Auditing Problems

AUDIT OF CASH AND CASH EQUIVALENTS PROBLEM NO. 1 The controller of the Legarda Company is in the process of preparing the company’s December 31, 2018 financial statements. He is trying to determine the correct balance of cash and cash equivalents to be reported as a current asset in the statement of financial position. The following items are being considered: 1. Savings account of ₱900,000 and a checking account balance of ₱1,200,000 are held at Manila Bank. 2. Money market placement with maturity of 3 months, ₱7,500,000. 3. Currency and coins on hand amounted to ₱11,550. 4. Travel advances of ₱270,000 for the first quarter of next year (employee reimbursement will be through salary deduction). 5. Legarda Company has purchased ₱3,150,000 of commercial paper of Mendez Corp. which is due in 60 days. 6. A separate cash fund amounting to ₱2,250,000 is restricted for the retirement of longterm debt. 7. Petty cash fund of ₱1,500. 8. An IOU from an employee of Legarda Company in the amount of ₱2,000. 9. Two certificates of deposit, each totaling ₱500,000. These CDs have a maturity of 120 days. 10. Legarda Company has received a check from a customer in the amount of ₱187,500 dated January 15, 2018. 11. Legarda Company has agreed to maintain a cash balance of ₱50,000 at all times at Manila Bank to ensure future credit availability but not restricted as to withdrawal. 12. On January 1, 2018, Legarda Company purchased marketable equity securities to be held as “trading” for ₱3,000,000. On December 31, 2018, its market value is ₱4,300,000. What amount should be reported as cash and cash equivalents on December 31, 2018? A. ₱13,763,050 C. ₱12,751,500 B. ₱13,000,550 D. ₱12,763,050 PROBLEM NO.2 In connection with your audit of Pureza Corporation for the year ended December 31, 2018, you gathered the following: Current account at Metrobank Current account at BPI Payroll account Foreign bank account - restricted (in equivalent pesos) Postage stamps Employee's post dated check IOU from controller's sister Credit memo from a vendor for a purchase return

₱2,000,000 (100,000) 500,000 1,000,000 1,000 4,000 10,000 20,000

Traveler's check Not-sufficient-funds check Money Order Petty cash fund (₱4,000 in currency and expense receipts for ₱6,000) Treasury bills, due 3/31/2019 (purchased 12/31/2018) Treasury bills, due 1/31/2019 (purchased 1/01/2018)

50,000 15,000 30,000 10,000 200,000 300,000

Based on the above information and the result of your audit, compute for the cash and cash equivalent that would be reported on the December 31, 2018 balance sheet. A. ₱2,784,000 B. ₱3,084,000

C. D.

₱2,790,000 ₱2,704,000

PROBLEM NO.3 In the course of your audit of the Tayuman Corporation, its controller is attempting to determine the amount of cash to be reported on its December 31, 2018 balance sheet. The following information is provided: 1. Commercial savings account P1,200,000 and a commercial checking account balance of P1,800,000 are held at PS Bank. 2. Travel advances of P360,000 for executive travel for the first quarter of the next year (employee to reimburse through salary deduction). 3. A separate cash fund in the amount of P3,000,000 is restricted for the retirement of a long term debt. 4. Petty cash fund of P10,000 5. An I.O.U from a company officer in the amount of P40,000. 6. A bank overdraft of P250,000 has occurred at one of the banks the company uses to deposit its cash receipts. At the present time, the company has no deposits at this bank. 7. The company has two certificates of deposit, each totaling P1,000,000. These certificates of deposit have maturity of 120 days. 8. Tayuman Corp. has received a check dated January 2, 2019 in the amount of P150,000. 9. Tayuman Corp. has agreed to maintain a cash balance of P200,000 at all times at PS Bank to ensure future credit availability. 10. Currency and coin on hand amounted to P15,000. Questions: Based on the above and the result of your audit, how much will be reported as cash and cash equivalent at December 31, 2018? A. ₱3,025,000 B. ₱2,825,000

C. D.

₱2,575,000 ₱5,025,000

PROBLEM NO. 4 Laborious Company closed the accounts on June 30. The entity provided the following transactions:

May 2 – The entity established an imprest fund of P10,000 May 29 – The fund is replenished. The petty cash items include: Currency and coin P2,000 Postage 1,000 Supplies 3,000 Transportation 2,500 Miscellaneous Expense 1,500 June 30 – The fund was not replenished. The fund is composed of the following: Currency and coin P6,000 Supplies 2,000 Postage 1,000 Transportation 1,000 July 15 – The fund is replenished and increased to P15,000 Currency and coin Supplies Postage Transportation Miscellaneous Expense

P3,000 3,500 1,500 1,500 500

Required: Prepare journal entries to record the transactions under imprest fund system and fluctuating fund system.

PROBLEM NO. 5 In connection with your audit of the cash account of ANNIE CORP, you gathered the following information. a. Balance per bank statement, December 1, 2018 b.Total Bank receipts (credits) in December c. Balance per bank, December 31, 2018

P145,000 346,000 114,500

d. Outstanding checks, Nov. 30, 2018 (including P12,000 paid by bank in December)

67,500

e. Outstanding checks, December 31, 2018 (including checks issued in November)

94,162

f. Deposit in transit, November 30, 2018

39,458

g. A customer’s check received on December 4, 2018, was returned by bank on December 7 marked ‘’NSF’’. It was redeposited on December 8, 2018. The only

11,143

Entry made was to take up the collection on December 4, 2018. 1. What is the total book receipts in December? a. P295,399 c. P334,857 b. P306,542 d. P346,000 2. What is the total bank disbursements in December? a. P315,500 c. P231,500 b. P376,500 d. P346,000 3. What is the total book disbursements in December? a. P447,519 c. P403,662 b. P376,500 d. P392,519 PROBLEM NO.6 Shown below is the bank reconciliation for J.Ruiz Company for November 2018: Balance per bank, November 30, 2018 Add: Deposits in transit Total Less: Outstanding checks Bank credit recorded in error Cash balance per books, November 30, 2018

₱150,000 24,000 174,000 28,000 10,000

38,000 ₱136,000

The bank statement for December 2018 contains the following data: Total deposits Total charges, including an NSF check of ₱8,000 and a service charge ₱400

₱110,000 ₱ 96,000

All outstanding checks on November 30, 2018, including the bank credit, were cleared in the bank in December 2018. There were outstanding checks of ₱30,000 and deposits in transit of ₱38,000 on December 31, 2018. 1. How much is the cash balance per bank on December 31, 2018? A. ₱154,000 C. ₱164,000 B. ₱150,000 D. ₱172,400 2. How much is the December receipts per books? A. ₱124,000 C. ₱110,000 B. ₱96,000 D. ₱148,000 3. How much is the December disbursements per books? A. ₱96,000 C. ₱89,600 B. ₱79,600 D. ₱98,000 4. How much is the cash balance per books on December 31, 2018? A. ₱150,000 C. ₱180,400 B. ₱170,400 D. ₱162,000

5. The adjusted cash in bank balance as of December 31, 2018 is A. ₱141,600 C. ₱172,000 B. ₱162,000 D. ₱196,000 PROBLEM NO.7 Your examination of the financial statements of Gilmore Group Co. for the year ended December 31, 2018 you obtained the following information on the checking account of the company: a. The bank statement on November 30, 2018 showed a balance of ₱15,300. b. Among the bank credits in November was a customer’s note for ₱5,000 collected for the account of the company which the company recognized in December among its receipts. c. Included in the bank debits in November was a cost of checkbooks amounting to ₱60. d. A check for ₱2,000 issued by MAGULO Group Co. in November was charged by the bank in error against Gilmore Group Co. account. e. You also ascertained that there were deposits in transit amounting to ₱4,000 and outstanding checks totaling ₱8,500 as of November 30, 2018. f. The bank statement for the month of December showed total credits of ₱20,800 and total charges of ₱10,200. g. Company books for December showed total receipts of ₱36,780 and disbursements of ₱20,360. h. Bank debit memos for December were: No. 418 for service charges, ₱80 and No. 504 on a customer’s returned check marked “Refer to Drawer” for ₱1,200. i. On December 29, 2018 the company placed with the bank a customer’s promissory note with a face value of ₱6,000 for collection. The company treated this note as part of its receipts although the bank was able to collect on the note only in January, 2019. j. A check for ₱198 was recorded in the company cash payments books in December as ₱1,980. 1. Adjusted cash balance as of December 31, 2018. A. ₱24,280 B. ₱36,880 C. ₱18,782

D. ₱16,940

2. Unadjusted book balance November 30, 2018. A. ₱12,800 B. ₱7,800 C. ₱12,860

D. ₱7,860

3. Adjusted cash balance November 30, 2018. A. ₱8,800 B. ₱12,800 C. ₱21,300

D. ₱10,800

4. Deposit in transit as of December 31, 2018. A. ₱21,980 B. ₱10,980 C. ₱8,890

D. ₱16,980

5. Outstanding Checks as of December 31, 2018. A. ₱19,940 B. ₱16,818 C. ₱19,880

D. ₱18,098

PROBLEM NO. 8 Cubao Company has a current account in Metrobank. Your audit of the company’s cash account reveals the following: a. Balances taken from the company’s general ledger: Cash balance, November 30, 2018

₱637,860

Cash balance, December 31, 2018 Receipts, December 1-31, 2018 b. Outstanding checks, November 30, 2018 (₱26,140 was paid by bank in December) c. Checks written and recorded in December; not included in the checks returned with the December bank statement d. Deposit in transit, November 30, 2018 e. Deposit in transit, December 31, 2018 f. A bank credit memo was issued in December to correct an erroneous charge made in November g. Note collected by bank in December (company was not informed of the collection)

576,420 306,220

h. A check for ₱2,020 (payable to a supplier) was recorded in the Check Register in December as ₱3,000

980

i. A check for ₱2,240 was charged by the bank as ₱2,420 in December j. Cubao Company issued a stop payment order to the bank in December. This pertains to a check written in December which was not received by the payee. A new check was written and recorded in the Check Register in December. The old check was written off by a journal entry, also in December k. k. Bank service charge, November 30, 2018

180

64,140 36,080

15,260 16,140 1,500 2,060

780

60

1. The total outstanding checks on December 31, 2018, should be: A. ₱38,000 B. ₱74,080 C. ₱36,080 D. ₱62,220 2. What is the bank statement balance on November 30, 2018? A. ₱684,400 B. ₱587,420 C. ₱685,180

D. ₱688,180

3. What is the bank statement balance on December 31, 2018? A. ₱636,440 B. ₱637,220 C. ₱637,580

D. ₱637,160

4. The total bank receipts for the month of December should be: A. ₱309,680 B. ₱304,000 C. ₱308,900

D. ₱308,120

5. The total bank disbursements for the month of December is: A. ₱356,080 B. ₱356,860 C. ₱357,640

D. ₱356,200

PROBLEM NO.9 The cash account of the Recto Corporation as of December 31, 2018 consists of the following: On deposit in current account with Real Bank Cash collection not yet deposited to the bank A customer's check returned by the bank for insufficient fund

₱900,000 350,000 150,000

A check drawn by the Vice-President of the Corporation dated January 15, 2019 A check drawn by a supplier dated December 28, 2018 for goods returned by the Corporation A check dated May 31, 2018 drawn by the Corporation against the Piggy Bank in payment of customs duties. Since the importation did not materialize, the check was returned by the customs broker. This check was an outstanding check in the reconciliation of the Piggy Bank Account. Petty Cash fund of which ₱5,000 is in currency; P3,600 in form of employees' I.O.U s; and P1,400 is supported by approved petty cash vouchers for expenses all dated prior to closing of the books on December 31, 2018. Total Less: Overdraft with Piggy Bank secured by a Chattel mortgage on the Inventories Balance per ledger

70,000 60,000

410,000

10,000 1,950,000 300,000 ₱1,650,000

At What amount will the account ‘’Cash’’ appear on the December 31, 2018 balance sheet? A. ₱1,315,000 B. ₱1,425,000

C. ₱1,495,000 D. ₱1,725,000

PROBLEM NO.10 In the course of your audit of the Tayuman Corporation, its controller is attempting to determine the amount of cash to be reported on its December 31, 2018 balance sheet. The following information is provided: 1. Commercial savings account P1,200,000 and a commercial checking account balance of P1,800,000 are held at PS Bank. 2. Travel advances of P360,000 for executive travel for the first quarter of the next year (employee to reimburse through salary deduction). 3. A separate cash fund in the amount of P3,000,000 is restricted for the retirement of a longterm debt. 4. Petty cash fund of P10,000 5. An I.O.U from a company officer in the amount of P40,000. 6. A bank overdraft of P250,000 has occurred at one of the banks the company uses to deposit its cash receipts. At the present time, the company has no deposits at this bank. 7. The company has two certificates of deposit, each totaling P1,000,000. These certificates of deposit have maturity of 120 days. 8. Tayuman Corp. has received a check dated January 2, 2019 in the amount of P150,000. 9. Tayuman Corp. has agreed to maintain a cash balance of P200,000 at all times at PS Bank to ensure future credit availability. 10. Currency and coin on hand amounted to P15,000. Questions: Based on the above and the result of your audit, how much will be reported as cash and cash equivalent at December 31, 2018? A. ₱3,025,000

C.

₱2,575,000

B. ₱2,825,000

D.

₱5,025,000

PROBLEM NO.11 You were able to gather the following from the December 31, 2018 trial balance of V.Mapa Corporation in connection with your audit of the company: Cash on hand Petty cash fund BPI current account Security Bank current account No. 01 Security Bank current account No. 02 PNB savings account PNB time deposit

₱500,000 10,000 1,000,000 1,080,000 (80,000) 1,200,000 500,000

Cash on hand includes the following items: a. Customer’s check for ₱40,000 returned by bank on December 26, 2018 due to insufficient funds but subsequently redeposited and cleared by the bank on January 8, 2019. b. Customer’s check for ₱20,000 dated January 2, 2019, received on December 29, 2018. c. Postal money orders received from customers, ₱30,000. The petty cash fund consisted of the following items as of December 31, 2018. Currency and coins Employees' vales Currency in an envelope marked '' collections for charity'' with names attached Unreplenished petty cash vouchers Check drawn by V.Mapa Corporation, payable to the petty cashier

₱2,000 1,600 1200 1,300 4,000 ₱10,100

Included among the checks drawn by V.Mapa Corporation against the BPI current account and recorded in December 2018 are the following: a. Check written and dated December 29, 2018 and delivered to payee on January 2, 2019, ₱80,000. b. Check written on December 27, 2018, dated January 2, 2019, delivered to payee on December 29, 2018, ₱40,000 The credit balance in the Security Bank current account No.2 represents checks drawn in excess of the deposit balance. These checks were still outstanding at December 31, 2018. The savings account deposit in PNB has been set aside by the Board of directors for acquisition of new equipment. This account is expected to be disbursed in the next 3 months from the balance sheet date.

Based on the above and the result of your audit, determine the adjusted balances of the following: 1. Cash on hand A. ₱410,000 B. ₱530,000 2. Petty cash fund A. ₱6,000 B. ₱7,200 3. BPI current account A. ₱1,000,000 B. ₱1,120,000 4. Cash and cash equivalents A. ₱2,917,200 B. ₱3,074,900

C. D.

₱470,000 ₱440,000

C. D.

₱2,000 ₱4,900

C. D.

₱1,080,000 ₱1,040,000

C. D.

₱3,052,000 ₱3,066,000

PROBLEM NO.12 In connection with the audit of Betty Go Belmonte Company’s financial statements, you obtained the following information pertaining to its cash account. Cash in bank July 31 Book receipts- August

₱136,429 ₱141,230

Book disbursements- August August 31 balance

₱111,423 ₱166,236

Further examination revealed the following: ▪ ▪ ▪

The cash receipts book in August was underfooted by ₱10,000. Included in the book receipts in August is a note collected by the bank in July for ₱1,500. July NSF checks of ₱526 and bank service charges of ₱50 were recorded by the Company in August.

▪

The bank statement in August showed total debits of ₱110,098, total credits of ₱149,951, and an ending balance of ₱180,413.

▪

Among the bank debits are: NSF checks ₱700 Bank error 900 Correction of July error 1,000 Service charges 65 Among the bank credits are: Correction of July error ₱600 Note collected by bank 4,277 Bank error 3,000 Deposits in transit: July 31, ₱5,200; Aug. 31, ₱8,330 Outstanding checks as of July 31, ₱8,007.

▪

▪ ▪

Determine the following: 1. Cash Shortage A. ₱6,026 B. ₱4,526 2. Outstanding checks, August 31 A. ₱11,421 B. ₱9,332 3. Adjusted cash Balance, August. 31 A. ₱175,222 B. ₱169,748 4. Adjusted cash balance, July 31 A. ₱136,429 B. ₱137,353

C. ₱5,474

D. ₱4,000

C. ₱8,007

D. ₱3,876

C. ₱125,841

D. ₱166,236

C. ₱111,612

D. ₱148,481

PROBLEM NO.13 The general ledger accounts showed the following cash balances at December 31, 2007: ₱210,000 90,000 10,000 ₱310,000

BDO current account EPCI savings account Working Fund Total per WBS

BDO Current – The following bank reconciliation as of December 31, 2007, was given to you by the accountant: Balance per books, December 31, 2007 Add: Deposit in transit Debit memo for customer’s check returned unpaid Less: Checks drawn but not paid by bank, per schedule below Error for an account payable entered on books as ₱7,000 but drawn and paid by bank as P12,000 Computed balance Unlocated difference Balance per bank, December 31, 2007

₱210,000 8,000 10,000 ₱18,000 5,000

(23,000) 202,000 6,000 ₱208,000

Check drawn but not paid by bank Check No. 346 490 509 615 805 950

₱2,250 4,960 7,490 3,710 1,550 1,040 ₱18,000

You traced the balance per books to the general ledger and the balance per bank to the bank confirmation reply. EPCI Savings Account – The balance in this account represents funds set aside for the purchase of a computer, per resolution of the Board of Directors. Working Fund – This fund was replenished as of December 31, 2007.

1. How much is the adjusted and reconciled balance of the BDO current account as of December 31, 2007? A. ₱200,000 B. ₱210,000 C. ₱198,000 D. ₱195,000 2. After considering all audit adjustments, what should be the correct total of outstanding checks? A. ₱21,000 B. ₱18,000 C. ₱16,000 D. ₱13,000 3. The amount of cash to be reported in the audited balance sheet at December 31, 2007 is A. ₱195,000 B. ₱295,000 C. ₱205,000 D. ₱310,000

PROBLEM NO.14 The accountant for the Anonas Company assembled the following data:

Cash account balance Bank statement balance Deposit in transit Outstanding checks

June 30

July 31

₱15,822 107,082 8,201 27,718

₱39,745 137,817 12,880 30,112

72

60

71,815

8,250 80,900

Bank service charge Customer's check deposited July 10, returned by bank on July 16 marked NSF, and redeposited immediately; no entry made on books for return or redeposit Collection by bank of company's note receivable

The bank statements and the company’s cash records show these totals: Disbursements in July per bank statement Cash receipts in July per Anonas's books

₱218,373 236,452

Based on the application of the necessary audit procedures and appreciation of the above data, you are to provide the answers to the following: 1. How much is the adjusted cash balance as of June 30? A. ₱87,565 C. ₱107,082 B. (₱3,695) D. ₱15,822 2. How much is the adjusted bank receipts for July? A. ₱253,787 C. ₱245,537 B. ₱214,802 D. ₱232,881 3. How much is the adjusted book disbursements for July? A. ₱220,767 C. ₱181,782 B. ₱212,517 D. ₱206,673 4. How much is the adjusted cash balance as of July 31? A. ₱137,817 C. ₱22,513 B. ₱112,335 D. ₱120,585 5. How much is the cash shortage as of July 31? A. ₱8,250 C. ₱196,144

B. ₱71,815

D.

₱0

PROBLEM NO.15 You obtained the following information on the current account of Santolan Company during your examination of its financial statements for the year ended December 31, 2018. The bank statement in November 30, 2018 showed a balance of ₱306,000. Among the bank credits in November was customer’s noted for ₱100,000 collected for the account of the

company which the company recognized in December among its receipts. Included in the bank debits were cost of checkbooks amounting to ₱1,200 and a ₱40,000 check which was charged by the bank in error against Santolan Company Co. account. Also in November you ascertained that there were deposits in transit amounting to ₱80,000 and outstanding checks totaling ₱170,000. The bank statements for the month of December showed total credits of ₱416,000 and total charges of ₱204,000. The company’s books for December showed total debits ₱735,600, total credits of ₱407,200 and a balance of ₱485,600. Bank debit memos for December were: No. 121 for service charges, ₱1,600 and No. 122 on a customer’s returned check ‘’Refer to Drawer’’ for ₱24,000. On December 31, 2018 the company placed with the bank a customer’s promissory note with a face value of ₱120,000 for collection. The company treated this note as part of its receipts although the bank was able to collect on the note only in January 2019. A check for ₱3,960 was recorded in the company cash payments books in December as ₱39,600. Questions: Based on the application of the necessary audit procedures and appreciation of the above data, you are to provide the answers to the following: 1. How much is the undeposited collections as of December 31, 2018? A. ₱339,600 C. ₱219,600 B. ₱179,600 D. ₱139,600 2. How much is the outstanding checks as of December 31, 2018? A. ₱191,960 C. ₱361,960 B. ₱397,600 D. ₱363,160 3. How much us the adjusted cash balance as of November 30, 2018? A. ₱216,000 C. ₱176,000 B. ₱256,000 D. ₱157,200 4. How much is the adjusted bank receipts for December? A. ₱635,600 C. ₱475,600 B. ₱515,600 D. ₱435,600 5. How much is the adjusted books disbursements for December? A. ₱395,960 C. ₱225,960 B. ₱431,600 D. ₱397,160 6. How much is the adjusted cash balance as of December 31, 2018? A. ₱625,640 C. ₱220,000

B. ₱195,640

D.

₱375,640

PROBLEM NO. 16 You were engaged to audit the books of accounts of Katipunan Enterprise for the year ended December 31, 2018. From the records of the Katipunan you gathered the following information: Katipunan Enterprises started operation on October 2, 2018 with Katipunan investing ₱200,000 cash. Monthly bank reconciliation statements have not been prepared for 2018; however, bank statements for October, November, and December were made available to you. Your analysis of these bank statements revealed total bank credits (deposits) of ₱1,140,000 including, Katipunan’s initial investment and bank loan, details of which are in the additional data. The bank statement in December, 2018 showed an ending balance of ₱60,760. Examination of the paid checks disclosed that checks totaling ₱9,000 were issued by the Katipunan in December, 2018 and were presented for payment only in January, 2019. Cash count of the Cashier’s accountability amounted to ₱12,600. You were told by the Cashier that ₱10,000 of these, in checks, were cash sales on December 29, 2018, deposited on Jan. 3, 2019. The balance, in currency and coins, represents Petty Cash Fund. Additional data: 1. Accounts receivable subsidiary ledger had a total balance of ₱140,000 at December 31, 2018. ₱10,000 of this was estimated to be uncollectible. 2. Supplier’s unpaid invoices for merchandise totaled ₱30,000; while an account for store fixtures bought on October 2, 2018 for ₱100,000 had an unpaid balance of ₱10,000. Fixtures are depreciated at 10% per annum. 3. Merchandise inventory at December 31, 2018 amounted to ₱60,000. 4. The bank statement in October showed a bank credit for ₱190,000 dated October 2, 2018. Inquiry from the Cashier disclosed that the amount represents proceeds of a 90-day, 20% discounted bank note. ₱160,000 of this loan was paid by check in December 2018. 5. Operating expenses paid during the period totaled ₱351,500; while merchandise purchases amounted to ₱500,000. Questions: 1. Petty cash fund as of December 31, 2018. A. ₱12,600 B. ₱5,000 C. ₱11,600

D. ₱2,600

2. Adjusted cash balance per bank. A. ₱61,760 B. ₱51,760

C. ₱60,760

D. ₱70,760

3. Total sales in 2018. A. ₱902,600 B. ₱910,000

C. ₱900,000

D. ₱890,000

4. Total cash paid to suppliers for merchandise purchases. A. ₱500,000 B. ₱470,000 C. ₱530,000

D. ₱560,000

5. Cost of sales in 2018. A. ₱560,000 B. ₱530,000

D. ₱500,000

C. ₱440,000

6. Total operating expense in 2018. A. ₱371,500 B. ₱363,750

C. ₱364,000

D. ₱351,500

7. Bad debts expense in 2018. A. ₱10,000 B. ₱5,000

C. ₱20,000

D. ₱0

8. Depreciation expense in 2018. A. ₱10,000 B. ₱2,500

C. ₱5,000

D. ₱2,250

9. Net income in 2018. A. ₱98,600 B. ₱96,000

C. ₱86,000

D. ₱106,000

10. Cash shortage as of December 31, 2018. A. ₱14,140 B. ₱16,740 C. ₱4,140

D. ₱6,740

PROBLEM NO. 17 The North Ave Corporation was organization on January 15, 2018 and started operation soon thereafter. The Company cashier who acted also as the bookkeeper had kept the accounting records very haphazardly. The manager suspects him of defalcation and engaged you to audit his account to find out the extent of the fraud, if there is any. On November 15, when you started the examination of the accounts, you find the cash on hand to be ₱25,700. From inquiry at the bank, it was ascertained that the balance of the Company’s bank deposit in current account on the same date was ₱131,640. Verification revealed that the check issued for ₱9,260 is not yet paid by the bank. The corporation sells at 40% above cost. Your examination of the available records disclosed the following information: Capital stock issued at par for cash Real state purchased and paid in full Mortgage liability secured by real state Furniture and fixtures (gross) bought on which there is still balance unpaid of ₱30,000 Outstanding notes due to bank Total amount owed to creditors on open account Total sales Total amount still due from customers Inventory of merchandise on November 15 at cost Expenses paid excluding purchases

₱1,600,000 1,000,000 400,000 145,000 160,000 231,420 1,615,040 426,900 469,600 303,780

Questions: Based on the above and results of your audit, compute the following as of November 15, 2018: 1. Collection from sales A. ₱1,188,140 B. ₱1,153,600 2. Payments for purchases

C. D.

₱1,615,040 ₱2,041,940

A. ₱1,854,620 B. ₱1,391,780 3. Total cash disbursements A. ₱2,340,960 B. ₱3,273,400 4. Unadjusted cash balance A. ₱74,740 B. ₱722,156 5. Cash shortage A. ₱574,076 B. ₱389,500

C. D.

₱1,207,204 ₱922,180

C. D.

₱2,810,560 ₱2,625,984

C. D.

₱1,007,180 ₱537,580

C. D.

₱859,100 ₱0

PROBLEM NO.18 You were engaged to audit the accounts of Quezon Ave Corporation for the year ended December 31, 2018. In your examination, you determined that the Cash account represents both cash on hand and cash in bank. You further noted that the company’s internal control over cash is very poor. You started the audit on January 15, 2019. Based on your cash count on this date, cash on hand amounted to ₱19,200. Examination of the cash book and other evidence of transactions disclosed the following: a. January collections per duplicate receipts, ₱75,200 b. Total duplicate deposit slips, all dated January, ₱44,000. This amount includes a deposit representing collections on December 31. c. Cash book balance at December 31, 2018 amounted to ₱186,000, representing both cash on hand and cash in bank. d. Bank statement for December showed a balance of ₱170,400.

e. Outstanding checks at December 31: November checks No. 280 ₱1,800 290 6,600

December checks No. 331 339 345 353 364

₱2,400 1,600 20,000 3,600 10,000

f. Undeposited collections at December 31, 2016 amounted to ₱20,000 g. An amount of ₱4,400 representing proceeds of a clean draft on a customer was credited by bank, but is not yet taken up in the company’s books. h. Bank service charges for December, ₱400. The company cashier presented to you the following reconciliation statement for December, 2018, which he has prepared: Balance per books, December 31, 2018 Add outstanding checks: No. 331 ₱2400

₱180,600

339 345 353 364

1600 2000 3600 1000

Total Bank service charge Undeposited collections Balance per bank, December 31, 2018

10,600 191,200 (400) (20,400) ₱170,400

Questions: Based on the above and the result of your audit, answer the following: 1. How much is the adjusted cash balance as of December 31, 2018? A. ₱152,800 C. ₱180,200 B. ₱144,400 D. ₱0 2. How much is the cash shortage as of December 31, 2018? A. ₱45,600 C. ₱37,200 B. ₱4,400 D. ₱41,200 3. How much is the cash shortage for the period January 1 to 15, 2019? A. ₱30,800 C. ₱31,200 B. ₱32,400 D. ₱32,000 4. Which of the following is not a method used by the cashier to cover-up the shortage as of December 31, 2018? A. Understating outstanding checks by ₱27,000 B. Not recording the bank collection of ₱4,400 C. Understating the book balance of ₱5,400. D. Overstatement of undeposited collections by ₱400. PROBLEM NO. 19 You are conducting an audit of the EDSA CORPORATION for the year ended December 31, 2018. The internal control procedures surrounding cash transactions were not adequate. Jane Quipit, the bookkeeper-cashier handles cash receipts, maintains accounting records and prepares the monthly reconciliations of the bank account. She prepared the following reconciliation at the end of the year: Balance per bank statement Add Deposit in transit Note collected by bank Balance Less: Outstanding checks Balance per general ledger

₱315,000 157,725 13,500

171,225 486,225 222,075 ₱264,150

In the process of your audit, you gathered the following: a. At December 31, 2018, the bank statement and the general ledger showed balances of ₱315,000 and ₱264,150 respectively. b. The cut off bank statement showed a bank charge on January 02, 2009 for ₱35,250 representing a correction of an erroneous bank credit. c. Included in the list of outstanding checks were the following:

d.

1. 2. 3.

1. A check payable to a supplier, dated December 29, 2018, in the amount of ₱13,275, released on January 05, 2019. 2. A check representing advance payment to a supplier in the amount of ₱33,489, the date of which is January 04, 2019, and released in December 2008. On December 31, 2018, the company received and recorded customer’s postdated check amounting to ₱45,000.

Compute the adjusted deposit in transit as of December 31, 2018. A. ₱157,725 B. ₱112,725 C. ₱202,725 D. ₱112,500 Compute the adjusted outstanding checks as of December 31, 2018. A. ₱222,075 B. ₱235,350 C. ₱255,564 D. ₱175,311 Compute the adjusted cash to be presented in the balance sheet as at Dec. 31, 2018. A. ₱211,914 B. ₱225,414 C. ₱238,914 D. ₱279,414

AUDIT OF RECEIVABLES PROBLEM NO. 1 Your audit disclosed that on December 31, 2018, the accounts receivable control account of Kamuning Company had a balance of ₱2,865,000. An analysis of the account showed the following: Accounts known to be worthless Advance payments to creditors on purchase orders Advances to affiliated companies Customer's accounts reporting credit balances arising from sales return Interest receivable on bonds Other trade accounts receivable - unassigned Subscriptions receivable due in 30 days Trade accounts receivable - assigned (Kamuning company's equity in assigned accounts is ₱150,000 Trade installment receivable due 1 - 18 months, including unearned finance charges of ₱30,000 Trade receivables from officers due currently Trade accounts on which postdated-checks are held (no entries were made on receipts of checks)

₱37,500 150,000 375,000 (225,000) 150,000 750,000 825,000 375,000 330,000 22,500 75,000 ₱2,865,000

Questions: Based on the above and the result of your audit, determine the adjusted balance of following: 1. The trade accounts receivable as of December 31, 2018 is A. ₱1,147,500 C. ₱1,485,000 B. ₱1,522,500 D. ₱1,447,500 2. The net current trade and other receivables as of December 31, 2018 is A. ₱2,647,500 C. ₱2,272,500

B. ₱2,610,000 D. ₱1,822,500 3. How much of the foregoing will be presented under non-current assets as of December 31, 2018? A. ₱1,200,000 C. ₱525,000 B. ₱375,000 D. ₱0 PROBLEM NO.2 Boni Company was incorporated on January 1, 2018. All sales are on account under the terms 3/10, 1/20, n/30. Boni Company uses the aging of the receivables approach in providing bad debts. Provided below is the aging schedule which Boni Company’s accountant prepares at the end of the accounting period. Days past due 1 – 30 days 31 – 60 days 61 – 90 days 91 – 120 days over 120 days

Probability of collectibility 95% 80% 60% 30% 10%

During 2018, Boni Company reported sales of ₱14,500,000. Initial bad debts expense has been provided during the year at 2.5% of gross sales. Write-offs during the year amounted to ₱75,000. In July 2018, Boni Company received a ₱50,000 face value note from a customer as payment for goods sold in February. The note carries an interest rate of 10% and will mature on June 30, 2020. Total cash collections for 2018 amounted to ₱12,961,000; of which ₱3,686,000 were collected within 10 days from the date of sale, ₱2,475,000 were collected beyond 10 days but within 20 days from the date of sale and the rest after 20 days, including recoveries totaling to ₱40,000. At the end of the year, a schedule of the receivable was provided Age of the Percentage Receivables 1 – 30 days 35% 31 – 60 days 25% 61 – 90 days 20% 91 – 120 days 10% 121 – 150 days 7% over 150 days 3% 1. The accounts receivable balance at December 31, 2018 is A. ₱1,275,000 B. ₱1,315,000 C. ₱1,415,000 D. ₱1,554,000 2. The allowance for bad debts account balance prior to the preparation of the aging schedule is A. ₱362,500 B. ₱402,500 C. ₱287,500 D. ₱327,500 3. The amount of bad debts expense to be reported in the 2018 income statement is A. ₱362,500 B. ₱468,422 C. ₱256,578 D. ₱221,578

PROBLEM NO. 3 SHAW CORP.’s accounts receivable subsidiary ledger shows the following information: CUSTOMER Arab, Inc.

ACCOUNT BALANCE DEC. 31, 2014 ₱35,180

Nahum Co.

20,920

Sikat Corp.

31,600

Tan Co.

45,140

Undi Co.

31,600

Xander Corp.

18,400

INVOICE DATE 12/04/14 11/29/14 09/27/14 08/20/14 12/08/14 10/25/14 11/17/14 10/09/14 12/12/14 12/02/14 09/12/14

AMOUNT ₱14,000 21,180 12,000 8,920 20,000 11,600 23,140 22,000 19,200 12,400 18,400

The estimated bad debt rates below are based on Shaw Corp.’s receivable collection experience. Age of Accounts 0 - 30 days 31 - 60 days 61 - 90 days 91 - 120 days Over 120 days

Rate 1% 1.5% 3% 10% 50%

The allowance for bad debts account had a debit balance of ₱5,500 on December 31, 2014, before adjustment. 1. The company’s accounts receivable under “61-90 days” category should be A. ₱32,600 C. ₱33, 600 B. ₱44,320 D. ₱42,000 2. The company’s accounts receivable under “91-120 days” category should be A. ₱38,320 C. ₱29,400 B. ₱30,400 D. ₱12,000 3. The allowance for bad debts to be reported in the statement of financial position at December 31, 2014, is A. ₱9,699 C. ₱9,829 B. ₱15,199 D. ₱5,500 4. What entry should be made on December 31, 2014, to adjust the allowance for bad debts account? A. Bad debt expense 15,199 Allowance for bad debts 15,199 B. Bad debt expense 4,199 Allowance for bad debts 4, 199 C. Allowance for bad debts 5,500 Bad debt expense 5,500 D. Bad debt expense 15,329 Allowance for bad debts 15,329

5.

What is the net realizable value of accounts receivable at December 31, 2014? A. ₱165,641 C. ₱196,039 B. ₱171,141 D. ₱173,011

PROBLEM NO. 4 Your audit of Central Corporation for the year ended December 31, 2018 revealed that the Accounts Receivable account consists of the following: ₱3,440,000 640,000 128,000 (80,000) 240,000

Trade accounts receivable (current) Past due trade accounts Uncollectible accounts Credit balances in customers’ accounts Notes receivable dishonored Consignment shipments - at cost (The consignee sold goods costing ₱96,000 for ₱160,000. A 10% commission was charged by the consignee and remitted the balance to Central. The cash was received in January 2019.) Total

320,000 4,688,000

The balance of the allowance for doubtful accounts before audit adjustment is a credit of ₱80,000. It is estimated that an allowance should be maintained to equal 5% of trade receivables, net of amount due from the consignee who is bonded. The company has not provided yet the 2018 bad debts exp.

Questions: Based on the above and the result of your audit, determine the adjusted balance of following: 1. Trade accounts receivable A. ₱4,080,000 B. ₱3,440,000 2. Allowance for doubtful accounts A. ₱204,000 B. ₱216,000 3. Doubtful accounts expense A. ₱264,000 B. ₱220,000

C. D.

₱4,464,000 ₱3,584,000

C. D.

₱172,000 ₱179,200

C. D.

₱252,000 ₱227,200

PROBLEM NO. 5 Blumentritt Company stared operation in 2006. The company has no allowance for doubtful accounts. Uncollectible receivables were expensed as written off and recoveries were credited to income as collected. Data from the company’s records for five years is as follows:

Year 2006 2007 2008 2009 2010

Credit sales ₱3,000,000 4,500,000 5,900,000 6,600,000 8,000,000

Amount Written Off ₱30,000 76,000 104,000 130,000 166,000

Recovery ₱ 5,400 5,000 9,600 10,000

Balances of accounts receivables are as follows: As of December 31, 2009 ₱3,000,000 As of December 31, 2010 3,500,000 On March 1, 2010, right after the 2009 financial statements were released, management realized that the company’s policy regarding treatment of bad accounts was not correct, and decided that an allowance method must be followed. A policy was established to set up an allowance for doubtful accounts based on the company’s historical debt loss percentage applied to year-end accounts receivable. The historical bad debt loss percentage shall be recomputed each year based on the average of all available past years up to a maximum of five years. Questions: Based on the above and the result of your audit, you are to provide the answers to the following: 1. The amount of allowance for doubtful accounts that should be set up as of January 1, 2010 (with corresponding charged to Retained Earnings is) A. ₱48,000 C. ₱54,000 B. ₱51,000 D. ₱120,400 2. The average percentage of net doubt accounts to credit sales that should be used in setting up the 2010 allowance is A. 1.80% C. 1.70% B. 1.50% D. 1.60% 3. The balance of allowance for doubtful accounts as of December 31, 2010 should be A. ₱56,000 C. ₱110,500 B. ₱59,500 D. ₱63,000 4. The doubtful accounts expense for 2010 is A. ₱156,000 C. ₱168,000 B. ₱136,000 D. ₱167,500 PROBLEM NO. 6 Carriedo Co. required additional cash for its operation and used accounts receivable to raise such needed cash, as follows: •

On December 1, 2018 Carriedo Co. assigned on a nonnotification basis accounts receivable of ₱5,000,000 to a bank in consideration for a loan of 90% of the receivable less a 5% service fee on the accounts assigned. Carriedo Co. signed a note for the bank loan. On December 31, 2018, Carriedo collected assigned accounts of ₱3,000,000 less discount of ₱200,000. Carriedo remitted the collections to the bank in partial payment for the loan. The bank applied first the collection to the interest and the balance to the principal. The agreed interest is 1% per month on the loan balance.

• • •

Carriedo Co. sold ₱1,550,000 of accounts receivable for ₱1,340,000. The receivables had a carrying amount ₱1,470,000 and were sold outright on a nonrecourse basis. Carriedo Co. received an advance of ₱300,000 from Union Bank by pledging ₱360,000 of accounts receivable. On June 30, 2018, Carriedo Co. discounted at a bank a customer’s ₱600,000, 6 month, 10% note receivable dated April 30, 2018. The bank discounted the note at 12% on the same date.

Questions: Based on the above and the result of your audit, answer the following: 1. In its December 31, 2018 statement of financial position, Carriedo should report note payable as a current liability at A. ₱1,745,000 C. ₱1,545,000 B. ₱2,250,000 D. ₱1,700,000 2. Carriedo Company’s equity in the assigned accounts receivable as of December 31, 2018 is A. ₱255,000 C. ₱455,000 B. ₱300,000 D. ₱0 3. The entry to record the sale of accounts receivable would include A. A debit to Finance Charge of ₱210,000 B. A debit to Allowance for Doubtful Accounts of ₱80,000 C. A credit to Accounts Receivable of ₱1,470,000 D. A credit to Notes Payable of ₱1,550,000 4. Accounts receivable pledged against borrowings, should be A. Included in total receivables with disclosure B. Included in total receivables without disclosure C. Excluded from total receivables with disclosure D. Excluded from total receivables without disclosure 5. The proceeds from the note receivable discounted on June 30, 2018 is A. ₱564,000 C. ₱604,800 B. ₱617,400 D. ₱576,000 PROBLEM NO. 7 The December 31, 2013 statement of financial position of the Magallanes Company included the following information: Accounts receivable Less: Allowance for bad debts Notes receivable* Total receivables

₱672,000 (42,300)

₱629,700 65,400 ₱695,100

* The company is contingently liable for discounted notes receivable of ₱114,000. During the year ending December 31, 2014, the following transactions occurred: Sales on credit Collections of accounts receivable Accounts receivable written off as uncollectible Notes receivable collected Customer notes received in payment of accounts receivable

₱2,623,800 2,523,000 41,400 87,000 216,000

Notes receivable discounted that were paid at maturity Notes receivable discounted that were defaulted, including interest of ₱60 and a ₱15 fee. This amount is expected to be collected during 2015 Proceeds from customer notes discounted with recourse (principal ₱135,000, accrued interest, ₱600) Collections on accounts previously written off Sales returns and allowances (on credit sales) Bad debts were estimated to be 1.5% of credit sales

108,000

6,075 135,225 1,500 600

Based on the preceding information, determine the balances of the following accounts at December 31, 2014. 1. Net Realizable value of Accounts receivable A. ₱515,475 C. ₱473,718 B. ₱513,975 D. ₱509,400 2. Allowance for doubtful accounts A. ₱41,757 C. ₱40,857 B. ₱39,357 D. ₱40,800 3. Notes receivable A. ₱59,400 C. ₱329,400 B. ₱194,400 D. ₱200,400 4. Notes receivable discounted A. ₱129,000 C. ₱135,000 B. ₱114,000 D. ₱120,000 PROBLEM NO.8 The financial statements of Ayala Company include the following: Accounts receivable Allowance for doubtful accounts Sales Cash collected from customers

December 31, 2017 ₱900,000

December 31, 2018 ₱45,000 ₱7,500,000 6,540,000

Among the cash collections was the recovery of ₱15,000 receivable from a customer whose account had been written off as worthless in 2017. During 2018, it was necessary to write-off uncollectible, customers' accounts at ₱75,000. On December 1, 2018, a customer settled his account by issuing a 12% six-month note for ₱300,000.

On December 31, 2018, the accounts receivable included ₱450,000 at past due accounts. After careful study, the management estimated that the probable loss on past due accounts is 20% and that in addition, 5% of the current accounts may prove uncollectible. Questions: 1. What is the balance of accounts receivable on December 31, 2018? A. ₱1,500,000 B. ₱1,800,000 C. ₱1,485,000

D. ₱1,470,000

2. What is the balance of allowance for doubtful accounts before adjustment on December 31, 2018? A. ₱15,000 debit B. ₱45,000 credit C. ₱30,000 debit D. ₱60,000 debit 3. How much is the required allowance for doubtful accounts on December 31, 2018? A. ₱185,000 B. ₱90,000 C. ₱127,500 D. ₱142,500 4. How much increase in allowance for doubtful accounts is required on December 31, 2018? A. ₱127,500 B. ₱157,500 C. ₱97,500 D. ₱142,500 5. The adjusting entry to record the doubtful accounts expense for 2018 is: A. Doubtful accounts expense ₱127,500 Allowance for doubtful accounts ₱127,500 B. Retained earnings ₱142,500 Allowance for doubtful accounts ₱142,500 C. Doubtful accounts expense ₱ 97,500 Allowance for doubtful accounts ₱97,500 D. Doubtful accounts expense ₱157,500 Allowance for doubtful accounts ₱157,500 PROBLEM NO. 9 The balance sheet for the Baclaran Corporation on December 31, 2007 includes the following receivables balances: Notes Receivable ₱365,000 Less notes discounted 155,000 ₱210,000 Accounts Receivable ₱856,000 Less allowance for doubtful accounts 41,500 814,500 Selected transactions during 2008 included the following: a. Notes received in settlement of accounts totaled ₱825,000. b. Notes receivable discounted as of December 31, 2007, were paid at maturity with the exception of one ₱30,000 note on which the company had to pay the bank ₱30,900, which included interest and protest fees. It is expected that recovery will be made on this note early 2009. c. Customers’ notes of ₱600,000 were discounted with recourse during the year, proceeds from their transfer being ₱585,000. Of this total, ₱480,000 matured during the year without notice of protest. h. Notes receivable collected during the year totaled ₱270,000 and interest collected was ₱24,500. Determine the adjusted balances of the following accounts as of December 31, 2008: 1. 2.

Notes Receivable (including notes receivable discounted). A. ₱320,000 B. ₱365,000 C. ₱165,000 Notes Receivable Discounted A. ₱155,000 B. ₱600,000 C. ₱120,000

D. ₱285,000 D. ₱105,000

PROBLEM NO. 10 In connection with your audit of the Libertad Corporation, you noted that the company’s Notes receivable consists of the following:

a. A 4 month note dated November 30, 2018, from AA Company, ₱200,000; interest rate, 16%; discounted on November 30, 2018 at 16%. b. A draft drawn payable 30 days after ₱900,000 by the BB Company on the Charlie Company in favor of the Delta Company, endorsed to Libertad Corporation on December 2, 2018 and accepted on December 4, 2018. c. 90-day note dated November 1, 2018 from E. Dy, ₱500,000; interest at 16% the note is for subscription to 5,000 preference shares of Libertad Corp. at 100 per share. d. A 60-day note dated May 3, 2018, from CC Company, ₱600,000; interest rate, 16%; dishonored at maturity; judgement obtained on October 10, 2018. Collection within the next twelve months is doubtful. e. A 90-day note dated January 4, 2018, from Apel Babada, president of Libertad Corp, ₱160,000; no interest; note not renewed; president confirmed. f. A 120-day note dated September 14, 2018, from DD Company, ₱120,000; interest rate, 16%; note is held by bank as collateral. Questions: 1. The adjusted balance of Notes Receivable as of December 31, 2018? A. ₱2,480,000 C. ₱1,020,000 B. ₱1,220,000 D. ₱900,000 2. How much of foregoing notes receivable will be reported in the current assets section of the statement of financial position? A. ₱1,220,000 C. ₱1,680,000 B. ₱2,480,000 D. ₱1,520,000 3. How much is the net interest income from the foregoing notes receivable for 2010? A. ₱19,093 C. ₱166,613 B. ₱70,613 D. ₱35,093 4. The adjusted balance of Interest Receivable as of December 31, 2018? A. ₱19,093 C. ₱70,613 B. ₱5,760 D. ₱0 AUDIT OF INVENTORIES PROBLEM NO.1 MONKEY CO., annual net income for the period 2014-2018 is as follows: YEAR 2014 2015 2016 2017 2018

NET INCOME (LOSS) P150,000 340,000 645,000 (100,000) 250,000

A review if the company’s records reveals the following inventory errors: 2014 2015 2017

P3,000 overstatement, end of year 6,000 understatement, end of year 4,500 understatement, end of year

2018

11,000 understatement, end of year

Questions: 1. What is the adjusted net income in 2014? a. P150,000 c. P153,000 b. P159,000 d. P147,000 2. What is the adjusted net income in 2015? a. P331,000 c. P349,000 b. P337,000 d. P340,000 3. What is the adjusted net income in 2016? a. P651,000 c. P639,000 b. P648,000 d. P645,000 4. What is the adjusted net loss in 2017? a. P89,500 c. P100,000 b. P101,500 d. P95,500 5. What is the adjusted net income in 2018? a. P250,000 c. P243,500 b. P234,500 d. P256,500 PROBLEM NO.2 BIRD COMPANY is a manufacturer of small tools. The following information was obtained from the company’s accounting records for the year ended December 31, 2018: Inventory at December 31, 2018 (based on physical count in Bird’s warehouse at cost on December 31, 2018) Accounts Payable at December 31, 2018 Net Sales (Sales less sales returns)

P1,870,000 1,415,000 9,693,400

Your audit reveals the following information: 1) The physical count included tools billed to a customer FOB shipping point on December 31, 2018. These tools cost P64,000 and were billed at P78,500. They were in the shipping area waiting to be picked up by the customer. 2) Goods shipped FOB Shipping point by a vendor were in transit on December 31, 2018. These goods with invoice cost of P93,000 were shipped on December 29, 2018. 3) Work in process inventory costing P27,000 was sent to a job contractor for further processing. 4) Not included in the physical count were goods returned by customers on December 31, 2018. These goods costing P49,000 were inspected and returned to inventory on January 7, 2019. Credit memos for P67,800 were issued to the customers at that date. 5) In transit to a customer on December 31, 2018, were tools costing P17,000 shipped FOB Shipping point on December 26, 2018. A sales invoice for P29,400 was issued on January 3, 2019, when BIRD Company was notified by the customer that the tools had been received.

6) At exactly 5:00 PM on December 31, 2018, goods costing P31,200 were received from a vendor. These were recorded on a receiving report dated January 2, 2019. The related invoice was recorded on December 31, 2018, but the goods were not included in the physical count. 7) Included in the physical count were goods received from a vendor on December 27, 2018. However, the related invoice for P36,000 was not recorded because the accounting department’s copy of the receiving report was lost. 8) A monthly freight bill for P32,000 was received on January 3, 2019. It specifically related to merchandise bought in December 2018, one-half of which was still in the inventory at December 31, 2018. The freight was not included in either the inventory or in accounts payable at December 31, 2018. Questions: 1. Bird’s December 31, 2018, inventory should be increased by a. P216,200 c. P252,200 b. P233,200 d. P123,200 2. Bird’s accounts payable at December 31, 2018, should be increased by a. P68,000 c. P125,000 b. P145,000 d. P161,000 3. The amount of net sales to be reported on BIRD’s income statement for the year ended December 31, 2018, should be a. P9,547,100 c. P9,591,000 b. P9,576,500 d. P9,595,300 4. BIRD’s statement of financial position at December 31, 2018, should report accounts payable of a. P1,576,000 c. P1,540,000 b. P1,483,000 d. P1,431,000 5. The amount of inventory to be reported on BIRD’s December 31, 2018, statement of financial position should be a. P2,103,200 c. P2,122,200 b. P2,086,200 d. P1,993,200 Problem no.3 You are engaged in the regular annual examination of the accounts and records of Buddy Manufacturing Company for the year ended December 31, 2004. To reduce the work load at year-end, the company, upon your recommendation, took its annual physical inventory on November 30, 2004. You observed the taking of the inventory and made tests of the inventory count and the inventory records. The company’s inventory account, which includes raw materials and work-in-process is on a perpetual basis. Inventories are valued at cost, first-in, first-out method. There is no finished goods inventory. The company’s physical inventory revealed that the book inventory of P4,239,900 was understated by P210,000. To avoid delay in completing its monthly financial statements, the company decided not to adjust the book inventory until year end except for obsolete inventory. You examination disclosed the following information regarding the November 30 inventory:

1. Pricing tests showed that physical inventory was overstated by P154,000. 2. An understatement of the physical inventory by P10,500 due to errors in footings and extensions. 3. Direct labor included in the inventory amounted to P700,000. Overhead was included at the rate of 200% of direct labor. You have ascertained that the amount of direct labor was correct and that the overhead rate was proper. 4. The physical inventory included obsolete materials with a total cost of P17,500. During December, the obsolete materials were written off by a change to cost of sales. Your audit also disclosed the following information about the December 31 inventory: 1. Total debits to the following accounts during December were: Cost of sales Direct labor Manufacturing expense Purchases

4,802,000 * 847,000 1,764,000 1,729,000

* Includes direct labor of P966,000 and manufacturing overhead of P1,932,000. 2. Scrap loss on established product lines is normally insignificant. However, a special order started and completed during December had a scrap loss of P56,000. This amount was charged to manufacturing expense. Questions: 1. The adjusted amount of physical inventory at November 30, 2004 is: a. P 4,078,900 b.P 4,288,900 c. P 4,498,900 d. P 4,596,900 2. The adjusted amount of inventory at December 31, 2004 is: a. P 3,844,400 b. P 3,826,900 c. P 3,774,400 d. P 3,756,900 3. The raw materials included in the ending inventory at December 31, 2004 is: a. P 1,961,400 b. P 2,013,900 c. P 2,031,400 d. P 2,188.900 4. The direct labor included in the ending inventory at December 31, 2004 is: a. P 581,000 b. P 847,000 c. P 700,000 d. P 966,000 5. The total cost of sales for December 31, 2004 is: a. P 4,854,500 b. P 4,802,000 c. P 4,784,500 d. P 4,714,500 Problem no.4 During your audit of the records of the Chivas Corporation for the year ended December 31, 2005, the following facts were disclosed: Raw materials inventory, 1/1/2005 Raw materials purchases Direct labor Manufacturing overhead applied (150% of direct labor) Finished goods inventory, 1/1/2005 Selling expenses

P 720,200 5,232,800 6,300,000 9,450,000 1,240,000 8,112,800

Administrative expenses

7,377,200

Your examination disclosed the following additional information: a) Purchases of raw materials Month

Units

January – February March – April May – June July – August September – October November – December

55,000 45,000 25,000 35,000 45,000 60,000 265,000

Unit Price P17.76 20.00 19.60 20.00 20.40 20.80

Amount

P976,800 900,000 490,000 700,000 918,000 1,248,000 P5,232,800

b) Data with respect to quantities are as follows: Units Explanation Raw materials Work in process (80% completed) Finished goods Sales, 205,000 units

1/1/05 35,000 0 15,000 15,000

12/31/05 ? 25,000 40,000 40,000

c) Raw materials are issued at the beginning of the manufacturing process during the year, no returns, spoilage, or wastage occurred. Each unit of finished goods contains one unit of raw materials. d) Inventories are stated at cost as follows: • Raw materials – according to the FIFO method • Direct labor – at an average rate determined by correlating total direct labor cost with effective production during the period • Manufacturing overhead – at an applied rate of 150% of direct labor cost Questions: Based on the above and the result of your audit, answer the following: 1. The raw materials inventory as of December 31, 2005 is a. P1,976,000 b. P936,000 c. P1,352,000 d. P897,800 2. The work in process inventory as of December 31, 2005 is a. P1,780,000 b. P1,885,565 c. P 1,751,294 d. P1,776,000 3. The finished goods inventory as of December 31, 2005 is a. P3,352,000 b. P3,553,130 c. P3,334,000 d. P3,284,588 4. The cost of goods sold for the year ended December 31, 2005 is a. P16,897,000 b. P15,857,000 c. P16,568,304 d. P16,875,000 5. Which of the following audit procedure is most appropriate to determine whether cost of inventories is properly calculated? a. Select a sample of items during the physical inventory count and determine they have been included on count sheets.

b. Select a sample of recorded items and examine supporting vendors’ invoices and contracts. c. Select a sample of recorded items on count sheets during the physical inventory count and determine that items are on hand. d. Examine current vendors’ price lists. AUDIT OF LIABILITIES PROBLEM NO.1 DATSMYBOY Inc. is a manufacturer and retailer of household furniture. Your audit if the company’s financial statements for the year ended December 31, 2018, discloses the following debt obligations of the company at the end of its reporting period. DATSMYBOY’s financial statements are authorized for issuance on March 6, 2019. 1. A P150,000 short-term obligation due on March 1, 2019. Its maturity could be extended to March 1, 2021, provided DATSMYBOY agrees to provide additional collateral. On February 12, 2019, an agreement is reached to extend the loan’s maturity to March 1, 2021. 2. A short-term obligation of P3,600,000 in the form of notes payable due February 5, 2019. The company issued 75,000 ordinary shares for P36 per share on January 25, 2019. The proceeds from the issuance, plus P900,000 cash, were used to fully settle the debt on February 5, 2019. 3. A long-term obligation of P2,500,000 due December 1, 2028. On November 10, 2018, DATSMYBOY breaches a covenant on its debt obligation and the loan becomes payable on demand. An agreement is reached to provide a waiver of the breach on December 11, 2018. 4. A long-term obligation of P4,000,000. The loan is maturing over 4 years in the amount of P1,000,000 per year. The loan is dated September 1, 2018 and the first maturity date is September 1, 2019. 5. A debt obligation of P1,000,000 maturing on December 31, 2021. The debt is callable on demand by the lender at any time. Questions: 1. What amount of current liabilities should be reported on the December 31, 2018 statement of financial position? a. P8,250,000 c. P4,750,000 b. P5,750,000 d. P3,750,000 2. What amount of noncurrent liabilities should be reported on the December 31, 2018, statement of financial position? a. P5,500,000 c. P6,500,000 b. P3,000,000 d. P7,500,000 PROBLEM NO.2 The data below are from the records of ANOSAYO, Inc. on December 31, 2018: Accounts Payable Cash balance, ABC Bank

P680,000 1,240,000

Cash overdraft with XYZ Customers’ accounts with credit balances Dividends in arrears on preference shares Employees’ income tax payable Estimated warranty payable Estimated premium claims outstanding Income tax payable Notes payable (issued in 2018 maturing in 20 semi-annual installments beginning on April 1, 2019) Salaries Payable

80,000 25,000 400,000 100,000 50,000 90,000 400,000 4,000,000 400,000

The amount to be shown as total current liabilities on ANOSAYO’s statement of financial position at December 31, 2018, is a. P2,225,000 c. P2,625,000 b. P2,025,000 d. P2,255,000 PROBLEM NO.3 EDINGA Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. To promote sale of its products, EDINGA uses two promotion techniques – premiums and warrants. PREMIUMS The premium is offered on the recorded and sheet music. Customers receive a coupon for each P10 spent on recorded music and sheet music. Customers may exchange 200 coupons and P200 for a CD player. EDINGA pays P340 for each CD player and estimates that 60% of the coupons given to customers will be redeemed. A total of 6,500 CD players used in the premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2018. WARRANTIES Musical instruments and sound reproduction equipment are sold with a one-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales. Replacement parts and labor for warranty work totaled P1,640,000 during 2018. EDINGA uses the accrual method to account for the warranty and premium costs for financial reporting purposes. EDINGA’s sales for 2018 totaled P72,000,000- P54,000,000 from musical instruments and sound reproduction equipment and P18,000,000 from recorded music and sheet music. The balances in the accounts related to warranties and premiums on January 1, 2018, were as shown below: Inventory of premium CD players Estimated premium claims outstanding Estimated liability from warranties

P399,500 448,000 1,360,000

Questions: Based on the preceding information, determine the amounts that will be shown on the 2018 financial statements for the following:

1. Warranty expense a. P1,640,000 c. P800,000 b. P1,080,000 d. P360,000 2. Estimated liability from warranties a. P1,920,000 c. P240,000 b. P1,080,000 d. P800,000 3. Premium expense a. P1,836,000 c. P756,000 b. P840,000 d. P2,189,500 4. Inventory of premium CD players a. P399,500 c. P2,210,000 b. P569,500 d. P739,500 5. Estimated premium claims outstanding a. P364,000 c. P756,000 b. P840,000 d. P672,000 PROBLEM NO.4 WOWYE Company purchased machinery on December 31, 2018, paying P80,000 down and agreeing to pay the balance in four equal installments of P60,000 payable each December 31. Implicit in the purchase price is an assumed interest of 12%. The following data are abstracted from the present value tables: Present value of 1 at 12% for 4 periods Present value of an ordinary annuity of 1 at 12% for 4 periods

0.63552 3.03735

Questions: 1. What is the cost of the machinery purchased on December 31, 2018? a. P233,083 c. P262,241 b. P320,000 d. P290,842 2. How much interest expense should be reported in WOWYE’s Income statement for the year ended December 31, 2019? a. P38,131 c. P17,293 b. P21,869 d. P42,707 3. What is the carrying value of the Note at December 31, 2020? a. P120,000 c. P99,310 b. P144,110 d. P101,403 PROBLEM NO.5 You are engaged to audit the December 31, 2018, financial statements of MILANI COMPANY, a manufacturer of household appliances. Your audit disclosed the following situations. 1. In June 2018, the company began producing and selling a new line of dishwasher. By the end of the year, it had sold 120,000 to various dealers for P15,000 each. The product was sold under a 1-year warranty, and the company estimates warranty costs to be P750 per dishwasher. MILANI had paid out P30 million in warranty expenses as of December 31, 2018,

which is also the amount shown as warranty expense in its income statement for the current year. 2. In response to your letter of audit inquiry, MILANI’s lawyer informed you that the company is involved in a lawsuit for violating environmental laws regulating hazardous waste. Although the litigation is pending. MILANI’s lawyer is certain that MILANI will most probably have to pay cleanup costs and fines of P5,500,000. MILANI neither accrued nor disclosed this loss in the financial statements. 3. MILANI is the defendant in a patent infringement suit by Megan Yang over MILANI’s use of a hydraulic compressor in several of its manufactured appliances. MILANI’s lawyer informed you that if the suit goes against your audit client, the loss may be as much as P10 million. However, the lawyer believes that the loss of this suit is only possible. MILANI did not in any way disclose this pending litigation in its financial statements. Questions: 1. What amount of warranty expense should be shown on MILANI’s income statement for the year ended December 31, 2018? a. P30,000,000 c. P60,000,000 b. P0 d. P90,000,000 2. What amount of warranty liability should be shown on MILANI’s statement of financial position as of December 31, 2018? a. P60,000,000 c. P30,000,000 b. P90,000,000 d. P0 3. What amount of lawsuit liability should be reported as a provision on MILANI’s December 31, 2018, statement of financial position? a. P10,000,000 c. P15,500,000 b. P5,500,000 d. P0 PROBLEM NO.6 EWANKO Company has the following three loans payable scheduled to be repaid in February of next year. The company’s accounting year ends on December 31. a. The Company intends to repay Loan 1 for P100,000 when it comes due in February. In the following October, the Company intends to get a new loan for P80,000 from the same bank. b. The Company intends to refinance the Loan 2 for P150,000 when it comes due in February. The refinancing agreement, for P180,000, will be signed in April, after the financial statements for this year have been authorized for issue. c. The Company intends to refinance Loan 3 for P200,000 before it comes due in February. The actual refinancing for P175,000 took place in January, before the financial statements for this year have been authorized for issue. Questions: 1. As of December 31 of this year, the total current liabilities to be reported in the company’s statement of financial position should be a. P100,000 c. P450,000

b. P250,000 d. P125,000 2. As of December 31 of this year, the total noncurrent liabilities to be reported in the company’s statement of financial position should be a. P25,000 c. P175,000 b. P0 d. P350,000 PROBLEM NO.7 On January 1, 2009, PEREZ Corporation issued 5,000 of its 5 year P1,000 face value, 11% bonds dated January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each December 31. Perez uses the effective interest method of amortization. On December 31, 2010, the 3,000 bonds were extinguished early through acquisition in the open market by PEREZ for P2,970,000 plus accrued interest. Questions: Based on the above and the result of your audit, determine the following: (Round off present value factors to four decimal places.) 1. The issue price of the bonds on January 1, 2009 is a. P5,388,835 c. P5,282,135 b. P4,630,655 d. P5,000,000 2. The carrying amount of the bonds on December 31, 2009 is a. P4,755,930 c. P5,323,830 b. P5,453,840 d. P5,000,000 3. The gain on early retirement of bonds on December 31, 2010 is a. P116,442 c. P181,785 b. P266,811 d. P0 PROBLEM NO.8 On January 2, 2009, the MAUBAN Inc. issued P2,000,000 of 8% convertible bonds at par. The bonds will mature on January 1, 2013 and interest is payable annually every January 1. The bond contract entitles the bondholders to receive 6, P100 par value, ordinary shares in exchange for each P1,000 bond. On the date of issue, the prevailing market interest rate for similar debt without the conversion option is 10%. On January 1, 2013, the holders of the bonds with total face value of P1,000,000 exercised their conversion privilege. On that date, the bonds were selling at 110 and the ordinary share at P42. Questions: Based on the above and the result of your audit, answer the following (Round off present value factors to 4 decimal places) 1. The proceeds from issuance of convertible bonds to be allocated to the liability component is a. P1,366,000 c. P1,873,184 b. P1,778,336 d. P2,000,000 2. The proceeds from issuance of convertible bonds to be allocated to the equity instrument is a. P634,000 c. P126,816 b. P221,664 d. P0 3. The carrying amount of the bonds payable on December 31, 2009 is

a. P2,000,000 c. P1,389,400 b. P1,796,170 d. P1,900,502 4. The interest expense for the year 2010 is a. P160,000 c. P138,940 b. P179,617 d. P190,050 5. The gain to be recognized on conversion of the bonds is a. P126,816 c. P463,408 b. P400,000 d. P0 PROBLEM NO.9 ELEANOR CORP. has been producing quality disposable diapers for more than two decades. The Company’s fiscal year runs from April 1 to March 31. The following information relates to the obligations of ELEANOR as of March 31, 2018. BONDS PAYABLE ELEANOR issued P10,000,000 of 10% bonds on July 1, 2016. The prevailing market rate of interest for these bonds was 12% on the date if issue. The bonds will mature on July 1, 2026. Interest is paid semiannually on July 1 and January 1. ELEANOR uses the effective interest rate method to amortize bond premium or discount. The following prevailing present value factors are taken from present value tables: Present value of 1 at 12% for 10 periods Present value of 1 at 6% for 20 periods Present value of an ordinary annuity of 1 at 12% for 10 periods Present value of an ordinary annuity of 1 at 6% for 20 periods

0.32917 0.31180 5.65022 11.46992

NOTES PAYABLE ELEANOR has signed several long-term notes with financial institutions. The maturities of these notes are given in the schedule below. The total unpaid interest for all of these notes amounts to P600,000 on March 31, 2018:

DUE DATE April 1, 2018 July 1, 2018 October 1, 2018 January 1, 2019 April 1, 2019 – March 31, 2020 April 1, 2020 – March 31, 2021 April 1, 2021 – March 31, 2022 April 1, 2022 – March 31, 2023 April 1, 2023 – March 31, 2024 TOTAL

AMOUNT DUE P400,000 600,000 300,000 300,000 1,200,000 1,000,000 1,400,000 800,000 1,000,000 P7,000,000

ESTIMATED WARRANTIES ELEANOR has a one-year product warranty on some selected items in its product line. The estimated warranty liability on sales made during 2016-2017 fiscal year and still outstanding as of March 31, 2017 amounted to P180,000. The warranty costs on sales made from April 1, 2017 through March 31, 2018, are estimated at P520,000. The actual warranty costs incurred during the current 2017-2018 fiscal year are as follows: Warranty claims honored on 2016-2017 sales Warranty claims honored on 2017-2018 sales Total Warranty claims honored

P180,000 178,000 P358,000

OTHER INFORMATION 1. TRADE PAYABLES Accounts payable for supplies, goods and services purchased on open accounts amount to P740,000 as of March 31, 2018. 2. PAYROLL RELATED ITEMS Accrued salaries and wages Withholding taxes payable Other payroll deductions Total

P300,000 94,000 10,000 P404,000

3. MISCELLANEOUS ACCRUALS Other accruals not separately classified amount to P150,000 as of March 31, 2018. 4. DIVIDENDS On March 15, 2018, ELEANOR’s board of directors declared a cash dividend of P0.20 per ordinary share and a 10% share dividend. Both dividends were to be distributed on April 12, 2018 to the shareholders of record at the close of business on March 31, 2018. Data regarding ELEANOR ordinary share capital are as follows: Par Value Number of shares issued and outstanding

P5.00 per share 6,000,000 shares

Market Value of Ordinary shares March 15, 2018 March 31, 2018 April 12, 2018

P22.00 per share 21.50 per share 22.50 per share

Questions: 1. How much was received by ELEANOR from the sale of the bonds on July 1, 2016? a. P8,852,960 c. P10,500,000 b. P10,000,000 d. P10,647,040

2. What is the current portion of ELEANOR’s note payable at March 31, 2018? a. P2,800,000 c. P1,300,000 b. P1,600,000 d. P3,800,000 3. The balance of the estimated warranties payable at March 31,2018, is a. P342,000 c. P520,000 b. P18,000 d. P180,000 4. On March 31, 2018, ELEANOR’s statement of financial position would report total current liabilities of a. P5,286,000 c. P5,336,000 b. P4,386,000 d. P5,642,000 5. On March 31, 2018, ELEANOR’s statement of financial position would report total noncurrent liabilities of a. P14,389,350 c. P14,370,783 b. P14,352,217 d. P14,252,960

PROBLEM NO.10 At December 31, 2017, DRIGO CORPORATION had a temporary difference (related to depreciation) and reported a related deferred tax liability of P60,000 on its statement of financial position. At December 31, 2018, DRIGO has four temporary differences. An analysis of these reveals the following: TEMPORARY DIFFERENCE 1. Use of straight-line depreciation for accounting purposes and accelerated depreciation for tax purposes 2. Rent Collected in advance; recognized when earned for accounting purposes and when received for tax purposes 3. Various expenses accrued when incurred for accounting purposes; recognized for tax purposes when paid. 4. Recognition of gain on installment sales during the period of sale for accounting purposes and during the period of collection for tax purposes

2018

2019

YEAR LATER

P160,000

P220,000

P760,000

(380,000)

-

-

(90,000)

-

-

276,000 (P34,000)

210,000 P430,000

P760,000

Assume that the company has income taxes of P435,000 due per the tax return for 2018. The installment receivable collectible in 2020 is classified as non-current. The enacted tax rate is 30% for all periods. Questions:

1. What amount of deferred tax asset should be on DRIGO’s statement of financial position at December 31, 2018? a. P114,000 c. P141,000 b. P514,800 d. P27,000 2. What amount of deferred tax liability should be shown on DRIGO’s statement of financial position at December 31, 2018? a. P342,000 c. P141,000 b. P456,000 d. P487,800 3. How much is DRIGO’s pretax accounting income for 2018? a. P1,563,900 c. P1,450,000 b. P2,406,000 d. P2,606,000 4. How much is DRIGO’s net income for 2018? a. P1,971,000 c. P2,406,000 b. P1,684,200 d. P1,450,000

PROBLEM NO.11 The following data pertains to the DRAKE COMPANY 1. At December 31, the Company has a P900,000 liability reported for estimated litigation claims. This P900,000 balance represents amounts that have been charged to income but are not tax deductible until they are paid. The Company expects to pay the claims and thus have tax-deductible amounts in the future in the following manner: YEAR 2021 2022 2023

PAYMENTS P150,000 690,000 60,000 P900,000

2. The company uses different depreciation methods for financial reporting and tax purposes. Consequently, at December 31, 2018, the Company has a cumulative temporary difference due to depreciable property of P2,400,000. This P2,400,000 cumulative temporary difference is to result in taxable amounts in future years in the following manner: YEAR 2019 2020 2021 2022 2023

AMOUNT P480,000 480,000 480,000 480,000 480,000 P2,400,000

3. The income tax rate is 30% 4. Taxable income for 2018 is P2,400,000. The company expects to report taxable income for the next five years. 5. No temporary differences existed at the end of 2017

Questions: 1. The deferred tax liability to be reported in DRAKE’s statement of financial position at December 31, 2018, is a. P720,000 c. P450,000 b. P480,000 d. P270,000 2. The deferred tax asset to be reported in DRAKE’s statement of financial position at December 31, 2018, is a. P270,000 c. P450,000 b. P150,000 d. P720,000 3. The amount of current income tax payable to be reported in DRAKE’s statement of financial position at December 31, 2018, is a. P630,000 c. P540,000 b. P546,000 d. P720,000 4. DRAKE’s pretax accounting income for 2018 is a. P3,900,000 c. P2,874,000 b. P900,000 d. P2,400,000 5. DRAKE’s net income for 2018 is a. P2,730,000 c. P1,230,000 b. P3,630,000 d. P4,350,000