AUDIT OF CASH AND CASH EQUIVALENTS

PROBLEM NO. 1
The controller of the Legarda Company is in the process of preparing the company’s December
31, 2018 financial statements. He is trying to determine the correct balance of cash and cash
equivalents to be reported as a current asset in the statement of financial position. The following
items are being considered:
1. Savings account of ₱900,000 and a checking account balance of ₱1,200,000 are held at
Manila Bank.
2. Money market placement with maturity of 3 months, ₱7,500,000.
3. Currency and coins on hand amounted to ₱11,550.
4. Travel advances of ₱270,000 for the first quarter of next year (employee reimbursement
will be through salary deduction).
5. Legarda Company has purchased ₱3,150,000 of commercial paper of Mendez Corp.
which is due in 60 days.
6. A separate cash fund amounting to ₱2,250,000 is restricted for the retirement of long-
term debt.
7. Petty cash fund of ₱1,500.
8. An IOU from an employee of Legarda Company in the amount of ₱2,000.
9. Two certificates of deposit, each totaling ₱500,000. These CDs have a maturity of 120
days.
10. Legarda Company has received a check from a customer in the amount of ₱187,500
dated January 15, 2018.
11. Legarda Company has agreed to maintain a cash balance of ₱50,000 at all times at
Manila Bank to ensure future credit availability but not restricted as to withdrawal.
12. On January 1, 2018, Legarda Company purchased marketable equity securities to be
held as “trading” for ₱3,000,000. On December 31, 2018, its market value is ₱4,300,000.

What amount should be reported as cash and cash equivalents on December 31, 2018?
A. ₱13,763,050 C. ₱12,751,500
B. ₱13,000,550 D. ₱12,763,050

PROBLEM NO.2
In connection with your audit of Pureza Corporation for the year ended December 31, 2018, you
gathered the following:

Current account at Metrobank ₱2,000,000

Current account at BPI (100,000)
Payroll account 500,000
Foreign bank account - restricted (in equivalent pesos) 1,000,000
Postage stamps 1,000
Employee's post dated check 4,000
IOU from controller's sister 10,000
Credit memo from a vendor for a purchase return 20,000
 Traveler's check 50,000
Not-sufficient-funds check 15,000
Money Order 30,000
Petty cash fund (₱4,000 in currency and expense receipts
for ₱6,000) 10,000
Treasury bills, due 3/31/2019 (purchased 12/31/2018) 200,000
Treasury bills, due 1/31/2019 (purchased 1/01/2018) 300,000

Based on the above information and the result of your audit, compute for the cash and cash
equivalent that would be reported on the December 31, 2018 balance sheet.
A. ₱2,784,000 C. ₱2,790,000
B. ₱3,084,000 D. ₱2,704,000

PROBLEM NO.3
In the course of your audit of the Tayuman Corporation, its controller is attempting to determine
the amount of cash to be reported on its December 31, 2018 balance sheet. The following
information is provided:
1. Commercial savings account P1,200,000 and a commercial checking account balance of
P1,800,000 are held at PS Bank.
2. Travel advances of P360,000 for executive travel for the first quarter of the next year
(employee to reimburse through salary deduction).
3. A separate cash fund in the amount of P3,000,000 is restricted for the retirement of a long
term debt.
4. Petty cash fund of P10,000
5. An I.O.U from a company officer in the amount of P40,000.
6. A bank overdraft of P250,000 has occurred at one of the banks the company uses to deposit
its cash receipts. At the present time, the company has no deposits at this bank.
7. The company has two certificates of deposit, each totaling P1,000,000. These certificates of
deposit have maturity of 120 days.
8. Tayuman Corp. has received a check dated January 2, 2019 in the amount of P150,000.
9. Tayuman Corp. has agreed to maintain a cash balance of P200,000 at all times at PS Bank
to ensure future credit availability.
10. Currency and coin on hand amounted to P15,000.
Questions:
Based on the above and the result of your audit, how much will be reported as cash and cash
equivalent at December 31, 2018?
A. ₱3,025,000 C. ₱2,575,000
B. ₱2,825,000 D. ₱5,025,000

PROBLEM NO. 4
Laborious Company closed the accounts on June 30. The entity provided the following
transactions:
May 2 – The entity established an imprest fund of P10,000
May 29 – The fund is replenished. The petty cash items include:
Currency and coin P2,000
Postage 1,000
Supplies 3,000
Transportation 2,500
Miscellaneous Expense 1,500

June 30 – The fund was not replenished. The fund is composed of the following:
Currency and coin P6,000
Supplies 2,000
Postage 1,000
Transportation 1,000

July 15 – The fund is replenished and increased to P15,000

Currency and coin P3,000

Supplies 3,500
Postage 1,500
Transportation 1,500
Miscellaneous Expense 500

Required:

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

PROBLEM NO. 5
In connection with your audit of the cash account of ANNIE CORP, you gathered the following
information.

a. Balance per bank statement, December 1, 2018 P145,000

b.Total Bank receipts (credits) in December 346,000

c. Balance per bank, December 31, 2018 114,500

d. Outstanding checks, Nov. 30, 2018 (including 67,500

P12,000 paid by bank in December)

e. Outstanding checks, December 31, 2018 (including 94,162

checks issued in November)

f. Deposit in transit, November 30, 2018 39,458

g. A customer’s check received on December 4, 2018, 11,143

was returned by bank on December 7 marked ‘’NSF’’.
It was redeposited on December 8, 2018. The only
Entry made was to take up the collection on December
4, 2018.

1. What is the total book receipts in December?

a. P295,399 c. P334,857
b. P306,542 d. P346,000

2. What is the total bank disbursements in December?

a. P315,500 c. P231,500
b. P376,500 d. P346,000

3. What is the total book disbursements in December?

a. P447,519 c. P403,662
b. P376,500 d. P392,519

PROBLEM NO.6
Shown below is the bank reconciliation for J.Ruiz Company for November 2018:

Balance per bank, November 30, 2018 ₱150,000

Add: Deposits in transit 24,000
Total 174,000
Less: Outstanding checks 28,000
Bank credit recorded in error 10,000 38,000
Cash balance per books, November 30, 2018 ₱136,000

The bank statement for December 2018 contains the following data:

Total deposits ₱110,000

Total charges, including an NSF check of ₱8,000
and a service charge ₱400 ₱ 96,000

All outstanding checks on November 30, 2018, including the bank credit, were cleared in the
bank in December 2018.
There were outstanding checks of ₱30,000 and deposits in transit of ₱38,000 on December 31,
2018.
1. How much is the cash balance per bank on December 31, 2018?
A. ₱154,000 C. ₱164,000
B. ₱150,000 D. ₱172,400
2. How much is the December receipts per books?
A. ₱124,000 C. ₱110,000
B. ₱96,000 D. ₱148,000
3. How much is the December disbursements per books?
A. ₱96,000 C. ₱89,600
B. ₱79,600 D. ₱98,000
4. How much is the cash balance per books on December 31, 2018?
A. ₱150,000 C. ₱180,400
B. ₱170,400 D. ₱162,000
5. The adjusted cash in bank balance as of December 31, 2018 is
A. ₱141,600 C. ₱172,000
B. ₱162,000 D. ₱196,000

PROBLEM NO.7
Your examination of the financial statements of Gilmore Group Co. for the year ended December
31, 2018 you obtained the following information on the checking account of the company:

a. The bank statement on November 30, 2018 showed a balance of ₱15,300.

b. Among the bank credits in November was a customer’s note for ₱5,000 collected for the
account of the company which the company recognized in December among its receipts.
c. Included in the bank debits in November was a cost of checkbooks amounting to ₱60.
d. A check for ₱2,000 issued by MAGULO Group Co. in November was charged by the bank
in error against Gilmore Group Co. account.
e. You also ascertained that there were deposits in transit amounting to ₱4,000 and
outstanding checks totaling ₱8,500 as of November 30, 2018.
f. The bank statement for the month of December showed total credits of ₱20,800 and total
charges of ₱10,200.
g. Company books for December showed total receipts of ₱36,780 and disbursements of
₱20,360.
h. Bank debit memos for December were: No. 418 for service charges, ₱80 and No. 504 on
a customer’s returned check marked “Refer to Drawer” for ₱1,200.
i. On December 29, 2018 the company placed with the bank a customer’s promissory note
with a face value of ₱6,000 for collection. The company treated this note as part of its
receipts although the bank was able to collect on the note only in January, 2019.
j. A check for ₱198 was recorded in the company cash payments books in December as
₱1,980.

1. Adjusted cash balance as of December 31, 2018.

A. ₱24,280 B. ₱36,880 C. ₱18,782 D. ₱16,940

2. Unadjusted book balance November 30, 2018.

A. ₱12,800 B. ₱7,800 C. ₱12,860 D. ₱7,860

3. Adjusted cash balance November 30, 2018.

A. ₱8,800 B. ₱12,800 C. ₱21,300 D. ₱10,800

4. Deposit in transit as of December 31, 2018.

A. ₱21,980 B. ₱10,980 C. ₱8,890 D. ₱16,980

5. Outstanding Checks as of December 31, 2018.

A. ₱19,940 B. ₱16,818 C. ₱19,880 D. ₱18,098

PROBLEM NO. 8
Cubao Company has a current account in Metrobank. Your audit of the company’s cash account
reveals the following:
a. Balances taken from the company’s general ledger:
Cash balance, November 30, 2018 ₱637,860
 Cash balance, December 31, 2018 576,420
Receipts, December 1-31, 2018 306,220
b. Outstanding checks, November 30, 2018
(₱26,140 was paid by bank in December) 64,140
c. Checks written and recorded in December; not 36,080
included in the checks returned with the December
bank statement
d. Deposit in transit, November 30, 2018 15,260
e. Deposit in transit, December 31, 2018 16,140
f. A bank credit memo was issued in December to correct 1,500
an erroneous charge made in November
g. Note collected by bank in December (company was 2,060
not informed of the collection)

h. A check for ₱2,020 (payable to a supplier) was 980

recorded in the Check Register in December as
₱3,000

i. A check for ₱2,240 was charged by the bank as ₱2,420 180

in December
j. Cubao Company issued a stop payment order to the 780
bank in December. This pertains to a check written in
December which was not received by the payee. A
new check was written and recorded in the Check
Register in December. The old check was written off
by a journal entry, also in December
k. k. Bank service charge, November 30, 2018 60

1. The total outstanding checks on December 31, 2018, should be:

A. ₱38,000 B. ₱74,080 C. ₱36,080 D. ₱62,220
2. What is the bank statement balance on November 30, 2018?
A. ₱684,400 B. ₱587,420 C. ₱685,180 D. ₱688,180
3. What is the bank statement balance on December 31, 2018?
A. ₱636,440 B. ₱637,220 C. ₱637,580 D. ₱637,160
4. The total bank receipts for the month of December should be:
A. ₱309,680 B. ₱304,000 C. ₱308,900 D. ₱308,120
5. The total bank disbursements for the month of December is:
A. ₱356,080 B. ₱356,860 C. ₱357,640 D. ₱356,200

PROBLEM NO.9
The cash account of the Recto Corporation as of December 31, 2018 consists of the following:
On deposit in current account with Real Bank ₱900,000
Cash collection not yet deposited to the bank 350,000
A customer's check returned by the bank for insufficient fund 150,000
 A check drawn by the Vice-President of the Corporation dated
January 15, 2019 70,000
A check drawn by a supplier dated December 28, 2018 for
goods returned by the Corporation 60,000
A check dated May 31, 2018 drawn by the Corporation against
the Piggy Bank in payment of customs duties. Since the
importation did not materialize, the check was returned by the
customs broker. This check was an outstanding check in the
reconciliation of the Piggy Bank Account. 410,000
Petty Cash fund of which ₱5,000 is in currency; P3,600 in form
of employees' I.O.U s; and P1,400 is supported by approved
petty cash vouchers for expenses all dated prior to closing of the
books on December 31, 2018. 10,000
Total 1,950,000
Less: Overdraft with Piggy Bank secured by a Chattel mortgage
on the Inventories 300,000
Balance per ledger ₱1,650,000

At What amount will the account ‘’Cash’’ appear on the December 31, 2018 balance sheet?
A. ₱1,315,000 C. ₱1,495,000
B. ₱1,425,000 D. ₱1,725,000

PROBLEM NO.10
In the course of your audit of the Tayuman Corporation, its controller is attempting to determine
the amount of cash to be reported on its December 31, 2018 balance sheet. The following
information is provided:
1. Commercial savings account P1,200,000 and a commercial checking account balance of
P1,800,000 are held at PS Bank.
2. Travel advances of P360,000 for executive travel for the first quarter of the next year
(employee to reimburse through salary deduction).
3. A separate cash fund in the amount of P3,000,000 is restricted for the retirement of a long-
term debt.
4. Petty cash fund of P10,000
5. An I.O.U from a company officer in the amount of P40,000.
6. A bank overdraft of P250,000 has occurred at one of the banks the company uses to deposit
its cash receipts. At the present time, the company has no deposits at this bank.
7. The company has two certificates of deposit, each totaling P1,000,000. These certificates of
deposit have maturity of 120 days.
8. Tayuman Corp. has received a check dated January 2, 2019 in the amount of P150,000.
9. Tayuman Corp. has agreed to maintain a cash balance of P200,000 at all times at PS Bank
to ensure future credit availability.
10. Currency and coin on hand amounted to P15,000.
Questions:
Based on the above and the result of your audit, how much will be reported as cash and cash
equivalent at December 31, 2018?
A. ₱3,025,000 C. ₱2,575,000
B. ₱2,825,000 D. ₱5,025,000

PROBLEM NO.11
You were able to gather the following from the December 31, 2018 trial balance of V.Mapa
Corporation in connection with your audit of the company:

Cash on hand ₱500,000

Petty cash fund 10,000
BPI current account 1,000,000
Security Bank current account No. 01 1,080,000
Security Bank current account No. 02 (80,000)
PNB savings account 1,200,000
PNB time deposit 500,000

Cash on hand includes the following items:

a. Customer’s check for ₱40,000 returned by bank on December 26, 2018 due to insufficient
funds but subsequently redeposited and cleared by the bank on January 8, 2019.

b. Customer’s check for ₱20,000 dated January 2, 2019, received on December 29, 2018.
c. Postal money orders received from customers, ₱30,000.

The petty cash fund consisted of the following items as of December 31, 2018.

Currency and coins ₱2,000

Employees' vales 1,600
Currency in an envelope marked '' collections for charity'' with
names attached 1200
Unreplenished petty cash vouchers 1,300
Check drawn by V.Mapa Corporation, payable to the petty cashier 4,000
₱10,100

Included among the checks drawn by V.Mapa Corporation against the BPI current account and
recorded in December 2018 are the following:
a. Check written and dated December 29, 2018 and delivered to payee on January 2, 2019,
₱80,000.
b. Check written on December 27, 2018, dated January 2, 2019, delivered to payee on
December 29, 2018, ₱40,000

The credit balance in the Security Bank current account No.2 represents checks drawn in
excess of the deposit balance. These checks were still outstanding at December 31, 2018.
The savings account deposit in PNB has been set aside by the Board of directors for acquisition
of new equipment. This account is expected to be disbursed in the next 3 months from the
balance sheet date.
Based on the above and the result of your audit, determine the adjusted balances of the
following:
1. Cash on hand
A. ₱410,000 C. ₱470,000
B. ₱530,000 D. ₱440,000
2. Petty cash fund
A. ₱6,000 C. ₱2,000
B. ₱7,200 D. ₱4,900
3. BPI current account
A. ₱1,000,000 C. ₱1,080,000
B. ₱1,120,000 D. ₱1,040,000
4. Cash and cash equivalents
A. ₱2,917,200 C. ₱3,052,000
B. ₱3,074,900 D. ₱3,066,000

PROBLEM NO.12
In connection with the audit of Betty Go Belmonte Company’s financial statements, you
obtained the following information pertaining to its cash account.
Cash in bank
July 31 ₱136,429 Book disbursements- August ₱111,423
Book receipts- August ₱141,230 August 31 balance ₱166,236

Further examination revealed the following:

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

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

▪ Among the bank debits are:

NSF checks ₱700
Bank error 900
Correction of July error 1,000
Service charges 65
▪ Among the bank credits are:
Correction of July error ₱600
Note collected by bank 4,277
Bank error 3,000
▪ Deposits in transit: July 31, ₱5,200; Aug. 31, ₱8,330
▪ Outstanding checks as of July 31, ₱8,007.
Determine the following:
1. Cash Shortage
A. ₱6,026 B. ₱4,526 C. ₱5,474 D. ₱4,000
2. Outstanding checks, August 31
A. ₱11,421 B. ₱9,332 C. ₱8,007 D. ₱3,876
3. Adjusted cash Balance, August. 31
A. ₱175,222 B. ₱169,748 C. ₱125,841 D. ₱166,236
4. Adjusted cash balance, July 31
A. ₱136,429 B. ₱137,353 C. ₱111,612 D. ₱148,481

PROBLEM NO.13
The general ledger accounts showed the following cash balances at December 31, 2007:
BDO current account ₱210,000
EPCI savings account 90,000
Working Fund 10,000
Total per WBS ₱310,000

BDO Current – The following bank reconciliation as of December 31, 2007, was given to you by
the accountant:
Balance per books, December 31, 2007 ₱210,000
Add: Deposit in transit 8,000
Debit memo for customer’s check returned unpaid 10,000
Less: Checks drawn but not paid by bank,
per schedule below ₱18,000
Error for an account payable entered on books
as ₱7,000 but drawn and paid by bank as P12,000 5,000 (23,000)
Computed balance 202,000
Unlocated difference 6,000
Balance per bank, December 31, 2007 ₱208,000

Check drawn but not paid by bank

Check No. 346 ₱2,250
490 4,960
509 7,490
615 3,710
805 1,550
950 1,040
₱18,000
You traced the balance per books to the general ledger and the balance per bank to the bank
confirmation reply.
EPCI Savings Account – The balance in this account represents funds set aside for the purchase
of a computer, per resolution of the Board of Directors.
Working Fund – This fund was replenished as of December 31, 2007.
1. How much is the adjusted and reconciled balance of the BDO current account as of December
31, 2007?
A. ₱200,000 B. ₱210,000 C. ₱198,000 D. ₱195,000
2. After considering all audit adjustments, what should be the correct total of outstanding checks?
A. ₱21,000 B. ₱18,000 C. ₱16,000 D. ₱13,000
3. The amount of cash to be reported in the audited balance sheet at December 31, 2007 is
A. ₱195,000 B. ₱295,000 C. ₱205,000 D. ₱310,000

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

June 30 July 31

Cash account balance ₱15,822 ₱39,745

Bank statement balance 107,082 137,817
Deposit in transit 8,201 12,880
Outstanding checks 27,718 30,112

Bank service charge 72 60

Customer's check deposited July 10, returned by
bank on July 16 marked NSF, and redeposited
immediately; no entry made on books for return or
redeposit 8,250
Collection by bank of company's note receivable 71,815 80,900

The bank statements and the company’s cash records show these totals:
Disbursements in July per bank statement ₱218,373
Cash receipts in July per Anonas's books 236,452

Based on the application of the necessary audit procedures and appreciation of the above data,
you are to provide the answers to the following:
1. How much is the adjusted cash balance as of June 30?
A. ₱87,565 C. ₱107,082
B. (₱3,695) D. ₱15,822
2. How much is the adjusted bank receipts for July?
A. ₱253,787 C. ₱245,537
B. ₱214,802 D. ₱232,881
3. How much is the adjusted book disbursements for July?
A. ₱220,767 C. ₱181,782
B. ₱212,517 D. ₱206,673
4. How much is the adjusted cash balance as of July 31?
A. ₱137,817 C. ₱22,513
B. ₱112,335 D. ₱120,585
5. How much is the cash shortage as of July 31?
A. ₱8,250 C. ₱196,144
B. ₱71,815 D. ₱0

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

company which the company recognized in December among its receipts. Included in the bank
debits were cost of checkbooks amounting to ₱1,200 and a ₱40,000 check which was charged
by the bank in error against Santolan Company Co. account. Also in November you ascertained
that there were deposits in transit amounting to ₱80,000 and outstanding checks totaling
₱170,000.

The bank statements for the month of December showed total credits of ₱416,000 and total
charges of ₱204,000. The company’s books for December showed total debits ₱735,600, total
credits of ₱407,200 and a balance of ₱485,600. Bank debit memos for December were: No. 121
for service charges, ₱1,600 and No. 122 on a customer’s returned check ‘’Refer to Drawer’’ for
₱24,000.

On December 31, 2018 the company placed with the bank a customer’s promissory note with a
face value of ₱120,000 for collection. The company treated this note as part of its receipts
although the bank was able to collect on the note only in January 2019.
A check for ₱3,960 was recorded in the company cash payments books in December as
₱39,600.
Questions:
Based on the application of the necessary audit procedures and appreciation of the above data,
you are to provide the answers to the following:
1. How much is the undeposited collections as of December 31, 2018?
A. ₱339,600 C. ₱219,600
B. ₱179,600 D. ₱139,600
2. How much is the outstanding checks as of December 31, 2018?
A. ₱191,960 C. ₱361,960
B. ₱397,600 D. ₱363,160
3. How much us the adjusted cash balance as of November 30, 2018?
A. ₱216,000 C. ₱176,000
B. ₱256,000 D. ₱157,200
4. How much is the adjusted bank receipts for December?
A. ₱635,600 C. ₱475,600
B. ₱515,600 D. ₱435,600
5. How much is the adjusted books disbursements for December?
A. ₱395,960 C. ₱225,960
B. ₱431,600 D. ₱397,160
6. How much is the adjusted cash balance as of December 31, 2018?
A. ₱625,640 C. ₱220,000
B. ₱195,640 D. ₱375,640

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

Questions:
1. Petty cash fund as of December 31, 2018.
A. ₱12,600 B. ₱5,000 C. ₱11,600 D. ₱2,600
2. Adjusted cash balance per bank.
A. ₱61,760 B. ₱51,760 C. ₱60,760 D. ₱70,760
3. Total sales in 2018.
A. ₱902,600 B. ₱910,000 C. ₱900,000 D. ₱890,000
4. Total cash paid to suppliers for merchandise purchases.
A. ₱500,000 B. ₱470,000 C. ₱530,000 D. ₱560,000
5. Cost of sales in 2018.
A. ₱560,000 B. ₱530,000 C. ₱440,000 D. ₱500,000
 6. Total operating expense in 2018.
A. ₱371,500 B. ₱363,750 C. ₱364,000 D. ₱351,500
7. Bad debts expense in 2018.
A. ₱10,000 B. ₱5,000 C. ₱20,000 D. ₱0
8. Depreciation expense in 2018.
A. ₱10,000 B. ₱2,500 C. ₱5,000 D. ₱2,250
9. Net income in 2018.
A. ₱98,600 B. ₱96,000 C. ₱86,000 D. ₱106,000
10. Cash shortage as of December 31, 2018.
A. ₱14,140 B. ₱16,740 C. ₱4,140 D. ₱6,740

PROBLEM NO. 17
The North Ave Corporation was organization on January 15, 2018 and started operation soon
thereafter. The Company cashier who acted also as the bookkeeper had kept the accounting
records very haphazardly. The manager suspects him of defalcation and engaged you to audit
his account to find out the extent of the fraud, if there is any.
On November 15, when you started the examination of the accounts, you find the cash on hand
to be ₱25,700. From inquiry at the bank, it was ascertained that the balance of the Company’s
bank deposit in current account on the same date was ₱131,640. Verification revealed that the
check issued for ₱9,260 is not yet paid by the bank. The corporation sells at 40% above cost.
Your examination of the available records disclosed the following information:
Capital stock issued at par for cash ₱1,600,000
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 145,000
balance unpaid of ₱30,000
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 results of your audit, compute the following as of November 15, 2018:
1. Collection from sales
A. ₱1,188,140 C. ₱1,615,040
B. ₱1,153,600 D. ₱2,041,940
2. Payments for purchases
A. ₱1,854,620 C. ₱1,207,204
B. ₱1,391,780 D. ₱922,180
3. Total cash disbursements
A. ₱2,340,960 C. ₱2,810,560
B. ₱3,273,400 D. ₱2,625,984
4. Unadjusted cash balance
A. ₱74,740 C. ₱1,007,180
B. ₱722,156 D. ₱537,580
5. Cash shortage
A. ₱574,076 C. ₱859,100
B. ₱389,500 D. ₱0

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

e. Outstanding checks at December 31:

November checks December checks
No. 280 ₱1,800 No. 331 ₱2,400
290 6,600 339 1,600
345 20,000
353 3,600
364 10,000

f. Undeposited collections at December 31, 2016 amounted to ₱20,000

g. An amount of ₱4,400 representing proceeds of a clean draft on a customer was credited by
bank, but is not yet taken up in the company’s books.
h. Bank service charges for December, ₱400.

The company cashier presented to you the following reconciliation statement for December,
2018, which he has prepared:
Balance per books, December 31, 2018 ₱180,600
Add outstanding checks:
No. 331 ₱2400
 339 1600
345 2000
353 3600
364 1000 10,600
Total 191,200
Bank service charge (400)
Undeposited collections (20,400)
Balance per bank, December 31, 2018 ₱170,400

Questions:
Based on the above and the result of your audit, answer the following:
1. How much is the adjusted cash balance as of December 31, 2018?
A. ₱152,800 C. ₱180,200
B. ₱144,400 D. ₱0
2. How much is the cash shortage as of December 31, 2018?
A. ₱45,600 C. ₱37,200
B. ₱4,400 D. ₱41,200
3. How much is the cash shortage for the period January 1 to 15, 2019?
A. ₱30,800 C. ₱31,200
B. ₱32,400 D. ₱32,000
4. Which of the following is not a method used by the cashier to cover-up the shortage as of
December 31, 2018?
A. Understating outstanding checks by ₱27,000
B. Not recording the bank collection of ₱4,400
C. Understating the book balance of ₱5,400.
D. Overstatement of undeposited collections by ₱400.

PROBLEM NO. 19

You are conducting an audit of the EDSA CORPORATION for the year ended December 31,
2018. The internal control procedures surrounding cash transactions were not adequate. Jane
Quipit, the bookkeeper-cashier handles cash receipts, maintains accounting records and
prepares the monthly reconciliations of the bank account. She prepared the following
reconciliation at the end of the year:

Balance per bank statement ₱315,000

Add Deposit in transit 157,725
Note collected by bank 13,500 171,225
Balance 486,225
Less: Outstanding checks 222,075
Balance per general ledger ₱264,150

In the process of your audit, you gathered the following:

a. At December 31, 2018, the bank statement and the general ledger showed
balances of ₱315,000 and ₱264,150 respectively.
b. The cut off bank statement showed a bank charge on January 02, 2009 for
₱35,250 representing a correction of an erroneous bank credit.
c. Included in the list of outstanding checks were the following:
 1. A check payable to a supplier, dated December 29, 2018, in the amount
of ₱13,275, released on January 05, 2019.
2. A check representing advance payment to a supplier in the amount of
₱33,489, the date of which is January 04, 2019, and released in
December 2008.
d. On December 31, 2018, the company received and recorded customer’s postdated
check amounting to ₱45,000.

1. Compute the adjusted deposit in transit as of December 31, 2018.

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

AUDIT OF RECEIVABLES
PROBLEM NO. 1
Your audit disclosed that on December 31, 2018, the accounts receivable control account of
Kamuning Company had a balance of ₱2,865,000. An analysis of the account showed the
following:

Accounts known to be worthless ₱37,500

Advance payments to creditors on purchase orders 150,000
Advances to affiliated companies 375,000
Customer's 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 due in 30 days 825,000
Trade accounts receivable - assigned (Kamuning company's
equity in assigned accounts is ₱150,000 375,000
Trade installment receivable due 1 - 18 months, including
unearned finance charges of ₱30,000 330,000
Trade receivables from officers due currently 22,500
Trade accounts on which postdated-checks are held (no
entries were made on receipts of checks) 75,000
₱2,865,000
Questions:
Based on the above and the result of your audit, determine the adjusted balance of following:
1. The trade accounts receivable as of December 31, 2018 is
A. ₱1,147,500 C. ₱1,485,000
B. ₱1,522,500 D. ₱1,447,500
2. The net current trade and other receivables as of December 31, 2018 is
A. ₱2,647,500 C. ₱2,272,500
B. ₱2,610,000 D. ₱1,822,500
3. How much of the foregoing will be presented under non-current assets as of December 31,
2018?
A. ₱1,200,000 C. ₱525,000
B. ₱375,000 D. ₱0

PROBLEM NO.2
Boni Company was incorporated on January 1, 2018. All sales are on account under the
terms 3/10, 1/20, n/30. Boni Company uses the aging of the receivables approach in providing
bad debts. Provided below is the aging schedule which Boni Company’s accountant prepares
at the end of the accounting period.

Days past due Probability of collectibility

1 – 30 days 95%
31 – 60 days 80%
61 – 90 days 60%
91 – 120 days 30%
over 120 days 10%

During 2018, Boni Company reported sales of ₱14,500,000. Initial bad debts expense has been
provided during the year at 2.5% of gross sales. Write-offs during the year amounted to ₱75,000.
In July 2018, Boni Company received a ₱50,000 face value note from a customer as payment for
goods sold in February. The note carries an interest rate of 10% and will mature on June 30,
2020. Total cash collections for 2018 amounted to ₱12,961,000; of which ₱3,686,000 were
collected within 10 days from the date of sale, ₱2,475,000 were collected beyond 10 days but
within 20 days from the date of sale and the rest after 20 days, including recoveries totaling to
₱40,000.

At the end of the year, a schedule of the receivable was provided

Age of the Percentage
Receivables
1 – 30 days 35%
31 – 60 days 25%
61 – 90 days 20%
91 – 120 days 10%
121 – 150 days 7%
over 150 days 3%

1. The accounts receivable balance at December 31, 2018 is

A. ₱1,275,000 B. ₱1,315,000 C. ₱1,415,000 D. ₱1,554,000
2. The allowance for bad debts account balance prior to the preparation of the aging schedule
is
A. ₱362,500 B. ₱402,500 C. ₱287,500 D. ₱327,500
3. The amount of bad debts expense to be reported in the 2018 income statement is
A. ₱362,500 B. ₱468,422 C. ₱256,578 D. ₱221,578
PROBLEM NO. 3
SHAW CORP.’s accounts receivable subsidiary ledger shows the following information:
ACCOUNT BALANCE INVOICE
CUSTOMER DEC. 31, 2014 DATE AMOUNT
Arab, Inc. ₱35,180 12/04/14 ₱14,000
11/29/14 21,180
Nahum Co. 20,920 09/27/14 12,000
08/20/14 8,920
Sikat Corp. 31,600 12/08/14 20,000
10/25/14 11,600
Tan Co. 45,140 11/17/14 23,140
10/09/14 22,000
Undi Co. 31,600 12/12/14 19,200
12/02/14 12,400
Xander Corp. 18,400 09/12/14 18,400

The estimated bad debt rates below are based on Shaw Corp.’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 debit balance of ₱5,500 on December 31, 2014,
before adjustment.
1. The company’s accounts receivable under “61-90 days” category should be
A. ₱32,600 C. ₱33, 600
B. ₱44,320 D. ₱42,000
2. The company’s accounts receivable under “91-120 days” category should be
A. ₱38,320 C. ₱29,400
B. ₱30,400 D. ₱12,000
3. The allowance for bad debts to be reported in the statement of financial position at
December 31, 2014, is
A. ₱9,699 C. ₱9,829
B. ₱15,199 D. ₱5,500
4. What entry should be made on December 31, 2014, to adjust the allowance for bad
debts account?
A. Bad debt expense 15,199
Allowance for bad debts 15,199
B. Bad debt expense 4,199
Allowance for bad debts 4, 199
C. Allowance for bad debts 5,500
Bad debt expense 5,500
D. Bad debt expense 15,329
Allowance for bad debts 15,329
 5. What is the net realizable value of accounts receivable at December 31, 2014?
A. ₱165,641 C. ₱196,039
B. ₱171,141 D. ₱173,011

PROBLEM NO. 4
Your audit of Central Corporation for the year ended December 31, 2018 revealed that the
Accounts Receivable account consists of the following:

Trade accounts receivable (current) ₱3,440,000

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 ₱96,000 for
₱160,000. A 10% commission was charged by
the consignee and remitted the balance to
Central. The cash was received in January
2019.) 320,000
Total 4,688,000

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

Questions:
Based on the above and the result of your audit, determine the adjusted balance of following:
1. Trade accounts receivable
A. ₱4,080,000 C. ₱4,464,000
B. ₱3,440,000 D. ₱3,584,000
2. Allowance for doubtful accounts
A. ₱204,000 C. ₱172,000
B. ₱216,000 D. ₱179,200
3. Doubtful accounts expense
A. ₱264,000 C. ₱252,000
B. ₱220,000 D. ₱227,200

PROBLEM NO. 5
Blumentritt Company stared operation in 2006. The company has no allowance for doubtful
accounts. Uncollectible receivables were expensed as written off and recoveries were credited
to income as collected. Data from the company’s records for five years is as follows:
 Amount
Year Credit sales Written Off Recovery
2006 ₱3,000,000 ₱30,000 ₱
2007 4,500,000 76,000 5,400
2008 5,900,000 104,000 5,000
2009 6,600,000 130,000 9,600
2010 8,000,000 166,000 10,000

Balances of accounts receivables are as follows:

As of December 31, 2009 ₱3,000,000
As of December 31, 2010 3,500,000

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

• On December 1, 2018 Carriedo Co. assigned on a nonnotification basis accounts

receivable of ₱5,000,000 to a bank in consideration for a loan of 90% of the receivable
less a 5% service fee on the accounts assigned. Carriedo Co. signed a note for the bank
loan. On December 31, 2018, Carriedo collected assigned accounts of ₱3,000,000 less
discount of ₱200,000. Carriedo remitted the collections to the bank in partial payment for
the loan. The bank applied first the collection to the interest and the balance to the
principal. The agreed interest is 1% per month on the loan balance.
 • Carriedo Co. sold ₱1,550,000 of accounts receivable for ₱1,340,000. The receivables
had a carrying amount ₱1,470,000 and were sold outright on a nonrecourse basis.
• Carriedo Co. received an advance of ₱300,000 from Union Bank by pledging ₱360,000
of accounts receivable.
• On June 30, 2018, Carriedo Co. discounted at a bank a customer’s ₱600,000, 6 month,
10% note receivable dated April 30, 2018. The bank discounted the note at 12% on the
same date.

Questions:
Based on the above and the result of your audit, answer the following:
1. In its December 31, 2018 statement of financial position, Carriedo should report note payable
as a current liability at
A. ₱1,745,000 C. ₱1,545,000
B. ₱2,250,000 D. ₱1,700,000
2. Carriedo Company’s equity in the assigned accounts receivable as of December 31, 2018 is
A. ₱255,000 C. ₱455,000
B. ₱300,000 D. ₱0
3. The entry to record the sale of accounts receivable would include
A. A debit to Finance Charge of ₱210,000
B. A debit to Allowance for Doubtful Accounts of ₱80,000
C. A credit to Accounts Receivable of ₱1,470,000
D. A credit to Notes Payable of ₱1,550,000
4. Accounts receivable pledged against borrowings, should be
A. Included in total receivables with disclosure
B. Included in total receivables without disclosure
C. Excluded from total receivables with disclosure
D. Excluded from total receivables without disclosure
5. The proceeds from the note receivable discounted on June 30, 2018 is
A. ₱564,000 C. ₱604,800
B. ₱617,400 D. ₱576,000

PROBLEM NO. 7
The December 31, 2013 statement of financial position of the Magallanes Company included
the following information:
Accounts receivable ₱672,000
Less: Allowance for bad debts (42,300) ₱629,700
Notes receivable* 65,400
Total receivables ₱695,100
* The company is contingently liable for discounted notes receivable of ₱114,000.
During the year ending December 31, 2014, the following transactions occurred:
Sales on credit ₱2,623,800
Collections of accounts receivable 2,523,000
Accounts receivable written off as uncollectible 41,400
Notes receivable collected 87,000
Customer notes received in payment of accounts receivable 216,000
 Notes receivable discounted that were paid at maturity 108,000
Notes receivable discounted that were defaulted, including
interest of ₱60 and a ₱15 fee. This amount is expected to be
collected during 2015 6,075
Proceeds from customer notes discounted with recourse
(principal ₱135,000, accrued interest, ₱600) 135,225

Collections on accounts previously written off 1,500

Sales returns and allowances (on credit sales) 600
Bad debts were estimated to be 1.5% of credit sales

Based on the preceding information, determine the balances of the following accounts at
December 31, 2014.
1. Net Realizable value of Accounts receivable
A. ₱515,475 C. ₱473,718
B. ₱513,975 D. ₱509,400
2. Allowance for doubtful accounts
A. ₱41,757 C. ₱40,857
B. ₱39,357 D. ₱40,800
3. Notes receivable
A. ₱59,400 C. ₱329,400
B. ₱194,400 D. ₱200,400
4. Notes receivable discounted
A. ₱129,000 C. ₱135,000
B. ₱114,000 D. ₱120,000
PROBLEM NO.8
The financial statements of Ayala Company include the following:
December 31, 2017 December 31, 2018
Accounts receivable ₱900,000
Allowance for doubtful accounts ₱45,000
Sales ₱7,500,000
Cash collected from customers 6,540,000

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

On December 31, 2018, the accounts receivable included ₱450,000 at past due accounts. After
careful study, the management estimated that the probable loss on past due accounts is 20% and
that in addition, 5% of the current accounts may prove uncollectible.
Questions:
1. What is the balance of accounts receivable on December 31, 2018?
A. ₱1,500,000 B. ₱1,800,000 C. ₱1,485,000 D. ₱1,470,000
2. What is the balance of allowance for doubtful accounts before adjustment on December 31,
2018?
A. ₱15,000 debit B. ₱45,000 credit C. ₱30,000 debit D. ₱60,000 debit
3. How much is the required allowance for doubtful accounts on December 31, 2018?
A. ₱185,000 B. ₱90,000 C. ₱127,500 D. ₱142,500
4. How much increase in allowance for doubtful accounts is required on December 31, 2018?
A. ₱127,500 B. ₱157,500 C. ₱97,500 D. ₱142,500
5. The adjusting entry to record the doubtful accounts expense for 2018 is:
A. Doubtful accounts expense ₱127,500
Allowance for doubtful accounts ₱127,500
B. Retained earnings ₱142,500
Allowance for doubtful accounts ₱142,500
C. Doubtful accounts expense ₱ 97,500
Allowance for doubtful accounts ₱97,500
D. Doubtful accounts expense ₱157,500
Allowance for doubtful accounts ₱157,500

PROBLEM NO. 9
The balance sheet for the Baclaran Corporation on December 31, 2007 includes the following
receivables balances:
Notes Receivable ₱365,000
Less notes discounted 155,000 ₱210,000
Accounts Receivable ₱856,000
Less allowance for doubtful accounts 41,500 814,500
Selected transactions during 2008 included the following:
a. Notes received in settlement of accounts totaled ₱825,000.
b. Notes receivable discounted as of December 31, 2007, were paid at maturity with the
exception of one ₱30,000 note on which the company had to pay the bank ₱30,900,
which included interest and protest fees. It is expected that recovery will be made on
this note early 2009.
c. Customers’ notes of ₱600,000 were discounted with recourse during the year, proceeds
from their transfer being ₱585,000. Of this total, ₱480,000 matured during the year
without notice of protest.
h. Notes receivable collected during the year totaled ₱270,000 and interest collected was
₱24,500.

Determine the adjusted balances of the following accounts as of December 31, 2008:

1. Notes Receivable (including notes receivable discounted).

A. ₱320,000 B. ₱365,000 C. ₱165,000 D. ₱285,000
2. Notes Receivable Discounted
A. ₱155,000 B. ₱600,000 C. ₱120,000 D. ₱105,000

PROBLEM NO. 10
In connection with your audit of the Libertad Corporation, you noted that the company’s Notes
receivable consists of the following:
a. A 4 month note dated November 30, 2018, from AA Company, ₱200,000; interest rate, 16%;
discounted on November 30, 2018 at 16%.
b. A draft drawn payable 30 days after ₱900,000 by the BB Company on the Charlie Company
in favor of the Delta Company, endorsed to Libertad Corporation on December 2, 2018 and
accepted on December 4, 2018.
c. 90-day note dated November 1, 2018 from E. Dy, ₱500,000; interest at 16% the note is for
subscription to 5,000 preference shares of Libertad Corp. at 100 per share.
d. A 60-day note dated May 3, 2018, from CC Company, ₱600,000; interest rate, 16%;
dishonored at maturity; judgement obtained on October 10, 2018. Collection within the next
twelve months is doubtful.
e. A 90-day note dated January 4, 2018, from Apel Babada, president of Libertad Corp,
₱160,000; no interest; note not renewed; president confirmed.
f. A 120-day note dated September 14, 2018, from DD Company, ₱120,000; interest rate, 16%;
note is held by bank as collateral.

Questions:

1. The adjusted balance of Notes Receivable as of December 31, 2018?

A. ₱2,480,000 C. ₱1,020,000
B. ₱1,220,000 D. ₱900,000
2. How much of foregoing notes receivable will be reported in the current assets section of the
statement of financial position?
A. ₱1,220,000 C. ₱1,680,000
B. ₱2,480,000 D. ₱1,520,000
3. How much is the net interest income from the foregoing notes receivable for 2010?
A. ₱19,093 C. ₱166,613
B. ₱70,613 D. ₱35,093
4. The adjusted balance of Interest Receivable as of December 31, 2018?
A. ₱19,093 C. ₱70,613
B. ₱5,760 D. ₱0

AUDIT OF INVENTORIES

PROBLEM NO.1

MONKEY CO., annual net income for the period 2014-2018 is as follows:

YEAR NET INCOME (LOSS)

2014 P150,000
2015 340,000
2016 645,000
2017 (100,000)
2018 250,000

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

2014 P3,000 overstatement, end of year

2015 6,000 understatement, end of year
2017 4,500 understatement, end of year
 2018 11,000 understatement, end of year

Questions:

1. What is the adjusted net income in 2014?

a. P150,000 c. P153,000
b. P159,000 d. P147,000
2. What is the adjusted net income in 2015?
a. P331,000 c. P349,000
b. P337,000 d. P340,000
3. What is the adjusted net income in 2016?
a. P651,000 c. P639,000
b. P648,000 d. P645,000
4. What is the adjusted net loss in 2017?
a. P89,500 c. P100,000
b. P101,500 d. P95,500
5. What is the adjusted net income in 2018?
a. P250,000 c. P243,500
b. P234,500 d. P256,500

PROBLEM NO.2

BIRD COMPANY is a manufacturer of small tools. The following information was obtained from
the company’s accounting records for the year ended December 31, 2018:

Inventory at December 31, 2018 (based on physical count in Bird’s P1,870,000

warehouse at cost on December 31, 2018)
Accounts Payable at December 31, 2018 1,415,000
Net Sales (Sales less sales returns) 9,693,400

Your audit reveals the following information:

1) The physical count included tools billed to a customer FOB shipping point on December 31,
2018. These tools cost P64,000 and were billed at P78,500. They were in the shipping area
waiting to be picked up by the customer.

2) Goods shipped FOB Shipping point by a vendor were in transit on December 31, 2018.
These goods with invoice cost of P93,000 were shipped on December 29, 2018.

3) Work in process inventory costing P27,000 was sent to a job contractor for further
processing.

4) Not included in the physical count were goods returned by customers on December 31, 2018.
These goods costing P49,000 were inspected and returned to inventory on January 7, 2019.
Credit memos for P67,800 were issued to the customers at that date.

5) In transit to a customer on December 31, 2018, were tools costing P17,000 shipped FOB
Shipping point on December 26, 2018. A sales invoice for P29,400 was issued on January 3,
2019, when BIRD Company was notified by the customer that the tools had been received.
6) At exactly 5:00 PM on December 31, 2018, goods costing P31,200 were received from a
vendor. These were recorded on a receiving report dated January 2, 2019. The related invoice
was recorded on December 31, 2018, but the goods were not included in the physical count.

7) Included in the physical count were goods received from a vendor on December 27, 2018.
However, the related invoice for P36,000 was not recorded because the accounting
department’s copy of the receiving report was lost.

8) A monthly freight bill for P32,000 was received on January 3, 2019. It specifically related to
merchandise bought in December 2018, one-half of which was still in the inventory at December
31, 2018. The freight was not included in either the inventory or in accounts payable at
December 31, 2018.

Questions:

1. Bird’s December 31, 2018, inventory should be increased by

a. P216,200 c. P252,200
b. P233,200 d. P123,200
2. Bird’s accounts payable at December 31, 2018, should be increased by
a. P68,000 c. P125,000
b. P145,000 d. P161,000
3. The amount of net sales to be reported on BIRD’s income statement for the year ended
December 31, 2018, should be
a. P9,547,100 c. P9,591,000
b. P9,576,500 d. P9,595,300
4. BIRD’s statement of financial position at December 31, 2018, should report accounts payable
of
a. P1,576,000 c. P1,540,000
b. P1,483,000 d. P1,431,000
5. The amount of inventory to be reported on BIRD’s December 31, 2018, statement of financial
position should be
a. P2,103,200 c. P2,122,200
b. P2,086,200 d. P1,993,200

Problem no.3
You are engaged in the regular annual examination of the accounts and records of Buddy
Manufacturing Company for the year ended December 31, 2004. To reduce the work load at
year-end, the company, upon your recommendation, took its annual physical inventory on
November 30, 2004. You observed the taking of the inventory and made tests of the inventory
count and the inventory records.
The company’s inventory account, which includes raw materials and work-in-process is on a
perpetual basis. Inventories are valued at cost, first-in, first-out method. There is no finished
goods inventory.
The company’s physical inventory revealed that the book inventory of P4,239,900 was
understated by P210,000. To avoid delay in completing its monthly financial statements, the
company decided not to adjust the book inventory until year end except for obsolete inventory.
You examination disclosed the following information regarding the November 30 inventory:
 1. Pricing tests showed that physical inventory was overstated by P154,000.
2. An understatement of the physical inventory by P10,500 due to errors in footings and
extensions.
3. Direct labor included in the inventory amounted to P700,000. Overhead was included at
the rate of 200% of direct labor. You have ascertained that the amount of direct labor was
correct and that the overhead rate was proper.
4. The physical inventory included obsolete materials with a total cost of P17,500. During
December, the obsolete materials were written off by a change to cost of sales.

Your audit also disclosed the following information about the December 31 inventory:
1. Total debits to the following accounts during December were:

Cost of sales 4,802,000 *

Direct labor 847,000
Manufacturing expense 1,764,000
Purchases 1,729,000

* Includes direct labor of P966,000 and manufacturing overhead of P1,932,000.

2. Scrap loss on established product lines is normally insignificant. However, a special order
started and completed during December had a scrap loss of P56,000. This amount was
charged to manufacturing expense.

Questions:
1. The adjusted amount of physical inventory at November 30, 2004 is:
a. P 4,078,900 b.P 4,288,900 c. P 4,498,900 d. P 4,596,900
2. The adjusted amount of inventory at December 31, 2004 is:
a. P 3,844,400 b. P 3,826,900 c. P 3,774,400 d. P 3,756,900
3. The raw materials included in the ending inventory at December 31, 2004 is:
a. P 1,961,400 b. P 2,013,900 c. P 2,031,400 d. P 2,188.900
4. The direct labor included in the ending inventory at December 31, 2004 is:
a. P 581,000 b. P 847,000 c. P 700,000 d. P 966,000
5. The total cost of sales for December 31, 2004 is:
a. P 4,854,500 b. P 4,802,000 c. P 4,784,500 d. P 4,714,500
Problem no.4

During your audit of the records of the Chivas Corporation for the year ended December 31, 2005,
the following facts were disclosed:

Raw materials inventory, 1/1/2005 P 720,200

Raw materials purchases 5,232,800
Direct labor 6,300,000
Manufacturing overhead applied (150% of direct labor) 9,450,000
Finished goods inventory, 1/1/2005 1,240,000
Selling expenses 8,112,800
Administrative expenses 7,377,200

Your examination disclosed the following additional information:

a) Purchases of raw materials
Month Units Unit Price Amount
January – February 55,000 P17.76 P976,800
March – April 45,000 20.00 900,000
May – June 25,000 19.60 490,000
July – August 35,000 20.00 700,000
September – October 45,000 20.40 918,000
November – December 60,000 20.80 1,248,000
265,000 P5,232,800

b) Data with respect to quantities are as follows:

Units
Explanation 1/1/05 12/31/05

Raw materials 35,000 ?

Work in process (80% completed) 0 25,000
Finished goods 15,000 40,000
Sales, 205,000 units 15,000 40,000

c) Raw materials are issued at the beginning of the manufacturing process

during the year, no returns, spoilage, or wastage occurred. Each unit of finished goods contains
one unit of raw materials.

d) Inventories are stated at cost as follows:

• Raw materials – according to the FIFO method
• Direct labor – at an average rate determined by correlating total direct labor cost with
effective production during the period
• Manufacturing overhead – at an applied rate of 150% of direct labor cost

Questions:
Based on the above and the result of your audit, answer the following:
1. The raw materials inventory as of December 31, 2005 is
a. P1,976,000 b. P936,000 c. P1,352,000 d. P897,800
2. The work in process inventory as of December 31, 2005 is
a. P1,780,000 b. P1,885,565 c. P 1,751,294 d. P1,776,000
3. The finished goods inventory as of December 31, 2005 is
a. P3,352,000 b. P3,553,130 c. P3,334,000 d. P3,284,588
4. The cost of goods sold for the year ended December 31, 2005 is
a. P16,897,000 b. P15,857,000 c. P16,568,304 d. P16,875,000
5. Which of the following audit procedure is most appropriate to determine whether cost of
inventories is properly calculated?
a. Select a sample of items during the physical inventory count and determine they have
been included on count sheets.
 b. Select a sample of recorded items and examine supporting vendors’ invoices and
contracts.
c. Select a sample of recorded items on count sheets during the physical inventory count
and determine that items are on hand.
d. Examine current vendors’ price lists.

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

2. What amount of noncurrent liabilities should be reported on the December 31, 2018,
statement of financial position?
a. P5,500,000 c. P6,500,000
b. P3,000,000 d. P7,500,000

PROBLEM NO.2

The data below are from the records of ANOSAYO, Inc. on December 31, 2018:

Accounts Payable P680,000

Cash balance, ABC Bank 1,240,000
 Cash overdraft with XYZ 80,000
Customers’ accounts with credit balances 25,000
Dividends in arrears on preference shares 400,000
Employees’ income tax payable 100,000
Estimated warranty payable 50,000
Estimated premium claims outstanding 90,000
Income tax payable 400,000
Notes payable (issued in 2018 maturing in 20 semi-annual installments 4,000,000
beginning on April 1, 2019)
Salaries Payable 400,000

The amount to be shown as total current liabilities on ANOSAYO’s statement of financial

position at December 31, 2018, is
a. P2,225,000 c. P2,625,000
b. P2,025,000 d. P2,255,000

PROBLEM NO.3

EDINGA Music Emporium carries a wide variety of musical instruments, sound reproduction
equipment, recorded music, and sheet music. To promote sale of its products, EDINGA uses
two promotion techniques – premiums and warrants.

PREMIUMS

The premium is offered on the recorded and sheet music. Customers receive a coupon for each
P10 spent on recorded music and sheet music. Customers may exchange 200 coupons and
P200 for a CD player. EDINGA pays P340 for each CD player and estimates that 60% of the
coupons given to customers will be redeemed. A total of 6,500 CD players used in the premium
program were purchased during the year and there were 1,200,000 coupons redeemed in 2018.

WARRANTIES

Musical instruments and sound reproduction equipment are sold with a one-year warranty for
replacement of parts and labor. The estimated warranty cost, based on past experience, is 2%
of sales. Replacement parts and labor for warranty work totaled P1,640,000 during 2018.

EDINGA uses the accrual method to account for the warranty and premium costs for financial
reporting purposes. EDINGA’s sales for 2018 totaled P72,000,000- P54,000,000 from musical
instruments and sound reproduction equipment and P18,000,000 from recorded music and
sheet music. The balances in the accounts related to warranties and premiums on January 1,
2018, were as shown below:

Inventory of premium CD players P399,500

Estimated premium claims outstanding 448,000
Estimated liability from warranties 1,360,000

Questions:

Based on the preceding information, determine the amounts that will be shown on the 2018
financial statements for the following:
1. Warranty expense
a. P1,640,000 c. P800,000
b. P1,080,000 d. P360,000
2. Estimated liability from warranties
a. P1,920,000 c. P240,000
b. P1,080,000 d. P800,000
3. Premium expense
a. P1,836,000 c. P756,000
b. P840,000 d. P2,189,500
4. Inventory of premium CD players
a. P399,500 c. P2,210,000
b. P569,500 d. P739,500
5. Estimated premium claims outstanding
a. P364,000 c. P756,000
b. P840,000 d. P672,000

PROBLEM NO.4

WOWYE Company purchased machinery on December 31, 2018, paying P80,000 down and
agreeing to pay the balance in four equal installments of P60,000 payable each December 31.
Implicit in the purchase price is an assumed interest of 12%.

The following data are abstracted from the present value tables:

Present value of 1 at 12% for 4 periods 0.63552

Present value of an ordinary annuity of 1 at 12% for 4 periods 3.03735

Questions:

1. What is the cost of the machinery purchased on December 31, 2018?

a. P233,083 c. P262,241
b. P320,000 d. P290,842
2. How much interest expense should be reported in WOWYE’s Income statement for the year
ended December 31, 2019?
a. P38,131 c. P17,293
b. P21,869 d. P42,707
3. What is the carrying value of the Note at December 31, 2020?
a. P120,000 c. P99,310
b. P144,110 d. P101,403

PROBLEM NO.5

You are engaged to audit the December 31, 2018, financial statements of MILANI COMPANY, a
manufacturer of household appliances. Your audit disclosed the following situations.

1. In June 2018, the company began producing and selling a new line of dishwasher. By the end
of the year, it had sold 120,000 to various dealers for P15,000 each. The product was sold
under a 1-year warranty, and the company estimates warranty costs to be P750 per
dishwasher. MILANI had paid out P30 million in warranty expenses as of December 31, 2018,
which is also the amount shown as warranty expense in its income statement for the current
year.

2. In response to your letter of audit inquiry, MILANI’s lawyer informed you that the company is
involved in a lawsuit for violating environmental laws regulating hazardous waste. Although the
litigation is pending. MILANI’s lawyer is certain that MILANI will most probably have to pay
cleanup costs and fines of P5,500,000. MILANI neither accrued nor disclosed this loss in the
financial statements.

3. MILANI is the defendant in a patent infringement suit by Megan Yang over MILANI’s use of a
hydraulic compressor in several of its manufactured appliances. MILANI’s lawyer informed you
that if the suit goes against your audit client, the loss may be as much as P10 million. However,
the lawyer believes that the loss of this suit is only possible. MILANI did not in any way disclose
this pending litigation in its financial statements.

Questions:

1. What amount of warranty expense should be shown on MILANI’s income statement for the
year ended December 31, 2018?
a. P30,000,000 c. P60,000,000
b. P0 d. P90,000,000
2. What amount of warranty liability should be shown on MILANI’s statement of financial position
as of December 31, 2018?
a. P60,000,000 c. P30,000,000
b. P90,000,000 d. P0
3. What amount of lawsuit liability should be reported as a provision on MILANI’s December 31,
2018, statement of financial position?
a. P10,000,000 c. P15,500,000
b. P5,500,000 d. P0

PROBLEM NO.6

EWANKO Company has the following three loans payable scheduled to be repaid in February
of next year. The company’s accounting year ends on December 31.

a. The Company intends to repay Loan 1 for P100,000 when it comes due in February. In the
following October, the Company intends to get a new loan for P80,000 from the same bank.

b. The Company intends to refinance the Loan 2 for P150,000 when it comes due in February.
The refinancing agreement, for P180,000, will be signed in April, after the financial statements
for this year have been authorized for issue.

c. The Company intends to refinance Loan 3 for P200,000 before it comes due in February. The
actual refinancing for P175,000 took place in January, before the financial statements for this
year have been authorized for issue.

Questions:

1. As of December 31 of this year, the total current liabilities to be reported in the company’s
statement of financial position should be
a. P100,000 c. P450,000
b. P250,000 d. P125,000
2. As of December 31 of this year, the total noncurrent liabilities to be reported in the company’s
statement of financial position should be
a. P25,000 c. P175,000
b. P0 d. P350,000

PROBLEM NO.7

On January 1, 2009, PEREZ Corporation issued 5,000 of its 5 year P1,000 face value, 11%
bonds dated January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each
December 31. Perez uses the effective interest method of amortization. On December 31, 2010,
the 3,000 bonds were extinguished early through acquisition in the open market by PEREZ for
P2,970,000 plus accrued interest.

Questions:

Based on the above and the result of your audit, determine the following: (Round off present
value factors to four decimal places.)

1. The issue price of the bonds on January 1, 2009 is

a. P5,388,835 c. P5,282,135
b. P4,630,655 d. P5,000,000
2. The carrying amount of the bonds on December 31, 2009 is
a. P4,755,930 c. P5,323,830
b. P5,453,840 d. P5,000,000
3. The gain on early retirement of bonds on December 31, 2010 is
a. P116,442 c. P181,785
b. P266,811 d. P0

PROBLEM NO.8

On January 2, 2009, the MAUBAN Inc. issued P2,000,000 of 8% convertible bonds at par. The
bonds will mature on January 1, 2013 and interest is payable annually every January 1. The
bond contract entitles the bondholders to receive 6, P100 par value, ordinary shares in
exchange for each P1,000 bond. On the date of issue, the prevailing market interest rate for
similar debt without the conversion option is 10%.
On January 1, 2013, the holders of the bonds with total face value of P1,000,000 exercised their
conversion privilege. On that date, the bonds were selling at 110 and the ordinary share at P42.

Questions:

Based on the above and the result of your audit, answer the following (Round off present value
factors to 4 decimal places)

1. The proceeds from issuance of convertible bonds to be allocated to the liability component is
a. P1,366,000 c. P1,873,184
b. P1,778,336 d. P2,000,000
2. The proceeds from issuance of convertible bonds to be allocated to the equity instrument is
a. P634,000 c. P126,816
b. P221,664 d. P0
3. The carrying amount of the bonds payable on December 31, 2009 is
a. P2,000,000 c. P1,389,400
b. P1,796,170 d. P1,900,502
4. The interest expense for the year 2010 is
a. P160,000 c. P138,940
b. P179,617 d. P190,050
5. The gain to be recognized on conversion of the bonds is
a. P126,816 c. P463,408
b. P400,000 d. P0

PROBLEM NO.9

ELEANOR CORP. has been producing quality disposable diapers for more than two decades.
The Company’s fiscal year runs from April 1 to March 31. The following information relates to
the obligations of ELEANOR as of March 31, 2018.

BONDS PAYABLE

ELEANOR issued P10,000,000 of 10% bonds on July 1, 2016. The prevailing market rate of
interest for these bonds was 12% on the date if issue. The bonds will mature on July 1, 2026.
Interest is paid semiannually on July 1 and January 1. ELEANOR uses the effective interest rate
method to amortize bond premium or discount.

The following prevailing present value factors are taken from present value tables:

Present value of 1 at 12% for 10 periods 0.32917

Present value of 1 at 6% for 20 periods 0.31180
Present value of an ordinary annuity of 1 at 12% for 10 periods 5.65022
Present value of an ordinary annuity of 1 at 6% for 20 periods 11.46992

NOTES PAYABLE

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

DUE DATE AMOUNT DUE

April 1, 2018 P400,000
July 1, 2018 600,000
October 1, 2018 300,000
January 1, 2019 300,000
April 1, 2019 – March 31, 2020 1,200,000
April 1, 2020 – March 31, 2021 1,000,000
April 1, 2021 – March 31, 2022 1,400,000
April 1, 2022 – March 31, 2023 800,000
April 1, 2023 – March 31, 2024 1,000,000
TOTAL P7,000,000
ESTIMATED WARRANTIES

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

Warranty claims honored on 2016-2017 sales P180,000

Warranty claims honored on 2017-2018 sales 178,000
Total Warranty claims honored P358,000

OTHER INFORMATION

1. TRADE PAYABLES

Accounts payable for supplies, goods and services purchased on open accounts amount to
P740,000 as of March 31, 2018.

2. PAYROLL RELATED ITEMS

Accrued salaries and wages P300,000

Withholding taxes payable 94,000
Other payroll deductions 10,000
Total P404,000

3. MISCELLANEOUS ACCRUALS

Other accruals not separately classified amount to P150,000 as of March 31, 2018.
4. DIVIDENDS

On March 15, 2018, ELEANOR’s board of directors declared a cash dividend of P0.20 per
ordinary share and a 10% share dividend. Both dividends were to be distributed on April 12,
2018 to the shareholders of record at the close of business on March 31, 2018. Data regarding
ELEANOR ordinary share capital are as follows:

Par Value P5.00 per share

Number of shares issued and outstanding 6,000,000 shares

Market Value of Ordinary shares

March 15, 2018 P22.00 per share

March 31, 2018 21.50 per share
April 12, 2018 22.50 per share

Questions:

1. How much was received by ELEANOR from the sale of the bonds on July 1, 2016?
a. P8,852,960 c. P10,500,000
b. P10,000,000 d. P10,647,040
2. What is the current portion of ELEANOR’s note payable at March 31, 2018?
a. P2,800,000 c. P1,300,000
b. P1,600,000 d. P3,800,000
3. The balance of the estimated warranties payable at March 31,2018, is
a. P342,000 c. P520,000
b. P18,000 d. P180,000
4. On March 31, 2018, ELEANOR’s statement of financial position would report total current
liabilities of
a. P5,286,000 c. P5,336,000
b. P4,386,000 d. P5,642,000
5. On March 31, 2018, ELEANOR’s statement of financial position would report total noncurrent
liabilities of
a. P14,389,350 c. P14,370,783
b. P14,352,217 d. P14,252,960

PROBLEM NO.10

At December 31, 2017, DRIGO CORPORATION had a temporary difference (related to

depreciation) and reported a related deferred tax liability of P60,000 on its statement of financial
position. At December 31, 2018, DRIGO has four temporary differences. An analysis of these
reveals the following:

TEMPORARY DIFFERENCE 2018 2019 YEAR LATER

1. Use of straight-line depreciation
for accounting purposes and
accelerated depreciation for tax P160,000 P220,000 P760,000
purposes
2. Rent Collected in advance;
recognized when earned for
accounting purposes and when (380,000) - -
received for tax purposes
3. Various expenses accrued when
incurred for accounting purposes;
recognized for tax purposes when (90,000) - -
paid.
4. Recognition of gain on installment
sales during the period of sale for
accounting purposes and during the
period of collection for tax purposes 276,000 210,000 -
(P34,000) P430,000 P760,000

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

Questions:
1. What amount of deferred tax asset should be on DRIGO’s statement of financial position at
December 31, 2018?
a. P114,000 c. P141,000
b. P514,800 d. P27,000
2. What amount of deferred tax liability should be shown on DRIGO’s statement of financial
position at December 31, 2018?
a. P342,000 c. P141,000
b. P456,000 d. P487,800

3. How much is DRIGO’s pretax accounting income for 2018?

a. P1,563,900 c. P1,450,000
b. P2,406,000 d. P2,606,000

4. How much is DRIGO’s net income for 2018?

a. P1,971,000 c. P2,406,000
b. P1,684,200 d. P1,450,000

PROBLEM NO.11

The following data pertains to the DRAKE COMPANY

1. At December 31, the Company has a P900,000 liability reported for estimated litigation
claims. This P900,000 balance represents amounts that have been charged to income but are
not tax deductible until they are paid. The Company expects to pay the claims and thus have
tax-deductible amounts in the future in the following manner:

YEAR PAYMENTS
2021 P150,000
2022 690,000
2023 60,000
P900,000

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

YEAR AMOUNT
2019 P480,000
2020 480,000
2021 480,000
2022 480,000
2023 480,000
P2,400,000

3. The income tax rate is 30%

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

1. The deferred tax liability to be reported in DRAKE’s statement of financial position at

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