01.

05: Audit of Current Liabilities

BA 123

Part I Determination of Classification

In the audit of the Jordan Corporations financial statements at December 31, 2003, the chief accountant of the
said corporation provided the following information:
Notes payable:
Arising from purchase of goods
Arising from bank loans, on which marketable securities valued
at P600,000 have pledged as security, due Dec. 31, 2004
Arising from advances by officers, due June 30, 2004
Reserve for general contingencies
Employees income tax withheld
Advances received from customers on purchase orders
Containers deposit
Accounts payable arising from purchase of goods, net of debit
of P30,000
Accounts receivable, net of credit balances P40,000
Cash dividends payable
Stock dividends payable
Dividends in arrears on preferred stock, not yet declared
Convertible bonds, due January 31, 2005
First mortgage serial bonds, payable in semi-annual installments of
P50,000, due April 1 and October 1 of each year
Overdraft with Allied Bank
Cash in bank balance with PNB
Estimated damages to be paid as a result of unsatisfactory performance
on a contract
Estimated expenses on meeting guarantee for service requirements on
merchandise sold
Accrued interest on bonds payable
Common stock warrants outstanding
Common stock options outstanding
Unused letters of credit
Deficiency income tax assessment being contested
Notes receivable discounted
REQUIRED:
Based on your audit of the above, compute for the following as of December 31, 2003:
1.
2.

Total current liabilities

Total liabilities

120,000
500,000
50,000
400,000
20,000
64,000
50,000
balances
170,000
360,000
80,000
100,000
200,000
1,000,000
2,000,000
90,000
390,000
160,000
120,000
360,000
120,000
210,000
80,000
500,000
200,000

01.05: Audit of Current Liabilities

BA 123

Part II Cut Off Procedures

In conjunction with your firms examination of the financial statements of Duncan Company as of December 31,
2003, you obtained from the voucher register the information shown in the working paper below.
Item
No.
1

Entry Date
12.18.03

Voucher
Ref.
12-202

2
3

12.18.03
12.21.03

12-204
12-206

12.21.03

12-214

12.21.03

12-219

12.26.03

12-221

7
8

12.28.03
12.28.03

12-230
12-234

12.28.03

12-243

10

01.02.04

01-001

11

01.02.04

01-002

12

01.05.04

01-003

13

01.10.04

01-004

14

01.10.04

01-005

15
16

01.12.04
01.12.04

01-006
01-007

17

01.13.04

01-008

18

01.14.04

01-009

19

01.15.04

01-010

20

01.15.04

01-011

Description
Supplies, purchased FOB destination,
12.15.03; received, 12.17.03
Auto insurance, 12.15.03 to 12.15.04
Repair services; received 12.20.03
Merchandise shipped FOB shipping point,
11.20.03; received, 12.4.03
Payroll, 12.6.03 to 12.20.03
(12 working days)
Subscription to tax reporting service for
2004
Utilities for December 2003
Merchandise shipped FOB destination,
12.24.03; received, 1.2.04
Merchandise shipped FOB destination,
12.26.03; received, 1.3.04
Legal services, received 12.28.03
Medical services for employees for
December 2003
Merchandise shipped FOB shipping point,
12.29.03; received, 1.4.04
Payroll, 12.21.03 to 01.05.04
(12 working days in total,
4 working days in January)
Merchandise shipped FOB shipping point,
1.2.04; received, 1.5.04
Manufacturing royalties, Dec. 2003
Merchandise shipped FOB destination,
1.3.04; received, 1.10.04
Maintenance services, received 1.9.04
Interest on bank loan,
10.12.03 to 1.10.04
Manufacturing equipment, installed on
12.29.03
Dividends declared, 12.15.03

Amount
20,000
24,000
24,000

Supplies on hand
Prepaid insurance
Repairs and
maintenance

17,000

Inventory

69,000

Salaries and wages

Dues and subscription
expense
Utilities expense

5,000
29,000
111,500

Inventory

84,000
46,000

Inventory
Legal and professional
expense

25,000

Medical expense

55,000

Inventory

72,000

Salaries and wages

64,000
39,000

Inventory
Manufacturing costs

38,000
9,000

Inventory
Repairs and
maintenance

30,000
254,000
160,000

Accrued liabilities as of December 31, 2003 were as follows:

Accrued payroll
Accrued interest payable
Dividends payable
Accrued royalties payable

Account Charged

48,000
26,667
160,000
39,000

Interest expense
Machinery and
equipment
Dividends payable

01.05: Audit of Current Liabilities

BA 123

The Accrued payroll, Accrued interest payable, and Accrued royalties payable accounts were reversed on January
1, 2004.
REQUIRED:
Prepare adjusting entries as of December 31, 2003 based on your review of the data given above.

Part III Other Current Liabilities

Jolinas Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, and sheet
music. The company started operations in January 1, 2010. The following pertain to some of the liabilities of Jolina
at year-end 2010.
1.

2.

3.
4.

5.

6.
7.

8.

Cut-off procedures revealed that a Php50,000 advertising bill was received last January 10, 2011,
comprising costs of Php37,500 for advertisements in December 2010 and Php12,500 for January 2011. No
accrual was posted as of December 31, 2010.
A store lease, effective January 1, 2010, calls for fixed rent of Php120,000 per month, payable one month
from the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over
Php6,000,000 per calendar year is payable every January 31 of the following year. Sales for the year
amounted to Php7,500,000. no accrual was made at year end
Jolina has a bonus agreement with the company under which she receives 10% of audited net income
after bonuses each year. Since net income is yet to be determined, the bonus has not been provided for.
The company sold 70,000 units of sheet music. Each sheet music comes with a coupon, which if submitted
with Php50, entitles the customer to a free mixed song CD. Jolina pays Php70 for the CDs. Jolina estimates
that 70% of the coupons will be redeemed. Actual redemption amounted to 300,000 coupons for the
year. The accountant expensed CDs given out as redeemed. For the year, Jolina bought 450,000 mixed
song CDs.
Musical products are sold with a one-year warranty for replacement parts and labor. The estimated
warranty cost is 10% of musical product sales which comprise 40% of total sales. Like coupons, warranty
expense of Php64,000 was recorded as replacement parts are requisitioned and as job time tickets of
personel are submitted. Sales is for P 7.5 Million.
The accounts payable ledger included debits amounting to Php240,000 representing overpayment to a
supplier.
The unpaid voucher files were examined. The following payables and amounts were traced from the
accounts payable GL to the unpaid vouchers:
a) A Company Php224,000 merchandise shipper on December 31, 2010, FOB destination. The
inventory was received on January 10,2011.
b) B Company Php192,000; merchandise shipped on December 26,2010, FOB shipping point,
received on January 16, 2011.
c) C Super Services Php144,000; for janitorial services over a three month period ending January
31, 2011.
d) Meralco Php67,200; for electric bills covering the period December 15 to January 15, 2011.
Unaudited net income, and current liabilities amounted to Php1,000,000 and Php5,350,000 respectively.

Requirements:
1. Proposed audit adjustments from the foregoing data.
2. Audited net income.
3. Schedule indicating adjustments for audited liabilities.