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AP-5902_Liabilities - Page 1 of 10 CPA REVIEW SCHOOL OF THE...

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Page 1 of 10 CPA REVIEW SCHOOL OF THE PHILIPPINES M a n i l a AUDITING PROBLEMS AUDIT OF LIABILITIES PROBLEM NO. 1 In the audit of the Heats Corporation’s financial statements at December 31, 2005, the chief accountant of the said corporation provided the following information: Notes payable: Arising from purchase of goods 304,000 Arising from 5 year-bank loans, on which marketable securities valued at P600,000 have been pledged as security, P400,000 due on June 30, 2006; P100,000 due on Dec. 31, 2006 500,000 Arising from advances by officers, due June 30, 2006 50,000 Reserve for general contingencies 400,000 Employees’ income tax withheld 20,000 Advances received from customers on purchase orders 64,000 Containers’ deposit 50,000 Accounts payable arising from purchase of goods, net of debit balances of P30,000 170,000 Accounts receivable, net of credit balances P40,000 360,000 Cash dividends payable 80,000 Stock dividends payable 100,000 Dividends in arrears on preferred stock, not yet declared 200,000 Convertible bonds, due January 31, 2007 1,000,000 First mortgage serial bonds, payable in semi-annual installments of P50,000, due April 1 and October 1 of each year 2,000,000 Overdraft with Allied Bank 90,000 Cash in bank balance with PNB 390,000 Estimated damages to be paid as a result of unsatisfactory performance on a contract 160,000 Estimated expenses on meeting guarantee for service requirements on merchandise sold 120,000 Estimated premiums payable 75,000 Deferred revenue 87,000 Accrued interest on bonds payable 360,000 Common stock warrants outstanding 120,000 Common stock options outstanding 210,000 Unused letters of credit 400,000 Deficiency VAT assessment being contested 500,000 Notes receivable discounted 200,000 On March 1, 2006, the P400,000 note payable was replaced by an 18-month note for the same amount. Heats is considering similar action on the P100,000 note payable due on December 31, 2006. The 2005 financial statements were issued on March 31, 2006. On December 1, 2005, a former employee filed a lawsuit seeking P200,000 for unlawful dismissal. Heats’ attorneys believe that the suit is without merit. No court date has been set. On January 15, 2006, the BIR assessed Heats an additional income tax of P300,000 for the 2003 tax year. Heats’ attorneys and tax accountants have stated that it is likely that the BIR will agree to a P200,000 settlement. AP-5902
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Page 2 of 10 REQUIRED: Based on the above and the result of your audit, compute for the following as of December 31, 2005: 1. Total current liabilities a. P2,500,000 b. P2,100,000 c. P2,300,000 d. P2,400,000 2. Total noncurrent liabilities a. P3,300,000 b. P2,900,000 c. P3,000,000 d. P3,400,000 3. Total liabilities a. P5,200,000 b. P5,000,000 c. P5,400,000 d. P5,800,000 PROBLEM NO. 2 The following information relates to Sonic Company ’s obligations as of December 31, 2005. For each of the numbered items, determine the amount if any, that should be reported as current liability in Sonic’s December 31, 2005 balance sheet. 1. Accounts payable:
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