O CPA REVIEW SCHOOL OF THE PHILIPPINES AP-7602 Manila AUDITING PROBLEMS CPA Review AUDIT OF LIABILITIES PROBLEM NO. 1 The following two (2) independent questions at the end of each situation. jations relate to the audit of bonds payable. Answer the Teese SAN PEDRO CO, issued a §-year P2,500,000 face value of 12% convertible bonds at 105 on January 1, 2014, maturing on January 1, 2018, and paying interest annually on December 31. It is reliably ascertained that the bonds would sell at P2,350,000 without the conversion feature with an effective yield of 14%. Each P1,000 bond is convertible into 10 shares of P100 par value share capital. On December 31, 2014, the entire bond issue was converted into share capital, and on this date, the share has a market vaiue of P150 and the bonds are quoted at 101. 1. What is the equity component of the issuance of the convertible bonds on January 1, 20147 @.) P275,000 B. 150,000 C. 125,000 Dd. PO 2. What amount of share premium should be recognized on conversion of bonds payable into share capital? A. PO B. P275,000 ©) P121,000 \D,) P154,000 (On January 1, 2014, SAN PABLO CO. issued P4,000,000 of 12% bonds payable maturing in 5 years. The bonds pay interest semiannually on June 30-and December 31. The bonds include share warrants giving the bondholder the right to purchase 8,000 P:100 par value shares for PASO per share within the next three years. The bonds and warrants were issued at 120. The value of the warrants at the time of issuance was P750,000. The market rate of interest for similar bonds without the warrants is 10%. All share warrants were exercised on December 31, 2014. ‘The following are extracted from the present value tables: 5% for 10 periods 6% for 10 periods Present value of 1 0.61 0.55 Present value of an ordinary annuity of 1 7.72 7.36 3, On January 1, 2014, what amount should be recognized as increase in shareholders’ equity as a result of the bond issuance? = A, P833,600 B, P750,000 (© Ps07,200 D. 292,800 4. What is the total bond premium amortization for the year ended December 31, 20147 AL P49,452 B) P51,988 C. P54,487 D. P97,600 5, What amount of share premium should be recognized as a result of the exercise of share warrants? 3) P907,200 B. P400,000 C. P@55,212 D. P750,000 PROBLEM NO. 2 FEEL NA FEEL, INC. has been producing quality appliances 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, 2014.a Goo. 0 on fof Tyo 150 200 5286 whoa» 5:00 000 4907078 CPAR- MANILA AP7602 ~ AUDIT OF LABILTIES BONDS PAYABLE Feel Na Fee! issued P'10,000,000 of 10% bonds on July 1, 2012. The prevailing market rate of interest for these bonds was 12% on the date of issue. The bonds will mature on July 1, 2022. L lows 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. PY Loft 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 31,2014. = k A Due Date Amount Due q April 1, 2014 : JP. 400,000 cy duly 4, 2014 | two | 600,000 October 1, 2014 300,000 January 1, 2015 - 300,000 April 1,2015 - March 31, 2016 + 1,200,000, April 1, 2016 - March 31, 2017 1,000,000 April 1, 2017 - March 31, 2018 1,400,000 April 1, 2018 - March 34, 2019 800,000" April 1, 2019 - March 31, 2020 1,000,000: 27,000,000 cv, 01/17 1 ESTIMATED WARRANTIES ; See. NCLAG v9) n/i Bod pateTwa. Feel Na Feel has @ one-year product warranty on some selected items in its product line. The estimated warranty liability on sales made during the 2012-2013 fiscal year and still outstanding as of March 31, 2013, amounted to P180,000. The warrenty costs on sales made from April 1, 2013, through March 31, 2014, are estimated at P520,000. The actual warranty costs incurred during the current 2013-2014 fiscal year are as follows: Warranty daims honored on 2012-2013 sales P 180,000 Warranty claims honored on 2013-2014 sales 178,000 Total warranty claims honored 358,000 OTHER INFORMATION “2, TRADE PAYABLES ( * Accounts payable for supplies, goods and services purchased on open account amount to 740,000 as of March 31, 2014. 2. PAYROLL RELATED ITEMS CL Accrued salaries and wages P 300,000 Withholding taxes payable 94,000 Other payroll deductions 10,900 3. MISCELLANEOUS ACCRUALS (CL. “ Other accruals not separately classified amount to P150,000 as of March 31, 2014. 4. DIVIDENDS On March 15, 2014, Feel Na Feel’s board of directors declared a cash dividend of P0.20 per common share and a 10% ordinary stock dividend. oth dividends were to be distributed (on April 12, 2014, to the ordinary shareholders of record at the close of business on March 31, 2014. Data regarding Feel Na Feel ordinary shares are as follows:oO B C al CPAR = MANILA Par value P 5,00 per share Number of shares issued and outstanding 6,000,000 shares aon Market values of ordinary shares: March 15, 2014 P22.00 per share March 31, 2014 21.50 per share April 12, 2014 22.50 per share APT602— AUDIT OF LIABILITIES. 1. How much was received by Feel na Feel from the bonds issued on July 1, 2012? A, 8,852,960 B. P10,000,000 C. 10,500,000 ——D.-P10,647,040 2. On March 31, 2014, Feel na Feel’s statement of financial position would report total current Hlabllities of A. P5,286,000 B. P4,386,000 C. P5,336,000 D. P5,642,000 3. On March 31, 2014, Feel na Feel’s statement of financial position would report: total noncurrent liabilities oF A. 14,389,350 -B, P14,352,217 CC, (P14,370,783 iD. P14,252, hedinat PROBLEM NO, 3 lt Ms, The following data were obtained from the initial audit of BIB] COMPANY: 15%) 10-year, Bonds Payable, dated January 1, 2013 Debit Oe N4eIIT credit? Cash proceeds from issue on January 1, 2013 ’ of 1,000, P1,000 bonds. The market rate of of interest on the date of issue was 12%, P1,172,044 Bond Interest Expense. Cash paid, 1/2/14 Cash paid, 7/1/14 = Accrual, 12/31/14 » Accrued Interest on Bonds Balance, 1/1/14 P 75,000 Accrual, 12/31/14 75,000 Treasury Bonds Redemption price and interest to date on 200 bonds permanently retired on 12/31/14 265,000 Based on the preceding information, determine the following: 1. Carrying value of bonds payable at December 31, 2014 fon 960 im Oe > 3 Sun ud 445% Balance Oe P1,172,044 75,000 150,000 225,000 . P 75,000 150,000 A, P831,110 B. P800,000 C. P1,151,583 2. Loss on Bond Redemption 4 265000 A. P4,683 B. P19,683 C. P15,000 - D. P34,683 Aner} (200TxI5), 3. Accrued Interest on Bonds at December 31, 2014 we ie A. P75,000 B. P135,000 Cc. P60,000 D. P52,500 RP 4. Bond Interest Expense for the year ended December 31, 2014 a A. P150,000 B. P139,174 C. P69,745 D. P160,826 ‘ét (07 12/3) NS Tex © boootPROBLEM NO. 4 Jogoos-02 JOLINNA C. RODEL’S Music Emporium carries wide variety of musical instruments, sound esi, teproduction equipment, recorded music, and sheet music. Rodel’s uses two sales promotion techniques - warranties and premiums - to attract customers. Musical instruments and sound equipment are sold with a one-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales. “The 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 P20 for a CD payer. Rode! pays P34 for each CD player and estimates that 60% of the coupons iven to customers will be redeemed. . [Teo Wh] Rodel’s total sales for 2014 were P14,400,000-P10,800,000 | from musical instruments and t sound reproduction equipment and 3,600,000" from recorded music and sheet music. « qgn Replacement parts and labor for warranty work totaled P328,000 during 2018, | A total of opts 4 431000 CD players used in the premium program were purchased during the year and there 3-61 — wiere 2,400,000 coupons redeemed in 2014. The accrual method is used by Rodel’s to account for the warranty and premium costs for financial reporting purposes. The balances in the accounts related to warranties and premiums on January 1, 2014, were as shown below: Fre. Ad fa Est to 10-6 Inventory of Premium CD Players stzs0\ aay P7990 rena Estimated Premium Claims Outstanding | 89,600 in TOO. Estimated Liability from Warranties 272,000 : Jolinna C, Rodel’s: Music Emporium: is preparing Its financial. statements. for the year ended December 31, 2014, Determine, the amcunts that wil be shown on the 2014 financial ing: kv: 10 * statements for the following: Re isin Rey aah ra ewe, B 1 Warranty expense alia et foe A. P488,000 B.” P216,000 c."8338,000 D. P160,000 A 2. Estimated liability from warranties A. P160,000 B. P272,000 C. P48,000 D. P488,000 3. Premium expense A. P168,000 B. 113,900 Cc. 367,200 D. P151,200 D 4, Inventory of premium CD players A. P168,000 B, P147,900 C. P151,200 D. 113,900 [5 Estimated premium claims outstanding A. P106,400 B. P151,200 CC. P56,000 PROBLEM NO. 5 Bricks - ovestale mont ‘ynblitiu - uaderstad nent Select the best answer for each of the following: Cc 4, In auditing accounts payable, an auditor's procedures most likely will focus primarily on management's assertion of A. Existence Voudin .C. Completeness ~ weeny B, Presentation and dsciosure _ "D. Valuation and alfocatio a 2. An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all A. Merchandise received C. Canceled checks B. Vendors’ invoices D. Receiving reports”2 => CPAR - MANILA i P7602 ~ AUDIT OF ABILITIES 3, The primary aud test to determine if accounts payable are valued properly is, A. Confirmation of accounts payable. Vouching accounts payable to supporting documentation. An analytical procedure. Verification that accounts payable was reported as a current liability In the balance sheet. 9OeP 4, Which of the following procedures is least likely to be performed before the balance shest date? ‘A. Observation of inventory count. B. Testing of internal control over cash. . C. Search for unrecorded liabilities. Fxamiaah’on oF sulseqpent cash disusanents, D. Confirmation of receivables. 5. An audit assistant found a purchase order for a regular supplier in the amount of P5,500. The purchase. order was dated after receipt of goods. The purchasing agent had forgotten to Issue the purchase order, Also, a disbursement of 450 for materials did not have a receiving report. The assistant wanted to select additional purchase orders for investigation but was unconcemed 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 recelving report exception. 8, Agree with the assistant because the cash disbursement clerk had been assured by the receiving clerk that the failure to fill out a report didn’t happen very often. C. Disagree with the assistant because two problems have an equal risk of loss associated with them. D. Disagree with the assistant because the lack of a receiving report has a greater risk of loss associated with it. 6. When using confirmation to provide evidence about completeness assertion for accounts payable, the appropriate population most likely is A. Vendors with whom the entity has previously done business. B. Amounts recorded in the accounts payable subsidiary ledger. C. Payees of checks drawn in the month after the year end. D. Invoices filed in the entity's open invoice file. 7. Which of the following is a substantive test that an auditor is most likely to perform to verify the existence and valuation of recorded accounts payable? A. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and accounted for. B. Receiving the client’s mail, unopened, for a reasonable period of time after year end to search for unrecorded vendor's Invoices. C. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports. D. Confirming accounts peyable balances with known suppliers who have zero balances. 8. 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 ©. Price - B. Quality D. Terms 9. Unrecorded liabilities are most likely to be found during the review of which of the following documents? A. Unpaid bills C. Bills of fading B. Shipping records D. Unmatched sales invoicesCPAR -MANILA AP7602 — AUDIT OF LABILTIES A 10. Which of the following audit procedures is best for identifying unrecorded trade accounts payable? A. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period. B, Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. C. Examining unusual relationships between monthly accounts payable balances and recorded cash payments. D. Reconciling vendors’ statement to the file of receiving reports to identify items received just prior to the balance sheet date. C 11. Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the client’s employees? AA. Test footings in the accounts payable ledger. B. Reconcile unpaid invoices to vendors’ statements. . Prepare a schedule of accounts payable. . Mail confirmations for selected account balances. b 12. An auditor’s purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management's assertions about A. Existence C. Completeness B. Presentation and disclosure D. Valuation 4 13. An auditor's program to audit long-term debt should include steps that require A. Examining bond trust indentures. B. Inspecting the accounts payable subsidiary ledger. . Investigating credits to the bond interest income account. D. Verifying the existence of the bondholders. 14. In auditing long-term bonds payable, an auditor most likely will A. Perform analytical procedures on the bond premium and discount accounts, . 8, Examine documentation of assets purchased with bond proceeds or liens. C. Compare interest with the bond payable amount for reasonableness, D. Confirm the existence of individual bondholders at year-end. 5 415. 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 accounts payable are the result of completed transactions. B, Accrued liability balances are less material than accounts payable balances. . Evidence supporting accrued liablities is nonexistent while evidence supporting accounts payable is readily avallable. D. Accrued liabilities at year-end will become accounts payable during the following year. END