AUDIT OF LIABILITIES

PROBLEM 1 - BOOM

In the audit process, the following data were obtained from the books of the BOOM
COMPANY which uses a voucher system. All invoices are subject to terms 2/10, n/30
and are entered net with the discount entered in Purchase Discounts column of the
voucher register. The accountant in charge of the books went on leave to attend to
his family based in New Jersey. A fresh accountancy graduate has been assigned to
record the transactions. At year-end, the substitute accountant finds that the
unpaid vouchers do not agree with the Vouchers Payable control account. You are
called to adjust the matter.
A schedule of unpaid vouchers as of December 31, 2024, all of which are net of
discount, is presented to you.
Date Voucher No. Supplier Amoun
t
Nov. 27 797 Dominguez Supply P
Co. 78,400
Dec. 02 821 Gudoy Distributors 19,600
11 829 Panutsa Sales 44,100
20 836 Mukasim Dealers 17,150
21 842 Bekenemen 22,050
Merchandising
22 856 Halimaw 80,850
Mercantile
31 865 Balakang Traders 78,40
0
P340,55
0
Vouchers Payable
(control account)
Cash P1,645,00
disbursements P1,309,500 Purchases journal 0
Purchase returns 36,750*
journal
* Voucher Nos. 821 and 836 canceled as goods were returned in December.

Based on the above and the result of your audit, compute for the following as of
December 31, 2024:

1. Adjusted balance of Vouchers Payable

A. P310,000 B. P306,750 C. P303,800 D. P344,250

2. Purchase discounts lost on unpaid vouchers

A. P6,200 B. P2,950 C. P3,700 D. P 0

3. Purchase discounts lost on paid vouchers

A. P28,750 B. P8,000 C. P5,050 D. P41,800

4. The adjusting entry or entries to correct the accounts will include A. A debit to
Purchase Discounts Lost of P11,250.
B. A debit to Purchase Discounts Lost of P5,050.

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 C. A credit to Vouchers Payable of P8,000.
D. A credit to Vouchers Payable of P11,250.

PROBLEM 2 - TOROTOT MUSIC

TOROTOT MUSIC carries a wide variety of musical instruments, sound reproduction

equipment, recorded music, and sheet music. To promote the sale of its products,
Torotot uses two
promotion techniques—premiums and warranties.

PREMIUMS
The premium is offered on the recorded and sheet music. Customers receive a
coupon for each P10 spent on recorded music and sheet music. Customers may
exchange 200 coupons and P200 for a power bank. Torotot pays P340 for each
power bank and estimates that 60% of the coupons given to customers will be
redeemed. A total of 6,500 power banks used in the premium program were
purchased during the year and there were 1,200,000 coupons redeemed in 2024.

WARRANTIES
Musical instruments and sound reproduction 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. Replacement parts and labor for warranty work
totaled P1,640,000 during 2024.

Torotot uses the accrual method to account for the warranty and premium costs for
financial reporting purposes. Torotot’s sales for 2024 totaled P72,000,000—
P54,000,000 from musical instruments and sound reproduction equipment and
P18,000,000 from recorded music and sheet music. The balances in the accounts
related to warranties and premiums on January 1, 2024, were as shown below:
Inventory of power banks P
399,500
Estimated premium claims outstanding 448,00
0
Estimated liability from warranties 1,360,00
0

Based on the preceding information, determine the amounts that will be shown on
the 2024 financial statements for the following:

1. Warranty expense
A. P1,640,000 B. P1,080,000 C. P800,000 D. P360,000

2. Estimated liability from warranties

A. P1,920,000 B. P1,080,000 C. P240,000 D. P800,000

3. Premium expense
A. P1,836,000 B. P840,000 C. P756,000 D. P2,189,500

4. Inventory of power banks

A. P399,500 B. P569,500 C. P2,210,000 D. P739,500

5. Estimated premium claims outstanding

A. P364,000 B. P840,000 C. P756,000 D. P672,000

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6. Auditor confirmation of accounts payable balances at the end of the reporting
period maybe unnecessary because
A. There is likely to be other reliable external evidence to support the
balances.
B. Correspondence with the audit client’s 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 the reporting period may not be paid
before the audit iscompleted.

PROBLEM 3 - BAIKAL COMPANY

On December 31, 2020, BAIKAL COMPANY acquired a piece of equipment from Seller
Company by issuing a P1,200,000 note, payable in full on December 31, 2024.
Baikal’s credit rating permits it to borrow funds from its several lines of credit at
10%. The equipment is expected to have a 5-year life and a P150,000 salvage
value.

1. What is the equipment’s book value on December 31, 2022?

A. P551,767 B. P630,000 C. P491,767 D.
P341,767
2. What is the carrying value of the note at December 31, 2022?
A. P1,090,903 B. P991,730 C. P1,200,000 D.
P819,612

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