Audit of Liabilities Q&A

Audit of Liabilities
Problem A
Boomerang Inc. is a manufacturer and retailer of household furniture. Your audit of the company’s
financial statements for the year ended December 31, 2020, discloses the following debt obligations of
the company at the end of its reporting period. Boomerang’s financial statements are authorized for
issuance on March 6, 2021.
a. A ₱150,000 short-term obligation due on March 1, 2021. Its maturity could be extended
to March 1, 2023, provided Boomerang agrees to provide additional collateral. On
February 12, 2021, an agreement is reached to extend the loan’s maturity to March 1,
2023.
b. A short-term obligation of ₱3,600,000 in the form of notes payable due to February 5,

2021. The company issued 75,000 ordinary shares for ₱36 per share on January 25,
2021. The proceeds from the issuance, plus ₱900,000 cash, were used to fully settle the
debt on February 5, 2021.
c. A long-term obligation of ₱2,500,000 on December 1, 2020. On November 10, 2020,

Boomerang breaches a covenant on its debt obligation and the loan becomes payable
on demand. An agreement is reached to provide a waiver of the breach on December
11, 2020.
d. A long-term obligation of ₱4,000,000. The loan is maturing over 4 years in the amount
of ₱1,000,000 per year. The loan is dated September 1, 2020, and the first maturity date
is September 1, 2021.
e. A debt obligation of ₱1,000,000 maturing on December 31, 2023. The debt is callable on
demand by the lender at any time.
1. What amount of current liabilities should be reported on the December 31, 2020
statement of financial position?
a. 8,250,000
b. 5,750,000
c. 4,750,000
d. 3,750,000
2. What amount of non-current liabilities should be reported on the December 31,

2020 statement of financial position?
a. 5,500,000
b. 3,000,000
c. 6,500,000
d. 7,500,000
Problem B
The data below are from the records of Almanor Inc. on December 31, 2020:
Accounts payable 680,000
Cash balance, ABC Bank 1,240,000
Cash overdraft with XYZ Bank 80,000
Customers’ accounts with credit balances 25,000
Dividends in arrears on preference shares 400,000
Employees’ income tax payable 100,000
Estimated warranty payable 50,000
Estimated premium claims outstanding 90,000
Income tax payable 400,000
Notes payable (issued in 2020 maturing in 20 semi-annual
installments beginning on April 1, 2021) 4,000,000
Salaries payable 400,000
The amount to be shown as total current liabilities on Almanor’s statement of financial position at
December 31, 2020 is?
a. 2,225,000
b. 2,025,000
c. 2,625,000
d. 2,145,000
Problem C
Saimaa Corp. records its purchases at gross amounts but wishes to change to recording purchases net of
purchase discounts. Discounts on purchases recorded from January 1, 2020 to December 31, 2020,
totaled ₱80,000. Of this amount, ₱8,000 is still available in the accounts payable balance. The balances
in Saimaa’s accounts as of and for the year ended December 31, 2020, before conversion are:
Purchases 4,000,000
Purchase discounts 32,000
Accounts payable 1,200,000
1. The amount of purchase discounts lost to be recognized is

a. 8,000
b. 0
c. 32,000
d. 40,000
2. The accounts payable balance should be reduced by

a. 8,000
b. 80,000
c. 32,000
d. 40,000
3. The purchases account should be reduced by

a. 32,000
b. 80,000
c. 40,000
d. 8,000
4. The entry to record the conversion is
a. Accounts payable 80,000
Purchases 80,000
b. Purchase discounts lost 32,000
Purchases 32,000
c. Purchase discounts lost 40,000
Purchase discounts 32,000
Purchases 80,000
d. Purchase discounts lost 32,000
Purchases 40,000
Problem D
Anglin Corporation must determine the December 31, 2020 year-end accruals for advertising and rent
expenses. A ₱50,000 advertising bill was received January 10, 2021 comprising costs of ₱37,500 for
advertisements in December 2020 issues and ₱12,500 for advertisements in January 2021 issues of the
newspaper.
A store lease, effective December 16, 2019, calls for fixed rent of ₱120,000 per month, payable one
month from the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over
₱6,000,000 per calendar year is payable on January 31 of the following year. Net sales for 2020 were
₱7,500,000.
What is the total accrued liabilities that should be reported by Anglin Corporation in its statement of
financial position as at December 31, 2020?
a. 185,000
b. 172,500
c. 97,500
d. 110,000
Problem E
Ana Rosa, president of the Apopka Company, has a bonus arrangement with the company under which
she receives 10% of the net income (after deducting taxes and bonuses) each year. For the current year,
the net income before deducting either the provision for income taxes or the bonus is ₱4,650,000. The
bonus is deductible for tax purposes, and the tax rate is 30%.
1. Determine the amount of Ana Rosa’s bonus.

2. Compute the appropriate provision for income tax for the year.
3. Prepare the entry to record the bonus (which will be paid in the following year).

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Audit of Liabilities

b. A short-term obligation of ₱3,600,000 in the form of notes payable due to February 5,

c. A long-term obligation of ₱2,500,000 on December 1, 2020. On November 10, 2020,

2. What amount of non-current liabilities should be reported on the December 31,

1. The amount of purchase discounts lost to be recognized is

2. The accounts payable balance should be reduced by

3. The purchases account should be reduced by

1. Determine the amount of Ana Rosa’s bonus.

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