ACCOUNTANCY AND BUSINESS ADMINISTRATION

AUDITING PART II

Problem 1: Audit of Liabilities

You are auditing Mary Jane Corp’s various liability accounts. The following schedule of liabilities was
presented to you by the company’s was presented to you by the company’s accountant in relation to your
audit:
Accounts payable P460,000
Warranties payable 153,250
Salaries payable 268,500

Audit notes:
a. You have rendered a purchases cut-off to ascertain the completeness of the company’s
accounts payable balance. The following is the summary of the entries 10 days before and
after the balance sheet date and your audit observations:

Purchase journal entries: Dec. 20-Dec. 31, 2014

Receiving Report Supplier’s Invoice Amount FOB Term/Remark
Date Date
Dec. 20, 2014 Dec. 19, 2014 60,000 Shipping Point
Dec. 23, 2014 Dec. 20, 2014 42,000 From consignor
Dec. 28, 2014 Dec. 26, 2014 45,000 Destination
Jan. 3, 2015 Dec. 29, 2014 30,000 Destination

Purchase journal entries: Jan 2-January 10, 2015

Receiving Report Supplier’s Invoice Amount FOB Term/Remark
Date Date
Jan. 3, 2015 Dec. 28, 2014 20,000 From consignee
Jan. 5, 2015 Dec. 3, 2015 55,000 Shipping point
Jan. 6, 2015 Jan. 3, 2015 84,000 Shipping point
*note: assume suppliers’ invoice date as supplier’s shipment date of goods and ending
inventories were appropriately established through an inventory count.

b. The company started its 2-year warranty program for merchandise sold starting 2013. The
company estimates that it will incur P360 in part and labor for repairing each unit of
merchandise. The company further estimates that 70% of the units sold shall be returned for
repairs and that 40% of the warranty costs shall be incurred in the year of sale with 60% to be
incurred in the year following the year of sale. The following information is deemed relevant
for your audit:
2013 2014
Number of units sold 1,250 1,410
Actual warranty costs 153,000 250,000
The balance of the warranties payable is the accrued warranty cost at the end of 2013. Actual
warranty costs were charged to current-year warranty expense. Adjusting entry at the end of
2014 is yet to be made.

c. The board of directors approved through a resolution, additional incentive to key officers in
the form of a bonus which shall be at 10% of the adjusted net-income after 30% income tax
and after bonus. The net income of the company before any adjustments were made is at
P2,032,700.
Requirements:

1. What is the adjusted balance of the accounts payable account?

2. What is the balance of warranties payable as of December 31, 2014?
3. What is the correct amount of bonus to key officers?

Problem 2: Audit of Stockholder’s Equity

Yambao Inc., had the following selected information in its December 31, 2015 stockholder’s equity
portion of its balance sheet:

10% preference shares, P100 par value, 50,000 shares authorized, P1,000,000
10,000 shares issued and outstanding
Ordinary shares, P50 par value, 100,000 shares authorized, 50,000 2,500,000
shares issued, 5,000 shares reacquired at P75 per share
Share premium on preference shares 250,000
Share premium on ordinary shares 250,000
Accumulated profits 2,450,000

Transactions in 2016 are as follows:

a. On January 2, the company issued 5,000, P1,000 12% bonds payable with detachable
warrants. One warrant is attached to each P1,000 bond. The bonds which pay semi-annual
interest every June 30 and December 31 were issued at total lump-sum of P5,700,000. On the
date of issuance, the bonds were quoted at 105 without the warrants while each warrant can
be sold in the market at P25. Five warrants surrendered together with P60 exercise price
entitle the holder to acquire one ordinary share. Warrants can be exercised 2 years from the
date of issuance.
b. On March 1, 4,000 treasury shares were reissued at P70 per share. The remaining treasury
shares were retired and reverted to unissued basis.
c. On April 15, stock rights were issued to ordinary stakeholders. 10 stock rights plus P62 per
share entitles the holder to acquire one additional ordinary share.
d. On June 1, 60% of the warrants issued with the bonds were exercised.
e. On August 15, all but 9,000 stock rights were exercised by the ordinary stakeholders.
f. Adjusted net-income for the year amounted to P1,250,000.
Requirements:
1. The entry to recognize the retirement of the treasury shares on March 1 shall be?
2. What is the credit to the share premium account as a result of the exercise of the stock warrants
on June 1?
3. What is the credit to the share premium account as a result of the exercise of stock rights on
August 15?
4. What is the total additional paid in capital as of December 31, 2016?
5. What is the total stockholder’s equity as of December 31, 2016?