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CHAPTER 1 - Accounting Process &

Working Paper Preparation


Exercises: Indicate your answer by encircling the letter that contains your choice in each
of the following questions.

1. One is using periodic inventory system. For the year, its total purchases amounted to
P250,000. Its unsold merchandise at the end of the year has a cost of P5,000 which is
80% of its beginning inventory. One’s cost of sale is
a. P 250,000 b. P 251,250 c. P 249,000 d. P 248,750

2. Two’s purchase per purchase invoice is P150,000. The purchase discount is 2/10, n/30.
Freight is P500, FOB shipping point collect. The net purchase amounts under net
method is
a. P P147,000 b. P 147,500 c. P 148,500 d. P 150,500

3. Using the information in Item 2, the amount paid by the buyer is


a. P P147,000 b. P 147,500 c. P 148,500 d. P 150,500

4. The purchase invoice shows the amount of P250,000, 2/10, 1/20, n/30; FOB destination
collect, P200. If the account is paid 15 days after the invoice date, the net payment
should be
a. P 245,000 b. P 247,500 c. P 247,300 d. P 244,800

5. Using the information in Item 4, the net purchase is


a. P 245,000 b. P 247,500 c. P 247,300 d. P 244,800

6. Three purchased merchandise for P5,000 and paid P200 for freight, FOB destination
collect. The merchandise was sold at 120% of cost. The gross profit is
a. P 1,000 b. P 1,040 c. P 6,000 d. P 6,240

7. The total purchase is P1,176, net of 2% cash discount. Unsold portion of purchase is
P176. The sale is at mark-up of 10%. The gross profit is
a. P 117.60 b. P 88.24 c. P 115.25 d. P 100.00

8. The term of a P300,000 purchase is 2/20, n/60, FOB shipping point prepaid, P300. If
the account is paid on the 25th day from the invoice date, the total payment would be
a. P 294,000 b. P 299,700 c. P 294,300 d. P 300,300

9. Four paid freight for P200 on its purchase on account from Five, FOB shipping point. The
journal entry in both books of Four and Five would be
Books of Four Books of Five
a. Freight-out 200 Freight-in 200
Cash 200 Accounts payable 200
b. Freight-in 200 No entry
Accounts receivable 200
c. Freight-in 200 No entry
Cash 200
d. Freight-in 200 Freight-out 200
Cash 200 Accounts receivable 200

1
10. Six sold merchandise at list price of P250,000; 10; 5; n/30. Part of the sale amounting
to P10,000 was returned due to defect. The amount to be collected by Six is
a. P 205,200 b. P 203,750 c. P 204,000 d. P 195,200

11. Amar Company received P96,000 on April 1, 2002 for one year’s rent in advance and
recorded the transaction with a credit to a nominal account. The December 31, 2002
adjusting entry is
a. Debit rent revenue and credit unearned rent revenue, P24,000.
b. Debit rent revenue and credit unearned rent revenue, P72,000.
c. Debit unearned rent revenue and credit rent revenue, P24,000.
d. Debit unearned rent revenue and credit rent revenue, P72,000.

12. Andoy Company paid P72,000 on June 1, 2002 for a two-year insurance policy and
recorded the entire amount as insurance expense. The December 31, 2002 adjusting
entry is
a. Debit insurance expense and credit prepaid insurance, P21,000.
b. Debit insurance expense and credit prepaid insurance, P51,000.
c. Debit prepaid insurance and credit insurance expense, P21,000.
d. Debit prepaid insurance and credit insurance expense, P51,000.

13. Antipuesto Company purchase equipment on November 1, 2002 and gave a 12-month,
9% note with a face value of P480,000. The December 31, 2002 adjusting entry is
a. Debit interest expense and credit interest payable, P7,200.
b. Debit interest expense and credit interest payable, P10,800.
c. Debit interest expense and credit cash, P7,200.
d. Debit interest expense and credit interest payable, P43,200.

14. On December 31, 2002, Asilo Company’s bookkeeper made an adjusting entry debiting
supplies expense and credit supplies inventory for P12,600. The supplies inventory
accounts had a P15,300 debit balance on December 31, 2001. The December 31, 2002
balance sheet showed supplies inventory of P11,400. Only one purchase of supplies was
made during the month, on account. The entry for that purchase was
a. Debit supplies inventory and credit cash, P8,700.
b. Debit supplies expense and credit accounts payable, P8,700.
c. Debit supplies inventory and credit accounts payable, P8,700.
d. Debit supplies inventory and credit accounts payable, P16,500.

15. Astillo Company loaned P300,000 to another company on December 1, 2002 and
received a 3-month, 15%, interest-bearing note with a face value of P300,000. What
adjusting entry should Astillo Company make on December 31, 2002?
a. Debit interest receivable and credit interest income, P7,500.
b. Debit cash and credit interest income, P3,750.
c. Debit interest receivable and credit interest income, P3,750.
d. Debit cash and credit interest receivable, P7,500.
.
16. The supplies inventory account balance at the beginning of the period was P66,000.
Supplies totaling P128,250 were purchased during the period and debited to supplies
inventory. A physical count shows P38,250 of supplies inventory at the end of the
period. The year-end adjusting entry is
a. Debit supplies inventory and credit supplies expense, P90,000.
b. Debit supplies expense and credit supplies inventory, P128,250.
c. Debit supplies inventory and credit supplies expense, P156,000.
d. Debit supplies expense and credit supplies inventory, P156,000.

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17. At the end of 2002, Avila Company made four adjusting entries for the following items:
(1) depreciation expense, P35,000; (2) expired insurance, P2,200 (originally recorded as
prepaid insurance); (3) interest payable, P9,000; and (4) rental revenue receivable,
P10,000.

In the normal situation, to facilitate subsequent entries, the adjusting entry or entries
that may be reversed is/are
a. Entry 1 c. Entries 3 and 4
b. Entry 4 d. Entries 2, 3, and 4

18. Bagaipo Company reported an allowance for doubtful accounts of P12,000 (credit) at
December 31, 2002 before performing an aging of accounts receivable. As a result of
the aging, Bagaipo Company determined that an estimated P20,000 of the December
31, 2002 accounts receivable would prove uncollectible. The adjusting entry at
December 31, 2002 would be
a. Doubtful accounts expense 8,000
Allowance for doubtful accounts 8,000
b. Doubtful accounts expense 20,000
Accounts receivable 20,000
c. Allowance for doubtful accounts 8,000
Doubtful accounts expense 8,000
d. Doubtful accounts expense 8,000
Interest revenue 8,000

19. Assuming that the company does not reverse the adjusting entries, what should be
made on April 1, 200 when the annual interest payment is received?
a. Debit cash and credit interest revenue, P9,375.
b. Debit cash and credit interest receivable, P28,125.
c. Debit cash, P37,500; credit interest receivable, P28,125; and interest revenue,
P9,375.
d. Debit cash and credit interest revenue, P37,500.

20. Using the data of No. 19, but assuming that the company does reverse its adjusting
entries, what entry should be made on April 1, 2003 when the annual interest payment
is received?
a. Debit cash and credit interest revenue, P9,375.
b. Debit cash and credit interest receivable, P28,125.
c. Debit cash, P37,500; credit interest receivable, P28,125; and interest revenue,
P9,375.
d. Debit cash and credit interest revenue, P37,500.

Answer:
1. b 2. b 3. a 4. c 5. b 6. a 7. d 8. d 9. c 10. a
11.a 12.d 13.a 14.c 15.c 16.d 17.c 18.a 19.c 20.d

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Problem 1
The following is the post-closing trial balance of Abagon Shop dated February 1, 2006:

Debit Credit
Cash 120,000
Accounts Receivable 280,000
Allowance for doubtful accounts 2,800
Unused shop supplies 800
Shop Equipment 240,000
Accumulated depreciation - shop 48,000
equipment
Accounts payable 88,800
Notes payable 100,000
Accrued interest payable 1,200
Abagon, Capital 400,000
Total 640,800 640,800

For the month of February, the following are the transactions of Abagon Shop.

1. Abagon withdrew P100,000 cash from the business for her personal use.
2. Paid P12,000 insurance premium.
3. Paid P24,000 rent.
4. Total service rendered to various customers, P140,000, 40% of total sales are on cash
basis and the balance on open account.
5. Received promissory note from customer to replace P40,000 accounts receivable.
6. Collected in cash P164,000 of accounts receivable.
7. Paid the notes payable of P100,000 plus the P2,400 interest.
8. Purchased P2,400 shop supplies on cash basis.
9. Paid salaries, P24,000.

At the end of the month, the following information are available to effect adjustments.

a. The insurance in number 2 for P12,000 is applicable for six months starting February.
b. The rent of P24,000 paid in number 3 is for 3 months, starting February.
c. The note receivable is number 5 is earning 12% interest per year. The note is dated
February 1, and is due on April 30.
d. Bad debts expense is estimated at 2% of accounts receivable balance.
e. The annual depreciation is P48,000.
f. The unused supplies balance is P1,000.

Questions
1. Cash at end of February is:
a. P 103,200 b. P 85,200 c. P 75,200 d. P 72,800

2. Net Realizable value of Accounts Receivable at end of February is


a. P 156,800 b. P 157,200 c. P 196,800 d. P 197,200

3. Unused shop supplies at end of February is


a. P 1,800 b. P 1,000 c. P 800 d. P 200

4. Net book value of Shop Equipment at end of February is


a. P 188,000 b. P 189,000 c. P 184,000 d. P 144,000

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5. Accounts Payable at end of February is
a. P 128,800 b. P 88,800 c. P 86,400 d. P 48,800

6. Notes Payable at end of February is


a. P 100,000 b. P 102,400 c. P 97,600 d. P 0

7. Abagon Capital, net of drawing at end of February is


a. P 398,600 b. P 397,400 c. P 397,800 d. P 388,600
8. Net income of the company at end of February is
a. P 98,600 b. P 97,400 c. P 97,800 d. P 88,600

9. Total Revenue of the company at end of February is


a. P 142,800 b. P 142,400 c. P 140,400 d. P 140,000

10. Total Expenses of the Company at end of February is


a. P 52,600 b. P 41,800 c. P 41,400 d. P 41,000

Solution
1 Abagon, drawing 100,000
Cash 100,000
2 Insurance expense 12,000
Cash 12,000
3 Rent expense 24,000
Cash 24,000
4 Cash 56,000
Accounts receivable 84,000
Revenue 140,000
5 Notes receivable 40,000
Accounts receivable 40,000
6 Cash 164,000
Accounts receivable 164,000
7 Notes payable 100,000
Interest expense 2,400
Cash 102,400
8 Supplies expense 2,400
Cash 2,400
9 Salaries 24,000
Cash 24,000

Adjusting Entry:

a Prepaid Insurance 10,000


Insurance expense 10,000
b Prepaid rent 16,000
Rent expense 16,000
c Interest receivable 400
Interest income 400
(P40,000 x 12% x 1/12)
d Bad debts 400
Allowance for bad debts 400
e Depreciation 4,000
Accum. depreciation 4,000
f Unused supplies 1,000
Supplies expense 1,000
Supplies expense 800
Unused supplies 800
g Accrued interest payable 1,200
Interest expense 1,200
To reverse the beg. accrued interest
payable

5
TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET

75,20
CASH 0 75,200
ACCNTS RECEIV 160,000 160,000
ALLOW. FOR BD 2,800 400 3,200
NOTES RECEIV 40,000 40,000
UNUSED SUPPLIES 800 1,000 800 1,000
SHOP EQUIPMENT 240,000 240,000
ACCUM. DEPN 48,000 4,000 52,000
ACCOUNTS PAY 88,800 88,800
NOTES PAYABLE - -
ACC. INT. PAY 1,200 1,200 -
ABAGON, DRAWING 100,000 100,000
ABAGON, CAPITAL 400,000 400,000
REVENUE 140,000 140,000
INSURANCE EXP 12,000 10,000 2,000
RENT EXPENSE 24,000 16,000 8,000
SUPPLIES EXP 2,400 800 1,000 2,200
SALARIES 24,000 24,000
INTEREST EXP 2,400 _______ 1,200 1,200
680,800 680,800
PREPAID INS 10,000 10,000
PREPAID RENT 16,000 16,000
INTEREST RECEI 400 400
INTEREST INC 400 400
BAD DEBTS 400 400
DEPRECIATION 4,000 _______ 4,000 ________
33,800 33,800 41,800 140,400
NET INCOME 98,600 ________ _______ 98,600
140,400 140,400 642,600 642,600

Answer:
1. C 2. A 3. B 4. A 5. B 5. D 8. A 9. A 9. C 10. B

Problem 2
The following selected transactions were completed during Year 1 of operations by Vicar
Corporation:

a. Sold of its 20,000 shares of its own common stock, par P1 per share, for P15 per
share and received cash in full.

b. Borrowed P100,000 cash on 12%, one-year note, interest payable at maturity on


April 30, Year 2.

c. Purchased equipment for use in operating the business at a net cash cost of
P164,000; paid in full.

d. Purchased merchandise for resale at cash cost of P140,000; paid cash. Assume a
periodic inventory system; therefore, debit Purchases.

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e. Purchased merchandise for resale on credit terms of 2/10, n/60. The merchandise
will cost P9,800 if paid within 10 days; after 10 days, the payment will be P10,000. The
company always takes the discount; therefore, such purchased are recorded at net of
the discount.

f. Sold merchandise for P180,000; collected P165,000 cash, and the balance is due in
one month.

g. Paid P30,000 cash for operating expenses.

h. Paid ¾ of the balance for the merchandise purchased in (e) within 10 days; the
balance remains unpaid.

i. Collected 50% of the balance due on the sale in (f); the remaining balance is
uncollected.

j. Paid cash for an insurance premium, P600; the premium was for two years’ coverage
(debit Prepaid insurance).

k. Purchased a tract of land for a future building for company operations, P63,000 cash.

l. Paid damages to a customer who was injured on the company premises, P10,000
cash.

Questions
Using the unadjusted trial balance, answer the following:

1. Cash balance is:


a. P 157,550 b. P 157,400 c. P 157,250 d. P 149,900

2. Accounts receivable balance is:


a. P 15,000 b. P 10,000 c. P 7,700 d. P 7,500

3. Prepaid insurance balance is:


a. P 600 b. P 400 c. P 300 d. P 200

4. Land account balance is:


a. P 227,000 b. P 164,000 c. P 101,000 d. P 63,000

5. Equipment account balance is:


a. P 227,000 b. P 164,000 c. P 101,000 d. P 63,000

6. Accounts payable balance is:


a. P 2,650 b. P 2,500 c. P 2,450 d. P 2,150

7. Notes payable balance is:


a. P 112,000 b. P 109,000 c. P 100,000 d. P 88,000

8. Common stock balance is:


a. P 300,000 b. P 280,000 c. P 200,000 d. P 20,000

1. Premium on capital stock balance is:


a. P 300,000 b. P 280,000 c. P 200,000 d. P 20,000

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2. Sales balance is:
a. P 180,000 b. P 160,000 c. P 100,000 d. P 80,000
3. Purchases balance is:
a. P 149,800 b. P 149,600 c. P 150,000 d. P 150,200

4. Operating expenses and other expenses is:


a. P 49,800 b. P 40,200 c. P 40,000 d. P 38,800
Solution

(a) Cash 300,000


Common stock 20,000
Premium on capital stock 280,000
(b) Cash 100,000
Notes payable 100,000
(c) Equipment 164,000
Cash 164,000
(d) Purchases 140,000
Cash 140,000
(e) Purchases 9,800
Accounts payable 9,800
(f) Cash 165,000
Accounts receivable 15,000
Sales 180,000
(g) Operating expenses 30,000
Cash 30,000
(h) Purchase disc. lost 200
Accounts payable 200
Accounts payable 7,500
Cash 7,500
(i) Cash 7,500
Accounts receivable 7,500
(j) Prepaid insurance 600
Cash 600
(k) Land 63,000
Cash 63,000
(l) Loss on damages 10,000
Cash 10,000

Cash 157,400
Accounts receivable 7,500
Prepaid insurance 600
Land 63,000
Equipment 164,000
Accounts payable 2,500
Notes payable 100,000
Common stock 20,000
Premium on capital stock 280,000
Sales 180,000
Purchases 149,800
Operating expenses 30,000
Purchase disc. lost 200
Loss on damages 10,000 _______
Total 582,500 582,500

ANSWER
1. b 2. d 3. a 4. d 5. b 6. b 7. c 8. d 9. b 10. a
11. a 12. b

Problem 3

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The post-closing trial balance of the general ledger of Wilson Corporation at December 31,
20I, reflected the following:

Account Debit Credit


Cash 27,000
Accounts receivable 21,000
Allowance for doubtful accounts 1,000
Inventory (perpetual inventory system) 35,000
Prepaid insurance (20 mos. remaining) 900
Equipment (20-year life, no salvage value)50,000
Accumulated depreciation 22,500
Accounts payable 7,500
Wages payable -
Income taxes payable (for 20I) 4,000
Common stock, par P1 80,000
Retained earnings 18,900
Sales revenue -
Cost of goods sold -
Operating expenses -
Income tax expense -
Income summary -___ ______
133,900 133,900
* Ending inventory, P45,000 (at 12/31/20J)

The following transactions occurred during 20J in the order given (use the number at the
left to indicate the date):

1. Sales revenue at P30,000, of which P10,000 was on credit; cost provided by perpetual
inventory record, P19,500.
2. Collected P17,000 on accounts receivable.
3. Paid income taxes payable (20I), P4,000.
4. Purchased merchandise, P40,000, of which P8,000 was on credit.
5. Paid accounts payable, P6,000.
6. Sales revenue of P72,000 (in cash); cost, P46,800.
7. Paid operating expenses, P19,000.
8. On January 1, 20J, sold and issued 1,000 shares of common stock, par P1, for P1,000
cash.
9. Purchased merchandise, P100,000, of which P27,000 was on credit.
10. Sales revenue of P98,000, of which P30,000 was on credit; cost P63,700.
11. Collected cash on accounts receivable, P26,000.
5. Paid cash on accounts payable, P28,000.
6. Paid various operating expenses in cash, P18,000.

Assume a bad debt rate of ½% of credit sales for the period and a 32% income tax rate. At
December 31, 20J, accrued wages were P300. Use straight-line depreciation.

Questions
1. Cash at December 31, 20J is:
a. P 51,000 b. P 50,000 c. P 45,000 d. P 41,000

2. Accounts receivable at December 31, 20J is:


a. P 18,000 b. P 16,800 c. P 16,000 d. P 15,800

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3. Inventory at December 31, 20J is:
a. P 64,500 b. P 45,000 c. P 35,000 d. P 32,500

4. Prepaid insurance at December 31, 20J is:


a. P 360.00 b. P 562.50 c. P 900 d. P 540

5. Equipment at December 31, 20J is:


a. P 95,000 b. P 60,000 c. P 50,900 d. P 50,000

6. Accumulated depreciation at December 31, 20J is:


a. P 30,000 b. P 25,000 c. P 22,500 d. P 20,000

7. Accounts payable at December 31, 20J is:


a. P 15,000 b. P 14,500 c. P 10,500 d. P 8,500

8. Income taxes payable at December 31, 20J is:


a. P 9,600 b. P 9,427 c. P 5,651 d. P 4,000

9. Retained earnings at December 31, 20J is:


a. P 39,300 b. P 38,933 c. P 30,909 d. P 27,400

10. Cost of goods sold at December 31, 20J is:


a. P 110,500 b. P 128,000 c. P 130,000 d. P 132,000

11. Net income before taxes at December 20J is:


a. P 30,000 b. P 29,460 c. P 17,660 d. P 12,500
Solution
(1) Cash 20,000
Accounts receivable 10,000
Sales 30,000
Cost of sales 19,500
Inventory 19,500
(2) Cash 17,000
Accounts receivable 17,000
(3) Income taxes payable 4,000
Cash 4,000
(4) Inventory 40,000
Cash 32,000
Accounts payable 8,000
(5) Accounts payable 6,000
Cash 6,000
(6) Cash 72,000
Sales 72,000
Cost of sales 46,800
Inventory 46,800
(7) Operating expenses 19,000
Cash 19,000
(8) Cash 1,000
Common stock 1,000
(9) Inventory 100,000
Cash 73,000
Accounts payable 27,000
(10) Cash 68,000
Accounts receivable 30,000
Sales 98,000
Cost of sales 63,700
Inventory 63,700
(11) Cash 26,000
Accounts receivable 26,000

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(12) Accounts payable 28,000
Cash 28,000
(13) Operating expenses 18,000
Cash 18,000

Adjusting Entry:
(a) Operating expenses (ins. Exp) 540
Prepaid insurance 540
(P900 x 12/20)
(b) Operating expenses (depreciation) 2,500
Accumulated depreciation 2,500
(c) Operating expenses (bad debts) 200
Allowance for bad debts 200
(d) Operating expenses 300
Wages payable 300

FINANCIAL STATEMENTS
Cash 51,000
Accounts receivable 18,000
Allowance for bad debts (1,200)
Inventory 45,000
Prepaid insurance 360
Equipment 50,000
Accumulated depreciation (25,000)
Total Assets 138,160

Accounts payable 8,500


Wages payable 300
Income taxes payable 9,427
Common stock 81,000
Retained earnings 38,933
Total Liability/SHE 138,160

Sales revenue 200,000


Cost of sales 130,000
Gross profit 70,000
Operating expenses 40,540
Income before taxes 29,460
Income taxes expense 9,427
Net income 20,033
Retained earnings – beg 18,900
Retained earnings – end 38,933

Answer:
1. a 2. b 3. b 4. a 5. d 6. b 7. d 8. b 9. b 10.c 11.b

Problem 4
The account of PEQUIT COMPANY as at December 1, 2006 are listed below:

Cash 214,000
Accounts receivable 338,000
Marketable securities 426,000
Office supplies 31,000
Prepaid insurance 48,000
Land 370,000
Building 900,000
Accum. depreciation – bldg 250,000
Equipment 800,000
Accum. depreciation – equip. 200,000
Accounts payable 172,000
Mortgage payable 1,200,000
Capital _______ 1,305,000

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3,127,000 3,127,000

The following transactions occurred during the month of December 2006:

Dec. 1 Settled the accounts payable of P115,000 less 2% discount.


3 Collected the accounts receivable of P180,000 less 3% discount.
4 Sold merchandise on account to PAPACOY SUPPLIES, P210,000. Terms: FOB
destination, 3/10, n/30. PAPACOY SUPPLIES paid the freight for P3,000.
5 Received returns from PAPACOY SUPPLIES, P25,000.
7 Purchased merchandise from OSTIQUE PRODUCTS, P232,000. Terms: FOB
shipping point, 2/10, n/30. PEQUIT COMPANY paid P2,000 for the
transportation cost.
9 Returned goods to OSTIQUE PRODUCTS, P12,000 acquired on December 7.
10 Paid interest on mortgage payable, P8,000.
11 Received payment from PAPACOY SUPPLIES for the amount due.
12 Sold merchandise to OANI SHOPPERS, P330,000. Terms: FOB shipping point,
3/10, n/30.
18 Received payment from OANI SHOPPERS from the December 12 sales.
19 Sold merchandise to NAVALES SHOP, P242,000. Term: FOB shipping point,
3/10, n/30. PEQUIT COMPANY paid P5,000 for the freight.
20 Paid P9,000 for representation expense.
29 Received from NAVALES SHOP returned merchandise in the amount of
P18,000 from the December 19 sales.
30 The owner, Genevieve, withdraw merchandise for personal use. Cost –
P20,000; Selling price – P30,000.

Additional information
1. Salaries in the amount of P73,000 have accrued on December 31.
2. Insurance coverage with premium of P2,000 has expired at month-end.
3. Depreciation on the building and on the equipment for the month amounted to
P3,000 and P4,500, respectively.
4. Office supplies on hand at month-end amounted to P7,000.
5. A count of the inventory amounted to P453,000 on December 31, 2006.

Questions
1. Cash balance at December 31, 2006 is:
a. P 773,750 b. P 772,700 c. P 748,450 d. P 727,700

2. Accounts receivable at December 31, 2006 is:


a. P 412,000 b. P 405,000 c. P 387,000 d. P 362,000

3. Inventory at December 31, 2006 is:


a. P 625,700 b. P 453,000 c. P 426,000 d. P 212,000

4. Office supplies at December 31, 2006 is:


a. P 7,000 b. P 10,000 c. P 24,000 d. P 31,000

5. Net carrying value of Fixed Assets at December 31, 2006 is:


a. P 1,980,000 b. P 1,620,000 c. P 1,612,500 d. P 1,242,500

6. Total assets at December 31, 2006 is:


a. P 3,253,950 b. P 3,250,950 c. P 3,203,950 d. P 3,153,950

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7. Accounts payable at December 31, 2006 is:
a. P 289,000 b. P 279,000 c. P 277,000 d. P 257,000

8. Accrued expenses at December 31, 2006 is:


a. P 97,000 b. P 73,000 c. P 24,000 d. P 9,000

9. Net sales at December 31, 2006 is:


a. P 782,000 b. P 718,950 c. P 718,240 d. P 718,150

10. Total purchases at December 31, 2006 is:


a. P 232,000 b. P 212,000 c. P 199,700 d. P 197,700

11. Operating expenses at December 31, 2006 is:


a. P 126,500 b. P 118,500 c. P 109,500 d. P 101,500

12. Net income at December 31, 2006 is:


a. P 482,800 b. P 426,950 c. P 419,040 d. P 418,950

13. Capital balance at December 1, 2006 is:


a. P 1,704,040 b. P 1,703,950 c. P 1,305,000 d. P 1,285,000

14. Capital balance at December 31, 2006 is:


a. P 1,704,040 b. P 1,703,950 c. P 1,305,000 d. P 1,285,000

15. Total liabilities and capital at December 31, 2006 is:


a. P 3,253,950 b. P 3,250,950 c. P 3,203,950 d. P 3,153,950

Solution

Dec 1 Accounts payable 115,000 Dec 10 Interest expense 8,000


Cash 112,700 Cash 8,000
Purchases (discount) 2,300
Dec 11 Cash 176,450
Dec 3 Cash 174,600 Sales (discount) 5,550
Sales (discount) 5,400 Accounts receivable 182,000
Accounts receivable 180,000

Dec 12 Accounts receivable 330,000


Dec 4 Accounts receivable 207,000 Sales 330,000
Transportation exp 3,000
Sales 210,000 Dec 18 Cash 320,100
Sales (discount) 9.900
Dec 5 Sales (returns) 25,000 Accounts receivable 330,000
Accounts receivable 25,000
Dec 19 Accounts receivable 247,000
Dec 7 Purchases 232,000 Cash 5,000
Freight-in 2,000 Sales 242,000
Cash 2,000
Accounts payable 232,000 Dec 20 Representation exp 9,000
Cash 9,000
Dec 9 Accounts payable 12,000
Purchases (returns) 12,000 Dec 29Sales (returns) 18,000
Accounts receivable 18,000

Dec 30 Drawing 20,000


Purchases 20,000
Adjusting entry:

13
1. Salaries expense 73,000
Accrued salaries 73,000

2. Insurance expense 2,000


Prepaid insurance 2,000

3. Depreciation 7,500
Accum. Dep’n – bldg 3,000
Accum. Dep’n – equip 4,500

4. Supplies expense 24,000


Office supplies 24,000

5. Inventory – BS 453,000
Inventory – IS 453,000

ANSWER:
1. C 2. C 3. B 4. A 5. C 6. A 7. C 8. B 9. D 10. C
11. A 12. D 13. C 14. B 15. A

Problem 5
The Righter Shoe Store Company prepares monthly financial statements for its bank. The
November 30 and December 31, 2006, trial balances contained the following information:

Nov. 30 Dec. 31
Dr. Cr. Dr. Cr.
Supplies 1,000 3,000
Prepaid insurance 6,000 4,250
Wages payable 10,000 15,000
Unearned rent revenue 2,000 1,000

The following information also is known:

a. The December income statement (accrual basis) reported P2,000 in supplies


expense.
b. No insurance payments were made in December.
c. P10,000 was paid to employees during December for wages.
d. On November 1, 2006, a tenant paid Righter P3,000 in advance rent for the
period November through January. Unearned revenue was credited.

Questions
1. What was the cost of supplies purchased during December?
a. P 1,000 b. P 2,000 c. P 3,000 d. P 4,000

2. What was the adjusting entry recorded at the end of December for prepaid
insurance?
a. Prepaid insurance 4,250
Insurance expense 4,250
b. Insurance expense 4,250
Prepaid insurance 4,250
c. Insurance expense 1,750
Prepaid insurance 1,750
d. No adjusting entry

3. What was the adjusting entry recorded at the end of December for
accrued wages?
a. Wages expense 15,000

14
Wages payable 15,000
b. Wages expense 10,000
Wages payable 10,000
c. Wages expense 5,000
Wages payable 5,000
d. No adjusting entry

4. What was the amount of rent revenue earned in December?


a. P 1,000 b. P 2,000 c. P 3,000 d. P 4,000

5. What adjusting entry was recorded at the end of December for unearned
rent?
a. Unearned rent rev. 3,000
Rent revenue 3,000
b. Rent revenue 2,000
Unearned rent rev. 2,000
c. Unearned rent revenue 1,000
Rent revenue 1,000
d. Unearned rent revenue 2,000
Rent revenue 2,000

Solution
1. D
Supplies on Hand
Beg. Bal 1,000 Adjustment 2,000
Purchases 4,000 *
Ending bal. 3,000
* squeezed figure
2. C 3. A 4. A 5. C

Problem 6
The trial balance of ANN CO., prior to the closing of its account for the fiscal year ended
September 30, 2006 follows:

Cash P22,500
Accounts receivable 93,600
Allowance for doubtful accounts P 3,190
Note receivable 15,500
Merchandise inventory, 9/30/02 56,890
Furniture and equipment 61,800
Accumulated depreciation 18,750
Goodwill 30,000
Accounts payable 53,600
Notes payable 10,000
Capital Stock 100,000
Retained Earnings 55,250
Sales 372,000
Sales return and allowances 4,760
Purchases 215,930
Purchase return and allowances 3,650
Advertising 9,610
Sales salaries 28,850
Commission expense 15,200
Miscellaneous expense 2,990

15
Rent expense 13,000
Office salaries 19,720
Light and Water 1,500
Insurance expense 1,080
Taxes and licenses 4,780
General expense 16,340
Interest expense 4,120
Interest income 910

Your examination of the company’s account has the need for adjustments based on the
following items:

a. The cash account included a customer’s check for P1,500 deposited on


September 25, 2006 but returned by the bank on September 29, 2006 for lack of
countersignature. No entry was made for the returned check.

b. Unrecorded bank charge for September 2006, P500

c. The allowance for doubtful accounts should be adjusted to 5% of the


outstanding accounts receivable balance on September 30, 2006.

d. A physical inventory of merchandise taken at the end of the fiscal year 2006
amounted to P60,120.

e. Goods received on consignment, still unsold costing P2,000 were included in


the physical inventory.

f. The merchandise inventory on September 30, were correctly stated.

g. Depreciation of furniture and equipment at 10% annually has not been


recognized.

h. Accrued salesmen’s salaries not recorded P5,000

i. An insurance policy was taken on the inventory and equipment on March 1,


2006 with the annual insurance premium of P1,080 paid on that date.

j. Rent expense account considered of rent for the store and office space for
thirteen months starting August 1, 2006.

Based on the aforementioned data, answer the following questions;

1. The adjusting entry on item A is


a. Cash 1,500
Accounts receivable 1,500
b. Accounts payable 1,500
Cash 1,500
c. Accounts receivable 1,500
Cash 1,500
d. No adjustment

2. The adjusting entry on item B is


a. Cash 500

16
Accounts receivable 500
b. Cash 500
General expenses 500
c. General Expenses 500
Cash 500
d. No adjustment

3. The adjusting entry on item C is


a. Accounts receivable 4,680
Allowance for Doubtful Accounts 4,680
b. Doubtful Accounts 1,565
Allowance for Doubtful Accounts 1,565
c. Allowance for Doubtful Accounts 1,490
Doubtful Accounts 1,490
d. Doubtful Accounts 1,490
Allowance for Doubtful Accounts 1,490

4. The adjusting entry on item D is


a. Merchandise Inv. 60,120
Income Summary 60,120
b. Merchandise Inv. 60,120
Purchases 60,120
c. Income summary 60,120
Merchandise inventory 60,120
d. No adjustment

5. The adjusting entry on item E


a. Income summary 2,000
Merchandise Inv. 2,000
b. Sales 2,000
Merchandise Inv. 2,000
c. Merchandise inventory 2,000
Income summary 2,000
d. No adjustment

6. The adjusting entry on item F is


a. Merchandise Inv. 56,890
Income summary 56,890
b. Merchandise Inv. 56,890
Purchases 56,890
c. Income summary 56,890
Merchandise inventory 56,890
d. No adjustment

7. The adjusting entry on item G is


a. Depreciation Exp. 6,180
Accumulated Depreciation 6,180
b. Accumulated Depreciation 6,180
Furniture and Equipment 6,180
c. Accumulated depreciation 6,180
Depreciation expense 6,180
d. No adjustment

17
8. The adjusting entry on item H is
a. Accrued Salaries Expense 5,000
Sales salaries 5,000
b. Accrued salaries exp. 5,000
Office salaries 5,000
c. Office salaries 5,000
Depreciation expense 5,000
d. Sales salaries 5,000
Accrued salaries expense 5,000

9. The adjusting entry on item I is


a. Insurance Exp. 630
Prepaid insurance 630
b. Prepaid insurance 630
insurance exp. 630
c. Insurance expense 450
Prepaid insurance 450
d. Prepaid insurance 450
Insurance expense 450

10. The adjusting entry on item J is


a. Rent expense 11,000
Prepaid rent 11,000
b. Prepaid rent 2,000
Rent expense 2,000
c. Prepaid rent 11,000
Rent expense 11,000
d. Rent expense 2,000
Prepaid rent 2,000

After making the adjustments compute the following:

11. Cash
a. P24,000 b. P21,000 c. P20,500 d. P20,000

12. Net realizable value of accounts receivable


a. P90,410 b. P90,345 c. P88,920 d. P88,845

13. Merchandise inventory, September 30, 2006


a. P60,120 b. P56,890 c. P62,120 d. P58,120

14. Furniture and Equipment, net of accumulated depreciation


a. P55,620 b. P36,870 c. P36.700 d. 36,890

15. Total assets, September 30, 2006


a. P262,785 b. P250,845 c. P223,850 d. P262,700

16. Cost of goods sold, September 30, 2006


a. P211,050 b. P210,050 c. P212,300 d. P212,280

17. Net income, September 30, 2006 (disregard tax effect)


a. P31,635 b. P31,625 c. P38,935 d. P38,115

18
18. Prepaid insurance
a. P630 b. P450 c. P1,080 d. P600

19. Prepaid rent


a. P11,000 b. P2,000 c. P13,000 d. P10,000

Answer:
1. C 2. C 3. B 4. A 5. A 6. D 7. A 8. D 9. D 10. C
11. C 12. B 13. D 14. B 15. A 16. A 17. D 18. B 19. A

Problem 7
Selected pre-adjustment account balances and adjusting information of NAPPY COMPANY for
the year ended December 31, 2006, are as follows:

Retained earnings, January 1, 2006 440,670


Sales Salaries and Commissions 35,000
Advertising Expense 16,000
Legal Services 2,225
Insurance and Licenses 8,500
Travel Expense – Sales Representative 4,560
Depreciation Expense 10,900
Interest Revenue 700
Utilities expense 6,400
Telephone and Postage Expense 1,475
Supplies inventory 2,180
Miscellaneous Selling Expense 2,200
Dividends 33,000
Dividend Revenue 7,150
Interest expense 4,520
Allowance for bad debts (Cr. Balance) 370
Officers’ Salaries Expense 36,600
Sales 495,200
Sales returns and allowances 11,200
Sales discounts 880
Gain on sales of assets 18,500
Inventory, January 1, 2006 89,700
Inventory, December 31, 2006 20,550
Purchases 173,000
Freight-in 5,525
Accounts Receivable, December 31, 2006 261,000
Shares of common stock outstanding 39,000

Adjusting information:

1. Cost of inventory in the possession of consignee as of December 31, 2006, was not
included in the ending inventory balance, P33,600.

2. After preparing an analysis of aged accounts receivable, a decision was made to increase
the allowance for bad debts to a percentage of the ending account receivable balance to
3%. Accounts totaling P7,480 were written off as uncollectible during the year.

3. Purchase returns and allowances amounting to 6% of purchases (not including freight-


in) were not recorded at year-end.

19
4. Sales commission for the last day of the year had not been accrued. Total sales for the
day, P3,600. Average sales commission as a percent of sales is 3%.
5. No accrual has been made for a freight bill received on January 3, 2007, for goods
received on December 29, 2006, P800.

6. An advertising campaign for P1,818 was initiated November 1, 2006. This amount was
recorded as “prepaid advertising” and should be amortized over a 6-month period. No
amortization was recorded.

7. Freight charges paid on sold merchandise and not passed to the buyer were netted
against sales. Freight charges on sales during 2006 is P4,200.

8. Interest earned but not accrued, P690.

9. Depreciation expense on a new forklift (estimated life is 10 years) purchased for P7,800
on March 1, 2006 had not been recognized. (Assume all equipment will have no salvage
value and the SLM is used. Depreciation is calculated to the nearest month.)

10. A “real” account is debited upon the receipt of supplies. Supplies on hand at year-end is
P1,600.

11. Income tax rate (on all items) is 32%.

Questions
1. Net Sales is
a. P 499,200 b. P 489,300 c. P 488,500 d. P 487,320

2. Purchases net of returns and allowances is


a. P 165,200 b. P 164,000 c. P 162,620 d. P 161,200

3. Freight-in is
a. P 6,325 b. P 5,200 c. P 5,000 d. P 4,125

4. Inventory – 12/31/02 is
a. P 54,700 b. P 54,150 c. P 53,600 d. P 52,200

5. Cost of sales is
a. P 265,440 b. P 205,350 c. P 204,495 d. P 114,795

6. Sales salaries and commission is


a. P 35,108 b. P 35,100 c. P 35,000 d. P 34,700

7. Advertising expense is
a. P 24,696 b. P 16,800 c. P 16,750 d. P 16,606

8. Depreciation expense is
a. P 14,600 b. P 12,500 c. P 12,000 d. P 11,550

9. Supplies expense is
a. P 670 b. P 580 c. P 560 d. P 480

20
10. Doubtful accounts expense is
a. P 7,500 b. P 7,460 c. P 7,300 d. P 7,200

11. Interest revenue is


a. P 1,540 b. P 1,390 c. P 1,300 d. P 1,290

12. Income tax expense is


a. P 58,554 b. P 54,605 c. P 53,722 d. P 53,693

13. Net income is


a. P 115,586 b. P 115,558 c. P 114,159 d. P 104,445
Solution
Per book Adjust ments Per Audit
Sales 495,200 4,200 499,400
Sales ret. And allow. (11,200) (11,200)
Sales discount (880) (880)
483,120 487,320
Cost of Sales
Beginning inventory 89,700 89,700
Purchases 173,000 173,000
Purch. Ret and allow. 10,380 (10,380)
Purch. Discount -
Freight-in 5,525 800 6,325
Total Goods Avail. For Sale 268,225 258,645
Ending inventory 20,550 33,600 54,150
247,675 204,495

Gross Profit 235,445 282,825

Interest revenue 700 690 1,390


Dividends revenue 7,150 7,150
Gain on sale of assets 18,500 18,500

Total Revenue 261,795 309,865

Sales Salaries and Commission 35,000 108 35,108


Advertising Expense 16,000 606 16,606
Legal services 2,225 2,225
Insurance and licenses 8,500 8,500
Travel expense 4,560 4,560
Depreciation expense 10,900 650 11,550
Utilities expense 6,400 6,400
Telephone and postage 1,475 1,475
Misc. selling expense 2,200 2,200
Officers' salaries 36,600 36,600
Interest expense 4,520 4,520
Bad debts 7,460 7,460
Transportation expense 4,200 4,200

21
Supplies expense 580 580
141,984

Income before tax 167,881


Income tax 53,721.92

Net Income 114,159

ANSWER:
1. D 2. C 3. A 4. B 5. C 6. A 7. D 8. D 9. B 10. B
11. B 12. C 13. C

Problem 8
Presented below are unaudited balances of selected accounts of Baluyot Company as at
December 31, 2006 – its first year of operation. During the course of your audit of
Baluyot’s books you obtained additional information affecting these accounts:

Debit Credit
Cash 500,000
Accounts receivable 1,300,000
Allowance for bad debts 8,000
Sales (net) 6,750,000
Accounts payable 600,000
Purchases (net) 4,350,000
Cars and trucks 1,200,000
Machinery and equipment 950,000
Accumulated depreciation 95,000

Additional information:

a. On December 31, 2006, Baluyot recorded and wrote check payments to creditors
amounting to P300,000. A number of checks amounting to P150,000 were mailed on
January 3, 2007.

b. On December 28, 2006, Baluyot purchased and received goods amounting to P100,000,
terms 2/10, n/30. As a policy, Baluyot records purchases in accounts payable at net
amounts. This particular invoice was recorded and paid on January 4, 2007.

c. On December 26, 2006, a supplier authorized Baluyot to return goods shipped and billed
at P80,000 on December 3, 2006. The goods were returned on December 30, 2006.
The supplier’s credit memo was received and recorded on January 5, 2007.

d. Goods amounting to P50,000 were invoiced for the account of Palmes Company and
recorded on January 2, 2007 with terms of net 60 days, FOB shipping point. The goods
were shipped to Palmes on December 30, 2006.

e. The bank returned on December 29, 2006, a customer check for P5,000 marked “No
Sufficient Fund” but no entry was made.

f. Baluyot estimates that allowance for uncollectible accounts should be one and one-half
percent (1½%) of the accounts receivable balance as of year-end. No provision has yet
been made for 2006.

22
g. All the cars and trucks were acquired on May 1, 2006 at a total cost of P1,200,000.
Baluyot estimates the useful life of the cars and trucks at five-years and depreciates
these assets based on 150% declining balance. As a policy, depreciation is computed to
the nearest month and rounded-off to the nearest peso. No depreciation has been
recorded for cars and trucks as at December 31, 2006.

Questions
1. The adjusted amount of Cash is:
a. P 650,000 b. P 645,000 c. P 500,000 d. P 495,000

2. The adjusted amount of Accounts Receivable is:


a. P 1,355,000 b. P 1,350,000 c. P 1,305,000 d. P 1,300,000

3. The adjusted amount of Sales – net is:


a. P 6,840,000 b. P 6,800,000 c. P 6,750,000 d. P 6,700,000

4. The adjusted amount of Purchases – net is:


a. P 4,448,000 b. P 4,368,000 c. P 4,350,000 d. P 4,270,000

5. The adjusted amount of Bad Debts Expense is:


a. P 36,325 b. P 28,325 c. P 20,325 d. P 12,325

6. The adjusted amount of 2006 Depreciation Expense – Machinery and Equipment is:
a. P 95,550 b. P 95,500 c. P 95,417 d. P 95,000

7. The adjusted amount of Accounts payable is:


a. P 818,000 b. P 800,000 c. P 768,000 d. P 600,000
Solution
(a) Cash 150,000
Accounts payable 150,000
(b) Purchases 98,000
Accounts payable 98,000
(c) Accounts payable 80,000
Purchase returns 80,000
(d) Accounts receivable 50,000
Sales 50,000
(e) Accounts receivable 5,000
Cash 5,000
(f) Bad debts 28,325
Allowance for bad debts 28,325
(1,355,000 x 1½% = P 20,325 + P8,000 debit balance of Allowance)
ANSWER:
1. B 2. A 3. B 4. B 5. B 6. D 7. C

Problem 9
The trial balance of TRANQUILAN CORPORATION, prior to the closing of is accounts for the
fiscal year-ended September 30, 2006 follows:
DEBIT CREDIT
Cash 225,000
Accounts receivable 936,000
Allowance for doubtful accounts 31,900
Notes receivable 155,000
Merchandise inventory, Sept. 30, 2005 568,900
Furniture and Equipment 618,000
Acc. Depreciation – Furniture & Equipment 187,500

23
Goodwill 300,000
Accounts payable 536,000
Notes payable 100,000
Capital stock 1,000,000
Retained earnings 552,500
Sales 3,728,200
Sales returns and allowances 47,600
Purchases 2,159,300
Purchase returns and allowances 36,500
Advertising 96,100
Sales salaries 288,500
Commission expense 152,000
Miscellaneous selling expenses 29,900
Rent expense 130,000
Office salaries 197,200
Light and water 15,000
Insurance expense 10,800
Taxes and licenses 47,800
Miscellaneous general expenses 163,400
Interest expense 41,200
Interest income ________ 9,100
6,181,700 6,181,700

Your examination of the company’s accounts had indicated the need for adjustments based
on the following information:

1. The Cash account include a customers’ check for P15,000 deposited on September 25,
2006, but returned by the bank on September 29, 2006 for lack of countersignature. No
entry was made by the company for the return of the check or for its redeposit on
October 5, 2006.

2. The Allowance for Doubtful Accounts should be adjusted to 5% of the customers’


outstanding balances on September 30, 2006.

3. A physical inventory taken of the merchandise stock as of the end of the fiscal year
amounted to P601,200.

4. A purchase of merchandise FOB shipping point, for which goods costing P40,000 were
still in transit on September 30, 2006 was neither taken as a liability nor included in the
inventory on that date.

5. Goods received on consignment, still unsold, were included in the inventory at the
agreed selling price of P24,000.

6. The merchandise inventory at September 30, 2005 was correctly stated.

7. On July 1, 2006, equipment acquired on October 1, 2003 with a book value of P32,000
on September 30, 2005 was sold for P35,000 in cash. The sales proceeds were credited
to the Furniture and Equipment account.

8. Depreciation for the fiscal year 2005-2006 has not been recorded. Depreciation rate
being used is 10% annually.

24
9. An insurance policy was taken on the inventory and equipment on April 1, 2006 with the
annual premium of P10,800 paid on that date.

10. Rent expense account consisted of rent paid for stock and office space for thirteen (13)
months ending October 31, 2006.

11. The 120-day Note Payable of P100,000 bearing interest of 12% was discounted at the
bank on September 1, 2006.

12. The Goodwill account was set-up by a credit to Retained Earnings under a resolution of
the Board of Directors.

Questions
1. Cash for the fiscal year-ended September 30, 2006 is:
a. P 195,000 b. P 210,000 c. P 225,000 d. P 240,000

2. Accounts receivable for the fiscal year-ended September 30, 2006 is:
a. P 906,000 b. P 921,000 c. P 951,000 d. P 936,000

3. Allowance for doubtful accounts for the fiscal year-ended September 30, 2006 is:
a. P 15,650 b. P 46,800 c. P 45,300 d. P 47,550

4. Merchandise inventory for the fiscal year-ended September 30, 2006 is:
a. P 617,200 b. P 641,200 c. P 677,200 d. P 561,200

5. Book value of the Furniture and Equipment for the fiscal year-ended September 30,
2006 is:
a. P 360,200 b. P 372,200 c. P 375,200 d. P 489,800

6. Goodwill for the fiscal year-ended September 30, 2006 is:


a. P 300,000 b. P 292,500 c. P 285,000 d. P 0

7. Accounts payable for the fiscal year-ended September 30, 2006 is:
a. P 496,000 b. P 536,000 c. P 552,000 d. P 576,000

8. Net income for the fiscal year-ended September 30, 2006 is:
a. P 326,750 b. P 332,750 c. P 346,750 d. P 347,750

9. Retained earnings for the fiscal year-ended September 30, 2006 is:
a. P 252,500 b. P 600,250 c. P 885,250 d. P 900,250

10. Insurance expense for the fiscal year-ended September 30, 2006 is:
a. P 5,400 b. P 9,200 c. P 10,800 d. P 16,200

Solution

1. Accounts Receivable 15,000


Cash 15,000

2. Doubtful Accounts Expense 15,650


Allowance for doubtful accounts 15,650
{5% x (936,000 + 15,000) = 47,550 - 31,900}

3. Merchandise Inventory 601,200


Income Summary 601,200

25
4. Purchases 40,000
Merchandise Inventory 40,000
Accounts Payable 40,000
Income Summary 40,000

5. Income Summary 24,000


Merchandise Inventory 24,000

6. Income Summary 568,900


Merchandise Inventory 568,900

7. Accumulated Depreciation – Fur. & Eqpt. 11,000


Gain on sale of equipment 6,000
Furniture & Equipment 5,000

Cost (P32,000 / 80%) P40,000


Less acc. depr. to date of sale 11,000
(P40,000 x 10% x 2 + (40,000 x 10% x
9/12)
Book value P29,000
Selling price 35,000
Gain on sale of equipment P 6,000

8. Depreciation expense 64,300


Acc. Depr. – Fur. & Equip 64,300

Depr. for year ended 9.30.03


On eqpt sold (40,000 x 10% x 9/12) P 3,000
On remaining eqpt. (613,000 x 10%) 61,300
P64,300

9. Prepaid Insurance 5,400


Insurance expense 5,400

10. Prepaid rent 10,000


Rent expense 10,000

11. Discount on notes payable 3,000


Interest expense 3,000

Total discount P4,000


(100,000 x 12% x 120/360)
Less portion applicable to year ended 9.30. 1,000
Unamortized, 9.30. P3,000

12. Retained Earnings 300,000


Goodwill 300,000

TRANQUILAN CORPORATION
WORKING TRIAL BALANCE
September 30, 2003

Trial Balance Adjustments Income Statement Balance Sheet


Debit Credit Debit Credit Debit Credit Debit Credit
Cash 225,000 15,000 210,000
AR 936,000 15,000 951,000
All. for DA 31,900 15,650 47,550
NR 155,000 155,000
MI 568,900 568,900 617,200 617,200*
F/E 618,000 5,000 613,000
AD– F/E. 187,500 11,000 64,300 240,800

26
Goodwill 300,000 300,000 -0-
AP 536,000 40,000 576,000
NP 100,000 100,000
CS 1,000,000 1,000,000
RE 552,500 300,000 252,500
Sales 3,728,200 3,728,200
Sales R& A 47,600 47,600
Purchases 2,159,300 40,000 2,199,300
Purch R&A. 36,500 36,500
Adv 96,100 96,100
Sales sal 288,500 288,500
Com. exp 152,000 152,000
Misc.sell 29,900 29,900
Rent exp 130,000 10,000 120,000
Office sal 197,200 197,200
Light & W 15,000 15,000
Ins. exp 10,800 5,400 5,400
Tax & licen 47,800 47,800
Misc. Ge 163,400 163,400
Int. exp 41,200 3,000 38,200
Int inc 9,100 9,100
6,181,700 6,181,700

DA 15,650 15,650
Gain 6,000 6,000
Depren 64,300 64,300
Pre ins 5,400 5,400
Pre rent 10,000 10,000
Disc on NP 3,000 3,000
464,350 464,350 4,049,250 4,397,00 2,564,600 2,216,850
0
NET INC 347,750 347,750
4,397,000 4,397,000 2,564,600 2,564,600

ANSWER:
1. B 2. C 3. D 4. A 5. B 6. D 7. D 8. D 9. B 10. A

Problem 10
Your audit client, Tortor Corporation, presents to you the unadjusted trial balance shown
below, which was drawn from its general ledger as at June 30, 2006, the end of its fiscal
year.
TORTOR CORPORATION
Unadjusted Trial Balance
June 30, 2006
Cash 721,800
Trading Securities 200,000
Accounts receivable 2,128,000
Inventory, June 30, 2005 5,194,300
Invest. in associates (Equity Method) 1,200,000
Equipment 1,621,000
Prepaid expenses 116,200
Goodwill 500,000
Accounts payable 2,426,400
Accrued expenses 152,600
Accrued interest payable 226,000
Allowance for bad debts 36,100
Allowance for depreciation 450,700
Loans payable 2,500,000
Capital stock 3,000,000

27
Additional paid-in capital 260,000
Retained earnings 1,808,800
Sales 21,602,000
Interest income 140,000
Purchases 13,928,000
Salaries and wages 3,250,000
Rent, light and water 750,000
Advertising 400,000
Supplies 300,000
Taxes 250,000
Miscellaneous expenses 1,793,300
Interest expense 250,000 _________
32,602,600 32,602,600

Your examination of the accounts disclosed the following information:

1. The cash account included an NSF check returned by the bank on June 30, 2006, but
recorded as a cash reduction in July, 2006, P44,000, and a voucher for suppliers paid in
cash on June 27, 2006 but not entered in the books, P26,500.

2. Marketable Securities which cost P200,000 have a market value of P210,000. Long-
Term Investments have a market value of P1,250,000 as at balance sheet date.

3. The company has been providing an allowance for bad debts at 5% of the
outstanding customers’ balances. Uncollectible accounts were charged off against the
allowance during the year.

4. A physical inventory taken by management personnel of the merchandise stock at


June 30, 2006 totaled P5,751,900. You were unable to observe the inventory-taking as
your services were engaged only on July 15, 2006. Due to the condition of the
accounting records and internal accounting controls, you were also unable to satisfy
yourself as to the inventory.

5. Equipment no longer needed (cost, P150,000; accumulated depreciation, P45,000)


was sold for P100,000 cash on June 29, 2006; the cash proceeds were credited to the
Equipment account. Equipment is depreciated at 10% a year on a monthly basis
computed at year-end.

6. Prepaid expenses included insurance premium of P30,000 paid on April 1, 2006 on a


one-year fire insurance policy.

7. Salaries unpaid as of June 30, 2006, P13,000 were not taken up under accrued
expenses.

8. The Goodwill account was set-up with a credit to Retained Earnings on the basis of a
resolution of the Board of Directors.

9. A 10% cash dividend declared on June 15, 2006, payable on July 31, 2006, has not
been recorded.

10. The Board of Directors approved a resolution on June 25, 2006 appropriating out of
Retained Earnings the amount of P300,000 to meet possible future losses on inventories.

28
Questions
1. Cash for the fiscal year-ended June 30, 2006 is:
a. P 633,800 b. P 651,300 c. P 677,800 d. P 695,300

2. Marketable securities for the fiscal year-ended June 30, 2006 is:
a. P 0 b. P 190,000 c. P 200,000 d. P 210,000

3. Accounts receivable for the fiscal year-ended June 30, 2006 is:
a. P 2,172,000 b. P 2,128,000 c. P 2,100,000 d. P 2,084,000

4. Allowance for doubtful accounts for the fiscal year-ended June 30, 2006 is:
a. P 72,500 b. P 104,200 c. P 106,400 d. P 108,600

5. Inventory for the fiscal year-ended June 30, 2006 is:


a. P 5,751,900 c. P 4,636,700
b. P 5,194,300 d. Cannot be determined.

6. Equipment for the fiscal year-ended June 30, 2006 is:


a. P 1,671,000 b. P 1,571,000 c. P 1,621,000 d. P 1,566,000

7. Accumulated depreciation for the fiscal year-ended June 30, 2006 is:
a. P 390,700 b. P 552,800 c. P 562,800 d. P 622,800

8. Retained earnings before net income for the fiscal year-ended June 30, 2006 is:
a. P 708,800 b. P 1,008,800 c. P 1,308,800 d. P 1,508,000

9. Retained earnings after net income for the fiscal year-ended June 30, 2006 is:
a. P 2,639,700 b. P 2,405,500 c. P 1,840,500 d. P 1,805,500

10. The auditor should issue a(an):


a. Unqualified Opinion c. Qualified Opinion
b. Unqualified Opinion with explanatory paragraph d. Adverse Opinion

Solution

TORTOR CORPORATION
WORKING TRIAL BALANCE
June 30, 2006

Trial Balance Adjustments Income Statement Balance Sheet


Debit Credit Debit Credit Debit Credit Debit Credit
Cash 721,800 70,500 651,300
TS 200,000 10,000 210,000
AR 2,128,000 44,000 2,172,000
Inven. 5,194,300 5,194,300 5,751,900 5,751,900
Invest. Ass. 1,200,000 1,200,000
Equip. 1,621,000 50,000 1,571,000
Prepaid exp. 116,200 7,500 108,700
Goodwill 500,000 500,000 ------------
AP 2,426,400 2,426,400
Acc. Exp. 152,600 13,000 165,600
Acc. int. pay 226,000 226,000
Allow. For 36,100 72,500 108,600
BD
Acc. for 450,700 60,000 172,100 562,800
depr.
Loans 2,500,000 2,500,000

29
payable
Capital stock 3,000,000 3,000,000
APIC 260,000 260,000
RE 1,808,800 500,000
300,000
300,000 708,800
Sales 21,602,000 21,602,000
Int. inc. 140,000 140,000
Purch. 13,928,000 13,928,000
Sal. & wages 3,250,000 13,000 3,263,000
Rent, light … 750,000 750,000

Advertising 400,000 400,000


Supplies 300,000 26,500 326,500
Taxes 250,000 250,000
Mis. exp. 1,793,300 1,793,300
Int. exp. 250,000 250,000
32,602,600 32,602,600
Holding gain 10,000 10,000
BD expense 72,500 72,500
Gain on sale 10,000 10,000
Dep exp 172,100 172,100
Ins. expense 7,500 7,500
Div. payable 300,000 300,000
RE-appro. 300,000 300,000
1,505,600 1,505,600 26,407,200 27,513,900 11,654,900 10,558,200
NET INC. 1,106,700 1,106,700
27,513,900 27,513,900 11,664,900 11,664,900

1. Accounts receivable 44,000


Supplies 26,500
Cash 70,500
2. Trading Securities (Valuation 10,000
Allow.)
Holding gain - TS 10,000
3. Bad debts expense 72,500
Allowance for bad debts 72,500
5% x (2,128,000 + 44,000) =
108,600 - 36,100
4. To be considered in the preparation
of the audit report. Failure to
observe the inventory taking results
in a limitation in the scope of
examination. Depending on the
materiality of the amount of
Inventory in relation to other
accounts, the auditor will either
issue a qualified opinion or
disclaimer of opinion.
5. Allowance for depreciation 60,000
Equipment 50,000
Gain on sale of equipment 10,000
Cost
P150,000
Less acc. depr.
(45,000+15,000)
60,000
Book value P 90,000
Selling price 100,000
Gain P 10,000
Depreciation expense 172,100
Allowance for depreciation 172,100

30
10% x (1,621,000 + 100,000)
6. Insurance expense 7,500
Prepaid expenses 7,500
(30,000 x 3/12)
7. Salaries and wages 13,000
Accrued expenses 13,000
8. Retained earnings 500,000
Goodwill 500,000
9. Retained earnings 300,000
Dividends payable (10% x 300,000
P3,000,000)
10. Retained earnings 300,000
RE Appropriated for Possible 300,000
Losses in Inv.
ANSWER:
1. B 2. C 3. A 4. D 5. A 6. B 7. C 8. A 9. D 10. C

Problem 11
Erasmo Corporation was incorporated on December 1, 2005, and began operations one
week later. Jesus is a nonpublic enterprise. Before closing the books for the fiscal year
ended November 30, 2006, Erasmo Corporation’s controller prepared the following financial
statements:
Balance Sheet
November 30, 2006
ASSETS

Current Assets:
Cash 150,000.00
Marketable securities, at cost 60,000.00
Accounts receivable 450,000.00
Allowance for doubtful accounts (59,000.00)
Inventories 430,000.00
Prepaid insurance 15,000.00
Total current assets 1,046,000.00
Property, plant and equipment 426,000.00
Accumulated depreciation (40,000.00)
Research and developments 120,000.00
Total assets 1,552,000.00

LIABILITIES & STOCKHOLDERS’ EQUITY

Current Liabilities
Accounts payable & accrued expenses 592,000.00
Income tax payable 224,000.00
Total current liabilities 816,000.00
Stockholders’ Equity
Common stock, P10 par value 400,000.00
Retained earnings 336,000.00
Total stockholders’ Equity 736,000.00
Total liabilities & Stockholders’ Equity 1,552,000.00

Statement of Income
For the year ended November 30, 2006

Net sales 2,950,000.00

31
Cost & expenses:
Cost of sales 1,670,000.00
Selling and Administrative 650,000.00
Depreciation 40,000.00
Research and Development 30,000.00
2,390,000.00
Income before income taxes 560,000.00
Provision for income taxes 224,000.00
Net income 336,000.00

Erasmo is in the process of negotiating a loan for expansion purposes and the bank has
requested audited financial statements. During the course of the audit, the following
additional information was obtained:

1. The investment portfolio consist of short-term investments in marketable equity


securities with a total market valuation of P55,000 as of November 30, 2006.

2. Based on aging of the accounts receivable as of November 30, 2006, it was


estimated that P36,000 of the receivables will be uncollectible. There were no Bad Debt
write-offs during the year.

3. Inventories at November 30, 2006, did not include work in process inventory costing
P12,000 sent to an outside processor on November 29, 2006.

4. A P3,000 insurance premium paid on November 30, 2006, on a policy expiring one year
later was charged insurance expense.

5. On June 1, 2006, a machine purchased for P24,000 was charged to repairs and
maintenance. Erasmo depreciates machines of this type on the straight-line method over
a five year life, with no salvage value, for financial and tax purposes.

6. Research and development costs of P150,000 were incurred in the development of a


patent which Erasmo expects to be granted during the fiscal year ending November 30,
2003. Erasmo initiated a five year amortization of the P150,000 total cost during the
fiscal year ended November 30, 2006.

7. During November 2006, a competitor company filed suit against Erasmo for patent
infringement claiming P200,000 in damages. Erasmo Corporation’s legal counsel
believes that an unfavorable outcome is probable. A reasonable estimate of the court’s
award to the plaintiff is P50,000.

8. The 40% effective tax rate was determined to be appropriate for calculating the
provision for income taxes for the fiscal year ended November 30, 2006. Ignore
computation of deferred income taxes.

Questions
1. In the income statement for the year ended November 30, 2006, Erasmo should report
for the marketable securities
a. A realized loss of P5,000. c. A realized gain of P5,000
b. An unrealized loss of P5,000. d. An unrealized gain of P5,000

2. In the November 30, 2006, balance sheet, Erasmo should report in respect of the
investment portfolio

32
Marketable Securities Valuation Allowance
a. P55,000 P -0-
b. P55,000 P5,000
c. P60,000 P -0-
d. P60,000 P5,000

3. In the November 30, 2006, balance sheet, Erasmo should report the allowance for
doubtful accounts at
a. P23,000 b. P36,000 c. P59,000 d. P69,000

4. Bad debts expense for the year ended November 30, 2006, is
a. P -0- b. P23,000 c. P36,000 d. P59,000

5. Inventories at November 30, 2006, should be reported at


a. P418,000 b. P430,000 c. P442,000 d.P450,000

6. Cost of goods sold for the year ended November 30, 2006, reported as
a. P1,643,000 b. P1,645,000 c. P1,658,000 d. P1,670,00

7. Prepaid insurance at November 30, 2006, should be reported at


a. P -0- b. P12,000 c.P15,000 d. P18,000

8. At November 30, 2006, property, plant and equipment should be reported at


a. P402,000 b. P426,000 c. P447,500 d. P450,000

9. Depreciation expense for the year ended November 30, 2006, should be
reported at
a. P16,000 b. P37,600 c. P40,000 d. P42,400

10. At November 30, 2006, accumulated depreciation should be reported at


a. P37,600 b. P40,000 c. P42,400 d. P44,800

11. In the November 30, 2006 balance sheet, research and development costs
should be reported at
a. P -0- b. P120,000 c. P135,000 d. P150,000

12. Research and development expense for the year ended November 30, 2006 is
a. P -0- b. P15,000 c. P30,000 d. P150,000

13. In the November 30, 2006 balance sheet, Erasmo should report an estimated
liability from lawsuit at
a. P -0- b. P50,000 c. P100,000 d. P200,000

14. For the year ended November 30, 2006, which one of the following adjustments
increases the Unadjusted income, before income taxes of P560,000?
a. Pension expense
b. Work in process inventory at outside processor
c. Estimated loss from lawsuit
d. Research and development cost

15. For the year ended November 30, 2006, which of the following adjustments
decreases the unadjusted income, before income taxes, of P560,000?
a. Recognition of prepaid insurance

33
b. Reduction in allowance for doubtful accounts
c. Depreciation on machine purchased June 1,2006
d. Recognition of research and development cost
Solution

1. Unrealized holding loss 5,000


Valuation allowance 5,000
2. Allowance for bad debts 23,000
S & A Expense (Bad debts) 23,000
3. Inventory 12,000
Cost of sales 12,000
4. Prepaid insurance 3,000
S & A Expense 3,000
5. Property and equipment 24,000
S & A Expense 24,000
Depreciation 2,400
Accum. Depreciation 2,400
6. RD cost – IS 120,000
RD cost – BS 120,000
7. Est. loss on damages 50,000
Est. liab on damages 50,000

ANSWER:
1. B 2. D 3. B 4. C 5. C 6. C 7. D 8. D 9. D 10. C
11. A 12. D 13. B 14. B 15. C

Problem 12
In connection with your audit of the Eddie Vic Farms Corp., the accountant prepared the
following balance sheet:
Eddie Vic Farms Corp.
Balance sheet
December 31, 2006
Assets
Cash P 493,000
Marketable securities 630,000
Accounts receivable 540,000
Inventories 1,002,000
Total current assets 2,665,000
Land, buildings, and equipment 2,904,000
Total assets P5,569,000
Liabilities and Stockholders’ Equity
Accounts payable P 684,840
Estimated losses from future crop failures 670,000
Salaries payable 300,000
Total current liabilities 1,654,840
10% Bonds payable (due in 10 years) 1,050,000
Capital stock 900,000
Retained earnings 1,964,160
Total liabilities and stockholder’s equity P 5,569,000

Additional information:

a. Cash is held in a checking account and a savings account with balances of P130,700 and
P362,300, respectively. The cash in the savings account will be used to support
operations in the event of a crop failure.

34
b. The marketable securities represents the cost of treasury bills with a total market value
of P600,000 at year-end.

c. A loan to the president for P360,000 that is to be repaid in quarterly installments of


P30,000 is included in “Accounts Receivable”. The balance of accounts receivable are
considered to be 95 percent collectible.

d. Inventories include:

Finished products 780,000


Supplies 39,000
Storage buildings (net of P60,960 depreciation) 183,000
Total 1,002,000

e. “Land, buildings, and equipment” includes 5 tractors that were purchased near the end
of the year for P720,000 (shown net of a P600,000, 5-year loan used to buy the
tractors). The balance of the account consists of land that was purchased for
P2,400,000 and buildings that were purchased for P510,000 (shown net of depreciation
of P126,000).

f. Included in “Accounts Payable” are P210,000 of deposits to suppliers for delivery of


goods in February of the next year.

g. The company has 180,000 shares of P5 par common stock issued and outstanding. The
common stock was originally sold for P7 per share, and the premium was included in
“Retained Earnings.”

h. After reading a PAGASA report, the president believes that next year will be a bad crop
year due to prolonged “El Nino” phenomenon and estimates the company will lose about
P670,000. An appropriation of Retained Earnings has been made for this amount.

Questions
Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2006:

1. Cash
a. P 130,700 b. P 231,600 c. P 362,300 d. P 493,000

2. Accounts receivable
a. P 171,000 b. P 513,000 c. P 531,000 d. P 540,000

3. Current assets
a. P 2,443,000 b. P 2,233,000 c. P 2,080,700 d. P 2,050,700

4. Land, Buildings, and Equipment


a. P 3,873,960 b. P 3,687,000 c. P 3,657,960 d. P 3,087,000

5. Noncurrent assets
a. P 4,409,300 b. P 4,289,300 c. P 4,047,000 d. P 3,927,000

6. Total assets
a. P 6,642,300 b. P 6,490,000 c. P 6,340,000 d. P5,977,700

35
7. Current liabilities
a. P 1,194,840 b. P 1,654,840 c. P 984,840 d. P 774,840

8. Total liabilities
a. P 3,514,840 b. P 2,844,840 c. P 2,634,840 d. P 2,424,840

9. Total retained earnings


a. P 2,265,160 b. P 2,235,160 c. P 1,604,160 d. P 1,595,160

10. Total stockholders’ equity


a. P 3,495,160 b. P 3,797,460 c. P 3,429,160 d. P 2,462,860

Solution
a. Cash – restricted 362,300
Cash 362,300
b. Holding loss 30,000
Allowance for holding loss 30,000
c. Other receivable – noncurrent 360,000
Accounts receivable 360,000
Other receivable – current 120,000
Other receivable – noncurrent 120,000
Bad debts 9,000
Allowance for bad debts 9,000
(180,000 x 5%)
d. Supplies 39,000
Land, building & equipment 183,000
Inventories 222,000
e. Land, building & equipment 600,000
Long-term liability 600,000
f. Advances to suppliers 210,000
Accounts payable 210,000
g. OE: Retained earnings 670,000
Est. liability 670,000
CE: Retained earnings 670,000
Retained earnings – appropriated 670,000
Adj: Estimated liability 670,000
Retained earnings 670,000
Answer:
1. A 2. A 3. D 4. B 5. B
6. C 7. A 8. B 9. B 10. A

Problem 13
M. Senajon hired an attorney to help her start SENAJON REPAIR SERVICE CORPORATION.
On March 1, M. Senajon deposited P11,500 cash in bank account in the name of the
corporation in exchange for 1,150 shares of P10 par value common stock. When he paid the
attorney’s bill of P700, the attorney advised her to hire an accountant to keep his records.
M. Senajon was so busy that it was March 31 before she asked you to straighten out his
records. Your task is to develop the financial statements on the March transactions.

After investing in her business and paying her attorney, M. Senajon borrowed P5,000 from
the bank. She later paid P260, including interest of P60, on this loan. She also purchased a
used pickup truck in the company’s name, paying P2,500 down and financing P7,400. The
first payment on the truck is due April 15. M. Senajon then rented an office and paid three
months’ rent P900, in advance. Credit purchases of office equipment of P800 and repair
tools of P500 must be paid by April 10.

In March,SENAJON REPAIR SERVICE CORPORATION completed repairs of P1,300, of which


P400 were cash transactions. Of the credit transactions, P300 were collected during March.

36
Wages of P450 were paid to employees. On March 31, the company received a P75 bill for
the March utilities expense and a P50 check from a customer for work to be completed in
April.
Questions
1. The Cash balance of SENAJON REPAIR SERVICE CORPORATION at March 31 is:
a. P12,390 b. P12,315 c. P12,440 d. P11,500

2. The Accounts Receivable balance of SENAJON REPAIR SERVICE CORPORATION at


March 31 is:
a. P900 b. P800 c. P700 d. P600

3. The Total Current Assets of SENAJON REPAIR SERVICE CORPORATION at March 31


is:
a. P13,715 b. P13,565 c. P13,515 d. P13,640

4. The Total Non-current assets of SENAJON REPAIR SERVICE CORPORATION at March


31 is:
a. P11,900 b. P11,888 c. P11,388 d. P11,200

5. The Total Assets of SENAJON REPAIR SERVICE CORPORATION at March 31 is:


a. P25,528 b. P25,415 c. P24,840 d. P24,915

6. The Total Stockholders’ Equity of SENAJON REPAIR SEVICE CORPORATION at March


31 is:
a. P11,215 b. P11,903 c. P(85) d. P(285)

7. The Total Liability of SENAJON REPAIR SERVICE CORPORATION at March 31 is:


a. P16,025 b. P14,725 c. P13,625 d. P6,225

8. The Total Liability and Stockholders’ Equity of SENAJON REPAIR SERVICE


CORPORATION at March 31 is:
a. P25,528 b. P25,415 c. P24,840 d. P24,915

9. The Total Operating expenses and other expenses of SENAJON REPAIR SERVICE
CORPORATION at March 31 is:
a. P1,585 b. P1,035 c. P1,015 d. P897

10. The Net Income of SENAJON REPAIR SERVICE CORPORATION at March 31 is:
a. P415 b. P403 c. P(85) d. P(285)

Solution
Cash 11,500
Common stock 11,500
Pre-operating cost 700
Cash 700
Cash 5,000
Notes payable 5,000
Interest expense 60
Notes payable 200
Cash 260
Equipment 9,900
Cash 2,500
Notes payable 7,400
Rent expense 300
Prepaid rent 600
Cash 900

37
Equipment 800
AP – others 800
Tools 500
Accrued expenses 500

Cash 400
Accounts receivable 900
Revenue 1,300
Cash 300
Accounts receivable 300
Wages 450
Cash 450
Utilities 75
Accrued expenses 75
Cash 50
Advances from customer 50
Answer:
1. C 2. D 3. D 4. D 5. C 6. A 7. C 8. C 9. A 10. D

Problem 14
OMANDAC CORPORATION has just completed its third year of operations, December 31,
2006. The newly selected president was amazed, to say the least, when told that the
“company’s books have never been in balance.” In fact, he has learned that they are
P14,800 out of balance. Consequently, he has decided to ask an independent CPA to “get
things straightened out.” You are the lucky CPA! While getting an overview of the situation
you learn that the bookkeeper journalize and posts all of the daily transactions, but the
adjusting and closing entries are entered directly into the ledger accounts. A worksheet is
not used. After recording the adjusting entries, the bookkeeper prepares an adjusted trial
balance, which is then used to prepare the financial statements.

At your request the bookkeeper prepared the following post-closing trial balance following
his usual procedures:
OMANDAC CORPORATION
Post-closing Trial Balance
December 31, 2006

Cash 17,800
Accounts receivable 55,000
Note receivable 6,000
Merchandise inventory (periodic system) 120,000
Prepaid insurance 2,400
Equipment 240,000
Land (future site) 40,000
Accounts payable 20,000
Income tax payable 10,000
Mortgage payable 100,000
Common stock, par P10 (20,000 shares outstanding) 320,000
Dividends declared and paid 4,000
Retained earnings 50,000
To balance 14,800 _______
Total 500,000 500,000

After spending considerable time digging into the records and files of the company, you
discovered the following:

a. Estimates of bad debts expense that total P5,000 have been credited directly to
Accounts Receivable.

38
b. Accrued interest expense of P4,000 was recorded, but the credit was omitted.

b. Depreciation expense, on a straight-line basis (no residual value), is P30,000 per


year. Depreciation for 2001 and 2002 was credited directly to the asset account.

c. The 2006 ending inventory of P140,000 was not recorded; the beginning inventory
was P120,000.

d. Prepaid insurance of P2,400 was for two full years, 2006 and 2007.

e. Depreciation was not recorded in 2006.

f. Accounts payable of P2,000 were paid, but the debit was not recorded.

g. The common stock account needs scrutiny.

Questions
1. Cash at December 31, 2006 is:
a. P 11,800 b. P 13,800 c. P 15,800 d. P 17,800

2. Accounts receivable at December 31, 2006 is:


a. P 65,000 b. P 60,000 c. P 55,000 d. P 50,000

3. Notes receivable at December 31, 2006 is:


a. P 10,000 b. P 8,000 c. P 6,000 d. P 0

4. Merchandise inventory at December 31, 2006 is:


a. P 260,000 b. P 140,000 c. P 120,000 d. P 110,000

5. Prepaid insurance at December 31, 2006 is:


a. P 2,400 b. P 1,800 c. P 1,200 d. P 0

6. Equipment at December 31, 2006 is:


a. P 210,000 b. P 240,000 c. P 270,000 d. P 300,000

7. Land (future site) at December 31, 2006 is:


a. P 40,000 b. P 30,000 c. P 20,000 d. P 0

8. Accounts payable at December 31, 2006 is:


a. P 22,000 b. P 20,000 c. P 18,000 d. P 16,000

9. Income taxes payable at December 31, 2006 is:


a. P 38,016 b. P 28,016 c. P 10,384 d. P 10,000

10. Mortgage payable at December 31, 2006 is:


a. P 100,000 b. P 95,000 c. P 90,000 d. P 80,000

11. Common stock at December 31, 2006 is:


a. P 320,000 b. P 200,000 c. P 180,000 d. P 120,000

14. Retained earnings at December 31, 2006 is:


a. P 50,000 b. P 35,200 c. P 18,000 d. P 24,000

39
Solution
Cash 17,800
Accounts receivable 60,000
Allowance for bad debts 5,000
Note receivable 6,000
Merchandise inventory 140,000
Prepaid insurance 1,200
Equipment 300,000
Accumulated depreciation 90,000
Land 40,000
Accounts payable 18,000
Interest payable 4,000
Income tax payable 10,000
Mortgage payable 100,000
Common stock 200,000
APIC 120,000
Retained earnings ________ 18,000 squeezed figure
565,000 565,000

Answer
1. D 2. C 3. C 4. B 5. C 6. A 7. A 8. C 9. D 10. A
11. B 12. C

Problem 15
Your new audit client, Capiz Company, prepared the trial balance below as of December 31,
2006. The company started its operations on January 1, 2005. Your examination resulted in
the necessity of applying the adjusting entries indicated in the additional data below.

Capiz Company
TRIAL BALANCE
December 31, 2006

Debits Credits
Cash P510,000
Accounts receivable, net allowance of P20,000 600,000
Inventories, December 31, 2005 669,000
Land 660,000
Buildings 990,000
Accumulated depreciation, building P19,800
Machinery 444,000
Accumulated depreciation, machinery 45,000
Sinking fund assets 75,000
Bond discounts 75,000
Treasury stock, common 105,000
Accounts payable 567,000
Accrued bond interest 11,250
First mortgage, 6% sinking fund bonds 679,500
Common stock 1,500,000
Premium on common stock 150,000
Stock donation 180,000

40
Retained earnings, December 31, 2005 222,450
Net sales 2,625,000
Purchases 850,500
Salaries and wages 507,000
Factory operating expenses 364,500
Administrative expenses 105,000
Bond interest 45,000 _________
P6,000,000 P6,000,000
Additional data are as follows:

(1) The 1,500,000 common stock was issued at a 10 percent premium to the owners of
the land and buildings on December 31, 2004, the date of organization. Stock with a par
value of P180,000 was donated back by the vendors. The following entry was made:

(Debit) Treasury stock P180,000


(Credit) Stock donation P180,000

The stock was donated because the proceeds from its subsequent sale were to be
considered as an allowance on the purchase price of land and buildings in proportion to
their values as first recorded. The treasury stock was sold in 2006 for P75,000, which
was credited to treasury Stock.

(2) On December 31, 2006, a machine costing P15,000 when the business started was
removed. The machine had been depreciated at 10 percent during the first year. The
only entry made was one crediting the Machinery account with its sales price of P6,000.

(3) Depreciation is to be provided on the straight-line basis, as follows: buildings, 2


percent of cost; machinery, 10 percent of cost. Ignore salvage values.

(4) The first mortgage, 6% sinking fund bonds, par value P750,000 will mature in ten
years from January 1, 2005, interest payable April 1 and October 1. The bonds were
sold on January 1, 2005, at 90; the discount is to be amortized over the life of the bonds
on straight-line basis.

(5) A sinking fund is built up on the straight-line basis, with a provision that each
installment after the first shall be decreased y the amount of the annual 6 percent
interest, which interest is to be added to the fund. The audit disclosed that the proper
installment to the sinking fund was paid by the company on December 31, 2006, but
that the amount was charged in error o the firs Mortgage, 6% Sinking Fund Bonds
account.

(6) The trustee of the sinking fund reported an addition of P4,500 interest to the fund on
December 31, 2006. this had not been recorded by the company.

(7) Inventories at December 31, 2006, were P525,000.

Questions
Based on the above and the result of your audit, you are to provide the answers to the
following:

1. The correct balance of Land account as of December 31, 2006 was


a. P660,000 b. P630,000 c. P588,000 d. P0

41
2. The adjusted net book value of the Building as of December 31, 2006 was
a. P 907,200 b. P905,400 c. P950,400 d. P945,000

3. The correct net book value of the machinery as of December 31, 2006 was
a. P399,000 b. P354,000 c. P345,000 d. P348,000

4. The correct amount of total depreciation expense for 2006 was


a. P648,000 b. P63,900 c. P62,400 d. P63,000

5. How much was the gain or loss on sale of machinery on December 31, 2006?
a. P6,000 loss b. P6,000 gain c. P7,500 loss d. P7,500 gain

6. The adjusted net carrying amount of 6% sinking fund bonds as of December 31,
2006 was
a. P675,000 b. P679,500 c. P690,000 d. P735,000

7. The correct balance of sinking fund assets as of December 31, 2006 was:
a. P75,000 b. P79,500 c. P150,000 d. P154,500

8. The correct balance of Treasury Stock as of December 31, 2006 was:


a. P0 b. P105,000 c. P180,000 d. P75,000

9. The correct balance of Common Stock as of December 31, 2006 was:


a. P1,320,000 b. P1,500,000 c. P1,650,000 d. P1,395,000

10. The correct balance of stock donation as of December 31, 2006 was:
a. P180,000 b. P105,000 c. P0 d. P75,000

Solution
1. OE: Treasury stock 180,000
Stock donation 180,000
CE: Memo entry
Adj: Stock donation 180,000
Treasury stock 180,000
---------------------------------------------------------
OE: Cash 75,000
Treasury stock 75,000
CE: Cash 75,000
Land 30,000
Building 45,000
Adj: Treasury stock 75,000
Land 30,000
Building 45,000
2. OE: Cash 6,000
Machinery 6,000
CE: Cash 6,000
Accum. Dep’n 3,000
Loss on sale 6,000
Machinery 15,000
Adj: Accum. Dep’n: mach 3,000
Loss on sale 6,000
Machinery 9,000
3. Depreciation 63,900
Accum. Dep’n – Mach 45,000 *
Accum. dep’n - bldg 18,900
* 444,000 + 6,000 – 15,000 x 10% = 45,000
** 990,000 – 45,000 = 945,000 x 2% = 18,900
Accum. Dep’n – bldg 900

42
Retained earnings 900
4. Discount on bonds 75,000
Sinking fund bonds 75,000
Retained earnings 7,500
Interest expense 7,500
Discount on bonds 15,000
P 75,000/10 yrs = P7,500 – 2002
7,500 – 2003
5. OE: Sinking fund bond 70,500
Cash 70,500
CE: Sinking fund 70,500
Cash 70,500
Adj: Sinking fund 70,500
Sinking fund bond 70,500
6. Sinking fund 4,500
Interest income 4,500
Answer:
1. B 2. A 3. D 4. B 5. A 6. C 7. C 8. A 9. B 10. C

Problem 16

Instructions:
1. Prepare the audit adjustments required in the problems.
2. Post the net adjustment at the Working Balance Sheet (WBS) and Working Profit and
Loss (WPL).
3. Compute the final balances of each account on your WBS and WPL, proceed to the
questionnaires and transfer all answers to the final answer sheet.
4. Assume no other issues, except those discussed on the problem.

On November 20, 2006 you have substantially completed your fieldwork relative to your
audit of RUCHELL Corporation, engaged in the sale of rechargeable lamps. Its rented store
and office is located in Davao City.

Based on your review of the records you have found out that the company’s financial
statements at the end of its fiscal year September 30, 2006 submitted by their account is
subject to the adjustments you noted in your audit.

Audit finding No. 1


Included in the Cash account is a customer’s check for P1,100 deposited on September 30,
2006 but returned by the bank on September 30, 2006 for insufficiency of drawer’s funds.
The check was redeposited on October 3, 2006. No entry was made by the company for the
return nor the redeposit of the check.

Audit finding No. 2


The debit balance of P1,500 in the allowance for bad debts resulted from write-offs of
uncollectible accounts in excess of the beginning balance of the allowance. Further analysis
of the customer’s accounts disclosed the need for setting up an allowance as at September
30, 2006 to 5% of outstanding balance as of date.

Audit finding No. 3


Goods shipped out on consignment basis in September 2006, still unsold as at the end of
the month, were recorded as sales for P4,900 which included 40% gross profit on cost. This
was not included in the physical inventory.

43
Audit finding No. 4
A physical inventory taken of the merchandise on September 30, 2006 amounted to
P41,500.
Audit finding No. 5
Notes receivable included a 120-day 8% for P9,000 dated July 1, 2006 from J. Ramos,
interest due on maturity date (assume 30 days per month).

Audit finding No. 6


Furniture and equipment costing P3,000 acquired on October 1, 2003, and a book value of
P2,400 at September 30, 2005, was sold for P2,000 cash on October 1, 2006. The sales
price was credited to Furniture and Equipment.

Audit finding No. 7


Depreciation for the fiscal year has not been recorded. Estimated life of the furniture and
equipment is 10 years.

Audit finding No. 8


A one-year insurance policy was taken by the company on June 30, 2006 and paid the
annual of P1,200.

Audit finding No. 9


The company paid P11,700 representing rent for 13 months ending on October 31, 2006.

Audit finding No. 10


The 120-day note payable of P6,000, bearing 12% interest was discounted with the bank on
August 15, 2006. Interest expense was debited.

Audit finding No. 11


The excess of P110 issue price over the 100 par value upon sale of 200 shares was credited
to retained earnings.

Audit finding No. 12


Goodwill account was set-up with a credit to Retained Earnings on the basis of a resolution
of the Board of Directors.

Audit finding No. 13


Office salaries unpaid as of September 30, 2006, P1,200, were not taken up as accrued
expense.

Audit finding No. 14


Patents were acquired by purchase on September 30, 2005 for P20,000. It has as estimated
useful life of 4 years.

Audit finding No. 15


An analysis of the investment account shows that on September 2006 25 shares were sold
for P200 per share. This was recorded as a debit balance to Cash, P5,000 and a credit to
Investments in A Co., P5,000.

Audit finding No. 16


A repayment of non-interest bearing note payable for P5,000 was erroneously debited to
Advertising.

44
Audit finding No. 17
A payment of P1,000 for Taxes on September 29, 2006 was not recorded in the books.

Audit finding No. 18


On September 30, 2006 RUCHELL Company declared a 10% stock dividend distributable on
October 21, 2006. The market value per share is P120 at the time of declaration. This has
not been taken up in the books.

Audit finding No. 19


On September 30, 2006 a Land was donated by a stockholder. The stockholder bought the
Land in 1998 for P26,000. The appraised value of the land at present is P50,000.

Audit finding No. 20


Marketable Securities which cost P15,000 has a market value of P16,000.

Audit finding No. 21


A payment to supplier within the discount period was made on June 20, 2006. The discount
of P20 was credited to Sales discounts instead of purchase discounts.

Audit finding No. 22


RUCHELL Corporation has a pending lawsuit from a customer, asking for a P100,000
damages. The lawyers of the company believe that it is remote that the case of the
customer will prosper in court.

RUCHELL Corporation
Working Balance Sheet
September 30, 2006

PER AUDIT FINAL


BOOK ADJUSTMENT BALANCES
Current
Cash 10,500
Marketable Securities 15,000
Account Receivable – trade 57,200
Allowance for doubtful accounts 1,500 dr.
Notes Receivable 21,500
Inventories 39,500
Investment in A, Co. –100 shares 25,000
Interest Receivable -
Prepayments 1,750
TOTAL 171,950

Land
Furniture & Equipment 50,850
Accumulated Depreciation (12,170)
TOTAL 38,680

Goodwill 10,000
Patents 20,000
TOTAL 30,000
Total Assets 240,630

45
Liabilities
Accounts payable 35,420
Accrued expenses -
Notes payable 31,000
Stockholders’ equity
Capital Stock, P100 75,000
Additional paid in capital -
Stock dividend distributable -
Donated capital -
Retained Earnings 99,210
Total Liab. & S. E 240,630

RUCHELL CORPORATION
Working Profit and Loss
Year Ended September 30, 2006
PER AUDIT FINAL
BOOKS ADJUSTMENT BALANCES

Sales 269,810
Sales returns ( 1,950)
Sales discounts ( 1,700)
Net sales 266,160

Cost of sales
Inventory, beg. 39,500
Purchases 189,360
Purchase returns ( 3,700)
Purchase discounts ( 1,970)
Inventory, end (41,500)
181,690
Gross Profit 84,470
Advertising ( 7,210)
Doubtful Accounts -
Salesman’s Salaries (21,650)
Miscellaneous Selling expenses ( 1,940)
Rent expense (11,700)
Insurance expense ( 1,200)
Light and water ( 300)
Taxes ( 1,510)
Office salaries ( 3,330)
Miscellaneous office expense ( 1,560)
Loss on sale -
Amortization of Intangibles -
Interest Expense ( 4,060)
Other Income 430
Net Income 30,440

Questions

1. Cash
a. P 9,500 b. P8,400 c. P10,600 d. P5,800

2. Accounts receivable – trade

46
a. P57,200 b. P53,400 c. P50,000 d. P58,300

3. Allowance for doubtful accounts


a. P1,500 b. P2,670 c. P2.860 d. P4,115
4. Interest Receivable
a. P60 b. P180 c. P240 d. 90

5. Inventories
a. P41,500 b. P46,400 c. P45,000 d. 40,000

6. Doubtful accounts
a. P2,980 b. P2,670 c. P4,170 d. P4,000

7. Prepayments
a. P2,980 b. P3,700 c. p2,050 d. P2,650

8. Furniture and Equipment


a. P57,850 b. P62,850 c. P60,850 d. P50,850

9. Depreciation
a. P5,085 b. P6,285 c. P6,085 d. P4.985

10. Accounts payable


a. P35,420 b. P34,420 c. P36,000 d. P32,988

11. Capital Stock


a. P75,000 b. P77,000 c. P0 d. P73,000

12. Sales
a. P269,810 b. P274,710 c. P264,910 d. P260,100

13. Purchases
a. P189,360 b. P187,360 c. P180,000 d. P200,160

14. Interest expense


a. P4,030 b. P4.060 c. P4,090 d. P3,910

15. Other Income


P430 b. P610 c. P400 d. 0

16. Goodwill
a. P0 b. P10,000 c. P5,000 d. P6,000

17. Office salaries


a. P2,130 b. P22,850 c. P4,530 d. P1,200

18. Patents
a. P0 b. P10,000 c. P15,000 d. P5,000

19. Additional Paid in Capital


a. P3,500 b. P500 c. P2,000 d. P200

20. Investment in a Co.

47
a. P0 b. P26,000 c. P24,000 d. P25,000

21. Advertising
a. P7,210 b. P5,210 c. P2,210 d. P5,000
22. Light and Power
a. P500 b. P5,300 c. P300 d. P0

23. Taxes
a. P1,970 b. P2,510 c. P1,000 d. P300

24. RUCHELL Company should record stock dividend payable at


a. P7,500 b. P9,000 c. P0 d. P1,500

25. Land
a. P0 b. P50,000 c. p26,000 d. P24,000

26. The appropriate account to be credited for the donation is


a. Retained Earnings c. Donated Capital
b. Capital Stock d. Other Income

27. Marketable securities, net of any allowance for decline


a. P14,000 b. P15,000 c. P16,000 d. P0

28. Sales discount


a. P1,680 b. P1,720 c. P1,200 d. P1,500

29. Salesman’s salaries


a. P21,650 b. P22,850 c. P20,000 d. P25,000

30. RUCHELL Company should recognize liability from damages for


a. P0 b. P100,000 c. P50,000 d.P200,000

Answer:
1. B 2. B 3. B 4. B 5. C 6. C 7. B 8. D 9. A 10. A
11. A 12. C 13. A 14. D 15. B 16. A 17. C 18. C 19. A 20. C
21. C 22. C 23. B 24. A 25. B 26. C 27. B 28. B 29. A 30. A

Entries:
Finding 1 Finding 8
Accounts receivable 1,100 Prepayments 900
Cash 1,100 Insurance expense 900
Finding 2 Finding 9
Bad debts 4,170 Prepayments 900
Allow. For BD 4,170 Rent expense 900
Finding 3 Finding 10
Sales 4,900 Prepayment 150
Accounts receivable 4,900 Interest expense 150
Inventory 3,500 Finding 11
COS 3,500 Retained earnings 2,000
Finding 4 APIC 2,000
COS 39,500 Finding 12
Inventory 39,500 Retained earnings 10,000
Inventory 41,500 Goodwill 10,000
COS 41,500 Finding 13
Finding 5 Office salaries 1,200
Interest receivable 180 Accrued expenses 1,200
Interest income 180 Finding 14
Finding 6 Amortization 5,000

48
No adjustments Patents 5,000
Finding 7
Depreciation 5,085
AD 5,085

Finding 15 Finding 18
Loss on sale 1,000 Retained earnings 9,000
Investment 1,000 Stock div. distr. 7,500
Finding 16 APIC 1,500
Note payable 5,000 Finding 19
Advertising 5,000 Land 50,000
Donated capital 50,000
Finding 17
Taxes 1,000 Finding 20
Cash 1,000 No adjustment
Finding 21
Sales discount 20
Purchase discount 20

WORKING PAPER
Per books Per audit
2,100.0
Cash 10,500.00 0 8,400.00
Marketable securities 15,000.00 15,000.00
1,100.0 4,900.0
Accounts receivable - trade 57,200.00 0 0 53,400.00
4,170.0 (2,670.0
Allow.for bd - debit balance 1,500.00 0 0)
Notes receivable 21,500.00 21,500.00
45,000.0 39,500.0
Inventories 39,500.00 0 0 45,000.00
1,000.0
Investment in A. Co. - 100 shares 25,000.00 0 24,000.00
Interest receivable - 180.00 180.00
1,950.0
Prepayments 1,750.00 0 3,700.00
50,000.0
Land - 0 50,000.00
Furniture & Equipment 50,850.00 50,850.00
(12,170.0 5,085.0 (17,255.0
Accumulated depreciation 0) 0 0)
10,000.0
Goodwill 10,000.00 0 -
5,000.0
Patents 20,000.00 0 15,000.00
240,630.0 267,105.0
0 0

Accounts payable 35,420.00 35,420.00


1,200.0
Accrued expenses - 0 1,200.00
5,000.0
Notes payable 31,000.00 0 26,000.00
Capital stock, P100 75,000.00 75,000.00
3,500.0
Additional paid in capital - 0 3,500.00
7,500.0
Stock dividend distributable - 0 7,500.00
50,000.0
Donated capital - 0 50,000.00
Retained earnings 99,210.00 68,485.00
240,630.0 267,105.0
0 0

49
4,900.0
Sales 269,810.00 0 264,910.00
(1,950.0 (1,950.0
Sales returns 0) 0)
(1,700.0 (1,720.0
Sales discounts 0) 20.00 0)
Net sales 266,160.00 261,240.00
39,500.0
Cost of sales *** 181,690.00 0 20.00
41,500.0
0
3,500.0
0 176,170.00
Gross profit 84,470.00 85,070.00
Other income 430.00 180.00 610.00
TOTAL 84,900.00 85,680.00
Operating expenses
(7,210.0 5,000.0 (2,210.0
Advertising 0) 0 0)
4,170.0 (4,170.0
Doubtful accounts - 0 0)
(21,650.0 (21,650.0
Salesmen's salaries 0) 0)
(1,940.0 (1,940.0
Miscellaneous selling expenses 0) 0)
(11,700.0 (10,800.0
Rent expenses 0) 900.00 0)
(1,200.0 (300.00
Insurance expense 0) 900.00 )
(300.00 (300.00
Light and water ) )
(1,510.0 1,000.0 (2,510.0
Taxes 0) 0 0)
(3,330.0 1,200.0 (4,530.0
Office salaries 0) 0 0)
(1,560.0 (1,560.0
Miscellaneous office expenses 0) 0)
1,000.0 (1,000.0
Loss on sale - 0 0)
5,085.0 (5,085.0
Depreciation - 0 0)
5,000.0 (5,000.0
Amortization of intangibles - 0 0)
Income from operations 34,500.00 24,625.00
(4,060.0 (3,910.0
Interest expense 0) 150.00 0)
Net income 30,440.00 20,715.00
12,000.0
Retained beginning 68,770.00 0 56,770.00
9,000.0 (9,000.0
Dividends - 0 0)
Retained end 99,210.00 68,485.00
186,105.0 186,105.0
0 0
*** COS
Inventory - beg. 39,500.00
Purchases 189,360.00
(3,700.0
Purchase returns 0)
Purchase discounts (1,970.0

50
0)
TGAS 223,190.00
(41,500.0
Inventory - end 0)
COS 181,690.00

CHAPTER 2 – Accounting for


Correction of Errors
Exercises

1. On November 1, 2006, Rosete Company paid P10,800 to renew its insurance policy for 3
years. On December 31, 2006, Rosete’s unadjusted trial valance showed a balance of
P270 for prepaid insurance and P13,230 for insurance expense. What amounts should
be reported for prepaid insurance and insurance expense in Rosete’s December 31, 2006
financial statements?
Prepaid Insurance Insurance Expense
a. P 9,900 P 3,600
b. P 10,200 P 3,600
c. P 10,200 P 3,300
d. P 10,200 P 3,030

2. An analysis of Palmes Corporation’s unadjusted prepaid expense account at December


31, 2006 revealed the following:

 An opening balance at P6,000 for Palmes comprehensive insurance policy. Palmes


had paid an annual premium of P12,000 on July 1, 2005.
 A P12,800 annual insurance premium payment made July 1, 2006.
 A P8,000 advance rental payment for a warehouse Palmes leased for 1 year
beginning January 1, 2006.

In its December 31, 2006 balance sheet, what amount should Palmes report as prepaid
expenses?
a. P 20,400 b. P 14,400 c. P 8,000 d. P 6,400

3. On October 1, 2006, a company sold services to a customer and accepted a note in


exchange with a P120,000 face value and an interest rate of 10%. The note requires
that both the principal and interest be paid at the maturity date, December 1, 2007.
The company’s accounting period is the calendar year. What adjusting entry (related to
this note) will be required at December 31, 2006 on the company’s books?

a. Deferred interest income 3,000


Interest receivable 3,000
b. Interest income 3,000
Interest receivable 3,000
c. Interest receivable 3,000
Deferred interest income 3,000
d. Interest receivable 3,000
Interest income 3,000

51
4. What is the purpose of the following entry?

Supplies xxxx
Supplies expense xxxx

a. To recognize supplies used, if purchases of supplies are recorded in supplies.


b. To recognize supplies on hand, if purchases of supplies are recorded in supplies
expense.
c. To record the purchase of supplies during or at the end of the period.
d. To close the expense account for supplies at the end of the period.

5. On December 31, earned but unpaid wages amounted to P15,000. What reversing entry
could be made on January 1?
a. Wages expense 15,000
Wages payable 15,000
b. Prepaid expense 15,000
Wages expense 15,000
c. Wages expense 15,000
Prepaid wages 15,000
d. Wages payable 15,000
Wages expense 15,000

6. A 3-year insurance policy was purchased on October1 for P6,000, and prepaid insurance
was debited. Assuming a December 31 year-end, what is the reversing entry at the
beginning of the next period?
a. None is required.
b. Cash 6,000
Prepaid insurance 6,000
c. Prepaid insurance 5,500
Insurance expense 5,500
d. Insurance expense 500
Prepaid insurance 500

7. A consulting firm started and completed a project for a client in December 2006. The
project has not been recorded on the consulting firm’s books, and the firm will not
receive payment from the client until February 2007. The adjusting entry that should be
made on the books of the consulting firm on December 31, 2006, the last day of the
firm’s fiscal year, is
a. Cash in transit xxx
Consulting revenue xxx
b. Consulting revenue receivable xxx
Consulting revenue xxx
c. Unearned consulting rev. xxx
Consulting revenue xxx
d. Consulting revenue receivable xxx
Unearned consulting revenue xxx

8. Cristie Company sublet a portion of its warehouse for 5 years at an annual rental of
P15,000, beginning on March 1. The tenant paid 1 year’s rent in advance, which Cristie
recorded as a credit to calendar-year basis. The adjustment on December 31 of the first
year should be
a. No Entry.

52
b. Unearned rental income 2,500
Rental income 2,500
c. Rental income 2,500
Unearned rental income 2,500
d. Unearned rental income 12,500
Rental income 12,500

9. After a successful drive aimed at members of a specific national association, Online


Company received a total of P180,000 for 3-year subscriptions beginning April 1, 2006,
and recorded this amount in the unearned revenue account. Assuming Online records
adjustment only at the end of the calendar year, the adjusting entry required to reflect
the proper balances in the accounts at December 31, 2006 is to
a. Debit subscription revenue for P135,000 and credit unearned revenue for P135,000.
b. Debit unearned revenue for P135,000 and credit subscription revenue for P135,000.
c. Debit subscription revenue for P45,000 and credit unearned revenue for P45,000.
d. Debit unearned revenue for P45,000 and credit subscription revenue for P45,000.

10. Jay Corporation renewed an insurance policy for 3-years beginning July 1, 2006 and
recorded the P81,000 premium in the prepaid insurance accounts. The P81,000
premium represents an increase of P23,400 from the P57,600 premium charged 3 years
ago. Assuming Jay'’ records its insurance adjustments only at the end of the calendar
year, the adjusting entry required to reflect the proper balances in the insurance
accounts at December 31, 2006, Jay’s year-end is to
a. Debit insurance expense for P13,500 and credit prepaid insurance for P13,500.
b. Debit prepaid insurance for P13,500 and credit insurance expense for P13,500.
c. Debit insurance expense for P67,500 and credit prepaid insurance for P67,500.
d. Debit insurance expense for P23,100 and credit prepaid insurance for P23,100.

11. The 2006 financial statements of Hershey Company reported net income for the year
ended December 31, 2006 of 2 million. On July 1, 2007, subsequent to the issuance of
the 2006 financial statements, Hershey changed from an accounting principle that is not
generally accepted to one that is generally accepted. If the generally accepted
accounting principle had been used in 2006, net income for the year ended December
31, 2006 would have been decreased by 1 million. On August 1, 2007, Hershey
discovered a mathematical error relating to its 2006 financial statements. If this error
had been discovered in 2006, net income for the year ended would have been increased
by P500,000.

What amount, if any, should be included in net income for the year ended December 31,
2007 because of the items noted above?
a. P 0 c. P 500,000 increase
b. P 500,000 decrease d. P 1,000,000 decrease

12. Edcelle Company reported a retained earnings balance of P400,000 at December 31,
2005. In August 2006, Edcelle determined that insurance premiums of P60,000 for the
3-year period beginning January 1, 2005 had been paid and fully expensed in 2005.
Edcelle has a 30% income tax rate.

What amount should Edcelle report as adjusted beginning retained earnings in its 2006
statement of retained earnings?
a. P 442,000 b. P 440,000 c. P 428,000 d. P 420,000

53
13. Colasissi Corporation failed to accrue warranty costs of P50,000 in its December 31,
2005 financial statements. In addition, a change from straight-line to accelerated
depreciation made at the beginning of 2006 resulted in a cumulative effect of P30,000
on Colasissi’s retained earnings. Both the P50,000 and P30,000 are net of related
income taxes.

What amount should Colasissi report as prior period adjustments in 2006?


a. P 0 b. P 30,000 c. P 50,000 d. P 80,000
Questions 14 and 15 are based on the following information.

On October 1, 2006, Yuri Retailers signed a 4-month, 16% note payable to finance the
purchase of holiday merchandise. At that date, there was no direct method of pricing the
merchandise, and the note’s market rate of interest was 11%. Yuri recorded the
purchase at the note’s face amount. All of the merchandise was sold by December 1,
2006. Yuri’s 2006 financial statements reported interest payable and interest expense
on the note for 3 months at 16%. All amounts due on the note were paid February 1,
2007.

14. Yuri’s 2006 cost of goods sold for the holiday merchandise was
a. Overstated by the difference between the note’s face amount and the note’s October
1, 2006 present value.
b. Overstated by the difference between the note’s face amount and the note’s October
1, 2006 present value plus 11% interest for 2 months.
c. Understated by the difference between the note’s face amount and the note’s
October 1, 2006 present value.
d. Understated by the difference between the note’s face amount and the note’s
October 1, 2006 present value plus 11% interest for 2 months.

15. As a result of Yuri’s accounting treatment of the note, interest, and merchandise, which
of the following items was reported correctly?

12/31/06 12/31/06
Retained earnings Interest payable
a. Yes Yes
b. No No
c. Yes No
d. No Yes

16. On December 31, 2006, Excel Corp. sold merchandise for P75,000 to Fineafle Co. The
terms of the sale were net 30, FOB shipping point. The merchandise was shipped on
December 31, 2006 and arrived at Fineafle on January 5, 2007. Because of a clerical
error, the sale was not recorded until January 2007, and the merchandise, sold at 25%
markup, was included in Excel’s inventory at December 31, 2006.

As a result, Excel’s cost of goods sold for the year ended December 31, 2006 was
a. Understated by P 75,000 c. Understated by P 15,000
b. Understated by P 60,000 d. Correctly stated

17. For the past 3 years, Greenwish Co. has failed to accrue unpaid wages earned by
workers during the last week of the year. The amounts omitted, which are considered
material, were as follows:

December 31, 2003 P56,000

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December 31, 2005 51,000
December 31, 2006 64,000

The entry on December 31, 2006 to correct for these omissions would include a
a. Credit to wage expense for P64,000
b. Debit to wage expense for P51,000
c. Debit to wage expense for P13,000
d. Credit to retained earnings for P64,000
18. An audit of Funny Co. for 2006, its first year of operations, detected the following errors
made at December 31, 2006:

Failed to accrue P50,000 interest expense


Failed to record depreciation expense on office equipment of P80,000
Failed to amortize prepaid rent expense of P100,000
Failed to delay recognition of prepaid advertising expense of P60,000

The net effect of these errors was to overstate net income for 2006 by
a. P 130,000 b. P 170,000 c. P 230,000 d. P 290,000

19. While preparing its 2006 financial statements, Falfact Corp. discovered computational
errors in its 2005 and 2004 depreciation expense. These errors resulted in
overstatement of each year’s income by P25,000, net of income taxes. The following
amounts were reported in the previously issued financial statements:
2005 2004
Retained earnings, 1/1 P 700,000 P 500,000
Net income 150,000 200,000
Retained earnings, 12/31 P 850,000 P 700,000

Falfact’s 2006 net income is correctly reported at P180,000. Which of the following
amounts should be reported as prior-period adjustments and net income in Falfact’s
2006 and 2005 comparative financial statements?

Year Prior period adjustment Net income


a. 2005 - P150,000
2006 P (50,000) 180,000
b. 2005 (50,000) 150,000
2006 - 180,000
c. 2005 (25,000) 125,000
2006 - 180,000
d. 2005 - 125,000
2006 - 180,000

20. The following information appeared on Blight Inc.’s December 31 financial statements:
2005 2006
Assets P 1,000,000 P1,200,000
Liabilities 750,000 800,000
Contributed capital 120,000 120,000
Dividends paid 100,000 60,000

In preparing its 2006 financial statements, Blight discovered that it had misplaced a
decimal in calculating depreciation for 2005. This error overstated 2005 depreciation by
P10,000. In addition, changing technology had significantly shortened the useful life of

55
Blight’s computers. Based on this information, Blight determined that depreciation
should be P30,000 higher in 2006 financial statements.

Assuming that no correcting or adjusting entries have been made and ignoring income
taxes, how much should Blight report as 2006 net income?
a. P 230,000 b. P 210,000 c. P 180,000 d. P 170,000

Questions 21 and 22 are based on the following information.

An audit of Angelina Company has revealed the following four errors that have occurred
but have not been corrected:

 Inventory at December 31, 2005-P40,000, understated


 Inventory at December 31, 2006-P15,000, overstated
 Depreciation for 2005-P7,000, understated
 Accrued expenses at December 31, 2006-P10,000, understated

21. The errors cause the reported net income for the year ending December 31, 2006 to be
a. Overstated by P72,000 c. Understated by P28,000
b. Overstated by P65,000 d. Understated by P45,000

22. The errors cause the reported retained earnings at December 31, 2006 to be
a. Overstated by P65,000 c. Overstated by P25,000
b. Overstated by P32,000 d. Understated by P18,000

23. Collection of notes receivable of P50,000 plus interest of P500 was recorded as debit to
cash of P50,500 and notes receivable of P50,500. This error will
a. Overstate the expenses by P500
b. Understate the liability by P500
c. Understate assets by P500 and understate revenue by P500
d. Understate revenue by P500

24. Accounts payable of P32,000 was paid and erroneously recorded as debit to accounts
payable and credit to cash for P23,000. The working capital
a. Has no effect c. Is understated by P9,000
b. Is overstated by P9,000 d. Is understated by P23,000

25. The beginning accumulated depreciation per record was P100,000. During the year, the
firm sold one of its machines recorded as follows:
Cash 270,000
Accumulated depreciation - machine 30,000
Machine 300,000

If the actual cash proceeds is P300,000, the correcting entry would be:
a. Cash 300,000
Machine 300,000
b. Cash 30,000
Gain on sale of machine 30,000
c. Accumulated depreciation - machine 30,000
Gain on sale of machine 30,000
d. Cash 300,000

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Machine 270,000
Gain on sale of machine 30,000

26. Based on no. 25, assume that the nominal accounts had been closed. The effect of the
error to the accounting elements, if not corrected, is
a. P30,000 understatement of the net income.
b. P30,000 understatement of asset and P30,000 understatement of net income.
c. P30,000 understatement of asset and P30,000 understatement of owner’s equity.
d. P30,000 understatement of asset and P30,000 overstatement of owner’s equity.
27. A cash purchase of P5,200 was recorded as P2,500. The error had been discovered when
nominal accounts were already closed to income summary, but not yet closed to the
capital account. The correcting entry will require a
a. P2,700 debit to accounts receivable
b. P2,700 debit to purchases
c. P2,700 credit to purchases
d. P2,700 credit to accounts payable

28. Under the periodic inventory system, the ending inventory of P65,000 was erroneously
recorded as P56,000. The error had been discovered when all nominal and temporary
accounts were already closed to the real account. The correcting entry would require a
a. Debit to capital account c. Credit to cost of sale
b. Debit to income summary account d. Credit to owner’s capital

29. A sales discount of P5,000 was recorded as purchase discount. The error had been
discovered when nominal accounts were still open. The correcting entry would require a
a. P5,000 debit to purchase discount c. P5,000 credit to sales discount
b. P5,000 credit to purchase discount d. P5,000 credit to accounts payable

30. An owner’s withdrawal amounting to P20,000 was erroneously recorded as salaries


expense. The error had been discovered when all temporary accounts were already
closed to the capital account. The correcting entry will require a
a. P20,000 debit to owner’s capital c. P20,000 debit to salaries expense
b. P20,000 debit to owner’s drawings d. No correcting entry is necessary

31. A payment of P20,000 rent was recorded as a debit to rent income. The error had been
discovered when nominal accounts were already closed. The correcting entry would
require a
a. P20,000 debit to rent expense c. P40,000 credit to rent income
b. P20,000 debit to rent income d. No adjustment entry is necessary

32.A cash collection of P5,000 from customer’s open account was recorded as P500. The
error had been discovered when nominal accounts were still open. The correcting entry
would require a
a. P4,500 debit to accounts receivable c. P500 credit to accounts
receivable
b. P4,500 debit to cash d. P500 credit to cash

33. A sale of merchandise on account of P3,200 was recorded as P2,300. The error had
been discovered when nominal accounts were already closed. The correcting would
require a
a. P900 debit to cash. c. P900 debit to sale
b. P900 debit to accounts receivable d. P900 credit to accounts receivable

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34. A collection of P5,000 notes receivable, plus P500 interest income was recorded as debit
to cash P5,500 and credit to notes receivable P5,500. The error had been discovered
when nominal accounts were still open. The correcting entry would require a
a. P500 debit to cash. c. P500 credit to cash
b. P500 debit to accounts receivable d. P500 credit to interest income

35.The accrued interest on a 12%, 60-day note of a customer dated December 1, 2006 with
a face value of P100,000 was not taken up as of December 31, 2004. The collection of
the note, which matured on January 31, 2007, was recorded as
Cash 102,000
Notes receivable 100,000
Interest Income 2,000

The error was discovered after collection. The correcting entry would require a
a. P2,000 debit to cash.
b. P2,000 debit to accrued interest receivable
c. P1,000 debit to interest income
d. P2,000 credit to interest income

36.A return of merchandise amounting to P4,500 which was previously purchased on


account was recorded as

Accounts payable 5,400


Purchases 5,400

If the error had been discovered when the nominal accounts were still open, the
correcting entry would require a
a. P900 debit to purchase return
b. P900 debit to accounts payable
c. P900 credit to purchases
d. P900 credit to accounts payable

Answer:
1. c 2. a 3, d 4, b 5. d 6. a 7. b 8. d 9. d 10. d

11. d 12. c 13. c 14. a 15. d 16. b 17. c 18. b 19. a 20. c

21. b 22. b 23. c 24. a 25. b 26. c 27. b 28. c 29. b 30. d

31. d 32. b 33. b 34. d 35. c 36. d

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Problem 1
The first audit of the books of Luzon Company was made for the year ended December 31,
2006. In examining the books, the auditor found that certain items had been overlooked or
incorrectly handled in the last 3 years. These items are:

a. At the beginning of 2004, the company purchased a machine for P1,020,000 (salvage
value of P102,000) that had a useful life of 6 years. The bookkeeper used straight-line
depreciation, but failed to deduct the salvage value in computing the depreciation base
for the 3 years.

b. At the end of 2005, the company failed to accrue sales salaries of P90,000.

c. A tax lawsuit that involved the year 2004 was settled late in 2006. It was determined
that the company owed an additional P170,000 in taxes related to 2004. The company
did not record a liability in 2004 or 2005 because the possibility of loss was considered
remote, and charged the P170,000 to a loss account in 2006.

d. Luzon Company purchased another company early in 2004 and recorded goodwill of
P900,000. Luzon had not amortized goodwill because its value had not diminished. The
estimated economic life of the goodwill is 20 years.

e. In 2006, the company wrote off P174,000 of inventory considered to be obsolete; this
loss was charged directly to Retained Earnings.

f. Year-end wages payable of P6,800 were not recorded because the bookkeeper though
that “they were immaterial.”

g. Insurance for a 12-month period purchased on November 1 of this year was charged to
insurance expense in the amount of P5,280 because “the amount of the check is about
the same every year.

Questions

1. The entry to record the adjustment of item “a” is:


a. Accumulated depreciation 34,000
Retained earnings 17,000
Depreciation expense 17,000
b. Accumulated depreciation 51,000
Retained earnings 34,000
Depreciation expense 17,000
c. Accumulated depreciation 17,000
Depreciation expense 17,000
d. Accumulated depreciation 17,000

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Retained earnings 17,000

2. The entry to record the adjustment of item “c”:


a. No adjustment.
b. Retained earnings 170,000
Estimated liability 170,000
c. Loss on damages 170,000
Estimated liability 170,000
d. Loss on damages 170,000
Cash 170,000
3. Net income of 2005 is overstated by:
a. P 460,400 b. P 318,400 c. P 107,000 d. P 73,000

4. Net income of 2006 is overstated by:


a. P 367,000 b. P 312,000 c. P 103,400 d. P 69,400

Solution
a. Accumulated depreciation 51,000
Depreciation expense (2006) 17,000
Retained earnings (2004 & 2005) 34,000
b. Retained earnings 90,000
Salaries expense 90,000
c. No adjustment
d. No adjustment since no indication of impairment.
e. Loss on obsolete inventory 174,000
Retained earnings 174,000
f. Salaries expense 6,800
Salaries payable 6,800
g. Prepaid insurance 4,400
Insurance expense 4,400

2004 2005 2006


Item A 17,000 17,000 17,000
Item B (90,000) 90,000
Item C - - -
Item D
Item E (174,000)
Item F (6,800)
Item G ___________ __________ 4,400
Net Effect 17,000 (73,000 (69,400)

Answer:
1. B 2. A 3. D 4. D

Problem 2
A CPA is engaged by the Sony Corporation in 2006 to examine the books and records and to
make whatever corrections are necessary. An examination of the accounts discloses the
following:

a. Dividends had been declared on December 15 in 2004 and 2005 but had not been
entered in the books until paid.

b. Improvements in building and equipment of P9,600 had been debited to expense at the
end of April 2003. Improvements are estimated to have an 8-year life. The company
uses the straight-line method in recording depreciation and computes depreciation to
the nearest month.

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c. The physical inventory of merchandise had been understated by P3,000 at the end of
2004 and by P4,300 at the end of 2005.

d. The merchandise inventories at the end of 2005 and 2006 did not include merchandise
that was then in transit and to which the company had title. This shipments of P3,800
and P5,500 were recorded as purchases in January of 2006 and 2004, respectively.

e. The company had failed to record sales commissions payable of P2,100 and P1,700 at
the end of 2005 and 2006, respectively.

f. The company had failed to recognized supplies on hand of P1,200 and P2,500 at the end
of 2005 and 2006, respectively.

The Retained Earnings account showed the following postings:

Date Item Debit Credit


2004 Jan 1 Balance 81,000
Dec 31 Net income for year 18,000
2005 Jan 10 Dividends paid 15,000
Mar 6 Stock sold – excess
over par 32,000
Dec31 Net loss for year 11,200
2006 Jan 10 Dividend paid 15,000
Dec 31 Net loss for year 12,400

Questions:
1. Corrected net income of 2004
a. P 19,800 b. P 15,600 c. P 13,600 d. P 16,800

2. Corrected net loss of 2005


a. P 16,000 b. P 14,000 c. P 12,000 d. P 10,000

3. Corrected net loss of 2006


a. P 16,200 b. P 15,800 c. P 15,200 d. P 12,800

4. Adjusted retained earnings at December 31, 2004


a. P 109,200 b. P 106,400 c. P 94,600 d. P 85,000

5. Adjusted retained earnings at December 31, 2005


a. P 71,200 b. P 69,000 c. P 67,600 d. P 65,000

6. Adjusted retained earnings at December 31, 2006


a. P 51,400 b. P 49,800 c. P 49,000 d. P 48,200

Solution
2004 2005 2006
Unadjusted Net income/Loss 18,000 (11,200) (12,400)
Item B (1,200) (1,200) (1,200)
Item C 3,000 (3,000)
4,300 (4,300)
Item D – unrecorded ending inv. 3,800 (3,800)
5,500
- unrecorded purchases (3,800) 3,800
(5,500)
Item E (2,100) 2,100

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(1,700)
Item F 1,200 (1,200)
___________ __________ 2,500
Adjusted net income/loss 19,800 (12,000) (16,200)
Retained earnings – beg. 81,000 94,600 67,600
Item A (15,000) (15,000)
Item B – error in recording improv. 9,600
- unrecorded depreciation (800) _________ ____________
Retained earnings - end 94,600 67,600 51,400
Answer:
1. A 2. C 3. A 4. C 5. C 6. A

Problem 3
A partial trial balance of Josh Alejandro Corporation is as follows on December 31, 2006:
Dr.____ ____Cr.____
Supplies on hand P 13,500
Accrued salaries and wages P 7,500
Interest receivable on investments 25,500
Prepaid insurance 450,000
Unearned rent -0-
Accrued interest payable 75,000

Additional adjusting data:

a. A physical count of supplies on hand on December 31, 2006, totaled P5,500.

b. Through oversight, the Accrued Salaries and Wages account was not changed during
2006. Accrued salaries and wages on 12/31/06 amounted to P22,000.

c. The interest receivable on investments account was also left unchanged during 2006.
Accrued interest on investments amounts to P21,750 on 12/31/06.

d. The unexpired portions of the insurance policies totaled P325,000 as of December


31, 2006.

e. P140,000 was received on January 1, 2005, for the rent of a building for both 2005
and 2006. The entire amount was credited to rental income.

f. Depreciation for the year was erroneously recorded as P25,000 rather than the
correct figure of P250,000.

g. A further review of depreciation calculations of prior year revealed that depreciation


of P36,000 was not recorded. It was decided that this oversight should be corrected by a
prior period adjustment.

Questions
1. The accrued salaries and wages at year-end is:
a. P 29,500 b. P22,000 c. P 14,500 d. P 7,500

2. How much is the adjusted salaries and wages at year-end assuming that the balance of
this account in the book is P350,000?
a. P 379,500 b. P 372,000 c. P 364,500 d. P 342,500

3. Prepaid insurance at year-end is:

62
a. P 450,000 b. P 325,000 c. P 125,000 d. P 0
4. Supplies on hand at year-end is:
a. P 13,500 b. P 8,000 c. P 5,500 d. P 2,500

5. Depreciation expense at year-end is:


a. Understated by P225,000
b. Overstated by P225,000
c. Understated by P261,000
d. Overstated by P261,000

Solution
1. Supplies expense 8,000
Supplies on hand 8,000
2. Accrued salaries and wages 7,500
Salaries and wages expense 7,500
To reverse accrued salaries.
Salaries and wages expense 22,000
Accrued salaries and wages 22,000
3. Interest income 25,500
Interest receivable 25,500
To reverse accrued income.
Interest receivable 21,750
Interest income 21,750
4. Insurance expense 125,000
Prepaid insurance 125,000
5. Retained earnings 70,000
Rent income 70,000
6. Depreciation expense 225,000
Accumulated depreciation 225,000
7. Retained earnings 36,000
Accumulated depreciation 36,000
Answer:
1. B 2. C 3. B 4. C 5. A

Problem 4
The before tax income for Franzine Gomez Co. for 2005 was P303,000 and P232,200 for
2006. However, the accountant noted that the following errors had been made:

1. Sales for 2005 included amounts of P114,600 which was received in cash during 2005,
but for which the related products were delivered in 2006. Title did not pass to the
purchaser until 2006.

2. The inventory on December 31, 2005, was understated by P25,920.

3. The bookkeeper in recording interest expense for both 2005 and 2006 on bonds payable
made the following entry:

Interest expense 15,000


Cash 15,000

The bonds have a face value of P250,000 and pay a stated interest rate of 6%. They
were issued at a discount of P15,000 on January 1, 2005, to yield an effective interest of
7%. (Assume that the effective yield method should be used.)

4. Ordinary repairs to equipment had been erroneously charged to the Equipment account
during 2005 and 2006 for P25,500 and P30,000, respectively. The company applies a

63
rate of 10% to the balance in the equipment account at the end of the year in its
determination of depreciation charges.

Questions

1. The adjusted 2005 net income is:


a. P 422,120 b. P 419,120 c. P 192,920 d. P 189,920

2. The adjusted 2006 net income is:


a. P 294,878 b. P 291,878 c. P 180,278 d. P 65,678

3. 2005 net income is overstated by:


a. P 232,200 b. P 229,200 c. P 113,080 d. P 3,000

4. 2006 net income is:


a. Understated by P62,678
b. Understated by P59,678
c. Overstated by P166,522
d. Overstated by P51,922

5. The correcting entry in item “1” is:


a. Accounts receivable 114,600
Sales 114,600
b. Sales 114,600
Accounts receivable 114,600
c. Retained earnings 114,600
Sales 114,600
d. Sales 114,600
Retained earnings 114,600

Solution
1. Retained earnings 114,600
Sales 114,600
2. Cost of sales (beg. inv) 25,920
Retained earnings 25,920
3. Retained earnings 1,450
Interest expense 1,552
Discount on bonds payable 3,002
Int. paid Int. exp. Amort. Carrying
Value
235,000
2002 15,000 16,450 1,450 236,450
2003 15,000 16,552 1,552 238,002

4. Retained earnings 25,500


Repairs expense 30,000
Equipment 55,500
Accumulated depreciation 5,100
Retained earnings 2,550
Depreciation expense 2,550
Accumulated depreciation 3,000
Depreciation expense 3,000

2002 2003
Unadjusted net income 303,000 232,200
Item 1 (114,600) 114,600
Item 2 25,920 (25,920)
Item 3 (1,450) (1,552)
Item 4 (25,500) (30,000

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- error in recording depreciation 2,550 2,550
__________ 3,000
Adjusted net income 189,920 294,878
Answer:
1. D 2. A 3. C 4. A 5. C

Problem 5
You have been assigned to examine the financial statements of Macelle Company for the
year ended December 31, 2006. Below is the Balance Sheet of the company.

Current assets 700,000 Current liabilities 250,000


Non-current assets 2,000,000 Non-current liabilities 900,000
_________ Stockholders’ Equity 1,550,000
Total Assets 2,700,000 Total liabilities/SHE 2,700,000

In the course of your audit, you discover the following situations:

1. Depreciation of P16,000 for 2006 on delivery vehicles was not recorded.

2. The physical inventory count on December 31, 2005, improperly excluded merchandise
costing P95,000 that had been temporarily stored in a public warehouse. Macelle uses
periodic inventory system.

3. The physical inventory count on December 31, 2006, improperly included merchandise
with a cost of P42,500 that had been recorded as a sale on December 27, 2006.

4. A collection of P28,000 on account from a customer received on December 31, 2006


was not recorded until January 2, 2007.

5. In 2006, the company sold for P18,500 fully depreciated equipment that originally cost
P110,000. The company credited the proceeds from the sale to the Equipment account.

6. During November 2006, a competitor company filed a patent-infringement suit against


Macelle claiming damages of P1,100,000. The company’s legal counsel has indicated
that an unfavorable verdict is probable and a reasonable estimate of the court’s award
to the competitor is P625,000. The company has not reflected or disclosed this situation
in the financial statements.

7. Macelle has a portfolio of trading securities. No entry has been made to adjust to
market. Information on cost and market value is as follows:

COST MARKET
December 31, 2005 P 190,000 P 190,000
December 31, 2006 168,000 164,000

8. At December 31, 2006, an analysis of payroll information shows accrued salaries of


P36,600. The Accrued Salaries payable account had a balance of P48,000 at December
31, 2006, which was unchanged from its balance at December 31, 2005.

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9. A large piece of equipment was purchased on January 3, 2006, for P1,600,000 and was
charged to Repairs Expense. The equipment is estimated to have a service life of 8 years
and no residual value. Macelle normally uses the straight – line depreciation method for
this type of equipment.

10. A P75,000 insurance premium paid on July 1, 2005, for a policy that expires on June 30,
2009, was charged to insurance expense.

11. A trademark was acquired at the beginning of 2005 for P250,000. No amortization has
been recorded since its acquisition. Trademark has an economic life of 5 years.
Questions
1. Current assets at year-end is:
a. P 776,000 b. P 695,000 c. P 691,000 d. P 678,500

2. Non-current assets at year-end is:


a. P 3,498,500 b. P 3,402,500 c. P 3,302,500 d. P 3,298,500

3. Current liabilities at year-end is:


a. P 911,600 b. P 863,600 c. P 286,600 d. P 238,600

4. Non-current liabilities at year-end is:


a. P 1,561,600 b. P 1,525,000 c. P 1,513,600 d. P 900,000

5. The net income of 2006 is understated by:


a. P 622,400 b. P 603,900 c. P 568,400 d. P 559,900

6. The total amount of fundamental error is:


a. P 176,000 b. P 157,500 c. P 107,500 d. P 25,000

7. Total Stockholders’ Equity at year-end is:


a. P 2,329,900 b. P 2,229,900 c. P 2,227,400 d. P 2,099,400

8. The correcting entry of item “3” assuming the company’s books were already closed is:
a. No adjustment
b. Retained earnings 42,500
Cost of sales 42,500
c. Cost of sales 42,500
Retained earnings 42,500
d. Retained Earnings 42,500
Inventory 42,500

Solution
1. Depreciation expense 16,000
Accumulated depreciation 16,000
2. Cost of sales (beg. inv) 95,000
Retained earnings 95,000
3. Cost of sales 42,500
Inventory 42,500
4. Cash 28,000
Accounts receivable 28,000
5. Accumulated depreciation 110,000
Machinery 91,500
Gain on sale 18,500
6. Loss on damages 625,000
Estimated liability on damages 625,000

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7. Unrealized holding loss 26,000
Valuation allowance 26,000
Market value – beg. 190,000
Market value – end 164,000
Unrealized holding loss 26,000
8. Salaries payable 48,000
Salaries expense 48,000
To reverse accrued salaries.
Salaries expense 36,600
Salaries payable 36,600
9. Equipment 1,600,000
Repairs expense 1,600,000
Depreciation expense 200,000
Accumulated depreciation 200,000
10. Insurance expense 25,000
Prepaid insurance 37,500
Retained earnings 62,500
11. No amortization since no information about its impairment.

Answer:
1. C 2. B 3. B 4. D 5. B 6. A 7. A 8. D

Problem 6
Matias Corporation requires audited financial statements for credit purposes. After making
normal adjusting entries, but before closing the accounting records for the year ended
December 31, 2006. Matias’s controller prepared the following financial statements for
2006:
Matias Corporation
STATEMENT OF FINANCIAL POSITION
December 31, 2006
Assets
Cash 1,225,000
Marketable equity securities 125,000
Accounts Receivable 460,000
Allowance for doubtful accounts ( 55,000)
Inventories 530,000
Property and equipment 620,000
Accumulated Depreciation ( 280,000)
Total Assets 2,625,000

Liabilities and Stockholders’ Equity


Accounts payable and accrued liabilities 1,685,000
Income tax payable 110,000
Common stock, P20 par 300,000
Additional paid-in capital 75,000
Retained earnings 455,000
Total liabilities and stockholders’ equity 2,625,000

Matias Corporation
STATEMENT OF INCOME
For the Year Ended December 31, 2006
Net Sales 1,700,000
Cost of sales 570,000
Gross Profit 1,130,000
Operating Expenses
Selling and administrative 448,000

67
Depreciation 42,000
Income before income tax 640,000
Income tax expense 192,000
Net Income 448,000

Matias’s tax rate for all items was 30% for all affected years, and it made estimated tax
payments when due. Matias has been profitable in the past and expects results in the
future to be similar to 2006. During the course of the audit, the following additional
information (not considered when the above statements were prepared) was obtained:

1. The investment portfolio consists of short-term investment, classified as available-for-


sale, for which total market value equaled cost at December 31, 2005. On February 2,
2006, Matias sold one investment with a carrying value of P100,000 for P130,000. The
total of the sale proceeds was credited to the investment account.

2. At December 31, 2006, the market value of the remaining securities in the portfolio was
P142,000.

3. The P530,000 inventory total, which was based on a physical count at December 31,
2006, was priced at cost. Subsequently, it was determined that the inventory cost was
overstated by P66,000. At December 31, 2006, the inventory’s market value
approximated the adjusted cost.

4. Pollution control devices costing P48,000, which is high in relation to the cost of the
original equipment, were installed on December 29, 2005, and were charged to repairs in
2005.

5. The original equipment referred to in Item 4, which had a remaining useful life of six
years on December 20, 2005, is being depreciated by the straight-line method for both
financial and tax reporting.

6. A lawsuit was filed against Matias Corporation in October 2006 claiming damages of
P250,000. Company’s legal counsel believes that an unfavorable outcome is probable,
and a reasonable estimate of the court’s award to the plaintiff is P60,000, which will be
paid in 2007 if the case is settled.

Questions
1. Marketable Equity Securities at year-end is:
a. P 155,000 b. P 125,000 c. P 95,000 d. P 82,000

2. Allowance for market decline in value of marketable equity security at year-end is:
a. P 0 b. P 8,000 c. P 10,000 d. P 13,000

3. Inventory at year-end is:


a. P 464,000 b. P 512,000 c. P 530,000 d. P 596,000

4. Cost of sales at year-end is:


a. P 636,000 b. P 570,000 c. P 550,000 d. P 504,000

5. Net income of the company is:


a. P 399,700 b. P 379,000 c. P 366,100 d. P 331,000

68
Solution
1. Marketable equity securities 30,000
Gain on sale 30,000
2. Loss on market decline 13,000
Allowance for market decline 13,000
3. Cost of sales 66,000
Inventory 66,000
4. Equipment 48,000
Retained earnings 48,000
5. Depreciation 8,000
Accumulated depreciation 8,000
6. Loss on damages 60,000
Estimated liability on damages 60,000
Answer:
1. A 2. D 3. A 4. A 5. C

Problem 7
Long established a retail business in 2004. Early in 2007, Long entered into negotiations
with Short with the intent to form a partnership. You have been asked by Long and Short
to check Long’s books for the past three years to help Short evaluate the earnings potential
of the business.

The net incomes reported on statements submitted to you were as follows:

Year ending 12/31


2004 2005 2006
Income, pretax P63,000 P 70,763 P 61,880

During the examination of the accounts, you found the data given below:

For year ended Dec. 31


2004 2005 2006
Omission from the books

a. Accrued expenses at end of year P 15,120 P 14,658 P 32,368


b. Earned (uncollected) revenue at end
of year 1,400
c. Prepaid expenses at end of year 6,314 8,470 9,842
d. Unearned revenue (collected in advance)
at end of year 4,270

Goods in transit at end of year omitted from


inventory

e. Purchase for which the entry had been made


(ownership passed) 18,270 21,640
f. Purchase for which the entry had not been made
(ownership not passed) 11,970 13,710

Other points requiring considerations:

g. On January 1, 2006, sold operational equipment for P31,500 that originally cost P35,000
on January 1, 2004. Cash was debited for P31,500 and equipment was credited for
P31,500. The asset sold was depreciated in 2004 and 2005 but not on the 2006 on the
basis of a 10-year life and no residual value.

69
h. No allowance for bad debts has been set up. An analysis of accounts receivable as of
December 31, 2006, indicates that the allowance account should have a balance of
P14,000, of which P3,500 relates to 2004, P4,900 to 2005, and P5,600 to 2006.

Questions
1. Adjusted net income of 2004 is:
a. P 85,834 b. P 82,334 c. P 52,094 d. P 39,466

2. Adjusted net income of 2005 is:


a. P 81,669 b. P 81,081 c. P 80,157 d. P 76,769

3. Adjusted net income of 2006 is:


a. P 86,502 b. P 56,682 c. P 51,082 d. P 42,682
4. Inventory at year-end is understated by:
a. P 3,370 b. P 7,930 c. P 21,640 d. P 35,350

5. Accrued expenses at year-end is:


a. Overstated by P17,710 c. Understated by P31,908
b. Understated by P32,368 d. Understated by P17,710

Solution

2004 2005 2006


Unadjusted net income 63,000 70,763 61,880
Item A (15,120) 15,120
(14,658) 14,658
(32,368)
Item B 1,400 (1,400)
Item C 6,314 (6,314)
8,470 (8,470)
9,842
Item D (4,270) 4,270
Item E 18,270 (18,270)
21,640
Item F - - -
Item G 3,500
Item H (3,500) (4,900) (5,600)
Adjusted net income 52,094 81,081 51,082
Answer:
1. C 2. B 3. C 4. C 5. B

Problem 8
VILLA LYDIA CO. The records of the Company have not been examined for the
three-year period ended December 31, 2006. As a result of your audit of the
records for the year ended December 31, 2006 and your review of the records of
the two prior years, it is necessary to revise the net income and the retained
income based upon the audited data, which follows:

The company’s retained income at December 31, 2006 follows:

Balance, 12/31/04 P 90,000


Net income, 2005 100,000
Net income, 2006 110,000
Balance, 12/31/06 P300,000

70
From your examination, you obtained the following information which must be taken into
consideration at the close of the year involved:

December 31, 2004

1. Goods consigned out to consignees are included in the inventory at


P120,000, which is 20 percent in excess of cost.
2. Equipment with a 10-year-life was purchased for P30,000 and charged to
expense on December 31.
3. The following liabilities are omitted from the records:
Materials included in inventory P 3,000
Accrued taxes 4,100

December 31, 2005

4. Uncollectible accounts receivable of P9,000 are to be written off.


5. Marketable Securities costing P15,000 were at a market value of only
P9,000.
6. Gain of P3,000 on sale of fully depreciated equipment was credited to the
allowance for depreciation.
7. Land cost of P9,000 had been erroneously charged to expense.
8. The inventory is overstated by P14,300 because of an error in footing an
inventory price sheet.
9. Depreciation was omitted; P5,000 should be provided.

December 31, 2006

10. The following liabilities are omitted from the records:


For purchases of new machinery on December 31, 2006 P12,000
Accrued taxes 5,900

Questions
1. Adjusted net income of 2005 is:
a. P 119,400 b. P 110,800 c. P 102,600 d. P 90,800

2. Adjusted net income of 2006 is:


a. P 89,800 b. P 98,600 c. P 115,400 d. P 145,400

3. Adjusted retained earnings of 2004 is:


a. P 112,900 b. P 109,900 c. P 92,900 d. P 89,900

4. Adjusted retained earnings of 2005 is:


a. P 180,700 b. P 203,700 c. P 212,500 d. P 212,300

5. Adjusted retained earnings of 2006 is:


a. P 416,200 b. P 416,000 c. P 319,100 d. P 296,100

6 The entry to correct information “number 3” at December 31, 2006 is:


a. Retained earnings 4,100
Accrued taxes 4,100
b. Cost of sales 3,000
Accounts payable 3,000

71
c. Retained earnings 4,100
Cost of sales 3,000
Accrued taxes 4,100
Accounts payable 3,000
d. No adjusting entry is necessary.

9. The entry to correct information “number 4” at December 31, 2006 is:


a. Allowance for bad debts 9,000
Accounts receivable 9,000
b. Retained earnings 9,000
Accounts receivable 9,000
c. Retained earnings 9,000
Allowance for bad debts 9,000
d. No adjusting entry is necessary

8. Adjusted net income of 2004 (assuming P85,000 is recorded as net income of 2004) is:
a. P 116,900 b. P 115,000 c. P 107,900 d. P 87,900

Solution
1. No adjustment since the 2004 financial statement was not affected.
2. Equipment 30,000
Retained earnings 30,000
Retained earnings 3,000
Depreciation expense 3,000
Accumulated depreciation 6,000
3. No adjustment since the 2004 financial statement was not affected.
4. Allowance for bad debts 9,000
Accounts receivable 9,000
5. Retained earnings 6,000
Allowance for market decline 6,000
6. Accumulated depreciation 3,000
Retained earnings 3,000
7. Land 9,000
Retained earnings 9,000
8. Retained earnings 14,300
Cost of sales 14,300
9. Retained earnings 5,000
Accumulated depreciation 5,000
10. Machinery 12,000
Accounts payable – others 12,000
Taxes 5,900
Accrued taxes 5,900

2004 2005 2006


Unadjusted net income 100,000 110,000
Item 1 (20,000) 20,000
Item 2 30,000 (3,000) (3,000)
Item 3 (3,000) 3,000
(4,100) 4,100
Item 4 - - -
Item 5 (6,000)
Item 6 3,000
Item 7 9,000
Item 8 (14,300) 14,300
Item 9 (5,000)
Item 10 _________ _________ (5,900)
Adjusted net income 110,800 115,400
Retained earnings - beg 90,000 203,700
Adjustments:
Item 1 (20,000)
Item 2 30,000
Item 3 (3,000)

72
(4,100) _________
Retained earnings - end 203,700 319,100
Answer:
1. B 2. C 3. C 4. B 5. C 6. D 7. A 8. D

Problem 9
The Corporation prepared its own income statement for the years 2005 and 2006. The
President was not satisfied and decided to engage the services of a CPA. The following
errors were discovered by the CPA:
___2005__ ___2006___
Net income after income tax P 123,250 P 156,250
Inventory understatement at year-end P - P 12,500
Prepaid expenses not taken up 5,000 15,000
Merchandise purchased on account not
Recorded as liability but included in
inventory 25,000
Unearned rent received taken into income 9,000
Accrued taxes unrecorded 20,000 15,000

Questions
1. Net income of 2005 is:
a. P 163,250 b. P 108,250 c. P 83,250 d. P 73,250

2. Net income of 2006 is:


a. P 199,750 b. P 174,750 c. P 144,750 d. P 142,250

Solution
2005 2006
Unadjusted net income 123,250 156,250
12,500
5,000 (5,000)
15,000
(25,000) 25,000
(9,000)
(20,000) 20,000
__________ (15,000)
Adjusted net income 83,250 199,750
Answer:
1. C 2. A

Problem 1O
Wizard Company, a calendar-year sole proprietorship, maintained its books on the cash
basis during the year

Wizard is in the process of negotiating a bank loan to finance the planned expansion of its
business. The bank is requesting 2006 financial statements prepared on the accrual basis of
accounting from Wizard. As Wizard’s external auditor, you were called upon to assist in
preparing the financial statements. The following information were obtained during the
course of your engagement:
Wizard Company
TRIAL BALANCE
December 31, 2006
Debits Credits

73
Cash P448,000
Accounts receivable, 12/31/05 283,500
Inventory, 12/31/05 1,085,000
Furniture & Fixtures 2,068,500
Leasehold improvements 787,500
Accumulated depreciation, 12/31/05 P 567,000
Accounts payable 297,500
Wizard, Drawings
Wizard, Capital, 12/31/05 2,180,500
Sales 11,427,500
Purchases 5,339,250
Salaries expense 3,045,000
Taxes and licenses 217,000
Insurance expense 152,250
Rent expense 598,500
Utilities expense 220,500
Living expenses 227,500 _________
P 14,472,500 P 14,472,500
Additional information:

1. At December 31, 2006, amounts due from customers totaled P415,000.

2. Based on the analysis of the above receivables, P20,750 may prove uncollectible.

3. Unpaid invoices for the plant purchases totaled P533,750 and P297,500 at December 31,
2006 and December 31, 2005 respectively.

4. The inventory totaled P1,274,000 based on a physical count of the goods at December
31, 2006. The inventory was priced at cost, which approximates market value.

5. On May 1. 2006, Wizard paid P152,250 to renew its comprehensive insurance coverage
for one year. The premium on the previous policy, which expired on April 30, 2006, was
P136,500.

6. On January 2, 2006, Wizard entered into a twenty-year operating lease for the vacant
lot adjacent Wizard’s retail store used as a parking lot. As agreed in the lease, Wizard
paved and fenced in the lot at a cost of P787,500. The improvements were completed on
April 1, 2006, and estimated to have a useful life of fifteen years. No provision for
depreciation has been recorded. Depreciation on furniture and fixtures was P210,000 for
2006.

7. Accrued expenses at December 31, 2006 and 2005 were as follows:


2006 2005
Taxes and licenses P33,750 P20,250
Utilities 36,000 24,750
P69,750 P45,000

8. Wizard is being sued for P4,000,000. The coverage under the comprehensive insurance
policy is limited to P2,500,000. Wizard’s attorney believes that an unfavorable outcome
is probable and that a reasonable estimate of the settlement is P3,000,000.

9. The salaries account includes P40,000 per month paid to the proprietor. Wizard also
receives P4,375 per week for living expenses.

74
Questions
Determine the balances of the following under the accrual basis of accounting.

1. Accounts Receivable
a. 415,000 b. P 283,500 c. P 131,500 d. P 152,000

2. Accounts Receivable, net


a. P 408,425 b. P 404,625 c. P 394,250 d. P 262,500

3. Inventory
a. P 1,274,000 b. P 1,085,000 c. P 189,000 d. P 896,000

4. Prepaid Insurance
a. P 147,000 b. P 96,250 c. P 50,750 d. P0

5. Property and equipment, net


a. P 2,856,000 b. P 2,616,469 c. P 2,039,625 d. P 1,858,500
6. Accounts payable
a. P 533,750 b. P 523,750 c. P 297,500 d.P 236,250

7. Accrued Expenses
a. P 114,750 b. P 69,750 c. P 24,750 d. P0

8. Wizard, Drawings
a. P 707,500 b. P 480,000 c. P 227,500 d. P0

9. Wizard, Capital, 12/31/05


a. P 2,226,000 b. P 2,181,000 c. P 2,180,500 d. P 2,135,500

10. Sales
a. P 11,842,500 b. P 11,559,000 c. P 11,427,500 d. P 11,296,000

11. Purchases
a. P 5,873,000 b. P 5,575,500 c. P 5,339,250 d. P 5,103,000

12. Salaries Expense


a. P 3,272,500 b. P 3,045,000 c. P 2,655,000 d. P 2,565,000

13. Taxes and licenses


a. P 250,750 b. P 230,500 c. P 217,000 d. P 203,500

14. Insurance expense


a. P 197,750 b. P 147,000 c. P 152,250 d. P 101,500

15. Utilities expense


a. P 256,500 b. P 231,750 c. P 220,500 d. P 195,750

16. Doubtful account expense


a. P 20,750 b. P 10,375 c. P 6,575 d. P 0

17. Depreciation expense


a. P 294,375 b. P 249,375 c. P 239,531 d. P 210,000

75
18. Cost of sales
a. P 5,386,500 b. P 5,368,500 c. P 5,150,250 d. P 4,065,000

19. Estimated loss from lawsuit


a. P 4,000,000 b. P 3,000,000 c. P 500,000 d. P0

Solution
1. A - P415,000 given in item no. 1
2. C - P394,250 (P415,000 – P20,750 item no. 2)
3. A - P1,274,000 given in item no. 4
4. C - P152,250 x 4/12 = P50,750
5. C
Furniture & fixtures 2,068,500
Leasehold improvements 787,500
Less: Accumulated dep’n – 1/1/02 ( 567,000)
2002 Depreciation – improve. ( 39,375)
2002 Dep’n – furniture ( 210,000)
Carrying value – 2002 2,039,625
6. A - P533,750 given in item no. 3
7. B - P69,750 given in item no. 7
8. A
Salaries – P40,000 x 12 - P 480,000
Living allowance P4,375 x 52 weeks - 227,500
Total 707,500
9. B
Capital – beg. 2,180,500
Omission of prepaid expense in 2001 45,500
Omission of accrued expenses in 2001 ( 45,000)
Total 2,181,000
10. B
Sales – cash basis - 11,427,500
+ AR – end - 415,000
- AR – beg - 283,500
Sales – accrual basis - 11,559,000
11. B
Purchases – cash basis - 5,339,250
+ AP – end - 533,750
- AP – beg - 297,500
Purchases – accrual basis - 5,575,500
12. D
Salaries per record - 3,045,000
- Salaries of the proprietor * - 480,000
Adjusted Salaries - 2,565,000
* Salaries of the proprietor for a partnership is considered as part of profit distribution
13. B
Taxes and licenses – cash basis - 217,000
+ Accrued taxes – end - 33,750
- Accrued taxes – beg - 20,250
Taxes and licenses – accrual basis - 230,500
14. B
Insurance expense – cash basis - 152,250
+ Prepaid insurance – beg - 45,500
- Prepaid insurance – end - 50,750
Insurance expense – accrual basis - 147,000
15. B
Utilities – cash basis - 220,500
+ Accrued utilities – end - 36,000
- Accrued utilities – beg - 24,750
Utilities – accrual basis - 231,750
16. A – given in item # 2
17. B – refer to Question # 5 question
18. A
Beginning inventory - 1,085,000

76
Purchases - 5,575,500
Ending inventory - (1,274,000)
Cost of Sales - 5,386,500
19. C
Since there is a comprehensive insurance policy for the damage, only P500,000 will be charged as loss (3M –
2.5M)

Problem 11
You have been engaged to examine the financial statements of Vince Corporation
for the year ended December 31, 2006. In the course of your examination, you
have ascertained the following information:

1. Vince uses the allowance method of accounting for uncollectible trade accounts
receivable. The allowance is based upon 3% of past due accounts (over 120 days) and
1% of current accounts as of the close of each month. Due to the changing economic
conditions and climate, the amount of past due accounts has increased significantly, and
management has decided to increase the percentage based on past due accounts to 5%.
The following balances are available:

As of As of
Nov. 30, 2006 Dec. 31, 2006

Debit Credit Debit Credit

Accounts Receivable P 390,000 - P 430,000 -


Past due accounts (included 12,00
in Accounts Receivable) 0 - 30,000 -
Allowance for uncol-
lectible accounts - P 28,000 9,000 -

2. The merchandise inventory on December 31, 2005 did not include merchandise
having a cost of P7,000.00 which was stored in a public warehouse. Merchandise having
a cost of P3,000.00 was erroneously counted twice and included twice in the
merchandise inventory on December 31, 2006. Vince uses a periodic inventory system.

3. On January 2, 2006, Vince had a new machine delivered and installed in its new
factory. The cost of this machine was P97,000.00 and the machine is being depreciated
on a straight-line method over an estimated useful life of 10 years. When the new
machine was installed, Vince paid for the following items which were not included in the
cost of the machine, but were charged to repairs and maintenance:
Delivery Expense - P 2,500.00
Installation Costs - 8,000.00
Rearrangement of related Equipment - 4,000.00
P14,500.00

4. On May 3, 2006, Vince exchanged 500 shares of treasury stock (P50.00 par value
common stock) for a parcel of land to be used as a site for a new factory. The treasury
stock had a cost P70.00 per share when it was acquired and on May 03, 2006, it had a
fair value of P80.00 per share. Vince received P2,000.00 when an existing building on
the land was sold for scrap. The land was capitalized at P40,0000.00 and Vince recorded
a gain of P5,000.00 on the sale of its treasury stock.

You found the following journal entries in the books:


Land . . . . . . . . . . . . . . . P 40,000.00

77
Treasury stock . . . . . . . . . . . . . . P 35,000.00
Gain on Sale of treasury stock . . . . . 5,000.00

Cash . . . . . . . . . . . . . . . P 2,000.00
Miscellaneous Income . . . . . . . . . . P 2,000.00

5. On January 02, 2006, Vince Corporation established a noncontributory defined


benefit plan covering all employees and contributed P 1,000,000.00 to the plan and
charged this amount to the “pension expense”. At December 31, 2006, Vince
determined that the 2006 current service and interest costs on the plan amount to P
620,000,00. The expected and actual rate of return on plan assets for 2006 was 10%.

Questions
1. The allowance for uncollectible accounts to be reported on the Balance Sheet is:
a. P 14,500.00 b. P 9,000.00 c. P 5,500.00 d. P 4,000.00

2. Doubtful account expense at December 31, 2006 is:


a. P 14,500.00 b. P 9,000.00 c. P 5,500.00 d. P 4,000.00
3. 2006 merchandise inventory is:
a. Understated by P 10,000.00 c. Overstated by P 3,000.00
b. Understated by P 4,000.00 d. Overstated by P 4,000.00

4. If no proper correcting entries were made at December 31, 2005, by how much will
2005 net income before income taxes be overstated or understated?
a. Understated by P7,000.00 c. Overstated by P 7,000.00
b. Understated by P4,000.00 d. Overstated by P 4,000.00

5. Machinery and equipment account should be reported in the balance sheet (net of
accumulated depreciation) at December 31, 2006:
a. P 100,350.00 b. P 110,050.00 c. P 111,500.00 d. P 101,800.00

6. Land account should be reported in the balance sheet at December 31, 2006:
a. P 35,000.00 b. P 33,000.00 c. P 40,000.00 d. P 38,000.00

7. What should be reported at December 31, 2006 as prepaid pension cost?


a. P 620,000.00 b. P 520,000.00 c. P 1,000,000.00 d. P 480,000.00

8. What amount should be reported as pension expense in 2006?


a. P 620,000.00 b. P 520,000.00 c. P 1,000,000.00 d. P 480,000.00

9. How much gain should be reported on item no. 4?


a. P 5,000.00 b. P 15,000.00 c. P 10,000.00 d. P 0

10. If no proper correcting entries were made at December 31, 2006, by how much will
2006 net income before income taxes be overstated or understated?
a. Understated by P 493,450.00 c. Overstated by P 539,050.00
b. Understated by P 534,050.00 d. Overstated by P 498,450.00

Solution
(1) Doubtful Account Expense 14,500.00
Allowance for D/A 14,500.00
Required allowance as of 12.31.2006
-on past due accounts (5% x P30,000.00) P 1,500.00
-on current accounts (1% x P400,000.00) 4,000.00

78
Total P 5,500.00
Unadjusted “debit” balance of Allowance for D/A 9,000.00
Additional Provision (expense) P14,500.00
(2) a. Merchandise Inventory, 01.01.2006 7,000.00
Retained Earnings 7,000.00
(to correct understatement of inventory at end of 2005)
b. Cost of Sales 3,000.00
Merchandise Inventory, 12.31.2006 3,000.00
(to correct overstatement ending inventory for 2006)
(3) a. Machinery 14,500.00
Repairs and Maintenance 14,500.00
(to reclassify delivery and installation costs)
b. Depreciation Expense 1,450.00
Accumulated Depreciation 1,450.00
(to provide for depreciation for items not capitalized)
(4) Miscellaneous Income 2,000.00
Gain on Sale of Treasury Stock 5,000.00
Land 2,000.00
APIC-T/S 5,000.00
(to correct client’s entry on the purchase of land)
(5) Prepaid Pension Cost 480,000.00
Pension Expense 480,000.00
(to correct client’s entry in the treatment of prepaid pension cost)
Current Service and interest cost P 620,000.00
Expected return on Plan Asset
(P 1,000,000.00 x 10%) ( 100,000.00)_
Pension Expense P 520,000.00
Reported pension expense 1,000,000.00
Prepaid Pension Cost P 480,000.00
Answer:
1. C 2. A 3. C 4. A 5. A 6. D 7. D 8. B 9. D 10. D

Problem 12
Ron-Ron Storage underwent a restructuring in 2006. The company conducted a thorough
internal audit, during which the following facts were discovered. The audit occurred during
2006 before any adjusting entries or closing entries are prepared.

a. Additional printers were acquired at the beginning of 2004 and added to the company’s
office network. The P9,000 cost of the printers was inadvertently recorded as
maintenance expense. The printers have five-year useful lives and no material salvage
value. This class of equipment is depreciated by the straight-line method.

b. Three weeks prior to the audit, the company paid P51,000 for storage boxes and
recorded the expenditure as office supplies on hand. The error was discovered a week
later.

c. On December 31, 2005, inventory was understated by P112,000 due to a mistake in the
physical inventory count. The company uses the periodic inventory system.

d. Three years earlier, the company recorded a 3% stock dividend (4,000 common shares,
P1) as follows:

Retained earnings 4,000


Common stock 4,000

The shares had a market price at the time of P10 per share.

e. At the end of 2005, the company failed to accrue interest expense that accrued during
the last four months of 2005 on bonds payable. The bonds which were issued at face

79
value mature in 2010. The following entry was recorded on March 1, 2006, when the
semi-annual interest was paid:

Interest expense 180,000


Cash 180,000

f. A three-year liability insurance policy was purchased at the beginning of 2005 for
P216,000. The full premium was debited to insurance expense at the time.

Questions

6. Net income of 2004 is:


a. Overstated by P9,000 c. Overstated by P7,200
b. Understated by P9,000 d. Understated by P7,200

7. Net income of 2005 is


a. Understated by P374,200 c. Understated by P89,800
b. Understated by P134,200 d. Overstated by P81,800
8. Net income of 2006 is
a. Overstated by P65,800 c. Overstated by P305,800
b. Overstated by P185,800 d. Understated by P38,200

9. Accrued interest on Bonds Payable is


a. P 60,000 b. P 80,000 c. P 120,000 d. P 180,000

Solution
2004 2005 2006
A 9,000
(1,800) (1,800) (1,800)
B
C 112,000 (112,000)
D
E (120,000) 120,000
(120,000)
F _________ 144,000 (72,000)
Under/(Over) 7,200 134,200 185,800
Answer:
1. D 2. B 3. B 4. C

Problem 13
You been asked by a client to review the records of the Claire Joy Company, a small
manufacturer of precision tools and machines. Your client is interested in buying the
business, and arrangements have been made for you to review the accounting records.

Your examination reveals the following:

a. Claire Joy Company commenced business on April 1, 2003, reporting on a fiscal year
ending March 31. The company has never been audited, but the annual statements
prepared by the bookkeeper reflect the following income before closing and before
deducting income taxes:

Year Ended March 31 Income Before Taxes


2004……………………………………… P 71,600

80
2005……………………………………… 111,400
2006……………………………………… 103,580

b. A relatively small number of machines have been shipped on consignment. These


transactions have been recorded as an ordinary sale and billed as such. On March 31 of
each year, machines billed and in the hands of consignees amounted for:
2004…………………………………….. P7, 800
2005…………………………………….. none
2006…………………………………….. 5, 590

Sales price was determined by adding 30% to cost. You learned that the consigned
goods were sold the following year.

c. On March 30, 2005, two machines were shipped to a customer on a C.O.D. basis. The
sale was not entered until April 5, 2005 when cash was received for P6,100. The
machines were not included in the inventory at March 31, 2005. (Title passed on March
30, 2005).

d. All machines are sold subject to a five-year warranty. It is estimated that the
expense ultimately to be in connection with the warranty will amount to ½ of 1% of
sales. The company has charged an expense account for warranty costs incurred.
Sales per books and warranty costs were:
Warranty of Expense for Sales Made in
Year Ended March 31 Sales 2004 2005 2006 Total
2004 P940, 000 P760 P760
2005 1, 010, 000 360 P1, 310 1, 670
2006 1, 795, 000 320 1, 620 P1, 910 3, 850

e. The bank deducts 6% on all contracts financed. Of this amount ½% is place in a


reserve to the credit of Claire Joy Company, which is refunded to Claire Joy as finance
contracts are paid in full. The reserve established by the bank has not been reflected in
the books of Claire Joy. The excess of credits over debits (net increase) to the reserve
account with Claire Joy, on the books of the bank for each fiscal year were as follows:
2004…………………………………. P 4, 000
2005…………………………………. 4, 000
2006…………………………………. 5, 000
P 14, 000

f. A delivery equipment with a 10-year life (no residual value, straight-line depreciation)
was purchased on April 1, 2005 by issuing a P 600,000 non- interest- bearing, 4 year
note. The entry made to record the purchase was a debit to Delivery Equipment and a
credit to Notes payable for P 600,000; a 10% is a fair rate of interest on the note. The
accountant failed to provide for depreciation for the year on this equipment.

g. For the last three (3) years, the company has failed to accrue salaries and wages. The
correct amounts at the end of each fiscal year were:
2004…………………………………. P 12, 000
2005…………………………………. 18, 000
2006…………………………………. 10, 000

Questions
Answer the following questions based on the audit findings. Ignore income tax implications.

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1. The adjusting entry to set up the estimated Liability under Warranties is
a. Warranty expense 5,411
Retained earnings 7,006
Estimated liability under warranties 12,417
b. Retained earnings 5,411
Warranty expense 7,006
Estimated liability under warranties 12,417
c. Warranty expense 12,417
Estimated liability under warranties 12,417
d. Retained earnings 12,417
Estimated liability under warranties 12,417

2. The total receivable from the bank representing dealers fund reserve as of
March 31, 2006 is:
a. P 5,100 b. P 6,900 c. P 12,000 d. P 14,000

3. Sales in 2004 were (over) understated by


a. P 6,500 b. P (6,500) c. P 7,800 d. P (7,800)

4. Sales in 2006 were (over) understated by:


a. P 6,500 b. P (6,100) c. P (5,590) d. P (11,690)
5. The accrued Salaries Payable that should be set up on March 31, 2006 is:
a. P 18,000 b. P 28,000 c. P 10,000 d. P 40,000

6. The audited balance of Discount on Note Payable as of March 31, 2006 is:
a. P 0 b. P 102, 452 c. P 149, 211 d. P 190, 192

7. Depreciation Expense for fiscal year 2006 that should be provided on the
equipment purchased on April 1, 2005 is
a. P 13,660 b. P 40,981 c. P 60,000 d. P 66,000

Solution

Adjusting entry:

b. Sales 5,590
Accounts receivable 5,590
Inventory 4,300
Cost of sales 4,300
c. Sales 6,100
Retained earnings - beg 6,100
d. Warranty expense 12,417
Estimated warranty payable 12,417
2004 940,000 – 7,800 = 932,200
2005 1,010,000 + 6,100 – 7,800 = 1,023,900
2006 1,795,000 – 5,590 – 6,100 = 1,783,310
Adjusted balance = 3,739,410
X ½ of 1% = .005
Total Warranty expense = 18,697
Less: Warranty paid = 6,280
Estimated warranty liability = 12,417
e. Fund reserve from the bank 14,000
Other income 14,000
f. OE: Delivery equipment 600,000
Notes payable 600,000
CE: Delivery equipment 409,808
Discount on NP 190,192
Notes payable 600,000

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Adj: Discount on NP 190,192
Delivery equipment 190,192
Adj: Interest expense 40,981
Discount on NP 40,981
P409,808 x 10% = P 40,981
g. Retained earnings 18,000
Salaries 18,000
Salaries 10,000
Accrued salaries 10,000

Answer:
1. C 2. D 3. D 4. D 5. C 6. C 7. B

Problem 14
You are auditing the accounts of Keith Zandro Merchandising Corporation for the year ended
December 31, 2006. You discover that the adjustments made in the previous audit for the
year 2005 were not entered in the accounts by Keith Zandro’s bookkeeper; therefore, the
accounts are not in agreement with the audited amounts as of December 31, 2005. The
following adjustments were included in the 2005 audit report:

a. Invoices for merchandise purchased on credit in December 2005 were not


entered on the books until payment of P12,000 was made in January 2006. The
merchandise was not included in the December 31, 2005 inventory. The company uses a
periodic inventory system.
b. Invoices for merchandise received on credit in December 2005 were not recorded
in the accounts until payment was made in January 2006; the goods were included in
the 2005 ending inventory, P18,000.

c. Allowance for doubtful accounts for 2005 was understated by P2,000 because bad
debts expense in 2005 was not recorded.

d. Selling expense for 2005, P5,000, was not recorded in the accounts until paid in
2006.

e. Accrued wages of P4,000 at December 31, 2005, were not recorded in the
accounts until paid in January 2006.

f. Prepaid insurance at December 31, 2005 was understated by P600 because this
amount was included in 2005 expense. The insurance policy expires on December 31,
2006.

g. Income tax expense of P2,400 for the last part of the year ended December 31,
2005, was not recorded until paid in January 2006.

h. Depreciation of P9,000 was not recorded for 2005.

Questions:
Based on the information given, answer the following:

1. Net income of 2005 is overstated by


a. P 40,400 b. P 39,800 c. P 38,400 d. P 29,400

2. Net income of 2006 is understated by


a. P 40,800 b. P 39,800 c. P 28,800 d. P 27,800

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3. Operating expenses of 2005 is understated by
a. P 21,800 b. P 21,800 c. P 20,600 d. P 19,400

4. Operating expense of 2006 is overstated by


a. P 21,800 b. P 10,800 c. P 9,000 d. P 8,400

5. Cost of sales of 2006 is


a. Overstated by P18,000 c. Understated by P6,000
b. Understated by P18,000 d. Not affected with error

Solution
NET INCOME
2005 2006
A. Omission of purchases (12,000) 12,000
Omission of inventory 12,000 (12,000)
B. Omission of purchases (18,000) 18,000
C. (2,000)
D (5,000) 5,000
E (4,000) 4,000
F 600 (600)
G (2,400) 2,400
H (9,000) _______
(39,800) 28,800

OPERATING EXPENSES
2005 2006
A

B.
C. (2,000)
D (5,000) 5,000
E (4,000) 4,000
F 600 (600)
G
H (9,000) _______
(19,400) 8,400
Answer:
1. B 2. C 3. D 4. D 5. A

Pro0blem 15
Tuburan Company was organized during 2002 by three technical experts to assemble (parts
to be purchased from suppliers) and market an electronic device that they had previously
patented. No products were sold during 2002; however, 2003 and 2004 produced significant
sales, but modest profits. During 2003, the company hired bookkeeper who, although very
industrious, had very little knowledge of accounting. Realizing this competency problem, the
company is considering engaging an outside independent CPA to as they said “straighten
things out and make recommendations.” Among numerous other accounting problems,
adjusting entries have never been made. The bookkeeper stated that “the transactions are
recorded in the right way when they occur.”

The following 2005 transactions, and the way in which the bookkeeper recorded or
explained them, are being discussed:

a. Inventory – ending 2004, P30,000; ending 2005, P47,000 (by inventory count).

84
Inventory of parts 17,000
Purchases 17,000

b. Depreciation – equipment (purchased at the beginning of 2004) cost, P80,000;


estimated useful life, 10 years; manufacturer’s recommended value at end of 5 years,
P10,000.
Depreciation expense 7,000
Equipment 7,000

c. Unpaid wages at year-end 2004, P3,000; 2005, P11,000.

Record when paid, because that is when the wages requires the payment of resources
and “it all events out anyway.”
d. Note payable, P60,000, five-year, 15%, interest payable each October 31; signed
November 1, 2004.
Interest expense 9,000
Cash 9,000
Because this is the correct amount of interest each year

e. Contract to deliver six electronic devices, signed October 15, 2005, pending
assembly, P45,000.
Due from customers 45,000
Sales 45,000

f. Property taxes for 2005, billed in November 2005, payable without penalty up to
February 15, 2004, P9,000. Paid on February 14, 2006.
February 14, 2006:
Property taxes 9,000
Cash 9,000

g. Advertising costs for December 2005, Christmas season, P17,000. Paid, within the
30-day credit period, on January 26, 2006.

January 26, 2006:


Advertising 17,000
Cash 17,000
Questions:
Based on the information given, answer the following:

1. Interest expense of the P60,000 note at December 31, 2005 is


a. P 10,500 b. P 9,000 c. P 7,500 d. P 1,500

2. Interest payable at December 31, 2005 is


a. P 9,000 b. P 7,500 c. P 1,500 d. P 750

3. Inventory at December 31, 2005 is


a. P 64,000 c. P 30,000
b. P 47,000 d. Cannot be determined

4. Wages expense at December 31, 2005 is


a. Understated by P 14,000 c. Understated by P 8,000
b. Understated by P 11,000 d. Correctly stated

85
5. Accrued expenses at December 31, 2005 is understated by
a. P 38,500 b. P 12,500 c. P 11,750 d. P 11,000

Solution
1. B
P 60,000 x 15% = P 9,000
2. C
P 60,000 x 15% x 2/12 = P 1,500
3. B Given in item A
4. C
Retained earnings 3,000
Wages expense 3,000
Wages expense 11,000
Wages payable 11,000
5. A
Interest payable 1,500
Wages payable 11,000
Property taxes 9,000
Advertising 17,000
Total 38,500

Problem 16
Branzuela Corporation reported the following amounts of net income for the years ended
December 31, 2003, 2004 and 2005:

2003 P127,000
2004 150,000
2005 128,500

You are performing the audit for the year ended December 31, 2005. During your
examination, you discover the following errors:

a. As a result of errors in the physical count, ending inventories were misstated as follows:

December 31, 2004 P14,000 understated


December 31, 2005 P23,000 overstated

b. On December 29, 2005, Branzuela recorded as a purchase, merchandise in transit,


which cost P15,000. The merchandise was shipped FOB Destination and had not arrived
by December 31. The merchandise was not included in the ending inventory.

c. Branzuela records sales on the accrual basis but failed to record sales on account made
near the end of each year as follows

2003 P4,000
2004 5,000
2005 3,500

86
d. The company failed to record accrued office salaries as follows:

December 31, 2003 P10,000


December 31, 2004 14,000

e. On March 1, 2004, a 10% stock dividend was declared and distributed. The par value of
the shares amounted to P10,000 and market value was P13,000. the stock dividend was
recorded as follows:

Miscellaneous expense P13,000


Common stock 10,000
Retained earnings 3,000

f. On July 1, 2004, Branzuela acquired a three-year insurance policy. The three-year


premium of P6,000 was paid on that date, and the entire premium was recorded as
insurance expense.

g. On January 1, 2005, Branzuela retired bonds with a book value of P120,000 for
P106,000. The gain was incorrectly deferred and is being amortized 10 years as a
reduction of interest expense on other outstanding obligations.

Questions:

1. What is the adjusted net income for the year ended December 31, 2003?
a. P133,000 b. P121,000 c. P117,000 d. P113,000

2. What is the adjusted net income for the year ended December 31, 2004?
a. P159,000 b. P160,000 b. P179,000 c. P187,000

3. What is the adjusted net income for the year ended December 31, 2005?
a. P129,600 b. P131,600 c. P139,600 d. P142,600

4. What adjusting entry should be made on December 31, 2005 to correct the error
described in item B?
a. Accounts payable 15,000
Purchases 15,000
b. Purchases 15,000
Accounts payable 15,000
c. Accounts payable 15,000
Cash 15,000
d. Accounts payable 15,000
Retained earnings 15,000

5. The adjusting entry on December 31, 2004 to correct the error described in item E
should include a debit to
a. Common stock P10,000 c. Additional paid in capital, P3,000
b. Retained earnings, P16,000 d. Miscellaneous expenses, P3,000

Solution
2003 2004 2005
Unadjusted Net Income 127,000 150,000 128,500
A 14,000 (14,000)
(23,000)

87
B 15,000
C 4,000 (4,000)
5,000 (5,000)
3,500
D (10,000) 10,000
(14,000) 14,000
E 13,000
F 5,000 (2,000)
G 14,000
___________ ___________ (1,400)
Adjusted Net Income 121,000 179,000 129,600

Answer:
1. B 2. A 3. D 4. A 5. B

CHAPTER 3 - Audit of Cash &


Cash Equivalents
Problem 1
The “CASH” account of Don Corporation’s ledger on December 31, 2006 showed the
following:

a. Petty cash fund (including P7,500 unreplenished


voucher of which P2,400 is dated January 3, 2007) P 15,000
b. Redemption Fund Account – PNB 500,000
c. Traveler’s check 100,000
d. Money order 10,000
e. Treasury bill, purchased December 1, 2006 (due on Feb. 1, 2007) 50,000
f. Time deposit due on March 31, 2007 50,000
g. 180-day Treasury bill, due March 15, 2007 120,000
h. Note receivable in the possession of a collecting agency 20,000
i. PNB – Checking Account #211-009-091 325,900
j. Cash on hand, including customer postdated check of P15,000 23,000
k. Savings deposit, earmarked for acquisition of equipment 210,000
l. A check payable to San Ignacio Incorporated, dated January 5, 2007,
that was included in the December 31 PNB Checking Account
#211-009-091 50,000
m. Bond Sinking Fund (used to finance the maturing long-term obligation
on March 31, 2007) 150,000
n. Overdraft in PNB Checking Account #211-099-085 ( 50,000)
o. Check #801 in payment to Accounts Payable, dated Dec. 31, 2006
not mailed until January 5, 2007 20,000
p. Advances to Officers/Employees for Seminars (no liquidation is
required) 80,000
q. Money market placement (due June 30, 2007) 600,000
r. Listed stock held as temporary investment 100,000
s. Check #789 in payment to Suppliers, dated January 5, 2007 and
recorded December 31, 2006. 35,000
t. Customers’ certified checks 10,000
u. Pension Fund 150,000
TOTAL 2,568,900

88
Questions
1. The entry to correct/adjust item F is:
a. Investment 50,000
Cash 50,000
b. Other assets 50,000
Cash 50,000
c. Short-term investment 50,000
Cash 50,000
d. No adjustment

2. The entry to correct/adjust item L is:


a. Accounts payable 50,000
Cash 50,000
b. Cash 50,000
Other liabilities 50,000
c. Cash 50,000
Accounts payable 50,000
d. No adjustment

3. The entry to correct/adjust item M is:


a. Investment 150,000
Cash 150,000
b. Other assets 150,000
Cash 150,000
c. Short-tem investment 150,000
Cash 150,000
d. No adjustment

4. DON CORPORATION’S cash and cash equivalents balance at December 31, 2006 is:
a. Overstated by P1,950,100 c. Overstated by P 1,845,100
b. Overstated by P 1,895,100 d. Overstated by P 1,795,100

5. DON CORPORATION’S adjusted cash and cash equivalents balance at December 31,
2006 is:
a. P 618,800 b. P 623,800 c. P 673,800 d. P 723,800

Solution

a. Operating expenses 5,100


Cash 5,100
b. Investment 500,000
Cash 500,000
c. No adjustment
d. No adjustment
e. No adjustment
f. No adjustment
g. Short-term investment 120,000
Cash 120,000
h. Notes receivable 20,000
Cash 20,000
i. No adjustment
j. Accounts receivable 15,000
Cash 15,000
k. Cash – restricted 210,000
Cash 210,000
l. No adjustment

89
m. Investment – current 150,000
Cash 150,000
n. No adjustment
o. No adjustment
p. Operating expenses 80,000
Cash 80,000
q. Short-term investment 600,000
Cash 600,000
r. Short-term investment 100,000
Cash 100,000
s. No adjustment
t. No adjustment
u. Investment 150,000
Cash 150,000

Answer:
1. D 2. D 3. C 4. A 5. A

Problem 2
The following items are found in the cash account of Ivie Company at December 31, 2006.
The company’s controller asks your opinion whether the items listed below should be
considered as part of cash account and come up with adjusting entry to adjust the cash
account.

1. Customers’ check dated December 25, 2006, P25,000.


2. Company’s check (P30,000) dated December 26, 2006 which was drawn in payment
for merchandise purchased on that date but not delivered until January 3, 2007. This
check was deducted in the cash balance.
3. A check worth P196,000 from customer who paid the account net of the 2%
discount. The company records the transaction as credit to Accounts Receivable for the
proceeds.
4. Cash in closed bank (Urban Bank), P95,000.
5. Redemption fund, P100,000
6. Sinking fund, P100,000. This will be used on March 1, 2007 to redeem the bonds
payable.
7. Metro Bank Checking Account No. 0004568, P210,000.
8. RCBC Checking Account No. 0002347, P115,000.
9. Overdraft in PNB Checking Account No. 00011256, P50,000.
10. Company’s check dated January 3, 2007 in payment of account, P50,000. This was
recorded in the company’s disbursement ledger at December 31, 2006.
11. Overdraft in RCBC Checking Account No. 0056791, P15,000.
12. Postage stamps, P2,000.
13. 90-day Treasury Bills (purchase on November 1, 2006), P100,000
14. Treasury Bills that matures on February 1, 2007, P50,000.
15. Change fund, P10,000.
16. Customers’ certified check, P20,000.
17. Company’s certified check, P50,000. (This was included in the cash disbursement for
December).

Questions

1. The entry to correct/adjust item number 3 is:

90
a. Accounts receivable 4,000
Sales discounts 4,000
b. Sales discounts 4,000
Accounts receivable 4,000
c. Accounts receivable 4,000
Sales 4,000
d. No adjustments

2. The entry to correct/adjust item number 10 is:


a. Accounts payable 50,000
Cash 50,000
b. Other liabilities 50,000
Cash 50,000
c. Cash 50,000
Accounts payable 50,000
d. No adjustment

3. The entry to correct/adjust item number 17 is:


a. Accounts payable 50,000
Cash 50,000
b. Cash 50,000
Accounts receivable 50,000
c. Cash 50,000
Accounts payable 50,000
d. No adjustments

4. The entry to correct/adjust item number 16 is:


a. Accounts receivable 20,000
Cash 20,000
b. Cash 20,000
Accounts payable 20,000
c. Cash 20,000
Accounts receivable 20,000
d. No adjustments

5. IVIE COMPANY’S adjusted cash and cash equivalents balance at December 31, 2006 is:
a. P 771,000 b. P 741,000 c. P 721,000s d. P 691,000

Solution

Item 1 - Cash
Item 2 - Cash
Item 3 - Cash
Item 4 - Other Assets
Item 5 - Investment
Item 6 - Investment – current
Item 7 - Cash
Item 8 - Cash
Item 9 - Current liability
Item 10 – Offset to cash
Item 11 – Offset to Cash
Item 12 – Unused supplies
Item 13 – Cash as cash equivalents
Item 14 – Short-term investment
Item 15 – Cash
Item 16 – Cash
Item 17 – property recorded as disbursement

91
Answer:
1. B 2. A 3. D 4. D 5. D

Problem 3
Your audit of the December 31, 2006, financial statements of Mato Corporation reveals the
following:

1. Current account at PBCom P (35,000)


2. Current account at PNB 65,000
3. Treasury bills (acquired 3 months before maturity) 200,000
4. Treasury bills (maturity date is 12/31/07) 500,000
5. Payroll account 175,000
6. Foreign bank account - restricted (translated using the
12/31/06 exchange rate) 900,000
7. Postage stamps 600
8. Employees’ checks marked “DAIF” 10,000
9. IOU from the vice-president 50,000
10. Credit memo from a supplier for a purchase returns 25,000
11. Traveler’s check 60,000
12. Money order 10,000
13. Company’s check dated 12/30/06 but not mailed at year-end 30,000
14. Petty cash fund (P4,000 in currency and expense receipts for
(P6,000) 10,000

Questions

1. The entry to adjust the employees’ checks marked “DAIF” is:


a. Accounts receivable 10,000
Cash 10,000
b. Cash 10,000
Accounts receivable 10,000
c. Employees’ advances 10,000
Cash 10,000
d. Cash 10,000
Employees’ advances 10,000

2. MATO CORPORATION’S adjusted cash and cash equivalents balance at December 31,
2006 is:
a. P 560,000 b. P 544,000 c. P 514,000 d. P 509,000

Solution

Current account at PNB 65,000


Treasury bills acquired 3 mos. Before maturity 200,000
Payroll account 175,000
Traveler’s check 60,000
Money order 10,000
Company’s undelivered check 30,000
Petty cash fund 4,000
TOTAL 544,000

Answer:
1. C B. B

92
Problem 4
The controller of Pacatang Company is attempting to determine the amount of cash to be
reported on its December 31, 2006 balance sheet. The following information is provided:

a. Commercial savings account of P1,000,000 and a commercial checking account


balance of P900,000 are held at Phil. Banking Corporation.
b. Money market fund account held at Allied Bank, P600,000
c. Travel advance of P180,000 for executive travel for the first quarter of next year
(employee to reimburse through salary reduction)
d. A separate fund in the amount of P1,500,000 is restricted for the retirement of long-
term debt.
e. Petty cash fund, P5,000
f. An IOU from David Santos, a company officer, in the amount of P10,000.
g. A bank overdraft of P110,000 has occurred at one of the banks the company uses to
deposit its cash receipts. At the present time, the company has no other deposits at this
bank.
h. The company has two certificates of deposit, each totaling P500,000. These
certificates of deposit have a maturity of 120 days.
i. Pacatang Company has received a check that is dated January 12, 2007 in the
amount of P125,000.
j. Currency and coins on hand amounted to P5,300.
Questions

1. PACATANG COMPANY’S adjusted cash and cash equivalents balance at December 31,
2006 is:
a. P 1,910,300 b. P 2,400,300 c. P 2,510,300 d. P 3,510,300

2. The travel advance of P180,000 for executive travel should be classified as:
a. Accounts receivable c. Prepaid expenses
b. Travel expenses d. Advances to employees

Solution
Commercial savings account P1,000,000
Commercial checking account 900,000
Petty cash fund 5,000
Currency and coin on hand 5,300
Amount of cash to be reported on balance sheet at 12.31.03 P1,910,300

(2) Money market fund acct. M/S or Temp. Investments


(3) Travel advance for executive travel (employee to
reimburse through salary deduction) Advances to Employees
(4) Bond Retirement Fund Long-term Investment
(6) IOU from company officer Advance to officers
(7) Bank overdraft (the co. has no other deposits at this bank)
Current Liabilities
(8) Certificates of deposit (maturity of 120 days Marketable securities
(9) Postdated check January 12, 2004 Receivable

Answer:
1. A 2. D

Problem 5
Present journal entries to record the following transactions in the books of Marites
Corporation, which uses a calendar year as accounting period. Assume that the company is
using the imprest method in accounting for petty cash fund:

93
a. A petty cash fund was set up on November 1, 2006 in the amount of P2,400.

b. On November 29, 2006, a check was issued to replenish the fund, the composition of
which was as follows:
Currency – bills and coins 166
Vouchers showing expenditures for:
Office supplies 270
Charges from purchased of supplies 124
Repairs and maintenance 350
Wages paid to casual employees 950
Charges from purchased of goods to be sold 400

c. On December 18, 2006, the fund was replenished and correspondingly increased to
P3,000; its composition included the following:
Currency – bills and coins 158
Vouchers showing expenditures for:
Store supplies 304
Accounts payable 914
Charges from purchased of goods to be sold 242
Miscellaneous expenses 782

d. An examination on December 31, 2006, disclosed the following composition of the fund,
although it was not replenished on this date:
Currency – bills and coins 958
Check of office manager, dated January 5, 2007 1,000
Vouchers showing expenditures for:
Office supplies 126
Miscellaneous expenses 90
Accounts payable 800

e. On January 5, 2007, the check of office manager was cashed and the proceeds were
added to the petty cash fund.

f. On January 6, 2007, replenished disbursement from December 18, 2006 to January 5,


2007.

Questions
1. The entry to record the November 29 replenishment of petty cash fund is:
a. Operating expenses 1,694
Freight-in 400
Cash short/over 140
Cash 2,234
b. Operating expenses 2,234
Petty cash fund 2,234
c. Operating expenses 1,694
Freight-in 400
Cash short/(over) 140
Petty cash fund 2,234
d. No entry since the company is using an impress fund system.

2. The adjusted Petty Cash Fund balance of MARITES CORPORATION at December 31,
2006 is:
a. P 3,000 b. P 1,958 c. P 984 d. P 958

94
3. The entry to record the December 31, 2006 adjustment of petty cash fund is:
a. Operating expenses 216
Accounts payable 800
Cash short/over 26
Petty cash fund 1,042
b. Operating expenses 216
Accounts payable 800
Cash short/over 26
Cash 1,042
c. Operating expenses 216
Accounts payable 800
Advances – employees 1,000
Cash short/(over) 26
Petty cash fund 2,042
d. No entry since there is no replenishment yet.

4. The entry to record the January 6, 2004 replenishment of petty cash fund is:
a. Operating expenses 216
Accounts payable 800
Cash short/over 26
Petty cash fund 1,042
b. Operating expenses 216
Accounts payable 800
Cash short/over 26
Cash 1,042
c. Operating expenses 216
Accounts payable 800
Advances – employees 1,000
Cash short/(over) 26
Cash 2,042
d. No entry since the account has been adjusted on December 31.

Solution
a. Petty cash fund 2,400
Cash 2,400
b. Operating expenses 1,694 TCAF 2,260
Freight-in 400 Accountability 2,400
Cash short/over 140 Shortage 140
Cash 2,234
c. Operating expenses 1,086 TCAF 2,400
Accounts payable 914 Accountability 2,400
Freight-in 242 Shortage 0
Cash 2,242
Petty cash fund 600
Cash 600
d. Operating expenses 216 TCAF 2,994
Advances to employees 1,000 Accountability 3,000
Accounts payable 800 Shortage 26
Cash short/over 26
Petty cash fund 2,042

Reversing entry – January 1

95
Petty cash fund 2,042
Operating expenses 216
Advances to employees 1,000
Accounts payable 800
Cash short/over 26

e. No entry
f. Operating expenses 216
Accounts payable 800
Cash short/over 26
Cash 1,042
Answer:
1. A 2. D 3. C 4. B

Problem 6
Your audit of the petty cash (P10,000) of Juliet Company as of December 31, 2006 revealed
the following: (cash count date is January 3, 2007 at 5:00 pm)

Bills: 10 - P500 bill 15 - P100 bill 18 - P50 15 - P20 5 - P10


Coins: P180 in P5 pieces; P42 in P1.00 pieces; P23 in P0.25 pieces.
IOU’s submitted were:
Dec. 18 Nap R. - P 750
Dec. 28 Ruel R. 125
Dec. 30 Sonny S. 500
Cashed checks:
Dec. 28, 2006 check drawn by the manager P 1,125
Dec. 28, 2006 check drawn by an employee 500
Dec. 30, 2006 check drawn by a customer 350
Jan 1, 2007 check drawn by an employee 1,250

The cashier informed you that owing to the lack of cash it was necessary for him to open
certain payroll envelopes unclaimed by employees and use the cash found herein. They
were as follows:
Dec. 15, 2006 - Ed A. P 1,250
Dec. 30, 2006 - Andoy 1,750
Dec. 30, 2006 - Macky 650
Dec. 30, 2006 - Paz 1,000

The cashier also informed you that all cash sales receipts were passed through his fund
and that cash sales tickets Nos. 2059 to 2061 under dates of Dec. 30, Jan. 3 and Jan. 4
for P350, 500 and P545, respectively, had not yet been turned over to the general
cashier.

The petty cash vouchers found in the petty cash box were as follows:
Dec. 30, 2006Transportation P515
Dec. 30, 2006Token gifts to visitors 650
Dec. 30, 2006Freight for office supplies purchase 215
Jan. 1, 2007 Freight for mdse. purchased 125
Jan. 2, 2007 Freight for mdse. sold 575
Questions

1. JULIET COMPANY’S cash shortage at December 31, 2006 is:


a. P 2,072.75 b. P 1,370.00 c. P 1,027.75 d. P 327.75

2. The adjusted petty cash balance of JULIET COMPANY at December 31, 2006 is:
a. P 10,000 b. P 9,625 c. P 5,975 d. P 4,625

96
3. The entry to adjust the unclaimed payroll at December 31, 2006 is:
a. Petty Cash Fund c. Cash
Salaries expense Accrued salaries
b. Salaries expense d. Accrued salaries
Petty cash fund Cash

4. The cashed check dated January 1, 2007


a. Should be adjusted since it was dated January 1, 2007, hence a postdated check.
b. Should be adjusted since it was received December 31, 2006 but the check is dated
January 1, 2007, hence a postdated check.
c. Should not be adjusted since the check is dated January 1, 2007.
d. Should not be adjusted since the check was received December 31, 2007.

5. The Cash account (excluding PCF) of JULIET COMPANY is understated at December 31,
2006 by:
a. P 4,650 b. P 4,900 c. P 6,045 d. P 6,370

Solution
Cash Count Due to custodian 1,370
Bills 7,750 Petty cash fund 1,370
Coins 245
IOUs 1,375 Advances to employees 1,375
Checks 3,225 Petty cash fund 1,375
Vouchers 2,080
TCAF 14,675 Cash 350
Accountability Sales 350
PCF per ledger (10,000)
Unclaimed payroll ( 4,650) Advances to employees 1,250
Undeposited sales ( 1,395) Petty cash fund 1,250
Cash shortage 1,370
Cash 4,650
Accrued salaries 4,650

Operating expenses 1,380


Petty cash fund 1,380
ANSWER:
1. B 2. D 3. C 4. B 5. B

Problem 7
You are making an audit of the Darwin Corporation for the past calendar year. The balance
of the Petty Cash account at December 31, 2006 was P1,300. Your count of the imprest
cash count made at 8:30 am on January 3, 2007, in the presence of the petty cash
custodian, revealed:

Currency and coins 571.38

Checks:
Date Maker Bank
12/28/06 Macky, vice-president PNB 360.00
12/29/06 Andy, employee DBP 60.00
12/31/06 Bobot, customer RCBC 153.80
01/02/07 Neil, customer PNB 121.36

97
01/10/07 Jeff, employee PNB 60.00
(check received Dec. 29)
(These checks were all considered good when deposited after dates shown on the
checks. The first four checks were actually deposited Jan. 3; the last check was
deposited Jan. 11; all five checks proved to be good.)

Vouchers:
Dec. 11 #261 Richard, shipping clerk – temporary advance for the use of the
receiving department. Your count of Mr. Richard’s fund revealed:
currency – P28.80; merchandise freight bills, P31.20. P 60.00
Dec. 28 # 301 Postage 12.00
Dec. 29 # 302 Freight bill on merchandise purchases 47.30
Dec. 31 # 305 Freight bill on office supplies 88.93
Jan. 2 # 500 Freight bill on merchandise purchases 29.36

IOU Dec. 21 Mabel, employee 36.00

Sales Invoices (for cash sales, collections handled by the petty cashier):
Invoice # 315 Dec. 30 P 120.00
328 Dec. 31 153.80
334 Jan. 2 121.36
(As a general rule, the petty cashier endeavored to turn over the proceeds of
cash sales to the general cashier on the 10 th, 20th and last days of each month.
Proceeds on these sales were recorded and deposited by the general cashier.)

Postage Stamps:
Three one-peso stamps. The petty cashier handled postage stamps. These
stamps represent the unused stamps purchased on Voucher # 301.

Questions
1. The petty cash fund shortage at December 31, 2006 is:
a. P 216.39 b. P 123.83 c. P 98.03 d. P 95.03

2. The adjusted petty cash fund balance of DARWIN CORPORATION at December 31, 2006
is:
a. P 900.74 b. P 960.74 c. P 1,174.54 d. P 1,234.54

3. DARWIN CORPORATION’S operating expenses found in the petty cash fund at December
31, 2006 is:
a. P 208.23 b. P 205.75 c. P 174.03 d. P 97.93

4. The Cash account (excluding PCF) of DARWIN CORPORATION is understated at


December 31, 2006 by:
a. P 395.16 b. P 273.80 c. P 153.80 d. P 120.00

Solution
Cash count

98
Currency and coins 571.38 Due to custodian 95.03
Checks 755.16 PCF 95.03
Vouchers 237.59
IOU 36.00 Cash 273.80
TCAF 1,600.13 Sales (SI#328 & 315) 273.80
Accountability
PCF per ledger (1,300.00) Adv. to employee 60.00
Undeposited sales ( 395.16) PCF 60.00
Cash shortage 95.03
Adv. to employee 60.00
Operating expenses 100.93
Freight-in 47.30
PCF 208.23

Freight-in 31.20
Adv. to employee 31.20

Adv. to employee 36.00


PCF 36.00

Unused postage 3.00


Operating expenses 3.00
Answer:
1. D 2. A 3. D 4. B

Problem 8
In connection with your audit of the financial statements of Reyes Corporation for the year
ended December 31, 2006, you conducted a surprise count of the company’s petty cash and
undeposited collections at 9:10 am on January 3, 2007. You count disclosed the following:

Bills and counts

Bills Coins
P100.00 5 pieces P1.00 205 pieces
50.00 40 pieces 0.50 162 pieces
20.00 35 pieces 0.25 32 pieces
10.00 27 pieces

Postage stamps (unused) - P365

Checks
Date Payee Maker Amount
Dec. 30 Cash Custodian P 1,200
Dec. 30 Reyes Corp. Karren, Inc. 14,000
Dec. 31 Reyes Corp. Sheryl, sales manager 1,680
Dec. 31 Reyes Corp. Victor Corp. 17,800
Dec. 31 Reyes Corp. Ma. Karen, Inc. 8,300
Dec. 31 Merry Corp. Reyes Corp. 27,000
(not endorsed)

Unreimbursed vouchers
Date Payee Description Amount
Dec. 23 Sheryl, sales mgr. Advance for trip P 7,000
Dec. 28 Post Office Postage stamps 1,620
Dec. 29 Messengers Transportation 150
Dec. 29 Ace, Inc. Computer repair 800

99
Other items found inside the cash box:

1. Unclaimed pay envelope of Jeanette. Indicated on the pay slip is his net salary of
P7,500. Your inquiry revealed that Jeanette’s salary is mingled with the petty cash
fund.

2. The sales manager’s liquidation report for this Baguio Trip.


Cash Advance received on Dec. 23 P 7,000
Less: Hotel accomodation, meals, etc. P 4,500
Bus fare for two 400
Cash given to Carlo, salesman 300 5,200
Balance P 1,800
Accounted for as follows:
Cash returned by Carlo to the sales manager P 120
Personal check of the sales manager 1,680
Total P 1,800

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, 2006.

OR No. Amount Form of Payment


4352 P 13,600 Cash
4353 17,800 Check
4354 3,600 Cash
4355 8,300 Check

3. The petty cash balance per general ledger is P10,000. The last replenishment of the
fund was made on December 22, 2006.

Questions

1. REYES CORPORATION’S cash shortage/overage at December 31, 2006 is:


a. P 61,166 short c. P 34,166 over
b. P 20,166 short d. P 22,514 over

2. The adjusted petty cash balance of REYES CORPORATION at December 31, 2006 is:
a. P 4,964 b. P 2,110 c. P 1,200 d. P 430

3. The undeposited sales/collection of REYES CORPORATION at December 31, 2006 is:


a. P 66,480 b. P 64,800 c. P 57,300 d. P 43,300

Solution
Bills and coins 3,764
Checks 69,980
Vouchers 9,570
TCAF 83,314
Accountability
PCF per ledger (10,000)

100
Undeposited sales – with receipts (43,300)
Unclaimed payroll ( 7,500)
Unendorsed check (27,000)
Undeposited sales – without receipts (14,000)
Check endorsed by sales manager ( 1,680)
Cash shortage (20,166)

Due to custodian 20,166


Cash 20,166

Cash 57,300
Sales (with and without receipts) 57,300

Cash 7,500
Accrued salary 7,500

Petty cash fund 1,680


Advances to employees 1,680

Advances to employees 7,000


Operating expenses 2,570
Petty cash fund 9,570

Operating expenses 5,080


Advances to employees 5,080

Answer: 1. B 2. B 3. C
Problem 9
Mary Jane is the cashier of Adlawan Corporation. AS representative of the Zarate and
Associates, CPAs, you were assigned to verify her cash on hand in the morning of January
3, 2007. You began to count at 9:00 AM in the presence of Mary Jane. In the course of
your counting, you found currencies in paper bills and coins together with checks, vouchers,
and other items, which are mentioned below:

Bills: (2) P500; (8) P100; (12) P50; (5) P20

Coins: P 5.00 11 loose


1.00 24 loose
0.25 5 rolls and 32 loose (50 pieces to a roll)
0.10 10 rolls and 15 loose (50 pieces to a roll)
0.05 14 rolls and 20 loose (40 pieces to a roll)
Checks:
Date Maker Payee Amount
12/22/06 Vivian, Asst. Mgr Adlawan Corp. P 6,000
12/26/06 Mary Jane, cashier Adlawan Corp. 4,000

IOUs:
Date Maker Amount
12/20/06 Yap, Janitor P 500
12/22/06 Felix, clerk 750
12/24/06 Ablay, bookkeeper 500

PETTY CASH VOUCHERS FOR REPLENISHMENT


Date Payee Accounts Charged Amount
12/16/06 Wagan, messenger Advances to employees P1,000.00
12/17/06 Maren and Co. Supplies 545.00
12/18/06 Eeman Liner Freight in 982.50

101
12/18/06 Posts Office Supplies 300.00
12/20/06 Alejandre, carpenter Repairs 2,950.00
12/21/06 Violan Miscellaneous expense 554.00

Your investigation also disclosed the following:

1. The balance of petty cash fund per books is P20,000.00.

2. Cash sale of January 2, 2007 amounted to P8,650 per sales records, while cash
receipts book and bank deposit slip showed that only P7,650 was deposited in the
bank on January 3, 2007

3. The following employees’ pay envelopes had been opened and the money removed.
Each envelope was marked “Unclaimed” - Ernesto, P332.50; Secinando, P447.50.

Questions

1. The petty cash shortage of ADLAWAN CORPORATION at December 31, 2006 is:
a. P 2,748.50 b. P 1,748.50 c. P 968.50 d. P 188.50

2. The adjusted petty cash balance of ADLAWAN CORPORATION at December 31, 2006 is:
a. P 10,950 b. P 11,950 c. P 11,730 d. P 12,730

3. The undeposited sales/collection of ADLAWAN CORPORATION at December 31, 2006 is:


a. P 8,650 b. P 7,650 c. P 1,000 d. P 0

Solution
Cash count
Bills and coins 2,730.00 Due to custodian 968.50
Checks 10,000.00 Petty cash fund 968.50
IOUs 1,750.00
PCF Vouchers 6,331.50 Adv. to employees 1,750.00
TCAF 20,811.50 Petty cash fund 1,750.00
Accountability
PCF per ledger (20,000.00) Adv. to employees 1,000.00
Uneposited sales ( 1,000.00) Operating expenses 4,349.00
Unclaimed payroll ( 780.00) Freight-in 982.50
Cash shortage 968.50 Petty cash fund 6,331.50

Cash 780.00
Accrued salary 780.00
Answer:
1. C 2. A 3. D

Problem 10
In your year-end audit of Angela Corp., the cashier showed a cash accountability of
P1,100,000 as at December 31, 2006. The following transactions were extracted in the
books of the company, in summary form:

Accounts receivable, beginning P 275,000


Accounts receivable, end 385,000
Sales (80% on credit) 1,850,000
Accounts written-off 25,000
Recovery of accounts written-off, included in the collection
of account receivable 15,000
Depreciation of fixed assets 150,000

102
Inventory, end 185,000
Inventory, beg 203,000
Cost of sales 960,000
Income tax accrued 18,500
Payment of bank loan 200,000
Subscription receivable 250,000
Subscribed capital stock 950,000
Purchases of fixed assets 320,000
Proceeds from short-term bank loan 300,000
Accounts payable, end 425,000
Accounts payable, beg. 200,000

Questions

1. The correct cashier’s accountability at December 31, 2006 is:


a. P 1,493,000 b. P 1,123,000 c. P 793,000 d. P 423,000

2. ANGELA CORPORATION’S cash account at December31, 2006 is:


a. Understated by P 307,000 c. Overstated by P 693,000
b. Understated by P 393,000 d. Overstated by P 677,000

Solution

Proceeds from collection of accounts receivable 1,360,000 *


Proceeds from cash sales 370,000
Proceeds from bank loan 300,000
Proceeds from issuance of capital stock (P950,000 – P250,000) 700,000
Payment of accounts payable ( 717,000) **
Payment of short-term bank loan ( 200,000)
Purchase of fixed assets ( 320,000)
Total Accountability 1,493,000
Total Cash 1,100,000
Cash shortage 393,000

* Accounts Receivable
Beg. bal 275,000 Collection 1,360,000 squeeze figure
Cr. Sales 1,480,000 Write-off 25,000
Recovery 15,000 ________
1,770,000 1,385,000
End bal 385,000

** Accounts payable *** Beg. Inv. 203,000


Payment 717,000 Beg. bal. 200,000 Purchases 942,000
_______ Purchases 942,000 *** TGAS 1,145,000
717,000 1,142,000 End inv. 185,000
End bal. 425,000 COS 960,000
Answer:
1. A 2. B

Problem 11
The following data are gathered from the cash books and bank statement received from
Davao Bank by Grace Company:

103
The cash in bank ledger account shows a debit balance of P290,438.50 as of May 31.

The bank statement shows a credit balance of P318,560 as of May 31.

An examination of the checks encashed by the bank shows that the following checks are not
presented for payment:
No. 187, P3,608; No. 189, P15,499; No. 191, P4,400;
No. 192, P1,545.50, No. 193, P23,001

A certified check for P24,750 payable to creditor, was encashed by the bank during May.

The bank statement shows a deduction of P10,802 for check No. 184. The check was
actually made out at P10,208.

A check deposited on May 27 for P34,100 was returned by the bank on May 28 marked
Refer to Maker.

A non-interest bearing note for P44,000 was collected by the bank for the account Grace
Company. Collection fee deducted by the bank is P330.

A deposit for P20,900 was recorded in the books twice.

Check No. 179 for P26,400 was erroneously recorded in the books as P46,200.

Interest on an outstanding loan payable, deducted by the bank on May 31, P1,320.
Collections on May 31 to be deposited on June 1, P26,488.
Questions

1. GRACE COMPANY’S adjusted cash balance at May 31, 2006 is:


a. P 341,939.50 b. P 283,288.50 c. P 297,588.50 d. P 273,168.50

2. The recorded cash of GRACE COMPANY at May 31 is:


a. Understated by P 17,270 c. Overstated by P 7,150
b. Understated by P 7,150 d. Overstated by P 17,270

Solution

Unadjusted Book balance 290,438.50 Unadjusted Bank balance 318,560.00


Returned check (34,100.00) Outstanding checks (48,053.50)
Collection of Notes 43,670.00 Error 594.00
Error (20,900.00) Deposit in transit 26,488.00
Error 19,800.00
Error ( 1,320.00) _________
Adjusted book balance 297,588.50 Adjusted bank balance 297,588.50

Adjusting entry:

Accounts receivable 34,100


Cash 34,100
Cash 43,670
Collection fee 330
Notes receivable 44,000
Accounts receivable 20,900
Cash 20,900
Cash 19,800
Accounts payable 19,800
Interest expense 1,320

104
Cash 1,320

Answer:
1. C 2. B

Problem 12
The following data pertaining to the cash transactions and bank account of Abiso Company
for May 2006 are available to you:

Cash balance, per accounting records, May 31, 2006 P 51,582


Cash balance, per bank statement, May 31, 2006 95,874
Bank service charge for May 327
Debit memo for the cost of printed checks delivered by the bank;
the charge has not been recorded in the accounting records 375
Outstanding checks, May 31, 2006 20,184
Deposit of May 30 not recorded by bank until June 1 14,610
Proceeds of bank loan on May 30, not recorded in the accounting
records, net of interest of P900 17,100
Proceeds from a customer’s promissory note; principal amount P24,000,
collected by the bank, taken up in the books with interest 24,300
Check No. 1086 issued to a supplier entered in the accounting records
as P6,300 but deducted in the bank statement at an erroneous amount
of 3,600
Stolen check lacking an authorized signature, deducted from Abiso’s
account by the bank in error 2,400

Customer’s checks returned by the bank marked NSF, indicating that the
customer’s balance was not adequate to cover the checks; no entry has
been made in the accounting records to record the returned check 2,280

Questions

1. The adjusted cash in bank balance of ABISO COMPANY at May 31, 2006 is:
a. P 87,570 b. P 90,000 c. P 90,570 d. P 90,900

2. The cash in bank balance of ABISO COMPANY at May 31, 2006 is:
a. Understated by P39,318 c. Understated by P38,418
b. Understated by P38,988 d. Understated by P35,988

Solution
Book Bank
Unadjusted balance 51,582 95,874
Service charge ( 327)
DM – printed checks ( 375)
Outstanding checks (20,184)
Deposit in transit 14,610
Loan proceed 17,100
Proceed from note collection 24,300
Bank error ( 2,700)
Bank error 2,400
NSF ( 2,280) __________
Adjusted balance 90,000 90,000

Adjusting entry:

Service charge 327

105
Cash 327

Service charge 375


Cash 375

Cash 17,100
Prepaid interest 900
Bank loan 18,000

Cash 24,300
Note receivable 24,000
Interest income 300

Accounts receivable 2,280


Cash 2,280
Answer:
1. B 2. C

Problem 13
In connection with an audit, you are given the following bank reconciliation.

BANK RECONCILIATION
December 31, 2006
Balance per ledger, 12/31/03 P 34,349.72
Add: Collections received on the last day of
December and charged to “Cash in Bank”
on books but not deposited 5,324.50
Debit memo for customer’s checks returned
unpaid (check is on hand but no entry has been
made on the books) 4,000.00
Debit memo for bank service charge for December 1,000.00
P 46,674.22
Deduct:
Outstanding checks P 18,625
(see details below)
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 P12,625 but drawn and paid by bank as
16,225 3,600 32,225.00
Computed balance P 14,449.22
Unlocated difference 36,601.00
Balance per bank (check to confirmation) P 51,050.22

LIST OF OUTSTANDING CHECKS


December 31, 2006
Check No. Amount
14344 P 5,820
14358 1,295
14367 3,543
14399 2,001
14401 4,892
14407 5,074
P 18,625

106
Questions:

1. The adjusted cash balance at December 31, 2006 is:


a. P 33,749.72 b. P 34,949.72 c. P 37,749.72 d.P40,949.72

2. A check for an account payable entered on books as P12,625 but drawn and paid by
bank as 16,225
a. Should not be included in the reconciliation since the bank already gave the money
to the payee.
b. Should not be included in the reconciliation since bank’s record is always followed.
c. Should be included as deduction in the book reconciliation since this is considered as
book error, thus a reconciling item.
d. Should be included as addition in the book reconciliation since this is considered as
book error, thus a reconciling item.

3. The outstanding checks at December 31, 2006 is:


a. P 15,025 b. P 18,625 c. P 19,025 d. P 22,625

4. The cash balance of the company per record at December 31, 2006 is:
a. Overstated by P600 c. Understated by P 3,400
b. Overstated by P1,200 d. Overstated by P 6,600

Solution
Bank Book
Unadjusted balance 51,050.22 34,349.72
Returned checks ( 4,000.00)
Service charge ( 1,000.00)
Collection of note receivable 8,000.00
Deposit in transit 5,324.50
Outstanding checks (22,625.00)
Book error ____________ ( 3,600.00)
Adjusted balance 33,749.72 33,749.72

Adjusting entry

Accounts receivable 4,000


Cash 4,000

Service charge 1,000


Cash 1,000

Cash 8,000
Note receivable 8,000

Accounts receivable 3,600


Cash 3,600
Answer:
1. A 2. C 3. D 4. A

Problem 14
The cash books of Grace Corporation show the following entries during the month of June
2006.
Cash Receipts Journal Check Register
Date Amount Date Check No. Amount
June 1Balance 762,000 June2 801 15,625
4Deposit 113,000 3 802 7,526
4Deposit 811,000 5 803 229,205
7Deposit 152,200 7 804 169,555

107
10 Deposit 11,300 8 805 74,936
10 Deposit 12,700 10 806 274,600
11 Deposit 73,000 11 807 34,842
17 Deposit 110,075 13 808 250,000
18 Deposit 3,725 14 809 1,070,000
18 Deposit 65,000 17 810 167,300
19 Deposit 26,463 19 811 3,130
20 Deposit 133,037 21 812 82,730
27 Deposit 273,628 23 813 127,200
30 Deposit 92,400 25 814 93,080
30 815 720

The bank statement for the month of June 2006 shows:

Checks No. Deposits Date Amount


Balance May 31 798,000
924,000 June 5 1,722,000
800 36,000 6 1,686,000
804 169,555 7 1,516,445
805 74,936 217,200 8 1,658,709
801 16,525
803 229,205 9 1,412,979
807 34,842 97,000 12 1,475,137
924 75,000
200 40,400 CM 13 1,440,337
(collection charge)
809 1,070,000 14 370,337
808 250,000 15 120,337
198,000 CM 16 318,337
810 167,300 113,800 19 264,837
812 82,730 159,500 21 341,607
806 274,600 24 67,007
273,628 28 340,635
811 3,130
DM 300 30 337,205

Upon investigation, the following are discovered:

CM - Represents a 60-day, 6% note for P40,000 collected by the bank for the account of
Grace Company.
CM - Represents a 60-day, 6% own note for P200,000 discounted by Grace Corporation with
the bank and not yet recorded in the books.
DM - Represents bank service charge for the month.
Check No. 924 represents a check signed by Graciele Company.
Collection charge – represents collection fee charged by the bank.

Questions

1. The unadjusted cash ledger balance of GRACE CORPORATION at June 30, 2006 is:
a. P 114,079 b. P 113,179 c. P 39,079 d. P 38,179

2. The unadjusted cash bank balance of GRACE CORPORATION at June 30, 2006 is:
a. P 261,305 b. P 336,305 c. P 337,205s d. P 412,205

108
3. The deposit in transit of GRACE CORPORATION at June 30, 2006 is:
a. P 92,400 b. P 104,500 c. P 182,000 d. P 0

4. The outstanding checks of GRACE CORPORATION at June 30, 2006 is:


a. P 302,806 b. P 228,526 c. P 227,806 d. P 153,526

5. The adjusted cash balance of GRACE CORPORATION at June 30, 2006 is:
a. P 277,879 b. P 276,079 c. P 261,305 d. P 201,079

6. The error made in check number 801 is known as:


a. Fundamental error c. Transplacement error
b. Balance sheet error d. Transposition error

7. In the discounting of P200,000 note, the company should credit


a. Notes receivable discounting c. Notes payable
b. Notes Receivable d. Notes discounting

Solution
Unadjusted book bal. 39,079 Unadjusted bank bal. 337,205
Error – Deposit in transit 92,400
Check # 801 – P 15,625 Outstanding checks:
Correct 16,525 ( 900) # 802 7,526
Collection fee ( 200) # 813 127,200
DM ( 300) # 814 93,080
CM 40,400 # 815 720 (228,526)
CM 198,000 Error 75,000
Adjusted balance 276,079 Adjusted balance 276,079

Adjusting entry:
Accounts payable 900
Cash 900
Cash 40,200
Collection fee 200
Notes receivable 40,000
Interest income 400
Service charge 300
Cash 300
Cash 198,000
Interest expense 2,000
Notes payable 200,000

Answer:
1. C 2. C 3. A 4. B 5. B
6. D 7. B

Problem 15
The bank portion of the bank reconciliation for Angelo Company at October 31, 2006 was as
follows:
Angelo Company
Bank Reconciliation
October 31, 2006
Cash Balance per Bank P 12,367.90
Add: Deposit in transit 1,530.20
P 13,898.10
Less: Outstanding checks

Check Number Check Amount

109
2451 P 1,260.40
2470 720.10
2471 844.50
2472 426.80
2474 1,050.00 4,301.80

Adjusted cash balance per bank P 9,596.30

The adjusted cash balance per bank agreed with the cash balance per books at October 31.

The November bank statement showed the following checks and deposits.

Bank Statement
Checks Deposits
Date Number Amount Date Amount

11-1 2470 720.10 11-1 1,530.20


11-2 2471 844.50 11-4 1,211.60
11-5 2474 1,050.00 11-8 990.10
11-4 2475 1,640.70 11-13 2,575.00
11-8 2476 2,830.00 11-18 1,472.70
11-10 2477 600.00 11-21 2,945.00
11-15 2479 1,750.00 11-25 2,567.30
11-18 2480 1,330.00 11-28 1,650.00
11-27 2481 695.40 11-30 1,186.00
11-30 2483 575.50 Total 16,127.90
11-29 2486 900.00
Total 12,936.20
The cash records per books for November showed the following:

Cash Receipts
Cash Payments Journal Journal____
Date Number Amount Date Number Amount Date Amount
11-1 2475 1,640.70 11-20 2483 575.50 11-3 1,211.60
11-2 2476 2,830.00 11-22 2484 829.50 11-7 990.10
11-2 2477 600.00 11-23 2485 974.80 11-12 2,575.00
11-4 2478 538.20 11-24 2486 900.00 11-17 1,472.70
11-8 2479 1,570.00 11-29 2487 398.00 11-20 2,954.00
11-10 2480 1,330.00 11-30 2488 800.00 11-24 2,567.30
11-15 2481 695.40 Total 14,294.10 11-27 1,650.00
11-18 2482 612.00 11-29 1,186.00
11-30 1,225.00
Total 15,831.70

The bank statement contained two bank memoranda:

1. A credit of P2,105.00 for the collection of a P2,000 note for Angelo Company plus
interest of P120 and less a collection fee of P15. Angelo company has not accrued any
interest on the note.

2. A debit for the printing of additional company checks, P50.

110
At November 30, the cash balance per books was P11,123.90, and the cash balance per the
bank statement was P17,604.60. The bank did not make any errors, but Angelo Company
made two errors.

Note: The correction of any errors pertaining to recording checks should be made to
Accounts Payable. The correction of any errors relating to recording cash receipts should be
made to Accounts Receivable

Questions

1. The unadjusted cash ledger balance of ANGELO COMPANY at November 30, 2006 is:
a. P 11,133.90 b. P 12,990.90 c. P 13,188.90 d. P 13,377.90

2. The unadjusted bank balance of ANGELO COMPANY at November 30, 2006 is:
a. P 12,828.90 b. P 13,008.90 c. P 13,188.90 d. P 17,614.60

3. The outstanding checks of ANGELO COMPANY at November 30, 2006 is:


a. P 5,659.70 b. P 5,830.70 c. P 5,839.70 d. P 6,028.70

4. The deposit in transit of ANGELO COMPANY at November 30, 2006 is:


a. P 1,225 b. P 1,216 c. P 1,234 d. P 1,396

5. The adjusted book balance of ANGELO COMPANY at November 30, 2006 is:
a. P 11,133.90 b. P 12,990.90 c. P 13,188.90 d. P 13,377.90

Solution

Unadjusted bank bal. 17,614.60 Unadjusted book bal. 11,133.90


Deposit in transit 1,225.00 CM – notes collected 2,105.00
Outstanding checks: DM – service charge ( 50.00)
#2451 1,260.40 Error – overstatement of
#2473 426.80 recorded receipts ( 9.00)
#2478 538.20 Error- understatement of
#2482 612.00 disbursement ( 180.00)
#2483 829.50
#2484 974.80
#2488 800.00 ( 5,839.70) _________
Adjusted balance 12,990.90 Adjusted balance 12,990.90

Adjusting entry:

Cash 2,105
Service charge 15
Notes receivable 2,000
Interest income 120
Service charge 50
Cash 50
Accounts receivable 9
Cash 9
Accounts payable 180
Cash 180

Answer:
1. A 2. D 3. C 4. A 5. B

111
Problem 16
The following information pertains to the cash of Jenny Company:

Nov 31 Dec. 31
Balance shown on bank statement P 27,380 P 26,960
Balance shown in general ledger before
reconciling the bank account 25,780 25,000
Outstanding checks 8,630 10,150
Deposits in transit 6,850 12,450

For Dec.
Deposits shown in bank statement P 55,880
Charges shown on bank statement 56,300
Cash receipts shown in company’s books 53,980
Cash payments shown in company’s books 54,760

The bank service charge was P180 in November (recorded by the company during
December) and P240 in December (not yet recorded by the company).

Included with the December bank statement was a check for P5,000 that had been received
on December 25 from a customer on account. The returned check marked “NSF” by the
bank, has not yet been recorded on the company’s books.

During December the bank collected P7,500 of bond interest for the company and credited
the proceeds to the company’s account. The company earned the interest during the
current accounting period but has not yet recorded it.

During December the company issued a check for P6,960 for equipment. The check, which
cleared the bank during December, was incorrectly recorded by the company for P8,960.
Questions

1. The adjusted cash receipts of JENNY COMPANY at December 31 is:


a. P 61,480 b. P 53,980 c. P 50,280 d. P 46,480

2. The adjusted cash disbursements of JENNY COMPANY at December 31 is:


a. P 63,980 b. P 61,980 c. P 57,820 d. P 54,780

3. In a proof of cash, the NSF check:


a. Should be added in the December 31 column since this was
returned back by the bank.
b. Should be deducted in the December 31 column since this
was returned back by the bank.
c. Should be deducted in the December 31 column since this was returned back and
not paid by the bank, thus not considered as receipts.
d. Should be added in the December 31 column since this was returned back and not
paid by the bank, thus not considered as receipts.

4. The adjusted December 31 cash balance of JENNY COMPANY is:


a. P 29,760 b. P 29,260 c. P 27,260 d. P 25,600

5. The adjusted November 31 cash balance of JENNY COMPANY is:


a. P 29,160 b. P 27,260 c. P 26,160 d. P 25,600

112
6. The check issued but was incorrectly recorded as P8,960 should be adjusted by:
a. Accounts payable 2,000 c. Cash 2,000
Cash 2,000 Accounts payable 2,000
b. Equipment 2,000 d. Cash 2,000
Cash 2,000 Equipment 2,000

Solution
Nov. 30 Receipts Disburs. Dec. 31
Balance per book 25,780 53,980 54,760 25,000
Service charge – Nov. 30 (180) (180)
- Dec. 31 240 (240)
NSF check 5,000 (5,000)
Interest earned 7,500 7,500
Book error __________ _________ (2,000) 2,000
Adjusted Balance 25,600 61,480 57,820 29,260

Nov. 30 Receipts Disburs. Dec. 31


Balance per bank 27,380 55,880 56,300 26,960
Outstanding check – Nov. (8,630) (8,630)
- Dec. 10,150 (10,150)
Deposit in transit - Nov 6,850 (6,850)
- Dec __________ 12,450 _________ 12,450
Adjusted balance 25,600 61,480 57,820 29,260

Adjusting entry

Service charge 240


Cash 240

Accounts receivable 5,000


Cash 5,000

Cash 7,500
Interest income 7,500

Cash 2,000
Equipment 2,000
Answer:
1. A 2. C 3. C 4. B 5. D 6. D

Problem 17
ELEFANTE’s check register shows the following entries for the month of December

Date Checks Deposits Balance


2006
Dec 1 Beginning Balance P 83,900
5 Deposit P 65,000
7 Check # 14344 32,500 120,800
11 Check # 14345 14,000 106,800
26 Deposit 49,000
29 Check #14346 8,600 147,200

ELEFANTE’s bank reconciliation for November revealed one outstanding check (No.14343)
for P12,000 (written on November 28), and one deposit in transit for P5,550 (made
November 29).

The following is from Elefante’s bank statement for December 2006:

Date Checks Deposits Balance

113
2006
Dec. 1 Beginning balance P 95,970
1 Deposit P 5,550 101,300
4 Check No. 14344 P 32,500 68,800
5 Deposit 56,000 124,800
14 Check No. 14345 14,000 110,800
15 Loan Proceeds 500,000 610,800
20 NSF check 7,600 603,200
29 Service charge 1,000 602,200
31 Interest 3,600 605,800

Note: All errors noted in this problem were committed by the Elefante, not the bank. It is
also noted that the company failed to record one deposit in the book.

Questions

1. The unadjusted cash receipts per ledger of ELEFANTE COMPANY for the month of
December is:
a. P 119,620 b. P 114,000 c. P 110,620 d. P 105,000

2. The unadjusted cash receipts per bank of ELEFANTE COMPANY for the month of
December is:
a. P 574,150 b. P 568,600 c. P 565,150 d. P 559,600

3. The adjusted December 1 cash ledger balance of


ELEFANTE COMPANY is:
a. P 95,970 b. P 89,520 c. P 83,900 d. P 78,280

4. The adjusted December31 cash bank balance of ELEFANTE COMPANY is:


a. P 634,420 b. P 628,800 c. P 623,180 d. P 577,620

5. The overstatement of deposit should be:


a. Deducted in the bank December 31 column.
b. Added in the bank December 31 column.
c. Deducted in the book December 31 column.
d. Added in the book December 31 column.

Solution
Dec. 1 Receipts Disburs. Dec. 31
Bank balance 95,970 565,150 55,100 606,020
Deposit in transit – Dec. 1 5,550 (5,550)
- Dec. 31 49,000 49,000
Outstanding checks
Dec. 1 - #14343 (12,000) (12,000)
Dec. 31 - #14343 – P12,000
#14346 - 8,600 __________ ________ 20,600 (20,600)
Adjusted balance 89,520 608,900 63,700 634,420

Dec. 1 Receipts Disburs. Dec. 31


Book balance 83,900 114,000 55,100 142,800
Overstatement of deposit (9,000) (9,000)
Loan proceeds 500,000 500,000
Interest income 3,600 3,600
NSF 7,600 (7,600)
Service charge __________ ________ 1,000 (1,000)
Total 83,900 608,600 63,700 628,800
Unrecorded collection 5,620 ________ _________ 5,620

114
Adjusted balance 89,520 608,900 63,700 634,420

Adjusting entry

Accounts receivable 9,000


Cash 9,000

Cash 500,000
Notes payable 500,000

Cash 3,600
Interest income 3,600

Accounts receivable 7,600


Cash 7,600

Service charge 1,000


Cash 1,000
Answer:
1. B 2. C 3. B 4. A 5. C

Problem 18
Juliet Company maintains a checking account at the Davao Bank. At July 31, selected data
from the ledger balance and the bank statement are as follows:

Cash in Bank
Per Books Per Bank

Balance, July 1 P 17,600 P 19,200


July Receipts 82,000
July Credits 80,070
July Disbursement 76,900
July Debits . 74,740
P 22,700 P 24,530

Analysis of the bank data reveals that the credits consist of P78,000 of July deposits and a
credit memorandum of P2,070 for collection of a P2,000 note plus interest revenue of P70.
The July debits per bank consist of checks cleared, P74,700 and a debit memorandum of
P40 for printing additional company checks.

You also discover the following errors involving July checks: (1) a check for P230 to a
creditor on account that cleared the bank in July was journalized and posted as P320, and
(2) a salary check to an employee for P255 was recorded by the bank for P155.

The June 30 bank reconciliation contained only two reconciling items: deposits in transit,
P1,000 and outstanding checks, P2,600.

Assume that the interest on the note has been accrued.

Questions

1. The deposit in transit of JULIET COMPANY at July 31 is


a. P 5,000 c. P 1,000
b. P 2,930 d. Cannot be determined

2. The outstanding check of JULIET COMPANY at July 31 is:


a. P 4,700 b. P 4,660 c. P 4,610 d. P 4,520

115
3. The adjusted cash ledger balance of JULIET COMPANY at July 31 is:
a. P 25,020 b. P 24,820 c. P 24,730 d. P 24,640

4. The adjusted cash bank balance of JULIET COMPANY at July 31 is:


a. P 25,020 b. P 24,820 c. P 24,730 d. P 24,640

Solution

Book balance 22,700 Bank balance 24,530


CM – collection 2,070 Error – understatement of
DM – service charge ( 40) withdrawal ( 100)
Error – overstatement of Deposit in transit 5,000
disbursement 90 Outstanding checks (4,610)
Adjusted book balance 24,820 Adjusted bank balance 24,820

DIT – beg. 1,000 OC – beg 2,600


+ Book receipts 82,000 + Book disbursement 78,810
- Bank credits - Bank debits
(excluding all CMs) 78,000 (excluding all DMs) 74,800
DIT – end 5,000 OC – end 4,610

Adjusting entry:

Cash 2,070
Notes receivable 2,000
Interest income 70
Service charge 40
Cash 40
Cash 90
Accounts payable 90

Answer:
1. A 2. C 3. B 4. B

Problem 19
You are asked to audit the cash of Letty Corporation. Letty Corporation carries its checking
account with Mindanao Bank. The following data are available:

a. Letty Company Cash account for December:

Balance, November 30 P 20,900


Deposits during December 93,400
Checks written during December ( 83,000)
Balance, December 31 P 32,300

b. Bank statement for December:

Balance, November 30 P 20,000


Deposits during December 92,300
Checks cleared during December ( 82,150)
Funds transferred from foreign operations revenue
(in peso amount not yet recorded by Letty Corp.) 25,000
NSF check, Customer Nelly ( 180)
Bank Service charge ( 70)
Balance, December 31 P 54,900

116
c. Additional data:
1. Balance in Petty Cash account, P200 (not included in Letty Cash account).
2. The deposits of P93,400 by Letty Company are overstated by P100; the bank
recorded the correct amount.
3. The checks cleared by the bank of P82,150 erroneously included a P300 check
drawn by Laity Corporation; the bank has not yet corrected this error.
4. November 30: deposits outstanding, P2,000; and checks outstanding, P1,500.

Questions

1. The deposit in transit of LETTY COMPANY at December 31 is:


a. P 3,100 b. P 3,000 c. P 2,900 d. P 2,000

2. The outstanding checks of LETTY COMPANY at December 31 is:


a. P 1,650 b. P 1,500 c. P 2,050 d. P 2,350

3. The adjusted cash balance of LETTY COMPANY at December 31 is:


a. P 56,050 b. P 55,950 c. P 55,650 d. P 55,550

4. The cash shortage of LETTY COMPANY at December 31 is:


a. P 0 b. P 400 c. P 500 d. P 600

Solution

Book balance 31,300 Bank balance 54,900


CM 25,000 Error 300
DM ( 70) Deposit in transit 3,000
NSF ( 180) Outstanding checks (2,650)
Error ( 100) ______
Total 55,950 Total 55,550
Shortage ( 400) ______
Adjusted balance 55,550 55,550

DIT – beg 2,000 OC – beg 1,500


+ Book receipts 93,300 + Book disbursement 83,000
- Bank deposits 92,300 - Bank disbursement 81,850
DIT – end 3,000 OC – end 2,650

Adjusting entry:

Cash 25,000
Cash – foreign bank 25,000
Service charge 70
Cash 70
Accounts receivable 180
Cash 180
Accounts receivable 100
Cash 100
Due to custodian 400
Cash 400

Answer:
1. B 2. A 3. D 4. B

Problem 20
In Your audit of the accounts of Cleenenth Company, you find the following facts on
December 31, 2006.

Balance of cash in bank account P1,350,000

117
Balance of bank statement 1,200,000
Outstanding checks, December 31:
No. 000567 10,000
581 55,000
582 40,000
602 25,000
615 65,000
616 70,000 265,000
Receipts of December 31, deposited the following month 275,000
The bank statement shows the following charges:
Service charge for December 5,000
NSF check received from a customer 85,000

Additional information:

The stub for check number 000581 and the invoice relating thereto show that it was for
P35,000 but was incorrectly recorded as P55,000. This was in payment of the accounts
payable.

Payment has been stopped on check number 000567 which was drawn in payment of
accounts payable. The payee cannot be located.

Included in the bank statement was a canceled check the company had failed to record.
The check was in payment of accounts payable.

Questions

1. The unrecorded disbursement of CLEENETH COMPANY at December 31, 2006 is:


a. P 80,000 b. P 50,000 c. P 40,000 d. P 10,000

2. Cancellation of check number 567 should be recorded as:


a. Debit to Accounts Payable c. Credit to Accounts Payable
b. Credit to Cash d. No adjustment/entry

3. Cash shortage of CLEENETH COMPANY at December 31, 2006 is:


a. P 0 b. P 50,000 c. P 40,000 d. P 10,000

4. The adjusted cash balance of CLEENETH COMPANY at December 31, 2006 is:
a. P 1,290,000 b. P 1,240,000 c. P 1,210,000 d. P 1,180,000

Solution
Balance per book 1,350,000 Accounts payable 50,000
Service charge ( 5,000) Cash 50,000
NSF check ( 85,000)
Overstatement of disburs Service charge 5,000
check # 581 20,000 Cash 5,000
Cancellation of check
# 567 10,000 Accounts receivable 85,000
Total 1,290,000 Cash 85,000
Unrecorded disburs. * ( 50,000)
Adjusted balance 1,240,000 Cash 20,000
Accounts payable 20,000
Balance per bank 1,200,000
Outstanding checks ( 265,000) Cash 10,000

118
Deposit in transit 275,000 Accounts payable 10,000
Overstatement of disburs
check # 581 20,000
Cancellation of check
# 567 10,000
Adjusted balance 1,240,000
* squeeze figure

Answer:
1. B 2. C 3. A 4. B

Problem 21
Dema-ala Company is very profitable small business. It has not, however, given much
consideration to internal control. For example, in an attempt to keep clerical and office
expenses to a minimum, the company has combined the jobs of cashier and bookkeeper.
As a result, Maria handles all cash receipts, keeps the accounting records, and prepares the
monthly bank reconciliation.

The balance per bank statement on October 31, 2006, was P73,520. Outstanding checks
were: No. 62 for P507, No. 183 for P600, No. 284 for P1,103, No. 862 for P762.84, No. 863
for P907.20, No. 864 for P661.12. Included with the statement was a credit memorandum
of P800 indicating the collection of a note receivable for Dema-ala Company by the bank on
October 25. Dema-ala Company has not recorded this memorandum.

The company’s ledger showed one cash account with a balance of P87,570.88. The balance
included undeposited cash on hand. Because of the lack of internal control, Maria took for
personal use all the undeposited receipts in excess of P15,182.04. She then prepared the
following bank reconciliation in an effort to conceal her theft of cash.

Cash balance per books, October 31 P 87,570.88


Add: Outstanding checks
No. 862 P 762.84
No. 863 907.20
No. 864 661.12 1,931.16
P 89,502.04
Less: Undeposited receipts 15,182.04
Unadjusted balance per bank, October 31 P 74,320.00
Less: Bank credit memorandum 800.00
Cash balance per bank statement, October 31 P 73,520.00

Questions

1. DEMA-ALA COMPANY’S cash shortage at October 31 is:


a. P 4,210 b. P 3,410 c. P 1,600 d. P 800

2. DEMA-ALA COMPANY’S adjusted cash balance at October 31 is:


a. P 88,370.88 b. P 87,570.88 c. P 86,770.88 d. P 84,160.88

Solution
Book Bank
Unadjusted balance 87,570.88 73,520.00
Collection of note 800.00
Outstanding checks
# 62 P 507.00
#183 600.00
#284 1,103.00

119
#862 762.84
#863 907.20
#864 661.12 ( 4,541.16)
Deposit in transit _________ 15,182.04
Total 88,370.88 84,160.88
Cash shortage (4,210.00) ________
Adjusted cash balance 84,160.88 84,160.88

Adjusting entry:

Cash 800
Notes receivable 800
Due to custodian 4,210
Cash 4,210

Answer:
1. A 2. D

Problem 22
On December 15 of the current year, Darwin, who owns Herald Corporation, asks you to
investigate the cash-handling activities in his firm. He thinks that an employee might be
stealing funds. “I have no proof” he say, “but I’m fairly certain that the November 30
undeposited receipts amounted to more than P6,000 although the November 30 bank
reconciliation prepared by the cashier shows only P3,619.20. Also, the November bank
reconciliation doesn’t show several checks that have been outstanding for a long time. The
cashier told me that these checks needn’t appear on the reconciliation because he has
notified the bank to stop payment on them and he had made the necessary payment on the
books.

At your request, Darwin showed you the following November 30 bank reconciliation
prepared by the cashier.

Bal. Per bank statement P 2,360.12 Bal. Per Books P 5,385.22


Deposit in transit 3,619.20 Bank Service charge ( 30.00)
Outstanding checks Unrecorded bank CM ( 600.00)
# 2351 550.10
2353 289.16
2354 484.84 ( 1,224.10) ________
Adjusted Balance P 4,755.22 Adjusted Balance P 4,755.22

You discover that the P600 unrecorded bank credit represents a note collected by the bank
on Darwin’s behalf. It appears in the deposits column of the November bank statement.
Your investigation also reveals that the October 31 bank reconciliation showed three checks
that had been outstanding longer than 10 months: No. 1432 for P300, No. 1458 for
P233.45, and No. 1512 for P126.55.

You also discover that these items were never added back into the cash account in the
books. In confirming that the checks shown on the cashier’s November 30 bank
reconciliation were outstanding on that date, you discover that check No. 2353 was actually
a payment of P829.16 and had been recorded on the books for the amount.

120
To confirm the amount of undeposited receipts at November 30, you request a bank
statement for December 1-12 (called a cut-off bank statement). This indeed shows a
December 1 deposit of P3,619.20.

Questions

1. The amount of fund stolen by the cashier is:


a. P 3,160 b. P 2,500 c. P 1,840 d. P 580

2. The total outstanding checks of HERALD CORPORATION at November 30 is:


a. P 2,524.10 b. P 1,884.10 c. P 1,864.10 d. P1,224.10

3. The adjusted cash balance of HERALD CORPORATION at November 30 is:


a. P 5,955.22 b. P 5,355.22 c. P 4,115.22 d. P 3,455.22

Solution

Book balance 5,385.22 Bank balance 2,360.12


CM 600.00 Deposit in transit 3,619.20
Service charge ( 30.00) Outstanding checks
Stalled checks #2351 550.10
#1432 300.00 #2353 829.16
#1458 233.45 #2354 484.84 (1,864.10)
#1512 126.55 660.00 ________
Total 6,615.22 Total 4,115.22
Cash shortage (2,500.00) ________
Adjusted balance 4,115.22 Adjusted balance 4,115.22

Adjusting entry:

Cash 600
Notes receivable 600
Service charge 30
Cash 30

Cash 660
Accounts payable 660
Due to custodian 2,500
Cash 2,500

Answer:
1. B 2. C 3. C

Problem 23
The bank statement for the account of ARNOLD COMPANY at December 31, 2006 showed a
credit balance of P20,000, while the company’s ledger balance of the cash account as of
November 30, 2006 was a debit of P40,000. During December, 2006, the ledger showed
two postings, a debit of P60,000 and a credit of P39,000 from the Cash Receipts and Check
Disbursements Journal, respectively.

Your examination revealed that the cash column of the receipts book was underfooted by
P6,400. The receipts book recorded only the collections from customers and did not include
a bank credit in December for P8,000, representing loan proceeds of a P10,000 promissory
note.

An examination of the customers’ subsidiary ledgers showed total credits to individual


accounts amounting to P70,400. The December Check Disbursements Journal which was

121
overfooted by P500, records only the checks issued by the company. In the month of
December, 2006, the bank charged ARNOLD COMPANY for P5,000 representing a loan
guaranteed by the client but was dishonored by the maker, the company vice-president.
The December bank service charges of P1,200 were erroneously charged by the bank to the
account of Ronald Company. The bank made the correction in January, 2007. The
outstanding checks as of December 31, 2006 amounted to P5,600.

On the morning of January 2, 2007, a cash count conducted produced the following:

Bills and coins P 5,200


Three (3) duplicate copies of ARNOLD CO.
official receipts, all dated Jan. 2, 2007 1,800
Checks 2,900
NSF check charged by the bank on Jan. 2, 2007 1,400

Questions

1. The deposit in transit of ARNOLD COMPANY at December 31, 2006 is:


a. P 6,300 b. P 7,700 c. P 8,100 d. P 11,300

2. The cash shortage of ARNOLD COMPANY at December 31, 2006 is:


a. P 54,200 b. P 50,200 c. P 46,200 d. P 36,400

3. The maximum probable cash shortage of ARNOLD COMPANY at December 31, 2006
based on the records is:
a. P 54,200 b. P 50,200 c. P 46,200 d. P 36,400

4. The adjusted cash balance of ARNODL COMPANY at December 31, 2006 is:
a. P 19,500 b. P 21,300 c. P 20,900 d. P 24,500

Solution
Book Bank Cash shortage 50,200
Unadjusted balance 61,000 20,000 - Bank Recon
Understatement of receipts 6,400 Cash shortage – AR ledger
CM 8,000 -AR subsidiary
Overstatement of disbursements 500 ledger credit
DM – service charge (5,000) posting 70,400
DM – service charge not recorded - Cash debit
in the book and erroneously postings * 66,400 4,000
recorded by the bank (1,200) (1,200) Maximum Shortage 54,200
Outstanding checks (5,600)
Deposit in transit * Cash debit posting 60,000
(5,200 + 2,900 – 1,800) ______ 6,300 unrecorded collection 6,400
Total 69,700 19,500 66,400
Cash shortage (50,200) ______
Adjusted cash balance 19,500 19,500

Answer::
1. A 2. B 3. A 4. A

Problem 24
The PAMA CORPORATION engaged your services to audit its account. In your examination of
cash, you find that the Cash account represents both cash on hand and cash in bank. You
further noted that there is very poor internal control of cash.

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Your audit covers period ended June 30, 2006. You started the audit on June 15. Upon cash
count on this date, cash on hand amounted to P4,800. Examination of the cash book and
other evidence of transaction disclosed the following:

1. July collections per duplicate receipts, P18,800


2. Total of duplicate deposit slips, all dated, July, P11,000, includes a deposit
representing collections of June 30.
3. Cash book balance at June 30, 2006 is P46,500, representing both cash on hand and
cash in bank.
4. Bank statement for June shows a balance of P42, 400.
5. Outstanding checks at June 30: May checks, No. 183 for P450, and No. 198 for
P1,650; June checks, No. 205 for P600, No. 254 for P400, No. 280 for P5,000, No.
302 for P900, and No.317 for P2,500.
6. Undeposited collections at June 30, P5,000.
7. An amount of P900 representing proceeds of clean draft on a customer was credited
by bank, but is not yet taken up in the company’s books.
8. Bank service charges for June, P100.

The company cashier presented to you the following reconciliation statement for June, 2006
which he has prepared:

Balance per books, June 30, 2006 P46,500


Add: outstanding checks:
No. 205 P 600
254 400
280 500
302 700
317 1,500 3,600
Total P49,200
Bank charges (100)
Undeposited collections ( 5,100)
Balance per bank, June 30, 2006 P44,000
Questions

1. The outstanding checks of PAMA CORPORATION at June 30, 2006 is:


a. P 3,600 b. P 3,700 c. P 5,700 d. P 11,500

2. The cash shortage of PAMA CORPORATION at June 30, 2006 is:


a. P 7,800 b. P 11,400 c. P 12,800 d. P 19,400

3. The cash shortage of PAMA CORPORATION from July 1 to July 15, 2006 is:
a. P 8,000 b. P 7,800 c. P 3,000 d. P 2,800

4. The total cash shortage of PAMA CORPORATION up to July 15, 2006 is:
a. P 14,400 b. P 15,600 c. P 15,800 d. P 19,400

5. The adjusted cash balance of PAMA CORPORATION at June 30, 2006 is:
a. P 35,900 b. P 39,600 c. P 43,800 d. P 44,900

Solution
Book Bank
Unadjusted balance 46,500 42,400
Outstanding checks ( 11,500)

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Deposit in transit 5,000
CM 900
Service charge ( 100) ______
Total 47,300 35,900
Cash shortage (11,400) ______
Adjusted cash balance 35,900 36,900

Cash shortage from July 1 to July 15

Collection per records 18,800


Deposit in transit – June 30 5,000
Cash that should be deposited 23,800
Deposited collection 11,000
Undeposited collection 12,800
Cash on hand – July 15 4,800
Cash shortage – July 1 to July 15 8,000

ANSWER:
1. D 2. B 3. A 4. D 5. A

Problem 25
In connection with the general examination of the accounts of Nelson Trading Company at
December 31, 2006, you obtained the information and data as shown below relative to your
verification of Cash.

The record kept by the accountant showed the following:

(a) Balances at the end of the month:

December 1, 2006 December 31, 2006


Per Bank Statement P 54,000 P101,100
Per Books 50,400 70,215
Undeposited collections 3,300 7,200
Outstanding checks 6,900 * 12,000 *

* Composed of the following #6515 510 #6552 P 1,800


6517 2,250 6553 5,700
6518 2,400 6554 2,550
6519 1,740 6555 1,950

(b) Totals for the month of December, 2006:


Cash Book:
Receipts P 425,550
Disbursement 405,735
Bank Statement
Receipts P 444,225
Disbursement 397,125

After application of the necessary auditing procedures, the following were noted:

a. Footing of disbursement should be P 404,235, instead of P 405,735.


b. Bank service charge of P15 for December has not been booked.
c. Cancelled checks (returned together with the December bank statement) include the
following which were charged in the statement:
1. Check #6530 dated December 15, 2006 for P2,400 - this was issued as
replacement of check # 6518 which was returned by the payee because of

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certain erasures. No entry has been made to record the cancellation of check
#6518.
2. Check #6517 for P225 - this was erroneously recorded on the books as
P2,250.
3. Check of Neil Trading for P900 - this was charged by bank in error.
d. Proceeds from sale of stocks amounting to P23,250 (cost is P18,000) transmitted
directly by the broker to the bank and credited on December 31, 2006. No entry has
been made on the books to record this sale of stock investment.
e. The company failed to record disbursement for payment of accounts payable at
December 31, 2006 for P1,500.

Questions

1. The adjusted cash receipts per ledger of NELSON TRADING COMPANY at December 31,
2006 is:
a. P 448,800 b. P 448,125 c. P 444,225 d. P 425,550

2. The adjusted cash disbursement per bank of NELSON TRADING COMPANY at December
31, 2006 is:
a. P 401,325 b. P 402,000 c. P 405,735 d. P 406,125

3. The adjusted cash ledger balance of NELSON TRADING COMPANY at December 31,
2006 is:
a. P 91,350 b. P 95,400 c. P 97,200 d. P 97,500

4. The adjusted cash in bank balance of NELSON TRADING COMPANY at December 31,
2006 is:
a. P 91,350 b. P 95,400 c. P 97,200 d. P 97,500

5. The cash shortage of NELSON TRADING COMPANY at December 31, 2006 is:
a. P 765 b. P 675 c. P 575 d. P 390

Solution
Dec. 1 Receipts Disburse. Dec. 31
Balance per book 50,400 425,550 405,735 70,215
Overfooting of disburse. ( 1,500) 1,500
Service charge 15 ( 15)
Cancellation of check
# 6518 ( 2,400) 2,400
Overstatement of
disbursement ( 2,025) 2,025
Proceeds from sale of
stock 23,250 23,250
Unrecorded disbursement _________ _________ 1,500 ( 1,500)
Balance 50,400 448,800 401,325 97,875
Cash shortage _________ ( 675) _________ ( 675)
Adjusted balance 50,400 448,125 401,325 97,200

Dec. 1 Receipts Disburse. Dec. 31


Balance per bank 54,000 444,225 397,125 101,100
Deposit in transit
Dec. 1 3,300 ( 3,300)
Dec. 31 7,200 7,200
Outstanding checks
Dec. 1 ( 6,900) ( 6,900)
Dec. 31 12,000 ( 12,000)
Error _________ _________ ( 900) 900
Adjusted balance 50,400 448,125 401,325 97,200

125
Adjusting entry:

Due to custodian 675


Cash 675

Service charge 15
Cash 15

Cash 2,025
Accounts payable 2,205

Accounts payable 1,500


Cash 1,500

Cash 1,500
Accounts payable 1,500

Cash 2,400
Accounts payable 2,400

Cash 23,250
Stock investment 18,000
Gain on sale 5,250

Answer:
1. B 2. A 3. C 4. C 5. B

PART 2

PROBLEM

During your audit of Rupert Corp. you established the following data concerning the cash position as of
December 31, 2004:

Cash on Hand and in Bank per ledger P 8,425.00


Cash on Hand per count 2,302.00
Unrecorded credit memo from bank 100.00
Unrecorded debit memo from bank 5.00
Cash balance per bank statement 6,750.00
Total outstanding checks 817.00

The cashier prepared the following reconciliation:

Balance per Bank Statement P 6,750.00


Add: Unrecorded Credit Memo P 100.00
Cash per count 2,032.00 2,132.00
P 8,832.00
Less: Outstanding checks 457.00
Cash per Ledger, December 31, 2004 P 8,425.00

Questions

11. In preparing your own reconciliation, the adjusted cash in bank figure should be:

126
a. P 4,720.00 b. P 4,833.00 c. P 5,933.00 d. P 6,393.00

12. The adjusted cash on hand and in bank per ledger would be:
a. P 7,713.00 b. P 8,520.00 c. P 8,530.00 d. P 8,882.00

13. From your investigation, the cash shortage, if any, is:


a. P 0 b. P 285.00 c. P 360.00 d. P 555.00

PROBLEM

The following data are to be used in reconciling the May 31, 2004 bank balance of Royal Asia Corporation:
April May
Cash in bank balance – at the end of month P 3,561.00 P 4,629.72
Bank Statement Balance – end of the month 7,403.50 3,862.20
Bank service charges for the month 6.00 6.80
Checks marked NSF 815.00 118.00
Deposits in transit – end of month 950.00 925.40
Drafts collected by the bank (unrecorded by
the company until the month following
collection) 1,500.00 202.00
Outstanding checks at end of month 4,463.00 149.68
Checks of Loyal Asia Corporation charged to
the company’s account 349.50 60.00
Check number 6129 erroneously recorded in
the check register as P 78; the correct amount is 87.00
(This check is outstanding on 05.31.2004)
Receipts during the month 42,700.17
Total credits to cash in bank 41,631.45
Total charges on bank statement 45,317.57

Questions

1. Adjusted Cash in Bank balance on April 30, 2004:


a. P 3,561.00 b. P 4,240.00 c. P 4,324.00 d. P 4,442.00

2. The unadjusted total receipts on bank statement:


a. P 34,204.87 b. P 41,402.17 c. P 41,695.27 d. P41,776.27

3. Adjusted total receipts during May 31, 2004:


a. P 40,944.25 b. P 41,402.27 c. P 43,651.67 d. P44,402.17

4. Adjusted total charges during May 31, 2004:


a. P 40,944.25 b. P 41,402.27 c. P 43,651.67 d. P44,402.17

5. Adjusted Cash in Bank balance on May 31, 2004:


a. P 3,561.00 b. P 4,240.00 c. P 4,629.72 d. P 4,697.92

PROBLEM

The El Gato Painting Company maintains a checking account at American Bank. Bank statements are
prepared at the end of each month. The November 30, 2003, reconciliation of the bank balance is as
follows:

Balance per bank, November 30 P3,231


Add: Deposits outstanding 1,200
Less: Checks outstanding
#363 P123
#365 201
#380 56
#381 86

127
#382 340 (806)
Adjusted balance per bank, November 30 P 3,625

The Company’s general ledger checking account showed the following for December:

Balance, December 1 P 3,625


Receipts 42,650
Disbursements (41,853)
Balance, December 31 P 4,422

The December bank statement contained the following information:


Balance, December 1 P 3,231
Deposits 43,000
Checks processed (41,918)
Service charges (22)
NSF checks (440)
Balance, December 31 P 3,851

The checks that were processed by the bank in December include all of the outstanding checks at the end
of November except for check#365. In addition, there are some December checks that had not been
processed by the bank by the end of the month. Also, you discover that check#411 for P320 was correctly
recorded by the bank but was incorrectly recorded on the books as a P230 disbursement for advertising
expense. Included in the bank’s deposits is a P1,300 deposit incorrectly credited to the company’s
account. The deposit should have been posted to the credit of the Los Gatos Company. The NSF checks
have not been redeposited and the company will seek payment from customers involved.

Questions
10. The cash shortage at December 31, 2003 is:
a. P 0 b. P 1,020 c. P 1,321 d. P 1,120

11. The deposit in transit at December 31, 2003 is:


a. P 2,150 b. P 1,200 c. P 850 d. P 450

12. The outstanding checks at December 31, 2003 is:


a. P 831 b. P 852 c. P 651 d. P 630
PROBLEM

On January 10, 2005, you started the audit of the financial records of Bong Corporation for the year
ended December 31, 2004. From your investigation, you discovered the following:

1. The bookkeeper acts also as the cashier. Her December 31, 2004 year-end cash reconciliation
contained the following:

Cash per ledger, 12/31/04 161,400


Cash per bank, 12/31/04 164,850
Checks outstanding 15,850
Bing Corporation check charged by bank in error
13/30/04, corrected by bank on 1/04/05 750
Deposit in transit, credit by bank on 1/3/05 7,200

2. The cash account balance per ledger as of 12/31/04 were:

Cash 161,400
Petty Cash 1,500

3. The cost of the cash on hand at the close of business on January 10, 2005, including the petty cash
was as follows:

Currencies and coins 9,850


Expense vouchers ( 800)
Employees’ IOU dated 1/5/05 ( 300)

128
Customers’ checks in payment of account 900
11,850

4. From January 2, 2005 to January 10, 2005, the date of your cash count, total cash receipts
appearing in the cash record were P38,600. According to the bank statement for the period from
January 2, 2005 to January 10, 2005, total deposits were P32,400.

5. On July 5, 2004, cash of P1,600 was received from a customer in settlement of his account. This was
booked by a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.

6. On December 5, 2004, cash of P2,900 was received from a customer in settlement of his account.
Bong Corporation debited Inventory and credited Accounts Receivable.

7. Cash of P1,800 received from customer during 2004 was not recorded.

8. Checks received from customers from January 2, 2005 to January 10, 2005, totaling P4,200 were not
recorded but were deposited in the bank.

9. On July 1, 2004, the bank refunded interest of P200 because a note of Bong Corporation was paid
before maturity. No entry had been made for the refund.
10. In the cashiers petty cash, there were receipts for collection from customer on January 9, 2005
totaling P1,250; these were unrecorded and undeposited.

11. In the outstanding checks, there is one for P750 made payable to a trade creditor. Investigation
shows that this check had been returned by the creditor on June 14, 2004 and a new check for
P1,250 was issued in its place; the original check for P750 was made in error as to amount.

Questions

11. The adjusted bank balance as of December 31, 2004 is:


a. P 158,450 b. P 157,700 c. P 156,950 d. P 150,700

12. The correct cash balance, per ledger as of December 31, 2004 is:
a. P 169,700 b. P 168,650 c. P 167,900 d. P 167,700

13. The amount of cash shortage as of December 31, 2004 is:


a. P 16,500 b. P 11,250 c. P 10,950 d. P 10,200

14. The amount of cash shortage for the period from January 1, 2005 to January 10, 2005 is:
a. P 4,300 b. P 7,000 c. P 8,500 d. P 15,700

PROBLEM

The following bank reconciliation is presented for the ROY COMPANY for the month of November 2004:

Balance per bank statement, 11/30/04 18,040


Add: Deposit in transit 4,150
22,190
Less: Outstanding checks 6,300
Bank credit recorded in error 20 6,320
Balance per books, 11/30/04 15,870

Data for the month of December 2004 follows:

Per bank
December deposits 26,100
December disbursements 22,420
Balance, 12/31/04 21,720

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All items that were outstanding as of November 30, cleared through the bank in December, including the
bank credit. In addition, P2,500 in checks were outstanding as of December 31, 2004.

Questions

1. The total disbursements of the firm amounted to


a. P 24,920 b. P 22,420 c. P 18,600 d. P 18,320

2. The balance per books at December 31, 2004 is


a. P 21,720 b. P 19,220 c. P 18,040 d. P 15,870

PROBLEM

You have substantially completed the audit of Jhohan Corporation for the fiscal year ended June 30,
2002. You are now consolidating your working papers and reviewing the adjusting journal entries (AJE)
you will make.

Data gathering your audit of specific accounts are described below. You are expected to formulate the
appropriate journal entries and be aware of their impact on the accounts.
CASH LEAD SCHEDULE
Petty Cash fund P 5,000
Cash on Hand 15,000
Banco De Oro (BDO) current 205,000
PCI Bank – current account #1 90,000
PCI Bank – current account #2 (15,000)
Coco Bank – savings and time deposits 105,000
Total P 405,000

You conducted a count of the Petty Cash Fund and Cash on Hand at 8:00AM July 1, 2002, the
first working day of the new fiscal year 2002-2003. Results of the count are shown below
Count of Petty Cash Fund
Currency P 1,500
Officer’s check cash out of petty cash fund with
management approval 800
Employee’s VALES (duly approved) 1,200
Unreplenished petty cash vouchers for various
office expense 1,500
Total counted P 5,000

Count of Cash on Hand


Undeposited Collections
Currency P 2,400
Postal Money Order 3,000
Customers’ checks (including check for P1,500
dated July 12, 2002 8,100
Check drawn by office manager in settlement
of cash advance returned by bank marked
NSF 1,500
Total Counted P15,000

BDO Current Account

The supporting schedule for BDO current contains the following bank reconciliation
JHOHAN CORPORATION
Bank Reconciliation with BDO Current

130
June 30, 2002

Balance per Bank * P 234,100


Bank Charges 600
Outstanding checks ** (22,700)
Deposit of Mayang Corporation credited by the
bank in error to company account (5,000)
Check for an Accounts Payable, erroneously
recorded in Company’s books as P8,500 but
drawn and paid by bank as P6,500 *** (2,000)
Balance per Book P 205,000

* Checked against June bank statement, confirmed by bank

** Traced to cash disbursements books and to July cut-off bank statement (as of July 10, 2002).
Included in outstanding checks is a P4,000 company check payable to a supplier, dated and
recorded as of June 29, 2002, but not delivered to payee until July 14, 2002.

***Traced to cash disbursements book and reviewed cancelled checks.

PCI BANK CURRENT


Audit Notes:

1. PCI Bank current account #1 includes a P20,000 compensating balance against short-term
borrowing arrangements at June 30, 2002. The compensating balance is not legally restricted as to
withdrawal by Jhohan Company.

2. The credit balance in PCI Bank current account #2 represents check drawn in excess of the deposit
balance. The checks are still outstanding on June 30, 2002.

COCO BANK DEPOSIT


Coco bank deposits consist of:
Savings account deposit #1537 P 50,000
Savings account deposit #8302 30,000
Time Deposit 25,000
Total P 105,000
Audit Notes:

1. Saving accounts #1537 has been set aside by the Board of Directors for the acquisition of new
equipment.

2. Savings account deposit #8302 represents temporarily idle cash.

3. The time deposit matures July 24, 2002.

Questions

1. The balance per audit of petty cash fund is


a. P5,000 b. P2,300 c. P1,500 d. P3,500

2. The balance per audit of cash on hand is


a. P2,400 b. P15,000 c. P12,000 d. P13,500

3. The balance per audit of cash in bank-BDO current is


a. P206,400 b. P205,000 c. P211,400 d. P210,400

4. PCI Bank current accounts Nos. 1 and 2 should be reported in the audited balance sheet as
follows:
a. P90,000 as part of cash, P15,000 as a current liability because the
credit balance cannot be offset against current account # 1

131
b. P75,000 as part of cash
c. P70,000 as part of cash, P15,000 as a current liability; P20,000
compensating balance as part of current assets.
d. None of the above.

5. The adjusted amount of Coco Bank deposits that should be reported as part of cash in the
audited balance sheet is
a. P30,000 b. P50,000 c. P105,000
d. P55,000

6. Total cash per audit amounted to


a. P349,900 b. P344,700 c. P329,700
d. P405,000

PROBLEM

On December 31, 2004, the cash account of Jan Company has a debit balance of P3,500,000. An
analysis of the cash account shows the following details:

Undeposited collection 60,000


Cash-in bank- PCIB checking account 500,000
Cash-in bank- PNB (overdraft) (50,000)
Undeposited NSF check received from a customer, dated
December 1, 2004 15,000
Undeposited check from a customer, dated January 15, 2005
25,000
Cash in bank-PCIB (fund for payroll) 150,000
Cash in bank-PCIB ( savings deposit) 100,000
Cash in bank-PCIB (money market instrument, 90 days) 2,000,000
Cash in foreign bank (restricted) 100,000
IOUs from officers 30,000
Sinking fund cash 450,000
Listed stock held as temporary investment 120,000
3,500,000

Cash and cash equivalents on Jan’s December 31, 2004 balance sheet should be
a. P 2,760,000 c. P 2,935,000
b. P 2,810,000 d. P 2,885,000

PROBLEM

The December 31, 2004 trial balance of Chavie Company includes the following accounts:

Cash on Hand 500,000


Petty Cash on Hand 20,000
Security Bank Current account 1,000,000
PNB Current Account #1 400,000
PNB Current Account #2 (50,000)
BSP Treasury Bill-60 days 3,000,000
BPI time deposit-30 days 2,000,000
Two month treasury bonds 500,000

 The cash on hand includes a customer post dated check of P100,000 and a postal money
order of P40,000.
 The petty cash fund includes unreplenmished petty cash vouchers for P2,000 and an
employee check for P3,000 dated January 31, 2004.
 A check for P200,000 was drawn against Security Bank account, date January 15, 2005,
delivered to the payee and recorded at December 31,2004.

132
 The BPI time deposit is set aside for acquisition of land to be used as a factory site.

Total cash and cash equivalents on the balance sheet as of December 31, 2004 should be
a. P 4,965,000 c. P 6,965,000
b. P 5,465,000 d. P 4,775,000

PROBLEM

The Ralph Company’s internal control over its cash transactions is very weak. The company’s cash
position at December 31, 2004 were as follows:

The cash book showed a balance of P 15,000.00, which included as cash on hand. A credit on the bank’s
records did not appear on the company’s books. The bank statement showed a balance of P 12,300.00:
and the outstanding checks were: 01000-P120.00; 01100-P100.00; 01201-P230.00; 01511-P110.00;
01513-P140.00; 01515-P150.00.

The cashier removed all of the cash on hand in excess of P 3,000.00 and then prepared the following
reconciliation:

Balance per books, Dec. 31, 2004 . . . . . . . . . . . P 15,000.00


Add: Outstanding checks:
No. 01511 P 110.00
01513 140.00
01515 150.00 300.00
P 15,300.00
Deduct – Cash on Hand 3,000.00
Balance per Bank Statement, Dec. 31, 2004 P 12,300.00
Deduct – Unrecorded credit 150.00
True Cash, December 31, 2004 P 12,150.00

Questions
1. The cash shortage if any, is:
a. P 0 b. P 300.00 c. P 500.00 d. P 700.00

2. A correct reconciliation will show that the cashier’s accountability for cash on hand is:
a. P 3,300.00 b. P 3,400.00 c. P 3,500.00 d. P 3,700.00

3. The adjusted cash in bank balance for the balance sheet of December 31, 2004 is:
a. P 11,300.00 b. P 11,450.00 c. P 11,600.00 d. P 11,850.00

PROBLEM

Borres Company carries its checking account with Platinum Bank. The company is ready to prepare its
December 31 bank reconciliation and has requested you as auditor to prepare it for them. The following
data are available:

A. The November 30 bank reconciliation showed the following: (1) cash on hand (held back each
day by Borres Company for change), P400 (included in Borres’ cash account); (2) deposit in
transit, #51, P2,000; and (3) checks outstanding, #121, P1,000; #130, P2,000; and #142,
P3,000.

B. Cash account for December includes the following:


Balance, December 1 P 64,000
Deposits: #52 - #55, P186,500, #56, P3,500 190,000
Checks: #143-#176, P191,000; #177, P2,500
#178, P3,000; and P179, P1,500 (198,000)
Balance, December 31 (includes P400 cash held each

133
day for change) P 56,000
C. Bank statement, December 31:

Balance, December 1 P 67,600


Deposits: #51 - #55 188,500
Checks: #130, P2,000; #142, P3,000; #143 -
#176, 191,000 (196,000)
Note collected for Borres Company (including P720
interest) 6,720
Fund transfer received for foreign revenue (not yet
recorded by Borres Company) 10,000
NSF check, Customer Belinda 200
United Fund (per transfer authorization signed by Apple
Co.) (50)
Bank service charges (20)

Balance, December 31 P 76,550

Questions

8. The outstanding checks as of December 31 is


a. P8,000 b. P3,500 c. P3,900 d. P1,500

9. The deposit in transit as of December 31 is


a. P3,500 b. P8,000 c. P3,900 d. P1,500

10. The adjusted cash balance on December 31 is


a. P76,550 b. P56,000 c. P62,450 d. P72,450

11. The net adjustment to the cash per ledger is


a. P16,450 dr b. P16,450 cr c. P56,000 dr d. P72,450 cr

12. The overage (shortage) in cash is


a. P(400) b. P0 c. P400 d. P10,000

134
CHAPTER 4 – Audit of Receivables
Problem 1
The accounts receivable of FRANCO COMPANY were stated at P1,467,000 in a balance sheet
submitted to a banker for credit. You are called upon to audit the report and, upon
analysis, the asset was found to consist of the following items:

Due from customers on open account P 1,125,000


Acknowledged claim for damages 22,500
Due from consignee at billed price – cost price
being P22,500 30,000
Investment in and advances to affiliated company 150,000
Loans to officers and employees 13,500
Deposits with municipalities – bids for contracts 67,500
Unpaid capital stock subscriptions 60,000
Advances to creditors for merchandise purchased
but not received 24,000
Cash advanced to salesmen for traveling expenses 4,500
Allowance for doubtful accounts ( 30,000)
P1,467,000

The amount of P1,125,000 due from customers was the remaining balance after deducting
accounts with credit balances of P6,000.

During your examination, you noted that on December 31, the company assigned P300,000
of customers’ accounts to secure a 17%, P240,000 note payable. A 1% commission based
on the accounts assigned was charged and deducted from the cash received. The client
recorded this transaction by a debit to cash and a credit to notes payable.

135
Questions

1. How much is the Accounts Receivable (gross) balance at December 31?


a. P 759,000 b. P 789,000 c. P 1,101,000 d. P 1,131,000

2. The total current non-trade receivable balance at December 31 is:


a. P 64,500 b. P 96,000 c. P 120,000 d. P 192,000

3. The liability for the accounts receivable – assigned is:


a. P 237,000 b. P 240,000 c. P 243,000 d. P 300,000

4. The total non-trade receivable balance at December 31 is:


a. P 342,000 b. P 318,000 c. P 313,500 d. P 245,000

Solution
(1) Claims Receivable 22,500
Accounts receivable 22,500
(2) Sales 30,000
Accounts receivable 30,000
(3) Advances to affiliates 150,000
Accounts receivable 150,000
(4) Receivables - officers/employee 13,500
Accounts receivable 13,500
(5) Deposits for contracts bidding 67,500
Accounts receivable 67,500
(6) Subscription receivable 60,000
Accounts receivable 60,000
(7) Advances to suppliers 24,000
Accounts receivable 24,000
(8) Advances to officers/employee 4,500
Accounts receivable 4,500
(9) Accounts receivable 30,000
Allowance for bad debts 30,000
(10) Accounts receivable 6,000
Customers with credit balance 6,000
(11)
OE: Cash 237,000
Notes payable 237,000
CE: Cash 237,000
Commission expense 3,000
Notes payable 300,000
Adj: Commission expense 3,000
Notes payable 3,000

Unadjusted AR 1,467,000 Non-trade AR


(1) ( 22,500) Claims receivable 22,500
(2) ( 30,000) Advances to affiliates 150,000
(3) ( 150,000) Advances to off/empl
(4) ( 13,500) ( 13,500 + 4,500) 18,000
(5) ( 67,500) Deposit for contracts 67,500
(6) ( 60,000) Subscription receivable 60,000
(7) ( 24,000) Advances to suppliers 24,000
(8) ( 4,500)
(9) 30,000
(10) 6,000 __________
Adjusted balance 1,131,000 Total 342,000

Current non-trade AR
Claims receivable 22,500
Advances to off/empl
( 13,500 + 4,500) 18,000
Advances to suppliers 24,000
Total 64,500

136
Answer:
1. D 2. A 3. B 4. A

Problem 2
In your audit of MENDOZA COMPANY for the past calendar year, you find the following
accounts:
ACCOUNTS RECEIVABLES
Jan. 1, 2002 P 800,000 Jan. – Dec. 1992 collections P 5,900,000
Jan. – Dec. Sales 6,300,000 Jan. – Dec. write-off 100,000

ALLOWANCE FOR BAD DEBTS


Jan. – Dec. Write-off of Jan. 1, 2002 P 95,000
last year’s receivables P 85,000 Dec. 31 provisions 315,000

Write-off of this year’s


Receivables 15,000

In your examination, you find that the balance of Accounts Receivable represents sales of
the current audit year only; that credit balances in the subsidiary ledger for accounts
receivable totaled P80,000; and that the current year’s provision for bad debts expense was
5% of sales (as compared with 4½% last year, 4% of the year before, and 3½% the next
previous year). Sequential to aging the accounts receivable, you and the company’s
treasurer agree on an additional write-off of P50,000, and P300,000 as the probable loss to
be sustained on collection of the accounts receivable balance.

Questions

1. The adjusted Accounts Receivable balance is:


a. P 830,000 b. P 1,100,000 c. P 1,130,000 d. P 1,180,000

2. The adjusted Allowance for Bad Debts is:


a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000

3. The adjusted Bad Debts account is:


a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000

4. The provision per record at December 31 is:


a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000

Solution
Accounts Receivable 80,000
Customers’ credit balance 80,000
Allowance for bad debts 50,000
Accounts receivable 50,000
Bad debts expense 40,000
Allowance for bad debts 40,000
Computation:
Provision per records 315,000
* Provision per audit 355,000
Adjustment 40,000

* Beg. balance 95,000


+ Provisions 355,000 squeezed figure
- Write-off per book 100,000

137
- Additional write-off 50,000
Ending balance 300,000
Answer:
1. C 2. B 3. D 4. C

Problem 3
The following selected transactions occurred during the year ended December 31, 2006 of
DOMINGO COMPANY:

Gross sales (cash and credit) P 900,736.80


Collections from credit customers, net of 2% cash discount 294,000.00
Cash sales 180,000.00
Uncollectible accounts written off 19,200.00
Credit memos issued to credit customers for sales ret./allow. 10,080.00
Cash refunds given to cash customers for sales ret./allow. 15,168.00
Recoveries on accounts receivable written-off in prior years
(not included in cash received stated above) 6,505.20

At year-end, the company provides for estimated bad debts losses by crediting the
Allowance for Bad Debts account for 2% of its net credit sales for the year. The allowance
for bad debts at the beginning of the year is P19,327.20.

Questions
1. How much is the DOMINGO COMPANY’s gross sales?
a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P
689,488.80
2. DOMINGO COMPANY’s credit sales at December 31, 2006 is:
a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80

3. How much is the DOMINGO COMPANY’s net credit sales?


a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P
689,488.80

4. The Bad Debts Expense of DOMINGO COMPANY at December 31, 2006 is:
a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14

5. The Accounts Receivable of DOMINGO COMPANY at December31, 2006 is:


a. P 408.042.00 b. P 407,536.80 c. P 401,536.80 d. P 391,456.80

6. The Allowance for Bad Debts of DOMINGO COMPANY at December 31, 2006 is:
a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14

Solution
Accounts Receivable
Credit Sales 720,736.80 Collection 294,000.00
Recoveries 6,505.20 Sales discount
from credit cust. 6,000.00
Write-off 19,200.00
Sales returns from
credit customer 10,080.00
__________ Recoveries 6,505.20
727,242.00 335,785.20
Ending bal. 391,456.80

138
Net credit sales:
Credit sales 720,736.80
- Sales discounts from credit sales ( 6,000.00)
- Sales returns from credit sales (10,080.00)
Net credit sales 704,656.80

Bad debts:
Net credit sales 704,656.80
x % of uncollectible 2%
Bad debts 14,093.136

Allowance for bad debts:


Beg. balance 19,327.20
Provision for bad debts 14,093.14
Recoveries 6,505.20
Less: Write-off ( 19,200.00)
Allowance ending balance 20,725.54
Answer:
1. A 2. B 3. C 4. B 5. D 6. A

Problem 4
Presented below are unaudited balances of selected accounts of MARJORIE COMPANY as of
December 31, 2006:
Unaudited Balances, 12/31/06
Selected Accounts Debit Credit
Cash P 500,000
Accounts receivable 1,300,000
Allowance for doubtful accounts 8,000
Net sales P 6,750,000

Additional information are as follows:

a. Goods amounting to P50,000 were invoiced for the accounts of Joy Store & Co.,
recorded on January 2, 2007 with terms of net, 60 days, FOB shipping point. The goods
were shipped to Variety Store on December 30, 2006.

b. The bank returned on December 29, 2006, a customer’s check for P5,000 marked
“DAIF”, but no entry was made.

c. MARJORIE COMPANY estimates that allowance for uncollectible accounts should be one
and one-half percent (1½%) of the accounts receivable balance as of year-end. No
provision has yet been made for 2006.

Questions

1. What is the adjusted balance of Accounts Receivable on December 31, 2006?


a. P 1,355,000 b. P 1,350,000 c. P 1,305,000 d. P 1,300,000

2. What is the adjusted balance of Allowance for doubtful accounts on December 31, 2006?
a. P 36,325 b. P 28,325 c. P 20,325 d. P 8,000

3. What is the adjusted amount of 2006 Bad Debts Expense?


a. P 12,325 b. P 20,325 c. P 28,325 d. P 36,325

Solution

139
(1) A 1,300,000 + 50,000 + 5,000 P1,355,000

(2) C P1,355,000 x 1 ½% P20,325

(3) C P20,325 + P8,000 debit balance P28,325

Problem 5
During December, 2006, the Accounts Receivable controlling account on the books of
FERNANDEZ COMPANY showed one debit posting and two credit postings. The debit
represents receivables from December sales, P780,000. One credit was for P470,400, made
a result of cash collections on November and December receivables; the second credit was
an adjustment for estimated uncollectibles, P90,000. The December 31 balance was
P270,000.

When receivables were collected, the bookkeeper credited Accounts Receivables for the cash
collected. All customers who paid their accounts during December took advantage of the
2% cash discount.

As of December 1, debit balance in customers’ subsidiary accounts totaled P177,000. An


adjustment for estimated doubtful accounts of P18,000 had been posted to the Accounts
Receivable controlling account at the end of 2006, and no write-offs were recorded during
2006. In addition, a number of customers had overpaid their accounts, and as a result,
some of the customers’ subsidiary accounts had credit balances on December 1. No
overpayments were made during December nor were any credit balances in customers’
accounts reduced during December.

Questions

1. The Accounts Receivable beginning balance (unadjusted) of FERNANDEZ COMPANY at


December 31, 2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

2. The Accounts Receivable beginning balance (adjusted) of FERNANDEZ COMPANY at


December 31, 2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

3. The Credit Balance of Accounts Receivable at the beginning of the year of FERNANDEZ
COMPANY is:
a. P 48,600 b. P 66,600 c. P 108,600 d. P 126,600

4. The Accounts Receivable balance of FERNANDEZ COMPANY at December 31, 2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

Solution

Computation for unadjusted AR beginning balance:

Accounts Receivable
* Beg. bal. 50,400 Collections 470,400
Sales 780,000 Allow. for BD 90,000
830,400 560,400

140
End bal. 270,000
* squeezed figure

Ending balance of AR control account 270,000


Add: Credits during December 560,400
Less: Debits during December ( 780,000)
Balance of AR control account – Dec. 1 50,400
Add: 2006 Est. allowance for BD 18,000
Adjusted AR control account – Dec. 1 68,400
Less: AR subsidiary account – Dec. 1 177,000
Credit balance of AR account – Dec. 1 108,600

Answer:
1. A 2. B 3. C 4. D

Problem 6
You are examining the financial statements of MATIAS CORPORATION for the year ended
December 31, 2006. During the audit of the accounts receivable and other related
accounts, certain information was obtained.

The December 31, 2006 debit balance in the Accounts Receivable control account is
P197,000.

The only entries in the Bad Debts Expense account were: a credit for P324 on December
31, 2006, because Marlisa Company remitted in full for the accounts charged off October
31, 2006, and a debit on December 31 for the amount of the credit to the Allowance for
Doubtful Accounts.

The Allowance for Doubtful Accounts schedule is presented below:


Debit Credit Balance
January 1, 2006 P 3,658
October 21, 2006, Uncollectible;
Marlisa Co., - P324; Abonales Co.,
- P 820; Cherryl Co., - P564 P 1,508 2,150
December 31, 2006, 5% of P197,000 P 9,850 12,000

An aging schedule of the accounts receivable as of December 31, 2006 and the decision are
shown in the table below:

Age Net Debit Balance Amount to which the Allow.


is to be adjusted after adjust.
____________ _________________ and corrections have been made

0 – 1 month P 93,240 1 percent


1 – 3 months 76,820 2 percent
3 – 6 months 22,180 3 percent
over 6 months 6,000 Definitely uncollectible, P1,000;
P2,000 is considered 50% uncollec-
tible; the remainder is estima-
ted to be 80% collectible.

141
There is a credit balance in one account receivable (0-1 month) of P2,000; it represents an
advance on a sales contract. Also, there is a credit balance in one of the 1-3 months
accounts receivable of P500 for which merchandise will be accepted by the customer.

The ledger accounts have not been closed as of December 31, 2006. The Accounts
Receivable control account is not in agreement with the subsidiary ledger. The difference
cannot be located, and the auditor decides to adjust the control to the sum of the
subsidiaries after corrections are made.

Questions

1. The adjusted balance of accounts receivable of MATIAS CORPORATION at December 31,


2006 is:
a. P 199,740 b. P 199,540 c. P 198,300 d. P 198,100

2. The adjusted write-off of accounts receivable balance of MATIAS CORPORATION at


December 31, 2006 is:
a. P 2,708.00 b. P 2,508.00 c. P 2,384.00 d. P 1,708.00

3. The adjusted allowance of bad debts account of MATIAS CORPORATION at December 31,
2006 is:
a. P 4,980.60 b. P 4,964.20 c. P 4,780.60 d. P 4,764.20

4. The bad debts expense per book of MATIAS CORPORATION at December 31, 2006 is:
a. P 9,850.00 c. P 4,764.20
b. P 6,359.80 d. Cannot be determined

5. The adjusted bad debts expense of MATIAS CORPORATION at December 31, 2006 is:
a. P 3,814.20 b. P 3,614.20 c. P 3,490.20 d. P 2,814.20

6. The entry to adjust the account of Marlisa Company is:


a. Bad debts 324 c. Allow. for BD 324
Allow. for BD 324 Bad debts 324
b. Bad debts 324 d. Accounts receiv. 324
Accounts receivable 324 Bad debts 324

7. The entry to reconcile the accounts receivable control ledger to subsidiary ledger is:
a. Accounts receivable 1,440 c. Accounts receiv. 1,440
Allow. for BD 1,440 Misc. income 1,440
b. Allow. for BD 1,440 d. No adjustment
Accounts receivable 1,440

8. The net realizable value of accounts receivable of MATIAS CORPORATION at December


31, 2006 is:
a. P 194,975.80 b. P 194,775.80 c. P 193,335.80 d.P193,319.40

Solution

Per PER SUBSIDIARY LEDGERS


Control Over
Acct. 0-1 mo. 1-3 mos 3-6 mos. 6 mos. Total
Bal. before adjustments P 197,000 P 93,240 P 76,820 P 22,180 P 6,000 P 198,240

142
Adjustments:
Add(Deduct)
(2) Correction to 10.31.02
entry to write-off
uncollectible accts. (200)
(3) Write-off of acct.
considered definitely
uncollectible ( 1,000) (1,000) (1,000)
(4) Reclassification of
credit balances 2,500 2,000 500 2,500
P 198,300 P 95,240 P 77,320 P 22,180 P 5,000 P 199,740
(5) To adjust the control
acct. to agree with SL 1,440
Adjusted balance P 199,740

Audit adjustments as of 12.31.06

(1) Bad Debts expense 324


Allowance for doubtful accounts 324

(2) Allowance for doubtful accounts 200


Accounts Receivable 200

(3) Allowance for doubtful accounts 1,000


Accounts Receivable 1,000

(4) Accounts Receivable 2,500


Customer’s Accounts with Credit Balances 2,500

(5) Accounts Receivable 1,440


Miscellaneous Revenue 1,440

(6) Allowance for Doubtful Accounts 6,359.80


Bad Debts Expense 6,359.80

Required allowance on 12.31.06


0-1 mo. P 95,240 x 1% P 952.40
1-3 mos. 77,320 x 2 % 1,546.40
3-6 mos. 22,180 x 3% 665.40
Over 6 mos. 3,000 x 20% 600.00
2,000 x 50% 1,000.00
P 4,764.20
Beg. balance 3,658.00
+ Provision per audit 3,490.20
(squeezed figure)
- Write-off 2,384.00
Ending balance 4,764.20

Provision per book 9,850.00


Provision per audit 3,490.20
Adjustment 6,359.80

Answer:
1. A 2. C 3. D 4. A 5. C
6. A 7. C 8. A

Problem 7
You are auditing the Accounts Receivable and the related Allowance for Bad Debts account
of ROY COMPANY. The following data are available:

143
Accounts Receivable, general ledger balance P 848,000

Allowance for bad debts:


Beginning balance P 20,000
Provision per general ledger 48,000
Write-offs ( 16,000)
Balance, end P 52,000

Summary of Aging Schedule

The summary of the subsidiary ledger as of December 31, 2006, was totaled as follows:

Debit balances:
Under one month P 360,000
One to six months 368,000
Over six months 152,000
P 880,000

Credit balances:
Almario P 8,000 - OK; additional billing in
January 2004
Peter 14,000 – Should have been credited
To Manuel Co. - 1-6 mos.
classification.
Bituin 18,000 - Advance on a sales contract
P 40,000

The customers’ ledger is not in agreement with the accounts receivable control. The client
instructs the auditor to adjust the control to the subsidiary ledger after corrections are
made.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six
months are expected to require a reserve of 2 percent. Accounts over six months are
analyzed as follows:

Definitely bad P 48,000


Doubtful (estimated to be 50% collectible) 24,000
Apparently good, but slow (90% collectible) 80,000
Total P152,000
Questions

1. The entry to adjust the account of Almario is:


a. Accounts receivable 8,000 c. Accounts receivable 8,000
Sales 8,000 Cust. with Cr. bal. 8,000
b. Sales 8,000 d. No adjustment
Accounts receivable 8,000

2. The entry to adjust the account of Peter is:

144
a. Accounts receivable 14,000 c. Accounts receivable 14,000
Sales 14,000 Cust. with Cr. bal. 14,000
b. Sales 14,000 d. No adjustment
Accounts receivable 14,000

3. The entry to adjust the account of Bituin is:


a. Accounts receivable 18,000 c. Accounts receivable 18,000
Sales 18,000 Cust. with Cr. bal. 18,000
b. Sales 18,000 d. No adjustment
Accounts receivable 18,000

4. The entry to reconcile the control ledger to the subsidiary ledger is:
a. Miscellaneous loss 8,000 c. Accounts receivable 8,000
Accounts receivable 8,000 Sales 8,000
b. Accounts receivable 8,000 d. Sales 8,000
Miscellaneous gain 8,000 Accounts receivable 8,000

5. The entry to adjust the Bad Debts Expense is:


a. Bad Debts Expense 74,680 c. Bad Debts Expense 30,680
Allow. for BD 74,680 Allow. for BD 30,680
b. Bad Debts Expense 26,680 d. No adjustment
Allow. for BD 26,680

6. The Accounts Receivable balance at December 31, 2006 is:


a. P 840,000 b. P 826,000 c. P 818,000 d. P 786,000

7. The Allowance for Bad Debts at December 31, 2006 is:


a. P 74,680 b. P 48,000 c. P 30,680 d. P 26,680

8. The Bad Debts Expense at December 31, 2006 is:


a. P 74,680 b. P 48,000 c. P 30,680 d. P 26,680

Solution

* (1) Accounts receivable 8,000


Sales 8,000

(2) Accounts receivable 14,000


Accounts receivable 14,000

* (3) Accounts receivable 18,000


Customers’ deposit 18,000

(4) Allowance for bad debts 48,000


Accounts receivable 48,000

* (5) Miscellaneous losses 8,000


Accounts receivable 8,000
To reconcile control account with subsidiary ledger.

(6) Bad debts 26,680


Allowance for bad debts 26,680

* ignored in the aging of AR

145
Aging of AR
Control Under 1 to 6 Over 6
Account 1 mo. mos. mos.
Unadjusted balance 848,000 360,000 368,000 152,000
(1) 8,000
(2) - (14,000)
(3) 18,000
(4) (48,000) (48,000)
(5) ( 8,000) ______ _______ _______
Adjusted balance 818,000 360,000 354,000 104,000

Under 1 mo. 360,000 x 1% = 3,600


1 to 6 mos. 354,000 x 2% = 7,080
Over 6 mos.
24,000 x 50% = 12,000
80,000 x 10% = 8,000
Required allowance for bad debts 30,680

Provision for bad debts per audit:


Beginning balance 20,000
+ Provision – squeezed figure 74,680
- Write-off per book 16,000
- Additional Write-off 48,000
Ending balance 30,680

Provision per book 48,000


Provision per audit 74,680
Adjustment 26,680

Answer:
1. A 2. D 3. C 4. A 5. B
6. C 7. C 8. A

Problem 8
KAREN COMPANY’s accounts receivable subsidiary ledger shows the following information:
Invoice
Customer Account Balance – 12/31/06 Date Amount
Penas P 70,360 12/06/06 P 28,000
11/29/06 42,360

Jefferson 41,840 09/27/06 24,000


08/20/06 17,840

Junsay 61,200 12/08/06 40,000


10/25/06 21,200

Cherryl 90,280 11/17/06 46,280


10/09/06 44,000

Baron 63,200 12/12/06 38,400

146
12/02/06 24,800

Riza 34,800 09/12/06 34,800

The estimated bad debt rates below are based on Karen Company’s receivable collection
experience.
Age of Accounts Rate
0 – 30 days 1%
31 – 60 days 1.5%
61 – 90 days 3%
91 – 120 days 10%
Over 120 days 50%

The allowance for bad debts account had a credit balance of P7,000 on December 31, 2006,
before adjustment.

Questions

1. The adjusted Accounts Receivable balance of KAREN COMPANY at December 31, 2006
is:
a. P 317,680 b. P 319,320 c. P 326,880 d. P 361,680

2. The adjusted balance of Allowance for Bad Debts of KAREN COMPANY at December 31,
2006 is:
a. P 9,698.80 b. P 10,188.80 c. P 12,397.60 d. P 19,397.60

3. The adjusted balance of Bad Debts Expense of KAREN COMPANY at December 31, 2006
is:
a. P 9,698.80 b. P 10,188.80 c. P 12,397.60 d. P 19,397.60

4. The net realizable value of Accounts Receivable of KAREN COMPANY at December 31,
2006 is:
a. P 342,282.40 b. P 349,282.40 c. P 307,482.40 d. P 314,482.40

Solution

Aging of AR
Balance 0-30 31-60 61-90 91-120 Over 120
12/31/06 Days Days Days Days Days

Penas P 70,360 28,000 42,360


Jefferson 41,840 24,000 17,840
Junsay 61,200 40,000 21,200
Cherryl 90,280 46,280 44,000
Baron 63,200 63,200
Riza 34,800 ______ ______ ______ 34,800 _____
Total P361,680 131,200 88,640 65,200 58,800 17,840
x % of uncollectibility 1% 1.5% 3% 10% 50%
Required Allowance 1,312 1,329.60 1,956 5,880 8,920 = P 19,397.60

Bad debts expense 12,397.60


Allowance for bad debts 12,397.60
(P19,397.60 – P7,000)
Answer:

147
1. D 2. D 3. C 4. A

Problem 9
You are assigned to audit KENT COMPANY for the year ending December 31, 2006. The
accounts receivable were circularized as at December 31, 2006 and the following
exceptions/replies have not been disposed of at the date of your examination.

Customer Balance Comments Audit Findings

Duque P 30,000 Balance was paid Dec. Kent received mailed


29, 2006. January 2, 2007.

Odessa 74,000 Balance was offset by our Kent credited accounts


Dec. 10 shipment of goods. payable for P74,000 to
record purchase of goods

Solejon 16,200 The above balance has The payment was


been paid. Credited to Dairen – cust.

Rubin 23,700 We do not owe Kent any- The shipment costing


thing as the goods were P16,300 was made on
received January, 2007, Dec. 29, 2006 and the
FOB Destination goods were not included
in recording the year-end
inventory.

Jamea 150,000 Our deposit of P200,000 Kent had previously


should cover this balance credited the deposit to
sales.

Ocsio 54,000 We never received these The shipment was erro-


goods. neously made to another
customer and the goods
worth P51,000 are now
on its way to Ocsio. The
shipment, FOB Shipping
Point, was made on Dec.
30, 2006.

Dela Cruz 100,000 We are rejecting the price, Kent’s clerk erroneously
which is too much computed the unit price
at P2,000. The correct
pricing should have been
at P1,200 per unit.

Ronel 18,000 Amount is okay. Since Goods cost P12,000 and


this is on consignment, we were appropriately inclu-
will remit payment upon ded in Kent’s inventory
selling the goods.

KENT COMPANY has not recorded yet its 2006 inventory. The balance of inventory and
Accounts Receivable at December 31, 2006 (per trial balance) is P 456,000 and P345,900,
respectively.

148
Questions

1. The entry to adjust the finding made in the account of Duque is:
a. Cash 30,000 c. Accounts receivable 30,000
Accounts receivable 30,000 Cash 30,000
b. Cash 30,000 d. No adjustment
Sales 30,000

2. The entry to adjust the finding made in the account of Odessa is:
a. Purchases 74,000 c. Accounts payable 74,000
Accounts receivable 74,000 Accounts receivable 74,000
b. Sales 74,000 d. No adjustment
Purchases 74,000

3. The entry to adjust the finding made in the account of Solejon is:
a. Accounts receivable 16,200 c. Accounts receivable 16,200
Accounts receivable 16,200 Accounts payable 16,200
b. Accounts payable 16,200 d. No adjustment
Accounts receivable 16,200

4. The entry to adjust the finding made in the account of Rubin is (for sales):
a. Sales 23,700 c. Accounts receivable 23,700
Accounts receivable 23,700 Sales 23,700
b. Accounts payable 23,700 d. No adjustment
Purchases 23,700

5. Entry to adjust the finding made in the account of Rubin is (for cost of sales):
a. Cost of sales 16,300 c. Retained earnings 16,300
Inventory 16,300 Inventory 16,300
b. Inventory 16,300 d. No adjustment
Cost of sales 16,300

6. The entry to adjust the finding made in the account of Jamea is:
a. Customers’ advances 150,000 c. Sales 200,000
Sales 150,000 Customers’ advances 50,000
Accounts receivable 150,000
b. Customers’ advances150,000 d. Sales 150,000
Accounts receivable 150,000 Customers’ advances 150,000

7. The entry to adjust the finding made in the account of Ocsio is:
a. No adjustment c. Sales 54,000
Accounts receivable 54,000
b. Accounts receivable 51,000 d. Sales 3,000
Sales 51,000 Accounts receivable 3,000
8. The entry to adjust the finding made in the account of Dela Cruz is:
a. Accounts receivable 40,000 c. Sales 60,000
Sales 40,000 Accounts receivable 60,000
b. Sales 40,000 d. No adjustment
Accounts receivable 40,000

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9. The adjusted balance of Kent Company’s inventory at December 31, 2006 is:
a. 451,700 b. P 460,300 c. P 472,300 d. P 484,300

10. The adjusted balance of Kent Company’s accounts receivable at December 31, 2006 is:
a. P 37,200 b. P 55,200 c. P 187,200 d. P 205,200

Solution
For Doque No adjustment
For Odessa Accounts payable 74,000
Accounts receivable 74,000
For Solejon Accounts receivable 16,200
Accounts receivable 16,200
For Rubin Sales 23,700
Accounts receivable 23,700
Inventory 16,300
Cost of sales 16,300
For Jamea Sales 200,000
Customers’ advances 50,000
Accounts receivable 150,000
For Ocsio. Sales 3,000
Accounts receivable 3,000
For dela Cruz Sales 40,000
Accounts receivable 40,000
For Ronel Sales 18,000
Accounts receivable 18,000

Unadjusted Inventory 456,000 Unadjusted AR 345,900


Adjustment - Rubin 16,300 Adjustment - Odessa ( 74,000)
- Solejon -
- Rubin ( 23,700)
- Jamea (150,000)
- Ocsio ( 3,000)
- dela Cruz ( 40,000)
_________ - Ronel ( 18,000)
Adjusted balance 472,300 Adjusted balance 37,200

Answer:
1. D 2. C 3. A 4. A 5. B
6. C 7. D 8. B 9. C 10. A

Problem 10
You have been assigned to audit the financial statement MALAQUI INCORPORATED. The
company is a distributor of a variety of electronic appliances and parts. The company uses
the calendar year for reporting purposes. Information regarding balances of MALAQUI
INCORPORATED’S Accounts Receivable and the related Allowance for Doubtful Accounts as
of December 31, 2006 and the related audit finding, is given below.

The schedule of accounts receivable furnished you by the accountant reflects some errors.
The total figure in the schedule does not tally with the balance per subsidiary ledger of
P919,000. Based on your review of sales invoices, purchase orders and other related
documents, you noted the following information:

1. Sales on account of various electronics totaling P36,480 were returned by the customer
on December 28, 2006, but no entry was made in the books. The goods were included
in the year-end physical count.

150
2. Based on the findings per confirmation reply from a customer, he indicated that he has
already paid his account of P23,980 in October, 2006. Your verification disclosed that
said collection was credited to net sales account.

3. Collection of P12,950 on November 5, 2006 from Diana Corporation was credited to the
account of DNA Corporation.

The allowance for doubtful accounts is set at 3% of the outstanding accounts receivable at
the end of the period. As of December 31, 2006, the Allowance for Doubtful Accounts has a
balance of P32,400 before adjustment.

Questions

1. What is the adjusted balance of Accounts Receivable as of December 31, 2006?


a. P 919,000 b. P 895,020 c. P 882,520 d. P 858,540

2. What is the adjusted balance of Allowance for Doubtful Accounts as of December 31,
2006?
a. P 27,570.00 b. P 26,850.60 c. P 26,475.60 d. P 25,756.20

Solution
Sales 36,480
Accounts receivable 36,480
Sales 23,980
Accounts receivable 23,980
Answer:
1. D 2. D

Problem 11
You audit of APAS COMPANY for the year 2006 disclosed the following:

1. The December 31 inventory was determined by a physical count on December 28


and based on such count, the inventory was recorded by:
Inventory 1,400,000
Cost of sales 1,400,000
2. The 2006 ledger shows a sales balance of P20,000,000.
3. The company sells a mark-up of 20% based on sales.
4. The company recognizes sales upon passage of title to the customers.
5. All customers are within a four-day delivery area.

The sales register for December, 2006 and January, 2007, showed the following details:

December Register

Invoice No. FOB Terms Date Shipped Amount


300 Destination 12/30 P 50,000
301 Shipping point 12/30 62,500
302 Destination 12/23 47,500
303 Destination 12/24 82,500
304 Shipping point 01/02 56,000
305 Shipping point 12/29 90,000

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January Register

Invoice No. FOB Terms Date Shipped Amount


306 Destination 12/29 67,500
307 Shipping point 12/29 74,500
308 Destination 01/02 140,000
309 Shipping point 01/04 73,000
310 Shipping point 12/27 67,500

Questions

1. The Sales for December is over/(under) by:


a. P 36,000 under c. P 106,000 under
b. P 36,000 over d. P 106,000 over

2. The Inventory for December is over/(under) by:


a. P 235,600 under c. P 181,600 under
b. P 235,600 over d. P 181,600 over

3. The adjusted inventory at December 31, 2006 is:


a. P 1,645,412 b. P 1,635,600 c. P 1,218,400 d. P 1,164,400

4. The adjusted sales at December 31, 2006 is:


a. P 20,106,000 b. P 20,036,000 c. P 19,964,000 d. P 19,894,000

5. How much sales for the month of December 2006 were erroneously recorded in January
2007?
a. P 282,000 b. P 272,500 c. P 198,000 d. P 142,000

6. How much sales for the month of January 2007 were erroneously recorded in December
2006?
a. P 228,500 b. P 188,500 c. P 180,500 d. P 106,000

Solution
(1) Sales 50,000
Accounts receivable 50,000
Invoice # 300

(2) Cost of sales 50,000


Inventory 50,000
(62,500 x 80%)
Invoice # 301
(3) Sales 56,000
Accounts receivable 56,000
Invoice # 304
(4) Cost of sales 72,000
Inventory 72,000
(90,000 x 80%)
Invoice # 305
(5) Accounts receiv. 74,500
Sales 74,500
Invoice # 307
(6) Cost of sales 59,600
Inventory 59,600
(74,500 x 80%)
(7) Accounts receiv. 67,500
Sales 67,500

152
Invoice # 310

Unadjusted Sales 20,000,000 Unadjusted inventory 1,400,000


(1) ( 50,000) (2) ( 50,000)
(3) ( 56,000) (4) ( 72,000)
(5) 74,500 (6) ( 59,600)
(7) 67,500 _________
Adjusted Sales 20,036,000 Adjusted inventory 1,218,400

Sales for the month of December that 2003


were erroneously recorded in January 2004:
Invoice # 307 74,500
Invoice # 310 67,500
Total 142,000

Sales for the month of January 2004


were erroneously recorded in December 2003:
Invoice # 300 50,000
Invoice # 304 56,000
Total 106,000
Answer:
1. A 2. D 3. C 4. B 5. D 6. D

Problem 12
You are engaged to perform an audit of the accounts of the JELLER CORPORATION for the
year ended December 31, 2006, and have observed the taking of the physical inventory of
the company on December 27, 2006. Only merchandise shipped by the Durian Corporation
to customers up to and including December 27, 2006 have been removed or excluded from
inventory. The inventory as determined by physical inventory count has been recorded on
the books by the company’s controller. No perpetual inventory records are maintained. All
sales are made on an FOB shipping point basis.

The following lists of sales invoices are entered in the sales books for the months of
December 2006 and January 2007, respectively.

Sales Invoices
Date Amount Date Shipped

December 2006 (a) 12/23/06 P 25,000 12/31/06


(b) 12/27/06 18,000 12/27/06
(c) 12/30/06 30,000 01/05/07
(d) 12/22/06 12,000 01/08/07
(e) 12/28/06 16,000 12/29/06
(f) 12/03/06 8,000 12/05/06
(g) 12/31/06 20,000 01/07/07
(h) 12/31/06 14,000 12/31/06

January 2007 (i) 12/31/06 7,500 12/29/06


(j) 12/27/06 11,000 01/04/07
(k) 01/08/07 9,000 01/09/07
(l) 01/10/07 5,000 12/31/06
Questions

1. How much sales for month of December 2006 were erroneously recorded in January
2007?
a. P 7,500 b. P 12,500 c. P 18,500 d. P 20,000

153
2. How much sales for the month of January 2007 were erroneously recorded in December
2006?
a. Zero b. P 12,500 c. P 20,000 d. P 62,000

3. How much is the correct amount of sales for the month ended December 31, 2006?
a. P 143,000 b. P 155,500 c. P 93,500 d. P 81,000

Solution
(1) B Item (I)P7,500 and Item (l), P5,000 P12,500

(2) D Items c, d, g P62,000

(3) C Recorded sales for December P143,000


December sales recorded in January 12,500
January sales recorded in December (62,000)
Adjusted sales for December P 93,500

Problem 13
On September 1, DY COMPANY assigns specific receivables totaling P750,000 to Davao Bank
as collateral on a P625,000, 12% note. DY COMPANY will continue to collect the assigned
accounts receivable. Davao Bank also assesses a 2% service charge on the total accounts
receivable assigned. DY COMPANY is to make monthly payments to Davao Bank with cash
collected on assigned accounts receivable. Collections of assigned accounts during
September totaled P260,000 less cash discounts of P3,500.

Questions

1. What were the proceeds from the assignment of DY COMPANYs’ accounts receivable on
September 1?
a. P 610,000 b. P 612,500 c. P 625,000 d. P 735,000

2. What amount is owed to Davao Bank by DY COMPANY for September collections plus
accrued interest on the note to September 30?
a. P 260,000 b. P 262,750 c. P 264,000 d. P 266,250

Solution
(1) A P625,000 – (2% x P750,000) P610,000

(2) B P260,000 – P3,500 + (P625,000 x 12% x 1/12) P262,750


Problem 14
On April 1, 2006, VAILOCES CORPORATION assigned accounts receivable totaling P400,000
as collateral on a P300,000, 16% note from Racel Bank. The assignment was done on a
nonnotification basis. In addition to the interest on the note, the bank also receives a 2%
service fee, deducted in advance on the P300,000 value of the note.

Additional information is as follows:

1. Collections of assigned accounts in April totaled P191,100, net of a 2% sales discount.

2. On May 1, VAILOCES CORPORATION paid the bank the amount owed for April collections
plus accrued interest on note to May 1.

3. The remaining accounts were collected by VAILOCES CORPORATION during May except
for P2,000 accounts written-off as worthless.

154
4. On June 1, VAILOCES CORPORATION paid the bank the remaining balance of the
note plus accrued interest.

Questions

1. The journal entry of VAILOCES CORPORATION in the assignment of accounts receivable


on April 1, 2006 is:
a. Cash 294,000 c. Cash 294,000
Finance charges 6,000 Finance charges 6,000
Accounts receivable 300,000 Notes payable 300,000
b. Cash 294,000 d. Cash 294,000
Finance charges 6,000 Commission exp. 6,000
AR – assigned 300,000 AR – assigned 300,000

2. The journal entry of VAILOCES CORPORATION in the assignment of accounts receivable


on April 1, 2006 assuming the assignment is on notification basis:
a. Cash 294,000 c. Cash 294,000
Finance charges 6,000 Finance charges 6,000
Accounts receivable 300,000 Notes payable 300,000
b. Cash 294,000 d. Cash 294,000
Finance charges 6,000 Commission exp. 6,000
AR – assigned 300,000 AR – assigned 300,000

3. The entry of VAILOCES CORPORATION on April collection of the assigned account is:
a. Cash 191,100 c. Cash 191,100
Sales discounts 3,900 Sales discounts 3,900
AR – assigned 195,000 Accounts receivable 195,000
b. Cash 191,100 d No journal entry
Accounts receivable 191,100

4. If the assignment is on notification basis, who should collect the assigned accounts
receivable?
a. Vailoces Corporation c. A third party
b. Racel Bank d. It is the option of the customer to
whom he/she will pay the account

5. Using the assumption in number 4 above, what will be the entry of VAILOCES
CORPORATION on the April collection of the assigned accounts receivable?
a. Cash 191,100 c. Cash 191,100
Sales discounts 3,900 Sales discounts 3,900
AR – assigned 195,000 Accounts receivable 195,000
b. Cash 191,100 d No journal entry
Accounts receivable 191,100

6. The journal entry of VAILOCES CORPORATION on the on May 1, 2006 is:


a. Notes payable 187,100 c. Notes payable 188,500
Interest expense 4,000 Interest expense 2,600
Cash 191,100 Cash 191,100
b. Notes payable 195,000 d. Notes payable 195,000
Interest expense 5,333 Interest expense 4,000
Cash 200,333 Cash 199,000

155
7. Using the same information in number 6 (May 1 transaction) except that the assignment
is done on a notification basis, the entry should be:
a. Notes payable 187,100 c. Notes payable 188,500
Interest expense 4,000 Interest expense 2,600
Accounts receivable 191,100 AR –assigned 191,100
b. Notes payable 195,000 d. No journal entry
Interest expense 4,000
AR - assigned 199,000

8. The total interest expense of VAILOCES CORPORATION on the assigned accounts


receivable is:
a. P 5,400 b. P 8,066 d. P 10,000 c. P 11,400

Solution
April 1 Accounts receivable – assigned 400,000
Accounts receivable 400,000
1 Cash 294,000
Finance charges (300,000 x 2%) 6,000
Notes payable 300,000
(1) Cash 191,100
Sales discounts 3,900
AR – assigned (191,100/98%) 195,000
(2) Notes payable 195,000
Interest expense 4,000
(300,000 x 16% x 1/12)
Cash 199,000
(3) Cash 203,000
Allowance for bad debts 2,000
AR – assigned 205,000
(400,000 – 195,000)
(4) Notes payable (300,000 – 195,000)105,000
Interest expense 1,400
(105,000 x 16% x 1/12)
Cash 106,400
Answer:
1. C 2. C 3. A 4. B 5. D
6. D 7. B 8. A

Problem 15
UY FINANCE CORPORATION purchases the accounts receivable of other companies on a
without recourse, notification basis. At the time the receivables are factored, 15% of the
amount factored is charged to the client as commission and recognized as revenue in UY’S
books. Also, 10% of the receivables factored is withheld by Uy as protection against sales
returns or other adjustments. This amount credited by Uy to the client Retainer account.
At the end of each month, payments are made by Uy to its clients so that the balance in the
Client Retainer account is equal to 10% of unpaid factored receivables. Based on Uy’s bad
debt loss experience, an allowance for bad debts of 5% of all factored receivables is to be
established, Uy makes adjusting entries at the end of each month.

On January 3, 2003, Jannette Company factored its accounts receivable totaling


P1,000,000. By January 31, P800,000 on these receivables had been collected by Uy.

156
Questions

1. The commission earned of Uy Finance Corporation from Jannette Company’s accounts


receivable factored is:
a. P 150,000 b. P 120,000 c. P 135,000 d. P 90,000

2. The proceeds received by Jannette Company on the accounts factored is:


a. P 810,000 b. P 780,000 c. P 765,000 d. P 750,000

3. How much is the Client Retainer account of Uy Finance Corporation at January 31, 2003
is:
a. P 0 b. P 20,000 c. P 60,000 d. P 80,000

4. How much is the bad debts expense of Uy Finance Corporation at January 31, 2003 is:
a. P 50,000 b. P 40,000 c. P 20,000 d. P 0

Solution

UY FINANCE CORPORATION’S BOOKS

Jan. 3 Accounts receivable factored 1,000,000


Commission income (P1 M x 15%) 150,000
Client Retainer (P1 M x 10%) 100,000
Cash 750,000
31 Cash 800,000
Accounts receivable factored 800,000
31 Client Retainer 80,000
Cash (100,000 – [10% x 200,000]) 80,000
31 Bad debts expense 50,000
Allowance for bad debts (P1 M x 5%) 50,000

JANETTEE COMPANY’S BOOKS

Jan. 3 Cash 750,000


Receivable from factor 100,000
Commission 150,000
Accounts receivable 1,000,000
31 Cash 80,000
Receivable from factor 80,000

Answer:
1. A 2. D 3. B 4. A

Problem 16
During your audit of the LEILANI COMPANY for the calendar year 2006, you find the
following accounts:
NOTES RECEIVABLE
Sept. 1 Samson, 12%, due in 3 mos. 36,000 36,000
Nov. 1 Hazel, 15%, due in 6 mos. 90,000 126,000
Nov. 1 Salazar, no interest, due in one
year 75,000 201,000
Nov. 30 Rosa, Co. 12%, due in 13 mos. 15,000 216,000
Dec. 1 Rona, 15%, due in 15 mos. 36,000 252,000
Dec. 2 Anito, President, 18%, due in 3
mos. 18,000 270,000

157
NOTES RECEIVABLE DISCOUNTED
Sept. 1 Samson note, discounted at 36,000 36,000
15%
Nov. 1 Salazar note, discounted at 75,000 111,000
15%

INTEREST EXPENSE
Sept. 1 Samson note 310.50 310.50
Nov. 1 Salazar note 11,250.00 11,560.50

All notes are trade notes receivable unless otherwise specified. The Samson note was paid
December31, 2006. Interest income is credited only upon receipt of cash.

Questions

1. The accrued interest income at December 31, 2006 is:


a. P 2,748 b. P 3,018 c. P 3,120 d. P 4,200

2. The interest expense at December 31, 2006 is:


a. P 1,875.00 b. P 2,185.50c. P 4,060.50 d. P 11,560.50

3. The Notes Receivable at December 31, 2006 is:


a. P 141,000 b. P 159,000 c. P 216,000 d. P 252,000

4. The Notes Receivable – discounted at December 31, 2006 is:


a. P 63,750 b. P 73,125 c. P 75,000 d. P 111,000

5. How much is the proceeds in the discounting of notes receivable for the year?
a. P 99,439.50 b. P 100,060.50 c. P 111,000.00 d. P 111,310.50

Solution
1. C
Hazel 90,000 x 15% x 2/12 = P 2,250
Rosa 15,000 x 12% x 1/12 = 150
Rona 36,000 x 15% x 1/12 = 450
Anito 18,000 x 18% x 1/12 = 270
Total accrued interest P 3,120
2. B
Samson = P 310.50
Salazar 11,250 x 2/12 = 1,875.00
Total interest expense = P2,185.50
3. A
Hazel 90,000
Rosa 15,000
Rona 36,000
Total 141,000
4. C
Salazar 75,000
5. A
Samson P 36,000 – P 310.50 = P 35,689.50
Salazar P 75,000 – P11,250 = 63,750.00
Total proceeds = P 99,439.50

158
Problem 17
On January 1, 2006, TUQUIB COMPANY sells its equipment with a carrying value of
P160,000. The company receives a non-interest-bearing note due in 3 years with a face
amount of P200,000. There is no established market value for the equipment. The
prevailing interest rate for a note of this type is 12%. The following are the present value
factors of 1 at 12%:

Present value of 1 for 3 periods 0.71178


Present value of an ordinary annuity of 1 for 3 periods 2.40183

Questions

1. The gain or loss on the sale of equipment is:


a. P 40,000 b. P 122 c. P 0 d. (P 17,644)

2. The discount on notes receivable is:


a. P 57,644 b. P 40,000 c. P 39,878 d. P 0

3. The entry to record the sale of equipment is:


a. Notes receivable 200,000 c. Notes receivable 200,000
Equipment 200,000 Loss on sale 17,644
Equipment 160,000
Discount on NR 57,644
b. Notes receivable 200,000 d. Notes receivable 200,000
Equipment 160,000 Equipment 160,000
Gain on sale 40,000 Gain on sale 122
Discount on NR 39,878

4. The discount amortization at the end of the second year using the effective-interest
amortization is:
a. P 17,083 b. P 19,133 c. P 21,428 d. P 36,216

5. The entry to record the discount amortization is:


a. Discount on NR c. Interest income
Interest income Discount on NR
b. Discount on NR d. Interest expense
Interest expense Discount on NR

Solution
1. D
Sales price – present value of note (P200,000 x 0.71178) 142,356
Book value of equipment 160,000
Loss on sale of equipment (17,644)

2. A
Face value of note 200,000
Present value of note 142,356
Discount on notes receivable 57,644
3. C
Notes receivable 200,000
Loss on sale of equipment 17,644
Equipment 160,000
Discount on notes receivable 57,644
4. B
Present value of note, 1/1/03 142,356
Add: Interest earned in 2003

159
(142,356 x 12%) 17,083
Present value of note, 1/1/04 159,439
Add: interest earned in 2004
(159,439 x 12%) 19,133
Present value of note, 1/1/05 178,572
5. A

Problem 18
On January 2, 2006, a tract of land that originally cost P800,000 was sold by MAYLENE
CORPORATION. The company received a P1,200,000 note as payment. It bears interest
rate of 4% and is payable in 3 annual installments of P400,000 plus interest on the
outstanding balance. The prevailing rate of interest for a note of this type is 10%. The
present value table shows the following present value factors of 1 at 10%:

Present value factor of 1 for 3 periods 0.75132


Present value factor of 1 for 2 periods 0.82645
Present value factor of 1 for 1 period 0.90909
Present value of an ordinary annuity of 1 for 3 periods 2.48685

Questions

1. The gain on sale of land on January 2, 2006 is:


a. P 194,740 b. P 276,847 c. P 290,740 d. P 400,000

2. The interest income on the note receivable for the year ended December 31, 2006 using
effective interest method is:
a. P 120,000 b. P 109,074 c. P 107,685 d. P 99,474

3. How much cash will MYLENE CORPORATION received from notes receivable?
a. P 1,076,847 b. P 1,200,000 c. P 1,296,000 d. P 1,476,847

Solution
Amount of cash to be received:

Interest Principal Total


2003 48,000 * 400,000 448,000
2004 32,000 ** 400,000 432,000
2005 16,000 *** 400,000 416,000
Total 1,296,000
* 1,200,000 x 4%
** 800,000 x 4%
*** 400,000 x 4%

Cash received PV Factor Present Value


2003 448,000 0.90909 407,272
2004 432,000 0.82645 357,026
2005 416,000 0.75132 312,549
Total 1,076,847
Present value of note 1,076,847
Cost of land 800,000
Gain on sale 276,847

Interest income for 2006 – P1,076,847 x 10% = P107,685

Answer:
1. B 2. C 3. C

Problem 19

160
The balance sheet of PERSEVERANCE CORPORATION on December 31, 2005, includes the
following cash and receivable balances:

Cash – Davao Bank P 45,000


Currency and coins 16,000
Petty cash fund 1,000
Cash in bond sinking fund 15,000
Notes receivable (including discounted with
recourse, P15,500) 36,500
Accounts receivable P 85,600
Less: Allow. for bad debts (4,150) 81,450
Interest receivable 525

Current liability reported in the December 31, 2005, balance sheet included:

Obligation on discounted notes receivable 15,500

Transactions during 2006 included the following:

1. Sales on account were P767,000.

2. Cash collected on accounts totaled P576,500, including accounts of P93,000 with


cash discounts of 2%.

3. Notes received in settlement of accounts totaled P82,500.

4. Notes receivable discounted as of December 31, 2005, were paid at maturity with
the exception of one P3,000 note on which the company had to pay the bank P3,090,
that included interest and protest fees. It is expected that recovery will be made on this
note early in 2004.

5. Customer notes of P60,000 were discounted with recourse during the year, proceeds
from their transfer being P58,500. Of this total, P48,000 matured during the year
without notice of protest.

6. Customer accounts of P8,720 were written-off in prior year as worthless.

7. Recoveries of doubtful accounts written-off in prior years were P2,020. (not included
in the collection in number 2)

8. Notes receivable collected during the year totaled P27,000 and interest collected was
P2,450.

9. On December 31, accrued interest on notes receivable was P630.

10. Uncollectible accounts are estimated to be 5% of the December 31, 2006, accounts
receivable balance.

11. Cash of P35,000 was borrowed from Davao Bank, accounts receivable of P50,000
being pledged on the loan. Collections of P19,500 had been made on these receivables
included in the total given in transaction (2) and this amount was applied on December
31, 2006, to payment of accrued interest on the loan of P600, and the balance to partial
payment of the loan.

161
12. Petty cash fund was reimbursed based on the following analysis of expenditure
vouchers:
Travel expenses P 112
Entertainment expenses 78
Postage 93
Office supplies 173
Cash over 6

13. P3,000 cash was added to the bond sinking fund.

14. Currency on hand at December 31, 2006 was P12,000.

15. Total cash payment for all expenses during the year were P468,000. Charge to
General Expense

Based on the information above and some other analysis, answer the following questions:

Questions

1. PERSEVERANCE CORPORATION’s Cash balance at December 31, 2006 is:


a. P 269,430 b. P 265,430 c. P 252,430 d. P 219,930

2. PERSEVERANCE CORPORATION’s Accounts Receivable balance at December 31, 2006 is:


a. P178,8787.00 b. P 178,824.50 c. P176,804.50 d. P174,254.50

3. PERSEVERANCE CORPORATION’s Other Cash Item (Currency and coins & Petty Cash
Fund) at December 31, 2006 is:
a. P 16,000 b. P 13,000 c. P 12,550 d. P 12,000

4. PERSEVERANCE CORPORATION’s Notes Receivable at December 31, 2006 is:


a. P 46,500 b. P 31,000 c. P 30,910 d. P 28,500

5. PERSEVERANCE CORPORATION’s Obligation of Discounted of Note Receivable at


December 31, 2006 is:
a. P 15,500 b. P 12,000 c. P 11,910 d. P 3,500

6. PERSEVERANCE CORPORATION’s Interest Receivable at December 31, 2006 is:


a. P 2,555 b. P 1,155 c. P 630 d. P 525

7. PERSEVERANCE CORPORATION’s Bad debts at December 31, 2006 is:


a. P 16,005.20 b. P 13,875.50 c. P 11,855.50 d. P 11,825.50

8. PERSEVERANCE CORPORATION’s Allowance for bad debts at December 31, 2006 is:
a. P 9,406.50 b. P 9,305.50 c. P 9,252.00 d. P 4,150.00

9. PERSEVERANCE CORPORATION’s Sales balance at December 31, 2006 is:


a. P 767,000 b. P 765,140 c. P 765,102 d. P 757,330

10. PERSEVERANCE CORPORATION’s Interest income balance at December 31, 2006 is:
a. P 3,086 b. P 3,080 c. P 2,561 d. P 2,555

Solution

162
(1) Accounts receivable 767,000
Sales 767,000
(2) Cash 576,500
Sales discounts 1,860
Accounts receivable 576,360
(3) Notes receivable 82,500
Accounts receivable 82,500
(4) Obligation on discounted note 12,500
Notes receivable 12,500
Accounts receivable 3,090
Cash 3,090
Obligation on discounted note 3,000
Notes receivable 3,000
(5) Cash 58,500
Interest expense 1,500
Obligation on discounted note 60,000
Obligation on discounted note 48,000
Notes receivable 48,000
(6) Allowance for bad debts 8,720
Accounts receivable 8,720
(7) Accounts receivable 2,020
Allowance for bad debts 2,020
Cash 2,020
Accounts receivable 2,020
(8) Cash 27,000
Notes receivable 27,000
Cash 2,450
Interest receivable 525
Interest income 1,925
(9) Interest receivable 630
Interest income 630
(10) Bad debts 11,855.50
Allowance for bad debts 11,855.50
(11) Cash 35,000
Notes payable 35,000
Interest expense 600
Notes payable 18,900
Cash 19,500
(12) Operating expenses 456
Cash 456
Cash 6
Other income 6
(13) Sinking fund 3,000
Cash 3,000
(14) No entry
(15) General expenses 468,000
Cash 468,000

Answer:
1. A 2. C 3. B 4. D 5. B
6. C 7. C 8. B 9. B 10. D

Problem 20
You are engaged in your fifth annual examination of the financial statements of NAVAL
CORPORATION. Your examination is for the year ended December 31, 2006. The client
prepared the following schedule of Trade Notes Receivable and Interest Receivable for you
at December 31, 2006. You have agreed the opening balances to your prior year’s audit
workpapers.

NAVAL CORPORATION
TRADE NOTES RECEIVABLE AND RELATED INTEREST RECEIVABLE
Trade-Notes Receivable

163
Maker Date Terms Int. Bal. 2006 2006 Bal.
Rate 12/31/05 debits credit 12/31/06
Rubin 04/01/05 1-year 12% P 60,000 P 60,000
Co.
Cardoza 05/01/06 90 days - P 30,000 29,375 P 625
after date
Pancho 07/01/06 60 days 12% 6,000 6,000
after date
Betque 08/03/06 Demand 12% 15,000 15,000
Gabuter 10/02/06 60 days 12% 50,000 50,000 -
o after date
Noval 11/01/06 90 days 8% 42,000 35,000 7,000
after date
Gan 11/01/06 90 days 12% 32,000 32,000
after date

INTEREST RECEIVABLE
Due from Balance 2006 debit 2006 credit Balance
12/31/06
Rubin Co. P 5,400 P 1,800 P 7,200
Pancho 120 P 120
Betque 400 400
Gabutero 1,000 660 340
Noval 560 560
Gan ___________ 640 ___________ 640
Totals P 5,400 P 4,520 P 7,860 P 2,060

Your examination reveals this information:

1. Interest is computed on a 360-day basis. In computing interest, it is the corporation’s


practice to exclude the first day of the note’s term and to include the due date.

2. The Cardoza’s 90-day non-interest bearing note was discounted on May 15 at 10%, and
the proceeds were credited to the Trade Notes Receivable account. The note was paid
at maturity.

3. Pancho became bankrupt on August 31, and the corporation will recover 75 cents on the
peso. All of Naval Corporation’s notes receivable provide for interest at a rate of 12% on
the maturity value of a dishonored note.

4. Betque, president of Naval Corporation, confirmed that she owed Naval Corporation
P15,000 and that she expected to pay the note within six months. You are satisfied that
the note is collectible.

5. Gabutero’s 60-day note was discounted on November 1 at 8%, and the proceeds were
credited to the Trade Notes Receivable and Interest Receivable accounts. On December
2, Naval Corporation received notice from the bank that GAbutero’s note was not paid at
maturity and that it had been charged against Naval’s checking account by the bank.
Upon receiving the notice from the bank, the bookkeeper recorded the note and the
accrued interest in the Trade Notes Receivable and Interest Receivable account.
Gabutero paid Naval Corporation the full amount due in January 2003.

164
6. Noval, 90-day note was pledged as collateral for P35,000, 60-day 10% loan from the
Davao National Bank on December 1.

7. On November 1, the corporation received four, P8,000, 90-day notes from Gan. On
December 1, the corporation received payment from Gan for one of the P8,000 notes
with accrued interest. Prepayment of the notes is allowed without penalty. The
bookkeeper credited the Gan’s Accounts Receivable account for the cash received.

Questions

1. At December 31, 2006, the note receivable from Cardoza has a balance of:
a. P 30,000 b. P 29,375 c. P 625 d. P 0

2. The interest income from Cardoza’s note at December 31, 2006 is:
a. P 750 b. P 625 c. P 500 d. P 0

3. At December 31, 2006, the note receivable from Pancho has a balance of:
a. P 6,370.92 b. P 6,366.00 c. P 6,120 d. P 0

4. The interest income from Pancho’s note at December 31, 2006 is:
a. P 370.92 b. P 250.92 c. P 246 d. P 0

5. At December 31, 2006, the note receivable from Betque has a balance of:
a. P 15,350 b. P 15,000 c. P 14,650 d. P 0

6. At December 31, 2006 the note receivable from Gabutero has a balance of:
a. P 150,000 b. P 100,000 c. P 50,000 d. P 0

7. At December 31, 2006 the note receivable from Noval has a balance of:
a. P 42,000 b. P 35,000 c. P 7,000 d. P 0

8. At December 31, 2006 the note receivable from Gan has a balance of:
a. P 32,480 b. P 32,000 c. P 24,000 d. P 23,950

9. The total Note Receivable – Trade at December 31, 2006 is:


a. P 89,000 b. P 81,000 c. P 72,366 d. P 66,000

10. The total Interest Receivable at December 31, 2006 is:


a. P 2,300 b. P 2,060 c. P 1,950 d. P 1,790

Solution

Adjusting Entries as of Dec. 31, 2006


(2) Cardoza (a) Interest Expense 625.00
Trade Notes receivable 625.00
Maturity Value = Face Value P30,000
Discount (30,000 x 10% x 75/360) 625
Proceeds P29,375

(3) Pancho (b) Accounts Receivable 6,370.92


Trade Notes Receivable 6,000.00
Interest Receivable 120.00
Interest Revenue 250.92
Face Value P6,000.00
Interest (6000 x 12% x60/360) 120.00

165
Maturity value P6,120.00
Add.’l interest from due date , 8.30.06 to
12.31.06 (6,120 x 12% x 123/360) 250.92
Total amount due, 12.31.06 P6,370.92

(4) Betque © Notes receivable- Officers 15,000


Interest Receivable 350
Interest Revenue 350
Trade Notes Receivable 15,000
Accrued Interest as of 12.31.06
(15,000 x 12% x 150/360) = P750

(5) Gabutero OE: Cash 50,660


Notes Receivable 50,000
Interest Receivable 660

CE: Cash 50,660


NR – Discounted 50,000
Interest income 660
(d)
Adj: Notes Receivable 50,000
Interest Receivable 660
Interest income 660
NR – discounted 50,000
----------------------------------------- ----------- ----------

OE: Notes Receivable 50,000


Interest Receivable 1,000
Cash 51,000

CE: Accounts Receivable 51,000


Cash 51,000

NR – discounted 50,000
Notes Receivable 50,000

(e) Accounts Receivable 51,000


NR – discounted 50,000
Trade Notes Receivable 100,000
Interest Receivable 1,000
Face Value P50,000
Interest (50,000 x 12% x 60/360) 1,000
Maturity Value P51,000
Discount (50,000 x 8% x 30/360) 340
Proceeds P50,660

(f) Accounts Receivable 510


Interest Revenue 510
(51,000 x 12% x 30/360)

(6) Noval (g) Trade Notes Receivable 35,000


Notes Payable- bank 35,000

(7) Gan (h) Accounts Receivable 8,080


Trade Notes Receivable 8,000
Interest Revenue 80
(8,000 x 12% x 30/360) = P80
(I) Interest revenue 160
Interest Receivable 160
(Accrued Interest as of 12.31.06
24,000 x 12% x 60/360) = P480
ANSWER:
1. D 2. D 3. D 4. A 5. B

166
6. D 7. A 8. C 9. D 10. D

PART 2
PROBLEM

The following T-account summarizes the transactions affecting the accounts receivable
of Lance Corporation for 2004.

Accounts Receivable
Jan. 1 balance after Collections from
deducting credit balance customers, including
P 53,000.00
of P 3,000.00 overpayment of P5,000.00
P 620,000.00
Charge sales 625,000.00 Write offs 3,500.00
Charge for goods out on Merchandise returns 2,500.00
consignment Allowances to customers
5,000.00 for
Stockholders subscription 30,000.00 shipping damages 1,500.00
Accounts written off but Collections on carrier 1,000.00
recovered claims 15,000.00
1,000.00 Collection on subscription
Cash paid to customer for
Jan.1 credit balance 2,500.00
Deposit on contract 15,000.00
Claim against common
carrier for shipping
damages 1,500.00
IOUs from employees 500.00
Cash advance to affiliate 10,000.00
Advance to supplier 5,000.00

Questions

14. The Accounts receivable of Lance Corporation at January 1, 2004 is:


a. P 53,000.00 b. P 56,000.00 c. P 58,500.00 d. P 61,000.00

15. The correcting entry to be made on Lance corporation’s books for customers’
account with credit balance is:
a. Accounts Receivable P 2,000.00
Customers’ accounts w/ credit balances P 2,000.00
b. Accounts Receivable P 3,000.00
Customers’ accounts w/ credit balances P 3,000.00
c. Accounts Receivable P 5,000.00
Customers’ accounts w/ credit balances P 5,000.00

167
d. Accounts Receivable P 5,500.00
Customers’ accounts w/ credit balances P 5,500.00

16. The net adjustments to be made on Accounts receivable is:


a. P 45,500.00 b. P 59,500.00 c. P 65,000.00 d. P 76,500.00

17. The Accounts receivable of Lance Corporation at the end of the year is:
a. P 45,500.00 b. P 59,500.00 c. P 65,000.00 d. P105,000.00

PROBLEM

Client furnished you with a schedule of accounts receivable as of December 31, 2005.
Reconciliation between the general ledger control account and subsidiary balances
shows:
Per subsidiary ledger:
Total accounts with debit balances P610,000
Total accounts with credit balances ( 20,000)
Balance P590,000
Advances to officers collectible in one year 30,000
Advances for affiliated company- no definite
Repayment date 50,000
Claim against transportation company 60,000
Total per WBS P730,000

Below are your audit findings:

1. A cutoff examination revealed that goods having a selling price of P40,000 were
shipped to a customer FOB Shipping Point on December 28, 2005, but the sale
recorded on January 4, 2006. The goods were not included in the December 31,
2005 inventory. Company’s gross profit rate is 20%. Term of sales is n/30.

2. The claim against Transportation Company represents claim for damage goods
while in transit. The claim was paid on February 14, 2006.

3. On December 28, 2005, a customer notified the Corporation that goods billed and
shipped FOB shipping point on December 20, 2005, were lost in transit. The
invoice amount was P20,000.

4. On December 29, 2005, P50,000 of accounts receivable were factored without


recourse for P45,000. Client recorded this transaction by debiting Cash and
crediting Notes Payable-Finance Co. for P45,000. The factored accounts are
classified under 61-120 days past due category.

5. Goods sold for P7,500 on December 20, 2005 were returned on December 27,
2005. The goods were included in the ending inventory at selling price which is
125% of cost. A credit memo was issued on January 6, 2006 at which time the
sales return was recorded

168
Fifty accounts (out of a total of 120) were selected for confirmation. Positive
confirmation request were mailed asking customers to confirm account balances as of
December 31, 2005. Second request were sent out on 15 accounts from which no
reply was received. Fifteen were signed without comments: 10 had minor differences
which have been cleared satisfactorily; one was returned by the post office unopened
and marked “not at address indicated”.

Five confirmations had the following comments:


2. Glenn – The balance of P10,000 was paid on December 26, 2005.
3. Arjay – We never received the goods.
4. Cocoy – Your credit memo dated January 4, 2006 cancels P1,000 of the above
amount of P7,000.
5. Yap – An advance payment of P20,000 was made by us on December 28, 2005.
This should be enough to cover the amount of P16,000 show on your statement.
6. Eliseo – We do not owe you anything on December 31, 2005 as the goods
represented by your invoice dated December 30, 2005 in the amount of P15,000
were received on January 4, 2006 on FOB destination terms.

Audit Notes:
1. The P10,000 from Glenn per OR No. 1570 was credited to Blend resulting to a
credit balance amounting P10,000 to Blend’s account. Glenn’s account was
classified under 60 days past due category.

2. Goods costing P5,600 were set aside on December 29, 2005, and excluded form the
physical inventory. Shipment was made to Arjay at 125% above cost on January 3,
2006. Shipping company states that vessel was temporarily stranded on the way
its destination.

3. Credit memo No. 29-5 was issued to Cocoy on January 4, 2006, granting an
allowance of P1,000 for defective merchandise. Company policy is to record returns
and allowances in the period in which credit memo was issued. The account of
Cocy was included under current to 60 days past due.

4. Yap’s advance payment was credited to sales when received; the unused portion
will be applied to another shipment on January 4, 2006. Yap’s account was
classified under current to 60 days past due.

5. Goods were shipped at 125% above cost FOB destination to Eliseo Corporation on
December 30, 2005. These goods were excluded from the physical inventory on
December 31, 2005.

An analysis of the Allowance for Doubtful Accounts in the General Ledger shows:

Balance, January 1, 2005 P64,000


Accounts written-off (24,000)
Provisions for the year 70,000
Bad debt recoveries 12,000
Balance, December 31, 2005 P122,000

Below is an aging schedule prepared by the client at your request:

169
Age category Amount
Current – 60 days past due P300,000
61 – 120 days past due 160,000
121 – 180 days past due 90,000
Over 180 days past due 60,000
Total Debit Balances P610,000

After consulting with the credit manager, the following percentages are to applied to he
total of the account in each age category (after adjustments per audit) for the purpose
of estimating the required balance in the Allowance for Doubtful Accounts:

Current – 60 days pas due 2%


61 – 120 days past due 15%
121 – 1880 days past due 30%
Over 180 days past due 50%

Questions

15. The gross amount of Trade Accounts Receivable to be reported in the audited balance
sheet at December 31, 2005 is?
a. 633,500 b. 553,500 c. 543,600 d. 423,500

16. The Allowance for Doubtful Account to be reported in the audited balance sheet at
December 31, 2005 is
a. 110,070 b. 79,370 c. 79,170 d. 74,490

17. The Doubtful Accounts Expense to be reported in the audited income statement for year
2005 is
a. 58,070 b. 27,370 c. 27,170 d. 22,490

18. Audit adjustments will increase (decrease) merchandise inventory by


a. 16,100 b. (16,100) c. (P1,500) d. 5,600

For questions 13 to 17, determine the adjusted amount to be use as a basis for
estimating uncollectible accounts in each age group.

19. Current to 60 days past due


a. 299,500 b. 293,500 c. 283,500 d. 238,500

20. 61 to 120 days past due


a. 160,000 b. 140,000 c. 120,000 d. 110,000

21. 121 to 180 days past due


a. 90,000 b. 70,000 c. 80,000 d. 60,000

22. Over 180 days past due


a. 60,000 b. 70,000 c. 80,000 d. 90,000

23. Audit adjustment will increase (decrease) sales by

170
a. (10,500) b. (4,500) c. 9,500 d. 4,500

PROBLEM

The accounts receivable subsidiary ledger of Pelin Corporation shows the following
information:

Customer 12/321/04 Invoice


Account Balance Date Amount
Pablo, Inc. 140,720 12/06/04 56,000
11/29/04 84,720
Palma Gil Corp. 83,680 09/27/04 48,000
08/20/04 35,680
Panoso Co. 122,400 12/08/04 80,000
10/25/04 42,400
Papacoy Co. 180,560 11/17/04 92,560
10/09/04 88,000
Parong, Inc. 126,400 12/12/04 76,800
12/02/04 49,600
Pelarion Corp. 69,600 09/12/04 69,600
TOTAL 723,360 P 723,360
The estimated bad debts rates below are based on the Pelin Corporation’s receivable
collection experience.

Age of Accounts Rate


0 – 30 days 1%
31 – 60 days 1.5%
61 – 90 days 3%
91 – 120 days 10%
over 120 days 50%

The allowance for doubtful accounts had a credit balance of P14,000 on December 31,
2004, before adjustment.

Questions

1. How much is the adjusted balance of the allowance for doubtful accounts as of
December 31, 2004?
a. P 14,000 b. P 24,795 c. P 38,795 d. P 52,795

2. The necessary adjusting journal entry to adjust the allowance for doubtful
accounts as of December 31, 2004 would include:
a. No adjusting journal entry is necessary.
b. A debit to retained earnings of P24,795.
c. A debit to doubtful accounts expense of P38,795.
d. A credit to allowance for doubtful accounts of P24,795.

PROBLEM

171
You are engaged in a financial statement audit of Pequit Co. for the calendar year
2004. Presented below are information to your audit of Trade Accounts Receivable and
the related Allowance of Doubtful Accounts.

TRADE ACCOUNTS RECEIVABLE

1. Balance per books – Trade accounts receivable balance per general ledger as of
December 31, 2004, P428,400.

2. Confirmation of accounts balances – Customers account is confirmed as of


December 31, 2004. Following were replies citing differences:

a. Petisme Trading – Invoice no. 1578 for P5,000, dated November 15, 2004 was
paid on December 26, 2004.

Audit Finding – Collection of P5,000 per OR 1256 dated December 27, 2004
was erroneously credited to Phala Company’s account in the subsidiary ledger.

b. Pineda Company – We never received the goods for which you are billing us
P8,000.

Audit Finding – Goods costing P5,200 were set aside on December 29, 2004 and
excluded from the physical inventory on December 31. Shipment was made on
January 3, 2005. Shipping company states that vessel was temporarily
stranded on the way to its destination.

c. Pinero, Pinky – This P10,000 advance was approved by the Board of Directors
at their September 30, 2004 meeting. It is payable in two equal annual
installment from date of receipt.

Audit Finding – Verified approval by inspecting September 30 Board minutes.


Check no. 1234 for P10,000 was issued to Pinero on October 10, 2004. Ms.
Pinero is vice-president of the company.

3. Consignment Shipment – On September 15, 2004, a consignment shipment was


made on trial basis to Pioquinto Commercial Company. The consignee was billed
P14,000 and is entitled to a commission of 20% based on sales. The consigned
goods were recorded as sales on account and excluded from the ending inventory.
Goods billed to consignees at 40% above cost. Freight cost of P1,000 to deliver the
goods to consignee were charged to selling expenses. Account sales received from
the consignee, showed that goods billed at P9,800 had been sold as of December
31, 2004. The entire proceeds, net of commissions, were remitted to Pequit
Company on January 15, 2004.

4. Sales with the option to return – Towards the end of the year, in an effort to
increase sales, management allowed its employees to market their products, under
a contract with option to return if not sold within 30 days. Sales to employees are
20% above cost, instead of the usual 30% to customers. Sales totaling P50,000
were made to employees in December 2004. Sixty percent (60%) of these sales

172
were subsequently returned in January 2005. The remaining unreturned sales are
considered sold.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

5. Analysis of account – The allowance for doubtful accounts shows the following data
for 2004:

Date Debit Date Balance


Oct. 10 Write-off 3,000 Jan. 1 10,500
Dec. 31 5% of P428,400

6. Aging schedule – Client furnished an aging schedule which shows:

Age Category Net Debit Balance


Under 60 days 210,000
61 – 90 days 146,000
91 – 120 days 44,200
Over 120 days 28,200
428,400

7. Credit balances – Accounts with credit balances are as follows:


Podunas Commercial P 1,500 Allowance due to defective merchandise
per credit memo dated Dec. 2, 2004
Precilda & Company 2,000 Overpayment on invoice dated 7/1/04
Rabago, Inc. 4,800 Advance on sales contract per OR
dated October 18, 2004
Phala Company 5,000 Erroneous credit on Sales collection

8. Review of collectibility – Collectibility of the accounts was reviewed with the credit
manager. It was mutually agreed to apply the following percentages to each age
after correcting the accounts.
Under 60 days 1% estimated uncollectible
61 – 90 days 5% estimated uncollectible
91 – 120 days 10% estimated uncollectible
Over 120 days P4,200 definitely uncollectible, remainder is 75%
collectible

* Excluding consignment sales which were fully collected after the balance sheet
date.

Questions
1. What is the effect of the confirmation reply received from Petisme Trading on the
total account balances in the “under 60 days” age category and on the total
Accounts Receivable?
Under 60 days Age Category Total Accounts Receivable
a. Increase No effect
b. Decrease Increase
c. Increase Decrease

173
d. No effect No effect

2. What is the effect of the confirmation reply received from Pineda Company on the
account balance of
Accounts Receivable Merchandise Inventory
a. Increase Decrease
b. Decrease Increase
c. Increase Increase
d. Decrease Decrease

3. What age category will be affected by the confirmation reply received from Ms.
Pinky Pinero?
a. 61 – 90 days c. Over 120 days
b. 91 – 120 days d. None of the age categories is affected

4. What course of action would you take regarding the sales to employees under a
special contract with option to return?
a. Make an adjustment to take up January 2005 sales returns in calendar
year 2004.
b. Reverse entries recording sales in December 2004 as this is obviously a
management fraud.
c. Recommend that management discontinue this arrangement as it is obviously
disadvantageous to the company.
d. Make no further adjustments and take no further action.

5. What is the cost of consigned goods what should be included in the December 31,
2004 inventory?
a. P 3,000 b. P 4,000 c. P 3,300 d. None

6. To obtain the adjusted amount which will be used as a basis for estimating the
uncollectible accounts in each age category, what should we do with the credit
balance in Podunas Commercial’s account?
a. Deduct from the unadjusted balance of appropriate age group.
b. Add to unadjusted balance of appropriate age group.
c. Ascertain from the given data whether it should be added or deducted.
d. Ignore

7. The adjusted balance of accounts receivable to be used as a basis for estimating


the uncollectible accounts in “under 60 days age group” is
a. P 203,500 b. P 188,000 c. P 173,500 d. P 172,000

8. The adjusted balance of accounts receivable to be used as a basis for estimating


the uncollectible accounts in “61 – 90 days age group” is
a. P 160,800 b. P 150,800 c. P 140,800 d. P 136,000

9. The adjusted balance of accounts receivable to be used as a basis for estimating


the uncollectible accounts in “91 – 120 days age group” is
a. P 46,200 b. P 44,200 c. P 42,000 d. P 30,200

174
10.The adjusted balance of accounts receivable to be used as a basis for estimating
the uncollectible accounts in “over 120 days age group” is
a. P 30,200 b. P 28,200 c. P 26,000 d. P 24,000

11.The gross amount of Trade Accounts Receivable to be reported in the audited


balance sheet at December 31, 2004 is
a. P 428,400 b. P 390,300 c. P 380,300 d. P 372,000

12.The allowance for doubtful accounts to be reported in the audited balance sheet at
December 31, 2004 is
a. P 32,260 b. P 31,925 c. P 19,330 d. P 18,295

13.The doubtful accounts expense to be reported in the audited income statement at


December 31, 2004 is
a. P 35,385 b. P 21,420 c. P 14,995 d. P 10,795

14.The net decrease in 2004 net sales resulting from audit adjustment is
a. P 48,000 b. P 42,200 c. P 38,200 d. P 34,200

15.The net increase in the 2004 ending inventory resulting from audit adjustments is
a. P 33,500 b. P 33,200 c. P 30,200 d. P 28,300

PROBLEM

In conducting your audit of Revicon Corporation, a company engaged in import and


wholesale business, for the fiscal year ended June 30, 2003, you determined that its
internal control system was good. Accordingly, you observed the physical inventory at
an interim date, May 31, 2003 instead of at June 30, 2003.

You obtained the following information from the company’s general ledger.

Sales for eleven months ended May 31, 2003 P1,344,000


Sales for the fiscal year ended June 30, 2003 1,536,000
Purchases for eleven months ended may 31, 2003
(before audit adjustments) 1,080,000
Purchases for the fiscal year ended June 30, 2003 1,280,000
Inventory, July 1, 2002 140,000
Physical inventory, May 31, 2003 220,000

Your audit disclosed the following additional information.

(1) Shipments costing P12,000 were received in May and included in the physical
inventory but recorded as June purchases.
(2) Deposit of P4,000 made with vendor and charged to purchases in April 2003.
Product was shipped in July 2003.
(3) A shipment in June was damaged through the carelessness of the receiving
department. This shipment was later sold in June at its costs of P16,000.

Questions

175
In audit engagements in which interim physical inventories are observed, a frequently
used auditing procedure is to test the reasonableness of the year-end inventory by the
application of gross profit ratios. Based on the above and the result of your audit, you
are to provide the answers to the following:

1. The gross profit ratio for eleven months ended May 31, 2003 is
a. 20% b. 30% c. 35% d. 25%

2. The cost of goods sold during the month of June, 2003 using the gross profit
ratio method is
a. P132,000 b. P148,000 c. P144,000 d. P160,000

3. The June 30, 2003 inventory using the gross profit method is
a. P264,000 b. P268,000 c. P340,000 d. P260,000

CHAPTER 5 – Audit of Inventory

Exercises - Analysis of Transactions

1. Moneba Company bought merchandise on January 2, 2006 from Lynn Company costing
P15,000; terms, less 20%, 20% down payment, balance 2/10, n/30. Two days after,
P2,000 worth of merchandise was returned due to wrong specification. Moneba
Company paid the account within the discount period. How much Moneba Company
paid to Lynn Company?
a. P 7,600 b. P 7,448 c. P 7,408 d. P 7,360

Answer - P 7,448
Buyer Seller
Purchases 12,000 Accounts Receivable 9,600
Cash 2,400 Cash 2,400
Accounts Payable 9,600 Sales 12,000
Accounts payable 2,000 Sales 2,000

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Purchases 2,000 Accounts Receivable 2,000
Accounts payable 7,600 Cash 7,448
Purch. Disc. 152 Sales Discount 152
Cash 7,448 Accounts Receivable 7,600

2. Merchandise shipped fob destination to customer was made on January 5, 2006 for
P25,000. The customer issued P10,000 12% 30-day note and the balance 2/10, n/30
on January 10, 2006, the date the goods were received. The customer made a partial
payment on January 15, 2006 for P5,000. Payment was made within the discount
period. How much discount was granted?
a. P 0 b. P 200 c. P 300 d. P 500

Answer - P 300
Buyer Seller
Jan . 5 No Entry Jan. 5 No Entry
Jan. 10 Purchases 25,000 Jan. 10 Notes Receivable 10,000
Notes payable 10,000 Accounts Receiv. 15,000
Accounts pay. 15,000 Sales 25,000
Jan. 15 Accounts pay. 5,000 Jan 15 Cash 5,000
Cash 5,000 Accounts receiv. 5,000
Date of Payment:
Accounts pay. 10,000 Cash 9,700
Cash 9,700 Sales discount 300
Purchase discount 300 Accounts reciev. 10,000
Discount : P15,000 x 2% = P300

3. On January 10, 2006, Lao Company sold merchandise on account fob destination to
Febryan Co. for P20,000. Febryan Co. paid the freight cost of P1,500 to be deducted
from its account. How much Febryan Company paid to Lao Company?
a. P 21,500 b. P 20,000 c. P 19,600 d. P 18,500
Answer - P 18,500
Seller Buyer
Accounts receivable 18,500 Purchases 20,000
Transportation expense 1,500 Accounts payable 18,500
Sales 20,000 Cash 1,500
Cash 18,500 Accounts payable 18,500
Accounts receivable 18,500 Cash 18,500

4. Goods worth P12,000 was shipped on account (2/10, n/30) to Ibuyan Company on
January 15, 2006 from Rubenil Company The term of the shipment was fob shipping
point. Rubenil Company paid freight of P950. On January 12, 2006, P2,500 worth of
merchandise was received by Rubenil Co. from Ibuyan Co. due to wrong specification.
Ibuyan Company made a partial payment of P5,000. How much is the subsequent
collection of Rubenil Company from Ibuyan Company assuming Ibuyan Company paid
within the discount period?
a. P 5,450 b. P 5,260 c. P 4,500 d. P 4,410

Answer- P 5,260
Buyer Seller
Purchases 12,000 Accounts receivable 12,950
Freight-in 950 Sales 12,000
Accounts payable 12,950 Cash 950
Account payable 2,500 Sales 2,500
Purchases 2,500 Accounts receivable 2,500
Accounts payable 5,000 Cash 5,000
Cash 5,000 Accounts receivable 5,000
Accounts payable 5,450 Cash 5,260
Cash 5,260 Sales discount 190

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Purchase discount 190 Accounts receivable 5,450
 Discount – P12,000 – P2,500 = P9,500 x 2% = P190

5. Gabutero Company purchased merchandise on account for P10,000 from Lilibeth


Company with term shipping point. The freight cost was P1,500 and was paid by
Gabutero Company Upon the arrival of the carrier, it found out that the merchandise
got lost while in transit. The carrier company accepted the loss as their fault. How
much is the subsequent collection of Lilibeth Company from Gabutero Company?
a. P 11,500 b. P 10,000 c. P 8,500 d. P 0

Answer - P 10,000
Buyer Seller
Purchases 10,000 Accounts receivable 10,000
Freight-in 1,500 Sales 10,000
Accounts payable 10,000
Cash 1,500
Claims receivable 11,500
Purchases 10,000
Freight-in 1,500

6. Chan Company bought from Casas Company a second-hand machinery for the use of its
plant for P50,000 A 50% down payment was made and balance 2/10, n/30. Freight
cost was paid by Chan Company for P2,000. Casas Company acquired the machinery
three years ago at P60,000 with 10 year life. (Straight-line method is use in computing
Depreciation). Two days after purchase, Casas Company granted the request of Chan
Company for a P5,000 price adjustments because of some defects of the machinery.
Cash paid by Chan Company to Casas Company assuming the account was paid within
the discount period is
a. P 20,400 b. P 20,000 c. P 19,600 d. P 19,000

Answer - P 19,600
Buyer Seller
Machinery 50,000 Cash 25,000
Cash 25,000 Accounts recei. – others 25,000
Accounts payable – others 25,000 Accum. depreciation 18,000
Machinery 60,000
Gain on sale 8,000
Machinery 2,000
Cash 2,000
Accounts payable – others 5,000 Gain on sale 5,000
Machinery 5,000 Accounts recie. – others 5,000
Accounts payable – others 20,000 Cash 20,000
Cash 20,000 Accounts recie – others 20,000
If paid within the discount period:
Accounts payable – others 20,000 Cash 19,600
Cash 19,600 Gain on sale 400
Machienry 400 Accounts payable – others 20,000

7. The Ariel Company purchased land and building at lump-sum price of P300,000 from
Cherely Company on January 1, 2006. The land and building was purchased by Cherely
Company 3 year ago at a total cost of P300,000. Based on the appraiser’s computation
and analysis, the cost of the land is twice as much to that of the building. Ariel
Company assume a five-year life of the building with no salvage cost. Two years later,
Ariel Company sold the building at P80,000 to Jaan Company.

Ariel Company will record gain or loss from the sale of the building to Jaan Company by
a. Gain of P 20,000
b. Loss of P100,000

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c. Neither gain nor loss
d. Cannot be determined

Answer - P 20,000
Buyer Seller
Land 200,000 Cash 300,000
Building 100,000 Land and building 300,000
Cash 300,000

Sale of Building: Buyer


Cash 80,000 Building 80,000
Accum. depreciation 40,000 Cash 80,000
Building 100,000
Gain on sale 20,000

Problem 1
Listed below are some items of inventory from Anecito Company that are in question during
the audit. The company stores a substantial portion of the merchandise in a separate
warehouse and transfer damaged goods to a special inventory account.

1. Items in receiving department returned by customer, no


communication received from customer 20,000
2. Items ordered and in receiving department, invoice not yet
received from supplier 50,000
3. Items counted in warehouse by the inventory crew 70,000
4. Invoice received for goods ordered, goods shipped but not received
(Anecito Company pays freight) 5,000
5. Items, shipped today, fob destination, invoice mailed to customer 5,000
6. Items currently used for window displays 10,000
7. Items on counter for sale per inventory count [not in (3)] 90,000
8. Items in shipping department, invoice not mailed to customer 6,000
9. Items in receiving department, refused by Anecito because of
Damage [(not in (3)] 3,000
10. Items shipped today, fob shipping point, invoice mailed to customer 4,000
11. Items included in warehouse count, damaged, not returnable 8,000
12. Items included in warehouse count, specifically crafted and
segregated for shipment to customer in five days per sales
contract, with return privilege. 18,000

Question:
1. If the recorded inventory in the balance sheet is P289,000, the year-end inventory will
be overstated by:
a. P 41,000 b. P 23,000 c. P 18,000 d. P 3,000

2. The following should be included from the inventory, except:


a. Inventory shipped today, f.o.b. shipping point, invoice mailed to customer.
b. Inventory counted in warehouse by the inventory crew.
c. Inventory shipped today, f.o.b. destination, invoice mailed to customer.
d. Inventory in warehouse count, specifically crafted and segregated for shipment to
customer with return privilege.

3. The inventory per audit at year-end is:


a. P 286,000 b. P 271,000 c. P 266,000 d. P 248,000

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Solution

1. P 20,000
2. 50,000
3. 70,000
4. 5,000 (the fact that Anecito pays the freight, the term then is FOB shipping point)
5. 5,000
6. 10,000
7. 90,000
8. 6,000
9. –
10. –
11. ( 8,000)
12. 18,000 (this is still included in the inventory since the goods has a return privilege)
P266,000
Answer:
1. b 2. a 3. c

Problem 2
In the event of your audit, you found the following information related to the
inventories on December 31, 2006.

a. An invoice for P90,000, FOB shipping point, was received on December 15, 2006. The
receiving report indicates that the goods were received on December 18, 2006, but
across the face of the report is the notation “Merchandise not of the same quality as
ordered, returned for credit, December 19”. The merchandise was included in the
inventory.

b. Included in the physical count were inventories billed to customer FOB shipping point on
December 31, 2006. These inventories had a cost of P28,000 and were billed at
P35,000. The shipment was in loading dock waiting to be picked by the common carrier.

c. Merchandise with an invoice cost of P50,000, received from a vendor at 5:00 pm on


December 31, 2006, were recorded on a receiving report dated January 2, 2007. The
goods were not included in the physical count, but invoice was included in accounts
payable at December 31, 2006.

d. Merchandise costing P15,000 to the company FOB shipping point on December 26,
2006. The purchase was recorded, but the merchandise was excluded from the ending
inventory because it was not received until January 4, 2007.

e. The inventory included 1000 units erroneously priced at P9.50 per unit. The correct cost
was P10.00 per unit.

The adjusting entries for:

1. Item letter “a” is;


Debit Credit
a. Cost of sales 90,000 Inventory 90,000
b. Inventory 90,000 Cost of Sales 90,000
c. Retained earnings 90,000 Inventory 90,000
d. No adjustment

2. Item letter “b” is:

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Debit Credit
a. Cost of sales 28,000 Inventory 28,000
b. Inventory 28,000 Cost of sales 28,000
c c. Cost of sales 35,000 Inventory 35,000
d d. No adjustment

3. Item letter “c” is;


Debit Credit
a. Inventory 50,000 Cost of sales 50,000
b. Cost of sales 50,000 Inventory 50,000
c. Inventory 50,000 Retained earnings 50,000
e d. No adjustment

4. Item letter “d” is:


Debit Credit
a. Cost of sales 15,000 Inventory 15,000
b. Inventory 15,000 Cost of sales 15,000
c. Inventory 15,000 Retained earnings 15,000
d. No adjustment

5. Item letter “d” is:


Debit Credit
a. Cost of sales 500 Inventory 500
b. Inventory 500 Cost of sales 500
c. Cost of sales 10,000 Inventory 10,000
d. Inventory 10,000 Cost of sales 10,000

Answer -
1. a 2. d 3. a 4. b 5. b

Problem 3
You have observed the physical count of DEMI CORPORATION’s inventory taken on
December 31, 2006. The following errors were discovered:

a. Goods that cost P7,000 was sold for P8,500 on December 29, 2006. The order was
shipped December 31, 2006 with terms fob destination. The merchandise was not
included in the ending inventory. The sale was not recorded until January 4, 2007, the
date when the customer made payment of the sold goods.

b. On December 29, 2006, DEMI CORPORATION purchased merchandise costing P15,000


from a supplier. The order was shipped December 30, 2006 (terms FOB shipping point)
and was still “in transit” on December 31, 2006. Since the invoice was received on
December 31, the purchase was recorded in 2006. The merchandise was included in the
inventory count.

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c. On January 4, 2007, goods that were included in the ending inventory at December 31,
2006, were returned to DEMI CORPORATION because the consignee had not been able
to sell it. The cost of this merchandise was P9,500 with a selling price of P14,500.

d. DEMI CORPORATION failed to make an entry for a purchase on account of P6,500 at the
end of 2005, although it included this merchandise in the inventory count. The purchase
was recorded when payment was made to the supplier in 2006.

e. On January 6, 2007, DEMI CORPORATION received merchandise which had been shipped
to them on December 31, 2006. The terms of the purchase were fob destination. Cost
of the merchandise was P6,400. The purchase was not recorded until payment was
made in January 2007 but the goods were included in the inventory as of December 31,
2006.

f. Goods with a selling price of P30,000 was shipped to Herald Company, a consignee,
on December 29, 2005. Since this was shipped before the inventory count, the
merchandise, which was billed 20% above cost, was excluded from the inventory count.
Sales was not recorded until the inventory was received on January 5, 2006. Your
further investigation revealed that 50% of these goods were sold in 2006 and the on-
hand at December 31, 2006 were not yet reported in 2006 inventory.

Questions: Based on the above information, answer the following:


1. What is the entry to adjust audit finding “a” at December 31, 2006?
a. Accounts Receivable 8,500 c. Both A and B
Sales 8,500
b. Inventory 7,000 d. Accounts Receivable 8,500
Retained Earnings 7,000 Retained Earnings 8,500

2. What is the entry to adjust audit finding number “b” at December 31, 2006?
a. Inventory 15,000 c. Both A and B
Retained Earnings 15,000
b. Retained Earnings 15,000 d. Neither A nor B
Accounts Payable 15,000

3. DEMI CORPORATION should debit what account to adjust audit finding number “c” at
December 31, 2006?
a. Sales c. Retained Earnings
b. Cost of Sales d. No adjustment is necessary
4. In audit finding number “d”, choose the correct statement?
a. The company is correct for not making an entry on the P6,500 purchase on account
even though it is already included in the inventory count since no term of shipment is
given.
b. The company should reduced its purchases at December 31, 2006 since the
purchases being paid in 2006 was the purchase for 2005.
c. The company is correct in recording of purchases in year 2006 since this is the time
when the company made payment on such.
d. Inventory should be recorded at December 31, 2005 since the purchases were
recorded on this year.

5. The entry to adjust audit finding number “e” at December 31, 2006 is: (assume the
book is not close)
a. Retained Earnings 6,400 c. Purchases 6,400
Inventory 6,400 Accounts Payable 6,400

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b. Retained Earnings 6,400 d. Cost of sales 6,400
Accounts payable 6,400 Inventory 6,400

6. The entry to adjust audit finding number “f” at December 31, 2006 is: (assume the book
is close)
a. Inventory 25,000 c. Cost of sales 25,000
Accounts Receivable 25,000 Sales 25,000
Cost of sales 25,000 Retained Earnings 25,000
Sales 25,000 Accounts Receivable 25,000
b. Cost of sales 25,000 d. Retained Earnings 2,500
Sales 15,000 Inventory 12,500
Retained Earnings 25,000 Accounts Receivable 15,000
Accounts Receivable 15,000

Answer
1. b 2. d 3. d 4. b 5. a 6. d

Problem 4
The PRINCE COMPANY’S year-end inventory based on physical count conducted on
December 31, 2006, amounted to P885,000. Your cut-off examination disclosed the
following information”:

1. Included in the physical count were goods billed to customer FOB shipping point on
December 31, 2006. These goods had a cost of P28,000 and were billed at P35,000.
The shipment was on PRINCE’S loading dock waiting to be picked up by the common
carrier.

2. Goods were in transit from a vendor to PRINCE on December 31, 2006. The invoice cost
was P50,000 and the goods were shipped FOB Shipping on Dec. 29,2006.

3. Work in process inventory costing P20,000 was sent to an outside processor for plating
on Dec. 30, 2006.

4. Goods returned by customers and held pending inspection in the returned goods area on
Dec. 31, 2006, were not included in the physical count. On January 8, 2007, the goods
costing P26,000 were inspected and returned to inventory. Credit memos totaling
P40,000 were issued.
5. Goods shipped to customer FOB destination on Dec. 26, 2006, were in transit at Dec.
31, 2006 and had a cost of P25,000. Upon notification of receipt by the customer on
January 2, 2007, the company issued a sales invoice for P42,000.

6. Goods received from a vendor on Dec. 26, 2006, were included in the physical count.
However the related P60,000 vendor invoice was not included in Accounts Payable as
December 31, 2006, because the Accounts Payable copy of the receiving report was lost.

7. On January 3, 2007, a monthly freight bill in the amount of P4,000 was received. This
was specifically related to merchandise purchased in Dec. 31, 2006. The freight charges
were not included in either the inventory or in accounts payable at Dec. 31, 2006.

Question:
1. Sales at year-end is overstated by:
a. P 75,000 b. P 40,000 c. P 35,000 d. P 33,000

183
2. Purchases at year-end is understated by:
a. P 110,000 b. P 84,000 c. P 64,000 d. P 60,000

3. Cost of sales at year-end is overstated by:


a. P 46,000 b. P 21,000 c. P 11,000 d. P 7,000

4. The inventory per audit at year-end is:


a. P 981,000 b. P 959,000 c. P 1,006,000 d. P 1,010,000

Solution
1. Sales 35,000
Accounts receivable 35,000
2. Inventory 50,000
Cost of sales 50,000
Purchases 50,000
Accounts payable 50,000
3. Inventory 20,000
Cost of sales 20,000
4. Inventory 26,000
Cost of sales 26,000
Sales 40,000
Accounts receivable 40,000
5. Inventory 25,000
Cost of sales 25,000
6. Purchases 60,000
Accounts payable 60,000
7. Inventory 4,000
Accounts payable 4,000
Answer:
1. a 2. a 3. c 4. d

Problem 5
On January 1, 2007, Arcenith Corporation engaged an independent CPA to perform an audit
for the year ended December 31, 2006. The company uses a periodic inventory system.
The CPA did not observe the inventory count on December 31, 2006, as a result, a special
examination was made of the inventory records.

The financial statements prepared by the company (uncorrected) showed the following:
ending inventory, P72,000; accounts receivable, P60,000; accounts payable, P30,000;
sales, P400,000; net purchases, P160,000, and pretax income P51,000.

The following data were found during the audit:

1. Merchandise received on January 2, 2007, costing P800 was recorded on December 31,
2006. An invoice on hand showed the shipment was made fob supplier’s warehouse on
December 31, 2006. Because the merchandise was not on hand at December 31, 2006,
it was not included in the inventory.

2. Merchandise that cost P18,000 was excluded from the inventory, and the related sale for
P23,000 was recorded. The goods had been segregated in the warehouse for shipment;
there was no contract for sale but a “tentative order by phone”.

3. Merchandise that cost P10,000 was out on consignment for Valentin Distributing
Company and was excluded from the ending inventory. The merchandise was recorded
as a sale P25,000 when shipped to Valentin on December 29, 2006.

184
4. A sealed packing case containing a product costing P900 was in Arcenith’s shipping room
when the physical inventory was taken. It was included in the inventory because it was
marked “Hold for customer’s shipping instructions.” Investigation revealed that the
customer signed a purchase contract dated December 18, 2006, but that case was
shipped and the customer billed on January 10, 2007. A sale for P1,500 was recorded
on December 31, 2006.

5. A special item, fabricated to order for a customer, was finished and in the shipping room
on December 31, 2006. The customer has inspected it and was satisfied. The customer
was billed in full on that sale in the amount of P5,000. The item was included in
inventory at cost, P1,000 because it was shipped on January 4, 2007.

6. Merchandise costing P15,600 was received on December 28, 2006. The goods were
excluded from inventory, and a purchase was not recorded. The auditor located the
related papers in the hands of the purchasing; they indicated, “On consignment from
Roselyn Company”.

7. Merchandise costing P2,000 was received on January 8, 2007, and the related purchase
invoice recorded January 9. The invoice showed the shipment was made on December
29, 2006, fob destination. The merchandise was excluded from the inventory.

8. Merchandise that cost P6,000 was excluded from the ending inventory and not recorded
as a sale for P7,500 on December 31, 2006. The goods had been specifically
segregated. According to the terms of the contract of sale, ownership will not pass until
actual delivery.

9. Merchandise that cost P15,000 was included in the ending inventory. The related
purchase has not been recorded. The goods had been shipped by the vendor fob
destination, and the invoice was received on December 30, 2006. The goods was
received on January 5, 2007.

10. Merchandise in transit that cost P7,000 was excluded from inventory because it was not
on hand. The shipment from the vendor was fob shipping point. The purchase was
recorded on December 29, 2006, when the invoice was received.

11. Merchandise in transit that cost P13,000 was excluded from inventory because it had not
arrived. Although the invoice had arrived, the related purchase was not recorded by
December 31, 2006. The merchandise shipped fob shipping point by the vendor.
12. Merchandise that cost P8,000 was included in the ending inventory because it was on
hand. The merchandise had been rejected because of incorrect specifications and was
being held for return to the vendor. The merchandise was recorded as a purchase on
December 26, 2006.

Question:
Based on your analysis and the information above, answer the following:

1. The adjusted balance of inventory at year-end is:


a. P 101,900 b. P 102,000 c. P 102,800 d. P 120,400

2. The adjusted balance of accounts receivable at year-end is:


a. P 10,500 b. P 12,000 c. P 35,000 d. P 37,000

3. The adjusted balance of accounts payable at year-end is:

185
a. P 43,000 b. P 35,000 c. P 30,000 d. P 22,000

4. The adjusted balance of Sales at year-end is:


a. P 377,000 b. P 352,000 c. P 350,500 d. P 347,000

5. The adjusted balance of Net Purchases at year-end is:


a. P 152,000 b. P 165,000 c. P 173,000 d. P 181,000

6. The adjusted balance of Pre-tax income at year-end is:


a. P 27,300 b. P 29,000 c. P 29,800 d. P 35,800

Solution

Inventory Acnts. Receivable Acnts. Sales Net Pretax


end Payable Purchases ncome
Unadj. bal. 72,000 60,000 30,000 400,000 160,000 51,000
Item 1 800 800
Item 2 18,000 18,000
(23,000) (23,000) (23,000)
Item 3 10,000 10,000
(25,000) (25,000) (25,000)
Item 4 (1,500) (1,500) (1,500)
Item 5 (1,000) (1,000)
Item 6 - - - - - -
Item 7 - - - - - -
Item 8 6,000 6,000
Item 9 (15,000) (15,000)
Item 10 7,000 7,000
Item 11 13,000 13,000
13,000 13,000 (13,000)
Item 12 (8,000) (8,000)
- - (8,000) (8,000) 8,000
Adjusted 102,800 10,500 35,000 350,500 165,000 27,300
balance

Answer:
1. c 2. a 3. b 4. c 5.b 6. a

Problem 6
Marlisa Company’s December 31, 2005 and December 31, 2006 inventory is P35,000 and
P27,000, respectively. The beginning and ending inventories were determined by physical
count of the goods on hand on those dates, and no reconciling items were considered. All
purchases are f.o.b. shipping point. In the course of your examination of the inventory cut-
off, both the beginning and ending of each year, you discover the following facts:

Beginning of the year

a. Invoices totaling P3,260 were entered in the voucher register on January, but the goods
were received during December.
b. December invoices totaling P4,100 were entered in the voucher register in December,
but the goods were not received until January.

186
End of the Year

c. Invoices totaling P7,260 were entered in the voucher register in January but the goods
were received in December.
d. December invoices totaling P3,600 were entered in the voucher register in December,
but the goods were not received until January.
e. Invoices totaling P1,500 were entered in the voucher register in January, and the goods
were received in January, but the invoices were dated December.

Question:
Based on your analysis and the information above, answer the following:

1. The adjusted balance of the Jan. 1, 2006 inventory is:


a. P 35,000 b. P 35,840 c. P 39,100 d. P 59,100

2. How much is the adjusted balance of the Purchases account at December 31, 2006
assuming the amount of Purchases in the trial balance is P5,176,000?
a. P 5,170,566 b. P 5,180,000 c. P 5,181,500 d. P 5,185,200

3. The corrected December 31, 2006 inventory is


a. P 52,100 b. P 50,600 c. P 32,100 d. P 28,500

4. When auditing inventories, an auditor would least likely verify that


a. All inventory owned by the client is on hand at the time of the count.
b. The client has used properly inventory pricing.
c. Damaged goods and obsolete items have been properly accounted for.
d. The financial statement presentation of inventories is appropriate.

Solution
a. Retained earnings 3,260
Purchases 3,260
b. Beginning inventory 4,100
Retained earnings 4,100
c. Purchases 7,260
Accounts payable 7,260
d. Inventory 3,600
Cost of sales 3,600
e. Inventory 1,500
Cost of sales 1,500
Purchases 1,500
Accounts payable 1,500
Answer: 1. c 2. c 3. c 4. a
Problem 7

During the 2006 audit of JONES Manufacturing Company’s year-end


inventory, you found the following items.

 A packing case containing product costing P8,160 was standing in the shipping room
when the physical inventory was taken. It was not included in the inventory because it
was marked “Hold for shipping instructions.” The customer’s order was dated December
18, but the case was shipped and the customer billed on January 10, 2007.

 Merchandise costing P6,250 was received on December 28, 2006, and the invoice was
recorded. The invoice was marked “On Consignment.”

187
 Merchandise received on January 6, 2007 costing P7,200 was entered in the purchase
register on January 7. The invoice showed shipment made FOB shipping point on
December 31, 2006.

 A special machine, fabricated to order for a particular customer, was finished and in the
shipping room on December 30. The customer was billed on that date and the machine
was excluded from inventory although it was shipped January 2, 2007. The machine
costs P25,000 and was sold for P45,000.

 Merchandise costing P23,500 was received on January 3, 2007, and the related purchase
invoice was recorded January 5. The invoice showed the shipment was made on
December 29, 2006, FOB destination.

 Merchandise costing P11,000 was sold on an installment basis on December 15 at


P25,000. The customer took possession of the goods on that date. The merchandise was
included in inventory because JONES still holds legal title. Historical experience suggests
that full payment on the installment sales is received approximately 99% of the time.

 Goods costing P15,000 were billed for P20,000 and delivered on December 20. The
goods were included in inventory because the sale was accompanied by a repurchase
agreement requiring JONES to buy back the inventory in February 2007.

Selected account balances before considering the effects of the above items are as follows:

Accounts receivable P 185,000


Inventory 114,500
Accounts payable 67,200
Sales 942,400
Gross profit 287,990
Net income 84,680

Questions:
1. What is the adjusted accounts receivable balance at the end of the year?
a. P 166,000 b. P 165,000 c. P 150,000 d. P 125,000

2. What is the adjusted inventory balance at the end of 2006?


a. P 118,860 b. P 116,700 c. P 112,610 d. P 104,450

3. What is the adjusted balance of accounts payable at the end of the year?
a. P 68,150 b. P 68,000 c. P 67,200 d. P 65,000

4. The adjusted total sales in 2006 is


a. P 962,400 b. P 925,600 c. P 925,000 d. P 922,400

5. The adjusted Cost of goods sold in 2006 is


a. P 640,040 b. P 650,200 c. P 651,040 d. P 657,250

Solution
1. Inventory 8,160
Cost of Sales 8,160
2. Accounts payable 6,250
Purchases 6,250

188
Cost of sales 6,250
Inventory 6,250
3. Inventory 7,200
Cost of sales 7,200
Purchases 7,200
Accounts payable 7,200
4. No adjustments
5. No adjustments
6. Cost of sales 11,000
Inventory 11,000
7. Sales 20,000
Accounts receivable 20,000
Answer:
1. b 2. c 3. a 4. d 5. d

Problem 8
CHARMAINE COMPANY is a manufacturer of small tools. The following information
was obtained from the company’s accounting records for the year ended December
31, 2006:
Inventory at December 31, 2006 (based on
physical count in Charmaine’s warehouse at cost
on December 31, 2006) 1,870,000
Accounts payable at December 31, 2006 1,415,000
Net sales (sales less sales returns) 9,693,400

Your audit reveals the following information:

 The physical count included tools billed to a customer FOB shipping


point on December 31, 2006. These tools cost P64,000 billed at P78,500.
They were in the shipping area waiting to be picked up by the customer.

 Goods shipped FOB shipping point by a vendor were in transit on


December 31, 2006.These goods with invoice cost of P93.400 were shipped
on December 29, 2006.

 Work in process inventory costing P27,000 was sent to a job


contractor for further processing.

 Not included in the physical count were goods returned by


customers on December 31, 2006. These goods costing P49,000 were
inspected and returned to inventory on January 7, 2007. Credit memos for
P67,800 were issued to the customers at that date.

 In transit to a customer on December 31, 2006, were tools costing


P17,740 shipped FOB destination on December 26, 2006. A sales invoice for
P29,400 was issued on January 3, 2007, when Charmaine Company was
notified by the customer that the tools had been received.
 At exactly 5:00 pm on December 31, 2006, goods costing P31,200
were received from a vendor. These were recorded on a receiving report
dated January 2, 2007. The related invoice was recorded on December 31,
2006, but the goods were not included in the physical count.

189
 Included in the physical count were goods received from a vendor
on December 27, 2006. However, the related invoice for P36,000 was not
recorded because the accounting department’s copy of the receiving report
was lost.

 A monthly freight bill for P16,000 was received on January 3, 2007.


It specifically related to merchandise bought in December 2006, one half of
which was still in the inventory at December 31, 2006. The freight was not
included in either the inventory or in accounts payable at December 31,
2006.

Question:
Based on your analysis and the information above, answer the following:

1. The inventory at year-end is:


a. Understated by P170,340 c. Understated by P126,340
b. Understated by P162,340 d. Understated by P82,140

2. The accounts payable at year-end is:


a. Understated by P93,400 c. Understated by P137,400
b. Understated by P106,200 d. Understated by P145,400

3. The amount of sales at year-end is:


a. Overstated by P67,800 c. Overstated by P29,400
b. Overstated by P38,400 d. Correctly stated

4. The adjusted balance of inventory at year-end is:


a. P 1,952,140 b. P 1,996,340 c. P 2,032,340 d. P 2,040,340

5 The adjusted balance of accounts payable at year-end is:


a. P 1,560,400 b. P 1,552,400 c. P 1,521,200 d. P 1,508,400

6. The adjusted balance of sales at year-end is:


a. P 9,722,800 b. P 9,693,400 c. P 9,655,000 d. P 9,625,600

Solution
Adjusting entry:
Cost of sales 64,000
Inventory 64,000
Inventory 93,400
Cost of sales 93,400
Purchases 93,400
Accounts payable 93,400
Inventory 27,000
Cost of sales 27,000
Inventory 49,000
Cost of sales 49,000
Sales 67,800
Accounts receivable 67,800
Inventory 17,740
Cost of sales 17,740
Inventory 31,200
Cost of sales 31,200

190
Purchases 36,000
Accounts payable 36,000
Inventory 8,000
Accounts payable 8,000
Answer:
1. b 2. c 3. a 4. c 5. b 6. d

Problem 9
The Cruzada Company is a wholesale distributor of automotive replacement parts. Initial
amounts taken from Cruzada’s accounting records are as follows:

Inventory at December 31, 2006 (based on physical count of goods in warehouse on


December 31, 2006); P1,250,000.

Accounts payable at December 31, 2006:


Dacalos Company 2% 10 days, net 30 265,000
Dano Company Net 30 210,000
De Lira Company Net 30 300,000
Dela Cruz Company Net 30 225,000
Deza Company Net 30 -
Encabo Company Net 30 -___
P 1,000,000

Sales in 2006 P 9,000,000

Additional information is as follows:

a. Parts held on consigment from Dano Company to Cruzada Company, the consignee,
amounting to P155,000, were included in the physical count of goods in Cruzada
Company’s warehouse on December 31, 2006 and in accounts payable at December 31,
2006.

b. P22,000 of parts which sere purchased from Deza Company and paid for in
December 2006 were sold in the last week of 2006 and appropriately recorded as sales
of P28,000. The parts were included in the physical count of goods in Cruzada’s
warehouse on December 31, 2006, because the parts were on the loading dock waiting
to be picked up by customers.

c. Parts in transit on December 31, 2006, to customers, shipped f.o.b. shipping point,
on December 28, 2006, amounted to P34,000. The customers received the parts on
January 6, 2007. Sales of P40,000 to the customers for the parts were recorded by
Cruzada Company on January 2, 2007.

d. Retailers were holding P210,000 at cost (P250,000 at retail) of goods on


consignment from Cruzada Company, the consignor, at their stores on December 31,
2006.

e. Goods were in transit from Encabo Company to Cruzada Company on December 31,
2006. The cost of goods was P25,000 and they were shipped f.o.b. shipping point on
December 29, 2006.

f. A quarterly freight bill in the amount of P2,000 specifically relating to merchandise


purchases in December 2006, all of which was still in the inventory at December 31,

191
2006, was received on January 3, 2007. The freight bill was not included in either the
inventory or in accounts payable at December 31, 2006.
g. All of the purchases from Dacalos Company occurred during the last seven days of
the year. These items have been recorded in accounts payable and accounted for in the
physical inventory at cost before discount. Cruzada’s policy is to pay invoices in time to
take advantage of all cash discounts, adjust inventory accordingly, and record accounts
payable, net of cash discount.

Questions:
1. The adjusted inventory is:
a. P 1,326,700 b. P 1,304,700 c. P 1,276,000 d. P 1,270,700

2. The adjusted accounts payable is:


a. P 864,700 b. P 866,700 c. P 872,000 d. P 1,017,700

3. The adjusted sales is:


a. P 8,960,000 b. P 9,000,000 c. P 9,040,000 d. P 9,100,000

Solution
a. Cost of sales 155,000 Accounts payable 155,000
Inventory 155,000 Purchases 155,000
b. Cost of sales 22,000
Inventory 22,000
c. Accounts receivable 40,000
Sales 40,000
d. Inventory 210,000
Cost of sales 210,000
e. Inventory 25,000
Accounts payable 25,000
f. Inventory 2,000
Accounts payable 2,000
g. Accounts payable 5,300
Inventory 5,300
Answer:
1. b 2. b 3. c

Problem 10
Raffy Corporation reported income before income taxes as follows:

2005 P525,000
2006 630,000

The company uses the periodic inventory system. Ending inventories for 2005 and 2006
were properly recorded. The following additional information became available following an
analysis of the inventories:

(a) Merchandise with a gross invoice price of P7,500 was shipped FOB shipping point by a
supplier on terms of 2/10, n/30 in 2005 and was recorded as a purchase by Raffy
Corporation in 2005 when the invoice was received: however, the goods were not
included in the ending inventory because they were not received until 2006. The
company always takes advantage of the early payment discounts and accordingly,
records its purchases using the net method.

192
(b) Merchandise that cost P3,000 was purchased FOB shipping point by Raffy Corporation on
December 31, 2005 and was shipped by the supplier that day. The merchandise was not
included in the 2005 ending inventory and was not recorded as a purchase until 2006.

(c) Merchandise costing P2,850 was shipped FOB shipping point to a customer in 2005 and
not included in the ending inventory for 2005. The sale of P4,260 was recorded in 2006
when the invoice was sent.

(d) Goods being held by Raffy Corporation on consignment from a supplier in the amount of
P4,950 were included in the physical inventory for 2005.

(e) Retailers were holding P6,750 of goods at cost (P9,000 at retail), on consignment from
Raffy, at their stores on December 31, 2005. These goods were not included in the
ending inventory of Raffy Corporation for 2005.

Question:
1. How much is the correct income before taxes for 2005?
a. P 643,410 b. P 616,590 c. P 538,410 d. P 511,590

2. How much is the correct income before taxes for 2006?


a. P 643,410 b. P 616,590 c. P 538,410 d. P 511,590

3. The cost of sales at December 31, 2006 is understated by:


a. P 12,150 b. P 9,750 c. P 9,150 d. P 6,750

4. The Retained earnings – beginning at December 31, 2006 is understated by:


a. P 13,410 b. P 12,150 c. P 10,410 d. P 9,150

5. The beginning inventory (January 1, 2006) of Raffy Corporation is understated by:


a. P 13,410 b. P 12,150 c. P 9,150 d. P 5,400

Solution
a. Beginning inventory (COS) 7,350 2005 2006
Retained earnings – beg 7,350 Net income 525,000 630,000
(a) 7,350 ( 7,350)
b. Beginning inventory (COS) 3,000 (b) 3,000 ( 3,000)
Retained earnings – beg 3,000 ( 3,000) 3,000
(c) 4,260 ( 4,260)
Retained earnings – beg 3,000 (d) ( 4,950) 4,950
Purchases (COS) 3,000 (e) 6,750
( 6,750)
Adjusted NI 538,410 616,590
c. Sales 4,260
Retained earnings – beg 4,260
d. Retained earnings – beg 4,950
Beginning inventory (COS) 4,950
e. Beginning inventory (COS) 6,750
Retained earnings – beg 6,750
Answer:
1. c 2. b 3. c 4. a 5. b

Problem 11
You audit of APAS COMPANY for the year 2006 disclosed the following:
6. The December 31 inventory was determined by a physical count on December 28
and based on such count, the inventory was recorded by:
Inventory 1,400,000
Cost of sales 1,400,000

193
7. The 2006 ledger shows a sales balance of P20,000,000.
8. The company sells a mark-up of 20% based on sales.
9. The company recognizes sales upon passage of title to the customers.
10. All customers are within a four-day delivery area.
The sales register for December, 2006 and January, 2007, showed the following details:

December Register
Invoice No. FOB Terms Date Shipped Amount
300 Destination 12/30 P 50,000
301 Shipping point 12/30 62,500
302 Destination 12/23 47,500
303 Destination 12/24 82,500
304 Shipping point 01/02 56,000
305 Shipping point 12/29 90,000

January Register
Invoice No. FOB Terms Date Shipped Amount
306 Destination 12/29 67,500
307 Shipping point 12/29 74,500
308 Destination 01/02 140,000
309 Shipping point 01/04 73,000
310 Shipping point 12/27 67,500

Questions
1. The Sales for December is over/(under) by:
a. P 36,000 under c. P 106,000 under
b. P 36,000 over d. P 106,000 over

2. The Inventory for December is over/(under) by:


a. P 235,600 over c. P 245,412 under
b. P 181,600 over d. P 245,412 over

3. The adjusted inventory at December 31, 2006 is:


a. P 1,645,412 b. P 1,218,400 c. P 1,164,400 d. P 1,154,588

4. The adjusted sales at December 31, 2006 is:


a. P 20,106,000 b. P 20,036,000 c. P 19,964,000 d. P 19,894,000

5. How much sales for the month of December 2006 were erroneously recorded in January
2007?
a. P 282,000 b. P 272,500 c. P 198,000 d. P 142,000

6. How much sales for the month of January 2007 were erroneously recorded in December
2006?
a. P 228,500 b. P 188,500 c. P 180,500 d. P 106,000

Solution
For SI # 300 For SI # 307
Sales 50,000 Accounts receivable 74,500
Accounts receivable 50,000 Sales 74,500
For SI # 301 Cost of sales 59,600
Cost of sales 50,000 Inventory 59,600
Inventory 50,000 P74,500 x 80%

194
P62,500 x 80%
For SI # 304 For SI # 310
Sales 56,000 Accounts receivable 67,500
Accounts receivable 56,000 Sales 67,500
For SI # 305
Cost of sales 72,000
Inventory 72,000 (P90,000 x 80%)
Unadjusted Sales 20,000,000 Unadjusted inventory 1,400,000
(1) ( 50,000) (2) ( 50,000)
(3) ( 56,000) (4) ( 72,000)
(5) 74,500 (6) ( 59,600)
(7) 67,500 (8) _________
Adjusted Sales 20,036,000 Adjusted inventory 1,218,400

Sales for the month of December that 2006


were erroneously recorded in January 2007:
Invoice # 307 74,500
Invoice # 310 67,500
Total 142,000

Sales for the month of January 2007


were erroneously recorded in December 2006:
Invoice # 300 50,000
Invoice # 304 56,000
Total 106,000
Answer:
1. a 2. b 3. b 4. b 5. d 7. d

Problem 12
On December 15, 2006, under your observation, your client took a complete physical
inventory and adjusted the financial perpetual inventory control accounts to agree with the
physical inventory.

As of December 31, 2006, you decided to accept the balance of the control account after
examining transactions recorded in that account between December 15 and December 31,
2006. The audit was for the year ended December 31, 2006.

In the course of conducting your examination of the sales cutoffs as of December 15 and
December 31, 2006, you discovered the following items:
Date Inventory
Item Cost Price Sales Price Date Shipped Date Billed Control Credited
A P 60,000 P 78,000 12-13-06 12-17-06 12-17-06
B 77,000 101,400 01-02-07 12-29-06 12-29-06
C 52,000 67,600 12-17-06 12-29-06 12-29-06
D 87,000 113,100 12-14-06 12-16-06 12-16-06
E 49,500 64,500 12-25-06 01-02-07 01-02-07

Question:
Based on the information above and your analysis, answer the following

1. The inventory at year-end is over/(under) by:


a. P 174,500 over c. P 114,500 over
b. P 174,500 under d. P 114,500 under

2. The cost of sales at year-end is over/(under) by:


a. P 174,500 over c. P 114,500 over
b. P 174,500 under d. P 114,500 under

195
3. The sales at year-end is over/(under) by:
a. P 36,900 over c. P 101,400 over
b. P 36,900 under d. P 101,400 under

4. The accounts receivable at year-end is over/(under) by:


a. P 36,900 over c. P 101,400 over
b. P 36,900 under d. P 101,400 under

Solution

AJEs as of December 31, 2002

Item Debit Credit


A Inventory 60,000
Cost of Goods Sold 60,000
This item was not included in the physical inventory
and was credited to the Inventory account on
12.17.06; a physical inventory cutoff error.

B Sales 101,400
Inventory 77,000
Accounts Receivable 101,400
Cost of goods sold 77,000
This item is a year-end sales cut-off error.
C Properly recorded; no AJE needed.
D Inventory 87,000
Cost of goods sold 87,000
(same as Item A)
E Accounts Receivable 64,500
Cost of goods sold 49,500
Sales 64,500
Inventory 49,500
This item is a year-end sales cut-off error.

Answer:
1. b 2. a 3. a 4. a

Problem 13
The following information was obtained from the balance sheet of LION INC.:

Dec. 31, 2006 Dec. 31, 2005


Cash P706,600 P 200,000
Notes receivable 0 50,000
Inventory ? 399,750
Accounts payable ? 150,000

All operating expenses are paid by Lion Inc. with cash and all purchases of inventory
are made on account. Lion, Inc. sells only one product. All sales are cash sales
which are made for P100 per unit. Lion. Inc., purchases 1,500 units of inventory

196
per month and values its inventory using the periodic FIFO. The unit cost of
inventory during January 2006 was P65.20 and increased P0.20 per month during
the year. During 2006, payments to suppliers totaled P943,400 and operating
expenses totaled P440,000. The ending inventory for 2005 was valued at P65.00
per unit.

Question:
Based on the information above and your analysis, answer the following

1. Recorded sale during 2006 is:


a. P 1,840,000 b. P 1,890,000 c. P 2,090,000 d. P 2,140,000

2. Number of units sold during 2006 is:


a. 21,400 b. P 20,900 c. 18,900 d. 18,400
3. The accounts payable balance at December 31, 2006 is:
a. P 400,000 b. P 250,000 c. P 156,000 d. P 150,000

4. The January 1, 2006 inventory balance is:


a. P 399,750 b. P 385,900 c. P 380,900 d. P 355,800

5. The amount of inventory at December 31, 2006 is:


a. P 399,750 b. P 385,900 c. P 380,900 d. P 355,800

Solution
Q1 & Q2
____________________Cash______________________
Beg. bal.200,000 Payment to supplier 943,400
NR collect 50,000 Ope. expenses 440,000
Sales 1,840,000 Ending balance 706,600

Sales (P) – P1,840,000/P100 = P18,400 units

Q3 _______________Accounts Payable_________________
Payment to supplier 943,400 Beg. bal. 156,000
Ending balance 400,000 Purchases 1,193,400

Jan. 1,500 x P65.20 = P 97,800 P65.20 + P67.40 / 2 = P66.30


Feb. 1,500 x P65.40 = 98,100 x 18,000 units
Mar 1,500 x P65.60 = 98,400 Purchases 1,193,400
Apr 1,500 x P65.80 = 98,700
May 1,500 x P66.00 = 99,000
Jun 1,500 x P66.20 = 99,300
July 1,500 x P66.40 = 99,600
Aug 1,500 x P66.60 = 99,900
Sept 1,500 x P66.80 = 100,200
Oct 1,500 x P67.00 = 100,500
Nov 1,500 x P67.20 = 100,800
Dec 1,500 x P67.40 = 101,100
Total purchases 1,193,400

Q4 P399,750 / P65.00 = 6,150 units

Q5 6,150 beg. units + 18,000 purchased units – 18,400 sold units = 5,750 ending

FIFO: 1,500 x P67.40 = P101,100


1,500 x P67.20 = 100,800
1,500 x P67.00 = 100,500

197
1,250 x P66.80 = 83,500
Total P 385,900

Problem 14
Kitkat Company operates a wholesale oil products company. Kitkat believes that an
employee and a customer are conspiring to steal gasoline. The employee records sales to
the customer not less than the amount actually placed in the customer’s tank truck. In
order to confirm or refuse these suspicions, Kitkat has collected the following data for the
past 10 working days.
Quantity Cost per
(gallons) unit (gal) Total Cost
Inventory, September 1 220,000 P1.45 P 319,000
Purchases 1,560,000 1.45 2,262,000
Goods available for sale 1,780,000 2,581,000

Kitkat had sales of P2,512,000 during this 10-day period. All sales were made at P1.60 per
gallon. A physical inventory indicates that there are 192,000 gallons of gasoline in inventory
at the close of business on September 10.

Questions:
1. How much inventory should be present at the end of the 10-day period (in gallons)?
a. 220,000 b. 210,000 c. 200,000 d. 192,000

2. What is the cost of missing inventory?


a. P 304,500 b. P 40,600 c. P 26,100 b. P 0

Answer
1 b 1,780,000 – (2,512,000/1.60) = 210,000 gallons
2 c 210,000 – 192,000 = 18,000 x P1.45 = P26,100

Problem 15
You were assigned to audit the factory accounts of Modfood Manufacturing Corporation for
the year ended December 31, 2006. The following data were gathered:

Total manufacturing Cost P 900,000


Cost of Goods Manufactured 800,000
Factory Overhead 75% of direct labor and 25% of total
manufacturing cost

Beginning work-in-process inventory, January 1, was 60% of ending work-in-process


inventory, December 31, 2006.

Manufacturing costs for the year ended December 31, 2006 submitted to you by the factory
accountant was as follows:

Raw Materials Used P400,000


Direct Labor 275,000
Factory Overhead 225,000
Total P900,000

Questions:

198
1. Assuming cost percentage relationships are stated are correct, what will be the
adjustment on manufacturing cost at December 31, 2006?
a. Debit: Raw materials used 25,000
Credit Direct labor 25,000
b. Debit: Direct labor 25,000
Credit Raw materials used 25,000
c. Debit: Raw materials used 50,000
Credit Direct labor 50,000
d. Debit: Direct labor 50,000
Credit Raw materials used 50,000

2. How much is the Work-in-process Inventory on December 31, 2006?


a. P 200,000 c. P 250,000
b. P 225,000 d. P 275,000

Solution
1 b Per books Per audit Difference
Raw Materials Used P400,000 P375,000 P25,000 over
Direct Labor 275,000 300,000 P25,000 under
Factory Overhead 225,000 225,000 ---
Total P900,000 P900,000
1 c (60% of WIP, end) + 900,000 – WIP,end = 800,000
WIP, end = 100,000/40% = P250,000

Problem 16
Following are portions of the ANTHONY CORPORATION’S SALES and PURCHASES
account for the calendar year 2006: (All sales are mark-up at 30% based on sales
price)

SALES
12/31 Closing Entry P 1,411,100 Sales Register P 1,230,000
12/25 SI#876 15,000
12/27 877 25,500
12/29 879 55,000
12/31 880 85,600
P 1,411,100 P 1,411,100

PURCHASES
Purchase Register P 740,000 12/31 Closing Entry P 792,500
12/27 RR#545 15,000
12/28 547 7,500
12/29 548 10,000
12/30 549 20,000 _______
P 792,500 P 792,500

You observed the physical inventory of goods in the warehouse on December 31, 2006 and
were satisfied that it was properly taken.

199
When performing sales and purchases cut-off tests, you found that at December 31, 2006,
the last Receiving Report (RR) that had been used was No. 549 and that no shipments have
been made on any Sales Invoices (SI) with number larger than No. 878.

The following information were found:

1. Included in the warehouse physical inventory at December 31, 2006 were chemicals
that had been purchased and received on Receiving Report No. 546 but for which an
invoice was not received until 2007. Cost was P14,500.

2. In the warehouse at December 31, 2006, were goods that had been sold and paid for by
the customer but which were not shipped out until 2007. They were all sold on Sales
Invoice No. 876.

3. On the evening of December 31, 2006, there were two shipments on ANTHONY
CORPORATION. First shipment was unloaded on January 3, 2007 and received on
Receiving Report No. 548. The freight was paid by the vendor. The second shipment
was loaded and sealed on December 31, 2006 but was not delivered until January 2,
2007. This order was sold on Sales Invoice No. 878, P20,000 and freight was paid by
the buyer.

4. Temporarily stranded on December 31, 2006, on a railroad sidings were two


trucks of chemicals en route to the Nelson Neil Company. They were sold on Sales
Invoice No. 879 and the term were fob destination.

5. En route to ANTHONY CORPORATION on December 31, 2006 was truckload of


materials that was received on Receiving Report No. 550. The material was shipped fob
destination.

6. Included in the physical inventory were chemicals exposed to rain while in transit
and deemed unsalable. Their invoice cost was P5,500 and freight charges of P200 had
been paid on the chemicals. This was recorded as purchases on 12/31/02

Questions:
1. The Sales at December 31, 2006 is:
s. Overstated by P 70,000 c. Overstated by P 155,600
b. Overstated by P 55,000 d. Overstated by P 15,000

2. The adjusted Sales at December 31, 2006 is:


a. P 1,396,100 b. P 1,356,100 c. P 1,341,100 d. P 1,255,500

3. The adjusted Purchases at December 31, 2006 is:


a. P 797,000 b. P 796,800 c. P 791,500 d. P 782,500

4. The Purchases at December 31, 2006 is:


a. Understated by P4,500 c. Overstated by P10,000
b. Overstated by P 1,000 d. Understated by P 4,300

5.The Inventory at December31, 2006 is:


a. Understated by P 8,300 c. Overstated by P12,500
b. Understated by P 14,000 d. Understated by P 12,500

6. The Cost of Sales at December 31, 2006 is:

200
a. Understated by P 17,000 c. Overstated by P1,200
b. Overstated by P 9,500 d. Understated by P12,500

Solution
1. Purchases 14,500
Accounts payable 14,500
SI # 546
2. Sales 15,000
Advances from customers 15,000
SI # 876
3. Accounts payable 10,000
Purchases 10,000
RR # 548
4. Inventory 14,000
Cost of sales 14,000
SI#878 - P20,000 x 70%
5. Sales 55,000
Accounts receivable 55,000
SI # 879
6. Claims Receivable 5,700
Purchases 5,500
Freight-in 200
7. Cost of sales 5,700
Inventory 5,700

8. Sales 85,600
Accounts receivable 85,600
SI # 880
Answer:
1. C 2. D 3. C 4. B 5. A 6. B

Problem 17
On April 15, 2007, a fire damaged the office and warehouse of KAREN MAE CORPORATION.
The only accounting record save was the general ledger, from which the trial balance below
was prepared.
KAREN MAE CORPORATION
TRIAL BALANCE
March 31, 2007
Cash 200,000
Accounts receivable 400,000
Inventory, December 31, 2006 750,000
Land 350,000
Building and equipment 1,100,000
Accumulated depreciation 413,000
Other Assets 36,000
Accounts payable 237,000
Other expense accruals 102,000
Capital stock 1,000,000
Retained earnings 520,000
Sales 1,350,000
Purchases 520,000
Operating expenses 266,000 ________
3,622,000 3,622,000
_______________________________________________________________

The following data and information have been gathered:

1. The fiscal year of the corporation ends on December 31.

201
2. An examination of the April bank statement and canceled checks revealed that checks
written during the period April 1-15 totaled P130,000: P57,000 paid to accounts
payable as of March 31, P34,000 for April merchandise shipments, and P39,000 paid for
other expenses. Deposits during the same period amounted to P129,500, which
consisted of receipts on account from customers with the exception of a P9,500 refund
from a vendor for merchandise returned in April.

3. Correspondence with suppliers revealed unrecorded obligations at April 15 of P106,000


for April merchandise shipments, including P23,000 for shipments in transit on that date.

4. Customers acknowledge indebtedness of P360,000 at April 15, 2007. It was also


estimated that customers owed another P80,000 that will never be acknowledge or
recovered. Of the acknowledged indebtedness, P6,000 will probably be uncollectible.

5. The companies insuring the inventory agreed that the corporation’s fire loss claim should
be based on the assumption that the overall gross profit ratio for the past two years was
in effect during the current year. The corporation’s audited financial statements
disclosed this information:

Year Ended December 31


2006 2005
Net Sales 5,300,000 3,900,000
Net purchases 2,800,000 2,350,000
Beginning inventory 500,000 660,000
Ending inventory 750,000 500,000

6. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The balance of the
inventory was a total loss.

Questions:
1. Cash balance at April 15, 2007 is:
a. P 70,000 b. P 143,000 c. P 190,000 d. P 199,700

2. Accounts Receivable balance at April 15, 2007 is:


a. P 350,500 b. P 360,000 c. P 400,000 d. P 440,000

3. Inventory at April 15, 2007 is:


a. P 0 b. P 35,000 c. P 58,000 d. P 93,000

4. Accounts payable at April 15, 2007 is:


a. P 106,000 b. P 180,000 c. P 276,500 d. P 286,000

5. Sales as of April 15, 2007 is:


a. P 1,470,000 b. P 1,510,000 c. P 1,750,000 d. P 1,790,000

6. Net purchases as of April 15, 2007 is:


a. P 544,500 b. P 593,500 c. P 627,500 d. P 650,500

7. Cost of Sales as of April 15, 2007 is:


a. P 513,000 b. P 547,000 c. P 721,000 d. P 830,500

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8. Estimated inventory as of April 15, 2007 is:
a. P 570,000 b. P 575,500 c. P 679,500 d. P 830,500

9. Inventory loss at April 15, 2007 is:


a. P 477,000 b. P 512,000 c. P 535,000 d. P 570,000

10. The Average Gross Profit for two years (2005 and 2006) is:
a. 45% b. 55% c. 42.76% d. 56.23%

Solution

Computation of sales for the period Jan 1 - April 15, 2007


Sales up to March 31, 2007 P1,350,000
Sales for the period April 1-15
Accounts Receivable, 4.15.07 P440,000
Receipts from customers 120,000
P560,000
Less Accts. Receivable, 3.31.07 400,000 160,000
Total sales P1,510,000

1. Computation of the amount of Inventory Fire Loss


Inventory, December 31, 2006 P750,000
Add purchases for the period Jan.1 to April 15
Purchases up to March 31, 2007 P520,000
Payments for April mdse. Shipments 34,000
Unrecorded obligations for April mdse, shipment 106,000
Purchases returns (9,500) 650,500
Merchandise available for sale P1,400,500
Less cost of goods sold (P1,510,000 sales x 55%) 830,500
Estimated inventory on date of fire P570,000
Less: Proceeds from sale of salvaged mdse. P35,000
Shipments in transit 23,000 58,000
Inventory fire loss P512,000

Computation of average GP ratio:


2005 2006 Total
Net Sales P3,900,000 P5,300,000 P9,200,000
Beginning Inventory P660,000 P500,000 P660,000
Net purchases 2,350,000 2,800,000 5,150,000
Available P3,010,000 P3,300,000 P5,010,000
Ending Inventory 500,000 750,000 750,000
Cost of goods sold P2,510,000 P2,550,000 P5,060,000
Gross Profit P1,390,000 P2,750,000 P4,140,000
Gross Profit rate 45%

JOURNAL ENTRIES – APRIL 1-15


Accounts payable 57,000
Cash 57,000
Purchases 34,000
Cash 34,000
Operating expenses 39,000
Cash 39,000
Cash 129,500
Accounts receivable 120,000
Purchase returns 9,500
Accounts receivable 160,000
Sales 160,000
Purchases 106,000
Accounts payable 106,000
Allowance for bad debts 80,000
Accounts receivable 80,000
Operating expenses (bad debts) 86,000

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Allow. for bad debts 86,000
(P80,000 + P6,000)
1. Cash balance at April 15, 2007 is: d. P 199,700
2. Accounts Receivable balance at April 15, 2007 is: a. P 350,500
3. Inventory at April 15, 2007 is: c. P 58,000
4. Accounts payable at April 15, 2007 is: d. P 286,000
5. Sales as of April 15, 2007 is: b. P1,510,000
6. Net purchases as of April 15, 2007 is: d. P 650,500
7. Cost of Sales as of April 15, 2007 is: d. P 830,500
8. Estimated inventory as of April 15, 2007 is: a. P 570,000
9. Inventory loss at April 15, 2007 is: b. P 512,000
10. The Average Gross Profit for two years (2005 and 2006) is: a. 45%

PROBLEM 18
The following accounts were included in the adjusted trial balance of Jeanina Company as of
December 31, 2006:

Cash P 240,800
Accounts receivable 563,500
Merchandise Inventory 1,512,500
Accounts payable 1,050,250
Accrued expenses 107,750

During your audit, you noted that Jeanina held its cash book open after year-end. In
addition, your audit reveled the following
1. Receipts for January 2007 of P163,650 were recorded in the December 2006 cash
receipts book. The receipts of P90,025 represents cash sales and P73,625 represents
collections from customers, net of 5% cash discounts.

2. Payments to suppliers made on January 2007 of P93,100, on which discounts of P3,100


were taken, were included in the December 2006 check register.

3. Merchandise inventory is valued at P1,512,500 prior to any adjustments . The following


information has been found relating to certain inventory transactions.

a. Goods valued at P68,750 are on consignment with a customer. These goods are not
included in the P1,512,500 inventory figure.

b. Goods costing P54,375 were received from a vendor on January 4, 2007. The related
invoice was received and recorded on January 6, 2007. The goods were shipped on
December 31, 2006, terms FOB shipping point.

c. Goods costing P159,375 were shipped on December 31, 2006, and were delivered to
the customer on January3, 2007. The terms of the invoice were FOB shipping point.
The goods were included in the 2006 ending inventory even though the sale was
recorded in 2006.

d. A P45,500 shipment of goods to a customer on December 30, terms FOB destination


are not included in the year-end inventory. The goods cost P32,500 and were
delivered to the customer on January 3, 2007. The sale was properly recorded in
2007.

e. The invoice for goods costing P43,750 was received and recorded as a purchase on
December 31, 2006. The related goods, shipped FOB destination were received on
January 4, 2007, and thus were not included in the physical inventory.

204
f. Goods valued at P153,200 are on consignment from a vendor. These goods are not
included in the physical inventory.

Questions
Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2006.

1. Cash
a. P 240,800 b. P 173,500 c. P 170,250 d. P 167,150

2. Accounts receivable
a. P 727,150 b. P 641,000 c. P 637,125 d. P 563,500

3. Merchandise inventory
a. P 1,520,000 b. P 1,508,750 c. P 1,465,000 d. P 1,252,500

4. Accounts payable
a. P 1,197,725 b. P 1,153,975 c. P 1,150,875 d. P 1,143,250

5. Working capital
a. P 1,158,800 b. P 1,058,275 c. P 1,055,175 d. P 1,000,800

6. Current ratio
a. 2.00 b. 2.01 c. 1.84 d. 1.83

Solution
1. Accounts receivable 77,500
Cash 73,625
Sales discount 3,875
Sales 90,025
Cash 90,025
2. Cash 90,000
Purchase discount 3,100
Accounts payable 93,100
3.a Inventory 68,750
Cost of sales 68,750
3.b Inventory 54,375
Cost of sales 54,375
Purchases 54,375
Accounts payable 54,375
3.c Cost of sales 159,375
Inventory 159,375
3.d Inventory 32,500
Cost of sales 32,500
3.e Accounts payable 43,750
Purchases 43,750
Answer:
1. d 2. b 3. b 4. b 5. c 6. c

PROBLEM 19
In conducting your audit of Ma. Angela Corporation, a company engaged in import and
wholesale business, for the fiscal year ended June 30, 2006, you determined that its
internal control system was good. Accordingly, you observed the physical inventory at an
interim date, May 31, 2006 instead of at June 30, 2006.

205
You obtained the following information from the company’s general ledger

Sales for eleven months ended May 31, 2006 P1,344,000


Sales for the fiscal year ended June 30, 2006 1,536,000
Purchases for eleven months ended May 31, 2006
(before audit adjestments0 1,080,000
Purchases for the fiscal year ended June 30, 2006 1,280,000
Inventory, July 1, 2005 140,000
Physical inventory, May 31, 2006 220,000

Your audit disclosed the following additional information.

(4) Shipments costing P12,000 were received in May and included in the physical
inventory but recorded as June purchases.

(5) Deposit of P4,000 made with vendor and charged to purchases in April 2006. Product
was shipped in July 2006.

(6) A shipment in June was damaged through the carelessness of the receiving
department. This shipment was later sold in June at its costs of P16,000.

Questions:
In audit engagements in which interim physical inventories are observed, a frequently used
auditing procedure is to test the reasonableness of the year-end inventory by the
application of gross profit ratios. Based on the above and the result of your audit, you are to
provide the answers to the following:

4. The gross profit ratio for eleven months ended May 31, 2006 is
a. 20% b. 25% c. 30% d. 35%

5. The cost of goods sold during the month of June, 23003 using the gross profit ratio
method is
a. P 132,000 b. P 148,000 c. P 144,000 d. P 160,000

6. The June 30, 2006 inventory using the gross profit method is
a. P 260,000 b. P 264,000 c. P 268,000 d. P 340,000

Solution
Q1 Beginning inventory 140,000
Purchases – adjusted 1,088,000 (P1,080,000 + P12,000 – P4,000)
TGAS 1,228,000
Ending inventory 220,000
Cost of goods sold 1,008,000

Sales 1,344,000
COS 1,008,000
Gross Profit 336,000 25%

Q2 Sales for the fiscal year ended June 30, 2003 P 1,536,000
Sales for the eleven months ended May 31, 2003 1,344,000
Sales for the month of June 30, 2003 P 192,000
Less: Sales of goods at cost 16,000
Sales with gross profit P 176,000

206
x Cost Rate 25%
Total P 132,000
Plus: Sale of goods at cost 16,000
Total Cost of Goods Sold for June 2003 P 148,000

Q3 Ending inventory P 220,000


Purchases for the month of June 200,000 (P1,280,000 – P1,080,000)
Goods sold at cost ( 16,000)
Total P 404,000
Less: Cost of items sold in June 144,000 (P192,000 x 75%)
Gross Profit P 260,000

Problem 20
You are engaged to audit the Abam’z Company and its subsidiary, Yamas Company as of
December 31, 2005. The Abam’z Company manufactures tires with it sells to its subsidiary
at cost plus 30%. During the course of the audit, you discover that the balances of the
inter-company accounts are not reconciled. Following is a copy of part of the inter-company
ledger sheets:

Accounts Receivable from Yamas


Date Reference Amount Date Reference Amount

Total Forwarded P180,000 Total Forwarded P130,000


Dec. 26 SI 903 7,600 Dec.26 CR 10,000
27 SI 904 4,000 29 CR 20,000
28 SI 905 6,200 31 Balance 52,500
29 SI 906 3,700
31 SI 908 11,000
P 212,500 P 212,500

Accounts Payable to Abam’z


Date Reference Amount Date Reference Amount

Total Forwarded P140,000 Total Forwarded P161,000


Dec. 26 CD 20,000 Dec. 26 VR 1003-902 19,000
31 CD 28,000 28 VR 1004-903 7,600
31 RG 80 4,100 29 VR 1005-904 4,000
31 Balance 16,700 31 VR 1006-907 9,000
31 VR 1010-909 8,200
P 208,800
P 208,800

Legend for references:


SI – Sales register and invoices number
CR – Cash receipts book
CD – Cash disbursements book
VR – Voucher register, receiving report number, and Abam’z invoice number
RG – Returned goods register and debit memo number

A review of the inventory observation working papers discloses the following information:

Observation at Abam’z Company on December 31, 2005:


1. Last shipment prior to the physical inventory was billed on Invoice number 908 dated
December 31, 2005.

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2. No returned merchandise was received from Yamas Company during the month of
December 2005.

Observation at Yamas Company on December 31, 2005:


1. The last shipment of merchandise returned to Abam’z in December 2005 was entered on
debit memo number 80 dated December 31, 2005.
2. The last receiving report used in December 2005 was number 1007 dated December 31,
2005 for merchandise billed on Abam’z invoice number 905.

Questions:
1. What is the total unrecorded purchases of Yamas as of December 31, 2005?
a. P 29,900 b. P 20,900 c. P 14,700 d. P 11,000

2. What is the reconciled balance of the inter-company accounts at December


31, 2005?
a. P 7,600 b. P 30,346 c. P 29,400 d. P 37,600

3. Abam’z Company’s inventory at December 31, 2005 should be increased by


a. P 3,154 b. P 4,100 c. P 10,077 d. P 6,923

4. Yamas Company’s inventory at December 31, 2005 should be increased by


a. P 29,400 b. P 4,100 c. P 11,000 d. P 14,700

Solution:
Abam’z Company and Yamas Company
Reconciliation of Inter-Company Accounts
Abam’z Yamas
Unadjusted balance 52,500 16,700
Abam’z shipments not recorded by Yamas
SI # 905 6,200
SI # 906 3,700
SI # 908 11,000
SI # 907 – not recorded by Abam’z 9,000
SI # 909 – recorded by Yamas although
there is no shipment made by Abam’z (8,200)
RG # 80 – not yet recorded by Abam’z (4,100)
Remittance from Yamas not yet recorded by
Abam’z ( 28,000) ______
Adjusted balance 29,400 29,400

Inventory Adjustments
December 31, 2005
Abam’z Yamas
Items to be added on inventory lists:
Cost of returned goods in transit
(4,100/130%) 3,154
Cost of purchases in transit –
SI # 906 3,700
SI # 908 _____ 11,000
Total addition to inventory 3,154 14,700

Adjusting Entry:
Book of Abam’z Book of Yamas
Accounts Receivable 9,000 Purchases 20,900
Sales 9,000 Accounts payable 20,900

208
SI # 907 SI # 905, 906, 908

Sales Ret. & Allow. 4,100 Accounts payable 8,200


Accounts Receivable 4,100 Purchases 8,200
Goods in transit from Yamas SI # 909

Cash 28,000
Accounts Receivable 28,000
Cash in transit from Yamas

PART2
Problem 6

The owner of a trading company engaged your service as auditor. There is a


discrepancy between the company’s income and the sales volume. The owner
suspects that the staff is accounting theft. You are to determine whether or nor this is
true. Your investigations revealed the following:

1. Physical inventory, taken December 31, 2004 under your observation showed that
cost was P265,000 and market value, P440,000. The inventory of January 1, 2004
showed cost of P390,000 and market value of P650,000..
2. The average gross profit rate was 40% of net sales.
3. The accounts receivables as of January 1, 2004 were P135,000. During 2004,
accounts receivable written off during the year amounted to P10,000. Accounts
receivables as of December 31, 2004 were P375,000.
4. Outstanding purchase invoices amounted to P500,000 at the end of 2004. At the
beginning of 2004 they were P375,000.
5. Receipts from customers during 2004 amounted to P3,000,000.
6. Disbursements to merchandise creditors amounted to P2,000,000.

Questions:

28.The total sales for 2004 is:


a. P 2,770,000 b. P 3,000,000 c. P 3,240,000 d. P 3,250,000

29.The total purchases for 2004 is:


a. P 1,870,000 b. P 2,000,000 c. P 2,125,000 d. P 2,500,000

30.The amount of inventory shortage is:


a. P 300,000 b. P 306,000 c. P 450,000 d. P 950,000

Problem 4
Rama Corporation uses the physical inventory system. You observed the taking of a
physical inventory on December 31, 2002. The total inventory cost per client’s list is
P376,000.

Test of inventory pricing and quantities revealed the following:

209
a. A review of quantities in the inventory list with those in the original inventory tags
disclosed that one inventory item should be 10 dozens instead of 10 units. The
price per client list is P100 per unit.

b. Inventory includes P50,000 worth of goods received on consignment from Recta


Company. Freight and other shipping charges totaling P5,000 which were incurred
by Rama Corporation were recorded as delivery expenses. These are to be
deducted from Rama’s payment to Recta when consigned goods are sold.

c. To ascertain that there was a proper cut-off, you reviewed purchases and sales
transactions a few days before and after December 31, 2002. You review disclosed
the following:

a. Purchase invoice for P15,000 physically counted on December 31, 2002, was
recorded in January 2003 voucher register.
b. Goods with an invoice price of P18,000 (cost P12,000) shipped to a customer
FOB destination on December 28, 2002, were in transit on December 31, 2002.
No entry was made to record the sale.
c. Merchandise costing P74,500 was consigned to Renegado Corporation on
December 24, 2002 Rama records consignment shipment on a memorandum
basis and bears the cost of shipping to consignees. As of December 31, 2002,
Renegado reported sales totaling P30,000 since December 24, and claimed
P6,000 as commission of 20% of sales. Renegado also claimed reimbursement
of P4,000 for freight paid on December 2002 and P500 for advertising expense
to be borne by Rama. No entry has been made on Rama’s books for the
consignment sales and the cost incurred by Renegado. You have verified that
as of December 31, 2002, the cost of consigned goods amounts to P59,600.

Having been appointed auditor only in May 2003, you were unable to physically
observe the taking of client’s inventory on December 31, 2002. However, you adopted
alternative means to verify this item. Through inquiry and review of the inventory
summary sheets and records, you became aware that the beginning inventory was
understated by P15,000. Other than this, you were satisfied as to the general
accuracy of the opening inventory.

Questions:
21.Inventories received from consignor will
a. Not be recorded but included in the inventories total.
b. Not be recorded but included in the notes to the balance sheet
c. Be recorded with a debit to inventories.
d. Either recorded or not recorded.

22.The shipping charges on the goods received on consignment was treated as


a. Other receivable c. Delivery charges
b. Deduction to accounts payable d. None of the above

23.Which of the following cost incurred by Renegado Corporation should be


capitalized by Rama as part of the consigned goods?
a. Freight charges c. Advertising charges
b. Consignment commissions d. None of the above

210
24.How much of the cost incurred by Renegado Corporation should be charged to
operating expenses?
a. P 10,500 b. P 7,300 c. P 6,500 d. P 6,000

25.What is the cost of consignment sales that should be reported by Rama in


connection with the sale of consigned goods by Renegado?
a. P 18,900 b. P 16,900 c. P 15,700 d. P 14,900

26.The inventories on consignment will be show a 2002 balance of


a. P 67,600 b. P 63,800 c. P 62,800 d. P 59,600

27.The 2002 inventories will be


a. P 411,800 b. P 408,600 c. P 348,300 d. P 312,500

28.The understatement in beginning inventory will result to


a. Net income decrease c. Retained earnings decrease
b. Retained earnings increase d. Net income increase

Problem 5
The Jorilyn Corporation was organized on January 15, 2004, and started operation
soon thereafter. The Company cashier acted also as the bookkeeper had kept the
accounting records very haphazardly. The manager suspects him of defalcation and
engaged you to audit his account to find out the extent of the fraud if there is any.

On November 15, when you started the examination of the accounts, you find the cash
on hand to be P25,700. From inquiry at the bank, it was ascertained that the balance
of the Company’s bank deposit in current account on the same date was P131,640.
Verification revealed that the check issued P9,260 is not yet paid by the bank. The
corporation sells at 40% above cost.

Your examination of the available records disclosed the following information:

Capital stock issued at par for cash P1,600,000


Real state purchased and paid in full 1,000,000
Mortgage liability secured by real state 400,000
Furniture and fixtures (gross) bought on which
there is still balance unpaid of P30,000 145,000
Outstanding notes due to bank 160,000
Total amount owed to creditors on open account 231,420
Total sales 1,615,040
Total amount still due from customers 426,900
Inventory of merchandise on November 15 at cost 469,600
Expenses paid excluding purchases 303,780

Questions:
Based on the above and the result of your audit, compute for the following as of
November 15, 2004.

211
A B C D
29. Collections from sales 1,615,040 2,041,940 1,153,600 1,188,140
30. Payments for purchases 1,207,204 922,180 1,854,620 1,391,780
31. Total cash disbursements 3,273,400 2,625,984 2,810,560 2,340,960
32. Unadjusted cash balance 1,007,180 537,580 74,740 722,156
33. Cash shortage 389,500 859,100 574,076 0

PROBLEM 4
You have been engaged for the audit of the Violet Company for the year ended
December 31, 2004. The Violet Company is engaged in the wholesale chemical
business and makes all sales at 30% based on sales price.

Following are portions of the client’s sales and purchases accounts for the calendar
year 2002.
SALES

Date Reference Amount Date Reference Amount


12-31 Closing entry P 4,313,000 Bal. Forward P4,000,000
12-27 SI # 706 60,000
12-28 708 80,000
12-28 709 50,000
12-31 710 40,000
12-31 711 45,000
____________ 12-31 712 38,000
P 4,313,000 P 4,313,000

PURCHASES

Date Reference Amount Date Reference Amount


Bal. Forward P 3,200,000 12-31 Closing entry P 3,735,000
12-28 RR # 903 100,000
12-30 905 110,000
12-31 906 150,000
12-31 907 175,000 ___________
P 3,735,000 P 3,735,000

SI – Sales Invoice
RR – Receiving Report
You observed the physical inventory of goods in the warehouse on December 31, 2004
and were satisfied that it was properly taken.

When performing a sales and purchases cutoff tests, you found that at December 21,
2004, the last receiving report that had been used No. 907 and that no shipments
have been made on any sales invoices with numbers larger than No. 709.

You also obtained the following additional information:

212
1. Included in the warehouse physical inventory at December 31, 2004, were
chemicals that had been purchased and received on receiving report No. 904 but
for which an invoice was not received until 2005. Cost was P89,000.

2. In the warehouse at December 31, 2004, were goods that had been sold and paid
for by the customer but which were not shipped out until 2005. They were all sold
on sales invoice No. 706 and were not inventoried.

3. On the evening of December 31, 2004, there were three cars on the Violet Company
siding:

(a) Car BR38162 was unloaded on January 2, 2005, and received on receiving
report No. 905. The freight was paid by the vendor.

(b) Car BAE74123 was loaded and sealed on December 31, 2004, and was
switched off the company’s siding on January 2, 2005. These goods were billed
on SI No. 708 and the freight was paid by Violet Company.

(c) Car BEH17943 was loaded and sealed on December 31, 2004, and was
switched off the company’s siding on January 2, 2005. The sales price was
P12,700 and the freight was paid by the customer. This order was covered by
SI No. 707.

4. Temporarily stranded at December 31, 2004, on a railroad siding were two cars of
chemicals en route to the Z Pulp and Paper Co. They were sold on sales invoice
No. 709 and the terms were FOB destination.

5. En route in the Violet Company on December 31, 2004, was a truckload of material
that was received on receiving report no. 910. The material was shipped FOB
destination and freight of P3,000 was paid by the Violet Company on January 4,
2005. However, the freight was deducted from the purchase price of P31,000.

6. Included in the physical inventory were chemicals exposed to rain while in transit
and deemed unsalable. Their invoice cost was P10,000 and freight charges of P700
had been paid on the chemicals.

7. In transit to Violet Company on December 31, 2004 were goods acknowledged on


RR No. 915. The freight of P2,500 was paid by the supplier. The supplier’s invoice
shows a total price of P37,500.

Questions:
20.The total purchases for the year ended December 31, 2004 should be
a. P 3,814,000 b. P 3,725,000 c. P 3,714,000 d. P 3,704,000

21.The total sales for the year ended December 31, 2004 should be
a. P 4,195,700 b. P 4,152,700 c. P 4,072,700 d. P 4,060,000

22.The net adjustment to accounts payable should be


a. P 117,000 increase c. P 89,000 decrease
b. P 89,000 increase d. P 0

213
23.The physical inventory count should be increased by
a. P 229,300 b. P 201,000 c. P 190,300 d. P 101,300

24.The amount of claims receivable from freight company should be


a. P 10,700 b. P 10,000 c. P 700 d. P 0

PROBLEM 7
Ms. Tonel, started Denise Company, a single proprietorship, several years ago. For a
number of years, her sister maintained the accounting records but early in the current
year she became seriously ill. Ms. Tonel consulted your accounting firm and your
partner told him, “You keep a record of your cash receipts and disbursements, and a
list of your assets and liabilities at the beginning and end of the year and we’ll prepare
financial statements for you at the end of the year.”

At the close of December 31, 2004, Ms. Tonel presented to you the following:

Analysis of cash receipts and disbursements for the year 2004


Cash Receipts Cash Disbursements
Jan. 1 cash balance 18,460 Accounts payable (net of
P6,480 cash discounts 225,650
Proceeds of bank loan 40,000 Equipment 25,000
Cash sales 87,300 Administrative/misc. 47,610
expense
Interest received 1,590 Insurance premium 980
Notes receivable 13,000 Freight-in on purchases 12,400
Equipment rental 7,000 Bank notes (including
interest of P600) 15,600
Customers (net of
P4,130 cash discounts) 177,690 Dec. 31 cash balance 17,800

List of assets and liabilities on January 1 and December 31, 2004

Jan. 1 Dec. 31
Cash 18,460 17,800
Notes receivable 15,000 2,000
Interest receivable 900 500
Accounts receivable 43,560 64,320
Inventory 38,900 43,400
Prepaid insurance 1,900 1,500
Equipment (net of accum. dep’n.) 124,000 136,000
Total Assets 242,720 265,520

Notes payable 10,000 35,000


Interest payable 500 1,750
Accounts payable 47,500 52,300
Other accrued liabilities 3,400 6,300
Unearned rent income 1,200 1,800
Total liabilities 62,600 97,150

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Additional information:

1. Ms. Tonel reported that all accounts and notes receivable arose from merchandise
sales and that P1,400 of accounts receivable were written off during 2004.
2. Ms. Tonel estimated that P1,420 of the December 31 receivables will prove
uncollectible.

3. Only purchases of merchandise are recorded in accounts payable.

Questions:

31. Total sales


a. P 238,350 b. P 236,930 c. P 291,280 d. P 203,980

32. Gross purchases


a. P 236,930 b. P 230,450 c. P 197,000 d. P 119,000

33. Cost of goods sold


a. P 291,280 b. P 238,350 c. P 225,950 d. P 123,200

34. Interest income


a. P 2,990 b. P 1,990 c. P 1,590 d. P 1,190

35. Rent income


a. P 7,600 b. P 7,000 c. P 6,400 d. P 5,200

36. Depreciation expense


a. P 29,500 b. P 13,000 c. P 12,320 d. P 11,500

37. Insurance expense


a. P 6,450 b. P 4,800 c. P 1,380 d. P 1,100

38. Interest expense


a. P 2,250 b. P 1,930 c. P 1,850 d. P 1,230

39. Total expenses


a. P 69,650 b. P 69,560 c. P 66,740 d. P 50,510

40. Net income (net loss)


a. P(13,260) b. P(13,170) c. P(10,350) d. P 13,260
PROBLEM

The following accounts were included in the adjusted trial balance of Jeanina
Company as of December 31, 2003:

Cash P 240,800
Accounts receivable 563,500
Merchandise Inventory 1,512,500
Accounts payable 1,050,250
Accrued expenses 107,750

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During your audit, you noted that Jeanina held its cash books open after year-end. In
addition, your audit reveled the following
1. Receipts for January 2004 of P163,650 were recorded in the December 2003 cash
receipts book. The receipts of P90,025 represents cash sales and P73,625
represents collections from customers, net of 5% cash discounts.

2. Payments to suppliers made on January 2004 of P93,100, on which discounts of


P3,100 were taken, were included in the December 2003 check register.

3. Merchandise inventory is valued at P1,512,500 prior to any adjustments . The


following information has been found relating to certain inventory transactions.

g. Goods valued at P68,750 are on consignment with a customer. These goods are
not included in the P1,512,500 inventory figure.
h. Goods costing P54,375 were received from a vendor on January 4, 2004. The
related invoice was received and recorded on January 6, 2004. The goods were
shipped on December 31, 2003, terms FOB shipping point.
i. Goods costing P159,375 were shipped on December 31, 2003, and were
delivered to the customer on January3, 2004. The terms of the invoice were
FOB shipping point. The goods were included in the 2003 ending inventory even
though the sale was recorded in 2003.
j. A P45,500 shipment of goods to a customer on December 30, terms FOB
destination are not included in the year-end inventory. The goods cost P32,500
and were delivered to the customer on January 3, 2004. The sale was properly
recorded in 2004.
k. The invoice for goods costing P43,750 was received and recorded as a purchase
on December 31, 2003. The related goods, shipped FOB destination were
received on January 4, 2004, and thus were not included in the physical
inventory.
l. Goods valued at P153,200 are on consignment from a vendor. These goods are
not included in the physical inventory.

QUESTIONS:

Based on the above and the result of your audit, determine the adjusted balances of
the following as of December 31, 2003.
A B C D
1. Cash 240,800 170, 250 167,150 173,500
2. Accounts receivable 641,000 727,150 637,125 563,500
3. Merchandise inventory 1,252,500 1,508,750 1,520,000 1,465,000
4. Accounts payable 1,143,250 1,197,725 1,150,875 1,153,975
5. Working capital 1,055,175 1,158,800 1,058,275 1,000,800
6. Current ratio 2.00 2.01 1.84 1.83

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CHAPTER 6 - Audit of Investments
Problem 1
The following data pertains to Rainbow Corporation’s investments in marketable securities:

Market Value
Cost 12/31/07 12/31/06
Trading P 150,000 P 155,000 P 100,000
Available-for-sale 150,000 130,000 126,000

Questions
1. What amount should Rainbow Corporation report as unrealized holding gain in its 2007
income statement?
a. P 65,000 b. P 60,000 c. P 55,000 d. P 50,000

2. What amount should Rainbow Corporation report as unrealized loss on marketable


equity securities at December 31, 2007, in accumulated other comprehensive income in
stockholders’ equity?
a. P 20,000 b. P 13,000 c. P 10,000 d. P 0

Solution
1. C
Market value – 1/1/07 P 100,000
Market value – 12/31/07 155,000
Unrealized holding gain P 55,000
2. A
Cost P 150,000
Market value – 12/31/07 130,000
Unrealized holding loss P 20,000

Problem 2
The following information pertains to Every Now and Then, Inc.’s portfolio of marketable
investments for the year ended December 31, 2007:

Cost Fair Value 2007 activities Fair value


12/31/06 Purc. Sales 12/31/07

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Held-to-maturity
Security ABC P 100,000 P 95,000

Trading Security
Security DEFP 150,000 P 100,000 155,000

Available-for-sale
Security GHI 190,000 165,000 P 175,000
Security JKL 170,000 175,000 160,000

Security ABC was purchased at par. All declines in fair values are considered to be
temporary.

Questions
1. The carrying value of security ABC at December 31, 2007 is
a. P 95,000 b. P 98,000 c. P 100,000 d. P 105,000

2. The carrying value of security DEF at December 31, 2007 is


a. P 100,000 b. P 120,000 c. P 150,000 d. P 155,000

3. The carrying value of security JKL at December 31, 2007 is


a. P 160,000 b. P 165,000 c. P 170,000 d. P 175,000

4. The recognized gain or loss on sale of security GHI is


a. P (40,000) b. P (25,000) c. P (15,000) d. P )10,000)

5. The unrealized holding gain or loss to be reported in 2007 net income is


a. P 55,000 b. P (25,000) c. P 15,000 d. P (5,000)

6. Unrealized gain or loss to be reported at December 31, 2007, as a separate component


of stockholders’ equity entitled “accumulated other comprehensive income” is
a. P (20,000) b. P 15,000 c. P (10,000) d. P 5,000

Solution
1. C Cost since the security is considered as held-to-maturity
2. D Market value at year-end
3. A Market value at year-end
4. C
Selling Price P 175,000
Cost 190,000
Loss P( 15,000)
5. A
Market value – 1/1/07 P 100,000
Market value – 12/31/07 155,000
Unrealized holding gain P 55,000
6. D
Cost P 170,000
Market value – 12/31/07 175,000
Holding gain P 5,000

Problem 3
At December 31, 2007, Maria Angela Corporation had the following investments that were
purchased during 2005, its first year of operations:

Cost Fair Value

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Trading Securities:
Security A 700,000 725,000
Security B 210,000 200,000
Totals 910,000 925,000

Securities Available for Sale:


Security C 500,000 560,000
Security D 850,000 865,000
Totals 1,350,000 1,425,000

Securities to be Held to Maturity:


Security E 970,000 980,000
Security F 412,000 409,000
Totals 1,382,000 1,389,000

No investments were sold during 2007. All securities except Security D and Security F are
considered short-term investments. None of the market changes is considered permanent.

Questions
13. The amount of investment to be reported as current assets is:
a. P 2,465,000 b. P 2,455,000 c. P 2,380,000 d. P 1,485,000

14. The amount of investment to be reported as non-current assets is:


a. P 1,389,000 b. P 1,382,000 c. P 1,277,000 d. P 1,274,000

15. The unrealized gain (or loss) component of income before taxes is:
a. P 15,000 b. P 75,000 c. P 97,000 d. P 100,000

16. The unrealized gain (or loss) component of shareholders’ equity is:
a. P 82,000 b. P 75,000 c. P 60,000 d. P 12,000

Solution
1. B
Security A P 725,000 at mv
Security B 200,000 at mv
Security C 560,000 at mv
Security E 970,000 at cost
Total P 2,465,000
2. C
Security D P 865,000 at mv
Security F 412,000 at cost
Total P 1,277,000
3. A
Trading security – cost P 910,000
Trading security – mv 925,000
Holding gain P 15,000
4. B
Available-for-sales security – cost P 1,350,000
Available-for-sales security – mv 1,425,000
Holding gain P 75,000

Problem 4
Marc Corporation had investments in marketable debt securities costing P650,000 that were
classified as available-for-sale. On June 30, 2007, Marc Corporation decided to hold the
investments to maturity and accordingly reclassified them from the held-to-maturity
category on that date. The investments’ market value was P575,000 at December 31,
2006; P530,000 at June 30, 2007; and P490,000 at December 31, 2007.

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Questions
1. What amount of loss from investments should Marc Corporation report in its 2007
income statement?
a. P 0 b. P 45,000 c. P 85,000 d. P 120,000

2. What amount should Marc Corporation report as net unrealized loss on marketable debt
securities in its 2007 statement of stockholders’ equity?
a. P 160,000 b. P 120,000 c. P 45,000 d. P40,000

Solution
Entry: Valuation allowance 75,000
Unrealized holding loss (SHE) 75,000
To close the valuation allowance of last year.

MES – HTM 530,000


Unrealized holding loss (SHE) 120,000
MES – SAS 650,000
1. a 2. b (Note: the unrealized holding loss should be amortized over the life
of the security)
Problem 5
Quiters has investments in shares of common stock of NeverWin Company, bought as
follows:
2003 1,000 shares – P 140,000
2005 500 shares – P 90,000

The following transactions took place in 2007 with respect to these holdings:

April 10 By proper resolution, there was a 3 for 1 stock split and Quiters
Company received 3,000 shares in addition to her original holdings.

July 10 Quiters Company received a P0.60 per share cash dividend and also rights to
subscribed to one share at P40 each for every five shares held. On this date,
shares of stock of NeverWin Company were selling ex-rights at P55 per share and
rights were selling at P2 each.

July 20 Quiters Company exercised all her rights by buying the new shares and paid
P36,000.

Nov. 15 Quiters sold 1,000 shares at P60 each, taken from those acquired in 2003, less
broker’s commission of P750.

Questions
1. The investment in stock at year-end is:
a. P 222,023 b. P 221,031 c. P 220,971 d. P 219,334

2. The investment in stock at year-end from the 2003 purchase is:


a. P 87,953 b. P 90,059 c. P 93,333 d. P 108,889

3. The investment in stock at year-end from the 2005 purchase is:


a. P 90,000 b. P 88,422 c. P 86,842 d. P 81,931

220
4. The gain on sale of investment at year-end is:
a. P 14,971 b. P 14,221 c. P 13,333 d. P 12,583

5. How many shares were purchased during the year?


a. 900 shares b. 600 shares c. 300 shares d. 150 shares

Solution
April 10 Memo entry
July 10 Cash 2,700
Dividend income 2,700
Investment in Stock Rights 8,070
Investment in stock 8,070
(2/57 x P230,000 = P8,070)
July 20 Investment in stock 44,070
Cash 36,000
Investment in stock rights 8,070
1999 Purchase
Nov 15 Cash (60,000 – 750) 59,250 1,000 140,000
Investment in stock 45,029 x 3 ______ Split
(1,000 rights/3,000 rights x P135,088) 3,000 140,000
Gain on sale 14,221 _____ ( 4,912) Stock rights
3,000 135,088
Answer:
1. C 2. B 3. C 4. B 5. A

Problem 6
Roelito Company has a fiscal year ending June 30. A summary of Roelito’s transactions in
the capital stocks of Joondee Company is presented below, except for several cash
dividends that have no bearing on the situation. In all transactions, Joondee Company uses
the specific certificate identification method.

The transactions in the Investment of Joondee Company common stock are as follows:

Sept 06, 2000 Purchased 500 shares of Joondee Company common, par P100 per share,
at a total cost of P48,500.

July 15, 2003 Converted 500 shares of Joondee Company preferred stock into 500
shares of Joondee Company common, in accordance with the conversion
privilege. The preferred shares originally cost P49,000, and the market
price at conversion date was P95 per share. The market price of the
common stock at July 15, 2003, was P101 per share. The transactions
had no commercial substance.

Aug. 07, 2005 Received additional shares of Joondee Company common in a two-for-one
stock split, in which the par value was reduced from P100 to P50 per
share.

Sept. 06, 2005 Purchased 1,000 share of Joondee Company common at a total cost of
P53,000.

Dec. 04, 2005 Exercised the option to receive Roelito share of common for each 10
shares held, in lieu of a cash dividend of P5.40 for each share held. The
market price of a share was P54.

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Dec. 02, 2006 Received stock dividend equal to 20 percent of the common shares held.

Apr. 04, 2007 Received warrants representing the right to purchase at par Roelito share
of Joondee Company common for each ten shares of common owned. On
that date of the issuance of the warrants, the market price of the stock
ex-rights was P58, and the market price of the rights was P2 each.

Apr. 15, 2007 Roelito Company exercised the 1,000 rights applicable to the shares
purchased on September 6, 2005, and sold all remaining rights. The net
proceeds from the sale of the rights was P1.80 per right.

June 12, 2007 Sold 600 shares of Joondee Company common for P32,400 net. The
shares were identified as 500 of those purchased on September 6, 2005,
and 100 of those purchased April 15, 2007.

Question
1. The entry to record the conversion of preferred stock to common stock on July 15, 2003
is:
a. Investment – preferred stock 47,500
Loss on conversion of stock 1,500
Investment – common stock 49,000
b. Investment – common stock 49,000
Investment – preferred stock 49,000

c. Investment – common stock 47,500


Loss on conversion of stock 1,500
Investment – preferred stock 49,000
b. Memorandum entry

2. The entry to record the December 4, 2005 transaction is:


a. Memorandum entry
b. Investment – common stock 16,200
Cash 16,200
c. Investment – common stock 16,200
Dividend income 16,200
d. Investment – common stock 16,200
Common stock 16,200

3. The cost of shares purchased through exercise of rights on April 15, 2007 is:
a. P 6,473 b. P 6,391 c. P 5,000 d. P 3,527

4. Gain on sale of the rights is:


a. P 1,761 b. P 1,473 c. P 1,294 d. P 1,244

5. Gain on sale of the stocks is:


a. P 5,900 b. P 4,636 c. P 4,580 d. P 3,844

6. The audited balance of investment in common stock at December 31, 2007 is:
a. P 139,796 b. P 138,344 c. P 95,081 d. P 89,344

7. The number of rights Roelito Company received from Joondee Company is:
a. 39,600 rights b. 30,000 rights c. 3,960 rights d. 3,000 rights

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8. The cost of the rights received is:
a. P 4,897 b. P 5,507 c. P 5,557 d. P 6,890

Solution
Sept 6, 2000 Investment – common 48,500
Cash 48,500
July 15, 2003 Investment – common 49,000
Investment – preferred 49,000
Aug 7, 2005 Memo entry
Sept 6, 2005 Investment – common 53,000
Cash 53,000
Dec 4, 2005 Investment – common 16,200
Dividend income 16,200
(shares outstanding – 3,000/10 = 300 shares x P54)
Dec 2, 2006 Memo entry
Apr 4, 2007 Stock rights 5,557
Investment – common 5,557
(Total investment to date – P166,700 x 2/60 = P 5,557)
Apr 15, 2007 Investment – common 6,473
Cash 5,000
Stock rights 1,473
(2/60 x 53,000 = P1,767 x 1,000 rights/1,200 rights)
Cash 5,328
Stock rights 4,084
(P5,557 – P1,473)
Gain on sale 1,224

June 12, 2007 Cash 32,400


Investment – common 27,820
[6,473 + (500/1200 x P51,233)]
Gain on sale 4,580
Answer:
1. B 2. C 3. A 4. D 5. C 6. A 7. C 8. C

Problem 7
On December 31, 2006, DreamBig Company reported as Available-for-sale securities:

Attitude Company, 5,000 shares of common stock (a 1% interest) P 125,000


IstheKEY Company, 10,000 shares of common stock (a 2% interest) 160,000
2Success Company, 25,000 shares of common stock (a 10% interest) 700,000
Marketable equity securities, at cost P 985,000
Less: Valuation allowance 50,000
Marketable equity securities, at market P 935,000

Additional information:

 On May, 2007, Attitude Company issued a 10% stock dividend when the market price of
its stock was P24 per share.

 On November 1, 2007, Attitude Company paid a cash dividend of P0.75 per share.

 On August 5, 2007, IstheKEY Company issued to all shareholders, stock rights on the
basis of one right per share. Market prices at date of issue were P13.50 per share (ex-
right) of stock and P1.50 per rights. DreamBig Company sold all rights on December 16,
2007 for net proceeds of P18,800.

223
 On July 1, 2007, DreamBig Company paid P1,520,000 for 50,000 additional shares of
2Success Company’s common stock which represented a 20% investment in 2Success
Company. The fair value of all of the 2Success Company’s identifiable assets net of
liabilities was equal to their carrying amount of P6,350,000. As a result of this
transaction, DreamBig Company owns 30% of 2Success Company and can exercise
significant influence over 2Success Company’s operating and financial policies.

 DreamBig Company’s initial 10% interest of 25,000 shares of 2Success Company’s


common stock was acquired on January 2, 2006 for P700,000. At that date, the net
assets of 2Success Company totaled P5,800,000 and the fair value of 2Success’s
identifiable assets net of liabilities was equal to their carrying amount.

 Market prices per share of the marketable equity securities which were all listed in the
stock exchange, were as follows:
At December 31
2006 2007
Attitude Company - common P 22 P 23
IstheKEY Company – common 15 14
2Success Company – common 27 29

 2Success Company reported net income and paid dividends of:

Year Ended Div. per Share


Year ended December 31. 2006 P350,000 none
Six months ended June 30, 2007 200,000 none
Six months ended December 31, 2007 370,000 P 1.30
(dividend was paid on 10/1/07

 There were no other intercompany transactions between DreamBig Company and


2Success Company and there were no impairment of 2Success Company’s asset at year-
end.

Questions
1. The investment in Attitude Company common stock at year-end is:
a. P 126,500 b. P 125,000 c. P 120,875 d. P 113,000

2. The investment in Isthekey Company common stock at year-end is:


a. P 160,000 b. P 150,000 c. P 144,000 d. P 140,000

3. The investment in 2Success Company common stock at year-end is:


a. P 2,288,500 b. P 2,270,250 c. P 2,264,000 d. P 2,175,000

4. The recovery of market decline to be reported in the income statement is:


a. P 50,000 b. P 47,500 c. P 2,500 d. P 0

5. Dividend income to be reported in the income statement is:


a. P 101,625 b. P 97,500 c. P 4,125 d. P 0

6. Gain on sale of stock rights is:

224
a. P 3,600 b. P 2,800 c. P 1,200 d. P 0

7. The recovery on market decline in value of investment should be


a. Credited to gain on recovery of market decline.
b. Debited to gain on recovery of market decline.
c. Credited to unrealized loss on market decline.
d. Debited to unrealized loss on market decline.

8. The entry to adjust the dividend received from 2Success Company has:
a. A debit to Dividend Income.
b. A credit to Dividend Income.
c. A debit to Retained Earnings.
d. A debit to Investment in Equity.

Solution
Memorandum entry
Cash 4,125
Dividend income 4,125
Stock rights 16,000
Investment – IstheKey 16,000
(1.50/15 x P160,000)
Cash 18,800
Stock rights 16,000
Gain on sale of stock rights 2,800
Investment – 2Success 1,520,000
Cash 1,520,000
Investment – 2Success 35,000
Retained earnings 35,000
To record share of income from 2Success for 2006 (10% x P350,000)

Investment – 2Success 131,000


Income from investment 131,000
6 mos. ended June 30 200,000 x 10% = P 10,000
6 mos. ended Dec. 31 370,000 x 30% = 111,000
P 131,000
Dividend income 97,500
Investment – 2Success 97,500
To adjust the dividend received
Allowance for market decline 47,500
Unrealized loss on market decline 47,500
Market Cost
Attitude 23 x 5,500 shares = P 126,500 P 125,000
Isthekey 14 x 10,000 shares = 140,000 144,000
Total P 266,500 P 269,000

Required Allowance 2,500


Less: Beginning bal. 50,000
Recovery 47,500

Answer:
1. A 2. D 3. A 4. D 5. C 6. B 7. C 8. A

Problem 8
At December 31, 2006, ABARCA SUGAR CORPORATION properly reported as trading the
following equity securities:
Cost Market
Shan Lily Co., 1,000 shares, P2.40
convertible preferred stock 40,000 42,000
Azenith Corp., 6,000 shares of common 60,000 66,000
Ronette Co., 2,000 shares of common 55,000 40,000

225
On January 2, 2007, ABARCA SUGAR CORPORATION purchased 100,000 shares of Nagasaki
Ryuco Company common stock for P1,700,000, representing 30% of Nagasaki’s outstanding
common stock and an underlying equity of P!,400,000 in Nagasaki’ net assets on January 2.
ABARCA SUGAR had no other financial transactions with Nagasaki during 2006. AS a result
of ABARCA SUGAR’s ownership of Nagasaki, ABARCA SUGAR has the ability to exercise
significant influence over Nagasaki’s financial and operating policies.

During 2007, ABARCA SUGAR disposed of the following securities:

 January 18 - sold 2,500 shares of Azenith Corporation for P13 per share.
 June 1 - sold 500 shares of Ronette Company, after a 10% stock dividend was
received, for P21 per share.
 October 1 - converted 500 shares of Shan Lily Company’s preferred stock into 1,500
shares of Shan Lily’s common stock, when the market price was P60 per share for the
preferred stock and P21 per share for the common stock. The conversion has no
economic substance.

The following 2007 dividend information pertains to stock owned by ABARCA SUGAR:

 February 14 - Ronette issued a 10% stock dividend, when the market price of
Ronette’s common stock was P22 per share.
 April 5 and October 5 - Shan Lily paid dividends of P1.20 per share on its P2.40
preferred stock, to stockholder of record on March 9 and September 9, respectively.
Shan Lily did not pay dividends on its common stock during 2007.
 June 30 - Azenith paid a P1.00 per share dividend on its common stock.
 March 1, June 1, September 1, and December 1 - Nagasaki paid quarterly dividends of
P0.50 per share on cash of these dates. Nagasaki’s net income for the year ended
December 31, 2007 was P1,200,000.

At December 31, 2007, ABARCA SUGAR’s management intended to hold Nagasaki’s stock on
a long term basis with the remaining investments considered temporary. Market prices per
share of the marketable equity securities were as follows:

12/31/07 12/31/06
Shan Lily Co., preferred stock P 56 P 42
Shan Lily Co., common stock 20 18
Azenith Corp., common stock 11 11
Ronette Co., common stock 22 20
Nagasaki Ryuco, Co., common 16 18

All of the foregoing stocks are listed on major stock exchanges. Declines in market value
from cost would not be considered permanent.

Instruction: Based on the information above and other analysis as necessary, answer the
following question:

1. The cost per share of Shan Lily preferred at December 31, 2007 is:
a. P 13.33 b. P 20.00 c. P 40.00 d. P 60.00

2. The adjusted balance of Shan Lily preferred (cost) at December 31, 2007 is:
a. P 20,000 b. P 28,000 c. P 30,000 d. P 50,000

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3. The number of shares acquired by ABARCA SUGAR through conversion of Shan Lily stock
is:
a. 300 b. 500 c. 1,500 d. 3,000

4. The adjusted balance of Azenith common (cost) at December 31, 2007 is:
a. P 60,000 b. P 37,273 c. P 35,000 d. P 27,500

5. The sale of Ronette common on June 1 resulted to a:


a. Gain of P3,250 b. Loss of P2,000 c. Gain of P12,500 d. Loss of P3,250

6. The adjusted balance of Ronette common (cost) at December 31, 2007 is:
a. P 55,000 b. P 46,900 c. P 42,500 d. P 41,250

7. The adjusted balance of Nagasaki common (cost) at December 31, 2007 is:
a. P 1,845,000 b. P 1,860,000 c. P 1,700,000 d. P 1,545,000

8. The total dividend income of ABARCA SUGAR at December 31, 2007 is:
a. P 8,400 b. P 5,900 c. P 5,300 d. P 0

9. The total income from investment of ABARCA SUGAR from Nagasaki at December 31,
2007 is:
a. P 145,000 b. P 160,000 c. P 345,000 d. P 360,000
10. ABARCA SUGAR’s income statement at December 31, 2007 will report a:
a. No unrealized gain/loss in market decline.
b. P7,000 unrealized loss in market decline.
c. P7,000 unrealized gain in market decline.
d. P23,400 unrealized gain in market recovery.

Solution
Jan 2 Investment – Nagasaki 1,700,000
Cash 1,700,000
Jan 18 Cash 32,500
MES – Azenith 25,000
Gain on sale 7,500
Feb 14 Memorandum entry
Apr 5 Cash 1,200
Dividend income 1,200
June 1 Cash 10,500
Loss on sale 2,000
MES – Ronette 12,500
June 30 Cash 3,500
Dividend income 3,500
Oct 1 Investment – common
Shan Lily 20,000
Investment – preferred
Shan Lily 20,000
Oct 5 Cash 1,200
Dividend income 1,200
March 1, June 1, September 1, and December 1 for Nagasaki shares
Cash 200,000
Investment – Nagasaki 200,000
(P0.50 x 100,000 shares = 50,000 x 4 quarters = P200,000
Dec 31 Investment – Nagasaki 360,000
Income from investment 360,000
(P1,200,000 x 30% = P 360,000)
Market Value Cost
Shan Lily preferred stock P 56 x 500 shares = P28,000 P20,000
Shan Lily common stock P 20 x 1,500 shares = 30,000 20,000
Azenith common P 11 x 3,500 shares = 38,500 35,000

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Ronette P 22 x 1,700 shares = 37,400 42,500
P133,900 P117,500
Valuation Allowance__________
Recovery * 23,400 Beg. Bal. 7,000
_____ _____
Ending bal. 16,400
* squeeze figure
Answer:
1. C 2. B 3. C 4. C 5. B 6. C 7. B 8. B 9. D 10. D

Problem 9
An examination of the general ledger account of HOPE COMPANY discloses the following
trading securities:
Debit/
(Credit)
Jan. 10 Purchased 5,000 shares of Piltel common at P20 per share P 100,000
Mar 15 Purchased 2,000 of ABS-CBN common at P15 per share 30,000
Oct 5 Purchased additional 2,000 shares of Piltel common 36,000
Nov 4 Sold 2,000 stock rights ( 3,000)
P 163,000
Additional information:

1. The company received stock rights from Piltel common when the market values of Piltel
common stock and stock rights were P19 and P1 respectively. Each right entitles the
holder to acquire 1 additional share of common stock for P18 per share on or before
December 31, 2007.

2. The company exercised its rights to acquire 2,000 additional Piltel common shares on
October 5, 2007.

3. On November 4, HOPE COMPANY sold 2,000 stock rights at P1.50 each.

4. At the end of the year, shares were quoted in the stock exchange as follows:

Piltel Common P 18
ABS-CBN common 14
Question
1. Ending balance per audit of Piltel common at year-end is:
a. P 140,000 b. P 138,000 c. P 133,000 d. P 126,000

2. Ending balance per audit of ABS-CBN common at year-end is:


a. P 28,000 b. P 30,000 c. P 36,000 d. P 38,000

3. Ending balance of investment at year-end is:


a. P 154,000 b. P 163,000 c. P 170,000 d. P 172,000

4. Allowance for market decline in value of investment at year-end is:


a. P 0 b. P 10,000 c. P 9,000 d. P 3,000

5. Gain or loss on stock rights transaction is:


a. P 0 b. P 2,000 c. P 1,000 d. P 500

6. Stock rights at December 31, 2007 is:


a. P 0 b. P 2,000 c. P 1,000 d. P 500

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Solution
1. Stock rights 5,000
Investment – Piltel 5,000
(1/2 x P100,000)
2. OE: Investment – Pitel 36,000
Cash 36,000
CE: Investment – Piltel 38,000
Cash 36,000
Stock rights 2,000
Adj: Investment – Piltel 2,000
Stock rights 2,000
3. OE: Cash 3,000
Investment – Pittel 3,000
CE: Cash 3,000
Stock rights 2,000
Gain on sale of rights 1,000
Adj: Investment – Piltel 3,000
Stock rights 2,000
Gain on sale of rights 1,000
4. Loss on market decline 9,000
Allowance for market decline 9,000
MV Cost
Piltel P18 x 7,000 shares = P 136,000 P 133,000
ABS-CBN P14 x 2,000 shares = 28,000 30,000
P 154,000 P 163,000 = P9,000
5. Loss on expiration of the rights 1,000
Stock rights 1,000
Answer:
1. D 2. A 3. B 4. C 5. A 6. A

Problem 10
YPILAN Investment Company has the following transactions in the common stock of
CHERRY MAE Chemicals Corporation:

a. On January 7, 2000, YPILAN purchased 2005 shares of P100 par value common
stock at P110 per share.

b. The CHERRY MAE Chemicals Corporation was expanding and as of March 1, 2001,
issued to YPILAN 2,000 rights each permitting them to purchase one fourth share of
common stock at par. The bid price of these stocks on March 1, 2001 was P140. There
was no quoted price for the rights.

c. YPILAN was advised that they should use the rights. YPILAN thereafter paid for the
new shares on April 1, 2001, charging the payment to the Investment account. YPILAN
purchased 500 shares of stocks using the stock rights.

d. The accountant felt that the cash paid for the new shares was merely an assessment
since their proportionate share in CHERRY MAE Chemicals was not changed. He credited
all dividends (5% in December of each year) to the Investment Account until the debit
was fully offset.

e. In December, 2005, YPILAN received a 50% stock dividend from CHERRY MAE
Chemicals. The accountant did not make any entry for this dividend because the
company president expected to sell the shares received. They did sell the dividend
share in January, 2006 for P160 per share. Income was credited for the proceeds.

f. In December, 2006, the stocks were split on a two-for-one basis and the new shares
were issued at no-par value. YPILAN found that each new share was worth P5.00 more

229
than the P110 per share which they had paid for their original shares so it was decided
to debit the Investment account with the additional shares received at P110 per share
and to credit income for it.

g. In June, 2007, YPILAN sold one-half of then CHERRY MAE Chemicals holdings at
P100 per share. The proceeds was credited to the Investment account.

Questions
1. The balance in Investment in CHERRY MAE’s Chemicals account, per books, before
correction is
a. P 245,000 b. P 275,000 c. P 495,000 d. P 595,000

2. The correct balance of the Investment in CHERRY MAE Chemicals account as of June
30, 2007 is
a. P 90,000 b. P 180,000 c. P 245,000 d. P 250,000

3. The average unit cost of the stocks sold in January, 2006 at P160 per share is
a. P 110.00 b. P 100.00 c. P 90.00 d. P 72.00

4. The average unit cost of the no-par shares of stock sold in June 2007 is
a. P 108.00 b. P 72.00 c. P 50.00 d. P 36.00
5. As of June 30, 2007, the balance of stock holdings in CHERRY MAE Chemicals was
a. 2,500 shares b. 3,750 shares c. 4,000 shares d. 5,000 shares

6. The 50% stock dividends should be taken up as+


a. A debit to Investment for P12,500.
b. A credit to Investment for P12,500.
c. A memorandum entry.
d. A credit to income for P20,000.

7. The two-for-one split on December, 2006 should be taken up as


a. A memorandum entry.
b. A debit to investment for P27,500.
c. A credit to income for P13,750.
d. A debit to investment for P25,000.

8. The profit on the sale of the stock dividend shares received in December, 2005 is
a. P 200,000 b. P 120,000 c. P 110,000 d. P 75,000

9. The profit of YPILAN from the sale of the 2,500 shares in June 2007 is
a. P 250,000 b. P 160,000 c. P 125,000 d. P 75,000

10. Cash dividends received from 2001 to 2004 totaled


a. P 100,000 b. P 75,000 c. P 50,000 d. P 55,000

Solution

(1) Investment account as kept by YPILAN Investment Co.


INVESTMENT IN CHERRY MAE CHEMICALS CORP. COMMON STOCK
01.07.00 2,000 Shares P220,000 12.31.01 Cash dividend P 12,500
04.01.01 500 shares 50,000 12.31.02 -do- 12,500
12.31.06 2,500 shares 275,000 12.31.03 -do- 12,500
12.31.04 -do- 12,500
June’ 07 Sold, 2,500 shs. 250,000
06.30.07 Bal. 2,500 shs. P245,000

230
(2) Investment account showing how the transactions should have been recorded:

INVESTMENT IN CHERRY MAE CHEMICALS CORP. COMMON STOCK


01.07.00 2,000 Shares P220,000 Jan.’06 Sold, 1,250 shs. P 90,000
04.01.01 500 shares 50,000

01.31.06 Bal. 2,500 shares P180,000 June’07 Sold, 2,500 shs. 90,000
Dec.’06 Stock split,2,500 shs --

06.30.07 Bal., 2,500 shares P 90,000

1. A
2. A
3. D P270,000 / 3,750 shares = P72.00
4. D P180,000 / 5,000 shares = P36.00
5. A 6. C 7. A
8. C Selling price, P160 less cost per share of P72 = P88 x 1,250 shares = P110,000
9. B Selling price, P100 less cost per share of P36 = P64 x 2,500 shares = P160,000
10. C P250,000 par x 5% x 4 years = P50,000

Problem 11
The Stock Investment account of YAP, Inc. showed the following details:

STOCK INVESTMENT
1/01 Beg. bal. (2,000 shrs) 40,000 2/28 Cash dividend 1,000
3/31 Purchased 300 shrs 4,500 4/01 Sale of stock rights 3,000
6/30 Sale of 230 shares 5,000

1. A cash dividend of P0.50 per share was received on Feb. 28. The adjusting entry is:
DEBIT CREDIT
a. Stock Investment 1,000 Dividend Income 1,000
b. Retained earnings 1,000 Dividend Income 1,000
c. Dividend income 1,000 Stock investment 1,000
a. None of the above

2. On March 15, stock rights were received entitling shareholders to purchase one share for
every five held at P15 per share. Market values on this date were: shares, P20; rights,
P5. The adjusting entry to recognize the cost allocated to the right is:
DEBIT CREDIT
a. Stock rights 8,000 Stock investment 8,000
b. Stock rights 10,000 Stock investment 10,000
c. Stock rights 5,000 Stock investment 5,000
b. none of the above

3. On March 31, 300 shares were purchased with the partial exercise of these rights.
The adjusting entry, after the adjustment in No. 14 above has been effected, is
DEBIT CREDIT
a. Stock investment 9,000 Stock rights 9,000
b. Stock investment 6,000 Stock rights 6,000
c. Stock rights 6,000 Stock investment 6,000
e. none of the above

231
4. On April 1, the remaining rights were sold for P3,000. The adjusting entry is:
DEBIT CREDIT
a. Stock investment 3,000 Gain on sale of rights3,000
b. Stock investment 3,000 Stock rights 2,000
Gain on sale of rights1,000
c. Stock investment 2,000 Stock rights 3,000
Loss on sale of rights 1,000
a. none of the above.

5. On June 30, 230 share were sold for P5,000 (use average cost method). The adjusting
entry is
DEBIT CREDIT
a. Cash 5,000 Stock investment 4,250
Gain on sale of stock 750
b. Stock investment 4,250 Gain on sale of stock 4,250
c. Stock investment 750 Gain on sale of stock 750
d. none of the above.

Answer
1. A 2. A 3. B 4. B 5. C
Problem 12
The INVESTMENT account, as of December 31, 2007, appearing in the records JOY
CORPORATION is as follows:

Date Particular Debit Credit


January 1 Balance 188,300
January 31 Sold Ventanilla Stock 21,364
March 31 Bought Don Dave Common 12,125
June 30 Dividend on Suson Common 10,000
July 31 Sold Suson Common 8,750
August 31 Sold Jasmin bonds 22,083
September 30 Interest on Sucuahi Mortgage 500

The audit working papers of the preceding year show that the account balances as of
January 1, 2007, consisted of the following:

Ventanilla Company – Common


1,000 shares, purchased in June 1997 at P20 per share, P20,000.
2,000 shares, purchased in August 1999 at P16 per share, P32,000.
1,500 shares, purchased in May 2002 at P22 per share, P33,000

Don Dave Company – Common


2,000 shares. Purchased in January 2003 at P33 per share, P66,000

Suson Company – Common


100 shares purchased in August 2003 at P73 per share, P7,300

Jasmin Company 5% bonds


2 bonds, P10,000 each purchased in July 2001 at par, P20,000
(Interest dates February 1 and August 1).

232
Sucuahi Company chattel mortgage on machinery
5, P10,000 mortgage taken in September 2004 in settlement of a receivable, P10,000

Your examination discloses the following information:

1. In January 2007, 1,000 shares of the Ventanilla company common stock purchased
in May 2002 were sold for P21,364 net.

2. In March 2007, 500 shares of Don Dave common stock were purchased at P24 per
share plus brokerage, for P12,125.

3. In June 2007, the Suson Company paid a 100% stock dividend on common.

4. In July 2007, JOY CORPORATION sold to its president, for P125 per share, 100
shares of Suson common stock, for which the president gave his check for P8,750 and a
letter in which he agreed to pay the balance upon demand of the treasurer of JOY
CORPORATION.

5. On August 2007, the Jasmin Company redeemed its 5% bonds at 110 plus accrued
interest.

6. In September 2007, JOY CORPORATION received one year interest on the P10,000
chattel mortgage of Sucuahi.

Question
1. The adjusted balance of Gain or Loss of Sale/Redemption on
Investment at December 31, 2007 is:
a. P 8,214 b. P 10,214 c. P 10,850 d. P 10,714

2. The adjusted balance of Investment at December 31, 2007 is:


a. P 157,728 b. P 155,411 c. P 154,775 d. P 152,692

3. The Investment at December 31, 2007 is:


a. Overstated by P 2,953 c. Overstated by P5,036
b. Overstated by P 2,317 d. Overstated by P3,056

4. Investment in Ventanilla Company common stock at year-end is:


a. P 65,000 b. P 63,000 c. P 63,636 d. P 52,000

5. Investment in Don Dave Company common stock at year-end is:


a. P 78,125 b. P 66,000 c. P 61,625 d. P 49,500

6. Investment in Suson Company common stock at year-end is:


a. P 7,300 b. P 3,650 c. P 2,500 d. P 1,450

Solution
1. OE: Cash 21,364
Investment – Ventanilla 21,364
CE: Cash 21,364
Loss on sale 636
Investment – Ventanilla 22,000
(P22 x 1,000 shares)
Adj: Loss on sale 636
Investment – Ventanilla 636
2. No adjustment

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3. Dividend income 10,000
Investment – Suson 10,000
4. OE: Cash 8,750
Investment – Suson 8,750
CE: Cash 8,750
Receivable – others 3,750
Investment – Suson 3,650
(P7,300 x 100/200)
Gain on sale 8,850
Adj: Investment – Suson 5,100
Receivable – others 3,750
Gain on sale 8,850
5. OE: Cash 22,083
Investment – Jasmin 22,083
CE: Cash 22,083
Investment – Jasmin 20,000
Gain on sale 2,000
Interest income 83
Adj: Investment – Jasmin 2,083
Gain on sale 2,000
Interest income 83
6. Investment – Sucuahi 500
Interest income 500
Answer:
1. A 2. C 3. A 4. B 5. A 6. B

Problem 13
Siacor Inc. acquired 30% of Lozano Co.’s voting stock for P200,000 on January 2, 2007.
Siacor’s 30% interest in Lozano gave Siacor the ability to exercise significant influence over
Lozano’s operating and financial policies. During 2007, Lozano earned P80,000 and paid
dividends of P50,000. Lozano reported earnings of P100,000 for the six months ended June
30, 2008, and P200,000 for the year enden December 31, 2008. On July 1, 2008, Siacor
sold half of its stock in Lozano for P150,000 cash. Lozano paid dividends of P60,000 on
October 1, 2008.

1. Before income taxes, what amount should Siacor include in its 2007 income statements
as a result of investment?
a. P15,000 b. P24,000 c. P50,000 d. P80,000

2. In Siacor’s December 31, 2007 balance sheet, what should be the carrying amount of
this investment?
a. P200,000 b. P209,000 c. P224,000 d. P230,000

3. In its 2008 income statement, what amount should Siacor report as gain from the sale of
half of its investment?
a. P24,500 b. P30,500 c. P35,000 d. P45,500

Solution
1. B
P80,000 x 30% = P24,000
2. B
Purchase price 200,000
+ income from investment 24,000
- dividends ( 15,000)
Ending balance – 12/31/03 209,000
3. B
Beginning balance – 1/1/04 209,000
+ income from investment 30,000
(100,000 x 30%) _______
Balance – June 30 239,000

234
Selling price 150,000
Cost (239,000 x 1/2 ) 119,500
Gain on sale 30,500

Problem 14
During 2006, Marlisa Company purchased marketable equity securities as trading securities.
At December 31, 2006, the balance in the allowance to reduce marketable equity securities
to market was P23,000. Pertinent information at December 31, 2007 is as follows:

Security Cost Market Value


Helen common P 245,000 P 230,000
Maritess common 180,000 182,000
P 425,000 P 412,000

On January 1, 2007, Marlisa Company paid P700,000 for 100,000 shares of Louie Company
representing 30% of Louie’s outstanding common stock. The following computations was
made by Marlisa Company:
Purchase price P 700,000
30% equity in book value of Louie’s net
assets 500,000
Excess of cost over book value P 200,000
The excess cost over book value was attributed to goodwill. Louie reported net income for
the year ended December 31, 2007 of P300,000. Louie Company paid cash dividends of
P100,000 on July 1, 2007. As of December 31, 2007 Marlisa reported, in its balance sheet, a
P700,000 balance of an Investment of Louie Stocks.

Question
1. Marlisa Company’s December 31, 2007 balance sheet should report the marketable
equity securities at:
a. P 427,000 b. P 412,000 c. P 410,000 d. P 402,000

2. In its 2007 income statement, Marlisa should report a (an):


a. Gain on market recovery of P8,000.
b. Gain on market recovery of P10,000.
c. Unrealized loss of P13,000.
d. Unrealized loss of P15,000.

3. If Marlisa Company exercised significant influence over Louie Company, the amount of
net investment revenue Marlisa Company should report from its investment in Louie
would be
a. P 30,000 b. P 80,000 c. P 90,000 d. P 110,000

4. If Marlisa Company exercised significant influence over Louie Company, the carrying
value of its investment in Louie at December 31, 2007 would be
a. P 810,000 b. P 780,000 c. P 760,000 d. P 750,000

5. If Marlisa Company did not exercise significant influence over Louie Company and
properly accounted for the long-term, investment under the cost method. The amount of
net investment revenue Marlisa Company should report from its investment in Louie
would be
a. P 30,000 b. P 80,000 c. P 90,000 d. P 110,000

235
6. If Marlisa Company did not exercise significant influence over Louie Company and
properly accounted for the long-term investment under the cost method, the carrying
value of its investment in Louie at December 31, 2007 would be
a. P 780,000 b. P 750,000 c. P 700,000 d. P 500,000

Solution
For Marketable Equity Securities
Total Cost 425,000
Total Market 412,000
Required Allowance – Dec. 31 13,000
Less: Allowance – Jan. 1 23,000
Recovery 10,000

Allowance in market decline 10,000


Gain on market recovery 10,000

For Investment
If acquired significant influence
Investment 90,000
Income from investment 90,000
To record share of income from the investee (P300,000 x 30%)

Dividend income 30,000


Investment 30,000
To adjust the dividend received (P100,000 x 30%)

Income from investment 10,000


Investment 10,000
To record amortization of excess over cost (P200,000/20 years)

If acquired NO significant influence


There will be no adjustment since the company used the cost method in accounting for the investment in the
books.
Answer:
1. B 2. B 3. B 4. C 5. A 6. C

Problem 15
On July 1 of the current year, AISAH Company acquired 25% of the outstanding shares of
common stock of Adonis Co., at a total cost of P1,400,000. The underlying equity (net
assets) of the stock acquired by AISAH Company was only P1,200,000. AISAH Company
was willing to pay more than book value for the Adonis Company stock for the following
reasons:

a. Adonis Company owned depreciable plant assets (10-year remaining


economic life) with a current fair value of P120,000 more than their carrying
amount.

b. Adonis Company owned land with a current fair value of P600,000 more than its
carrying amount.

c. AISAH Company believed Adonis Company possessed enough goodwill to justify the
remainder of the cost.

Adonis Company earned net income of P1,080,000 evenly over the current year ended
December 31. On December 31, Adonis Company declared and paid a cash dividend of
P210,000 to common stockholders. Market value of Adonis Company’s share of the stock at
December 31 is P1,500,000. Adonis Company closes its accounting records on December

236
31. As of December 31, 2007, the Investment in Adinois common has a balance of
P1,400,000.

AISAH Company has a portfolio of current marketable equity securities. Information on cost
and market value is as follows:
Cost Market
December 31, 2006 P 950,000 950,000
December 31, 2007 840,000 820,000

AISAH Company has not recorded yet any allowance for market decline in its marketable
securities. Marketable Securities at December 31, 2007 has a balance of P840,000.

Presented below is an amortization schedule related to AISAH Company’s 5-year, P100,000


bond with a 7% interest rate and a 5% yield, purchased on December 31, 2004, for
P108,660.

Date Cash Interest Bond Premium Carrying Value


Received Income Amortization of bonds
12/31/04 108,660
12/31/05 P 7,000 P 5,433 P 1,567 107,093
12/31/06 7,000 5,354 1,646 105,447
12/31/07 7,000 5,272 1,728 103,719
12/31/08 7,000 5,186 1,814 101,905
12/31/09 7,000 5,095 1,904 100,000

As of December 31, 2007, the Investment in bonds is recorded in the balance sheet at
P108,660.

Questions
1. The Investment in Adonis Company common at year-end is:
a. P 1,473,000 b. P 1,478,500 c. P 1,480,500 d. P 1,481,000

2. The income from investment in the Adonis Company common at year-end is:
a. P 131,000 b. P 133,500 c. P 159,250 d. P 185,500

3. The marketable securities at December 31, 2007 is:


a. P 820,000 b. P 840,000 c. P 930,000 d. P 950,000

4. The amortization of investment in bonds at year-end is:


a. P 1,728 b. P 4,941 c. P 6,669 d. P 7,000

5. Interest income from the investment in bonds at year-end is:


a. P 7,000 b. P 5,354 c. P 5,272 d. P 5,186

6. The investment in bonds at year-end is:


a. P 108,660 b. P 105,447 c. P 103,719 d. P 100,000

Solution
Cost P 1,400,000
Net Asset Acquired 1,200,000
Excess over cost P 200,000
Undervalue of asset 180,000
(720,000 x 25%) ________
Implied Goodwill P 20,000

237
Adj # 1:Income from investment 2,000
Investment 2,000
Undervaluation of depreciable asset - P1,500
[(P120,000 x 25%) / 10 x 6/12)
Implied goodwill (P20,000/20 x 6/12) - 500
Total P2,000
Adj # 2:Investment 135,000
Income from investment 135,000
(P1,080,000/12 mos. x 6 mos. x 25%)
Adj # 3:Dividend income 52,500
Investment 52,500
(P210,000 x 25%)
Adj # 4:Unrealized loss in market decline 20,000
Allow. for unrealized loss in market decline 20,000
Cost - P840,000
Market - 820,000
Allow. –P 20,000
Adj # 5:Retained earnings (2005 & 2006) 3,213
Interest income (2007) 1,728
Investment 4,941
Answer:
1. C 2. B 3. A 4. A 5. C 6. c

Problem 16
Roxanne Company’s permanent investment consists of the following:

3-year 8% P100,000 face value Paul Bonds (cost) P 96,500


Cash surrender value of life insurance of the president 15,000
Available-for-sale securities held for long-term appreciation
of value (at cost) 180,000

The cost and market value of these securities are presented here:

Cost Market
Sony Incorporate 80,000 90,000
Macky Corporation 60,000 60,000
Ruela Company 40,000 20,000

Additional information:

1. According to the company’s treasurer, investment in Paul bonds was acquired at the
beginning of the year with the intention of selling it when the need for additional working
capital arises. Interest at 8% is received annually every January 1. Accrued interest on
these bonds had been recorded. Effective interest rate for this type of securities is 10%.
The fair market value of Paul Bonds at the end of the year is P 98,000.

2. As part of additional compensation, the company insured the life of its president for a
total coverage of P2 million pesos. Insurance premium paid during the year amounted
to P54,000. Increase in cash surrender value of 5,000 was credited to insurance
expense account.

238
3. Subsequent event review revealed that the year-end market decline of Ruela Company
stock was other than temporary.

Questions
1. The total Available-for-sale securities of Roxanne Company at year-end is:
a. P 170,000 b. P 180,000 c. P 185,000 d. P 268,000

2. The Paul bonds at year-end is:


a. P 98,150 b. P 98,000 c. P 96,500 d. P 100,000

3 The cash surrender value of life insurance at year-end is:


a. P 15,000 b. P 20,000 c. P 69,000 d. P 0

4. The Held-to-maturity securities at year-end is:


a. P 98,150 b. P 98,000 c. P 96,500 d. P 0

Solution
Current MES
3-Year 8% P100,000 Paul bonds - P 96,500

Long-term Investment
Cash surrender value of life insurance - P 15,000
Long-term MES, at market - 170,000
Total - P185,000

ANSWER:
1. C 2. C 3. A 4.A 5. C
Problem 17
On January 1, 2007, Michelle Co. bought 30% of the outstanding common stock of Manila
Corporation. Michelle Co. accounts for this investment by the equity method. At the date of
acquisition of the stock, Manila Corporation’s net assets had a carrying value of
P11,800,000. Assets with an average remaining life of 5 years have a current market value
that is P2,600,000 in excess of their carrying values. The remaining difference between the
purchase price and the value of the underlying stockholders’ equity cannot be attributed to
any tangible asset. At the end of 2007, Manila Corporation reports net income of
P3,600,000. During the 2007, Manila Corporation declared and paid cash dividends of
P400,000. The balance of Michelle’s investment in Manila Corporation is P5,922,000 at
December 31, 2007.

Questions
1. What is the total adjustment to share of income for 2007?
a. P 198,000 b. P 156,000 c. P 256,000 d. P 562,000

2. What is the total dividend income for 2007?


a. P 0 b. P 78,000 c. P 107,400 d. P 120,000

3. What is the acquisition cost of Michelle Company’s investment in Manila Corporation?


a. P 6,198,000 b. P 5,118,000 c. P 3,540,000 d. P 1,920,000

Solution
Investment
Acquisition cost * 5,118,000 Amort. of
Share of income 1,080,000 depreciable
assets ** 156,000
Dividends *** 120,000

239
_________
6,198,000 276,000

Ending bal. 5,922,000


* Squeeze figure
** P2,600,000 x 30% = 780,000/5 years = P156,000
*** P400,000 x 30%
Answer:
1. B 2. A 3. B

Problem 18
The following entries were made by the accountant of LECIRAM COMPANY:

2007
Jan 2 Investment in bonds 11,120,000
Cash 11,120,000
Purchase of P10,000,000, 18% bonds at 102plus accrued interest and broker’s fee.
Bonds mature January 1, 2010.

Jan 3 Cash 900,000


Interest income 900,000
Interest received on 18% investment in bonds. (This same entry was made when
interest was received on July 1, 2007).

July 1 Investment in preferred stock 10,020,000


Premium paid on preferred stock 200,000
Cash 10,220,000
Purchase of 100,000 shares of 8% P100 preferred stock of Al Corp. at 102; broker’s
fee, P20,000

Dec 1 Investment in common stock 5,000,000


Cash 5,000,000
Purchase of 50,000 shares P100 par common stock of Randy Co. at P100 per share
after a P1 per share dividend had been declared by Randy Co. No broker’s fee.

Dec 31Cash 800,000


Premium paid on preferred stock 200,000
Dividend income 600,000
Dividend received on preferred stock investment

Dec 31Cash 50,000


Investment in common stock 50,000
P1 per share on investment in common stock

Question
1. What is the total interest income on investment in bonds for 2007?
a. P 1,827,500 b. P 1,800,000 c. P 1,772,500 d. P 927,500

2. What is the carrying value of the investment in bonds at December 31, 2007?
a. P 11,092,500 b. P 10,247,500 c. P 10,200,000 d. P 10,192,500

240
3. What entry should be made to correct the acquisition entry on Jan. 2, 2007?
a. Interest income 900,000 c. Interest income 900,000
Investment in bonds 900,000 Interest Receivable 900,000

b. Broker’s fees exp. 20,000 d. Interest income 900,000


Investment in bonds 20,000 Broker’s fee exp. 20,000
Investment in bonds 920,000

4. What is the adjusting entry to record the accrual of interest on December 31, 2007?
a. Interest receivable 900,000 c. Interest receivable 900,000
Interest income 900,000 Retained earnings 900,000
b. Interest income 900,000 d. No adjusting entry
Retained earnings 900,000

5. What adjusting entry should be made to correct the acquisition on July 1?


a. Broker’s fees exp. 20,000 c. Invest. in pref. 200,000
Invest. In pref. 20,000 Premium on PS 200,000
b. Broker’s fees exp. 20,000 d. No adjusting entry
Premium on PS 20,000

6. What is the dividend income on preferred stock investment for 2007?


a. P 0 b. P 200,000 c. P 600,000 d. P 800,000

7. What adjusting entry should be made at December 31, 2007, to correct the investment in
common stock account?
a. Dividend income 50,000 c. Retained earnings 50,000
Invest. In CS 50,000 Invest. in CS 50,000
b. Retained earnings 50,000 d. No adjusting entry
Dividend income 50,000

Solution
Adjustments:
Jan 2 Interest income 900,000
Investment - bonds 900,000
Jan 3 No adjustments
July 1 Investment – preferred 200,000
Premium paid on
preferred stock 200,000
Dec 1 Dividend income 50,000
Investment – common 50,000
Dec 31 Premium paid on pref.
stock 200,000
Dividend income 200,000
Dec 31 Investment – common 50,000
Dividend income 50,000
Interest income 27,500
Investment – bonds 27,500
To record amortization of premium. (P220,000/8 years = P27,500)
Answer:
1. C 2. D 3. A 4. A 5. C 6. D 7. D

Problem 19
The following two subsidiary accounts reflect the marketable securities of HOPE COMPANY
for the year 2008:

241
DREAM BIG COMPANY
Date Transactions Shares Ref. Debit Credit
Jan. 10 Purchase 20,000 CD P 1,900,000
31 Raised to market
value, offset to
retained earnings GJ 100,000
Mar 30 Sale at P150 (10,000) CR P 1,500,000
June 10 Stock dividend at par 10,000 GJ 1,000,000
July 28 Sale at P110 10,000 _________ 1,100,000
TOTALS P 3,000,000 P 2,600,000

AIM HIGH COMPANY


Date Transactions Shares Ref. Debit Credit
Sept. 05 Purchase 20,000 CD P 1,000,000
28 Cash dividends to
stockholders or record
Sept 15, declared Aug.
15 CR P 50,000
Oct. 01 Purchases 50,000 CD 2,500,000
05 Sale at P65 20,000 CR 1,000,000
Nov. 30 Cash collected for sale
made on Nov. 10, after
a Nov. 1 declaration of
P5 cash dividend per
share to stockholders
on record as of
December 1. 20,000 CR 3,300,000
Dec. 15 Cash dividend received 20,000 CR __________ 150,000
TOTAL P 3,500,000 P 4,500,000

On January 2, 2008, HOPE COMPANY purchased 39,000 shares of GOB BLESS YOU
COMPANY’s 200,000 shares of outstanding common stock for P1,170,000. On that date,
the carrying value of the acquired shares on GOD BLESS YOU COMPANY’s books was
P810,000. HOPE COMPANY attributed the excess of cost over carrying amount to goodwill.
HOPE COMPANY’s policy is to amortize intangible over 10 years.

During 2008, HOPE COMPANY gained a seat on GOD BLESS YOU COMPANY’s board of
directors. GOD BLESS YOU COMPANY reported earnings of P800,000 for the year ended
December 31, 2008, and declared and paid cash dividends of P200,000 during 2008. On
December 31, 2008, GOD BLESS YOU COMPANY’s common stock was trading at P30 per
share.

Questions
1. The gain on sale of 10,000 shares of DREAM BIG COMPANY on March 30 is:
a. P 0 b. P 500,000 c. P 550,000 d. P 1,500,000

2. The gain on sale of 10,000 shares of DREAM BIG COMPANY on July 28 is:
a. P 150,000 b. P 337,500 c. P 525,000 d. P 625,000

3. The adjusted balance of the HOPE COMPANY’s Investment in DREAM BIG COMPANY on
December 31, 2008 is:
a. P 525,000 b. P 500,000 c. P 475,000 d. P 375,000

242
4. The gain on sale of 20,000 shares of AIM HIGH COMPANY on October 5 is:
a. P 300,000 b. P 314,500 c. P 350,000 d. P 1,028,500

5. The gain on sale of 20,000 shares of AIM HIGH COMPANY on November 10 is:
a. P 1,000,000 b. P 2,200,000 c. P 2,300,000 d. P 2,400,000

6. The adjusted balance of the HOPE COMPANY’s Investment in AIM HIGH COMPANY on
December 31, 2008 is:
a. P 1,000,000 b. P 1,200,000 c. P 1,300,000 d. P 1,500,000

7. The gain on investment of HOPE COMPANY from the Investment in GOD BLESS YOU
COMPANY at December is:
a. P 81,000 b. P 120,000 c. P 156,000 d. P 990,000

8. The adjusted balance of the HOPE COMPANY’s Investment in GOD BLESS YOU COMPANY
at December 31, 2008 is:
a. P 1,251,000 b. P 1,287,000 c. P 1,170,000 d. P 1,320,000

Solution
DREAM BIG COMPANY
Retained earnings 100,000
MES 100,000
OE: Cash 1,500,000
MES 1,500,000
CE: Cash 1,500,000
MES 950,000
Gain on sale 550,000
Adj: MES 550,000
Gain on sale 550,000
Dividend income 1,000,000
MES 1,000,000
OE: Cash 1,100,000
MES 1,100,000
CE: Cash 1,500,000
MES 475,000
Gain on sale 625,000
Adj: MES 625,000
Gain on sale 625,000

AIM HIGH COMPANY


OE: MES 1,000,000
Cash 1,000,000
CE: MES 950,000
Dividend Income 50,000
Cash 1,000,000
Adj: Dividend income 50,000
MES 50,000
OE: Cash 50,000
MES 50,000
CE: Cash 50,000
Dividend income 50,000
Adj: MES 50,000
Dividend income 50,000
OE: Cash 1,300,000
MES 1,000,000
Gain on sale 300,000
CE: Cash 1,300,000
MES 950,000
Gain on sale 350,000
Adj: MES 50,000
Gain on sale 50,000
OE: Cash 3,300,000

243
MES 3,300,000
CE: Cash 3,300,000
MES 1,000,000
Gain on sale 2,200,000
Dividend income 100,000
Adj: MES 2,300,000
Gain on sale 2,200,000
Dividend income 100,000
MES 150,000
Dividend income 150,000

GOB BLESS YOU COMPANY


MES 1,170,000
Cash 1,170,000
MES 156,000
Investment income 156,000

Cash 39,000
MES 39,000
Answer:
1. C 2. D 3. C 4. C 5. B 6. D
7. B 8. B

Problem 20
The following are the transaction of DE GRACIA COMPANY for its Marketable Securities:

Marketable Securities

Jan 1 Beginning balance 58,000

Mar 15 Purchase 1,000 shares of Grace (common)


at P20, plus P2,000 commission for broker 20,000

Apr 30 Sold 500 shares of El Salvador at P1, less P15


commission for broker 485

May 11 Purchased 10,000 shares (par P1) of President


Company at P0.90 plus P90 commission for
broker 9,090

June 30 Received 100% stock dividend from Prince Co.

July 30 Purchase 50 shares of De Gracia at P140, plus


P70 commission for broker 7,000

Oct 1 Sold Ronald bonds; 10 bonds P10,400, plus


accrued interest to date, and less P50
commission for broker 10,650

Nov 15 Sold 20 shares of Prince Company at P20, no


commission involved 400

244
Nov 30 Proceeds from sale of stock rights 4,000

Dec 1 Liquidating dividend from Alta Company 400

Dec 10 Sold 15 shares of Grace (common) at P55, less


Commission of P15. 810

Additional Information:

1. The beginning balances is detailed as follows:


Prince common, 100 shares; par P50 5,000
El Salvador common, 70,000 shares; par P10 20,000
Ronald bonds, (face P1,000), 20 bonds, 12%, payable
Jan. 1 and July 1 22,000
Alta Company, 200 shares 1,000
Rhinna common, 5,500 shares, Par P2 10,000
58,000

2. Grace issued stock rights to stockholders entitling them to subscribe at par, 1 new
share for every 10 shares held on October 31, 2007. Market values at date of issuance
of rights were:
Stock, ex-right P72 per share
Stock rights 8 per share

3. The following commission were unpaid and unrecorded as at December 31, 2007:
P2,000 for the purchase of Grace stocks
P 70 for the purchase of De Gracia stocks

4. The following information was obtained relative to dividends which were not in the
books:
Company Date declared Kind Rate Remarks
Prince Company 12/15/07 Cash 20% Received 1/16/08
President Company 12/03/07 Stock 10% Received 1/19/08
Rhinna Company 01/15/08 Cash 10% Received 1/31/08

Question
1. The entry to adjust the March 15 transaction on the purchase of 1,000 share of Grace
common is:
a. Marketable securities 2,000
Commission expense 2,000
b. Marketable securities 2,000
Commission payable 2,000
c. Marketable securities 2,000
Cash 2,000
d. No adjustment

2. The entry to adjust the sale of 500 shares of El Salvador on April 30 is:
a. Marketable securities 372
Gain on sale of MS 372
b. Marketable securities 342
Cash 342
c. Marketable securities 342
Gain on sale of MS 342

245
d. No adjustment

3. The entry to adjust the purchase of 50 shares of De Gracia common on July 30 is:
a. Marketable securities 70
Commission payable 70
b. Treasury stock 7,070
Marketable securities 7,000
Commission payable 70
c. Treasury stock 7,000
Marketable securities 7,000
d. No adjustment

4. The entry to adjust the sale of 20 shares of Prince common on October 1 is:
a. Loss on sale of MS 650
Marketable securities 350
Interest income 300
b. Loss on sale of MS 350
Marketable securities 350
c. Loss on sale of MS 600
Marketable securities 300
Interest income 300
d. No adjustment

5. The gain on sale of stock rights is:


a. P 2,000 b. P 1,800 c. P 1,750 d. P 1,500

6. The entry to adjust the liquidating dividend on December 1 is:


a. Loss on investment 600
Marketable securities 600
b. Cash 600
Dividend income 600
c. Marketable securities 600
Dividend income 600
d. Marketable securities 600
Cash 600

7. Dividend receivable at year-end is:


a. P 3,900 b. P 2,900 c. P 2,800 d. P 1,800

8. Gain on sale of marketable securities at year-end is:


a. P 855 b. P 513 c. P 342 d. P 105

9. Loss on sale of marketable securities at year-end is:


a. P 100 b. P 650 c. P 750 d. P 1,350

10. The marketable securities at year-end is:


a. P 73,350 b. P 73,950 c. P 74,150 d. P 74,750

Solution
1. Marketable securities 2,000
Broker’s commission payable 2,000
To adjust the March 15 transaction.
2. Marketable securities 342

246
Gain on sale of MS 342
To adjust the April 30 transaction.
Selling price P 485
Cost 143
Gain on sale P 342
3. Treasury stock 7,070
Marketable Securities 7,000
Brokers’ commission payable 70
To adjust the July 30 transaction.
4. Loss on sale of MS 650
Marketable securities 350
Interest income 300
To adjust the October 1 transaction.
Selling price (P10,400 – P50) P 10,350
Cost of the bonds (P22,000/20 x 10) 11,000
Loss on sale P 650
5. Loss on sale of MS 100
Marketable securities 100
To adjust the Nov.15 transaction.
Selling price P 400
Cost 500
Loss on sale P 100
6. Stock rights 2,200
Marketable securities 2,200
To record the transaction that transpired on October 31.
Marketable securities 4,000
Stock rights 2,200
Gain on sale of Stock rights 1,800
To adjust the transaction on Nov. 30

7. Loss on investment 600


Marketable securities 600
To adjust the transaction on Dec. 1
8. Marketable securities 513
Gain on sale of MS 513
To adjust the transaction on Dec. 10
Selling price P 810
Cost 297
Gain on sale P 513
9. Dividend receivable 1,800
Dividend income 1,800
To record the dividend declared by Prince Company
P 50 x 180 shares x 20% = P 1,800
Answer:
1. B 2. C 3. B 4. A 5. B 6. A 7. D 8. A 9. C 10. B

Problem 21
In connection with your audit of the financial statement of the William Company for the
year 2007, the following investment in stock and dividend income accounts were presented
to you:
Investment in Stock
Debit Credit
June 18, 2006 10,000 shares common par
value P50, Samson Company 390,000
April 30, 2007 5,000 shares Samson Company
received as stock dividend 250,000
May 20, 2007 Sold 5,000 shares @ P25 125,000
Dec. 10, 2007 Sold 2,000 shares @ P60 120,000

Dividend Income
April 30, 2007 Stock dividend 250,000
Nov. 30, 2007 Samson Company common 50,000

247
The following information was obtained during your examination:

1. The balance in the investment in stock account at December 31, 2006 per your last
year‘s working papers, was P390,000.

2. From independent sources, you determine the following dividend information:

Type of Date Date of Date of


Dividend Declared Record Payment Rate
Stock March 15, 2007 April 1, 2007 April 30, 2007 50%
Cash Nov. 1, 2007 Nov. 15, 2007 Nov. 28, 2007 P5/share
Cash Dec. 1, 2007 Dec. 15, 2007 Jan. 2, 2008 20%

3. Closing market quotation as at December 31, 2007:


Bid Asked
Samson Company common 13¾ 16½

Questions:
Based on the above and the result of your audit, answer the following:

1. How much is the gain (loss) on the May 20, 2007 sale?
a. P (70,000) b. P (5,000) c. P 5,000 d. P 0

2. How much is the gain on the December 10, 2007 sale?


a. P 68,000 b. P 48,000 c. P 42,000 d. P 0

3. How much is the total dividend income for the year 2007?
a. P 400,000 b. P 300,000 c. P 150,000 d. P 50,000

4. How much is the adjusted balance of investment in stock as of December 31, 2007?
a. P 208,000 b. P 145,000 c. P 117,000 d. P 110,000

5. How much is the Allowance for Unrealized loss as of December 31, 2007?
a. P 98,000 b. P 35,000 c. P 7,000 d. P 0

Solution
Adjustments
Dividend income 250,000
Investment 250,000
-------------------------------------------------
OE: Cash 125,000
Investment 125,000
CE: Cash 125,000
Loss on sale 5,000
Investment 130,000
Adj: Loss on sale 5,000
Investment 5,000
-------------------------------------------------
OE: Cash 120,000
Investment 120,000
CE: Cash 120,000
Investment 52,000
Gain on sale 68,000
Adj: Investment 68,000
Gain on sale 68,000
-------------------------------------------------

248
Computation for the dividend income:
P5 x 10,000 shares = P 50,000
10,000 shares x P50 x 20% = 100,000
Total = P 150,000
Answer:
1. B 2. A 3. C 4. A 5. D

Problem 22
Macky Corporation’s accounting records showed the following investment at January 1,
2007:
Common stock
Johny Corp (1,000 shares) P 10,000
Sony Corp (5,000 shares) 100,000
Real estate:
Parking lot (leased to Ruel Co.) 300,000
Other:
Trademark (at cost, less accumulated amortization 25,000
Total investment P435,000

Macky owns 1% of Johny and 30% of Sony. Maky’s directors constitute a majority of Sony’s
directors. The Ruel lease, which commenced on January 1, 2002, is for ten year, at an
annual rental of P48,000. In addition, on January 1, 2002, Ruel paid a nonrefundable
deposit of P50,000, as well as security deposit of P8,000 to be refunded upon expiration of
the lease. The trademark was licensed to Nappy Co. for royalties of 10% of sales of the
trademark items. Royalties are payable semiannually on March 1 (for sales in July though
December of the prior year), and on September 1 for the sales in January through June of
the same year).

During the year ended December 31, 2007, Macky received cash dividends of P1,000 from
Johny, and P15,000 from Sony, whose 2007 net incomes were P75,000 and P150,000
respectively. Macky also received P48,000 rent from Ruel in 2007 and the following royalties
from Nappy:
March 1 September 1
2006 P3,000 P5,000
2007 4,000 7,000

Nappy estimated that sales of the trademark items would total to P20,000 for the last half
of 2007.

Questions
1. In Macky’s 2007 income statement, how much should be
reported for royalty revenue?
a. P 14,000 b. P 13,000 c. P 11,000 d. P 9,000

2. In Macky’s 2007 income statement, how much should be


reported for rental revenue?
a. P 43,000 b. P 48,000 c. P 53,000 d. P 53,800

3. In Macky’s 2007 income statement, how much should be reported as the total
investment income?
a. P 63,000 b. P 78,000 c. P 108,000 d. P 111,000

Solution
1. D
Royalty revenue for the 1st half of 2007 P 7,000

249
Royalty revenue for the 2nd half of 2007 2,000 (P20,000 x 10%)
Total royalty revenue P 9,000
2. C
Annual rental revenue P 48,000
Nonrefundable deposit (50,000/10) 5,000
Total rental revenue P 53,000
3. C
Royalty revenue P 9,000
Rental revenue 53,000
Dividend income 1,000
Share of income from equity investment 45,000 (P150,000 x 30%)
Total investment income P 108,000

Problem 23
In January of year 1, Divine Power paid P400,000 for 10,000 shares of Thy Grace voting
common stock, representing 15% interest in Thy Grace. At this date, the net assets of Thy
Grace totaled P2,000,000. The fair values of Thy Grace’s identifiable assets and liabilities
were equal to their book values. Divine Power did not have the ability to exercise significant
influence over the operating and financial policies of Thy Grace. Divine Power received
dividend of P0.70 per share from Thy Grace on October, year 1. Thy Grace reported net
income of P250,000 for year ended December 31, year 1. The stock classified as available-
for-sale. Market price for the 10,000 shares was P450,000.

In July of year 2, Divine Power paid P1,500,000 for 30,000 additional shares of Thy Grace’s
voting shares, which represents a 25% interest in Thy Grace. The fair value of Thy Grace’s
identifiable assets, net of liabilities, was equal to their book values of P4,600,000. As a
result of this transaction, Divine Power has the ability to exercise significant influence over
the operating and financial policies of Thy Grace. Divine Power received dividend of P0.80
per share from Thy Grace on April, year 2, and P1.35 per share from Thy Grace on October,
year 2. Thy Grace reported net income for the six month ended July 31, year 2 for P200,000
and P300,000 for the year ended December 31, Year 2.
The market value of the stock at the end of Year 2 is P52.

Questions:
1. Amount of income from investment in Thy
Grace that should be reported by Divine Power in its year 1 Income Statement is:
a. P 7,000 b. P 37,500 c. P 57,000 d. P 87,500

2. The carrying value of the investment in


Thy Grace that should be reported by Divide Power in its year 1 Balance Sheet is:
a. P 393,000 b. P 400,000 c. P 443,000 d. P 450,000

3. Amount of income from investment in Thy


Grace that should be reported by Divine Power in its year 2 Income Statement:
a. P 48,500 b. P 70,000 c. P 120,000 d. P 71,500

4. The carrying value of the investment in


Thy Grace that should be reported by Divide Power in its year 1 Balance Sheet is:
a. P 1,916,500 b. P 1,923,500 c. P 1,938,500 d. P 2,080,000

Solution:
Year 1 AFS 400,000
Cash 400,000
Cash 7,000
Dividend income 7,000

250
Year 2 Cash 8,000
Dividend income 8,000
AFS 1,500,000
Cash 1,500,000
RE – beg 7,000
AFS 7,000
AFS – equity 37,500
RE – beg 37,500
Dividend income 8,000
AFS 8,000
Cash 54,000
AFS 54,000
AFS 30,000
Income from invest. 30,000
AFS 40,000
Income from invest. 40,000

CHAPTER 7 – Audit of Property,


Plant, & Equipment
Problem 1
The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the
unaudited balance of the Machinery account. On April 1, 2006, a Jucuzzi machine costing
P40,000 with accumulated depreciation of P30,000 was sold for P20,000, which proceeds
was credited to the Machinery account. On June 30, 2006, a Goulds machine, costing
P50,000 and with accumulated depreciation of P22,000 was traded in for a new Pioneer
machine with an invoice price of P100,000. The cash paid of P90,000 for the Pioneer
machine (P100,000 less trade-in allowance of P10,000 was debited to the Machinery
account).

Company policy on depreciation which you accept, provides an annual rate of 10% without
salvage value. A full year’s depreciation is charged in the year of acquisition and none in
the year of disposition.

Question
1 The adjusted balance of the Machinery account at December 31, 2006 is:
a. P 290,000 b. P 370,000 c. P 260,000 d. P 300,000

2 The correct depreciation expense for the machinery for the year ended December 31,
2006 is:
a. P 37,000 b. P 29,000 c. P 30,000 d. P 26,000

251
Solution
OE: Cash 20,000
Machinery 20,000
CE: Cash 20,000
Accumulated dep’n. 30,000
Machinery 40,000
Gain on sale 10,000
Adj: Accumulated dep’n 30,000
Machinery 20,000
Gain on sale 10,000
---------------------------------------------
OE: Machinery 90,000
Cash 90,000
CE: Machinery 100,000
Accumulated dep’n 22,000
Loss on sale 18,000
Machinery 50,000
Cash 90,000
Adj: Machinery 10,000
Accumulated dep’n 22,000
Loss on sale 18,000
Machinery 50,000
---------------------------------------------
1 A P350,000 – P20,000 + P10,000 -P50,000
2 B P290,000 x 10%

Problem 2
The Land account was debited for P300,000 on March 31, 2006 for an adjoining piece of
land which was acquired in exchange for 15,000 shares of Rizal Corporation’s own stock
with a par value of P10. At the time of the exchange, the shares were selling at P24.
Transfer and legal fees of P20,000 were paid and charged to Professional Fees.

1. The adjusting entry required is:


DEBIT CREDIT
a. Land 140,000 Prem. on cap. stock 140,000
b. Land 160,000 Capital stock 150,000
Cash 10,000
c. Land 80,000 Professional fees 20,000
Prem. on cap. stock 60,000
d. None of these

2. On the Land acquired in No. 6, real estate taxes of P20,000 were paid in December,
2006, including P5,000 for the first quarter of the year. (Ignore penalty for delayed
payment). Land account was debited for the taxes paid.

The adjusting entry is:


DEBIT CREDIT
a. Taxes 15,000 Land 15,000
b. Taxes 5,000 Land 5,000
c. Land 5,000 Cash 20,000
Taxes 15,000
d. None of these

252
Solution
1. C OE: Land 300,000
Common Stock 150,000
APIC 150,000
Professional fees 20,000
Cash 20,000
CE: Land 380,000
Common stock 150,000
Cash 20,000
APIC 210,000
Adj: Land 80,000
APIC 60,000
Professional fees 20,000
2. A OE: Land 20,000
Cash 20,000
CE: Land 5,000
Taxes 15,000
Cash 20,000
Adj: Taxes 15,000
Land 15,000

Problem 3
Two independent companies, KAYA and MUYAN, are in the home building business. Each
owns a tract of land for development, but each company would prefer to build on the other’s
land. Accordingly, they agreed to exchange their land. An appraiser was hired and from
the report and the companies records, the following information was obtained:

KAYA Co.’s Land MUYAN Co.’s Land


Cost (same as book value) P 800,000 P 500,000
Market value, per appraisal 1,000,000 900,000
The exchange of land was made and based on the difference in appraised values, MUYAN
Company paid P100,000 cash to KAYA Company.

Question
1. For financial reporting purposes, KAYA Company would recognize a pretax gain on the
exchange in the amount of:
a. P 20,000 b. P 60,000 c. P 100,000 d. P 200,000

2. For financial reporting purposes, MUYAN Company recognize a pretax gain on the
exchange in the amount of:
a. P 0 b. P 100,000 c. P 300,000 d. P 400,000

3. After the exchange, KAYA Company record its newly acquired land at:
a. P 700,000 b. P 720,000 c. P 800,000 d. P 900,000

4. After the exchange, MUYAN Company record its newly acquired land at:
a. P 1,000,000 b. P 900,000 c. P 600,000 d. P
500,000

Solution
Muyan Kaya

Land 1,000,000 Cash 100,000


Cash 100,000 Land 900,000
Land 500,000 Land 800,000
Gain 400,000 Gain on sale 200,000

1 D

253
2. D
3. D
4. A

Problem 4
On an audit engagement for 2007, you handled the audit of fixed assets of Esmedina
Copper Mines. This mining company bought the exploration rights of Maharishi Exploration
on June 30, 2007 for P7,290,000. Of this purchase price, P4,860,000 was allocated to
copper ore which had remaining reserves estimated at 1,620,000 tons. Esmedina Copper
Mines expects to extract 15,000 tons of ore a month with an estimated selling price of P50
per ton. Production started immediately after some new machines costing P600,000 was
bought on June 30, 2007. These new machineries had an estimated useful life of 15 years
with a scrap value of 10% of cost after the ore estimated has been extracted from the
property, at which time the machineries will already be useless.

Among the operating expenses of Esmedina Copper Mines at December 31, 2007 were:

Depletion expense P 405,000


Depreciation of machineries 40,000

Questions
1. Recorded depletion expense was
a. Overstated by P90,000 c. Overstated by P135,000
b. Understated by P90,000 d. Understated by P135,000

2. Recorded depreciation expense was


a. Overstated by P10,000 c. Overstated by P20,000
b. Understated by P10,000 d. Understated by P20,000

3. The adjusted depletion at year-end amounted to:


a. P 270,000 b. P 315,000 c. P 495,000 d. P 540,000

4. The adjusted depreciation at year-end amounted to:


a. P 20,000 b. P 30,000 c. P 50,000 d. P 60,000

Solution
P4,860,000/1,620,000 x 15,00o tons x 6 months = P270,000
P600,000 – P60,000/9 years * x 6/12 = P30,000
*1,620,000 tons/180,000 = 9 years
1. C P405,000 - (4,860,000/1,620,000 x 90,000 units) = P135,000 overstated
2. A P40,000 - (600,000 - 60,000)/1,620,000 x 90,000 = P10,000 overstated
3. A
4. B

Problem 5
In connection with your examination of the financial statements of the Maraat Corporation
for the year 2007, the company presented to you the Property, Plant and Equipment section
of its balance sheet as of December 31, 2006, which consists of the following:

Land P 400,000
Buildings 3,200,000
Leasehold improvements 2,000,000
Machinery and equipment 2,800,000

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The following transactions occurred during 2007:

1. Land site number 5 was acquired for P4,000,000. Additionally, to acquire the land,
Maraat Corporation paid a P240,000 commission to a real estate agent. Costs of
P60,000 were incurred to clear the land. During the course of clearing the land, timber
and gravel were recovered and sold for P20,000.

2. The second tract of land (site number 6) with a building was acquired for P1,200,000.
The closing statement indicated that the land value was P800,000 and the building value
was P400,000. Shortly after acquisition, the building was demolished at a cost of
P120,000. The new building was constructed for P600,000 plus the following costs:

Excavation fees P 44,000


Architectural design fees 32,000
Building permit fees 4,000
Imputed interest on funds used during construction 24,000

The building was completed and occupied on September 1, 2007.

3. The third tract of land (site number 7) was acquired for P2,400,000 and was put on the
market for resale.

4. Extensive work was done to a building occupied by Maraat Corporation under a lease
agreement. The total cost of the work was P500,000, which consisted of the following:

Particular Amount Useful life


Painting of ceilings P 40,000 one year
Electrical work 140,000 Ten years
Construction of extension to current
working area 320,000 Thirty years

The lessor paid one-half of the costs incurred in connection with the extension to the
current working area.

5. A group of new machines was purchased under a royalty agreement which provides for
payment of royalties based on units of production for the machines. The invoice price of
the machines was P300,000, freight costs were P8,000, unloading charges were P6,000,
and royalty payments for 2007 were P52,000.

Question
1. Land at year-end is
a. P 5,480,000 b. P 5,900,000 c. P 6,000,000 d. P 8,400,000

2. Buildings at year-end is
a. P 3,800,000 b. P 3,880,000 c. P 4,200,000 d. P 4,280,000

3. Leasehold improvements at year-end is


a. P 2,300,000 b. P 2,560,000 c. P 2,600,000 d. P 2,720,000

255
4. Machinery and equipment at year-end is
a. P 3,100,000 b. P 3,108,000 c. P 3,114,000 d. P 3,166,000

Solution
1. Land 4,300,000
Cash 4,300,000
Cash 20,000
Land 20,000
2. Land 1,320,000
Cash 1,320,000
Building 680,000
Cash 680,000
3. Land - investment 2,400,000
Cash 2,400,000
4. Operating expenses 40,000
Leasehold improvements 300,000
Cash 340,000
5. Machinery 314,000
Royalty expenses 52,000
Cash 366,000
Answer:
1. C 2. B 3. A 4. C

Problem 6
Norie Company’s property, plant and equipment and accumulated depreciation balance at
December 31, 2005 are:
Accumulated
Cost Depreciation
Machinery and equipment P 1,380,000 P 367,500
Automobiles and trucks 210,000 114,320
Leasehold improvements 432,000 108,000

Additional information:

Depreciation methods and useful lives:

Machinery and equipment – straight line; 10 years


Automobiles and trucks – 150% declining balance; 5 years, all acquired after 2000.
Leasehold improvements – straight line

Depreciation is computed to the nearest month.

Salvage values are immaterial except for automobiles and trucks, which have an estimated
salvage values equal to 10% of cost.

Other additional information:

256
- Norie Company entered into a 12-year operating lease starting January 1, 2003. The
leasehold improvements were completed on December 31, 2002 and the facility was
occupied on January 1, 2003.

- On July 1, 2006, machinery and equipment were purchased at a total invoice cost of
P325,000. Installation cost of P44,000 was incurred.

- On August 30, 2006, Norie Company purchased new automobile for P25,000.

- On September 30, 2006, a truck with a cost of P48,000 and a carrying amount of
P30,000 on December 31, 2005 was sold for P23,500.

- On December 30, 2006, a machine with a cost of P17,000, a carrying value of P2,975 on
date of disposition, was sold for P4,000.

Questions

1. The gain on sale of truck on September 30, 2006 is:


a. P 0 b. P 250 c. P 2,680 d. P 6,500

2. The gain on sale of machinery on December 30, 2006 is:


a. P 0 b. P 13,000 c. P 2,725 d. P 1,025

3. The adjusted balance of the property, plant, and equipment as of December 31, 2006 is:
a. P 1,813,000 b. P 2,351,000 c. P 2,387,000 d. P 2,388,500

4. The total depreciation expense to be reported on the income statement for the year
ended December 31, 2006 is:
a. P 138,000 b. P 185,402 c. P 221,404 d. P 245,065
5. The carrying amount of property, plant, and equipment as of December 31, 2006 is:
a. P 1,290,547 b. P 1,578,545 c. P 1,587,497 d. P 1,617,322

Solution
Entries:
Machinery and equipment 369,000
Cash 369,000
Automobile and trucks 25,000
Cash 25,000
Cash 23,500
Accumulated depreciation 24,750
Automobile and trucks 48,000
Gain on sale 250
Accumulated deprecation - 12/31/02 18,000
Depreciation - 9 mos. (P30,000 x 30% x 9/12) 6,750
Total 24,750

Cash 4,000
Accumulated depreciation 14,025
Machinery and equipment 17,000
Gain on sale 1,025
Depreciation 221,404
Accumulated depreciation - mach. 156,450
Accumulated depreciation - auto. 28,954
Accumulated depreciation - improv. 36,000

Machinery and equipment - P1,380,000/10 years = P 138,000


P 369,000/10 years x 6/12 = 18,450 P 156,450
Leasehold improvement - P432,000/12 years = 36,000

257
Automobile and trucks - CV of unsold item P 65,680 x 30% = 19,704
Sold item - 30,000 x 30% x 9/12 = 6,750
Current purchase P25,000 x 30% x 4/12= 2,500 28,954
Answer:
1. B 2. D 3. B 4. C 5. B

Problem 7
Information pertaining to Highland Corporation’s property, plant and equipment for
2005 is presented below:

Account balances at January 1, 2005:


Debit Credit
Land P 150,000
Buildings 1,200,000
Accumulated depreciation – Buildings P263,100
Machinery and equipment 900,000
Accumulated depreciation – Machinery and equipment 250,000
Automotive equipment 115,000
Accumulated depreciation – Automotive equipment 84,600

Depreciation data:
Depreciation method Useful life

Buildings 150% declining-balance 25 years


Machinery and equipment Straight-line 10 years
Automotive equipment Sum-of-the-years’-digits 4 years
Leasehold improvements Straight-line -

The salvage values of the depreciable assets are immaterial. Depreciation is computed to
the nearest month.

Transactions during 2005 and other information are as follows:

a. On January 2, 2005, Highland purchased a new car for P20,000 cash and trade-in of a 2-
year-old car with a cost of P18,000 and book value of P5,400. The new car has a cash
price of P24,000; the market value of the trade-in is not known.

b. On April 1, 2005, a machine purchased for P23,000 on April 1, 2000, was destroyed by
fire, Highland recovered P15,500 from its insurance company.

c. On May 1, 2005, costs of P168,000 were incurred to improve leased office premises. The
leasehold improvements have a useful life of 8 years. The related lease terminates on
December 31, 2011.

d. On July 1, 2005, machinery and equipment were purchased at a total invoice cost of
P280,000; additional costs of P5,000 for freight and P25,000 for installation were
incurred.

e. Highland determined that the automotive equipment comprising the P115,000 balance
at January 1, 2005, would have been depreciated at a total amount of P18,000 for the
year ended December 31,2005.

Questions

258
Based on the information above, answer the following questions:

1. The adjusted balance of Machinery and Equipment (at cost) at December 31, 2005 is:
a. P 1,180,000 b. P 1,187,000 c. P 1,202,500 d. P 1,210,000

2. The adjusted balance of Automotive Equipment (at cost) at December 31, 2005 is:
a. P 139,000 b. P 121,000 c. P 115,000 d. P 109,000

3. The adjusted balance of Accumulated Depreciation of Building at December 31, 2005 is:
a. P 72,000 b. P 263,100 c. P 335,100 d. P 319,314

4. The adjusted balance of Accumulated Depreciation of Machinery and Equipment at


December 31, 2005 is:
a. P 330,775 b. P 342,275 c. P 351,475 d. P 353,775

5. The adjusted balance of Accumulated Depreciation of Automotive Equipment at


December 31, 2005 is:
a. P 90,600 b. P 96,000 c. P 103,200 d. P 108,600

6. The adjusted balance of Accumulated Depreciation of Leasehold Improvements at


December 31, 2005 is:
a. P 0 b. P 14,000 c. P 14,700 d. P 16,800

7. The total adjusted balance of Accumulated Depreciation of Property and Equipment at


December 31, 2005 is:
a. P 534,375 b. P 698,475 c. P 774,389 d. P 804,475

8. The total gain(loss) from disposal of assets at December 31, 2005 is:
a. P 5,400 b. P 4,000 c. P 2,600 d. P 1,400

9. The adjusted book value of Building at December 31, 2005 is:


a. P 1,128,000 b. P 936,900 c. P 880,686 d. P 864,900

10. The adjusted book value of Leasehold Improvement at December 31, 2005 is:
a. P 168,000 b. P 154,000 c. P 153,300 d. P 151,200

Solution
Entries:
a. Automobile Equipment 24,000
(cash paid, P20,000 plus P4,000 trade-in allow.)
Accum. Depreciation 12,600
Loss on trade-in 1,400
Automobile Equipment 18,000
Cash 20,000
* Trade in allowance is the difference between the cash price and the purchase
price of the equipment.
b. Cash 15,500
Accum. Depreciation 11,500
Machinery and equipment 23,000
Gain on asset disposal 4,000
c. Leasehold improvements 168,000
Cash 168,000
d. Machinery and equipment 310,000
Cash 310,000

Computation of the Depreciation Expense and Accumulated Depreciation:

259
Building: Book value 1/1/05 (P1,200,000 - P263,100) - P936,900
X declining rate (1/25 x 150%) 6% .
Depreciation for the year P 56,214
Plus; Accum. Depreciation - 1/1/05 263,100
Accum. Depreciation - 12/31/05 P319,314

Machinery and Equipment: Balance - 1/1/05 P900,000


Less: machine destroyed by fire 23,000
P877,000
Divided by 10 yrs. P 87,700
Dep’n of the Machine destroyed by fire:
(P23,000/10 x 3/12) 575
Dep’n of the machine purchase for the year:
(P310,000/10 x 6/12) 15,500
Total Depreciation P103,775
Plus: Accum. Dep’n - 1/1/05 250,000
Less: Accum. Dep’n - destroyed by fire ( 11,500)
Accum. Depreciation - 12/31/05 P342,275

Automotive Equipment: Depreciation on P115,000 balance, 1/1/05 P 18,000


Less: Depreciation on car traded in
(P18,000 x 2/10) 3,600
Adjusted depreciation on the beg. Bal. P 14,400
Dep’n on the 1/2/05 Purchase:
(P24,000 x 4/10) 9,600
Total Depreciation expense P 24,000
Plus: Accum. Depreciation - 1/1/05 84,600
Less: Accum. Dep’n - traded equipment ( 12,600)
Accumulated depreciation - 12/31/05 P 96,000

Leasehold Improvements: P168,000/80 months x 8 mos. for 2005 P 16,800

ANSWER: 1. B 2. B 3. D 4. B 5. B
6. D 7. C 8. C 9. C 10. D
Problem 8
The schedule of Gerasmo Company’s property and equipment prepared by the client
follows:

PLANT ASSETS
Land P 320,000
Building 540,000
Machinery and Equipment 180,000
Total 1,040,000

ACCUMULATED DEPRECIATION
Building P 81,000
Machinery and Equipment 54,000
Total P 135,000

Further examination revealed the following:

1. All property and equipment were acquired on January 2, 2003.


2. Assets are depreciated using the straight-line method. The building and equipment are
expected to benefit the company for 20 years and 10 years respectively. Salvage values
of the assets are negligible.
3. An equipment with an original cost of P40,000 was sold on December 30, 2005 for
P32,000. The proceeds were credited to other operating income account.
4. In 2005, The company recognized an appreciation in value of land and building as
determined by the Company’s engineers. The appraisal was recorded as follows:

260
Debit Credit
Land 70,000
Building 60,000
Accum. depreciation 6,000
Revaluation increment 124,000
Questions
1. Property and equipment at year-end is:
a. P 753,000 b. P 870,000 c. P 910,000 d. P 990,000

2. Accumulated depreciation at year-end is:


a. P 114,000 b. P 117,000 c. P 123,000 d. P 135,000

Solution
OE: Cash 32,000
Other ope. income 32,000
CE: Cash 32,000
Accumulated dep’n 12,000
Property & equip. 40,000
Other ope. income 4,000
Adj: Accum. dep’n 12,000
Other ope. income 28,000
Property & equip. 40,000
-----------------------------------------------
Adj: Revaluation increment 124,000
Accumulated dep’n 6,000
Property & equipment 130,000
-----------------------------------------------
Per book depreciation - bldg 75,000
Per audit depreciation - bldg 72,000 (540,000-60,000/20 x 3 yrs)
Adjustment 3,000

Adj: Accum. Depreciation 3,000


Operating expenses 3,000
Answer:
1. B 2. A

Problem 9
The following information pertains to Marlisa Company’s delivery trucks:

Date Particulars Debit Credit


1/1/04 Trucks 1, 2, 3, & 4 3,200,000
3/15/05 Replacement of truck 3 tires 25,000
7/1/05 Truck 5 800,000
7/10/05 Reconditioning of truck 4, which was
damaged in a collision 35,000
9/1/05 Insurance recovery on truck 4 accident 33,000
10/1/05 Sale of truck 2 600,000
4/1/06 Truck 6 1,000,000 150,000
5/2/06 Repainting of truck 4 27,000
6/30/06 Truck 7 720,000
12/1/06 Cash received on lease of truck 7 22,000

ACCUM. DEPRECIATION - DELIVERY EQUIPMENT

Date Particulars Debit Credit


12/31/04 Depreciation expense 300,000
12/31/05 Depreciation expense 300,000

261
12/31/06 Depreciation expense 300,000

a. On July 1, 2005, Truck 3 was traded-in for a new truck. Truck 5, costing P850,000; the
selling party allowed a P50,000 trade in value for the old truck.

b. On April 1, 2006, Truck 6 was purchased for P1,000,000; Truck 1 and cash of P850,000
being given for the new truck.

c. The depreciation rate is 20% by unit basis.

d. Unit cost of Trucks 1 to 4 is at P800,000 each.

Questions
1. What is the loss on trade-in of truck 3?
a. P 50,000 b. P 430,000 c. P 510,000 d. P 560,000

2. The correct cost of truck 5 is


a. P 560,000 b. P 610,000 c. P 800,000 d. P 850,000

3. The book value of truck 5 at December 31, 2006 is


a. P 850,000 b. P 595,000 c. P 560,000 d. P 510,000

4. What is the loss in trade-in of Truck 1?


a. P 150,000 b. P 250,000 c. P 290,000 d. P 410,000

5. The correct cost of truck 6 is


a. P 590,000 b. P 800,000 c. P 850,000 d. P 1,000,000
6. The carrying value of Truck 6 at December 31, 2006 is
a. P 501,500 b. P 680,000 c. P 850,000 d. P 1,100,000

7. The gain (loss) on sale of truck 2 is


a. P 80,000 b. P 331,600 c. P 495,000 d. P 496,200

8. The book value of truck 4 at December 31, 2006 is


a. P 320,000 b. P 331,600 c. P 495,000 d. P 496,200

9. The 2000 depreciation expense is understated by


a. P 92,000 b. P 252,000 c. P 292,000 d. P 372,000

10. The cost of repainting truck 4 should have been charged to:
a. Claims receivable - insurance company
b. Retained earnings
c. Accumulated depreciation
d. Repairs and maintenance

11. Which of the following controls would most likely allow for a reduction in the scope of the
auditor’s tests of depreciation expense?
a. Review and approval of the periodic property depreciation entry by a supervisor who
does not actively participate in its preparation.
b. Comparison of property account balances for the current year with the current year budget and prior-
year actual balance.
c. Review of the miscellaneous revenue account for salvage credits and scrap sales of
partially depreciated property.

262
d. Authorization of payment of vendors’ invoices by a designated employee who is
independent of the property receiving functions.

Solution
1. C
Cost of truck 3 800,000
Accumulated depreciation (P800,000 x 20% x 1.5) 240,000
Net book value 560,000
Trade-in allowance 50,000
Loss on trade-in 510,000
2. D
3. B (P850,000-(P850,000x20%x1.5)
4. B
Cost of truck 1 800,000
Less: Accumulated depreciation (P800,000 x 20% / 12 mos. x 27 mos.) 360,000
Net book value 440,000
Trade-in allowance 150,000
Loss on trade-in 290,000
5. D
6. C [P1,000,000 - (1,000,000 x 20% x 9/12)]
7. A
Cost of truck 2 800,000
Accumulated depreciation (P800,000 x 20% / 12 mos. x 21 mos.) 280,000
Net book value 520,000
Selling price 600,000
Gain on sale 80,000
8. A ([P800,000 - (P800,000 x 20% x 3)]
9. C
Truck 1 (P800,000 x 20% 3/12) 40,000 -
Truck 2 - -
Truck 3 - -
Truck 4 (P800,000 x 20%) 160,000 800,000
Truck 5 (P850,000 x 20%) 170,000 850,000
Truck 6 (P1,000,000 x 20% x 9/12) 150,000 1,000,000
Truck 7 (P720,000 x 20% x 6/12) 72,000 720,000
Depreciation per audit 592,000 3,370,000
Depreciation per records 300,000
Understatement 292,000
10. D
11. B

Problem 10
Information pertaining to SAILADIN CORPORATION’s property, plant and equipment for
2006 is presented below.

Account balances at January 1, 2006


Debit Credit
Land 6,000,000
Buildings 48,000,000
Accumulated depreciation – bldg. 10,524,000
Machinery and equipment 36,000,000
Accumulated depreciation – mach. & equip. 10,000,000
Automotive equipment 4,600,000
Accumulated depreciation – auto. Equip. 3,384,000

Depreciation data:
Depreciation method Useful life

Buildings 150% declining-balance 25 years


Machinery and equipment Straight-line 10 years

263
Automotive equipment Sum-of-the-years-digits 4 years
Leasehold improvements Straight-line -

The salvage values of the depreciable assets are immaterial. Depreciation is computed to
the nearest month.

Transactions during 2006 and other information are as follows:

(a) On January 2, 2006, Sailadin Corporation purchased a new car for P800,000 cash
and trade-in of a 2-year car with a cost of P720,000 and a book value of P216,000. The
new car has a cash price of P960,000; the market value of the trade-in is not know.

(b) On April 1, 2006, a machine purchased for P920,000 on April 1, 2001, was
destroyed by fire. Sailadin Corporation recovered P620,000 from its insurance company.

(c) On May 1, 2006, costs of P6,720,000 were incurred to improve leased office
premises. The leasehold improvements have a useful life of 8 years. The related lease
terminates on December 31, 2012.

(d) On July 1, 2006, machinery and equipment were purchased at a total invoice cost of
P11,200,000; additional costs of P200,000 for freight and P1,000,000 for installation
were incurred.

(e) Sailadin Corporation determined that the automotive equipment comprising the
P4,600,000 balance at January 1, 2006, would have been depreciated at a total amount
of P720,000 for the year ended December 31, 2006.

Questions
1. What is the depreciation on building for 2006?
a. P 2,998,080 b. P 2,880,000 c. P 2,248,560 d. P 1,499,040

2. What is the book value of the building at December 31, 2006?


a. P 35,976,960 b. P 35,227,440 c. P 34,596,000 d. P 34,477,920

3. What is the depreciation on machinery and equipment for 2006?


a. P 4,220,000 b. P 4,197,000 c. P 4,151,000 d. P 4,128,000

4. What is the gain on machine destroyed by fire?


a. P 620,000 b. P 460,000 c. P 300,000 d. P 160,000

5. What is the balance of the Accumulated Depreciation – Machinery and Equipment at


December 31, 2006?
a. P 13,777,000 b. P 13,760,000 c. P 13,691,000 d. P 13,231,000

6. What is the depreciation on automotive equipment for 2006?


a. P 1,104,000 b. P 960,000 c. P 816,000 d. P 720,000

7. What is the gain (loss) on car traded-in?


a. P 240,000 b. P (240,000) c. P 56,000 d. P (56,000)

8. What is the book value of automotive equipment at December 31, 2006?


a. P 1,720,000 b. P 1,144,000 c. P 1,000,000 d. P 712,000

264
9. What is the depreciation on leasehold improvements for 2006?
a. P 756,000 b. P 672,000 c. P 630,000 d. P 560,000

10. What is the book value of leasehold improvements at December 31, 2006?
a. P 6,160,000 b. P 6,090,000 c. P 6,048,000 d. P 5,964,000

Solution
1. C
Book Value, 1/1/06 (P48,000,000 - P10,524,000) P 37,476,000
150% declining-balance rate (1/25 x 150%) x 6%
Depreciation on building P 2,248,560
2. B
Cost of building P 48,000,000
Less: Accumulated depreciation (P10,524,000 + P 2,248,560) 12,772,560
Book value of building, 12/31/06 P 35,227,440
3. C
Balance, 1/106 P 36,000,000
Less: Machine destroyed by fire 920,000
Balance P 35,080,000
Depreciation 10%
3,508,000
Machine destroyed by fire (P920,000 x 10% x 3/12) 23,000
Purchased 7/1/06 (P12,400,000 x 10% x 6/12) 620,000
Total depreciation on machinery and equipment 4,151,000
4. D
Insurance recovery 620,000
Less: Book value of machine destroyed
(Cost 920,000 - Accum. dep’n (P 920,000 x 10% x 5) 460,000
Gain on recovery from insurance company 160,000
5. C
Balance, 1/1/06 10,000,000
Add: depreciation for 2006 4,151,000
Total 14,151,000
Less: Machinery destroyed by fire (P920,000 x 10% x 5) 460,000
Accumulated depreciation - machinery and equip. 13,691,000
6. B
Depreciation on