Question 5

Audit of Liabilities

The audit staff for Calm Mind Corporation turned over to you the working papers containing information on the company's liabilities. You noted the following:

Accounts Payable

a. General ledger has a balance of P5,000,000.

b. There is a net debit balance of P200,000 in the supplier's account.

c. Unrecorded vouchers include the following:

- Primo Company for P300,000. The merchandise was shipped December 31, 2022, FOB Shipping Point. The goods were received on January 3, 2023.

- George Company for P120,000. The merchandise was shipped on December 28, 2022, FOB Destination. The goods were received on January 4, 2023.

d. The Company, as consignee, held goods worth P900,000. These goods were not included in the physical inventory on December 31, 2022 but were included in the Accounts Payable.

Bonds Payable

Calm Mind issued 2,000 of its 5-year P1,000 face value 11% bonds on January 1, 2020. These bonds were sold for P2,155,800 a price that yields 9%. The bonds were dated January 1, 2020 and pay interest annually every December 31. On July 1, 2022, 1,000 of the bonds were retired, the company paying P1,100,000 inclusive of accrued interest. This amount was charged by the company to the bonds payable account. On December 31, 2022, the company charged interest expense for the amount of interest paid. No entry was made by the company during the 2022 for the amortization of bond premium.

Other Obligations:

- In October 2022, an employee was injured on the parking lot in an accident partially the result of his own negligence. The employee has sued for P500,000. The legal counsel believes it is probable that the outcome of the action will be unfavorable and that the settlement would cost the corporation from P200,000 to P300,000, with the P240,000 the most probable amount within this range.

- Calm Mind sells goods with a warranty under which customers are covered for the cost of any manufacturing defects that become apparent within the first year after the purchase. If minor defects were detected in all products sold, repair costs of P2,000,000 would result. If major defects were detected in all products sold, repair costs of P5,000,000 would result. The company's past experience and future expectations indicate that 65% of the goods sold have no defects, 25% of the goods sold have minor defects and 10% of the goods sold have major defects.

- On September 30, 2020, Calm Mind acquired special equipment from Poodle Company by paying P2,000,000 down and signing a note with a face value of P4,000,000 due September 30, 2023. The note is non-interest bearing. Market rate of interest for similar notes at the date of its issuance was 10%. (Round present value factor to five decimal places.)

Q1. The adjusted balance of Accounts Payable at December 31, 2022 is

A. P5,010,000

B. P5,410,000

C. P5,530,000

D. P5,500,000

Q2:The adjusted ledger balance of Premium on Bonds Payable at December 31, 2022 is*

A. P155,800

B. P101,506

C. P70,642

D. P35,321

Q3:The amount of gain or (loss) on retirement of bonds payable during 2022 is*

1 point

A.PP (1,963)

B.PP (56,963)

C.PP (5,753)

D. P1,963

Q4:The carrying amount of Notes Payable that will be shown on December 31, 2022 statement of financial position is

A. P4,000,000

B. P3,727,255

C. P3,636,240

D. P3,388,408

Q5:The provision for litigation expense that should be shown on the statement of financial position at December 31, 2022 is

A P200,000

B. P240,000

C. P250,000

D. P500,000

Q6:The provision for warranties that should be shown on the statement of financial position at December 31, 2022 is

A. P0

B. P1,000,000

C. P2,000,000

D. P3,500,000