AP-5902Q_liabs - Page 1 of 4 CPA REVIEW SCHOOL OF THE...

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Page 1 of 4 CPA REVIEW SCHOOL OF THE PHILIPPINES M a n i l a AUDITING PROBLEMS AUDIT OF LIABILITIES – QUIZZERS PROBLEM NO. 1 Cavaliers Corporation is selling audio and video appliances. The company’s fiscal year ends on March 31. The following information relates to the obligations of the company as of March 31, 2005: Notes payable Cavaliers 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 P340,000 on March 31, 2005. Due date Amount April 31, 2005 P 600,000 July 31, 2005 900,000 September 1, 2005 450,000 February 1, 2006 450,000 April 1, 2006 – March 31, 2007 2,700,000 P 5,100,000 Estimated warranties Cavaliers has a one-year product warranty on some selected items. The estimated warranty liability on sales made during the 2003 – 2004 fiscal year and still outstanding as of March 31, 2004, amounted to P252,000. The warranty costs on sales made from April 1, 2004 to March 31, 2005, are estimated at P630,000. The actual warranty costs incurred during 2004 – 2005 fiscal year are as follows: Warranty claims honored on 2003 – 2004 sales P 252,000 Warranty claims honored on 2004 – 2005 sales 285,000 Total P 537,000 Trade payables Accounts payable for supplies, goods, and services purchases on open account amount to P560,000 as of March 31, 2005. Dividends On March 10, 2005, Cavaliers’ board of directors declared a cash dividend of P0.30 per common share and a 10% common stock dividend. Both dividends were to be distributed on April 5, 2005 to common stockholders on record at the close of business on March 31, 2005. As of March 31, 2005, Cavaliers has 5 million, P2 par value, common shares issued and outstanding. Bonds payable Cavaliers issued P5,000,000, 12% bonds, on October 1, 1999 at 96. The bonds will mature on October 1, 2009. Interest is paid semi-annually on October 1 and April 1. Cavaliers uses the straight line method to amortize bond discount. QUESTIONS: Based on the foregoing information, determine the adjusted balances of the following as of March 31, 2005: 1. Estimated warranty payable a. P252,000 b. P345,000 c. P630,000 d. P882,000
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