Problem 1

In conjunction with your December 31, 2007, annual audit of the financial statements of

SweetHeart Company, you have obtained and examined the December 31, 2007, accounts payable trial balance. Your examination of this trial balance disclosed the following open vouchers:

a. Voucher 761, containing a P380,000 credit to Accounts Payable. This voucher covered a

cash transfer to the factory payroll bank account for the pay period ended December 28, 2007. The payroll cash transfer was made January 3, 2008, and payroll checks covering this pay period were distributed to factory employees on January 4, 2008.

b. Voucher 778, containing an P180,000 credit to Accounts Payable. The P180,000 credit

covered the principal and interest due on a ten-year installment loan. The loan was granted to SweetHeart Company on January 1, 2007. Terms of the loan agreement call for ten equal

annual installment payments of P100,000, each plus interest at 8 percent. Principal and

interest payments are due January 5, 2008 2017. The voucher indicated that the Loan Payable and Interest Expense accounts had been properly charged.

c. Voucher 741, containing a credit to Accounts Payable of P50,000. This voucher covered on invoice from AC Company for a new computer machine. The computer machine was installed December 10, 2007, and the Office Equipment account was properly charged.

d. Voucher 775, containing a credit to Accounts Payable in the amount of P65,480. This

voucher covered income taxes withheld from employees during December 2007.

e. Voucher 779, containing a credit to Accounts Payable of P41,460. This credit covered the

total interest and principal due on a 180-day P40,000 note payable to the CJ Company.

Charges to the Note Payable and Interest Expense had been properly handled.

f. Voucher 751, containing a P200,000 charge to Accounts Payable. This voucher represented a P200,000 advance payment to SS Company for a special order of ten boxes. The P200,000 check was mailed to SS Company on January 2, 2008.

Questions

1. Accounts payable at year-end is

a. Overstated by P716,940 c. Overstated by P516,940

b. Overstated by P666,940 d. Overstated by P466,940

2. The entry to adjust Voucher # 778 is

a. Accounts payable 180,000 c. Loans payable 100,000

Loans payable 100,000 Interest expense 80,000

Interest payable 80,000 Accounts payable 180,000

b. Accounts payable 180,000 d. Loans payable 100,000

Loans payable 100,000 Interest payable 80,000

Interest expense 80,000 Accounts payable 180,000

3. The entry to adjust Voucher # 741 is

a. Accounts payable others 50,000

Accounts payable 50,000

b. Accounts payable 50,000

Accounts payable others 50,000

c. Accounts payable others 50,000

Machinery 50,000

d. No adjustment

4. The current liability of the company at year-end is

a. Overstated by P340,000 c. Understated by P200,000

b. Overstated by P140,000 d. Understated by P 60,000