THEORIES

1. An audit procedure that provides evidence about proper valuation of trading securities arising from a
short-term investment of excess cash is
Comparison of carrying value with current market quotations.

2. Which of the following is not a control that is designed to protect investment securities?
Custody over securities should be limited to individuals who have recordkeeping responsibility
over the securities.

3. An auditor compares information on cancelled checks with information contained in the cash
disbursement journal. The objective of this test is to determine that
No discrepancies exist between the data on the checks and the data in the journal.

4. A cash shortage may be concealed by transporting funds from one location to another or by converting
negotiable assets to cash. Because of this, which of the following is vital?
Simultaneous surprise cash count

5. An auditor is most likely to learn of slow-moving inventory through

Review of perpetual inventory records.

6. Which of the following most likely would give the most assurance concerning the valuation assertion of
accounts receivable?
Assessing the allowance for uncollectible accounts for reasonableness.

7. Of the following, which is the most efficient audit procedure for testing accrued interest earned on bond
investments?
Recomputing interest earned.

8. An auditor most likely to inspect loan agreements under which an entity’s inventories are pledged to
support management’s financial statement assertion of
Presentation and disclosure

9. Auditing standards define a confirmation as “the process of obtaining and evaluating a direct
communication from a third party in response to a request for information about a particular item
affecting financial statement assertions” Two assertions for which confirmation of accounts receivable
balances provides a primary evidence are
Rights and obligations and existence

10. The auditee has acquired another company by purchase. Which of the following would be the best
audit procedure to test the appropriateness of the allocation of cost to tangible assets?
Evaluate procedures used to estimate and record fair market values for purchased assets.

11. An auditor selected items for test counts while observing a client’s physical inventory. The auditor then
traced the test counts to the client’s inventory listing. This procedure most likely obtained evidence
concerning
Completeness
12. The audit of year-end inventories should include steps to verify that the client’s purchases and sales
cutoffs were adequate. This audit steps should be designed to detect whether merchandise included in
the physical count at year-end was not recorded as a
Purchase in the subsequent period

13. Proper authorization procedures in the revenue/receipt cycle usually provide for approval of write-offs
by an employee in which of the following departments?
Treasurer

14. The negative form of accounts receivable confirmation request is particularly useful except when
Individual account balances are relatively large.

15. On receiving the bank cutoff statement, the auditor should trace
Deposits listed on the cutoff statement to deposits in the cash receipts journal.

16. Normally, the audit objective of valuation is of minimum concern during the audit of cash. However, the
auditor’s concern about the valuation objective would most likely increase when
The client has foreign currency accounts.

17. An auditor’s observation of physical inventories at the main plant at year-end provides direct evidence
to support which of the following objectives?
Identification of obsolete or damaged merchandise to evaluate allowance (reserve) for
obsolescence.

18. As one of the year-end audit procedures, the auditor instructed the client’s personnel to prepare a
standard bank confirmation request for a bank account that had been closed during the year. After the
client’s treasurer had signed the request, it was mailed by the assistant treasurer. What is the major
flaw in this audit procedure?
The request was mailed by the assistant treasurer.

19. Which of the following controls would an entity most likely use in safeguarding against the loss of
investment securities?
An independent trust company that has no direct contact with the employees who have record-
keeping responsibilities has possession of securities.

20. In auditing investments for proper valuation, the auditor should do all but the following:
Confirm securities held in safekeeping off the client’s premises.

21. The auditee has just acquired another company by purchasing all its assets. As a result of the
purchase, "goodwill" has been recorded on the auditee's books. Which of the following comparisons
would be the most appropriate audit test for the amount of recorded goodwill?
The purchase price and the fair market value of assets purchased.

22. Which of the following is one of the better auditing techniques that might be used by an auditor to
detect kiting?
Review subsequent bank statements received directly from the banks

23. The standard bank confirmation form requests all the following except
 The principal amount paid for a direct liability.

24. In confirming accounts receivable, an auditor decided to confirm customers’ account balances rather
than individual invoices. Which of the following most likely would be included with the client’s
confirmation letter?
A client prepared statement of account showing the details of the customer’s account balance.

25. Which of the following controls would a company most likely use to safeguard investment securities
when an independent trust agent is not employed?
Two company officials have joint control of investment securities, which are kept in a bank safe
deposit box.

26. Which of the following statements would an auditor most likely to add to the negative form of
confirmations of accounts receivable to encourage timely consideration by the recipient?
“If you do not report any difference within 15 days, it will be assumed that this statement is
correct.”

27. An auditor who is engaged to examine the financial statements of a business enterprise will request
cutoff bank statement primarily to
Verify reconciling items on the client’s bank reconciliation

28. After accounting for a sequential of inventory tags, an auditor traces a sample of tags to the physical
inventory listing to obtain evidence that all items
Represented by inventory tags are included in the listing.

29. An auditor who wishes to substantiate the gross balance of the account "Trade Notes Receivable" is
considering the advisability of performing the four procedures listed below. Which pair of procedures is
best suited to this objective?
I. Age the receivables.
II. Confirm the notes with the makers.
III. Inspect the notes.
IV. Trace a sample of postings from the sales journal to the notes receivable ledger.
II and III

30. Auditor may use positive or negative forms of confirmations requests for accounts receivable. An
auditor most likely will use
A combination of the two forms, with the positive form used for large balances and the negative
for the small balances

31. When negotiable securities are of considerable volume, planning by the auditor is necessary to guard
against
Substitution of securities already counted for other securities which should be on hand but are
not.

32. Who is responsible, always, for the petty cash fund?

Petty cash custodian
33. Which of the following controls would an entity most likely use to assist in satisfying the completeness
assertion related to long-term investments?
The internal auditor compares the securities in the bank safe deposit box with recorded
investments.

34. Purchase cut-off procedures should be designed to test whether all inventory
Purchased and received before year-end was recorded.

35. An auditor should trace bank transfers for the last part of the audit period and for the first part of the
subsequent period to detect whether
Cash balances were overstated because of kiting.

36. Tracing bills of lading to sales invoices provides evidence that

Shipments to customers were invoiced.

37. The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of
the following could explain the difference?
Credit memos for several items returned by customers had not been recorded

38. Which of the following audit procedures probably provides the most reliable evidence concerning the
entity’s assertion of rights and obligations related to inventories?
Inspect agreements to determine whether any inventory is pledged as collateral or subject to
any liens.

39. Which of the following procedures would an auditor most likely rely on to verify management’s assertion
of completeness?
Compare a sample of shipping documents to related sales invoices.

40. Which source document should an auditor use to verify the correct sales date for an item sold FOB
shipping point?
Carrier’s bill of lading

41. The primary purpose of sending a standard confirmation request to financial institutions with which the
client has done business during the year is to
Corroborate information regarding deposit and loan balances

42. What is the effect of not replenishing the petty cash fund at year-end and not making the appropriate
adjusting entry?
Cash will be overstated, and expenses understated

43. If the perpetual inventory records show lower quantities of inventory that the physical count an
explanation of the difference might be unrecorded
Purchases

44. An auditor is testing sales transactions. One step is to trace a sample of debit entries from the accounts
receivable subsidiary ledger back to the supporting sales invoices. What would the auditor intend to
establish by this step?
Debit entries in the accounts receivable subsidiary ledger are properly supported by sales
invoices.

45. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of
control risk is high an auditor will probably
 Request the client to schedule the physical inventory count at the end of the year.

46. The auditor finds situation in which one person can collect receivables, make deposits, issue credit
memos and record receipt of payments. The auditor suspects the individual may be stealing from cash
receipts. Which of the following audit procedures would be most effective in discovering fraud in this
scenario?
Perform a detailed review of debits to customer discounts, sales returns, or other debit
accounts, excluding cash posted to the cash receipts journal.

47. When counting cash on hand, the auditor must exercise control over all cash and other negotiable
assets to prevent
Substitution

48. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine
all the following except
General ledger

49. Kiting is a technique that might be used to conceal cash shortage. The auditor can best detect kiting by
performing which of the following procedures?
Examining the details of deposits made to all bank accounts several days after the balance
sheet date.

50. The auditor should ordinarily mail confirmation requests to all banks with which the client has
conducted any business during the year, regardless of the year-end balance, since
The confirmation form also seeks information about indebtedness to the bank.

51. In determining validity of accounts receivable, which of the following would the auditor consider most
reliable?
Confirmation replies received directly from customers.

52. An unrecorded check issued during the last week of the year would most likely be discovered by the
auditor when
Cutoff bank statement is reconciled.

53. To gather audit evidence about the proper credit approval of sales, the auditor would select a sample of
documents from the population represented by the
Customer order file

54. Periodic cycle counts 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?
Perpetual inventory records are maintained
 PROBLEMS
1. Enola Company provides for doubtful accounts based 3% of credit sales. The following data are
available for 2020.
Credit sales during 2020 P21,000,000
Allowance for doubtful accounts 1/1/2020 170,000
Collection of accounts written off in prior years (Customer credit was reestablished) 80,000
Customers account written off as uncollectible during 2020 300,000

● What is the balance in allowance for doubtful accounts at December 31, 2020?
580,000

2. Umbrella Academy purchased 25,000 shares of common stock of the Kapote Corporation for Php40
per share on January 2, 2020. Kapote Corporation had 100,000 shares of common stock outstanding
during 2020, paid cash dividends of Php60,000 during 2020, and reported net income of Php200,000
for 2020.

● How much should Umbrella report as revenue from investment for 2020?
50,000

3. The work-in-process inventories of Lisbon Company were destroyed by fire on October 1, 2020. You
were able to establish physical inventory figures as follows:

January 1 2020 Balance

Raw materials P60,000
Work-in-process 200,000
Finished goods 280,000

October 1 2020 Balance

Raw materials P120,000
Work-in-process 0
Finished goods 240,000

Sales from January 1 to September 30, were P546,750. Purchases of raw materials were P200,000
and freight on purchases, P30,000. Direct labor during the period was P160,000. It was agreed with
insurance adjusters than an average gross profit rate of 35% based on cost be used and that direct
labor cost was 160% of factory overhead.

Based on the above and the result of your audit, you are able to determine:

● Raw materials used

170,000

● Total value of goods put in process

630,000

● The value of goods manufactured and completed as of October

 365,000

● The work in process inventory destroyed as computed is

265,000

4. On March 31, 2020 Big Bang Company had a fire which completely destroyed the factory building and
inventory of goods in process; some of the equipment was saved.

After the fire, a physical inventory was taken. The material was valued at P750,000 and the finished
goods at P620,000.

The inventories on January 1, 2020 consisted of:

Materials P 310,000
Goods in process 1,215,000
Finished goods 1,700,000
Total P3,225,000

A review of the accounting records disclosed that the sales and gross profit on sales for the last three
years were:
Year/Sales/Gross profit
2017 / P8,000,000 / P2,400,000
2018 / 7,600,000 / 2,215,000
2019 / 5,000,000 / 1,776,000

The sales for the first three months of 2006 were P3,000,000. Material purchases were P1,250,000,
transportation on purchases was P100,000 and direct labor cost for the three months was P1,000,000.
For the past two years, factory overhead cost has been 80% of direct labor cost.

Based on the above and the result of your audit, compute the following:

● Inventory of goods in process lost / Cost of inventory of goods in process lost

2,951,500

● The most likely gross profit rate to be used in estimating the inventory of goods in process
destroyed by fire
31.55%

● Total cost of goods placed in process

3,925,000

● Total cost of goods manufactured

973,500

5. During your audit, you noted that Glee held its cash books open after year-end. In addition, your audit
revealed the following:
 1. Receipts for January 2020 of P327,300 were recorded in the December 2019 cash receipts
book. The receipts of P180,050 represent cash sales and P147,250 represent collections from
customers, net of 5% cash discounts.
2. Accounts payable of P186,200 was paid in January 2020. The payments, on which discounts of
P6,200 were taken, were included in the December 2019 check register.
3. Merchandise inventory is valued at P3,025,000 prior to any adjustments. The following
information has been found relating to certain inventory transactions.

a. Goods valued at P137,500 are on consignment with a customer. These goods are not
included in the inventory figure.
b. Goods costing P108,750 were received from a vendor on January 4, 2020. The related
invoice was received and recorded on January 6, 2020. The goods were shipped on
December 31, 2019, terms FOB shipping point.
c. Goods costing P318,750 were shipped on December 31, 2019, and were delivered to
the customer on January 3, 2020. The terms of the invoice were FOB shipping point.
The goods were included in the 2019 ending inventory even though the sale was
recorded in 2019.
d. A P91,000 shipment of goods to a customer on December 30, terms FOB destination
are not included in the year-end inventory. The goods cost P65,000 and were delivered
to the customer on January 3, 2020. The sale was properly recorded in 2020.
e. The invoice for goods costing P87,500 was received and recorded as a purchase on
December 31, 2019. The related goods, shipped FOB destination were received on
January 4, 2020, and thus were not included in the physical inventory.
f. Goods valued at P306,400 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, 2019

● Accounts Receivable
1,282,000

● Accounts Payable
2,307,950

● Cash
334,300

● Inventory
3,017,500

● Current ratio
1.84

6. The bank statement for the account of Pink Black Company at December 31, 2019 showed a credit
balance of P20,000, while the company’s ledger balance of the cash account as of November 30, 2019
was a debit of P40,000. During December, 2019, 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 overfooted by P500,
records only the checks issued by the company. In the month of December, 2019, the bank charged
the 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 Pink Black Company. The bank made the correction in January 2020. The outstanding checks as of
December 31, 2019 amounted to P5,600.

● The actual amount of checks issued by the Company for the month of December is
38,500

● The adjusted balance of bank debits is

43,500

● The deposit in transit on December 31, 2019 is

59,300

● Unadjusted bank disbursements for the month of December amount to:

39,100

● The adjusted balance of book receipts is

78,400

● The adjusted cash in bank balance at December 31, 2019 is

74,900

● The amount of customer accounts collected that were not recorded in the cash receipts journal
is
4,000

● The unadjusted balance of bank receipts is

19,100

7. Lakompake Corp. began operations in 2010. On July 15, 2019, a fire broke out in the company's
warehouse destroying all inventory and many accounting records. The following information was
assembled from the microfilmed records. All sales and purchases are on account.

January 1, 2019 balances

Inventory 480,200
Accounts Receivable 257,780
Accounts Payable 245,700
 July 15, 2019 balances
Accounts Receivable 261,180
Accounts Payable 176,280
Collections from customers, 1/1/19-7/15/19 2,350,000
Payment to suppliers, 1/1/19-7/15/19 3,050,000
Goods out on consignment on July 15, 2019, at cost 102,500
Goods in transit at July 15, 2019, purchased FOB Shipping Point (included in the July 15 accounts
payable balance) 34,750

The following is a summary of prior year’s sales and gross profit on sales:
2016
Sales P3,500,000
Gross Profit 1,050,000
2017
Sales P4,430,000
Gross Profit 1,506,200
2018
Sales P5,360,000
Gross Profit 1,393,600

● Purchase for the period is

2,980,580

● Sales for the period is

2,353,400

● The average gross profit rate is

30%

● The inventory loss due to fire is

1,676,150

8. Detective Company’s unadjusted trial balance on December 31, 2019, included the following accounts:

Accounts receivable P1,000,000 Debit

Allowance for doubtful accounts 40,000 Debit
Sales P15,000,000 Credit
Sales returns and allowances 700,000 Debit

Detective Company estimates its bad debt expense to be 1 ½% of net sales. Determine its bad debt
expense for 2019.
214,500

9. In your audit of Mukamo Plastic Products Co., you noted that the company’s statement of financial
position shows the accounts receivable balance at September 30, 2019 as follows:

Accounts receivable P 3,600,000

Allowance for doubtful accounts 72,000
 Accounts receivable, net P 3,528,000

During 2020, transactions relating to the accounts were as follows:

- Sales on account P 38,400,000.
- Cash received from collection of current receivable totalled P 31,360,000, after discount of P
640,000 were allowed for prompt payment.
- Customer’s accounts of P 160,000 were ascertained to be worthless and written off.
- Bad accounts previously written off prior to 2020 amounting to P 40,000 were recovered.
- The company decided to provide P 184,000 for doubtful accounts by journal entry at the end of
the year.
- Accounts receivable of P 5,600,000 has been pledged to a local bank on a loan of P 3,200,000.
Collections of P 1,200,000 were made on these receivables (not included in the collection
previously given) and applied as partial payment to the loan.

Based on the above results of your audit, answer the following:

● The net realizable value of AR as of September 30, 2020 is

8,504,000

● The accounts receivable as of September 30, 2020 is

8,640,000

● The allowance for doubtful accounts as of September 30, 2020 is

136,000

● If receivables are hypothecated against borrowings, the amount of receivables involved should
be
Disclosed in the statements or notes

10. At the end of its first year of operations ending September 30, 2020, Calayan Inc reported the following
information:
Accounts receivable, net of allowance for doubtful accounts P9,500,000
Customer accounts written off as uncollectible during 2020 240,000
Bad debts expense for 2020 840,000

What should be the balance in AR at September 30, 2020, before subtracting the allowance for doubtful
accounts?
10,100,000

11. Sixty-Five Company purchased bonds with a face amount of P400,000 between interest payment
dates. Sixty-Five purchased the bonds at 102, paid brokerage costs of P6,000, and paid accrued
interest for three months of P10,000. The amount to record as the cost of this long-term investment in
bonds is
414,000

12. Snow Corporation earns Php240,000 and pays cash dividends of Php80,000 during 2020. Charming
Corporation owns 3,000 of the 10,000 outstanding shares of Snow.
 ● What amount should Charming show in the investment account at December 31, 2020 if the
beginning of the year balance in the account was 320,000? (use equity method)
368,000

● How much investment income should Charming report in 2020? (use equity method)
72,000

13. On April 1, 2020, Etcha Co. purchased 25,000 ordinary shares of Pwera Co. at P180 per share which
reflected book value as of that date. At the time of the purchase, Pwera had 100,000 ordinary shares
outstanding. The shares are intended as a long term investment. The first quarter statement ending
March 31, 2009 of Pwera recorded profit of P480,000. For the year ended December 31, 2020, Pwera
reported profit of P2,400,000. Pwera paid Etcha dividends of P60,000 on June 1, 2009 and again
P60,000 on December 31, 2020. The shares of Pwera are selling at P190 per share on December 31,
2020.

Based on the above information, the carrying amount of the investment in Pwera Co. as of December
31, 2020 should be
4,750,000

14. On April 21, 2020, a fire damaged the office and warehouse of Holiday Made to Order Company. The
only accounting record saved was the general ledger, from which the trial balance below was prepared.
Holiday Made to Order Company
Trial Balance

Cash P 180,000 DEBIT

Accounts receivable 400,000 DEBIT
Inventory, December 31, 2019 750,000 DEBIT
Land 350,000 DEBIT
Building 1,100,000 DEBIT
Accumulated depreciation P 413,000 CREDIT
Other assets 56,000 DEBIT
Accounts payable 237,000 CREDIT
Accrued expenses 180,000 CREDIT
Common stock, P100 par 1,000,000 CREDIT
Retained earnings 520,000 CREDIT

Sales 1,350,000 CREDIT

Purchases 520,000 DEBIT
Operating expenses 344,000 .DEBIT

TOTAL DEBIT/ CREDIT P3,700,000

The following data and information have been gathered:

a. The company’s year-end is December 31.
b. An examination of the April bank statement and cancelled checks revealed that checks written
during the period April 1 to 21 totaled P130,000: P57,000 paid to accounts payable as of March
31, P34,000 for April merchandise purchases, 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.
c. Correspondence with suppliers revealed unrecorded obligations at April 21 of P106,000 for April
merchandise purchases, including P23,000 for shipments in transit on that date.
d. Customers acknowledged indebtedness of P360,000 at April 21, 2020. It was also estimated
that customers owed another P80,000 that will never be acknowledged or recovered. Of the
acknowledged indebtedness, P6,000 will probably be uncollectible
e. The insurance company agreed that the 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
company’s audited financial statements disclosed the following information:

2019 Balances
Net sales P 5,300,000
Net purchases 2,800,000
Beginning inventory 500,000
Ending inventory 750,000

2018 Balances
Net sales P 3,900,000
Net purchases 2,350,000
Beginning inventory 660,000
Ending inventory 500,000

f. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The balance of the
inventory was a total loss.

Based on the above and the result of your audit, answer the following:

● How much is the estimated inventory on April 21, 2020?

570,000

● How much is the adjusted balance of AP as of April 21, 2020?

286,000

● How much is the net purchases for the period January 1 to April 21, 2020?
650,500

● How much is the adjusted balance of Accounts Receivable as of April 21, 2020?
360,000

● How much is the sales for the period January 1 to April 21, 2020?
1,510,000

● How much is the cost of sales for the period January 1 to April 21, 2020?
830,500

● How much is the estimated inventory fire loss?

512,000
15. You obtained the following information on the current account of CLOY COMPANY during your
examination of its financial statements for the year ended December 31, 2019. The bank statement on
November 30, 2019 showed a balance of P76,500. Among the bank credits in November was
customer’s note for P25,000 collected for the account of the company which the company recognized in
December among its receipts. Included in the bank debits were cost of checkbooks amounting to P300
and a P10,000 check which was charged by the bank in error against Cloy Company. account. Also, in
November you ascertained that there were deposits in transit amounting to P20,000 and outstanding
checks totaling P42,500.

The bank statement for the month of December showed total credits of P104,000 and total charges of
P51,000. The company’s books for December showed total receipts of P183,900, disbursements of
P101,800 and a balance of P121,400. Bank debit memos for December were: No. 143 for service
charges, P400 and No. 145 on a customer’s returned check marked “DAIF” for P6,000.

On December 31, 2019, the company placed with the bank a customer’s promissory note with a face
value of P30,000 for collection. The company treated this note as part of its receipts although the bank
was able to collect on the note only in January 2020. A check for P990 was recorded in the company
cash payments books in December as P9,900.

Based on the application of the necessary audit procedures and appreciation of the above data, you
are to provide the answers to the following:

● How much is the adjusted cash balance as of December 31, 2019?

93,910

● How much is the undeposited collections as of December 31, 2019?

54,900

● How much is the outstanding checks as of December 31, 2019?

90,490 [90,940 YUNG CHOICES NI MA’AM PERO 90,490 SOLUTION]

● How much is the adjusted cash balance as of November 30, 2019?

64,000

● How much is the adjusted bank receipts for December?

128,900

● How much is the adjusted book disbursements for December?

98,990

16. In connection with your audit of the Emily Corporation, you noted that the company’s Notes Receivable
consists of the following:
a. A 4-month note dated November 30, 2019, from Gabriel Company, P200,000; interest rate, 16%;
discounted on November 30, 2019 at 16%.
b. A draft drawn payable 30 days after for P900,000 by the Lily Company on the Collins Company in
favor of the Paris Company, endorsed to Emily Corp. on December 2, 2019 and accepted on
December 4, 2019.
 c. A 90-day note dated November 1, 2019 from Lucas, P500,000; interest at 16%; the note is for
subscription to 5,000 shares of the preferred stock of Emily Corp. at P100 per share.
d. A 60-day note dated May 3, 2019, from Sherlock Company, P600,000; interest rate, 16%;
dishonored at maturity; judgment obtained on October 10, 2019. Collection within the next twelve
months is doubtful.
e. A 90-day note dated January 4, 2019, from John Watson, president of Emily, P160,000; no interest;
note not renewed; president confirmed.
f. A 120-day note dated September 14, 2019, from Malcolm Company, P120,000; interest rate, 16%;
note is held by bank as collateral.

Based on the above and the result of your audit, you are to provide the answers to the following:
● The adjusted balance of Notes Receivable as of December 31, 2019 is
1,220,000

● How much of the foregoing notes receivable will be reported in the current assets section of the
balance sheet?
1,680,000

● How much is the net interest income from the foregoing notes receivable for 2019?
35,093

● The adjusted balance of Interest Receivable as of December 31, 2019 is

19,093

17. The following information has been extracted from the accounting records of the BTS Company at
December 31, 2019:

Cash on hand P230,000

Savings Account 9,500
1year Treasury Bills purchased March 1, 2019 400,000
Petty cash fund 20,000
Current account 160,000
Time deposit placements:
Date / Time / Amount
Dec 15, 2019 / 30 days / 30,000
Oct 31, 2019 / 90 days / 40,000
Nov 30, 2019 / 180 days / 25,000
Employee travel advances 7,000
Cash in bond sinking fund 500,000
Customer’s note receivable 45,000
Postage stamps 2,400

The following are included in cash on hand:

• A customer check for P 75,000 dated January 3, 2020, received December 27, 2019.
• PHLPost money orders received from customers, P 30,000.

The petty cash fund consists of the following:

Currency and coins P13,500
 IOUs from officers and employees 3,000
Unreplenished petty cash vouchers 1,500
Currency in envelope with the notation:
“please accept our sympathies on the loss of your loved one” 1,500
Total P20,000

The following information pertains to current account:

• A check for P 13,000 was dated and recorded on December 29, 2019 but was delivered to payee on
January 5, 2020.
• A check for P 5,000 dated January 10, 2020, payable to a supplier was recorded and released to
payee on December 19, 2020. The bank requires current account depositors to maintain a monthly
average daily balance of P 50,000.

● The total adjustment in current account includes

Credit of 18,000 accounts payable

● The balance of the time deposit reported under cash and cash equivalents is
70,000

● Total Short term investments to be reported in the statement of financial position is

425,000

● The adjusted balance of the current account is

178,000

● Total receivable from custodian as adjustment to the petty cash account is

2,000

● The cash and cash equivalents presented in the statement of financial position amounts to
426,000

● The adjusted balance of the savings account is

9,500

● The adjusted balance of the petty cash fund account is

13,500

● An adjusted balance of cash on hand is

155,000

● The total adjustment in the petty cash fund is

6,500

18. The Bella Ciao Company values its inventory at the lower of FIFO cost or net realizable value (NRV).
The inventory accounts at
December 31, 2019, had the following balances.
Raw materials P 650,000
Work in process 1,200,000
 Finished goods 1,640,000

The following are some of the transactions that affected the inventory of the company during 2019.
Jan. 8
Bella Ciao purchased raw materials with a list price of P200,000 and was given a trade discount of
20%and 10%; terms 2/15, n/30. Bella Ciao values inventory at the net invoice price

Feb. 14
Bella Ciao repossessed an inventory item from a customer who was overdue in making payment. The
unpaid balance on the sale is P15,200. The repossessed merchandise is to be refinished and placed
on sale. It is expected that the item can be sold for P24,000 after estimated refinishing costs of P6,800.
The normal profit for this item is considered to be P3,200.

Mar. 1
Refinishing costs of P6,400 were incurred on the repossessed item.

Apr. 3
The repossessed item was resold for P24,000 on account, 20% down.

Aug. 30
A sale on account was made of finished goods that have a list price of P59,200 and a cost P38,400. A
reduction of P8,000 off the list price was granted as a trade-in allowance. The trade-in item is to be
priced to sell at P6,400 as is. The normal profit on this type of inventory is 25% of the sales price.

Based on the above and the result of your audit, answer the following: (Assume the client is using
perpetual inventory system)

● The journal entries on April 3 will include a

Credit to Repossessed Inventory of P20,400

● The entry on Jan. 8 will include a debit to Raw Materials Inventory of

141,120

● The repossessed inventory on Feb. 14 is most likely to be valued at

14,000

● The trade-in inventory on Aug. 30 is most likely to be valued at

4,800

● How much will be recorded as Sales on Aug. 30?

56,000

19. An analysis and aging of Helsinki Corp. accounts receivable at March 31, 2020 (fiscal), disclosed the
following:
Amounts estimated to be uncollectible P1,800,000
Accounts receivable 17,500,000
Allowance for doubtful accounts (per books) 1,250,000
 ● What is the net realizable value of Helsinki’s receivables at March 31, 2020?
15,700,000

20. Storybrooke Company purchased 200 of the 1,000 outstanding shares of Rumple Company's common
stock for Php300,000 on January 2, 2020. During 2020, Rumple Company declared dividends of
Php50,000 and reported earnings for the year of Php200,000.

● If Storybrooke Company used the fair value method of accounting for its investment in Rumple
Company, its Investment in Rumple Company account on December 31, 2020 should be
300,000

● If Storybrooke Company used the equity method of accounting for its investment in Rumple
Company, its Investment in Rumple Company account on December 31, 2020 should be
330,000

21. The adjusted trial balance of Gemerlyn Company as of December 31, 2018 shows the following:

Accounts receivable P1,000,000 Debit

Allowance for bad debts P40,000 Credit

Additional information:
- Cash sales of the company represents 10% of gross sales.
- 90% of the credit sales customers do not take advantage of the 2/10, n/30 terms.
- It is expected that cash discount of P6,000 will be taken on accounts receivable outstanding at
December 31, 2019.
- Sales returns in 2019 amounted to P400,000. All returns were from charge sales.
- During 2019, accounts totaling to P44,000 were written off as uncollectible; bad debt recoveries
during the year amounted to P3,000.
- The allowance for bad debts is adjusted so that it represents certain percentage of the
outstanding accounts receivable at year end. The required percentage at December 31, 2019 is
150% of the rate used on December 31, 2018.

Based on the above and the result of your audit, answer the following:

● The accounts receivable of the company is as of December 31, 2019 is

3,000,000

● The allowance for doubtful accounts as of December 31, 2019 is

180,000

● The net realizable value of accounts receivable of the company is as of December 31, 2019 is
2,814,000

● The doubtful account expense for the year 2019 is

181,000
22. Money Hays Sales Company uses the first-in, first-out method in calculating cost of goods sold for the
three products that the company handles. Inventories and purchase information concerning the three
products are given for the month of October.

Product C
Oct. 1 Inventory 50,000 units at P6.00
Oct. 1-15 Purchases 70,000 units at P6.50
Oct. 16-31 Purchases 30,000 units at P8.00
Oct. 1-31 Sales 105,000 units
Oct. 31 Sales price P8.00/unit

Product P
Oct. 1 Inventory 30,000 units at P10.00
Oct. 1-15 Purchases 45,000 units at P10.50
Oct. 1-31 Sales 50,000 units
Oct. 31 Sales price P11.00/unit

Product A
Oct. 1 Inventory 65,000 units at P0.90
Oct. 1-15 Purchases 30,000 units at P1.25
Oct. 1-31 Sales 45,000 units P2.00/unit

On October 31, the company’s suppliers reduced their prices from the most recent purchase prices by
the following percentages: product C, 20%; product P, 10%; product A, 8%. Accordingly, Malabon
decided to reduce its sales prices on all items by 10%, effective November 1. Malabon’s selling cost is
10% of sales price. Products C and P have a normal profit (after selling costs) of 30% on sales prices,
while the normal profit on product A (after selling cost) is 15% of sales price.

Based on the above and the result of your audit, determine the following:

● The Allowance for inventory write down at October 31 is

85,650

● The cost of Inventory at October 31 is / Total cost of inventory on October 31 is

655,500

● The amount of Inventory to be reported on the company’s balance sheet at October 31 is

569,850

● The cost of sales, before loss on inventory writedown, for the month of October is
1,208,000

23. Shown below is the May 31, 2020, bank reconciliation prepared by your client’s staff.

Start Up Company
RECONCILIATION
May 31, 2020
Bank Balance P652,000
Add: Deposit in transit 10,000
Total P662,000
Less: Outstanding checks
No. 640 P10,000
652 8,000
653 2,000
Total 20,000
Adjusted bank balance P642,000

Book Balance P570,800

Add: Proceeds of note receivable collected in May P70,000
Deposit on May 31 not recorded in books until June 2,000
Total Credit Memos 72,000
Total P642,800
Less: Bank service charge 800
Adjusted book balance P642,000

The June 2020 bank statement is shown below:

Taytay Bank
Period Covered: May 31, 2020 – June 30, 2020
Account No. 0018121
Date
June 1 Checks 8,000 Deposits 10,000
June 8 Checks 2,000 Deposits 19,000
June 11 Checks 14,000 Deposits 1,000
June 13 Checks DM 1,000 Deposits 0
June 16 Checks 4,000 Deposits 1,000
June 21 Checks 12,000 Deposits 56,000
June 27 Checks 18,000 Deposits 0
June 29 Checks E 1,000 Deposits 0
June 30 Checks SC 200 Deposits EC 1,000
June 30 Checks DM 3,000 Deposits 0

SC – Service Charge DM – Debit Memo E- Error

EC – Error Corrected CM – Credit Memo

The paid checks accompanying this bank statement (all clearing in June) are the following:
No. 652 P8,000 No. 654 P14,000 No. 657 P12,000
No. 653 P2,000 No. 655 P 4,000 No. 658 P18,000

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

The debit memos on June 13 and June 30 represent customers’ NSF checks returned by the bank.
 ● Entry to correct the error on June 29
No necessary entry in the books

● The adjusting entry for the debit memo on June 13 and June 30
Includes a debit of P4,000 Accounts receivable

● The adjusted cash receipts per book is

147,000

● Check still outstanding in June is

17,600

● The adjusted bank disbursement is

59,800

● Deposits still in transit as of June 30, 2020 totaled

70,000

24. Gaston Co. owns 20,000 of the 50,000 outstanding shares of Belle, Inc. common stock. During 2020,
Belle earns 800,000 and pays cash dividends of 640,000.

● If the beginning balance in the investment account was 500,000 and assuming the company
uses equity method, the balance at December 31, 2020 should be
564,000

● Assuming the company uses equity method, Gaston should report investment revenue for 2020
of
320,000

25. On January 1, 2019, Alaska Corporation purchased P1,000,000 10% bonds for P1,051,510 (including
broker’s commission of P20,000). Interest is payable annually every December 31. The bonds mature
on December 31, 2022. The prevailing market rate for the bonds is 9% at December 31, 2019. (Round
off present value factors to four decimal places)

● If the bonds are classified as held for trading, the amount to be recognized as fair value
adjustment loss in its 2019 profit or loss?
13,900

26. You were able to obtain the following information from your audit of Magsaysay Corporation’s Accounts
Receivable and Allowance for Doubtful Accounts:

● From the general ledger you noted that the Accounts Receivable has a balance of P848,000 as
of December 31, 2019. Below is a transcript of the Allowance for Doubtful Accounts:

○ January 1 – Balance P20,000 Credit

○ July 31 – Write-off P16,000 Debit
○ December 31- Provision P48,000 Credit
 ● The summary of the subsidiary ledger as of December 31, 2019 was totaled as follows:

○ Debit balances:
■ Under one month P360,000
■ One to six months 368,000
■ Over six months 152,000
■ Total P880,000

○ Credit balances:
■ Garcia P 8,000 - OK; additional billing in January, 2006
■ Aquino 14,000 - Should have been credited to Apol*
■ Roxas 18,000 - Advances on sales contract
■ Total P40,000
*Account is one to six months classification

The customers’ ledger is not in agreement with the accounts receivable control. The client requested
you to adjust the controlaccount to the subsidiary ledger after corrections are made.

● 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 (estimated to be 90% collectible) 80,000
○ Total P152,000

Based on the above and the result of your audit, answer the following:

● How much is the adjusted balance of the Accounts Receivable as of December 31, 2019?
818,000

● How much is the Doubtful Accounts Expense for the year 2019?
74,680

● How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31,
2019?
30,680

27. The cash in bank account of S-mart, Inc. for April showed an ending balance of P129,298. Deposits in
transit on April 30 wasP18,200. Outstanding checks as of April 30, were P59,435, including a P5,000
check which the bank had certified on April 27.During the month of April, the bank charged back NSF
checks in the amount of P3,435 of which P1,835 had been redeposited byApril 20. On April 23, the
bank charged S-Mart’s account for a P2,200 items which should have been charged against K-mart,
Inc.,the error was not detected by the bank. During April, the proceeds from notes collected by the bank
for S-Mart, Inc. was P7,548 andbank charges for this service was P18.

● How much is the unadjusted balance per bank on April 30?

 169,263

28. Stranger Co. required additional cash for its operation and used accounts receivable to raise such
needed cash, as follows:
• On December 1, 2019 Stranger Company assigned on a non-notification basis accounts receivable of
P5,000,000 to a bank in consideration for a loan of 90% of the receivables less a 5% service fee on the
accounts assigned. Stranger signed a note for the bank loan. On December 31, 2019, Stranger
collected assigned accounts of P3,000,000 less discount of P200,000. Stranger remitted the collections
to the bank in partial payment for the loan. The bank applied first the collection to the interest and the
balance to the principal. The agreed interest is 1% per month on the loan balance.
• Stranger Co. sold P1,550,000 of accounts receivable for P1,340,000. The receivables had a carrying
amount of P1,470,000 and were sold outright on a nonrecourse basis.
• Stranger Co. received an advance of P300,000 from Union Bank by pledging P360,000 of accounts
receivable.
• On June 30, Stranger Co. discounted at a bank a customer’s P600,000, 6-month, 10% note
receivable dated April 30, 2019. The bank discounted the note at 12% on the same date.

● The entry to record the sale of accounts receivable would include

A debit to Allowance for Doubtful Accounts of P80,000.

● Accounts receivable pledged against borrowings, should be

Included in total receivables with disclosure.

● In its December 31, 2019 balance sheet, Stanger Co. should report note payable as a current
liability at
1,745,000

● Tagudin Company’s equity in the assigned accounts receivable as of December 31, 2019 is
(dapat Stranger Co.; nakalimutan ni Ma’am iedit sa pinaggayahan niya sksksks)
255,000

● The proceeds from the note receivable discounted on June 30, 2019 is
604,800

29. You obtained the following information in connection with your audit of Targaryen Corporation:

Beginning inventory Cost P1,987,200 Retail P2,760,000

Sales Retail 7,812,000
Purchases Cost 4,688,640 Retail 6,512,000
Freight in Cost 94,560
Mark ups Retail 720,000
Mark up cancellations Retail 120,000
Markdown Retail 240,000
Markdown cancellations Retail 40,000

Targaryen Corp. uses the retail inventory method in estimating the values of its inventories and costs.

Based on the above and the result of your audit, answer the following:
 ● The cost ratio to be used considering the provisions of PAS 2 is
70%

● The estimated ending inventory at cost is

1,302,000

● The estimated ending inventory at retail is

1,860,000

● The estimated cost of goods sold is

5,468,400

30. The following accounts were taken from Coco Melon Inc.’s balance sheet at September 30, 2020.
Accounts receivable P4,100,000 Debit
Allowance for doubtful accounts 100,000 Debit
Net credit sales P7,500,00 Credit

If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be reported for
at fiscal year-end.
223,000

31. The balance sheet of Puhon Corporation reported the following long-term receivables as of December
31, 2018:

Note receivable from sale of plant P6,000,000

Note receivable from officer 1,600,000

In connection with your audit, you were able to gather the following transactions during 2019 and other
information pertaining to the company’s long-term receivables:

a. The note receivable from sale of plant bears interest at 12% per annum. The note is payable in 3
annual installments of P2,000,000 plus interest on the unpaid balance every April 1. The initial principal
and interest payment was made on April 1, 2019.
b. The note receivable from officer is dated December 31, 2018, earns interest at 10% per annum, and
is due on December 31, 2021.The 2019 interest was received on December 31, 2019.
c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2019, in exchange for an P800,000
non-interest bearing note due on April 1, 2021. The note had no ready market, and there was no
established exchange price for the equipment. The prevailing interest rate for a note of this type at April
1, 2019, was 12%. The present value factor of 1 for two periods at 12% is 0.797.
d. A tract of land was sold by the corporation to No Co. on July 1, 2019, for P4,000,000 under an
installment sale contract. No Co.signed a 4-year 11% note for P2,800,000 on July 1, 2019, in addition
to the down payment of P1,200,000. The equal annual payments of principal and interest on the note
will be P902,500 payable on July 1, 2020, 2021, 2022, and 2023. The land had an established cash
price of P4,000,000, and its cost to the corporation was P3,000,000. The collection of the installments
on this note is reasonably assured.

● Noncurrent receivables as of December 31, 2019

 6,500,484

● Current portion of long-term receivables as of December 31, 2019

2,594,500

● Accrued interest receivable as of December 31, 2019

514,000

● Interest income for the year 2019

911,384

32. The following information was included in the bank reconciliation for Tokyo, Inc. for June. Assume all
other reconciling items are listed.

Checks and charges recorded by bank in June, including a June service charge of P600 P344,200
Service charge made by bank in May and recorded in the books in June 400
Total of credits to Cash in all journals during June 396,040
Customer’s NSF check returned as a bank charge in June (no entry made on books) 2,000
Customer’s NSF check returned in May and redeposited in June (no entry made on books in either May
or June) 5,000
Outstanding checks at June 30 265,200
Deposits in transit at June 30 12,000

What was the total of outstanding checks at the beginning of June?

211,160

33. Your audit disclosed that on December 31, 2019, the accounts receivable control account of Amenadiel
Company had a balance ofP2,865,000. An analysis of the accounts receivable account showed the
following:

Accounts known to be worthless P 37,500

Advance payments to creditors on purchase orders 150,000
Advances to affiliated companies 375,000
Customers’ accounts reporting credit balances arising from sales return (225,000)
Interest receivable on bonds 150,000
Other trade accounts receivable – unassigned 750,000
Subscriptions receivable for common stock due in 30 days 825,000
Trade accounts receivable - assigned (Finance company’s equity in assigned accounts is P150,000)
375,000
Trade installment receivable due 1 – 18 months, including unearned finance charges of P30,000
330,000
Trade receivables from officers due currently 22,500
Trade accounts on which post-dated checks are held (no entries were made on receipts of checks)
75,000 P2,865,000

Based on the above and the result of your audit, determine the adjusted balance of following:

● How much will be presented under non-current assets as of December 31, 2019?
 375,000

● The current trade and other receivables net as of December 31, 2019 is
2,647,500

● The trade accounts receivable as of December 31, 2019 is

1,522,500

34. Presented below is a list of items that may or may not reported as inventory in a company’s December
31 balance sheet.

1. Goods out on consignment at another company’s store P800,000

2. Goods sold on installment basis P100,000
3. Goods purchased f.o.b. shipping point that are in transit at December 31 120,000
4. Goods purchased f.o.b. destination that are in transit at December 31 200,000
5. Goods sold to another company, for which our company has signed an agreement to repurchase at a
set price that covers all costs related to the inventory 300,000
6. Goods sold where large returns are predictable 280,000
7. Goods sold f.o.b. shipping point that are in transit December 31 120,000
8. Freight charges on goods purchased 80,000
9. Factory labor costs incurred on goods still unsold 50,000
10. Interest cost incurred for inventories that are routinely manufactured 40,000
11. Costs incurred to advertise goods held for resale 20,000
12. Materials on hand not yet placed into production 350,000
13. Office supplies 10,000
14. Raw materials on which the company has started production, but which are not completely
processed 280,000
15. Factory supplies 20,000
16. Goods held on consignment from another company 450,000
17. Costs identified with units completed but not yet sold 260,000
18. Goods sold f.o.b. destination that are in transit at December 31 40,000
19. Temporary investment in stocks and bonds that will be resold in the near future 500,000

● How much of these items would typically be reported as inventory in the financial statements?
2,300,000

35. The following information has been extracted from the accounting records of the URSULA COMPANY
at December 31, 2018:
Cash on hand P230,000
Impukan Bank savings account (the required minimum Monthly Average Daily Balance is P10,000)
9,500
364-day Treasury Bills purchased March 1, 2018 400,000
Petty cash fund (see note below) 20,000
Tipid Bank current account (see note below) 160,000
Time deposit placements:
Date / Time / Amount
Dec 15, 2018 / 30 days / 30,000
Oct 31, 2018 / 90 days / 40,000
 Nov 30, 2018 / 180 days / 25,000
Employee travel advances 7,000
Cash in bond sinking fund 500,000
Customer’s note receivable 45,000
Postage stamps 2,400

The following are included in cash on hand:

• A customer check for P43,000 returned by the bank December 28, 2018. It was redeposited and
cleared the bank on January 2, 2019.
• A customer check for P 75,000 dated January 3, 2019, received December 27, 2018.
• PHLPost money orders received from customers, P 30,000.

The petty cash fund consists of the following:

Currency and coins P13,500
IOUs from officers and employees 3,000
Unreplenished petty cash vouchers 1,500
Currency in envelope with the notation:
“please accept our sympathies on the loss of your loved one” 1,500
Total P20,000

The following information pertains to Tipid Bank current account:

• A check for P 13,000 was dated and recorded on December 29, 2018 but was delivered to payee on
January 5, 2019.
• A check for P 5,000 dated January 10, 2019, payable to a supplier was recorded and released to
payee on December 19, 2018. Tipid Bank requires current account depositors to maintain a monthly
average daily balance of P 50,000.

● What amount should be recorded as cash and cash equivalents on December 31, 2018?
383,000

● The total adjustment in the petty cash fund is

6,500

36. In connection with your audit of the Itaewon Manufacturing Company, you reviewed its inventory as of
December 31, 2019 and found the following items:

(a) A packing case containing a product costing P100,000 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 datedDecember 18, but the case was shipped and the
customer billed on January 10, 2020.
(b) Merchandise costing P600,000 was received on December 28, 2019, and the invoice was recorded.
The invoice was in the hands of the purchasing agent; it was marked “On consignment”.
(c) Merchandise received on January 6, 2020, costing P700,000 was entered in purchase register on
January 7. The invoice showed shipment was made FOB shipping point on December 31, 2019.
Because it was not on hand during the inventory count, it was not included.
(d) A special machine costing P200,000, fabricated to order for a particular customer, was finished in
the shipping room onDecember 30. The customer was billed for P300,000 on that date and the
machine was excluded from inventory although it was shipped January 4, 2020.
 (e) Merchandise costing P200,000 was received on January 6, 2020, and the related purchase invoice
was recorded January 5. The invoice showed the shipment was made on December 29, 2019, FOB
destination.
(f) Merchandise costing P150,000 was sold on an installment basis on December 15. The customer
took possession of the goods on that date. The merchandise was included in inventory because
Itaewon still holds legal title. Historical experience suggests that full payment on installment sale is
received approximately 99% of the time.
(g) Goods costing P500,000 were sold and delivered on December 20. The goods were included in the
inventory because the sale was accompanied by a purchase agreement requiring Itaewon to buy back
the inventory in February 2020.

● Based on the above and the result of your audit, how much of these items should be included in
the inventory balance at December 31, 2019?
1,300,000

37. Your audit of Goyo Corporation for the year ended July 31, 2019 (fiscal) revealed that the Accounts
Receivable account consists of the following:

Trade accounts receivable (current) P3,440,000

Past due trade accounts 640,000
Uncollectible accounts 128,000
Credit balances in customers’ accounts (80,000)
Notes receivable dishonored 240,000
Consignment shipments – at cost
The consignee sold goods costing P96,000 for P160,000.
A 10% commission was charged by the consignee and remitted the balance to Goyo.
The cash was received in August 1, 2019. 320,000
Total P4,688,000

The balance of the allowance for doubtful accounts before audit adjustment is a credit of P80,000. It is
estimated that an allowance should be maintained to equal 5% of trade receivables, net of amount due
from the consignee who is bonded. The company has not provided yet for the fiscal year ending July 31
bad debt expense.

Based on the above and the result of your audit, determine the adjusted balance of following:

● Doubtful Accounts Expense

264,000

● Trade Accounts Receivable

4,464,000

● Allowance for Doubtful Accounts

216,000