks.
b. Signed checks are distributed by the controller to approved payees.
c. The treasurer fails to check for bona fide names and addresses of check payees.
d. Cash disbursements are made directly out of cash receipts.

11. Matching the supplier's invoice, the purchase order, and the receiving report normally should be
the responsibility of the
a. Receiving department. The rest is voucher packet
b. Purchasing department.
c. Payables function.
d. Treasury function.

12. Which of the following is a necessary control procedure for cash disbursements?
a. Checks should be signed by the controller and at least one other employee of the company.
b. Checks should be sequentially numbered and the numerical sequence should be accounted
for.
c. Checks and supporting documents should be marked "Paid" immediately after the check is
returned with the bank statement.
d. Checks should be sent directly to the payee by the employee who prepares documents that
authorize check preparation.

13. Which of the following is not a common activity of the expenditure/disbursement cycle?
a. Purchasing.
b. Fixed asset additions.
c. Receiving.
d. Recording of disbursements.

14. Which of the following functions is not appropriate for the accounts payable department?
a. Compare purchase requisitions, purchase orders, receiving reports, and vendors' invoices.
b. Prepare purchase orders.
c. Prepare payable vouchers.
d. File voucher package by due date.
AP Module 2 Audit of Current and Non-Current Liabilities 6

15. The accounts payable department should

a. Cancel supporting documentation after the cancelled check is returned with the bank
statement.
b. Approve the price and quantity of each purchase requisition.
c. Assure that the quantity ordered is omitted from the receiving department's copy of the
purchase order.
d. Agree the vendor's invoice with the receiving report and purchase order.

16. When goods are received, the receiving clerk should match the goods with the
a. Purchase order and vendor’s invoice.
b. Vendor's invoice and the receiving report.
c. Vendor's shipping document and the purchase order.
d. Receiving report and the vendor's shipping document.

17. The accounts payable department compares the information on the vendor's invoice with the
a. Receiving report and the purchase order.
b. Receiving report and the voucher.
c. Vendor's packing slip and the purchase order.
d. Vendor's packing slip and the voucher.

18. The mailing of disbursement checks and remittance advices should be controlled by the employee
who
a. Signed the checks last.
b. Approved the vouchers for payment.
c. Matched the receiving reports, purchase orders, and vendor invoices.
d. Verified the mathematical accuracy of the vouchers and remittance advices.

19. Which of the following procedures relating to the audit of accounts payable could the auditor
delegate to the client's employees?
a. Test footings in the accounts payable ledger.
b. Reconcile unpaid invoices to vendors' statements.
c. Prepare a listing of accounts payable.
d. Mail confirmations for selected account balances.

20. An auditor selects a sample of vouchers payable and traces them to underlying documents. The
auditor is gathering evidence primarily to support the assertion that
a. Recorded obligations were paid.
b. Incurred obligations were recorded in the correct period.
c. Recorded obligations occurred.
d. Cash disbursements were recorded as incurred obligations.

21. Which of the following audit procedures is the most efficient at detecting unrecorded liabilities at
the balance sheet date?
a. Confirm large accounts payable balances at the balance sheet date.
b. Compare cash disbursements in the subsequent period with the accounts payable trial
balance at year-end.
c. Examine purchase orders issued for several days prior to the close of the year.
d. Obtain a letter from the client's attorney.

22. Which of the following audit procedures is least likely to detect an unrecorded liability?
a. Analysis and recomputation of interest expense.
b. Analysis and recomputation of depreciation expense.
c. Reviewing the returned standard bank confirmation form.
d. Reading the minutes of board of directors' meetings.

23. To protect against improper disbursements, checks should be

a. Perforated or otherwise canceled after being returned with the bank statement.
b. Sequentially numbered and accounted for by internal auditors.
c. Signed by an official after necessary supporting evidence has been examined.
d. Reviewed by the purchasing department before mailing.

24. Internal control is improved when the quantity of merchandise ordered is omitted from the copy of
the purchase order sent to the
a. Department that initiated the requisition.
b. Receiving department.
c. Purchasing agent.
d. Accounts payable department.

25. For effective control over purchases, a company's receiving department should
a. Be responsible for handling merchandise but not for preparing receiving reports.
b. Accept and count merchandise received only from previously used vendors.
c. Utilize the shipping documents to record the quantities on receiving reports.
d. Only accept merchandise for which an approved purchase order is on hand.
AP Module 2 Audit of Current and Non-Current Liabilities 7

26. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on
management’s assertion of
a. Existence or occurrence c. Completeness
b. Presentation and disclosure d. Valuation or allocation

27. 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

28. 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.

29. Which of the following procedures is least likely to be performed before the balance sheet date?
a. Observation of inventory c. Search for unrecorded liabilities
b. Testing of internal control over cash d. Confirmation of receivables

30. 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
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.

31. 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.

32. 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.

33. Only one of the following four statements, which compare confirmation of accounts payable with
suppliers and confirmation of accounts receivable with debtors is false. The false statement is that
a. Confirmation of accounts receivable with debtors is a more widely accepted auditing
procedures than is 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 due.

34. 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

35. 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
 AP Module 2 Audit of Current and Non-Current Liabilities 8

36. Which of the following audit procedures would best detect the existence of unrecorded payables
at the end of the reporting period?
a. Investigating whether the recorded payables just prior to and subsequent to the end of the
reporting period are supported by reviewing reports.
b. Reviewing cash disbursements after the reporting period to determine whether the
obligations relate to transactions of the period under audit.
c. Using analytical review procedures such as the ratio between ending accounts payable and
recorded cash payments on accounts payable.
d. Tracing the vendor’s invoice with the entries in the cash disbursements journal in the
subsequent reporting period.

37. Which of the following procedures would be considered least effective in the audit of contingent
liabilities?
a. Examining legal correspondence.
b. Reading the minutes of the meetings of the board of directors and other committees.
c. Examining BIR tax assessments.
d. Examining accounts payable confirmation replies.

38. Several liability accounts were discovered to have unexpected balances and several relationships
(ratios) were considered not normal based on the auditor’s performance of analytical procedures.
These results would most likely indicate that
a. Internal control system adopted by the client is not performing as expected.
b. Fraud exists in the relevant account balances.
c. Additional audit tests of account balances are necessary.
d. The auditor has to communicate immediately with the client management.

39. Which of the following conditions or events would cause an auditor to have substantial doubt on
the ability of the client to continue as a going concern?
a. A significant number of major suppliers denied the client the usual and normal credit terms.
b. There were numerous transactions between the client firm and its subsidiaries and associates.
c. The client issued a substantial number of additional share capital during the audit period.
d. There was above normal employee turnover rate.

40. Which of the following is the least likely procedure to search unrecorded liabilities?
a. Examine purchase order file.
b. Examine receiving reports.
c. Examine cash disbursement entries before the end of the reporting period.
d. Examine statements of accounts received after the end of the reporting period.

41. On which assertion does the auditor focus in the audit of liabilities?
a. Accuracy
b. Completeness
c. Occurrence
d. Presentation and disclosure

42. For an effective internal control, the purchasing department should

a. Obtain competitive bids from prospective suppliers/vendors.
b. Inspect goods received by the client.
c. Inspect vendor invoices to quantity, quality and price of goods received.
d. Post the amount of purchases to the accounts payable subsidiary ledger.

43. Which of the following audit procedures would be best for identifying unrecorded liabilities?
a. Examine unusual relationships between ending accounts payable and recorded purchases.
b. Reconcile vendors’ statements to the file of receiving reports processed just prior to the
reporting date.
c. Review cash disbursement entries after the reporting date to determine whether the payables
arise from previous period transactions.
d. Trace the recorded liabilities to the receiving report.

44. Auditors may choose not to confirm accounts payable when

a. Other reliable evidence are available to support the balances of accounts payable.
b. Significant number of transactions after the reporting period affect the balances of accounts
payable.
c. Vendors are few in number but significant in amount.
d. The client adopts the non-voucher system for cash disbursements.

45. Two months before the year end, the bookkeeper erroneously recorded the receipt of a long-term
bank loan by a debit to cash and a 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.
 AP Module 2 Audit of Current and Non-Current Liabilities 9

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

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

47. Which of the following is not used to test overstatements and understatements of accounts
payable?
a. Unmatched receiving reports.
b. Canceled voucher packages.
c. Cash receipts records.
d. Cash disbursement records.

48. 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 could 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. Discount on bonds payable is overstated.

49. 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.

50. Fair value disclosure of financial instruments may be made in the

Body of financial statements Notes to financial statements
a. No No
b. No Yes
c. Yes No
d. Yes Yes

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PROBLEM NO. 1 – Various current liabilities

The following information relates to Crystal Company’s obligations as of December 31, 2023. For each
of the numbered items, determine the amount if any, that should be reported as current liability in
Crystal’s December 31, 2023 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 not had
been recorded as of December 31, 2023:
a) A Company – P224,000 merchandise shipped on December 31, 2023, FOB destination;
received on January 10, 2024.
b) B, Inc. – P192,000 merchandise shipped on December 26, 2023, FOB shipping point;
received on January 16, 2024.
c) C Super Services – P144,000 janitorial services for the three-month period ending January 31,
2024.
d) MERALCO – P67,200 electric bill covering the period December 16, 2023 to January 15,
2024.

On December 28, 2023, a supplier authorized Crystal to return goods billed at P160,000 and
shipped on December 20, 2023. The goods were returned by Crystal on December 28, 2023, but
the P160,000 credit memo was not received until January 6, 2024.
AP Module 2 Audit of Current and Non-Current Liabilities 10

2. Payroll:

Items related to Crystal’s payroll as of December 31, 2023 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

3. Litigation:

In May, 2023, Crystal became involved in a litigation. The suit being contested, but Crystal’s lawyer
believes there is probable that Crystal 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.

4. Bonus obligation:

Crystal 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.)

5. Note payable:

A note payable to the Bank of the Philippine Islands for P2,400,000 is outstanding on December 31,
2023. The note is dated October 1, 2022, 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,
2023.

6. Purchase commitment:

During 2023, Crystal entered in a non-cancellable commitment to purchase 320,000 units of

inventory at fixed price of P5 per unit, delivery to be made in 2024. On December 31, 2023, 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, 2024.

7. Deferred taxes:

On December 31, 2023, Crystal’s deferred income tax account has a 2023 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
8. Product warranty:

Crystal has a one year product warranty on selected items in its product line. The estimated
warranty liability on sales made during 2022, which was outstanding as of December 31, 2022,
amounted to P416,000. The warranty costs on sales made in 2023 are estimated at P1,504,000.
Actual warranty costs incurred during 2023 are as follows:

Warranty claims honored on 2022 sales P416,000

Warranty claims honored on 2023 sales 992,000
Total warranty claims honored P1,408,000

9. Premiums:

To increase sales, Crystal Company inaugurated a promotional campaign on June 30, 2023. Crystal
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. Crystal estimated that only 60% of the coupons issued will be
redeemed. For the six months ended December 31, 2023, the following is available:

Packages of product sold 160,000

Premiums purchased 16,000
Coupons redeemed 64,000
AP Module 2 Audit of Current and Non-Current Liabilities 11

10. Due to Five Six Finance company:

Crystal’s accounting records show that as of December 31, 2023, P1,280,000 was due to Five Six
Finance Company for advances made against P1,600,000 of trade accounts receivable assigned
to the finance company with recourse.

Problem 2

Orbiter Corporation agreed to give its general manager a bonus of 10% of annual earnings. The net
income for the year before the bonus and income taxes is P90,000. Income tax rate is 30%.

REQUIRED:
Compute the amount of bonus and income tax under each of the following conditions:
a. Bonus is based on net income before deduction for bonus and income taxes.
b. Bonus is based on net income after deduction for bonus but before deduction for income taxes.
c. Bonus is based on net income after deduction for income taxes but before deduction for bonus.
d. Bonus is based on net income after deductions for bonus and income taxes.

Problem 3

In July 2021, Palm Inc. your client, was sued for damages to an adjacent property as a result of
construction being made on its property. On December 31, 2023, it was estimated that it is probable
that Palm will have to pay damages amounting to P1,750,000. On February 1, 2024, prior to the
issuance of your audit report and the company’s financial statements, the plaintiff agreed to a settlement
of P1,200,000.

In September 2023, Jessica filed a suit against Palm Inc. alleging violation of patent rights and it is
seeking payment of damages of P7,000,000. Palm disclaims the charges and the legal counsel is of
the opinion that the chance of Palm Inc. paying any damages is remote.

In October 2023, Mr. Chavez, a shareholder of Palm brought action against the company seeking for
P1,000,000 in damages. It is reasonably possible that Mr. Chavez will be successful but the amount
of damages Palm will have to pay cannot be reasonably estimated.

In November 2023, Palm Inc. became involved in a lawsuit. It is highly probable that Palm will have to
pay an amount between P1,600,000 and P2,000,000 but a better estimate is P1,800,000 as a result
of this lawsuit.

During 2023, the company was a defendant to a number of lawsuits as a result of a product that is
alleged to have harmful effects. The product was already withdrawn from the market. It is probable
that the company will have to pay for damages in the amount of P1,200,000 to P1,800,000. Each point
within the range is as likely as any other point.

Palm Inc. sold goods with a warranty under which customers are covered for the cost of repairs from
defects that become apparent within one year from the date of purchase. If only minor defects were
detected in all products sold, repair costs of P1,000,000 would result. If major defects were detected
in all products sold, repair costs of P5,000,000 would result. The company’s experience and future
expectations indicate that for the coming year, 60% of the goods sold will have no defects, 30% will
have minor defects and 10% will have major defects.

REQUIRED:

Compute the amount to be accrued at the end of 2021 and prepare the necessary adjusting entries.
Palm Inc has not yet recorded any amount of obligation as a result of the foregoing.

Problem 4 Audit of Liabilities: Current and Non-current

Hugs Wear, Inc. has produced quality children’s apparel for over 25 years. The company’s fiscal year
is from April 1 to March 31. The following information relates to the obligations of Hugs Wear as of
March 31, 2023:

Bonds Payable. The company issued P10,000,000 of 10% bonds on July 1, 2021. The prevailing
market rate of interest for these bonds was 12% on the date of issue. The bonds will mature on July
1, 2031. Interest is paid semiannually on July 1 and January 1. Hugs Wear uses the effective interest
rate method to amortize bond premium or discount.
 AP Module 2 Audit of Current and Non-Current Liabilities 12

Notes Payable. Hugs Wear 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
P600,000 on March 31, 2023.

Due Date Amount Due

April 1, 2023 P 400,000
July 1, 2023 600,000
Oct. 1, 2023 300,000
Jan. 1, 2024 300,000
Apr 1, 2024 – Mar. 31, 2025 1,200,000
Apr 1, 2025 – Mar. 31, 2026 1,000,000
Apr 1, 2026 – Mar. 31, 2027 1,400,000
Apr. 1, 2027– Mar. 31, 2028 800,000
Apr. 1, 2028 – Mar. 31, 2029 1,000,000
P7,000,000
==========
Estimated Warranties. Hugs Wear has a one-year product warranty on selected items. The estimated
warranty liability on sales made during the 2021 – 2022 fiscal year and still outstanding as of March
31. 2022 amounted to P180,000. The warranty costs on sales made from April 1, 2022 through March
31, 2023 are estimated at P520,000. The actual warranty costs incurred during the current 2022 –
2023 fiscal year are as follows:

Warranty claims honored on 2021 – 2022 sales P180,000

Warranty claims honored on 2022 – 2023 sales 178,000
P358,000
========
Additional Information:
1. Trade payables. Accounts payable for supplies, goods, and services purchased on open
account amounted to P740,000 as of March 31, 2023.

2. Payroll related items. The following outstanding obligations relate to Hugs Wear’s payroll as of
March 31, 2023.

Accrued salaries and wages P300,000

Income taxes withheld from employees 94,000
Philhealth premiums 10,000

3. Miscellaneous accruals. Other accruals not separately classified amount to P150,000 as of

March 31, 2023.

4. Dividends. On March 15, 2023, the company’s board of directors declared a cash dividend of P0.20
per ordinary share and a 10% share dividend. Both dividends were to be distributed on April 12, 2023,
to the shareholders of record at the close of business on March 31, 2023. Data regarding Hugs Wear’s
ordinary share are as follows:
Par value P5 per share
Number of shares issued and outstanding 6,000,000 shares
Market value of ordinary shares
Mar. 15, 2023 P22.00 per share
Mar. 31, 2023 P21.50 per share
Apr. 12, 2023 P22.50 per share

REQUIRED:
Per your audit, determine the following:
a. Amount received by Hugs from the sale of bonds on July 1, 20121
b. The current portion of Hugs Wear’s notes payable at march 31, 2023.
c. The balance of estimated warranties payable at March 31, 2023.
d. Total current liabilities to be reported on March 31, 2023.
e. Total noncurrent liabilities to be reported on March 31, 2023.

Problem 5

Described below are certain transactions of Harmony Corporation during 2024.

1. On April 1, the corporation bought a truck for P6,000,000 from Jeep Corporation, paying
P1,000,000 in cash and signing a one-year-12% note for the balance of the purchase price.
AP Module 2 Audit of Current and Non-Current Liabilities 13

2. On May 1, the corporation received proceeds of P18,760,000 from Unibank by signing a 10% note
payable in equal annual installments of P2,000,000. The payment is to apply first to interest and
then to principal. The first installment is due April 30, 2024.

3. On August 1, the Board of Directors declared a P300,000 cash dividend that was payable on
September 10, to shareholders of record on August 31.

4. On December 15, the corporation purchased goods from United Company for P1,500,000 subject
to cash discount terms 2/10, n/30. Purchases and accounts payable are recorded by the
corporation at net amounts after cash discounts. The invoice was paid on January 14, 2025.

5. Sales during the month of December amounted to P6,832,000, inclusive of value added tax. The
company made remittance of the VAT in January 2023.

REQUIRED:
(a). Make all journal entries necessary to record the transactions above using appropriate dates.

(b) Prepare any necessary adjusting entries on December 31, 2024 relative to the above.

Problem 6

You were able to obtain the following from the accountant of Explorer Corp. related to the company’s liabilities
as of December 31, 2023:

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 United Bank.
1. A P300,000, 8% notes payable issued March 1, 2021, payable on demand. Interest is payable every
6 months.
2. A 1-year, P500,000, 11% note issued January 2, 2023. On December 30, 2023, Explorer negotiated
a written agreement with United Bank to replace the note with a 2-year, P500,000, 10% note to be
issued January 2, 2024. The interest was paid on December 31, 2023.
c. The 10% mortgage note was issued October 1, 2020, with a term of 10 years. Terms of note give the
holder the right to demand immediate payment if the company fails to make monthly interest payment
within 10 days of the date the payment is due. As of December 31, 2023 , Explorer is three months
behind in paying its required interest payment.
d. The 12% mortgage note was issued May 1, 2017, 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, 2024. The payment includes interest of P180,000.
e. The bonds payable is 10-year, 8% bonds, issued June 30, 2014. Interest is payable semi-annually every
June 30 and December 31.

Based on your audit, determine the following:

1. Interest payable as of December 31, 2023.
2. The portion of the Note Payable – Bank to be reported under current liabilities as of December 31, 2023
3. Total current liabilities as of December 31, 2023.
4. Total noncurrent liabilities as of December 31, 2023.

Problem 7

VIVA MUSIC VIDEO carries a wide variety of musical instruments, sound reproduction equipment,
recorded music and sheet music. VIVA uses two sales promotion techniques, warranties and premiums,
to attract customers.

Musical instruments and sound equipment are sold with a two-year warranty for replacement of parts
and labor. The estimated warranty cost, based on past experience is 5% on the 1 st year of sales and
3% on the year following the year of sales.
AP Module 2 Audit of Current and Non-Current Liabilities 14

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 P75 for an original CD
of an artist of the customer’s choice. VIVA pays P125 for each original CD and estimates that 60% of
the coupons given to customers will be redeemed.

VIVA’s total sales for 2023 were P2,700,000, P1,500,000 from musical instruments and sound
reproduction system and P1,200,000 from recorded music and sheet music. Replacement parts and
labor for warranty work totaled P65,000 during 2023. A total of 500 original CDs used in the premium
program were purchased during the year and there were 120,000 coupons redeemed in 2023.

The accrual method is used by VIVA to account for the warranty and premium costs for financial
reporting purposes. The balances in the accounts related to warranties and premiums on January 01,
2023 were as follows:
Premiums P 39,500
Estimated premiums payable 20,000
Estimated warranties payable 135,000

Requirements:
1. Journal entries to record the above transactions.
2. Determine the amounts that will be shown on the 2023 financial statements for the following:
1. Warranty expense
2. Estimated warranties payable
3. Premium expense
4. Premiums
5. Estimated premiums payable

Problem 8

Right Move Company compensates its employees for certain absences for vacation and sickness.
Employees are entitled to one-day vacation plus one-day sick leave for each month worked during the
year. Unused vacation leaves may be carried forward but unused sick leave does not accumulate.
Employees are compensated according to their pay in effect at the time of the leave. The following data
were taken from the records for the year 2023.

Employee Date of Unused Vacation Sick Leave Rate per day

initial Vacation taken in taken in
employment 1.1.23 2023 2023
A. S. Santos 01.07.21 0 7 5 P450
B. D. Dela Cruz 06.28.22 6 3 10 420
R. T. Domingo 11.01.23 0 0 2 400
R. H. Henson 08.01.23 0 1 2 380

Required:
1. Compute the balance of the account Liability for Compensated Absences at December 31,
2022.
2. Compute the amount of employee benefit cost for sick leave and vacation leave for the year
2023
3. Prepare the entry for the payment of compensated absences for sick leave and vacation leave
during 2023.
4. Prepare the entry for the accrual of compensated absences at December 31, 2023.

Problem 9

In connection with your firm’s annual examination of the December 31, financial statements of Relay Corp., you
have been assigned the duty of auditing long-term liabilities for the year ended December 31, 2023. In the course
of performing your work, you obtained the following evidence and information related to a new bond issue sold
during 2023:

1. Relay floated a new issue of P8,000,000 par value, 15-year, 10% bonds during the latter half of the second
quarter of the year.
2. The new bond issue was dated July 1, 2021 and it was sold to an underwriting syndicate on that date for
P6,898,720. This price provided an effective interest on the bond issue of 12%.
3. Interest on a new bond issue was payable semiannually on January 1 and July 1.
4. Relay paid P120,000 cash for printing, legal and other fees in connection with the issuance of the bonds.
5. The Relay Corp. accounts related to this new bond reflect these bond transactions as follows:
AP Module 2 Audit of Current and Non-Current Liabilities 15

Bonds Payable, 2023 Issue

____________________________________________________________________

CR, 7/1/2023 8,000,000.00

Unamortized Bond Discount, 2023 Bond Issue

___________________________________________________________________

CR, 7/1/2023 1,101,280.00

CD, 7/1/2023 120,000.00
JV-2, 12/31/2023 40,709.30

Bond Interest Expense, 2023 Bond Issue

__________________________________________________________________

JV-2, 12/31/2023 40,709.30

VR-4, 12.30/2023 400,000.00

CR = Cash Receipts Journal

CD = Cash Disbursements Register
JV = Journal Voucher
VR = Voucher Register, Accounts Payable

Required:

Prepare adjusting entries that you would propose to correct the bond-related accounts. In drafting your
entries, assume that all accounts are material and that recommended accounting methods are to be employed.

Problem 10:

On March 01, 2023, FIRESTONE TIRES issued P3,000,000 of 16% bonds to yield 14%. Interest is
payable semi-annually on February 28 and August 31. The bonds mature in 5 years. FIRESTONE
TIRES is a calendar year corporation.

Requirements:
a. Determine the issue price of the bonds
b. Prepare an amortization schedule table for the first two years using the effective interest
method. Use the table below:

Date A B C D E
Interest Interest Amortization Unamortized Carrying
Paid Expense Premium Value
03.01.23
08.31.23
02.28.24
08.31.24
02.28.25
AP Module 2 Audit of Current and Non-Current Liabilities 16

c. Prepare journal entries to record the transactions on the following dates:

1. March 01, 2023
2. August 31, 2023
3. December 31, 2023
4. February 28, 2023
5.

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