Chapter 1 Audit Of Cash And Cash Equivalents

Chapter 1 Audit of Cash & Cash Equivalents AUDIT PROGRAM FOR CASH

Audit Objectives: To determine that: 1. Cash balances at the end of the reporting period represent cash and cash items on hand, in transit to, or in depository banks. 2. Cash transactions have been properly recorded 3. Cash balances are properly described and classified, and adequate disclosure with respect to amounts restricted as to withdrawal are made in the financial statements.

Page 2 Audit Procedures: 

Conduct a cash count of undeposited collections, petty cash and other funds.

   

 

Obtain custodian’s signature to acknowledge return of items counted. Reconcile items counted with general ledger balances. Trace undeposited collections counted to bank reconciliation. Follow up dispositions of items in cash counted:  Undeposited collections should be traced to bank deposits  Checks accommodated in petty cash should be deposited after the count to establish their validity.  IOUs in the petty cash should be confirmed and traced to collections in the next payroll period.  Expense vouchers should be traced to the succeeding replenishment voucher.

Coordinate cash count with count of marketable securities and other negotiable assets of the client. Obtain confirmation of year-end fund balances of cash not counted in branches or other offices.



Confirm bank balance by direct correspondence with all banks in which the client has had deposits and loans during the year.



Obtain or prepare bank reconciliation.    

Check arithmetical accuracy of reconciliation. Trace balance per book to the general ledger balance of cash account. Trace balance per bank to bank statement and compare with amount confirmed by bank. Establish authenticity of reconciling items by reference to their respective sources, like:  Bank debit or credit advices.  Duly approved journal vouchers.



Investigate checks outstanding for a long period of time. Page 3  Consider adjustment, especially if the check is already stale.  Consider the possibility of an erroneous preparation of the check.  Investigate any unusual reconciling items.  Where internal control over cash is weak, consider preparing a proof of cash reconciliation. 4. Obtain cutoff bank statement showing the client’s transactions within the bank at least one week after the reporting date, and:  Trace year-end reconciling items, like:  Deposit of the year-end undeposited collections.  Completeness of year-end outstanding checks.  Correction of bank errors.  Examine supporting documents of year-end outstanding checks that did not clear in the cutoff statement. 5. Obtain a list of interbank transfers of funds a few days before and after the reporting date.  Vouch supporting documents.  Ascertain that the related receipts and disbursements were booked by the client within the same day or at least within the same month. 6. Test reasonableness of cutoff by:  Comparing dates of checks returned with the cutoff bank statement to dates of recording in the cash disbursements register.  Tracing receipts recorded to a few days before reporting date to bank deposits. 7. Inspect savings account passbook and certificates of deposit  Reconcile with book balances. Page 4  Update interest earned posting on passbooks, if necessary.  Compare balances with bank confirmation reply.

8. Determine any restrictions on availability of cash. 9. Determine propriety of financial statement presentation and adequacy of disclosures. Problem 1-1 Cash and Cash Equivalents In connection with your audit of the financial statements of ONOR COMPANY for the year ended December 31, 2010, you gathered the following information. 1. The company maintains its current account with the Tsunami Bank. The bank statement on December 31, 2010 showed a balance of P638,340. Your audit of the company’s account with Tsunami Bank disclosed the following:  A check for P22,500 received from a customer whose account is current had been deposited and then returned by the bank on December 28, 2010. No entry was made for the return of this check. The customer replaced the check on January 15, 2011.  A check for P5,720 was cleared by the bank as P7,520. The bank made the correction on January 2, 2011.  A check for P3,500 representing payment of an employee advance was received and deposited on December 27, 2010, but was not recorded until January 3, 2011. Page 5  Post dated checks totaling P67,300 were included in the deposits in transit. These represent collections of current accounts receivable from customers. The checks were actually deposited on January 5, 2011.  Various debit memos for drafts purchased for payment of importation of equipment totaling P230,000 were not yet recorded. These purchases were previously set up as accounts payable. Said equipment arrived in December 2010.



Interest earned on the bank balances for the 4th quarter of 2010, amounting to P1,950 was not recorded.  Bank service charges totaling P1,260 were not recorded.  Deposit in transit and outstanding checks at December 31, 2010 totaled P136,250 and P276,380, respectively. 2. Various expenses from the company’s imprest petty cash fund dated December 2010 totaled P16,250, while those dated January 2011 amounted to P5,903. Another disbursement from the fund dated December 2010 was a cash advance to an employee amounting to P3,500. A replenishment of the petty cash fund was made on January 8, 2011. 3. The company’s trial balance on December 31, 2010 includes the following accounts: Cash in bank – Tsunami Bank

P 748,320

Cash in bank – Earthquake Bank (restricted account for plant expansion, expected to be disbursed in 2011) 700,000 Petty cash fund

30,000

Time deposit, placed December 20, 2010 and due March 20, 2011 1,000,000 Money market placement – Prudential Bank

4,000,000

1. What is the adjusted Petty cash fund balance on December 31, 2010? A. P4,347 C.P30,000 B. P10,250 D.P24,097 2. The petty cash shortage on December 31, 2010 is A. P 0 C. P3,500 B. P5903 D. P4,347 3. What is the adjusted Cash in bank – Tsunami Bank balance on December 31, 2010? A. P 500,010 C. P432,710 B. P748,320 D. P429,110

4. The entry to adjust the Cash in bank – Tsunami Bank account should include a debit to A. Accounts receivable for P89,800. B. Accounts receivable for P86,300. C. Accounts payable for P228,200. D. Interest expense for P1,950. 5. The December 31, 2010 statement of financial position should show “Cash and cash equivalents “ at A. P6,142,970 C. P4,442,960 B. P5,439,360 D. P5,442,960 Solution 1-1 1. Petty cash fund per trial balance Various expenses dated December 2010 Employee cash advance Adjusted petty cash fund balance

P30,000 (16,250) (3,500) P10,250

Answer: B 2. The petty cash shortage cannot be determined because of insufficient information. Answer: A Page 7 3.

Book P748,320 (22,500)

Unadjusted balances NSF check Bank error (P7,520 – P5,720) Unrecorded Cash receipt 3,500 Post dated checks (67,300) Deposits in transit (P136,250 – P67,300) Bank debit memos (230,000) Interest earned 1,950 Bank service charges (1,260) Outstanding checks Adjusted balances P432,710 Answer: C

Bank P638,340 1,800

68,950

(276,380) P432,710

4. Accounts receivable (P22,500 + P67,300) 89,800 Accounts payable 230,000 Bank service charges 1,260 Cash in bank – Tsunami Bank Advances to employees Interest income

315,610 3,500 1,950

Answer: A Cash in bank – Tsunami Bank Petty cash fund Time deposit Money market placement Cash and cash equivalents

P432,710 10,250 1,000,000 4,000,000 P5,442,960

Answer: D Page 8 Problem 1-2 Computation of Correct Cash Balance The following are the cash balances of LEONOR, INC. at December 31, 2010: Undeposited collections (in currency and coins)P40,200 Current account – unrestricted 620,000 Disbursement checks written and recorded in December 2010 but are to be released to the Payees in January 2011 130,000 Restricted time deposits (expected use in June 2011) 2,000,000 Leonor, Inc. has agreed to maintain a P200,000 compensating balance in its unrestricted current account in accordance with the loan covenant.

How much should Leonor, Inc. report as ash on its December 31, 2010, statement of financial position? A. P590,200 B. P2,790,200

C. P790,200 D. P750,000

Solution 1-2 Undeposited collections

P40,200

Current account – unrestricted

620,000

Unreleased/Undelivered checks

130,000

Total

P790,200

Answer: C 1. The P200,000 compensating balance should be reported as part of cash because it is not legally restricted as to withdrawal. Page 9 2. The time deposits should be reported separately as shortterm financial assets or temporary investments in the company’s statement of financial position because the term is more than three months but within one year. Problem 1-3 Cash and Cash Equivalents The accountant of SANTIAGO COMPANY is in the process of preparing the company’s financial statements for the year ended December 31, 2010. He is trying to determine the correct balance of cash and cash equivalents to be reported as a current asset on the statement of financial position. The following items are being considered: 

Balances in the company’s accounts at the Metropolitan Bank:  Current account P81,000

 Savings account P132,600  Undeposited customer checks of P22,200 (including a customer check dated January 2, 2011 or P3,000).  Currency and coins on hand of P3,480  Savings account at the Northern Philippines Bank with a balance of P2,400,000. This account is being used to accumulate cash for future plant expansion (in 2011).  Petty cash of P4,000 (currency of P1,200 and unreplenished vouches for P2,800).  P120,000 in a current account at the Northern Philippines Bank. This represents a 20% compensating balance for P600,000 loan with the bank. Santiago company is legally restricted to withdraw the funds until the loan is due in 2013.  Treasury bills: Two-month maturity bills P90,000 Seven-month bills 120,000  Time Deposit P100,000 Page 10 What is the correct balance of cash and cash equivalents to be reported in the current assets section of the statement of financial position? A. P547,480 C. P430,280 B. P427,480 D. P327,480 Solution 1-3 Savings and current accounts – Metropolitan Bank (P132,600 + 81,000) P213,600 Undeposited customer checks (P22,000 – P3000)

19,200

Currency and coins on hand

3,480

Petty Cash

1,200

Two-month treasury bills Time deposit

90,000 100,000*

Total cash and cash equivalents

P427,480

*It is assumed that the term is three months or less and therefore qualifies as a cash equivalent. Answer: B The following items are not included in the computation above: 1. P3,000 postdated customer check. 2. P2,400,000 cash balance at Northern Philippines Bank which represents a compensating balance that is restricted as to withdrawal. 3. P120,000 in a checking account at Northern Philippines Bank which represents a compensating balance that is restricted as to withdrawal. 4. 7-month treasury bills totaling P120,000.  Under PAS I: Presentation of Financial Statements, current assets include cash or cash equivalents unless they are restricted from being exchanged or used to settle a liability for at least 12 months after the reporting date. Page 11 

As stated in PAS 7, cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. These normally include short-term investments with maturities of three months or less from the date of acquisition.

Problem 1-4

Identifying Cash Items Which of the following items should be included in the cash balance at December 31, 2010?

I.

– A check payable to the company, dated January 3, 2011 in payment of a sale made in December 2010. II. – A check payable to a vendor, dated and recorded in the company’s books on December 31, 2010, but not released until January 4, 2011. A. I only C. Both I and II B. II only D. Neither I nor II 1-4 



The check payable to the company (I) is a postdated check, i.e., dated after the end of the reporting period. The amount should be shown as a receivable on the December 31, 2010 statement of financial position. The disbursement check (II) was not released until after the end of the reporting period. The amount should be included in the cash balance at December 31, 2010. Answer: B Page 12

Problem 1-5

Cash and Cash equivalents on the Statement of Financial Position Your audit of the December 31, 2010, financial statements of DIONISIO CORP. reveals the following: Current account at Prime Bank

P

Current account at Prudent Bank

(30,000) 135,000

Treasury bills (acquired 3 months before maturity) 300,000 Treasury bills (maturity date is Dec. 31, 2011)

1,500,000

Payroll account 390,000 Foreign bank account – restricted (translated using the December 31, 2010, exchange rate) 2,000,000

Postage stamps

1,250

Employee’s postdated check

4,500

IOU from the vice-president

8,000

Credit memo from a supplier for a purchase return

8,100

Traveler’s check

21,000

Money order

12,900

Petty cash fund (3,000 in currency and expense receipts for P12,000) 15,000

What amount would be reported as “cash and cash equivalents” on the statement of financial position on December 31, 2010? A. P840,050 B. P873,900

C.P849,400 D.P861,900

Solution 1-5 Current account at Prudent Bank

P135,000

Treasury bills (acquired 3months before maturity)

300,000

Payroll account

390,000

Traveler’s check

21,000 Page 13

Money order Petty cash fund Total cash and cash equivalents Answer: D

12,900 3,000 P861,900

Problem 1-6

Compensating Balance VICTORIA, INC. needs P2,000,000 to finance its expansion program. Victoria, Inc. is negotiating a loan with Metropolis Bank which requires company to maintain a compensating balance of 10% of the loan principal on deposit in a current account at the bank. Victoria, Inc. currently maintains a balance of P20,000 in its current account. The current account earns interest of 2% per annum; the interest rate on the loan is 12% per annum. 1. What is the principal amount of the loan? A. P2,200,000 C. P1,980,000 B. P2,000,000 D. P2,220,000 2. What is the effective interest rate on the loan? A. 13.2% C. 13% B. 11.8% D. 12%

Solution 1-6 1. (X= Principal amount of the loan) 10%X = P20,000 + (X – P2,000,000) 10%X = P20,000 +X – P2,000,000 10%X-X = -P1,980,000 90%X = P1,980,000 X = P1,980,000÷90% X = P2,200,000 Answer: A

Page 14 2. Annual interest payment (P2,200,000 x 12%) P264,000 Interest income on the loan proceeds in the compensating balance (P200,000 x %) 4,000 Effective interest P 260,000 Divide by loan proceeds ÷ P 2,000,000 Effective interest rate 13% Answer: C Problem 1-7

Compilation of Correct Cash Balance The Cash account of the BEA CORPORATION as of December 31, 2010 was composed of the following:

On deposit in current account with the Bank of PI Cash collection not yet deposited to the bank

P900,000 350,000

A customer’s check returned by the bank for Insufficient fund

150,000

A check drawn by the Vice-President of the Company dated January 15, 2011

70,000

A check drawn by a supplier dated December 28, 2010 for goods returned y the company A check dated May 31, 2010 drawn by the company the Bank of Manila in payment of custom 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 Bank

60,000

of Manila.

410,000

Petty cash fund of which P10,000 is in currency, P7,200 in form of employee’s IOUS; and P2,800 is supported by approved petty cash vouchers for expenses all dated prior to closing of the books on December 31, 2010 Total

20,000 P1,960,000

Less: Overdraft with the Bank of Manila secured by Page 15 a chattel mortgage on the inventories Cash balance per ledger

300,000 P1,660,000

What is the amount of cash to b e reported on the December 31, 2010 statement of financial position of Bea Company? Solution 1-7 Current account – Bank of PI Undeposited collection

P900,000 350,000

Supplier’s check for goods returned by the company

60,000

Petty cash fund

10,000

Bank of Manila (P410,000 – P300,000) Correct cash balance

110,000 P1,430,000

Problem 1-8 Petty Cash Fund On January 1, 2010, JERVS COMPANY established a petty cash fund of P10,000. On December 31, 2010, the petty cash fund was examined and found to have receipts and the documents for miscellaneous general expenses amounting to P8,120. In addition, there was cash amounting to P1,500. 1. What is the amount of petty cash shortage or overage? A. P380 overage C. P1,880 shortage B. P380 shortage D. P1,880 overage 2. What entry would be required to adjust the petty cash fund on December 31, 2010? A. Miscellaneous general expenses 8,120 Cash short or over 380 Petty cash fund 8,500 B. Miscellaneous general expenses 8,120 Cash short or over 380 Petty cash fund 7,740 C. Miscellaneous general expenses 8,120 Petty cash fund 8,120 D. Miscellaneous general expenses 8,500 Cash short or over 380 Petty cash fund 8,120 Solution 1-8 1. Cash Miscellaneous general expenses Petty cash accounted Petty cash per ledger Petty cash

P1,500 8,120 9,620 10,000 P 380

Answer: B 2. Miscellaneous general expenses Cash short or over Petty cash fund Ansawer: A

8,120 380 8,500

Problem 1-9

Petty Cash Fund The auditor for SAMANTHA, INC. examined the petty cash fund immediately after the close of business, July 31, 2010, the end of the company’s natural business year. The petty cash custodian presented the following during the count: Currency

P1,650

Petty cash vouchers: Page 17 Postage

420

Office supplies expense

900

Transportation expense

340

Computer repairs

800

Advances to office staff

1,500

A check drawn by Samantha, Inc., payable to the petty cash custodian Postage stamps An employee’s check, returned by bank, marked NSF

7,200 300 1,000

An envelope containing the currency of P1,890 for a gift for a retiring employee

1,890 P16,000

The general ledger shows an imprest petty cash fund balance of P16,000. 1. How much is the petty cash shortage or overage? A. P2,190 overage C. P1,890 shortage B. P2,190 shortage D. P1,890 overage

2. What is the adjusted balance of the petty cash fund at July 31, 2010? A. P10,740 C. P7,200 B. P3,540 D. P8,850 Solution 1-9 1. Currency Petty cash vouchers (P420 + P900 + P340 + P800 + P1,500) Replenishment check Employee’s NSF heck Petty cash accounted Petty cash fund per ledger (custodian’s accountability) Petty cash shortage

P1,650 3,960 7,200 1,000 13,810 16,000 P 2,190

Answer: B Page 18

2. Currency Replenishment check Adjusted petty cash balance

P1,650 7,200 P8,850

Answer: D Problem 1-10

Petty Cash Fund On January 1, TANYA CO. establishes a petty cash account and designates Orly Reyes as petty cash custodian. The original amount included in the petty cash fund is P10,000. The follow disbursements are made from the fund: Office supplies

P3,460

Postage

P2,240

Entertainment

840

The balance in the petty cash box is P3,200.

1. The person responsible, at all times, for the amount of the petty cash fund is the A. Chairman of the Board of Directors B. President of the company C. Petty cash custodian D. General cashier

2. The following are appropriate procedures for controlling the petty cash fund, except A. To monitor variations in different types of expenditures, the petty cash custodian files petty cash vouchers by category of expenditure after replenishing the fund. B. To replenish the fund, the general cashier issues a company check to the petty cash custodian, rather than cash. Page 19 C. To determine that the fund is being accounted for satisfactorily, surprise counts of the fund are made from time to time by the internal auditor or other responsible official. D. Each individual to whom petty cash is paid is required to present signed receipts to the petty cash custodian. 3. The entry to replenish the fund is A. Office supplies expense Postage expense Entertainment expense Cash

3,460 2,240 840

B. Office supplies expense Postage expense Entertainment expense Cash over and short Petty cash

3,460 2,240 840 260

6,540

6,800

C. Office supplies expense Postage expense Entertainment expense Cash over and short Cash D. Office supplies expense Postage expense Entertainment expense Petty Cash

3,460 2,240 840 260 6,800 3,460 2,240 840 6,540

4. The objective of establishing a petty cash fund is to A. Cash checks for employees B. Account for all cash receipts and disbarments C. Account for cash sales D. Facilitate payment of small, miscellaneous Items

5. What is the effect of not replenishing the petty cash at year-end and not making the appropriate adjusting entry? Page 20 A. Detailed audit is essential B. The petty cash custodian should turn over the petty cash to the general cashier. C. Cash will be overstated and expenses understated D. Expenses will be overstated and cash will be understated

Solution 1-10 1. One individual, the petty cash custodian, should be responsible for the petty cash fund. Answer: C 2. The petty cashier should not have custody of paid petty cash vouchers to prevent their reuse. Answer: A 3. Office supplies expense

3,460

Postage expense Entertainment expense Cash over and short Cash

2,240 840 260

Computation of cash shortage: Currency and coins Petty cash vouchers (P3,460 + P2,240 + 840) Petty cash accounted Petty cash per ledger Shortage

6,800

P3,200 6,540 9,740 10,000 P 260

Answer: C 4. Facilitate payment of small, miscellaneous items. Answer: D

Page 21 5. Cash will be overstated and expenses understated. Answer: C Problem 1-11

Count of Petty Cash Fund and Undeposited Collections

In connection with your audit of the financial statements of BENJAMIN CORP. for the year ended December 31, 2010, you conducted a surprise count of the company’s petty cash fund and undeposited collections at 8:20 a.m. on January 3, 2011. Your count disclosed the following:

Bills and coins

Bills

Coins

P100.00

5 pieces

5.00

18 pieces

50.00

40 pieces

1.00

206 pieces

20.00

48 pieces

0.25

32 pieces

Postage stamps (unused) – P365 Checks Date

Payee

Maker

Dec. 30

Cash

Custodian

Dec. 30

Benjamin Corp.

SLV, Inc.

Dec. 31

Benjamin Corp.

Mario Lansang, Sales manager

Dec. 31

Benjamin Corp.

MSU Corp.

Dec. 31

Benjamin corp.

Ateneo, Inc.

Dec. 31

Taiwan Corp. (not endorsed)

Benjamin Corp.

Amount P

1,200 14,000

1,680 17,800 8,300

27,700

Unreiumbursed vouchers Date

Payee

Description

Amount

Dec. 23

Mario Lansang

Advance trip for

P20,000

Sales manager

Tagaytay City

Page 22

28

Central Post Office

Postage stamps

1,620

29

Messengers

Transportation

150

29

Byte, Inc.

Computer repair

800

Other items found inside the cash box: 1. Unclaimed pay envelope of Juan MacDonut. Indicated on the pay slip is his net salary of P7,500.Your inquiry revealtd that Juan’S salary is mingled with the petty cash fund. 2. The sales manger’s liquidation report for his Tagaytay City trip. Cash advance received on Dec. 23 Less: Hotel accommodation, meals, etc.

P20,000 P16,000

Bus fare for two

1,200

Cash given to Pablo, salesman

1,000

Balance

18,200 P 1,800

Accounted for as follows: Cash returned by Pablo to the sales manager P Personal check of the sales manager Total

120 1,680 P1,800

Additional information: 1.

The custodian is not authorized to cash checks.

2. The last official receipt included in the deposit on December 30 is No. 4351 and the last official receipt issued for the current year is No. 4355. The following official receipts are all dated December 31, 2010.

OR No.

Amount

Form of Payment

4352

P13,600

4353

17,800

4354

3,600

Cash

4355

8,300

Check

Cash Check

3. The petty cash balance per general ledger is P25,000. The last replenishment of the fund was made on December 22, 2010. Page 23 1. What is the amount of shortage due from the sales manager? A. P240 C. P120 B. P1,800 D. P 0 2. What is the amount of undeposited collections on December 31, 2010? A. P44,300 C. P57,300 B. P84,300 D. P41,000 3. The adjusting entries on December 31. 2010 should include a net debit of Travel expenses of A. P17,320 C.P22,570 B. P18,320 D.P18,080 4. What is the total unreimbursed vouchers on January 3, 2011 (count date)? A. P22,450 C. P22,570 B. P22,085 D. P22,205 5. What is the total cash shortage? A. P22,166 B. P8,166

C. P22,406 D. P20,486

Solution 1-11 1. Cash advance Less: Actual cash disbursed Hotel, meals, etc. Bus fare Pablo(P1,000-P120) Cash that should be returned Cash actually returned Shortage due from the sales manager

P20,000 P16,000 1,200 880

18,080 1,920 1,680 P 240

Answer: A

Page 24 2. Collections per OR nos. 4352 – 4355 Unreceipted collections Total undeposited collections

P43,300 14,000 P57,300

Answer: C 3. Travel expenses (16,000 + P1,200 + P880)

P18,080

Answer: D 4. Unreimbursed vouchers (P20,000 + P1,620 + P150 + P800)

P22,570

Answer: C 5. Travel cash shortage Answer: A

P22,166

Benjamin Corp. CASH COUNT SHEET January 3, 2011 – 8:20 a.m. Bills and coins: Denomination

Quantity

Amount

P100.00

5

P 500

50.00

40

2,000

20.00

48

960

5.00

18

90

1.00

206

206

0.25

32

8

Total

P 3,764

Checks: Date

Maker

Amount

Dec. 30

Custodian

P 1,200

Dec. 30

SLV, Inc.

14,000

Dec. 31

Mario Lansang

Dec. 31

MSU Corp.

Dec. 31

Ateneo, Inc.

1,680 17,800 8,300

42,980

Page 25 Unreimbursed vouchers: Date

Account

Amount

Dec. 23

Advances

P20,000

Dec. 28

Postage

Dec. 29

Transportation

1,620 150

Dec. 29

Repairs

800

22,570

Total cash accounted

P69,314

Less: Accountabilities Petty cash

P25,000

Collections (per official receipts)

43,300

Unclaimed salary

7,500

Excess travel advance

1,680

Unreceipted collection from SLV, Inc. 14,000 CASH SHORTAGE

91,480 (P 22,166)

Benjamin Corp. ADJUSTING JOURNAL ENTRIES December 31,2010 1. Cash

14,000 Accounts receivable

2. Advances to officers and employees Postage expense Transportation expense Repairs expense Petty cash fund 3. Unused postage Postage expense 4. Cash

14,000 20,000 1,620 150 800 22,570 365 365 7,500

Salaries payable

7,500

Page 26 5. Receivable from custodian Cash

22,166 22,166

6. Travel expenses (P16,000 + P1,200 + P880)

18,080

Petty cash fund

1,680

Advances to officers and employees

19,760

Problem 1-12

Bank Reconciliation; Computation of Undeposited Collections On July 7, 2010, ANING CORP. received its bank statement for the month ending June 30. The statement showed a P209,500 balance while the cash account balance on June 30 was P35,000. In reconciling the balances, the auditor discovered the following: 1. The June 30 collections amounting to P176,000 were recorded on the books but were not deposited until July. 2. The bank charged the company for a DAUD (Drawn Against Uncollected Deposit) check of a customer. 3. A paid check for P24,300 was entered incorrectly in the cash disbursements journal as P42,300. 4. Outstanding checks as of June 30 totaled P354,400. 1. What is the amount of the customer’s DAUD check? A. P14,100 C. P21,900 B. P3,900 D. P334,900 2. The adjusted cash balance is A. P31,100 B. P387,900

C. P38,900 D. P4,900

Page 27 3. The cash balance per ledger should be increased (decreased) by A. P3,900 C. P(3,900) B. P178,400 D. P(178,400) 4. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except A. Year-end bank statement B. Cutoff bank statement C. Bank confirmation D. General ledger Solution 1-12

1. Customer’s DAUD check (see no.2)

P21,900

Answer: C 2. Unadjusted balances Bank charge for a DAUD check Overstatement of book disbursement (P42,300 – P24,300)) Outstanding checks Undeposited collections(SQUEEZE) Adjusted balances

Book Bank P35,000 P209,500 (21,900) 18,000

P31,100

(354,400) 176,000 P31,000

Answer: A 3. ADJUSTING JOURNAL ENTRIES June 30, 2010 a. Accounts receivable Cash b. Cash Accounts payable

21,900 21,900 18,000 18,000

Page 28 Net decrease in cash balance (P21,900[a] – P18,000[b])

P3,900

Or Balance of cash in bank per ledger Adjusted cash balance Net decrease in cash balance

P35,000 (31,100) P 3,900

Answer: C 4. General ledger Answer: D Problem 1-13

Bank Reconciliation: Unadjusted to Adjusted Balances Format

The following data were taken from GARAY’s check register for the month of April. Garay’s bank reconciliation for March showed one outstanding check, check No. 178 for P2,150 (written on March 20), and one deposit in transit for P4,350 (made on March 31). Date

Item

Checks

Deposits

Balance

2010 April 1

Beginning Balance

6,150

1

Deposit

1

Check No. 179

250

32,567

4

Check No. 180

10,673

21,898

27

Deposit

29

Check No. 181

26,167

11,774 13,217

32,317

33,672 20,490

The following is from Garay’s bank statement of April: Date

Item

Checks

Deposits

Balance

2010 April 1

Beginning Balance

3 Check No. 179

3,950 250

3,700

3 Deposit 5 Check No. 180

4,350 10,673

(2,623)

5 Automatic loan 5 Deposit 20 NSF check 20 Service charge

8,050

8,150

5,527

26,417

31,944

1,000

30,944

600

30,344

30 Interest

82

30,426

Assume that any errors or discrepancies you find are Garay’s, not the bank’s. What is the adjusted cash balance as of April 30? A. P26,833 B. P26,838

C. P30,426 D. P26,872

Solution 1-13

Unadjusted balances Outstanding checks Check no.178 Check no.181

Book

Bank

P20,490

P30,426

P2,150 13,217

(15,367)

Deposit in transit Error in recording deposit (P26,417 – P26,167)

11,774 250

Automatic loan

8,150

Interest NSF check

82 (1,000)

Bank service charge

(600)

Arithmetic error for: Check no. 179 (P32,567 – P32,067)

(500)

Check no. 180 (P21,898 – P21,894)

(4)

Check no. 181 (P20,490 – P20,455)

(35)

Adjusted balances

P26,833

P26,833

Answer: A

Page 30 Problem 1-14 Bank Reconciliation: Bank to Book Format The information below relates to CHARMAINE COMPANY’s cash in bank: Balance per bank statement, December 31, 2010

P27,910

Collections recorded but not yet deposited in bank

1,950

NSF check – not recorded on books nor redeposited

2,000

Bank charges not recorded

40

Note collected by bank and not recorded on books

2,800

Outstanding checks

3,000

The cash balance in the books of Charmaine Company on December 31, 2010, is: A. P26,020 B. P32,100

C. P22,200 D. P26,100

Solution 1-14 Balance per bank

P27,910

Collections not yet deposited

1,950

NSF check

2,000

Bank charges

40

Note collected by bank

(2,800)

Outstanding checks

(3,000)

Balance per books

P26,100

Answer: D

Page 31 Problem 1-15 Computation of Outstanding Checks The bank reconciliation for December for DONNIE CO. included the following information: Checks and debit memos recorded by bank in December, including a December service charge of P1,000 November bank service charge recorded on the books in December Cash disbarments per books during December Customer’s NSF check returned by bank in December (no entry on company books) Customer’s NSF check returned by bank in December(no entry on company book in either November or December) Deposit in transit, December 31 Outstanding checks, December 31 The outstanding checks at November 30 totaled A. P12,112 B. P13,112

C. P27,112 D. P10,112

P24,320 2,000 34,658 16,000 7,600 5,421 37,450

Solution 1-15 Outstanding checks, November 30 (SQUEZE) Add: Checks issued during December Book disbursements during December Less: November bank service charge Total

P12,112 P34,658 2,000

Less: Checks paid by bank during December Bank disbursements during December Less: NSF check returned in Dec. P16,000 Dec. bank service charge 1,000 Outstanding checks, December 31

32,658 44,770

P24,320 17,000

7,320 P37,450

Answer: A Problem 1-16 Bank Reconciliation: Unadjusted to Adjusted Balances Format ELAINE INC.’s newly hired accountant prepared the following cash reconciliation as of June 30, 2010: Bank Unadjusted balances Deposits in transit Bank service charges Check written and recorded on June 30 but was released on July 4 Outstanding checks NSF check Loan proceeds (company not informed) Erroneous bank debit Customer’s checks received on June 29 (all dated July 6), included in deposits in transit Certified check Unlocated difference

P268,367

Book P79,367 (15,000)

1,000 (12,000) 36,000 17,000 200,000 15,000

9,000 11,000 P477,367

345,000 P477,367

The adjusted cash balance of Elaine Inc. on June 30, 2010, should be A. P265,367 C. P273,367 B. P253,367 D. P264,367 Solution 1-16 Unadjusted balances Deposits in transit, net of post-dated checks (P15,000 – P9,000) Bank service charges Unreleased check

Book P79,367

Bank P268,367 6,000

(1,000) 12,000 Page 33

Outstanding checks, net of certified check (P36,000 – P11,000) NSF check (17,000) Loan proceeds 200,000 Erroneous bank debit Post-dated checks (9,000) Adjusted balances P264,367

(25,000)

15,000 P264,367

Answer: D Problem 1-17 Bank Reconciliation: Unadjusted to Adjusted Balances Format The following information pertains to FLINT CORP.:

Flint Corp. BANK RECONCILIATION November 30, 2010

Balance per bank statement Less: Outstanding checks No. 4321 4329 4340 4341

P435,000 P6,000 15,000 1,700 4,675

Add: Deposit in transit

27,735 P407,625 16,200

Balance per books

P423,825 CHECK REGISTER December 2010

Date

Payee

Dec. 1 3 7 12 15 16 18 21 22 28

San Beda Inc. Miriam Corp. UE Enterprises PSBA Corp. Payroll BU, Inc. New Era Co. UST, Inc. Petty cash fund Payroll

Vouchers Payable

No. 4342 4343 4344 4345 4346 4347 4348 4349 4350 4351

P

10,000 4,200 3,755 12,000 96,000 6,300 14,200 7,000 10,000 98,000 P261,455

Discount P500 120 142 P762

Cash P9,500 4,200 3,755 11,880 96,000 6,300 14,058 7,000 10,000 98,000 P260,693

BANK STATEMENT BANKABLE BANK Page 1 of 1 PERIOD: NOVEMBER 30, 2010 – DECEMBER 31, 2010 No.: 001-43-44 Check Date Decription Number Debit Credit Balance Balance last statement P435,000 Dec. 1 Cash Deposit P16,200 451,200 1 Check issued 4329 P15,000 436,200 4 Check issued 4342 9,500 426,700 4 Check issued 4341 4,675 422,025 5 Check deposit 49,000 471,025 6 Check deposit 4343 4,200 466,825 8 Check deposit 14,000 480,825 10 Check issued 4344 3,755 477,070 15 Encashment 4346 96,000 381,070 22 Encashment 4350 10,000 371,070 28 Encashment 4351 98,000 273,070 29 Debit memo service charge 1,000 272,070 29 Credit memo interest 1,550 273,620 Deposit in transit at December 31 totaled P49,000. 1. What is the total book receipts for December? A. P113,550 C. P63,000 B. P80,750 D. P112,000 Page 35 2. What is the cash balance per books on December 31, 2010 A. P275,132 C. P291,332 B. P226,132 D. P274,370 3. What is the total outstanding checks on December 31, 2010? A. P68,313 C. P46,938 B. P39,238 D. P40,938 4. What is the adjusted cash balance on November 30, 2010? A. P446,375 C. P226,682

B. P275,682

D. P274,920

5. What is the adjusted cash balance on December 31, 2010? A. P281,682 C. P226,682 B. P275,682 D. P274,920 Solution 1-17 1. Dec. 5 deposit Dec. 8 deposit Dec. 31 deposit in transit Total collections/book receipts

P49,000 14,000 49,000 P112,000

Answer: D 2. Cash balance, November 30 Add: December receipts(see no. 1) Total Less: Disbursements per check register Cash balance, December 31

P423,825 112,000 535,825 260,693 P275,132

Answer: A 3. Outstanding checks, December 31: Check no. 4321 4340

P6,000 1,700 Page 36

4345 4347 4348 4349 Total Answer: C

11,880 6,300 14,058 7,000 P46,938

4. Adjusted cash balance, Nov. 30, 2010

P423,825

The balance per books as determined and shown on the November 30 reconciliation is also the adjusted cash balance on that date. Notice that there are no book reconciling items in November. Answer: C 5. Unadjusted balances Deposits in transit Outstanding checks Service charge Interest Adjusted balances

Book P275,132

(1,000) 1,550 P275,682

Bank P273,620 49,000 (46,938)

P275,682

Answer: B Problem 1-18 Bank Reconciliation: Unadjusted to Adjusted Balances Format EDGARDO CO. was organized on January 2, 2010. The following items are from the company’s trial balance on December 31,2010. Ordinary share capital Share premium

P1,500,000 150,000 Page 37

Merchandise inventory Land Building Furniture and fixtures Accounts Receivable Accounts Payable Notes-payable Bank Sales Operating expenses (including depreciation Of P400,000)

69,000 1,000,000 1,400,000 367,000 165,000 389,650 500,000 6,235,200 1,005,150

Additional information is as follows: 1. 2. 3. 4. 5.

Deposit in transit, December 31 Service charge for December Outstanding checks, December 31 Bank Balance, December 31 Edgardo Co.’s mark up on sales is 30%

1.

What is the total collection from sales? A. P6,114,967 C. P6,235,200 B. P4,119,240 D. P6,069,800

2.

What is the total payments for merchandise purchases? A. P3,905,990 C. P4,043,990 B. P4,649,140 D. P5,914,550

3.

What is the total cash receipts per books? A. P7,819,800 C. P8,219,800 B. P8,169,800 D. P8,069,800

4.

What is the total cash disbursement per books? A. P7,816,140 C. P8,021,290 B. P7,416,140 D. P7,278,140

5.

6.

P364,000 2,000 475,000 892,000

What is the cash balance per books on December 31? A. P653,600 C. P1,203,660 B. P803,660 D. P707,060 CPA EXAMINATION REVIEWER: AUDITING PROBLEMS

Page 38

What is the adjusted cash balance on December 31? A. P801,660 C. P1,201,660 B. P651,660 D. P803,660

☺Solution 1-18 1. Sales Less: Accounts Receivables Collections from customers Answer: D

P6,235,200 165,400 P6,069,800

2. Cost of Sales (P6,235,200 x 70%) P4,364,640 Add: Merchandise Inventory, December 31 69,000 Goods Available for sale/Purchases (there is no beginning inventory) 4,443,640 Less: Accounts Payable, December 31 389,650 Payments for purchases P4,043,990 Answer: C 3. Issue price of ordinary shares (P1,500,000 + P150,000)

P1,650,000

Notes Payable – Bank Collections Total Cash Receipts per books Answer: C

500,000 6,069,800 P8,219,800

4. Land P1,000,000 Building 1,400,000 Furniture and fixtures 367,000 Operating Expenses paid(P1,005,150-P400,000) 605,150 Payment for purchases 4,043,990 Total cash disbursements per books P7,416,140 Answer: B

CHAPTER 1 AUDIT OF CASH EQUIVALENTS

Page 39

5. Cash receipts per books(see no. 3) Cash disbursements per books (see no. 4) Cash balance per books, December 31 Answer: B

P8,219,800 (7,416,140) P 803,660

6.

Bank P892,000 384,660

Unadjusted balances Deposit in transit Service charge Outstanding checks Adjusted Balances

Book P803,660 (2,000) P801,660

(475,000) P801,660

Answer: A Problem 1-19 Computation of Cash Receipts and Disbursements In connection with your audit of the cash account of ANNIE CORP., you gathered the following information. a. Balance per bank, December 1, 2010 P145,000 b. Total bank receipts (credits) in December 346,000 c. Balance per bank, December 31, 2010 114,500 d. Outstanding checks, Nov. 30, 2010(including P12,000 paid by bank in December) 67,000 e. Outstanding checks, December 31, 2010(including checks issued in November) 94,162 f. Deposit in transit, November 30, 2010 39,458 g. A customer’s check received on December 4, 2010, was returned by bank on December 7 marked “NSF.” It was redeposited on December 8, 2010. The only entry made was to take up the Collection on December 4, 2010 11,143

CPA EXAMINATION REVIEWER: AUDITING PROBLEMS 1. What is the total book receipt in December? A. P295,399 C. P334,857 B. P306,542 D. P346,000 2. What is the total bank disbursement in December? A. P315,550 C. P231,500 B. P376,500 D. P201,000 3. What is the book disbursements in December? A. P447,519 C. P403,662 B. P331,519 D. P392,519

40

Solution 1-19 1. Bank receipts (credits) in December Less: Deposit in transit, November 30 NSF check redeposited in December Book receipts (debits) in December

P346,000 P39,458 11,143

50,601 P295,399

Answer: A 2. Bank balance, December 1, 2010 Add: Bank receipts in December Total Less: Bank balance, December 31, 2010 Bank disbursements in December

P145,000 346,000 491,000 114,500 P376,500

Answer: B 3. Bank disbursements in December Add: Book disbursements in December But not in December bank disbursements: Checks issued in December, outstanding At December 31: Outstanding checks, Dec. 31 P94,162 Less: Checks issued in Nov.,

P376,500

Page 41 Still outstanding at Dec. 31 (P67,000 – P12,000) 55,000 Total Less: Bank disbursements in December but not in book disbursements in December: November outstanding checks paid by bank in December P12,000 NSF check 11,143 Book disbursements (credits) in December

39,162 415,662

23,143 P392,519

Alternative computation: Bank disbursements in December Add: Outstanding checks, December 31 Total

P376,500 94,162 470,662

Less: Outstanding checks, Nov. 30 NSF check Book disbursements in December

67,000 11,143

78,143 P392,519

Answer: D Problem 1-20 Petty Cash Fund; Bank Reconciliation Your audit of the cash account of JUNIE CORP. disclosed the following information: 1. Cash in bank balance per books, Dec. 31, 2010 2. Bank statement balance, December 31, 2010 3. Note collected by bank in December (principal plus interest of P800, less collection fee of P200) 4. Debit memo for a check book 5. Deposits in transit, Dec. 31 2010 6. Transposition error made by bank in Recording deposit of December 28: Correct amount P45,000 Recorded as 54,000 7. Erroneous bank debit 8. Included in the Cash in bank account is petty cash Fund of P10,000. Your count on December 31, 2010, revealed the following fund items: Currency and coins P 3,000 Supplies 2,400 Transportation 100 IOUs 4,000 9. Erroneous bank credit 10. Outstanding checks (including a certified Check of P10,000)

P35,000 60,000 27,000 Page 42 15,200

9,000 26,700

9,500 11,000 39,400

1. What is the principal amount of the note collected by bank in December? A. P27,600 C. P28,200 B. P26,800 D. P27,000

2. What is the adjusted cash in bank balance at December 31, 2010? A. P52,500 C. P53,000 B. P52,700 D. P51,900 3.

The cost of checkbook is A. P600 B. P300

C. P0 D. P100

4.

What is the amount of petty cash shortage at December 31, 2010? A. P400 C. P100 B. P500 D. 0

5.

What is the adjusted petty cash balance? A. P9,500 C. P3,000 B. P3,500 D. P10,000 Page 43

Solution 1-20 1. Principal(SQUEEZE) Interest Collection free Proceeds credited by bank

P27,000

Answer: A 2.

Book P35,000 27,600 (100)

Unadjusted balances Note collected by bank Debit memo for a checkbook Deposit in transit Transposition error in recording deposit (P54,000 – P45,000) Erroneous bank debit Petty cash fund 10,000 Erroneous bank credit Outstanding checks, net of certified check (P39,400 – P10,000) Adjusted balances P52,500

Bank P60,000

15,200 (9,000) 26,700 (11,000) (P29,400) P52,500

Answer: A 3. Cost of checkbook (see no. 2) 4. Petty cash fund per ledger Petty cash accounted Petty cash shortage

P100 P10,000 9,500 P 500

Answer: B Adjusted petty cash balance – currency & coins

P3,000

Answer: C Page 44 Problem 1-21 Computation of Book Disbursements Presented below is the November 30, 2010, reconciliation of the cash account of RAM, INC.: Balance pre bank statement, November 30, 2010 Add: Deposits in transit Total Less: Outstanding checks P49, 500 Erroneous Bank Credit 18, 436 Balance per books, November 30, 2010 Additional Information: • Balance per bank statement, December 31, 2010 • Bank receipts (credit) in December • Bank disbursements (debits) in December (Including all outstanding checks on November 30, 2010, and the erroneous Bank credit in November) • Outstanding checks, December 31, 2010

P78, 750 36, 415 115, 165 67, 936 P47, 229

P59, 214 139, 461

124, 554 74, 110

What is the total book disbursements in December? A. P149, 164 C. P118, 380 B. P130, 728 D. P124, 554 Solution 1-21 Bank disbursements in December Add: Book disbursement in December Not yet taken up by bank: Outstanding checks, December 31

Total Less: Bank disbursements in December But not on books: Outstanding checks, Nov. 30 Correction of November erroneous Bank credit Book disbursements in December Answer: B

P 124, 554

74, 110 Page 45 198, 664

P 49, 500 18, 436

67, 936 P 130, 728

Problem 1-22 Bank Reconciliation The cash receipts and the cash payments of LIEZEL COMPANY for April 2010 follow: Cash Receipts (CR) Cash Payment (CP) Date Cash Debit Check No. Cash Credit April 2 P 208, 700 4113 P 44, 550 8 20, 350 4114 7, 350 10 27, 950 4115 96, 500 16 109, 350 4116 33, 200 22 92, 700 4117 73, 600 29 53, 000 4118 50, 000 30 16, 850 4119 31, 600 Total P 528, 900 4120 83, 750 4121 5, 000 4122 120, 650 Total P 546, 200

The cash account of Liezel Company shows the following information at April 30, 2010: Page 46 Cash Date April 1 30 30

Item Balance

Ref. CR 6 CP 11

Debit

Credit

528, 900 546, 200

Balance 95, 550 624, 450 78, 250

Liezel Company received the following bank statement on April 30, 2010: Bank Statement for April 2010 Beginning balance Deposits and other credits: April 1 P 16, 300 EFT 4 208, 700 9 20, 350 12 27, 950 17 109, 350 22 68, 400 BC 23 92, 700 Check and other Debits: April 7 P 44, 550 13 69, 500 14 45, 150 US 15 7, 350 18 33, 200 21 10, 950 EFT 26 73, 600 30 50, 000 30 1, 000 SC Ending Balance Explanation: EFT -- electronic funds transfer US -- unauthorized signature BC -- bank collection SC -- service charge

P 95, 550

543, 750

(335, 300) P 304, 000

Page 47

Additional data for the bank reconciliation include the following: a. The EFT deposit was a receipt of the rent. The EFT debit was a monthly insurance payment. b. The unauthorized signature check was received from Lester Soon. c. The P 68,400 bank collection of a note receivable on April 22 included P 9,250 interest revenue. d. The correct amount of check number 4115, a payment on n account, is P 69,500. (Liezel's accountant mistakenly recorded the check for P 96, 500). 1. What is the amount of deposits in transit on April 30? A. P 53,000 C. P 45,150 B. P 69,850 D. P 115,000 2. What is the amount of outstanding checks on April 30? A. P 241,000 C. P 286,150 B. P 337,500 D. P 310,500 3. What is the amount of bank receipts in April? A. P 543,750 C. P 459,050 B. P 527,450 D. P 528,900 4. What is the amount of bank disbursements in April? A. P 290,150 C. P 289,150 B. P 335,300 D. P 316,150 5. What is the correct cash balance as of April 30? A. P 132,850 C. P 122,150 B. P 87,700 D. P 223,150

Page 48 Solution 1-22 1. Deposits in transit, April 30: April 29 collection per CR

P 53,000

April 30 collection per CR Total Answer: B 2. Outstanding Check no. Check no. Check no. Check no. Total Answer: A

16,850 P 69,850

checks, April 30: 4119 4120 4121 4122

P 31,600 83,750 5,000 120,650 P 241,000

3. Bank receipts in April (Total Deposits and other credits) Answer: A

P 543,750

4. Bank disbursements in April (Total checks and other debits) Answer: B

P 335,300

5. Unadjusted balances, April 30 Deposits in transit Outstanding checks Error in check no. 4115 (P 96,500-P 69,500) EFT-rent Bank collection Unauthorized signature check

Book P 78,250

Bank P 304,000 69,850 (241,000)

27,000 16,300 68,400 45,150 Page 49

EFT-insurance Service charge Adjusted balances, April 30 Answer: A

(10,950) (1,000) P 132,850

P 132,850

Problem 1-23 Bank Reconciliation: Unadjusted to Adjusted Balances Format FERMIN COMPANY's check register shows the following entries for the month of December:

Date 2010 Dec. 1 5 7 11 26 29

Checks Beginning Balance Deposit Check #14344 P 32,500 Check #14345 14,000 Deposit Check #14346 8,600

Deposits

P 65,000

49,000

Balance P 89,300 154,300 120,800 106,800 155,800 147,200

Fermin's bank reconciliation for November revealed one outstanding check (No. 14343) for P 12,000 (written on November 28), and one deposit in transit for P 5,550 (made on November 29). The following is from Fermin's bank statement for December 2010: Date 2010 Dec. 1 1 4 5 14 15 20 29 31

Checks Beginning Balance Deposit Check No. 14344 P 32,500 Deposit Check No. 14345 14,000 Loan proceeds NSF check 7,600 Service charge 1,000 Interest

Deposits

P 5,550 56,000 500,000

3,600

Balance P 95,750 101,300 68,800 124,800 110,800 610,800 603,200 602,200 605,800

Page 50 Assume that all errors were committed by Fermin Company, not the bank. 1. Adjusted cash balance on November 30 A. P 89,300 C. P 102,200 B. P 95,750 D. P 101,300 2. Outstanding checks on December 31 A. P 46,500 C. P 8,600 B. P 45,500 D. P20,600 3. Deposit in transit on December 31

A. P 52,600 B. P 49,000

C. P 5,550 D. P 43,450

4. Total Bank receipts in December A. P 114,000 C. P 565,150 B. P 119,550 D. P 61,550 5. Adjusted cash balance on December 31 A. P 663,800 C. P 748,200 B. P 634,200 D. P 597,200 Solution 1-23 1. Balance per bank, Nov. 30 Outstanding check (no. 14343) Deposit in transit Adjusted bank balance, Nov. 30 Answer: A

P 95,750 (12,000) 5,550 P 89,300

Page 51 Note that because there are no book reconciling items in November. The adjusted bank balance agrees with the cash in bank balance per ledger on November 30. 2. Outstanding checks on December 31: Check no. 14343 Check no. 14346 Total Answer: D

P 12,000 8,600 P 20,600

3. Deposit in transit on December 31: Dec. 26 collection Answer: B

P 49,000

4. Total Bank receipts in December Answer: C

P 565,150

The total bank receipt is the total amount credited by the bank during the period. 5. Unadjusted balances

Book P 147,200

Bank P 605,800

Deposit in transit Outstanding checks (see no. 2) Error in recording deposit (P 65,000-P 56,000) (9,000) Error in arithmetic for Check No. 14344 1,000 Loan proceeds 500,000 NSF check (7,600) Interest 3,600 Service charge (1,000) Adjusted balances P 634,200 Answer: B

49,000 (20,600)

P634,200

Page 52 Problem 1-24 Bank Reconciliation: Unadjusted to Adjusted Balances Format The accountant of NARCISA CO. provided the following data in reconciling the April 30 cash in bank balance: Balance per bank, April 30 P 130,350 Balance per books, April 30 85,000 Bank Service charge 2,000 Deposits in transit 49,000 Outstanding checks 17,650 Note collected by bank including P 11,200 Interest (NARCISA CO. not yet informed) 136,000 Check drawn by XYZ Co. erroneously Charged by bank to Narcisa's account 54,600 A transposition error was made in recording a sale and deposit in the sales journal and cash receipts journal in April. Correct amount P 13,658 Recorded as P 16,358 1. What is the adjusted cash balance on April 30? A. P 219,000 C. P 216,300 B. P 221,700 D. P 161,700 2. Prepare journal entries to correct the cash account. Solution 1-24 1.

Book

Bank

Unadjusted balances Bank service charge

P 85,000 (2,000)

P 130,350 Page 53

Deposits in transit Outstanding checks Collection of note Erroneous Bank debit Transposition error (P 16,358-P 13,658) Adjusted Balances Answer: C

49,000 (17,650) 136,000 54,600 (2,700) P 216,300

P 216,300

2. Adjusting Journal Entries April 30 a. Bank service charges Cash in bank b. Cash in bank Interest income Notes receivable c. Sales Cash in bank

2000 2000 136,000 11,200 124,800 2,700 2,700

Problem 1-25 Bank Reconciliation: Unadjusted to Adjusted Balances Format The following information is included in EMIL CORPORATION's bank statement for the month of March: A customer's check has been marked "NSF" by the bank and returned P 13,000 Bank service charge for March 1,200 In comparing the bank statement to the company's cash records, you found: Page54 Outstanding checks on March 31 P 184,000 Deposits made but are not yet shown in the April bank statement 14,000

The deposits in transit and outstanding checks correctly taken up in the company's books. You customer's check for P 17,400 that had not yet and had not been recorded in Emil's book. Your show a cash balance of P 36,420.

have been also found a been deposited client's books

What is Emil Corporation's correct cash balance at March 31? A. P 52,620 C. P 22,220 B. P 53,620 D. P 39,620 Solution 1-25 Balance per books Unrecorded and undeposited customer's check Bank service charge NSF check Adjusted cash balance Answer: D

P 36,420 17,400 (1,200) 13,000) P 39,620

Problem 1-26 Bank Reconciliation: Bank to Book Format The following information pertains to a checking account of a company at June 30, 2010. Balance per bank statement P 200,000 Interest earned for the second quarter 500 Outstanding checks 15,000 Customer's checks returned for insufficient funds 5,000 Deposit in transit 25,000 Page 55 At June 30, 2010, the cash balance per books is A. P 214,500 C. P 185,500 B. P 210,000 D. P 200,000 Solution 1-26 Balance per bank statement Outstanding checks Deposit in transit Interest earned

P 200,000 (15,000) 25,000 (500)

NSF checks Balance per books at June 30, 2010 ` Answer: A

5,000 P 214,500

Problem 1-27 Computation of Cash Balance per Bank Statement A company is reconciling its bank statement with internal records. The cash balance per the company's books is P 45,000. There are P 5,000 of bank charges not yet recorded, P 7,500 of outstanding checks, P 12,500 of deposits in transit, and P 15,000 of bank credits and collections not yet taken up in the company's books. What is the cash balance per bank? A. P 20,000 C. P 40,000 B. P 30,000 D. P 50,000 Solution 1-27 Balance per books Bank charges Outstanding checks

P 45,000 (5,000) 7,500 Page 56

Deposits in transit Bank credits and collections Balance per bank Answer: D

(12,500) 15,000 P 50,000

Problem 1-28 Computation of Adjusted Cash Balance A company shows a cash balance of P 175,000 on its bank statement dated June 30. As of June 30, there are P 55,000 of outstanding checks and P 37,500 of deposits in transit. What is the correct cash balance on the company books as of June 30? A. P 212,500 C. P 120,000 B. P 267,500 D. P 157,500

Solution 1-28 Balance per bank statement Outstanding checks Deposits in transit Adjusted cash balance Answer: D

P 175,000 (55,000) 37,500 P 157,500

Problem 1-29 Computation of Adjusted Cash Balance The cash account shows a balance of P 225,000 before reconciliation. The bank statement does not include a deposit of P 11,500 made on the last day of the month. The bank statement shows a collection by the bank of P 4,700 and a customer's check for P 1,600 was returned because it was NSF. A customer's check for P 2,250 was recorded on the books as P 2,700, and a check written for P 395 was recorded as P 485. Page 57 What should be the correct cash balance? A. P 227,740 C. P 228,640 B. P 239,240 D. P 227,560 Solution 1-29 Balance per books P 225,000 Bank collection 4,700 Customer's NSF check (1,600) Overstatement of cash receipt (P 2,700-P 2,250) (450) Overstatement of cash disbursement (P 485-P 395) 90 Adjusted cash balance P 227,740 Answer: A Problem 1-30 Computation of Outstanding Checks On July 5, 2010, EMILIA CORP. received its bank statement for the month ending June 30. The statement showed a P 209,500 balance while the cash account balance on June 30 was P 35,000. In reconciling the balances, the auditor discovered that:

1. The June 30 collections of P 176,000 were recorded on the books but were not deposited until July. 2. The bank service charges for the month of June totaled P 3,000. 3. A paid check for P 24,300 was entered incorrectly in the cash payments journal as P 34,200. Page 58 What is the total outstanding checks at June 30, 2010? A. P 75,400 C. P 363,400 B. P 343,600 D. P 353,500 Solution 1-30 Balance per books, June 30, 2010 Bank Service charges Overstatement of disbursement (P 34,200-P 24,300) Adjusted cash balance Balance per bank, June 30, 2010 P Add: Undeposited Collections Total P Less: Adjusted cash balance (see above computation) Outstanding checks, June 30, 2010 P Answer: B

P 35,000 (3,000) 9,900 P 41,900 209,500 176,000 385,500 41,900 343,600

Problem 1-31 Bank Reconciliation: Unadjusted to Adjusted Balances Format In connection with an audit, you are given the following bank reconciliation. BANK RECONCILIATION December 31, 2010 Balance per ledger, December 31, 2010 Add: Collections received on the last day of December and charged to "Cash in Bank" on books but not deposited Debit memo for customer's check unpaid (check is on hand but not entry has

P 34,350

5,325

been made on the books) Debit memo for bank service charge for December

Deduct: Outstanding Checks (see detailed list below) P 18,625 Credit memo for proceeds of a note receivable which had been left at the bank for collection but which has not been recorded as collected 8,000 Check for an account payable entered on books as P 12,625 but drawn and paid by bank as P 16,225 3,600 Computed balance Unlocated difference Balance per bank (checked to confirmation)

4,000 1,000 P 46,675 Page 59

32,225 P 14,450 36,600 P 51,050

LIST OF OUTSTANDING CHECKS December 31, 2010 Check No. 14344 14358 14367 14399 14401 14407

Amount P 5,820 1,295 3,543 2,001 4,892 5,074 P 18,625

1. What is the correct amount of outstanding checks December 31? A. P 18,625 C. P 17,625 B. P 22,625 D. P 21,625 Page 60 2. The journal entry to correct the outstanding checks should include a A. Debit to cash in bank of P 4,000 B. Credit to cash in bank of P 4,000 C. Debit to accounts payable of P 4,000

D. No journal entry is necessary 3. The correct amount of "unlocated difference" is A. P 32,600 C. P 36,600 B. P 35,600 D. P 0 4. The cash in bank to be shown on the company's December 31, 201 A. P 34,750 C. P 33,750 B. P 37,350 D. P 37,750 5. The journal entry to adjust the cash in bank account as of December 31 should be A. Debit to cash in bank of P 8,000 B. Credit to cash in bank of P 8,600 C. Net credit to cash in bank of P 600 D. Net debit to cash in bank of P 600 Solution 1-31 1. Outstanding checks, Dec. 31 Answer: B

(P 22,625)

2. No journal entry is necessary. There is no information in the problem that will indicate that those included in the list of outstanding checks were not taken up properly on books. Answer: D 3. A correct reconciliation (see no.4) shows that there is actually no "unlocated difference". Answer: D Page 61 4. Unadjusted balances Deposits in transit Customer's check returned Bank service charge Outstanding checks Credit memo for note collected Understatement of book Disbursement

Book P 34,350

Bank P 51,050 5,325

(4,000) (1,000) (22,625) 8,000 (3,600)

Adjusted balances Answer: C

P 33,750

P 33,750

5. ADJUSTING JOURNAL ENTRIES December 31, 2010 a. Accounts receivable 4,000 Cash in bank b. Bank service charges 1,000 Cash in bank c. Cash in bank 8,000 Notes receivable d. Accounts payable 3,600 Cash in bank Debit to cash in bank Credit to cash in bank (P 4,000+P 1,000+ P 3,600) Net credit to cash in bank Answer: C

4,000 1,000 8,000 3,600 P 8,000 (8,600) (P 600)

Page 62 Problem 1-32 Computation of Book Disbursement In connection with your audit of the MARCELO COMPANY at December 31, 2010, the following bank reconciliation was submitted to you by an employee of your client: Balance per bank Deposits in transit Outstanding checks Balance per books

P 30,534 37,856 P 68,390 42,756 P 25,634

As part of your verification, you obtained the bank statement and canceled checks from the bank on January 15, 2011. According to the records of the company, checks issued from January 1 to January 15, 2011, amounted to P 22,482. Checks returned by the bank on January 15, 2011, totaled P 58,438. Of the checks outstanding on December 31, 2010, P9,600 were not returned by the bank with the January 15, 2011, bank statement ; and of

those issued, according to the records of the company, in January 2011, P 7,200 were not returned by the bank. Based on the above data, calculate the disbursements per company records. 1. The difference between the disbursements per books as computed and as reported is A. P 61,912 C. P 10,000 B. P 2,800 D. P 29,874 2. Suggest three possible explanations for the difference between the disbursements per company as computed and as reported. Page 63 Solution 1-32 1. Outstanding checks, January 15: From December or before P 9,600 From January 7,200 Add: Disbursements per bank statement Total Less: Outstanding checks, December 31 Disbursements per books as computed Disbursements per books as reported Difference in disbursements Answer: C

P 16,800 58,438 P 75,238 42,756 P 32,482 22,482 P 10,000

2. Three possible explanations for the above difference: a. The bank disbursements (P 58,438) may be overstated by P 10,000. Another company check for P 10,000 may have been erroneously by the bank against the client's account. b. The December 31 outstanding checks may be understated by P 10,000. Since the bank reconciliation given in the problem was prepared by a company employee. There is no assurance that it is correct.

c. The client's employee may have failed to record check/s issued in January thus understanding the book disbursements (P 22,482). Page 64 Problem 1-33 Bank Reconciliation: Unadjusted to Adjusted Balance Format In auditing the HECTOR COMPANY, you obtained the bank statement, canceled checks, and other memoranda which relate to the company's bank account for December 2010. In reconciling the bank balance with that shown on the company's books, you observed the facts set forth below: (1) Balance per bank statement, 12/31/10

P 47,174

(2) Balance per books, 12/31/10

19,289

(3) Outstanding checks, 12/31/10

63,000

(4) Receipts of 12/31/10, deposited 1/2/11

6,260

(5) Service charge for November, per bank Memo of 12/15/10

1,000

(6) Proceeds of bank loan, 12/15/10, Discounted for 3 months at 18% per Annum, omitted from company books (7) Deposits of 12/22/10, omitted from Bank statement (8) Check of Milano Company, returned on 12/21/10, for absence of counter-signature And deposited with complete signature on 1/3/11, no entry on the books having been Made for the return or redeposit (9) Error on bank statement in entering deposit Of 12/18/10: Correct amount P 1,600

47,750

9,170

77,320

Entered in statement

160

1,440

(10) Check No. 021261 of Yek Company, Charged by bank in error to Company's account

13,600 Page 65

(11) Proceeds of note of Harthur Co., Collected by bank, 12/10/10, not Entered in cash book (principal amount of P 25,000 plus interest of P 1,125, less collection Fee) 25,625 (12) Erroneous debit memo of 12/28/10, to charge Company's account with settlement of bank Loan which was paid by check no. 112170 on Same date

5,000

(13) Error on bank statement in entering Deposit of 12/4/10: Entered as P 14,200.62 Correct amount 12,400.62

1,800

(14) Deposit of Bunso Co. of 12/02/10, Credited in error to this company

3,500

1. What is the principal amount of the loan obtained from bank in December? A. P 50,000 C. P 48,125 B. P 47,750 D. P 49,625 2. What amount of prepaid interest should be shown on Hector's December 31, 2010 statement of financial position? A. P 2,250 C. P 375 B. P 0 D. P 1,875 3. The amount of collection of fee is A. P 625 C. P 500 B. P 1,625 D. P 0 4. What is the adjusted cash in bank balance as of December 31, 2010?

A. P 14,344 B. P 11,464

C. P 17,944 D. P 9,344

Page 66 5. The cash in bank per ledger as of December 31, 2010, should be increased (decreased) by A. P 4,945 C. P (4,945) B. P 5,945 D. P (5,945) Solution 1-33 1.

Proceeds = 47,750 47,750 47,750 P P Answer: A

= = = = =

Principal-Interest P-(Px18%x3/12) P-0.045P 0.955 P 47,750 /0.955 P 50,000

2. Prepaid interest, Dec. 31 (P 2,250x2.5/3) Answer: D 3. Principal Interest income Maturity value Collection fee (SQUEEZE) Proceeds Answer: C

P 1,875

P 25,000 1,125 26,125 (500) P 25,625

4. Book Unadjusted balances P 19,289 Outstanding checks Receipts of 12/31/10, deposited 1/01/11 Service charge for November (1,000) Proceeds of bank loan 47,750 Deposit of 12/22/10, omitted from bank Statement Check of Milano Company charged back (77,320) Error in entering deposit of 12/18/10 Check of Yek Company charged in Error to Hector Company Proceeds of note of Harthur Co. 25,625

Bank P 47,174 (63,000) 6,260

9,170 1,440 13,600

Erroneous debit memo of 12/28/10, Charged by bank in settlement Of loan paid by check no. 112170 Error in entering deposit of 12/04/10 Deposit of Bunso Co., credited in error To Hector Company Adjusted Balances P 14,344 Answer: A 5. Adjusted Cash in bank balance (see no. 4) Cash in bank balance per ledger Net adjustment - decrease Answer: C

5,000 Page 67 (1,800) (3,500) P 14,344

P 14,344 19,289 P 4,945

Problem 1-34 Bank Reconciliation You are auditing general cash for the DION COMPANY for the fiscal year ended July 31, 2010. The client has not prepared the July 31 bank reconciliation. After a brief discussion with the owner you agree to prepare the reconciliation, with assistance from one of Dion Company's clerks. You obtain the following information: General Ledger Bank Statement Beginning Balance P 46,110 P 57,530 Deposits 250,560 Cash receipts journal 254,560 Checks cleared (236,150) Page 68 Cash disbursements journal July bank service charge Note paid directly NSF check Ending balance

(218,110)

P82,560

June 30 Bank Reconciliation Information in General Ledger and Bank Statement

(870) (61,000) (3,110) P 6,960

Balance per bank Deposit in transit Outstanding checks Balance per books

P57,530 6,000 17,420 46,110

Additional information obtained is: 1. Checks clearing that were outstanding on June 30 totaled P16,920. 2. Checks clearing that were recorded in the July disbursements journal totaled P204,670. 3. A check for P10,600 cleared the bank, but had not been recorded in the cash disbursements journal. It was for an acquisition of inventory. Dion uses the periodic inventory method. 4. A check for P3,960 was charged to Dion Company but had been written on a different company’s bank account. 5. Deposits included P6,000 from June and P244,560 for July. 6. The bank charged Dion Company’s account for a nonsufficient check totaling P3,110. The credit manager concluded that the customer intentionally closed its account and the owner left the city. The check was turned over to a collection agency. Page 69 7. A note for P58,000, plus interest, was paid directly to the bank under an agreement signed four months ago. The note payable was recoreded at P58,000 on Dion Company’s books. Based on facts given, answer the following: 1. The checks outstanding on June 30 amount to A. P9,980 C. P13,940 B. P10,830 D. P3,340 2. The deposits in transit on June 30 amount to A. P6,890 C. P6,000 B. P10,000 D. P9,110

3. The adjusted cash balance on July 31 is A. P6,980 C. P3,870 B. P10,940 D. P3,020 4. Which of the following audit procedures would be used to verify the payment of note in July? A. Examine checks returned with July bank statement. B. Check for absence of note on July 31 bank confirmation. C. Trace payment to duplicate deposit slip. D. Obtain cutoff bank statement. 5. The auditor would perform the following procedures to verify the unrecorded check of P10,600, except A. Obtain cutoff bank statement. B. Examine checks returned with July bank statement. C. Trace check number to absence in July cash disbursements journal and recording in August. D. Examine supporting documentation. Solution 1-34 1. Outstanding checks, June 30 Add: Checks issued in July(P218,110 per

P17,420 Page 70

Cash disbursements journal + P10,600 Unrecorded check) Total Less: Checks paid by bank in July (P236,150 – P3,960 erroneous check Charged by bank) Outstanding checks, July 31 Answer: C Alternative computation:

P228,710 246,130

232,190 P13,940

Checks outstanding on June 30 that did not clear in July (P17,420 – P16,920) Checks issued in July that did not clear in July (P218,110 – P204,670) Outstanding checks, July 31 2. Deposits in transit, June 30 Add: July deposits per cash receipts journal Total Less: Deposits credited by bank in July Deposits in transit, July 31

P500 13,440 P13,940 P 6,000 254,560 260,560 250,560 P10,000

Answer: B 3.

Book P82,560

Unadjusted balances Outstanding checks(see no. 1) Deposits in transit(see no. 2) Bank service charge (870) Unrecorded check (10,600) Check erroneously charged to Dion NSF check (3,110) Note payment (P58,000 principal + P3,000 interest) (61,000) Adjusted balances P 6,980

Bank P 6,960 (13,940) 10,000

3,960

P 6,980

Answer: A

Page 71 4. The following audit procedures would be performed to verify the note payment: 1. Examine cancelled check. 2. Recompute interest. 3. Check for absence of note on July 31 bank confirmation. 5. The following audit procedures would be performed to verify the unrecorded check: 1. Examine check returned with July bank statement.

2. Trace number to absence in July cash disbursements journal and recording in August. 3. Examine supporting documentation. 4. Investigate why it was unrecorded. The cutoff bank statement will no longer show the unrecorded check because it was already paid by bank in July. Answer: A Problem 1-35 Cash Transfers In the audit of the DENISSE SUPPLY COMPANY, a large branch that maintains its own bank account, cash is periodically transferred to the central account in Makati City. On the branch account’s records, bank transfers are recorded as a debit to the home office clearing account and a credit to the branch account. Similarly, the home office account is recorded as a debit to the central bank account and a credit to the branch office clearing account. Ram V. is the head bookkeeper for both the home office and the branch bank accounts. Since he also reconciles the bank account, the senior auditor, Hershey de Jesus, is concerned about the internal control weakness. As part of the Page 73 year-end audit of bank transfers, Hershey asks you to schedule the transfers for the last few days in 2010 and the first few days of 2011. You prepare the following list:

Date recorded

Amount

Date Recorded

In the Home

in the Branch

Date Deposited

Office Cash

Office Cash

in the Home

Of

Receipts

Transfer

Journal

P120,000 P260,000

12-27-10 12-28-10

Disbursements Journal 12-29-10 01-02-11

Office Bank

Date cleared

the Branch

Account

Bank Account

12-26-10 12-28-10

12-27-10 12-29-10

P140,000 P110,000 P150,000 P280,000 P370,000

01-02-11 12-26-10 01-02-11 01-07-11 01-04-11

12-30-10 12-26-10 01-02-11 01-05-11 01-06-11

12-28-10 12-28-10 12-28-10 12-28-10 01-03-01

12-29-10 01-03-11 12-31-10 01-03-10 01-05-11

1. In verifying the bank transfers, which of the following audit procedures should be performed? A. List bank transfers made a few days before and after the end of the reporting period. B. Trace bank transfers included in the schedule of bank transfers to the appropriate accounting records, bank reconciliations, and bank records to determine propriety of recording. C. Both A and B. D. A only. 2. Which of the following transfers would be included as deposits in transit in the December 31, 2010 bank reconciliation for the Home Office account? A. 3, 5, and 6 B. 1, 2, and 4 C. C. 3 and 5 D. D. No deposits in transit on December 31 3. Which of the following transfers would be included as outstanding checks in the December 31, 2010, bank reconciliation for the Branch Office account? A. 1, 2, and 3 B. 7 Page 73 C. 4 and 6 D. No outstanding checks on December 31 4. The cash in bank account on Home Office books should be increased by A. P290,000 C. P860,000 B. P570,000 D. P430,000

5. The cash in bank account on Branch Office books should be decreased by A. P430,000 C. P740,000 B. P280,000 D. P690,000 Solution 1-35 1. The following procedures should be performed to verify the bank transfers: a. List bank transfers made a few days before and after the end of the reporting period. b. Trace these bank transfers to the appropriate accounting records, bank reconciliations, and bank records to verify the propriety of recording. Answer: C 2. There are no deposits in transit on December 31. The lsit of transfers does not disclose transfers recorded in December 2010 on Home Office cash receipts journal but deposited in January 2011. Answer: D 3.

Transfer no. 4 Transfer no. 6 Total

P110,000 280,000 P390,000

These checks were issued (i.e., deposited in the Home Page 74 Office bank account) in December 2010 but cleared the Branch Office bank account in January 2011. Answer : C 4.

Transfer no. 3 Transfer no. 5 Transfer no. 6 Total

P140,000 150,000 280,000 P570,000

These transfers were deposited in the Home Office bank account in December 2010 but recorded in January 2011. Answer: B

5.

Transfer no. 2 Transfer no. 5 Transfer no. 6 Total

P260,000 150,000 280,000 P690,000

These checks were issued (i.e., deposited in the Home Office bank account) in December 2010 but recorded in the Branch Office cash disbursements journal in January 2011. Answer: D Problem 1-36 Proof of Cash: Unadjusted to Adjusted Balances Format The cash account of VELASCO COMPANY shows the following activities: Date

Debit

Nov.30 Balance Dec. 2 November bank charges 4 November bank credit for notes receivable collected P10,000 15 NSF check 20 Loan proceeds 48,500 21 December bank charges 31 Cash receipt book 703,300 31 Cash disbursements book

Credit P50

1,300 60 408,000

Balance P115,000 114,950 Page 75 124,950 123,650 172,150 172,090 879,390 471,390

CASH BOOKS RECEIPTS Date Dec. 1 2 3

OR NO. 110-120 121-136 137-150

PAYMENTS Amount

P11,000 21,300 20,000

Check No. 801 802 803

Amount P2,000 3,000 1,000

4 5 8 9 10 11 12 15 16 17 18 19 22 23 23 23 26 28 28 29 29 29 Totals

151-165 166-190 191-210 211-232 233-250 251-275 276-300 301-309 310-350 351-390 391-420 110-480 110-500 110-525 526-525 556-611 612-630 -

56,000 39,000 66,000 88,000 77,000 21,000 30,000 55,000 8,000 9,000 19,000 17,000 21,000 32,000 74,000 5,000 38,000 P703,300

804 805 806 807 808 809 810 811 812 813 814 816 817 818 819 820 821 822 823 824 825 826

3,000 12,000 19,000 26,000 30,000 61,000 7,000 8,000 16,000 20,000 22,000 36,000 11,000 50,000 7,000 4,000 3,000 12,000 13,000 29,000 2,000 11,000 P408,000 Page 76

BANK STATEMENT Date

Check No.

Dec. 1 2 3 4 5 8 9 10 11 12 15 16 17 18 19 22 23 23 23 26 28 28 29 29 29 Totals

792 802 804 EC 805 CM 16 799 DM 57 808 803 809 DM 61 813 CM 20 815 816 811 801 814 818 DM 112 821 CM 36 820

Charges P2,500 3,000 3,000 81,000 12,000 7,050 1,300 30,000 1,000 61,000 60 20,000 6,000 36,000 8,000 2,000 22,000 50,000 120 3,000 4,000 P353,030

Credits P8,500 11,500 21,300 20,000 81,000 95,000 12,000 154,000 77,000 21,000 85,000 8,000 19,000 48,500 47,000 32,000 74,000 5,000 12,000 P831,300

Additional information: 1. DMs 61 and 112 are for service charges. 2. EC is error corrected 3. DM 57 is for an NSF check. 4. CM 20 is for loan proceeds, net of P150 interest charges for 90 days. 5. CM 16 is for the correction of an erroneous November bank charge. Page 77

6. CM 36 is for customer’s notes collected by bank in December. 7. Bank balance on December 31 is P592,270. 1. The total outstanding checks at November 30 should be A. P9,550 C. P13,050 B. P7,050 D. P15,550 2. The total outstanding checks at December 31 should be A. P147,000 C. P153,000 B. P162,550 D. P159,000 3. The deposit in transit at November 30 should be A. P8,500 C. P48,500 B. P19,500 D. P 0 4. The deposit in transit at December 31 should be A. P44,000 C. P46,500 B. P 0 D. P38,000 5. The adjusted book balance at November 30 should be A. P125,000 C. P115,000 B. P124,950 D. P136,950 6. The adjusted bank receipts for the month of December should be A. P763,800 C. P115,000 B. P773,800 D. P136,950 7. The adjusted book disbursements for the month of December should be A. P403,480 C. P415,480 B. P415,540 D. P409,480 8. The adjusted bank balance at December 31 should be A. P592,270 C. P558,270 B. P477,270 D. P483,270

Page 78 Solution 1-36 1. OUTSTANDING CHECKS, NOVEMBER 30: Check no.792 799 Total

P2,500 7,050 P9,550

Answer: A 2. OUTSTANDING CHECKS, DECEMBER 31: Check no. 806 807 810 812 817 819 822 823 824 825 826 Total

P19,000 26,000 7,000 16,000 11,000 7,000 12,000 13,000 29,000 2,000 11,000 P153,000

Answer: C 3. Deposits in transit, November 30

P8,500

Answer: A 4. Deposit in transit, November 30(see no. 3) Add: Collections per cash receipts book Total Less: Deposits credited by bank: Bank receipts P831,300 Correction of erroneous bank charge in December (81,000) Correction of erroneous bank charge in November (12,000) Loan proceeds (48,500)

P8,500 707,300 715,800

Page 79

Note collected Deposits in transit, December 31 Answer: D

(12,000)

677,800 P38,000

PROOF OF CASH December 1-31 Balance Nov.30 Balances per bank

Receipts

P114,000 P831,300

Bank error corrected the same date

(81,000)

Erroneous bank charge in November 12,000

(12,000)

Balance Disbursements Dec.31 P353,030

P592,270

(81,000)

Deposits in transit: November 30

8,500

December 31

(8,500) 38,000

38,000

Outstanding checks November 30

(9,550)

(9,550)

December 31 Adj. bank balances P124,950

153,000 P767,800

P415,480

(153,000) P477,270

Balance Nov.30 Balances per books P115,000

Receipts

Balance Disbursements Dec.31

P765,800

P409,410

P471,390

Bank service charges November 30

(50)

(50)

December 31

120

(120)

Notes collected by bank: November 30

10,000

December 31

(10,000) 12,000

12,000

Unrecoreded disbursement – Check no. 815 Adj. bank balances P124,950

6,000 P767,800

P415,480

(6,000) P477,270 Page 80

5. Adjusted book balance, November 30

P124,950

Answer: B 6. Adjusted bank receipts in December

P767,800

Answer: D 7. Adjusted book disbursements in December

P415,480

Answer: C 8. Adjusted bank balance, December 31

P477,270

Answer: B Problem 1-37 Proof of Cash: Bank to Book Balances Format Shown below is the may 31, 2010, bank reconciliation prepared by your client’s staff.

RECONCILIATION May 31, 2010 Bank balance

P652,000

Add: Deposit in transit

10,000

Total Less:

P662,000 Outstanding checks No. 640

P10,000

652

8,000

653

2,000

20,000

Adjusted bank balance

P642,000

Book balance

P570,800

Add: Proceeds of note receivable collected in May Deposit on may 31 not recorded on books until June

P70,000 2,000

72,000 Page 81

Total Less: Bank service charge Adjusted book balance The June 2010 bank statement is shown below: Pasig bank Period covered: May 31, 2010 – Jun 30, 2010 Account no.: 0021261

P642,800 800 P642,000

Date

Checks

Deposit 10,000

June

1

8,000

June

8

2,000

June

11

14,000

June

13

1,000 DM

June

16

4,000

June

21

12,000

June

27

18,000

June

29

1,000 EC

June

30

200 SV

June

30

3,000 DM

20,000 1,000

56,000

1,000 EC

SV - Service Charges

DM – Debit Memo

EC – Error Corrected

CM – Credit Memo

The paid checks accompanying this bank statement (all clearing in June) are the following: No. 652 No. 653

P8,000 P2,000

No. 654 No. 655

P14,000 P 4,000

No. 657 No. 658

P12,000 P18,000

The check register reveals that the last check issued in June is No. 659 for P5,000 and that check no. 656 is for P2,600. Cash received for the period of June 22 through June 30 of P70,000 was deposited in the bank on July 1. The debit memos checks returned The June 13 NSF The June 30 NSF

on June 13 and June 30 represent customer’s NSF by the bank. Page 82 check was immediately redeposited without entry. check was redeposited on July 1 without entry.

1. What is the total bank receipts in June? A. P87,000 C. P77,000 B. P88,000 D. P78,000

2. What is the total bank disbursements in June? A. P59,200 C. P58,200 B. P58,000 D. P63,200 3. What is the balance per bank statement on June 30, 2007? A. P676,800 C. P732,400 B. P627,200 D. P729,200 4. What is the total book receipts in June? A. P88,000 C. P146,000 B. P220,000 D. P218,000 5. What A. B. 6. What A. B.

is the total book disbursements P53,000 P57,500 is the book balance on June 30, P732,200 P729,200

in June? C. P56,400 D. P63,200 2007? C. P732,400 D. P676,800

Solution 1-37 1. Bank receipts in June (arrived at by footing the Deposits column of the bank statement)

P88,000

Answer: B 2. Bank disbursements in June (arrived at by footing the Checks column of the bank statement) P63,200 Answer: D Page 83 3. Bank balance, May 31 Add: Bank receipts in June Total

P652,000 88,000 740,000

Less: Bank disbursements in June Bank balance, June 30 Answer: A

63,200 P676,800

PROOF OF CASH June 1-30, 2010

Balance May 31 Bank balances

P652,000

J u n e Balance Receipts Disbursements June 30 P88,000

P63,200

P676,800

Deposits in transit: May 31

10,000

June 30

(10,000) 70,000

70,000

Outstanding checks: May 31

(20,000)

(20,000)

June 30

17,600

(17,600)

Bank service charges May 31

800

800

June 30 Bank collection in May

(200) (70,000)

70,000

May deposited recorded by the company in June (2,000)

2,000

200

NSF checks: Already redeposited

(1,000)

Not yet redeposited Bank error corrected on the same date Book balances

P570,800

(1,000) (3,000)

(1,000) P218,000

3,000

(1,000) P56,400

P732,400

4. Total book receipts in June

P218,000

Answer: D

Page 84 5. Total book disbursements in June

P56,400

Answer: C 6. Book balance on June 30, 2010

P732,400

Answer: C

Problem 1-38 Proof of Cash: Bank to Book Balances Format

The following information was obtained in an audit of the cash account of CHELSEE COMPANY as of December 31, 2010. Assume that the CPA has satisfied himself as to the propriety of the cash book, the bank statements, and the returned checks, except as noted: 1. The bookkeeper’s bank reconciliation at November 30, 2010. Balance per bank statement

P194,000

Add: Deposit in transit

11,000

Total

P205,000

Less: Outstanding checks No. 1434

P1,400

1562

7,500

1571

5,800

1584

8,000

1591 Balance per books

300

23,000 P182,000

2. A summary of the bank statement for December 2010. Balance brought forward

P

Deposits

194,000 1,487,000

Total

P1,681,000

Charges

(1,325,000)

Balance, December 31, 2010

P

356,000

Page 85 3. Included with cancelled checks returned with the December statement were the checks listed below. 4. The Chelsee Company discounted its own 60-day note for P90,000 with the bank on December 1, 2010. The discount rate was 6 percent. The accountant recorded the proceeds as a cash receipt at the face value of the note. 5. The accountant records customer’s dishonored checks as a reduction of cash receipts. When the dishonored checks are redeposited they are recorded as a regular cash receipt. Two NSF checks for P1,800 and P2,200 were returned by the bank during December. Both checks were redeposited and were recorded by the accountant. 6. Cancellations of Chelsee Company checks are recorded by a reduction of cash disbursements. 7. December bank charges were P200. In addition, a P100 service charge was made in December for the collection of a note receivable in November. These charges were not recorded on the books 8. Check no. 1434 listed in the November outstanding checks was drawn in 2008. Since the payee cannot be located, the president of Chelsee Company agreed to the CPA’s suggestion that the check be written back into the accounts by a journal entry.

9. Oustanding checks at December 31, 2010, totaled P49,400, including checks 1434 and 1584. 10. The cutoff bank statement disclosed that the bank had recorded a deposit of P24,000 on January 2, 2011. The accountant had recorded this deposit on the books on December 31, 2010, and then mailed the deposit to the bank. Page 86 Cancelled Checks Returned with the December Bank Statement Number

Date of Check

Amount of Check

C o m m e n t s

1562

11/28/10

P750

This check was in payment of an invoice for P7,500 and was recorded in the cash book as P7,500

1571

11/28/10

5,800

This check was in payment of an invoice for P5,800 and was recorded in the cash book as P5,800.

1583

12/04/10

1,500

Examination of this check revealed that it was unsigned. A discussion with the client disclosed that it had been mailed inadvertently before it was signed. The check was endorsed and deposited by the payee and processed by the bank even though it was a legal nullity. The check was recorded in the cash disbursements journal.

1588

12/12/10

8,000

This check replaced 1584, which was returned by the payee because it was mutilated. Check 1584

was not cancelled on the books. ----

12/19/10

2,000

This was a counter check drawn at the bank by the president of the company as a cash advance for travel expense. The president overlooked informing the bookkeeper about the check.

----

12/20/10

3,000

The drawer of this check was the Chelsea Company. Page 87

1595

12/20/10

3,500

This check had been labeled NSF and returned bank had erroneously believed that the check was drawn by the Chelseen Company. Subsequently, the payee was advised to redeposit the check.

1599

01/05/11

100,000

This check was given to the payee on December 30 , 2010, as a postdated check with the understanding that it would not be deposited until January 5. The check was not recorded on the books in December.

1. What is the correct amount of outstanding checks on December 31? A. P41,400 C. P48,000 B. P33,250 D. P40,000 2. What is the amount of cash receipts per book in December? A. P1,496,900 C. P1,495,100

B. P1,504,900

D. P1,487,000

3. What is the amount of cash disbursements per book in December? A. P1,254,850 C. P1,256,850 B. P1,252,850 D. P1,248,850 4. What is the cash in bank balance per book as of December 31? A. P426,050 C. P430,050 B. P428,250 D. P343,050 5. What is the adjusted cash balance as of December 31? A. P343,000 C. P347,000 B. P340,200 D. P344,200 Page 88

1. Outstanding checks, December 31 (P49,400 – P1,400 – P8,000)

P40,000

Answer: D

Balance Nov. 30 Per bank statement P194,000

December Receipts Disbursements P1,487,000

P1,325,000

Balance Dec. 31 P356,000

Outstanding checks: Nov. 30

(23,000)

(23,000)

Dec. 31

40,000

(40,000)

Deposit in transit: Nov. 30

11,000

Dec. 31 Interest on note discounted (P90,000 x 6% 60/360)

(11,000) 24,000

24,000

900

900

NSF checks

(4,000)

(4,000)

Bank service charge

(300)

Cancellation of check no. 1434

1,400

300 (1,400)

Error in recording check no. 1562 (P7,500 – P750)

6,750

(6,750)

Cancellation of check no. 1584

8,000

(8,000)

Counter check drawn by president

(2,000)

2,000

Check of Chelsea charge in error

(3,000)

3,000

Post dated check presented for payment Per book balances

100,000

100,000

P182,000 P1,496,900 P1,248,850 P430,050

2. Book receipts in December

P1,496,900

Answer: A 3. Book disbursements in December

P1,248,850

Answer: D

4. Book balance on December 31

P430,050

Answer: C

5. Unadjusted balances

Book P430,050

Outstanding checks

Bank P356,000 (40,000)

Deposits in transit

24,000

Interest on note discounted

(900)

Bank service charge

(300)

Cancellation of check no. 1434

1,400

Error in recording check no. 1562

6,750

Cancellation of check no. 1584

8,000

Counter check

(2,000)

Check of Chelsea charged in error

3,000

Postdated check presented for payment(100,000) Adjusted balance

P343,000

P343,000

Answer: A Problem 1-39 Proof of Cash: Book to Bank Balances Format The following information was obtained in connection with the audit of PINKY COMPANY’s cash account as of December 31, 2010. Outstanding checks, 11/30/10

P16,250

Outstanding checks, 12/31/10

12,500

Deposit in transit, 11/30/10

12,500

Cash balance per general ledger 12/31/10

37,500

Actual company collections from its customers during December

152,500

Company checks paid by bank in December

130,000

Bank service charges recorded on company books in December

2,500

Bank service charges per December bank statement

3,250

Deposits credited by bank during December

145,000 Page 90

November bank service charges recorded on company books in December

1,500

The cash receipts book of December is underfooted by P2,500.

The bank erroneously charged the company’s account for a P3,750 check of another depositor. This bank error was corrected in January 2011.

1. How much is the deposit in transit on December 31, 2010? A. P5,000 C. P22,500 B. P20,000 D. P17,500 2. The total unrecorded bank service charges as of December 31, 2010 is A. P750 C. P1,750 B. P2,250 D. P4,250 3. What is the total book receipts in December? A. P150,000 C. P155,000 B. P152,500 D. P147,500 4. What is the total amount of company checks issued in December? A. P130,000 C. P133,750 B. P123,000 D. P126,250 5. What is the total book disbursements in December? A. P123,750 C. P133,750 B. P128,500 D. P126,750 6. What is the book balance on November 30, 2010? A. P16,250 C. P37,500 B. P21,250 D. P35,000 7. What is the bank balance on November 30, 2010? A. P23,000 C. P43,500 B. P18,500 D. P16,250 Page 91 8. What is the total bank receipts in December? A. P120,000 C. P145,000 B. P140,000 D. P150,000

9. What is the total bank disbursements in December? A. P154,500 C. P129,500 B. P132,500 D. P137,000 10. What is the bank balance on December 31, 2010? A. P21,500 C. P31,000 B. P26,500 D. P33,250

Solution 1-39 1. Deposit in transit, November 30

P12,500

Add: Company collections in December

152,500

Total

165,000

Less: Deposits credited by bank in December

145,000

Deposits in transit, December 31

P 20,000

Answer: B 2. Bank service charges per December bank statement

P3,250

Less: December bank service charges recorded on company books in December (P2,500 – P1,500)

1,000

Unrecorded December bank service charges

P2,250

Answer: B 3. Actual company collections in December Less: Underfooting of December cash receipts book Book receipts in December Answer: A

P152,500 2,500 P150,000 Page 92

4. Outstanding checks, December 31

P12,500

Add: Checks paid by bank in December

130,000

Total

142,500

Less: Outstanding checks, November 30

16,250

Checks issued in December

P126,250

Answer: D 5. Checks issued in December (see no. 4)

P126,250

Add: Bank service charges recorded in December Book disbursements in December

2,500 P128,750

Answer: D 6. Book balance, December 31

P 37,500

Add: Book disbursements in December (see no. 5)

128,750

Total

166,250

Less: Book receipts in December (see no. 3)

150,000

Book balance, November 30

P 16,250

Answer: A

Pinky Co. PROOF OF CASH For the Month of December 2010

Book balances

Balance Nov. 30

December Receipts Disbursements

P16,250

P150,000

P128,750

Balance Dec. 31 P37,500

Outstanding checks: Nov. 30

16,250

16,250

Dec. 31

(12,500)

12,500

Deposits in transit: Nov. 30 Dec. 31

(12,500)

12,500 (20,000)

(20,000)

Bank service charges: Nov. 30

(1,500)

(1,500) Page 93

Dec. 31

2,250

Underfooting of December book receipts

2,500

Erroneous bank charge in December Bank balances

P18,500

P145,000

(2,250) 2,500

3,750

(3,750

P137,000

P26,500

7. Bank balance, November 30, 2010

P18,500

Answer: B 8. Total bank receipts in December

P145,000

Answer: C 9. Total bank disbursements in December

P137,000

Answer: D 10. Bank balance, December 31

P26,500

Answer: B

Problem 1-40 Proof of Cash: Unadjusted to Adjusted Balances Format In your audit of HARRY INC.’s cash account as of December 31, 2010, you ascertain the following information: The bookkeeper’s bank reconciliation on November 30, 2010, is as follows: Balance per bank statement, November 30 Add: Deposits in transit

P24,298 3,648

Total

P27,946

Less: Outstanding checks No. 3408

P440

No. 3413

300

Page 94 No. 3414

6,820

No. 3416

3,924

No. 3417

800

Balance Add: Bank service charge for November Balance per general ledger, November 30

P12,284 P15,662 36* P15,698

*Entered in Check Register in December The Cash Receipts Journal shows total receipts for December of P371,766. The Check Register reflects total checks issued in December of P377,632. A collection of P5,912 was recorded on company books on December 31 but was not deposited until January 2, 2011. Your examination reveals the following additional information: 1.) Check no. 3413 dated November 24, 2010, was entered in the Check Register as P300. Your examination of the paid checks returned with the December bank statement reveals that the amount of this check is P30. 2.) Check no. 3417 was mutilated and returned by the payee. A replacement check (no. 3453) was issued. Both checks were entered in the Check Register but no entry was made to cancel check no. 3417. 3.) The December bank statement includes an erroneous charge of P480.

4.) On January 3, 2011, the bank informed your client that a December bank service charge of P42 was omitted from the statement. 5.) Your examination of the bank credit memo accompanying the December bank statement discloses that it represents proceeds from the note receivable collection in December for P4,000. Page 95 6.) The outstanding checks at December 31, 2010, are as follows: No. 3408 P440 No. 3418 P2,814 No. 3417 800 No. 3419 5,788

1. What is the total book disbursements for the month of December? A. P377,668 C. P377,632 B. P377,710 D. P377,596 2. What is the book balance at December 31? A. P9,832 C. P9,754 B. P9,868 D. P9,796 3. The outstanding checks at December 31 totaled A. P8,602 C. P9,042 B. P9,072 D. P9,842 4. What is the adjusted bank balance on November 30? A. P16,690 C. P16,804 B. P16,732 D. P16,774 5. The adjusted book receipts for the month of December should be A. P375,724 C. P371,238 B. P371,766 D. P375,766 6. The adjusted book disbursements for the month of December should A. P377,590 C. P377,674 B. P377,662 D. P377,632

7. What is the adjusted book balance on December 31? A. P14,824 C. P14,908 B. P14,866 D. P14,782 8. A proof of cash used by an auditor A. Provides that the client’s year-end balance of cash is fairly stated. B. Confirms that the client has properly separated the custody function from the recording unction with respect to cash. Page 96 C. Validates that the client’s bank did not make an error during the period being examined. D. Determines whether any unauthorized disbursements or unrecorded deposits were made for the given time period. Solution 1-10 1. Company checks issued in December Add: November bank service charge Total book disbursements in December

P377,632 36 P377,668

Answer: A 2. Book balance, November 30 Add: December book receipts Total Less: December book disbursements Book balance, December 31

P 15,698 371,766 387,464 377,668 P 9,796

Answer: D 3. Outstanding checks, December 31: Check no. 3408 3418 3419 Total Answer: C

P

440 2,814 5,788 P9,042

Balance Nov. 30 Book balances

December Balance Receipts Disbursements Dec. 31

P15,698

P371,766

P377,668

P

9,796

Bank service charges: November 30

(36)

(36)

December 31

42

Overstatement of Nov. disbursement (check #3413)

270

(42)

270 Page 97

Mutilated check (#3417)

800

Note collected by bank

800 4,000

Adj book balances

P16,732

Balance Nov. 30 Bank balances

P24,298

P375,766

4,000 P377,674

December Receipts Disbursements P375,502

P380,284

P14,824

Balance Dec. 31 P17,516

Deposits in transit: November 30

3,648

December 31

(3,648) 5,912

Erroneous bank charge Bank service charge

5,912 (480)

480

42

(42)

Outstanding checks: November 30

(11,214)

(11,214)

December 31 Adj. bank balances P16,732

9,042 P375,766

P377,674

(9,042) P14,824

4. Adjusted bank balance, November 30

P16,732

Answer: B 5. Adjusted book receipts in December

P375,766

Answer: D 6. Adjusted book disbursements in December

P377,674

Answer: C 7. Adjusted book balance, December 31

P14,824

Answer: A 8. A proof of cash usually consists of four columns, with reconciliation of beginning and end-of-period cash balances and reconciliations of cash receipts and disbursements during the period. The amounts appearing in the ledger and on bank statement should reconcile both horizontally and vertically. This reconciliation therefore detects unauthorized Page 98 disbursements and unrecorded deposits for the period. This is useful when internal control over cash transactions is weak or inadequate. Answer: D Problem 1-41 Proof of Cash: Unadjusted to Adjusted Balances Format The following data are assembled by the accountant of the HAROLD COMPANY: Nov. 30, 2010 Cash account balance

41,175.00

P100,712.50

267,705.00

344,542.50

Deposits in transit

20,502.50

32,200.00

Outstanding checks

69,295.00

75,280.00

1,800.00

1,500.00

Bank statement balance

Bank service charges NSF check *

P

Dec. 31, 2010

20,625.00

Company’s notes receivable collected by bank

179,537.50

202,250.00

*Redeposited in the same month. No entries made to take up the return and redeposit. The bank statement and the company’s cash records show the following totals: Canceled checks and debit memos per bank statement

P545,932.50

Cash receipts per cash book

411,592.50

Checks written per cash book

529,792.50

Deposits and credit memos per bank statement

622,770.00

1. What is the total book receipts in December? A. P613,842.50 C. P411,592.50 B. P591,130.00 D. P580,330.00 Page 99 2. What is the total book disbursements in December? A. P531,592.50 C. P533,092.50 B. P529,792.50 D. P531,292.50 3. What is the adjusted book balance on November 30? A. P220,712.50 C. P218,912.50 B. P222,512.50 D. P217,412.50 4. The adjusted bank receipts in December should be A. P634,168.50 C. P632,667.50 B. P622,770.00 D. P634,467.50 5. The adjusted book balance on December 31 shoueld be A. P545,932.50 C. P548,917.50 B. P552,517.50 D. P551,917.50 6. What is the adjusted book balance on December 31? A. P301,462.50 C. P322,087.50 B. P302,662.50 D. P280,537.50

Solution 1-41

1.

Cash receipts per cash book Add: Notes collected by bank in November Total book receipts in December

P411,592.50 179,537.50 P591,130.00

Answer: B 2. Checks written per cash book Add: Bank service charge in November Total book disbursements in December

P529,792.50 1,800.00 P531,592.50

Answer: A

Balance Nov. 30 Balance per Bank statement P267,705.00 Deposits in transit Nov. 30 20,502.50 Dec. 31 Outstanding checks Nov. 30 (69,295.00) Dec. 31 _________ Correct bank balance P218,912.50 Balance Nov. 30 Balance per Books P41,175.00 Bank service charges: November (1,800.00) December NSF check Collections of notes receivable: November 179,537.50 December _________ Correct book

December Receipts Disbursements

P622,770.00

Page 100 Balance Dec. 31

P545,932.50

P344,542.50

________

(69,295.00) _75,280.00

_(75,280.00)

P634,467.50

P551,917.50

P301,462.50

(20,502.50) 32,200.00

December Receipts Disbursements P591,130.00

P531,592.50

20,625.00

(1,800.00) 1,500.00 20,625.00

(179,537.50) 202,250.00

__________

Balance Dec. 31 P100,712.50 (1,500.00)

202,250.00

balance

4. 5. 6.

P218,912.50

P634,467.50

P551,917.50

Adjust book balance, November 30 Answer: C Adjust bank receipts in December Answer: D Adjusted book disbursements in December Answer: D Adjusted book balance, December 31 Answer: A

P301,462.50 P218,912.50 P634,467.50 P551,917.50 P301,462.50 Page 101

Problem 1-42 Proof of Cash: Book to Bank Balances Format The auditor of TSIKOY COMPANY gathered the following information: 1. The November 30 bank statement balance included bank service charges of P2,000 2. The November 30 cash balance in the general ledger was P244,500. 3. Outstanding checks on November 30 were P63,000 while undeposited receipts were P36,000. 4. The bank service charges as shown on the bank statement totalled P3,000. 5. The December 31 cash balance in the general ledger was P319,750, which recognized P482,750 for December receipts and P405,500 for checks written during December. In transit to the bank were receipts of P28,750. Checks of P15,000 written prior to December and checks of P60,500 written in December had not yet cleared the bank. 1. What A. B. 2. What A. B. 3. What A. B.

is the total book disbursements for December? P403,500 C. P407,500 P404,500 D. P405,500 is the November 30 bank balance? P271,500 C. P268,500 P269,500 D. P266,500 is the total bank receipts in December? P490,000 C. P497,250 P482,750 D. P488,000

4. What A. B. 5. What

is the total bank disbursements in December? P419,000 C. P408,500 P405,500 D. P396,000 is the bank balance on December 31?

Page 102

A. P316,750 B. P363,500

C. P322,750 D. P366,500

Solution 1-42 1. Checks written during December Add: November bank service charges recorded On company books in December Total book disbursements in December

P405,500 ___2,000 P407,500

Answer: C Balance Nov. 30 Balance per books P244,500 Undeposited receipts: Nov. 30 (36,000) Dec. 31 Outstanding checks: Nov. 30 63,000 Dec. 31 Bank service charges Nov. 30 (2,000) Dec. 31 ________ Balance per Bank P269,500

December Receipts Disbursements P482,750

P407,500

36,000 (28,750)

Balance Dec. 31 P319,750 (28,750)

63,000 (75,500)

75,500

________

(2,000) ___3,000

__(3,000)

P490,000

P396,000

P363,500_

2. Bank balance, November 30 Answer: B 3. Total bank receipt in December Answer: A 4. Total bank disbursements in December Answer: D 5. Bank balance, December 31 Answer: B

P269,500 P490,000 Page 103 P396,000 P363,500

Problem 1-43 Proof of Cash: Unadjusted to Adjusted Balances Format RODELIO CO. Has a current account in Pinoy Bank. Your audit of the company’s cash account reveals the following: 1. Balances taken from the company’s general ledger: Cash balance, Nov. 30, 2010 Cash balance, Dec. 31, 2010

P637,860 576,420

Receipts, Dec. 1-31, 2010 2. Balances taken from the December bank statement: Cash balance, Nov. 30, 2010 Cash balance, Dec. 31, 2010 Disbursements (debits)

306,220 P685,150 637,220 356,080

3. Outstanding checks, Nov. 30, 2010 (P26,140 was Paid by bank in December)

64,140

4. Checks written and recorded in December; not included in the checks returned with the December bank statement

36,080

5. Deposit in transit, Nov. 30, 2010

15,260

6. Deposit in transit, Dec. 31, 2010

16,140

7. A bank credit memo was issued in December to Correct an erroneous charge made in November 8. Note collected by bank in December (company was not informed of the collection)

1,500 Page 104 2,060

9. A check for P2,020 (payable to a supplier) was recorded in the check register in December as P3,000

980

10. A check for P2,240 was charged by the bank As P2,420 in December

180

11. Rodelio Co. 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

780

12. Bank service charge, Nov. 30, 2010 1. What is the total book disbursements in December? A. P367,660 C. P369,720 B. P244,780 D. P368,540 2. What is the total bank receipts in December? A. P260,160 C. P306,060

60

B. P308,120

D. P309,020

3. What is the total outstanding checks in December 31? A. P100,220 C. P62,220 B. P38,000 D. P72,080 4. What is the adjusted bank balance on November 30? A. P636,300 C. P637,800 B. P685,180 D. P634,800 Page 105 5. What is the adjusted book receipts in December? A. P307,500 C. P303,380 B. P306,220 D. P305,440 6. What is the adjusted bank disbursements in December? A. P353,980 C. P345,960 B. P365,840 D. P366,020 7. What is the adjusted book balance in December 31? A. P577,500 C. P576,420 B. P577,400 D. P579,460 Solution 1-43 1. Book balance, November 30 Add: Book receipts in December Total Less: Book disbursements in December (SQUEEZE) Book balance, December 31 Answer: A

P637,860 306,220 944,080

2. Bank balance, November 30 Add: Bank receipts in December (SQUEEZE) Total Less: Bank disbursements in December Bank balance, December 31 Answer: B

P685,180 308,120 993,300 356,080 P637,220

3. Checks issued prior to December (P64,140-P26,140) Checks issued in December Total outstanding checks, December 31 Answer: D Balance

December

367,660 P576,420

P38,000 36,080 P74,080 Page 106 Balance

Nov. 30 Balance per Books P637,860 Note collected By bank in December Overstatement of December book disbursement (P3,000-P2,020) Check stopped for Payment Bank service charge in November ____(60) Adj. book balances P637,800

Balance Nov. 30 Bank balances P685,180 Outstanding checks: November 30 (64,140) December 31 Deposits in transit: November 30 15,260 December 31 Erroneous bank charge in November 1,500 Overstatment of bank disbursement in December _______ Adj. bank Balances P637,800

Receipts P306,220

Disbursements P367,660

2,060

P576,420 2,060

(980) (780)

Dec. 31

980

(780)

________

____(60)

________

P307,500

P365,840

P579,460

December Receipts Disbursements P308,120

P356,080 (64,140) 74,080

(15,260) 16,140

Balance Dec. 31 P637,220

(74,080) 16,140

(1,500) ________ P307,500

_________(180) P365,840

____180 P579,460

4. Adjusted bank balance, November 30 Answer: C

P637,800

5. Adjusted book receipts in December Answer: A

P307,500 Page 107

6. Adjusted bank disbursements in December Answer: B

P365,840

7. Adjusted book balance, December 31 Answer: D

P579,460

Problem 1-44 Proof of Cash: Unadjusted to Adjusted Balances Format Data for the ANNABELLE, INC. are shown below: Cash account balance Bank statement balance Deposit in transit Outstanding checks Bank service charges for the month, not shown on company books NSF checks returned by bank, not shown on company books Bank collections from company customers, not shown on company books Additional information: 1. 2. 3. 4.

Nov. 30 P20,340 107,060 8,200 27,700

Dec. 31 P48,540 137,820 12,880 30,100

720

600

4,300

8,240

72,240

80,900

Deposits and credit memos per bank statement Canceled checks and debit memos per bank statement Cash receipts per cash book Checks written per cash book

P249,100 218,430 172,880 211,900

1. What is the total book receipts in December? A. P172,880 C. P253,780 B. P245,120 D. P181,540 Page 108 2. What is the total book disbursements in December? A. P211,900 C. P211,180 B. P216,200 D. P216,920 3. What is the adjusted cash balance on Novemer 30? A. P89,000 C. P71,160 B. P87,560 D. P96,160 4. What is the adjusted cash balance on December 31? A. P120,600 C. P137,080 B. P94,840 D. P155,040 5. What is the adjusted book receipts in December? A. P253,780 C. P244,420

B. P236,460

D. P270,180

6. What is the adjusted bank disbursements in December? A. P215,940 C. P248,440 B. P220,740 D. P204,260 Solution 1-44 1. Cash receipts per cash book Add: November bank collections Total book eceipts(debits)in December Answer: B

P172,880 72,240 P245,120

2. Checks written per cash book Add: Bank service charges in November P 720 NSF checks returned in November 4,300 Total book disbursements(credits) in December

P211,900 5,020 P216,920

Answer: D

Balance Nov. 30 Unadj. bank balances P20,340 Bank service charges: November 30 (720) December 31 NSF checks: November 30 (4,300) December 31 Bank collections: November 30 72,240 December 31 _______ Adj. bank Balances P87,560 Balance Nov. 30 Unadj. bank balances

P102,060

December Receipts Disbursements

Page 109 Balance Dec. 31

P245,120

P48,540

P216,920 (720) 600 (4,300) 8,240

(72,240) __80,900 P253,780

(8,240)

_____________

__80,900

P220,740

P120,600

December Receipts Disbursements P249,100

600

P218,340

Balance Dec. 31 P137,820

Deposits in Transit: November 30 8,200 December 31 Outstanding checks: November 30 (27,700) December 31 _______ Adj. bank Balances P87,560

(8,200) 12,880

12,880

________

(27,700) _______30,100

P253,780

P220,740

(30,100) P120,600

3. Adjusted cash balance, November 30 Answer: B

P87,560

4. Adjusted cash balance, December 31 Answer: A

P120,600

5. Adjusted book receipts in December Answer: A

P253,780

6. Adjusted bank disbursements in December Answer: B

P220,740 Page 110

Problem 1-45 Cash Shortage Computation The bookkeeper-cashier of the TANYING COMPANY absconded on the evening of April 16,2011, apparently with a large portion of the company’s cash. He had taken with him certain accounting records, including the cash journals and the general ledger. You are called upon to ascertain, if possible, the shortage with thick the missing employee may be charged. You obtained the following information from subsidiary journals, ledgers, and other data.

the

available

Balances at close of business, April 6, 2011: Accounts receivable Accounts payable Cash in bank, less checks outstanding

P442,550 201,300 98,830

Transactions, January 1-April 16,2011: Sales, per receivable clerk Cash sales

P5,876,170 none

Sales allowable in customers’ accounts 18,330 Cash purchase of furniture, per dealer’s invoice 3,000 Total merchandise purchases 3,615,260 Expenses paid, supported by paid invoices and payrolls 1,865,830 Cash dividend declared, P50,000 (of which, P10,000 remains unpaid) 40,000 Page 111 A check for P100,000 had been cashed by the bookkeeper shortly before his departure. Although the signature on the check had been obviously forged, it was paid by the bank and returned with other cancelled checks. A statement of financial position prepared from the books and other files follows: Tanying Company Statement of Financial Position December 31, 2010

ASSETS Cash Accounts receivable Inventory (at cost) Furniture Less: Accumulated depreciation Total Assets

P 32,670 226,230 440,350 P74,560 31,800

42,760 P742,010

LIABILITIES AND SHAREHOLDER’S EQUITY Accounts payable Capital stock Retained earnings Total Liabilities and shareholder’s equity

P114,720 500,000 127,290 P742,010

1. What is the total amount paid for merchandise purchases? A. P3,615,260 C. P3,522,680 B. P3,293,240 D. P3,707,840 2. What is the total amount of collections from sales? A. P5,641,520 C. P6,074,160 B. P5,659,850 D. P6,092,490

3. What is the total amount of cash disbursements from January 1April 1, 2011? A. P5,524,090 C. P5,431,510 B. P5,202,070 D. P6,092,490 Page 112 4. What is the cashier’s accountability (correct cash balance before shortage) on April 15, 2011? A. P242,680 C. P143,850 B. P98,830 D. P43,850 5. What is the amount of cash shortage chargeable against the cashier? A. P100,000 C. P143,850 B. P43,850 D. P242,680 Solution 1-45 1. Accounts payable, Dec. 31, 2010 Purchases Total Accounts payable, April 16, 2011 Payments for merchandise purchases Answer: C

P114,720 3,615,260 3,729,980 (207,300) P3,522,680

2. Accounts receivable, Dec. 31, 2010 Net sales(P5,876,170-P18,330) Total Accounts receivable, April 16,2011 Collections from sales Answer: A

P 226,230 5,857,840 6,084,070 442,550 P5,641,520

3. Payments for purchases Furniture Expenses Dividends Total cash disbursements

P3,522,680 3,000 1,865,830 40,000 P5,431,510

4. Cash balance, Dec. 31, 2010 Collections

P

Disbursements Cash balance, April 16,2011(accountability) Answer: A 5. Cash accountability Cash accounted Total shortage

32,670 5,641,520 Page 113 (5,431,510) P 242,680 P

242,680 (98,830) 143,850

Shortage chargeable against bank Shortage chargeable against the cashier Answer: B

(100,000) 43,850

P

Problem 1-46 Computation of Cash Shortage The JUNNEL COMPANY had weak internal controls over its cash transactions. Facts about its cash position at November 30,2010 Were as follows: The cash books showed a balnce of P94,508 which included undeposited receipts. A credit of P500 on the bank’s records did not appear on the books of the company. The balance per bank statement was P77,750. Outstanding checks were no. 8420 for P581, no. 8422 for P750, no. 8430 for P1,266, no. 8621 for P954, no. 8623 for P1,034 and no. 8632 for P726. The cashier stole all undeposited receipts in excess for P18,972 and prepared the following reconciliation: Balance per books, Nov.30,2010 Add: Outstanding checks 8621 P 954 8623 1,034 8632 726

P94,508

2,214 Page 114 96,722 18,972 77,750 500 P77,250

Less: Undeposited receipts Balance per bank, Nov. 30 Less: Unrecorded credit True cash, Nov. 30,2010 1. What deposit A. B.

is the correct amount of cash that should be hand for on November 30,2010? P23,069 C. P22,569 P18,972 D. P22,069

2. How much was stoln by the cashier? A. P3,597 B. P3,097

C. P4,097 D. P0

3. The cashier attempted to conceal his theft by I. Not listing all outstanding checks II. Underfooting outstanding checks shown on the reconciliation.

III. Adding an item to the bank balance that should be deducted from the book balance A. I and II only C. I and III only B. II and III only D. I, II and III 4. Taking only the information given, which of the following internal control deficiencies allowed the cashier to steal cash and conceal his theft? A. The cashier is also responsible for preparing the reconciliation B. No one othe rhtan the cashier is responsible for preparing the reconciliation to the deposits in the bank. C. Both A and B. D. Neither A and B 5. What is the adjusted cash balance as og November 30,2010? A. P95,008 C. P94,008 B. P91,411 D. P87,814 Page 115 Solution 1-46 1.

Cash balance per books, Nov. 30 Add: Bank Credit Adjusted cash balance (on hand and in bank) Less: Adjusted bank balance: Bank balance, Nov. 30 P77,750 Less: Outstanding checks No.8420 P 581 8422 750 8430 1,266 8621 954 8623 1,034 8632 726 5,311 Cash that should be on hand for deposit Answer: C 2. Cash that should be on hand for deposit (see no. 1) Cash reported Amount of theft Answer: A 3. The cashier attempted to conceal his theft by: 1. Not listing all outstanding checks. 2. Underfooting outstanding checks shown on the reconciliation.

P94,508 500 95,008

72,439 P22,569

P22,569 18,972 P3,597

3. Subtracting an item from the bank balance that should be added to book balance. Answer: A 4. The following internal control deficiencies are noticeable: 1. The cashier is also responsible for preparing the cash reconciliation. Page 116 2. No one other than the cashier is responsible for tracing cash receipts to the deposits in the bank. Answer: C 5. Unadjusted balances Unrecorded credit Outstanding checks Undeposited receipts Corrected balances Cash shortage(amount of theft) Adjusted cash balances Answer: B

Book P94,508 500 _______ 95,008 (3,597) P91,411_

Bank P77,750 (5,311) 18,972 91,411 ______ P91,411

Problem 1-47 Computation of Cash Shortage Presented below is the cash receipts book of APPL, INC.: CASH RECEIPTS BOOK June 1-20,2010 Date June 1 Cash Sales 10 BA 15 BO 20 BE 20 Cash Sales 25 BU 26 BO

Accounts Receivable

Cash Sales P 800

P 3,200 6,000 4,800

Sales Discount P 64 120 96

P2,400 10,800 4,000

216

Net Cash P 800 P3,136 5,880 4,664 2,400 10,504 4,000

26 BE 30 BO 30 BA

12,000 3,600 800 P45,200

_____

240 3,600 _______

11,680

P936

P47,464

P3,200

800

Page 117 The following are the company’s accounts receivable subsidiary ledgers. All the debits represent sales. The credit terms are 2%10days, net 30 days. BA June 3 3,200 4 4,800

BO June 10 3,200 30 800

BU June 2 6,000 10 4,800

June 25 10,800

June 2 6,000 9 4,000 15 3,600

June 15 6,000 26 4,000 30 3,600

BE June 15 4,800 16 12,000

June 20 4,800 26 12,000

1. What is the correct amount of cash receipts in June? A. P47,800 C. P48,000 B. P47,600 D. P47,664 2. What is the cash shortage on June 30? A. P336 C. P200 B. P 0 D. P536 Solution 1-47 1. Cash receipts per book Understatemet of cash receipts by: Recording sales discounts for collections made beyond the discount period: June 15 P120 June 25 216 Overfooting the sales discounts column (P936-P736) Cash receipts as corrected

P47,464

336 200 P48,000

Page 118 *To balance, the following extensions to the “Cash” column are understated: Correct Amount Amount Extended Understatement

June 20(P4,800-P96) June 25(P10,800-P216) June 26(P12,000-P240) Total Answer: C

P4,704 10,584 11,760

P4,664 10,504 11,680

P 40 80 80 P200

2. Cash receipts as corrected Cash receipts per book Cash shortage,June 30 Answer: D

P48,000 47,464 P 536

Problem 1-48 Computation of Cash Shortage You star5ted the audit of the financial statements of ARCHIE, INC. on January 15,2011 for the year ended December 31,2010. The general ledger shows cash account balance of P247,200 as at December 31,2010. The following items are included in reconciliation prepared by the cashier:

the

December

Cash per records, December 31,2010 Cash per bank statement, Dec. 31,2010 Outstanding checks Check of Tsikoy Co., charged bank in error on Dec. 28,2010; corrected by bank on January 2,2011 Deposit in transit

31,2010,

P247,200 264,095 25,325

750 3,500 Page 119 From January 2,2011, to January 15,2011, the date of your cash count, total cash receipts appearing in the cash records amounted to P53,500. During the same period, the bank had credited total deposits of P47,965. The following cash and cash items were on hand at the close of business on January 15,2011: Currency Customer’s check Expense vouchers

P1,425 1,950 375

Your further investigation revealed the following: a. Cash received on account from customers: DATE AMOUNT ENTRY MADE 07/05/10 P4,000 Allowance for bad debts Accounts receivable 12/10/10 P3,000 Inventory

4,000 4,000 3,000

12/15/10

P3,500

Accounts receivable Not recorded

3,000

b. Unrecorded but deposited checks received from customer from January 2,2011 to January 15,2011 totaled P2,000 c. The cashier presented receipts for collections from customers on January 10,2011 totalling P4,500; these were unrecorded and undeposited. 1. What adjusting entries would you provide for items (a) through (c)? 2. What is the total cash shortage as of December 31, 2010? A. P21,180 C. P14,680 B. P16,180 D. P4,180 3. What is the total cash shortage as of January 15, 2011? A. P26,465 C. P27,965 B. P18,430 D. P24,930 Page 120 Solution 1-48 1. ADJUSTING JOURNAL ENTRIES: a. 1. Cash 4,000 Allowance for bad debts 2. Cash 3,000 Inventory 3. Cash 3,500 Accounts receivable b. 4. Cash 2,000 Accounts receivable c. 5. Cash 4,500 Accounts receivable 2. Unadjusted balances Outstanding checks Bank error Deposit in transit AJE 1 2 3 Corrected balances SHORTAGE as of Dec. 31, 2010

Book P247,200

4,000 3,000 3,500 P257,700 (14,680)

4,000 3,000 3,500 2,000 4,500 Bank P264,095 (25,325) 750 3,500 _____ P243,020 _____

Adjusted balances

P243,020_

P243,020

3. Deposit in transit, Dec. 30, 2010 Add: Company collections, Jan.2-15,2011

P 3,500 Page 121

Per records P53,500 AJE 4 P2,000 5 4,500 6,500 Total Less: Deposits credited by bank, Jan.2-15,2011 Deposit in transit, Jan.15,2011 Cash and cash items per count on Jan.15,2011 Cash shortage, Jan.2-15,2011 Add: Cash shortage as of Dec. 31,2010 Total shortage as of January 15,2011 Answer: A

60,000 63,500 47,965 15,535 (3,750) P11,785 14,680 P26,465

Problem 1-49 Computation of Cash Shortage The LEINOR COMPANY does not have adequate controls over its cash transactions. During an adult, you found the following date connecting its cash position at December 31,2010. 1. On the company’s records the cash balance is P173,500 2. A credit of P2,500 for a note collected by the bank does not appear on the company’s records. 3. The bank statement balance is P135,000 4. Outstanding checks are as follows: Number Amount 1428 P5,200 1431 3,600 1445 4,080 1446 3,460 The cashier made the following reconciliation: Balance per bank statement Deduct: Outstanding checks:

P135,000 Page 122

No. 1431 1445 1446 Add: Undeposited collections

P3,600 4,080 3,460

10,140 P124,500

(per count) Collected note Cash per books, December 31,2010

P46,140 2,500

48,640 P173,500

1. What is the total shortage? A. P11,200 C. P5,000 B. P8,700 D. P6,000 2. How did the cashier attempt to conceal the shortage? Solution 1-49 1. Unadjusted balances Note collected by the bank Outstanding checks Undeposited collections Corrected balances SHORTAGE Adjusted Balances Answer: A

Book P173,500 2,500 ________ P176,000 (11,200) P164,800

Bank P135,000 (16,340) 46,140 P164,800 ________ P164,800

2. Concealment of shortage: Omission of outstanding check no. 1428 Underfooting of outstanding checks in Reconciliation(P11,140-P10,140) Adding(instead of deducting) the unrecorded Note collected by the bank Total shortage

P5,200 1,000 5,000 P11,200 Page 123

Problem 1-50 Computation of Cash Shortage The following table summarizes the cash receipts and disbursements of LOI COMPANY for the last six months of 2010: Month July August September October November December Additional information:

Receipts P102,000 70,000 120,000 172,000 260,000 280,000 P964,000

Disbursements P 60,000 110,000 68,000 92,000 122,000 180,000 P668,000

1. Bank balance, July 1, 2010 2. Bank balance, December 31,2010 3. Outstanding checks, December 31,2010 (No checks were outstanding on July 1) 4. Undeposited receipts, December 31,2010 (Included in the December receipts) 5. Bank deposits, July 1 through December 31

P200,000 524,000 42,000 24,000 914,000

1. What is the total shortage? A. P 0 C. P30,000 B. P76,000 D. P66,000 Solution 1-50 Book balance, July 1 (see note 1) P 200,000 Add: Total book receipts as corrected (see note 2) 1,004,000

Total Less: Total book disbursements as corrected Corrected book balance, December 31 Bank balance, December 31 Add: Undeposited receipts Total Less: Outstanding checks Adjusted bank balance Corrected book (accountability) Cash shortage Answer: D

Page 124 1,204,000 632,000 P 572,000 P 524,000 24,000 548,000 42,000 506,000 (572,000) P (66,000)

NOTES: 1. Because there were no book and bank reconciling items on July 1, the bank balance on that date was also the cash balance per books. 2. The receipts column of the table of cash receipts and disbursements is underfooted by P40,000 (P1,004,000 correct totalP964,000) while the disbursements column is overfooted by P36,000 (P668,000-P632,000 correct total) Problem 1-51 Computation of Cash Shortage

In connection with the audit of the financial statements of JEM COMPANY for the year ended October 31,2010, you conducted a surprise count of undeposited receipts on October 31,2010. It was witnessed by the company’s cashier whose accountability on October31 was determined to be P80,000. You count revealed the following: Currency and coins Unused postage stamps

P48,840 440 Page 125

Checks: Date Payee Maker 1-22 Cash Cashier 10-19 Jem Company DWU, Inc. 10-28 Jem Company PSU Co. 10-31 CCP Co. Jem Company Office supplies paid out of receipts Total per count

4,000 9,400 7,840 3,600 6,400 P80,520

1. What is the cash shortage on October 31,2010? A. P7,080 C. P3,080 B. P3,480 D. P7,600 2. A cash shortage may be concealed by transporting funds from one location to another or by converting negotiable assets to cash. Because of this, which of the following is vital? A. Simultaneous confirmations B. Simultaneous bank reconciliations C. Simultaneous verification D. Simultaneous surprise cash count Solution 1-51 1. Cashier’s accountability Accounted for as follows: Total per count Less: Cashier’s stale check Unreleased Disbursement check Cash shortage Answer: A

P80,000 P80,520 P4,000 3,600

7,600

72,920 P7,080

2. Simultaneous verification Answer: C Page 126

Problem 1-52 Computation of Working Capital and Current Ratio KAMP COMPANY’s unadjusted trial included the following accounts:

balance

at

Debit P 69,200 102,650 947,160

Cash Accounts receivable Merchandise inventory Accounts payable Accrued expenses

December

31,2010,

Credit

P789,715 13,214

Jam Co.’s year end December 31. At the end of 2010, it held is cash book open so that its statement of financial position would show a more favourable financial condition. You audit revealed the following items: 1. The December cash book included January cash receipts of P65,460, of which P36,010 represents cash sales and P29,450 represents collections from customers, net of 5% cash discounts. 2. The December check register included payments if accounts to suppliers of P37,240 on which discounts of P1,240 were taken. 3. The merchandise inventory account balance was determined by physical count on December 31, 2010. 1. What are Jam’s working capital and current ratio at December 31,2010, based on balances per company books? Page 127 A. B. C. D.

Working Capital P244,381 278,831 330,835 280,381

Current Ratio 1.29 0.33 1.40 1.33

Solution 1-52 ADJUSTING JOURNAL ENTRIES December 31,2010 a. Accounts receivable (P29,450/95%)

31,000

Sales Cash Sales discounts(P31,000x5%) b. Cash Purchase discounts Accounts payable

36,000 65,460 1,550 36,000 1,240 32,240

COMPUTATION OF WORKING CAPITAL AND CURRENT RATIO Per Books Current assets: Cash(P69,200-P65,460+P36,000) P69,200 Accounts receivable (P102,650+P31,000) 102,650 Merchandise inventory 947,160 Total P1,119,010 Current liabilities: Accounts payable (P789,650+P37,240) Accrued expenses Total

P789,715 13,214 P802,929

Per Audit P 39,740 133,650 947,160 P1,120,550

P826,955 13,214 P840,169 Page 128

Working Capital (CA-CL) Current ratio (CA/CL)

P316,081 1.39

P280,381 1.33

1. Answer: B 2. Answer: D Problem 1-53 Computation of Cash Shortage FE COMPANY, organized March1,2010, has a very poor internal control system. The company’s cashier is also its accountant. After 9 months of operations, the company’s manager suspects that the cashier accountant has been misappropriating company collections. You have been engaged to audit the company’s accounts to determine the extent of fraud, if any. You started the audit on November 15. On that date the on hand per your surprise count was P5,140. Also on that date, the bank confirmed that the balance of the company’s current account was P26,328. Your examination of the records reveals that a check for

P1,852 was outstanding on November 15. The company’s mark up is 40% of sales. Further examination of the company’s records reveals the following balances at November 15,2010: Ordinary share capital Share premium Real property purchased for cash Mortgage payable Furniture and fixtures(of the Acquisition cost,P6,000 remains Unpaid as of Nov. 15) Notes payable-bank Accounts payable-trade Expenses paid(excluding purchases)

P300,000 20,000 200,000 80,000 29,000 32,000 46,284 60,756

Page 129 Merchandise inventory at cost Accounts receivable-trade Total sales

93,920 85,380 340,000

1. How much was paid for inventory purchases? A. P157,716 C. P183,636 B. P293,716 D. P251,636 2. How much was collected from customers? A. P118,620 C. P50,620 B. P254,620 D. P340,000 3. How much is the cashier’s accountability at November 15,2010? A. P131,228 C. P145,228 B. P83,228 D. P151,228 4. What is the adjusted bank balance as of November 15,2010? A. P31,468 C. P29,616 B. P26,328 D. P23,040 5. The cash shortage as of November 15,2010 totaled A. P121,612 C. P127,612 B. P101,612 D. P206,992 Solution 1-53

1. Cost of sales(P340,000 total sales x 60%) Add: Merchandise inventory, November 15 Purchases Less: Accounts payable-trade, November15 Payments for purchases Answer: D

P204,000 93,920 297,920 46,284 P251,636 Page 130

2. Sales Less: Accounts receivable-trade, November 15 Collections from sales Answer: B 3. Cashier’s Accountability Receipts: Issuance of ordinary shares (P300,000+P20,000) Mortgage payable Note payable-bank Collections from sales(see no.2) Total Disbursements: Real property 200,000 Furniture and fixtures (P29,000-P6,000) 23,000 Expenses 60,756 Purchases(see no.1) 251,636 Cash balance Answer: D 4. Bank balance, Nov. 15 Add: Undeposited collections Total Less: Outstanding check Adjusted bank balance, Nov.15 Answer: C 5. Cashier’s accountability(see no.3) Cash accounted(see no.4) Cash shortage as of Nov. 15,2010 Answer: A

P340,000 85,380 P254,620

P320,000 80,000 32,000 254,620 686,620

535,392 P151,228 P26,328 5,140 31,468 1,852 P29,616 P151,228 (29,616) P121,612 Page 131

Problem 1-54 Computation of Cash Shortage

Your client, a successful small business, has given much attention to a sound internal control. In its employ is Alex Coopit, the company’s cashier-bookkeeper. Alex handles cash receipts, makes small disbursements from the cash receipts, maintains accounting records and prepares the monthly bank reconciliation. The bank statement for the month ended March 31,2010, shows a cash balance of P590,000. The following checks are outstanding on March 31: No. No. No. No. No. No.

7163 7284 7285 8722 8724 8733

P8,623 7,320 10,612 6,322 12,280 6,200

The bank company’s general ledger shows a cash balance of {696,499 on March 31,2010. Realizing that being the cashier-accountant of the company he can easily misappropriate collections and conceal it, Alex removed all the cash on hand in excess of P127,301 and then prepared the following reconciliation in an effort to conceal this theft. BANK RECONCILIATION Balance per accounting records Add: Outstanding checks No. 8722 P6,322 No. 8724 12,280 No. 8733 6,200 Total Deduct: Cash on Hand Balance per bank statement, March 31

P696,499

20,802 717,301 127,301 P690,000 Page 132

1. How much was taken by the cashier-accountant? A. P30,555 C. P4,000 B. P157,856 D. P26,555 2. What is the amount of cash that should be on hand at November 15,2010? A. P127,301 C. P157,856 B. P131,301 D. P30,555

Solution 1-54 1. Unadjusted balances Outstanding checks No. 7163 No. 7284 No. 7285 No. 8722 No. 8724 No. 8733 Undeposited collections Corrected balances CASH SHORTAGE Adjusted balances

Book P696,499 P8,623 7,320 10,612 6,322 12,280 6,200 P696,499 (30,555) P665,944

Bank P590,000

(51,357) 127,301 P665,944 P665,944

Answer: A Cash on hand Add: Cash shortage (see no. 1) Cash that should be on hand, Nov. 15 Answer: C

P127,301 30,555 P157,856