PROBLEM NO. 1

Dallas Corporation is selling audio and video appliances.

The company's fiscal year ends on March 31. The

following information relates to the obligations of the

company as of March 31, 2020:

Notes payable

Dallas has signed several notes with financial institutions.

The maturities of these notes are given below. The total

unpaid interest for all of these notes amounts to P340,000

on March 31, 2020.

Due date Amount

April 31, 2020 P 700,000

July 31, 2020 900,000

February 1, 2021 800,000

April 30, 2021 1,200,000

June 30, 2021 1,500,000

P 5,100,000

Estimated warranties

Dallas has a one-year product warranty on some selected

items. The estimated warranty liability on sales made

during the 2018 - 2019 fiscal year and still outstanding as

of March 31, 2019, amounted to P252,000. The warranty

costs on sales made from April 1, 2019 to March 31, 2020,

are estimated at P630,000. The actual warranty costs

incurred during 2019 - 2020 fiscal year are as follows:

Warranty claims honored on

2018 - 2019 sales P 252,000

Warranty claims honored on

2019 - 2020 sales 285,000

Total P 537,000

Trade payables

Accounts payable for supplies, goods, and services

purchases on open account amount to P560,000 as of

March 31, 2020.

Dividends

On March 10, 2020, Dallas' board of directors declared a

cash dividend of P0.30 per ordinary share and a 10%

ordinary share dividend. Both dividends were to be

distributed on April 5, 2020 to ordinary shareholders on

record at the close of business on March 31, 2020. As of

March 31, 2020, Dallas has 5 million, P2 par value,

ordinary shares issued and outstanding.

Bonds payable

Dallas issued P5,000,000, 12% bonds, on October 1, 2014

at 96. The bonds will mature on October 1, 2024.

Interest is paid semi-annually on October 1 and April 1.

Dallas uses the straight line method to amortize bond

discount.

QUESTIONS:

Based on the foregoing information, determine the

adjusted balances of the following as of March 31, 2020:

1. Estimated warranty payable

a. P252,000 c. P630,000

b. P345,000 d. P882,000

2. Total current liabilities

a. P6,445,000 c. P5,445,000

b. P5,105,000 d. P3,945,000

3. Trade and other payables

a. P5,445,000 c. P3,045,000

b. P5,100,000 d. P2,700,000

4. Total noncurrent liabilities

a. P7,700,000 c. P7,590,000

b. P7,500,000 d. P7,610,000

5. In auditing accounts payable, an auditor's procedures

most likely will focus primarily on management's

assertion of

a. Existence c. Completeness

b. Presentation and disclosure d. Valuation

6. Which of the following procedures is least likely to be

performed before the balance sheet date?

a. Observation of inventory

b. Testing of internal control over cash

c. Search for unrecorded liabilities

d. Confirmation of receivables

7. Unrecorded liabilities are most likely to be found during

the review of which of the following documents?

a. Unpaid bills

b. Bills of lading

c. Shipping records

d. Unmatched sales invoices

8. An auditor's purpose in reviewing the renewal of a note

payable shortly after the balance sheet date most

likely is to obtain evidence concerning management's

assertions about

a. Existence or occurrence

b. Presentation and disclosure

c. Valuation or allocation

d. Completeness

PROBLEM NO. 2

Relevant extracts from Magic Corporation's financial

statements at 31 December 2019 are as follows:

Current liabilities

Provision for warranties P405,000

Non-current liabilities

Provision for warranties 270,000

Note 10 - Contingent liabilities

Magic is engaged in litigation with various parties

in relation to allergic reactions to traces of peanuts

alleged to have been found in packets of fruit

gums. Magic strenuously denies the allegations

and, as at the date of authorizing the financial

statements for issue, is unable to estimate the

financial effect, if any, of any costs or damages

that may be payable to the plaintiffs.

The provision for warranties at 31 December 2019 was

calculated using the following assumptions: There was no

balance carried forward from the prior year.

Estimated costs of repairs - products with

minor defects P1,500,000

Estimated cost of repairs - products with

major defects P9,000,000

Expected % of products sold during 2019

having no defects in 2020 80%

Expected % of products sold during 2019

having minor defects in 2020 15%

Expected % of products sold during 2019

having major defects in 2020 5%

Expected timing of settlement of warranty

payments - those with minor defects All in 2020

Expected timing of settlement of warranty

payments - those with major defects

40% in

2020, 60%

in 2021

During the year ended 31 December 2020 the following

occurred:

1. In relation to the warranty provision of P675,000 at 31

December 2019, P300,000 was paid out of the

provision. Of the amount paid, P225,000 was for

products with minor defects and P75,000 was for

products with major defects, all of which related to

amounts that had been expected to be paid in 2020.

2. In calculating its warranty provision for 31 December

2020, Magic made the following adjustments to the

assumptions used for the prior year:

Estimated cost of repairs - products

with minor defects No change

Estimated cost of repairs - products

with major defects P7,500,000

Expected % of products sold during

2020 having no defects in 2021 85%

Expected % of products sold during

2020 having minor defects in 2021 13%

Expected % of products sold during

2020 having major defects in 2021 2%

Expected timing of settlement of

warranty payments - those with

minor defects All in 2021

Expected timing of settlement of

warranty payments - those with

major defects

20% in

2021, 80%

in 2022

3. Magic determined that part of its plant and equipment

needed an overhaul - the conveyer belt on one of its

machines would need to be replaced in about

December 2021 at an estimated cost of P500,000. The

carrying amount of the conveyer belt at 31 December

2020 was P280,000. Its original cost was P400,000.

4. Magic was unsuccessful in its defense of the peanut

allergy case and was ordered to pay P2,000,000 to the

plaintiffs. As at 31 December 2020 Magic had paid

P1,500,000.

5. Magic commenced litigation against one of its advisers

for negligent advice given on the original installation of

the conveyers' belt referred to in (4) above. In

October 2020 the court found in favor of Magic. The

hearing for damages had not been scheduled as at the

date the financial statements for 2020 were authorized

for issue. Magic estimated that it would receive about

P500,000.

6. Magic signed an agreement with Choko Bank to the

effect that Magic would guarantee a loan made by

Choko Bank to Magic's subsidiary, UN Ltd. UN's Ltd.

loan with Choko Bank was P3,000,000 as at 31

December 2020. UN Ltd. was in a strong financial

position at 31 December 2020.

QUESTIONS:

Based on the above and the result of your audit, answer

the following:

1. The warranty expense in 2020 is

a. P150,000 c. P600,000

b. P240,000 d. P345,000

2. The provision for warranties as of December 31, 2020

is

a. P870,000 c. P345,000

b. P720,000 d. P615,000

3. The provision for warranties to be reported as current

liability as of December 31, 2020 is

a. P330,000 c. P225,000

b. P600,000 d. P495,000

4. The provision for warranties to be reported as

noncurrent liability as of December 31, 2020 is

a. P120,000 c. P390,000

b. P225,000 d. P495,000

5. Total provisions to be reported in the statement of

financial position as of December 31, 2020 is

a. P 720,000 c. P 615,000

b. P1,770,000 d. P2,040,000