SUB: ACCOUNTING

Topic: Audit of Current Liabilities

Case 1 Audit of Current Liabilities You were assigned to audit the contract liabilities of Octo Inc. for the year ended December 31, 2024. The following details were provided to you: Octo Inc. sells sophisticated Bluetooth headsets for P2,000 per unit and to induce sales, two programs were initiated on January 1, 2023: warranty program and premium program. Premium program: Every headset sold includes 5 coupons that may be used to redeem a premium item, a pen recorder. To claim a pen recorder, a customer must present 15 coupons and pay additional P50. Each pen recorded costs P500 and may be sold for P750 each. The summary of the promotional campaign was as follows: 2023 2024 Total coupons presented for redemption 103,200 125,250 Further investigation reveals that the company expects that only 75% of the coupons will be presented for redemption. Octo Inc.'s policy is to account for premiums as part of the selling expenses. The following entries were made by the company related to the premium program: Date Particulars Debit Credit January 1, 2023 Premium inventory 3,850,000 Cash 3,850,000 To record purchase of premium items. December 31, 2023 Premium expense 3,440,000 Cash 344,000 Premium inventory 3,784,000 To record redemption of premium items. January 1, 2024 Premium inventory 4,675,000 Cash 4,675,000 To record purchase of premium items. December 31, 2024 Premium expense 4,175,000 Cash 417,500 Premium inventory 4,592,500 To record redemption of premium items. Warranty program: Octo Inc. offers 3-year warranty for every unit of sophisticated Bluetooth headset sold. It estimates warranty cost as a percentage of peso sales. Based on past experience, it is estimated that 4% will be repaired during the first year of warranty, 6% will be repaired during the second year of warranty and 10% will be repaired in the third year of warranty. The product warranty provides service other than agreed upon specification and can be availed by customers by paying additional P500 per unit. Cash received from customers availing the service was recorded as a credit to sales. The following entries were made by the company related to the premium program: Date Particulars Debit Credit December 31. 2023 Warranty expense 950,000 Cash 950,000 To record actual warranty services rendered December 31, 2024 Warranty expense 3,168,750 Cash 3,168,750 To record actual warranty services rendered The following additional information are deemed necessary: December 31, 2023 December 31, 2024 Total sale proceeds for the year P67,500,000 P89, 125,000 Total number of warranty contracts sold 15,000 26,250 Determine the following as a result of your audit: 21. How much is the balance of unearned premium income as of December 31, 2024? 22. How much is the balance of unearned warranty income as of December 31, 2024? 23. How much is the gross profit from premium in 2024? 24. Assuming the 2024 book was closed, the proposed adjusting journal entry for 2024 will include a debit (credit) to retained earnings of (in relation to all errors)? 25. Assuming the 2024 book is still open, the proposed adjusting journal entry for 2024 will include a debit (credit) to premium income of