ACC124AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 2 BSA

PROBLEM 1
You were able to obtain the following from the accountant of C Company related to the company’s liabilities as
of December 31, 2020:
Current liabilities:
Accounts payable 1,350,000
14% note payable issued October 1, 2019, maturing September 30, 1,250,000
2021
16% note payable issued April 1, 2018, due on April 2021 3,000,000
Interest payable ?
Non-current liability:
10% 2-year, note payable issued on July 1, 2020 2,000,000
The following additional information pertains to these liabilities:
a. The accounts payable balance of P1,350,000 was before any necessary year-end adjustments relating
to the following:
 Goods were in transit to C Company from a vendor on December 31, 202. The invoice cost was
P75,000. The goods were shipped FOB shipping point on December 29, 2020 and were received
on January 2, 2021.
 Goods shipped FOB destination on December 21, 2020, from a vendor to C Company, were
received on January 6, 2021. The invoice cost was P37,500.
 On December 27, 2020, C Company wrote and recorded checks totaling P60,000 which were
mailed on January 10, 2021.
b. The interest of the 14% note payable is payable every September 30.
c. On December 31, 2020, the company expects to refinance the P3,000,000 note by the issuance of a
long-term note payable in lump sum. The refinancing of the P3,000,000 is at the discretion of the
enterprise. C’s December 31, 2020 FSs were issued on March 31, 2021. On January 15, 2021, the
entire P3,000,000 balance of 16% note was refinanced by issuance of a long-term obligation payable.
The interest is payable every April 1.
d. The note payable of P2,000,000 is payable to D Corporation. The interest is payable quarterly. The
existing loan agreement does not carry a provision to refinance. During September, C was experiencing
financial difficulty and was unable to pay the periodic interest. D Company agreed at the reporting date
to provide a grace period ending at least twelve months to rectify the breach.

1. How much should be the 2020 accounts payable?

a. 1,410,000
b. 1,425,000
c. 1,462,500
d. 1,485,000

2. Total interest expense for the year 2020?

a. 175,000
b. 480,000
c. 655,000
d. 755,000

3. Total interest payable as of December 31, 2020?

a. 143,750
b. 2,423,750
c. 503,750
d. 2,380,750

4. Total current liability as of December 31, 2020?

a. 5,158,750
b. 2,878,750
c. 3,238,750
d. 5,115,000

5. Total noncurrent liabilities as of December 31, 2020?

a. 3,000,000
b. 2,000,000
c. 5,000,000

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ACC124AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 2 BSA
d. Nil
PROBLEM 2
Paracelis Inc. has been producing quality children’s apparel for more than 30 years. The company’s fiscal year
runs from April 1 to March 31. The following information relates to the obligations of Paracelis as of March 31,
2020.

Bonds payable
Paracelis issued P10,000,000 of 10% bonds on July 1, 2018. The prevailing market rate of interest for these
bonds was 12% on the date of issue. The bonds will mature on July 1, 2028. Interest is paid semi-annually on
July 1 and January 1. Paracelis uses the effective interest rate method to amortize the bond premium or
discount. (Round present value factors to the nearest 5 decimal places.)

Notes payable
Paracelis 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 P600,000 on March 31, 2020.
Due Date Amount Due
April 1, 2020 400,000
July 1, 2020 600,000
October 1, 2020 300,000
January 1, 2021 300,000
April 1, 2021 - March 31, 2022 1,200,000
April 1, 2022 – March 31, 1,000,000
2023
April 1, 2023 – March 31, 1,400,000
2024
April 1, 2024 – March 31, 800,000
2025
April 1, 2025 – March 31, 1,000,000
2026
Total 0

Estimated warranties
Paracelis has one-year product warranty on some selected items in its product line. The estimate warranty
liability on sale made during 2018-2019 fiscal year and still outstanding as of March 31, 2019 amounted to
P180,000. The warranty costs on sales made from April 1, 2019, through March 31, 2020, were estimated at
P520,000. The actual warranty costs incurred during 2019-2020 fiscal year are as follows:
Warranty claims honored on 2018 – 2019 180,000
sales
Warranty claims honored on 2019 – 2020 178,000
sales
Total warranty claims honored 0

Other information:
a. Trade payable. Accounts payable for supplies, goods and services purchases on open account amount
to P740,000 as of March 31, 2020.
b. Sales commissions payable. Paracelis pays its outside salespersons fixed monthly salaries and
commissions on net sales. Sales commissions are computed and paid on a monthly basis (in the
amount following the month of sale), and the fixed salaries are treated as advances against
commissions.
However, if the fixed salaries for salespersons exceed their sales commissions earned for the month,
such excess is not charged back to them. Pertinent data for the month of March 2020 for the 3
salespersons are as follows:
Salesperson Fixed Salary Net Sales Commission rate
s
A 10,000 200,000 4%
B 14,000 400,000 6%
C 18,000 600,000 6%
Total 0 0
c. Dividends. On March 15, 2020, Paracelis board of directors declared a cash dividend of P.20 per
ordinary share and a 10% common share dividend. Both dividends were able to be distributed on April

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ACC124AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 2 BSA
12, 2020 to the ordinary shareholders of record at the close of business on March 31 ,2020. Data
regarding Paracelis common stock as are as follows:
Par value P5 per share
Number of shares issued and 6,000,000 shares
outstanding
Market values of the ordinary shares:
March 15, 2020 P22 per share
March 31, 2020 P21.50 per share
April 12, 2020 P22.50 per share
Required:
1. Proceeds from sale of bonds on July 1, 2018
a. 8,852,960
b. 10,000,000
c. 10,500,000
d. 10,467,040

2. The current portion of Paracelis’ notes payable at March 31, 2020.

a. 2,280,000
b. 1,600,000
c. 1,300,000
d. 3,800,000

3. Estimated warranties payable, March 31, 2020.

a. 342,000
b. 18,000
c. 520,000
d. 180,000

4. Warranty expense of the year

a. 230,000
b. 168,000
c. 520,000
d. 358,000

5. Sales commissions payable at March 31, 2020.

a. 70,000
b. 68,000
c. 28,000
d. 26,000

6. Current liabilities, March 31, 2020

a. 4,732,000
b. 4,760,000
c. 5,286,000
d. 5,642,000

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