AUDITING PROBLEMS

PROBLEM NO. 1 – AUDIT OF CASH

The cash account of NUNAL COMPANY shows the following activities:

Date Debit Credit Balance
Nov. 30 Balance P345,000
Dec. 2 November bank charges P 150 344,850
4 November bank credit for notes
receivable collected P 30,000 374,850
15 NSF check 3,900 370,950
20 Loan proceeds 145,500 516,450
21 December bank charges 180 516,270
31 Cash receipts book 2,121,900 2,638,170
31 Cash disbursements book 1,224,000 1,414,170

CASH BOOKS
RECEIPTS PAYMENTS
Date OR No. Amount Check No. Amount
Dec. 1 110-120 P 33,000 801 P 6,000
2 121-136 63,900 802 9,000
3 137-150 60,000 803 3,000
4 151-165 168,000 804 9,000
5 166-190 117,000 805 36,000
8 191-210 198,000 806 57,000
9 211-232 264,000 807 78,000
10 233-250 231,000 808 90,000
11 251-275 63,000 809 183,000
12 276-300 90,000 810 21,000
15 301-309 165,000 811 24,000
16 310-350 24,000 812 48,000
17 351-390 57,000 813 60,000
18 391-420 27,000 814 66,000
19 421-480 51,000 816 108,000
22 481-500 63,000 817 33,000
23 501-525 96,000 818 150,000
23 - - 819 21,000
23 - - 820 12,000
26 526-555 222,000 821 9,000
28 556-611 15,000 822 36,000
28 - - 823 39,000
29 612-630 114,000 824 87,000
29 - - 825 6,000
29 - - 826 33,000
Totals P2,121,900 P1,224,000
 BANK STATEMENT

Date Check Charges Credits

Dec. 1 792 P 7,500 P 25,500

2 802 9,000 33,000
3 - - 63,900
4 804 9,000 60,000
5 EC 243,000 243,000
8 805 36,000 285,000
9 CM 16 - 36,000
10 799 21,150 462,000
11 DM 57 3.900 231,000
12 808 90,000 63,000
15 803 3,000 -
16 809 183,000 255,000
17 DM 61 180 24,000
18 813 60,000 57,000
19 CM 20 - 145,500
22 815 18,000 -
23 816 108,000 141,000
23 811 24,000 -
23 801 6,000 -
26 814 66,000 96,000
28 818 150,000 222,000
28 DM 112 360 -
29 821 9,000 15,000
29 CM 36 - 36,000
29 820 12,000 -
Totals P1,059,090 P2,493,900

1. DMs 61 and 112 are for service charges.

2. EC is error corrected.
3. DM 57 is for an NSF check.
4. CM 20 is for loan proceeds, net of P450 interest charges for 90 days.
5. CM 16 is for the correction of an erroneous November bank charge.
6. CM 36 is for customers’ notes collected by bank in December.
7. Bank balance on December 31 is P1,776,810

Based on the preceding information, determine the following:

1. Outstanding checks at December 31

A. P459,000
B. P477,000
C. P441,000
D. P487,650

2. Deposit in transit at December 31

A. P114,000
B. P139,500
C. P132,000
D. P0
 3. Adjusted bank receipts for the month of December

A. P2,297,400
B. P2,291,400
C. P2,303,400
D. P2,321,400

4. Adjusted book disbursements for the month of December

A. P1,228,440
B. P1,246,440
C. P1,210,440
D. P1,246,620

5. Adjusted bank balance at December 31

A. P1,449,810
B. P1,674,810
C. P1,431,810
D. P1,776,810

PROBLEM NO. 2 – AUDIT OF ACCOUNTS RECEIVABLE (CONFIRMATION)

To substantiate the existence of the accounts receivable balances as at December 31, 2018 of LUKAS
COMPANY, you have decided to send confirmation requests to customers. Below is a summary of the
confirmation replies together with the exceptions and audit findings. Gross profit on sales is 20%. The
company is under the perpetual inventory method.

Name of Balance Comments

Customer Per Books From Customers Audit Findings
Concordia P150,000 P90,000 was returned on December 30, Returned goods were
2018. Correct balance as is P60,000. received December 31, 2018.
Falcon P30,000 Your CM representing price adjustment The CM was taken up by
dated December 28, 2018 cancels this. Lukas Company in 2019.
Lazaro P144,000 You have overpriced us by P150. Correct The complaint is valid.
price should be P300.
Silang P112,500 We received the goods only on January 6, Term is shipping point.
2019. Shipped in 2018.
Yakal P135,000 Balance was offset by our December Lukas Company credited
shipment of your raw materials. accounts payable for
P135,000 to record
purchases. Yakal is a
supplier.

6. If the necessary adjusting journal entry is made regarding the case of Concordia, the net income
will

A. Decrease by P18,000. .
B. Decrease by P90,000.
C. Increase by P18,000
D. Increase by P90,000.
 7. The effect on 2018 net income of Lukas Company of its failure to record the CM involving
transaction with Falcon:

A. P30,000 over.
B. P30,000 under.
C. P6,000 over.
D. P6,000 under.

8. The overstatement of receivable from Lazaro is

A. P96,000
B. P24,000
C. P72,000
D. P48,000

9. The accounts receivable from Silang is

A. Correctly stated.
B. P112,500 over.
C. P225,000 under.
D. P112,500 under

10. The adjusting entry to correct the receivable from Yakal is

A. Purchases 135,000
Accounts receivable 135,000
B. Accounts payable 135,000
Purchases 135,000
C. Accounts receivable 135,000
Accounts payable 135,000
D. Accounts payable 135,000
Accounts receivable 135,000

PROBLEM NO. 3 – AUDIT OF NOTES RECEIVABLE

The HVR Company included the following in its notes receivable as of December 31, 2018:

Note receivable from sale of land P2,640,000

Note receivable from consultation 3,600,000
Note receivable from sale of equipment 4,800,000

The following transactions during 2018 and other information relate to the company’s notes receivable:

a) On January 1, 2018, HVR Company sold a tract of land to Triple X Company. The land, purchased 10
years ago, was carried on HVR’s books at P1,500,000. HVR received a noninterest-bearing note for
P2,640,000 from Triple X. The note is due on December 31, 2019. There was no established
exchange price for the land. The prevailing interest rate for this note on January 1, 2018 was 10%.

b) On January 1, 2018, HVR Company received a 5%, P3,600,000 promissory note in exchange for the
consultation services rendered. The note will mature on December 31, 2020, with interest receivable
every December 31. The fair value of the services rendered is not readily determinable. The
prevailing rate of interest for a note of this type was 10% on January 1, 2018.

c) On January 1, 2018, HVR Company sold an old equipment with a carrying amount of P4,800,000,
receiving P7,200,000 note. The note bears an interest rate of 4% and is to be repaid in 3 annual
installments of P2,400,000 (plus interest on the outstanding balance). HVR received the first
 payment on December 31, 2018. There is no established market value for the equipment. The
market interest rate for similar notes was 14% on January 1, 2018.

Note: Round off present value factors to four decimal places and final answers to the nearest hundred.

11. What amount of consultation fee revenue should be recognized in 2018?

A. P3,600,000
B. P2,705,000
C. P4,047,500
D. P3,152,500

12. What amount should be reported as gain on sale of equipment?

A. P994,800
B. P2,400,000
C. P1,162,700
D. P1,237,300

13. The amount to be reported as noncurrent notes receivable on December 31, 2018 is
A. P7,482,200
B. P6,037,300
C. P5,477,500
D. P7,877,600

14. The amount to be reported as current notes receivable on December 31, 2018 is
A. P4,800,000
B. P2,400,200
C. P4,404,900
D. P7,440,000

15. How much interest income should be recognized in 2018?

A. P974,200
B. P756,000
C. P1,378,700
D. P1,160,500

PROBLEM NO. 4 – AUDIT OF SHAREHOLDERS’ EQUITY

iBELIEVE COMPANY began operations on January 1. Authorized were 120,000 shares of P10 par value
ordinary shares and 240,000 shares of 10%, P100 par value preference shares. The following
transactions involving shareholders’ equity occurred during the first year of operations.

Jan. 1 Issued 30,000 ordinary shares to the corporation promoters in exchange for land valued at
P1,020,000 and services valued at P420,000. The property had cost the promoters P540,000 3
years before and was carried on the promoters’ books at P300,000.

Feb. 23 Issued 60,000 preference shares with a par value of P100 per share. The shares were issued
at a price of P150 per share, and the company paid P450,000 to an agent for selling the
shares.

Mar. 10 Sold 18,000 ordinary shares for P390 per share. Issue costs were P150,000.

Apr. 10 24,000 ordinary shares were sold under share subscriptions at P450 per share. No shares are
issued until a subscription contract is paid in full. No cash was received.

July 14 Exchanged 4,200 ordinary shares and 8,400 preference shares for a building with a fair value
of P3,060,000. The building was originally purchased for P2,280,000 by the investors and has
 a book value of P1,320,000. In addition, 3,600 ordinary shares were sold for P1,440,000 in
cash.

Aug. 3 Received payments in full for half of the share subscriptions and payments on account on the
rest of the subscriptions. Total cash received was P8,400,000. Share certificates were issued
for the subscriptions paid in full.

Dec. 31 Net income for the first year of operations was P3,600,000.

Dec. 31 Declared a cash dividend of P10 per share on preference shares and P20 per share on ordinary
shares, payable on February 10 to shareholders of record on January 15.

Based on the preceding information, calculate the balances of each of the following
accounts:

16. Share premium – preference shares

A. P2,550,000
B. P540,000
C. P3,090,000
D. P3,270,000

17. Ordinary shares

A. P528,000
B. P678,000
C. P366,000
D. P372,000

18. Share premium – ordinary shares

A. P22,242,000
B. P18,660,000
C. P11,520,000
D. P21,432,000

19. Retained earnings

A. P1,320,000
B. P3,600,000
C. P2,100,000
D. P1,740,000

20. Total shareholders’ equity

A. P32,160,000
B. P29,760,000
C. P33,900,000
D. P31,080,000

PROBLEM NO. 5 – COMPUTATION OF CASH SHORTAGE

You have been asked by the proprietor of the SANDOVAL CO. to verify the accountability of the cashier-
bookkeeper, who was allowed to take a vacation leave a few days ago.

A. The bank reconciliation statements prepared by the cashier-bookkeeper are presented below:
 November 30, 2018
Balance per bank statement P21,500
Cash on hand 500
Total 22,000
Outstanding checks:
No. 2520 P 2,000
2521 1,400
2522 1,900 (3,300)
Erroneous bank charge 2,000
Erroneous bank credit (500)
Book balance P20,200

December 31, 2018

Balance per bank statement P 135,000
Cash on hand 6,300
Total 141,300
Outstanding checks:
No. 2674 P31,000
2675 10,300
2676 5,000 (41,300)
Erroneous bank charge 3,000
Erroneous bank credit (600)
Book balance P102,400

B. The Cash in Bank account in the general ledger shows the following debits and credits during
December:

Cash in Bank
Dec. Dec.
1 Balance P20,200 1 Checks issued P2,000
2 Received from customers 4,500 5 Checks issued 5,200
7 Received from customers 5,000 14 Checks issued 31,000
12 Received from customers 20,000 24 Checks issued 46,000
17 Received from customers 30,000 28 Checks issued 7,600
23 Received from customers 9,000
27 Received from customers 70,000
31 Received from customers 48,500 31 Balance 102,400
Total P198,200 Total P198,200

C. The following summarized transactions were taken from the bank statement for the month of
December 2018:

Balance, December 1, 2018 P16,500

 Total deposits P173,700
The total deposits per bank statement include:
a. Collection of notes receivable P5,000
b. Correction of November erroneous bank charge 2,000
c. December 10 deposit of Lava, Inc. credited in error
to SANDOVAL 600
Total P7,600
Total checks P65,200
The total checks per bank statement include:
a. Correction of November erroneous bank credit P 500
b. December check of Nile Co. charged in error
to SANDOVAL 3,000
Total P3,500

D. Cash on hand per count in the morning of January 2, 2019, amounted to P6,300.

E. Before leaving his company for a one-week vacation, the proprietor had left several signed blank
checks that the cashier-bookkeeper had cashed for his personal use.

21. What is the adjusted cash balance on November 30, 2018?

A. P16,500
B. P13,200
C. P20,200
D. P14,500

22. The amount of unaccounted receipts in December is

A. P11,000
B. P13,200
C. P9,000
D. P15,100

23. The amount of unrecorded/unsupported disbursements in December is

A. P15,100
B. P10,900
C. P7,000
D. P5,000

24. What is the total cash shortage as of December 31, 2018?

A. P26,000
B. P15,100
C. P33,000
D. P7,000

25. What is the adjusted cash balance on December 31, 2018?

A. P102,400
B. P125,000
C. P87,400
D. P111,400

PROBLEM NO. 6 – AUDIT OF INVENTORIES

The cost of goods sold section of the income statement prepared by your client for the year ended
December 31 appears as follows:

Inventory, January 1 P 240,000

Purchases 4,800,000
Cost of goods available for sale P5,040,000
Inventory, December 31 300,000
Cost of goods sold P4,740,000

Although the books have been closed, your working paper trial balance is prepared showing all accounts
with activity during the year. This is the first time your firm has made an examination.

The January 1 and December 31 inventories appearing above were determined by physical count of the
goods on hand on those dates and no reconciling items were considered. All purchases are FOB shipping
point.

In the course of your examination of the inventory cutoff, both at the beginning and end of the year, you
discovered the following facts:
Beginning of the Year

1. Invoices totaling P75,000 were entered in the voucher register in January, but the goods were
received during December.

2. December invoices totaling P39,600 were entered in the voucher register in December, but the goods
were not received until January.

End of the Year

3. Sales of P129,000 (cost of P38,700) were made on account on December 31 and the goods delivered
at that time, but all entries relating to the sales were made on January 2.

4. Invoices totaling P45,000 were entered in the voucher register in January, but the goods were
received in December.

5. December invoices totaling P54,000 were entered in the voucher register in December, but the goods
were not received until January.

6. Invoices totaling P36,000 were entered in the voucher register in January, and the goods were
received in January, but the invoices were dated December.

Questions:

26. What working paper adjustment should be made at the end of the current year for item no. 1?
A. Purchases 75,000
Retained earnings 75,000
B. Retained earnings 75,000
Purchases 75,000
C. Inventory, beginning 75,000
Purchases 75,000
D. No adjusting entry is necessary.

27. The working paper adjustment to correct the error described in item no. 3 should include a debit to
A. Accounts receivable of P129,000
B. Sales of P129,000
C. Inventory of P38,700
 D. Retained earnings of P90,300

28. The company’s statement of financial position as of the end of the current year should show
inventory of
A. P390,000
B. P300,000
C. P279,600
D. P351,300

29. What is the net adjustment to purchases of the current year?

A. P81,000 increase
B. P75,000 decrease
C. P6,000 increase
D. P6,000 decrease

30. The cost of goods sold for the current year is

A. P4,683,600
B. P4,659,600
C. P4,740,000
D. P4,695,600

PROBLEM NO. 7 – AUDIT OF VARIOUS WORKING CAPITAL ACCOUNTS

The following accounts were included in the unadjusted trial balance of BUNCHING COMPANY as of
December 31, 2018:

Cash.................................................................................................P 963,200
Accounts receivable............................................................................2,254,000
Inventory...........................................................................................6,050,000
Accounts payable...............................................................................4,201,000
Accrued expenses.................................................................................431,000

During your audit, you noted that Bunching Company held its cash books open after year-end. In
addition, your audit revealed the following:

1. Receipts for January 2019 of P654,600 were recorded in the December 2018 cash receipts book. The
receipts of P360,100 represent cash sales and P294,500 represent collections from customers, net of
5% cash discounts.

2. Accounts payable of P372,400 was paid in January 2019. The payments, on which discounts of
P12,400 were taken, were included in the December 2018 check register.

3. Merchandise inventory is valued at P6,050,000 prior to any adjustments. The following information
has been found relating to certain inventory transactions:

a. The invoice for goods costing P175,000 was received and recorded as a purchase on December
31, 2018. The related goods, shipped FOB destination, were received on January 4, 2019, and
thus were not included in the physical inventory.
 b. A P182,000 shipment of goods to a customer on December 30, 2018, terms FOB destination, are
not included in the year-end inventory. The goods cost P130,000 and were delivered to the
customer on January 3, 2019. The sale was properly recorded in 2019.

c. Goods costing P637,500 were shipped on December 31, 2018, and were delivered to the
customer on January 3, 2019. The terms of the invoice were FOB shipping point. The goods
were included in the 2018 ending inventory even though the sale was recorded in 2018.

d. Goods costing P217,500 were received from a vendor on January 4, 2019. The related invoice
was received and recorded on January 6, 2019. The goods were shipped on December 31, 2018,
terms FOB shipping point.

e. Goods valued at P275,000 are on consignment with a customer. These goods are not included in
the inventory figure.

f. Goods valued at P612,800 are on consignment from a vendor. These goods are not included in
the physical inventory.

Based on the above and the result of your audit, determine the adjusted balances of the following as of
December 31, 2018:

31. Cash
A. P963,200
B. P681,000
C. P668,600
D. P693,400

32. Accounts receivable

A. P2,908,600
B. P2,564,000
C. P2,254,000
D. P2,548,500

33. Inventory
A. P6,035,000
B. P6,080,000
C. P5,860,000
D. P5,010,000

34. Accounts payable

A. P4,790,900
B. P4,615,900
C. P4,573,000
D. P4,603,500

35. Current ratio

A. 2.00
B. 1.83
C. 1.84
D. 2.01
PROBLEM 8 – AUDIT OF INVENTORY AND COST OF SALE
You have been engaged for the audit of the Letecia Company for the year ended December 31, 2007.
The Letecia Company is engaged in the wholesale chemical business and makes all sales at 25% over
cost.

Following are portions of the client’s sales and purchases accounts for the calendar year 2007.
SALES
Date Reference Amount Bal. Forward
Date Reference Amount
12-31 Closing entry P 699,860 P 658,320
12-27 SI # 965 5,195
12-28 966 19,270
12-28 967 1,302
12-31 969 5,841
12-31 970 7,922
_______ 12-31 971 2,010
P 699,860 P 699,860

PURCHASES
Bal. Forward
Date Reference Amount Date Reference Amount
P 360,300 12-31 Closing entry P 385,346
12-28 RR # 1059 3,100
12-30 1061 8,965
12-31 1062 4,861
12-31 1063 8,120 _______
P 385,346 P 385,346

SI – Sales Invoice
RR – Receiving Report

You observed the physical inventory of goods in the warehouse on December 31, 2007 and were
satisfied that it was properly taken.

When performing a sales and purchases cutoff tests, you found that at December 31, 2007, the
last receiving report that had been used No. 1063 and that no shipments have been made on any sales
invoices with numbers larger than No. 968. You also obtained the following additional information:

1. Included in the warehouse physical inventory at December 31, 2007, were chemicals that had been
purchased and received on receiving report No. 1060 but for which an invoice was not received until
2008. Cost was P2,183.

2. In the warehouse at December 31, 2007, were goods that had been sold and paid for by the
customer but which were not shipped out until 2008. They were all sold on sales invoice No. 965
and were not inventoried.

3. On the evening of December 31, 2007, there were two cars on the Letecia Company siding:

(a) Car BR38162 was unloaded on January 2, 2008, and received on receiving report No. 1063. The
freight was paid by the vendor.

(b) Car BAE74123 was loaded and sealed on December 31, 2007, and was switched off the
company’s siding on January 2, 2008. The sales price was P12,700 and the freight was paid by
the customer. This order was sold on sales invoice No. 968.
4. Temporarily stranded at December 31, 2007, 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. 966 and the terms were FOB
destination.

5. En route in the Letecia Company on December 31, 2007, was a truckload of material that was
received on receiving report no. 1064. The material was shipped FOB destination and freight of P75
was paid by the Letecia Company. However, the freight was deducted from the purchase price of
P975.

6. Included in the physical inventory were chemicals exposed to rain while in transit and deemed
unsalable. Their invoice cost was P1,250, and freight charges of P350 had been paid on the
chemicals.

Questions:

36. The inventory at year-end is understated by:

a. P 23,976 b. P 32,096 c. P 33,696 d. P 44,714

37. The adjusted sales at year-end is:

a. P 664,817 b. P 677,517 c. P 680,590 d. P 712,560

38. The adjusted purchases at year-end is:

a. P 377,226 b. P 379,409 c. P 383,163 d. P 387,529

39. The cost of sales at year-end is overstated by:

a. P 31,513 b. P 50,991 c. P 52,591 d. P 63,609

40. The sales at year-end is overstated by:

a. P 19,270 b. P 22,343 c. P 35,043 d. P 40,120

PROBLEM 9 – AUDIT OF INVENTORY AND COST OF SALE

Sydel Company was organized on January 1, 2007, 25,000 shares of P100 par value ordinary share being
issued in exchange for property, plant, and equipment valued at P3,000,000 and cash of P1,000,000.
The following data summarize activities for the year.

1. Net income for the period ending December 31, 2007 was P1,000,000.
2. Raw materials on hand on December 31 were equal to 25% of raw materials purchased.
3. Manufacturing costs were distributed as follows:
Materials used 50%
Direct labor 30%
Factory overhead 20% (includes depreciation of building, P100,000)
4. Goods in process remaining in the factory on December 31 were equal to 33 1/3% of the goods
finished and transferred to stock.
5. Finished goods remaining in stock were equal to 25% of the cost of goods sold.
6. Expenses were 30% of sales.
7. Cost of goods sold was 150% of expenses total.
8. Ninety percent of sales were collected. The balance was considered collectible.
9. Seventy five percent of the raw materials purchased were paid for. There were no expense accruals
or prepayments at the end of the year.

Questions:

41. Sales at year-end is:

a. P 4,000,000 b. P 5,000,000 c. P 2,222,222 d. P 2,200,000

42. Cost of goods sold at year-end is:

 a. P 2,250,000 b. P 1,800,000 c. P 1,200,000 d. P 666,667

43. Purchases at year-end is:

a. P 2,300,000 b. P 2,000,000 c. P 1,800,000 d. P 1,500,000

44. Cash receipts at year-end is:

a. P 2,980,000 b. P 3,000,000 c. P 4,600,000 d. P 5,500,000
45. Cost of goods sold rate is:
a. 56.25% b. 45% c. 30% d. 24%

46. Periodic or cycle of selected inventory items are made at various times during the year rather than a
single inventory count at year end, which of the following is necessary if the auditor plans to observe
inventories at interim dates?
a. Complete recounts by independent teams are performed.
b. Perpetual inventory records are integrated with production accounting records.
c. Unit cost records are integrated with production accounting records.
d. Inventory balances are rarely at low levels.

PROBLEM 10 – AUDIT OF SHAREHOLDERS’ EQUITY

Alcain COMPANY’s shareholders’ equity account balance at December 31, 2003, were as follows:
Ordinary share 800,000
Additional paid-in capital 1,600,000
Retained earnings 1,845,000

The following 2004 transactions and other information relate to the shareholders’ equity accounts:

a. Alcain had 400,000 authorized shares of P5 par ordinary share, of which 160,000 shares were issued
and outstanding.

b. On March 5, 2004, Alcain acquired 5,000 shares of its ordinary share for P10 per share to hold as
treasury share. The shares were originally issued at P15 per share. ALCAIN uses the cost method to
account for treasury share. Treasury share is permitted in Alcain’s state of incorporation.

c. On July 15, 2004, Alcain declared and distributed a property dividend of inventory. The inventory
had a P75,000 carrying value and a P60,000 fair market value.

d. On January 2, 2002, Alcain granted share options to employees to purchase 20,000 share of Alcain’s
ordinary share at P18 per share, which was the market on that date. The option may be exercised
within a three year period beginning January 2, 2004. The measurement date is the same as the
grant date. On October 1, 2004, employees exercised all 20,000 options when the market value of
the share was P25 per share. ALCAIN issued new shares to settle the transaction.

e. Alcain’s net income for 2004 was P240,000.

Questions
Based on the information above and other analysis as necessary, answer the following question:

47. Alcain’s Ordinary share balance at December 31, 2004 is:

a. P 1,300,000 b. P 1,160,000 c. P 900,000 d. P 800,000

48. Alcain’s Additional paid-in capital balance at December 31, 2004 is:
a. P 1,860,000 b. P 1,960,000 c. P 2,000,000 d. P 2,100,000
49. Alcain’s Retained Earnings balance at December 31, 2004 is:
a. P 2,085,000 b. P 2,025,000 c. P 2,010,000 d. P 1,770,000

50. Alcain’s Treasury Share balance at December 31, 2004 is:

a. P 0 b. P 50,000 c. P 75,000 d. P 125,000

51. Alcain’s Shareholders’ Equity balance at December 31, 2004 is:

a. P 4,910,000 b. P 4,820,000 c. P 4,735,000 d. P 4,720,000

PROBLEM NO. 11 – AUDIT OF RECEIVABLES

During your examination of the 2005 financial statements of the Yesterday Company you find that the
company does not provide allowance for doubtful accounts ever since it started operations in 2001. The
company’s practice is to directly write-off as expense doubtful accounts and credit recoveries to income.
The company’s contracts are generally for two years.

Upon your recommendation, the company agreed to change its accounts for 2005 to give effect to
doubtful treatment on the allowance basis. The allowance is to be based on a percentage of sales which
is derived from the experience of prior years. Statistics for 2001 to 2005 are shown as follows:

Year of Sale 2001 2002 2003 2004 2005

Charge Sales P600,000 P1,500,000 P1,800,000 P1,950,000 P1,650,000

Accounts Written off & Year of

Sale
2001 3,300
2002 9,000 6,000
2003 3,000 24,000 7,800
2004 7,200 27,000 9,000
2005 16,200 30,000 8,400
Recoveries & Year of Sale
2001
2002 600
2003 2,400
2004 3,000
2005 3,600

Accounts receivable at December 31, 2005 were as follows:

From 2004 sales P90,000

From 2005 sales 810,000
Total P900,000

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

52. The average percentage of net doubtful accounts to charge sales that should be used in setting
up the 2005 allowance is
a. 2.05% b. 2.50% c. 1.90% d. 1.77%

53. How much is the doubtful accounts expense for 2005?

a. P32,850 b. P54,600 c. P43,800 d. P41,250

54. The doubtful accounts expense for 2005 is over(under) stated by

a. P13,350 b. P55,950 c. (P32,850) d. (P41,250)
55. The net realizable value of accounts receivable that should be presented on the December 31,
2005 balance sheet is
a. P831,600 b. P853,800 c. P868,650 d. P810,000

The Perseverance Corporation has requested you to audit its financial statements for the year 2005.
During your audit, Perseverance presented to you its balance sheet as of December 31, 2004 containing
the following capital section:

Preferred stock P10 par; 60,000 shares authorized

and issued, of which 6,000 are treasury shares
costing P90,000 and shown as an asset P600,000
Common stock, par value P4; 600,000 shares
authorized, of which 450,000 are issued and outstanding 1,800,000
Additional paid in capital (P5 per share on preferred stock
issued in 2000) 300,000
Allowance for doubtful accounts receivable 12,000
Reserve for depreciation 840,000
Reserve for fire insurance 198,000
Retained earnings 2,250,000
P6,000,000

Additional information:

1) Of the preferred stock, 3,000 shares were sold for P18 per share on August 30, 2005.
Perseverance credited the proceeds to the Preferred Stock account. The treasury shares as of
December 31, 2004 were acquired in one purchase in 2004.

2) The preferred stock carries an annual dividend of P1 per share. The dividend is cumulative. As of
December 31, 2004, unpaid cumulative dividends amounted to P5 per share. The entire
accumulation was liquidated in June, 2005, by issuing to the preferred stockholders 54,000 shares
of common stock.

3) A cash dividend of P1 per share was declared on December 1, 2005 to preferred stockholders of
record December 15, 2005. The dividend is payable on January 15, 2006.

4) At December 31, 2005, the Allowance for Doubtful Accounts Receivable and Reserve for
Depreciation had balances of P25,000 and P1,050,000, respectively.

5) On March 1, 2005, the Reserve for Fire Insurance was increased by P60,000; Retained Earnings
was debited.

6) On December 31, 2005, the Reserve for Fire Insurance was decreased by P30,000, which
represents the carrying value of a machine destroyed by fire on that date. Estimated fire cleanup
costs of P6,000 does not appear on the records.

7) The December 31, 2004 Retained Earnings consists of the following:

Donated land from a stockholder (Market value on

date of donation) P450,000
Gains from treasury stock transactions 51,000
Earnings retained in business 1,749,000
P2,250,000

8) Net income for the year ended December 31, 2005 was P1,297,500 per company’s records.

QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balances of the following as of
December 31, 2005. (Disregard tax implications)

A B C D
56
. Preferred stock 555,000 630,000 570,000 600,000
57
. Common stock 2,070,000 2,016,000 1,800,000 1,854,000
58
. Additional paid in capital 810,000 864,000 414,000 804,000
59
. Appropriated retained earnings 0 303,000 258,000 228,000
60
. Unappropriated retained earnings 2,623,500 2,677,500 2,578,500 2,626,500
61
. Treasury stock 0 36,000 45,000 90,000
62
. Total stockholders’ equity 6,316,500 3,700,500 6,319,500 5,812,500

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1A 8D 15 C 22 D 29 C 36 B 43 B 50 B 57 B

2A 9A 16 C 23 B 30 D 37 A 44 C 51 D 58 B

3C 10 D 17 B 24 C 31 C 38 D 45 B 52 B 59 B

4B 11 D 18 D 25 C 32 B 39 D 46 B 53 D 60 C

5C 12 D 19 A 26 B 33 A 40 C 47 C 54 A 61 C

6A 13 C 20 D 27 A 34 B 41 A 48 A 55 B 62 A

7A 14 C 21 B 28 A 35 C 42 B 49 C 56 D