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CHAPTER 8 – Audit of Liabilities
Problem 1
In conjunction with your December 31, 2007, annual audit of the financial statements of
Documents 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
Sheet Music 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 h c arge to Accounts Payable. This vouc

her
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

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2. The entry to adjust Voucher # 778 is
a. Accounts payable
Loans payable
180,000
100,000
c. Loans payable 100,000
Interest expense 80,000

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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

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3. The entry to adjust Voucher # 741 is
a. Accounts payable – others 50,000
Accounts payable 50,000