APPLIED

AUDITING 2
Audit of Liabilities
(Problem 7-16)

Name: Asilo, Hersheys Maitha Jane M.

Schedule: 2:00 3:00 MWF/ 2:30 4:00 TTH
Instructor: Mr. Raymund Cabidog, CPA

PROBLEM 7 16
Analyzing Various Transactions Involving Liabilities
In conjunction with your firms examination of the financial statements of
BATUR, INC. as of December 31, 2014, you obtained the information from the
companys voucher register shown in the work paper below.
Ite Entry Vouche
m Date r Description Amou Account
No. Refere nt Charged
nce
1 12/18/ 12-200 Supplies, shipped FOB P15,00 Supplies on hand
14 destination, 12/15/14; 0
received 12/17/14
2 12/18/ 12-203 Auto insurance, 12/15/14 22,000 Prepaid
14 12/15/15 insurance
3 12/21/ 12-209 Repairs services; 19,000 Repairs &
14 received 12/20/14 maintenance
Merchandise, shipped
4 12/26/ 12-212 FOB shipping point, 123,00 Inventory
14 12/20/14; received 0
12/24/14
5 12/21/ 12-210 Payroll, 12/7/14 69,000 Salaries and
14 12/21/14 wages
(12 working days)
6 12/21/ 12-234 Subscription to industry 5,000 Dues &
14 magazine for 2015 subscriptions
expense
7 12/28/ 12-236 Utilities for December 24,000 Utilities expense
14 2014
Merchandise, shipped
8 12/28/ 12-241 FOB destination, 111,50 Inventory
14 12/24/14; received 0
1/2/15
Merchandise, shipped
9 12/28/ 12-242 FOB destination, 84,000 Inventory
14 12/24/14; received
1/2/15
Legal and
10 1/2/15 1-1 Legal services: received 46,000 professional fees
12/28/14 expense
11 1/2/15 1-2 Medical services for 25,000 Medical
employees for December expenses
2014
Merchandise, shipped
12 1/5/15 1-3 FOB shipping point, 55,000 Inventory
12/29/14; received
1/4/15
Payroll, 12/21/14 1/5/15
13 1/10/1 1-4 (12 working days in total, 72,000 Salaries and
5 4 working days in wages
January 2015)
Merchandise, shipped
14 1/10/1 1-6 FOB shipping point, 64,000 Inventory
5 1/2/15; received 1/6/15
Merchandise, shipped
15 1/12/1 1-8 FOB shipping point, 38,000 Inventory
5 1/3/15; received 1/10/15
16 1/13/1 1-9 Maintenance services; 9,000 Repairs &
5 received 1/9/15 maintenance
17 1/14/1 1-10 Interest on bank loan, 30,000 Interest expense
5 10/10/14 1/10/15
18 1/15/1 1-11 Manufacturing 254,00 Machinery &
5 equipment; installed 0 equipment
12/29/14
19 1/15/1 1-12 Dividend declared, 160,00 Dividends
5 12/15/15 0 payable

Accrued liabilities as of December 31, 2014, were as follows:

Accrued payroll P 48,000
Accrued interest payable 26,666
Dividends payable 160,000
The accrued payroll and accrued interest payable were reversed effective
January 1, 2015.

Required:
Review the data given above and prepare journal entries to adjust the
accounts on December 31, 2014. Assume that the company follows FOB
terms for recording inventory purchases.

SOLUTION 7 16
ADJUSTING JOURNAL ENTRIES
December 31, 2014
1. Insurance expense 917
Prepaid Insurance 917
(P22,000 x 0.5/12)

2. Prepaid dues and subscriptions 5,000

Dues and subscriptions expense 5,000

3. Accounts payable 111,500

Inventory 111,500

4. Accounts payable 84,000

Inventory 84,000

5. Legal and professional fees expense 46,000

Accounts payable 46,000

6. Medical expenses 25,000

Accounts payable 25,000
7. Inventory 55,000
Accounts payable 55,000

8. Machinery and equipment 254,000

Accounts payable 254,000

COMMENT:
The Conceptual Framework for Financial Reporting provides the following
definition of liabilities:
Liabilities are present obligations of an entity arising from past transactions
or events, the settlement of which is expected to result in an outflow from
the entity of resources embodying economic benefits.
Accordingly, the essential characteristics of an accounting liability are:
a. The liability is the present obligation of a particular entity.
b. The liability arises from past event.
c. The settlement of the liability requires an outflow of resources
embodying economic benefits.
PFRS 9, paragraph 5.1.1 provides that an entity shall measure initially a
financial liability at its fair value minus, in the case of financial liability not
designated at fair value through profit or loss, transaction costs that are
directly attributable to the issue of the financial liability.
Under PAS 10, paragraph 3, events after reporting period are those events
both favorable and unfavorable that occur between the end of reporting
period and the date when financial statements are authorized for issue.
There are two types of events after reporting period, namely
1. Adjusting events after reporting period are those that provide evidence
of conditions that exist at the end of the reporting period.
2. Nonadjusting events after reporting period are those that are indicative
of conditions that arise after the end of the reporting period.