Audit Problem (Aaconapps2 - Cash and Receivables

CHAPTER 1: OVERVIEW OF AUDIT PROCESS AND PRE-ENGAGEMENT ACTIVITIES
AUDIT
An audit is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the
degree of correspondence between these assertions and established criteria and communicating the results thereof. (American Accounting Association)
AUDIT PROCESS
The audit process is the sequence of different activities involved in an audit. This process normally includes the following steps:
PHASE DESCRIPTION
1. Pre-engagement This phase will require a decision from the auditor whether or not to accept a new client or continue
relationship with an existing one. This process would require evaluation not only of the auditor's
qualification, but also the integrity and auditability of the client's financial statements.
Primary objective: To minimize the likelihood of being associated to a client whose management
lacks integrity.
2. Audit planning Audit planning involves the development of an overall audit strategy, audit plan and audit program. The
auditor usually obtained more detailed knowledge about the client's business and industry in order to
understand the transactions and events affecting the financial statements.
Preliminary assessment of risk and materiality is also made during this phase.
Primary objective: To assess the different risks associated with the audit to determine the nature, timing
and extent of further audit procedures necessary to be performed
3. Consideration of Internal Since entity's internal control directly affects the internal controls reliability of the financial statements, it
Controls is appropriate to study and evaluate these controls.
Primary objective: To establish a basis for reliance on internal controls, in determining the nature, timing
and extent of audit procedures to be performed.
4. Evidence-gathering Using the information obtained in audit planning and consideration of internal controls, the auditor
(Substantive testing) performs substantive test to determine whether entity's financial statements are presented fairly in
accordance with financial reporting standards. Substantive procedures could either be analytical
procedures or test of details of transactions and balances.
This phase will always be performed by the auditor.
Primary objective: To ascertain the degree of correspondence between the financial statements prepared
by client's management and the financial reporting framework. With this, the auditor will be able to
conclude whether or not the financial statements are presented fairly in accordance with financial
reporting standards.
5. Completing the audit Wrapping-up procedures are performed; conclusions reached are reviewed; and an overall opinion is
formed during this phase.
Primary objective: To assist the auditor in assessing conclusion reached is consistent with evidence
gathered
6. Issuance of the audit report In this stage, auditor prepares and issues audit report which describes the scope of the audit and states the
auditor's conclusion regarding the fairness of the financial statements.
Primary objective: To communicate the conclusions reached by the auditor to various intended users
7. Post-audit responsibilities After completion of the audit engagement, auditor performs procedures that will enable him/her identify
areas for improvement in the current and future engagements.
Primary objective: To assess and evaluate the quality of services delivered by the engagement team
PRE-ENGAGEMENT
Ø Acceptance of an engagement
In making a decision whether to accept or reject an engagement, an auditor should consider the following:
1. Its competence;
2. Its independence;
3. Its ability to serve the client properly; and
4. The integrity of the prospective client's management.
Furthermore, the auditor is expected to perform the following:
1. Obtain a preliminary knowledge of the client's business and industry to determine whether the auditor has the degree of competence required by the engagement.
2. Consider whether there are any threats to the firm's independence and objectivity, and if so, whether adequate safeguards can be established.
3. Evaluation of the firm's ability to serve the prospective client.
4. Evaluate auditability.
5. Investigation of the integrity of the client's management through inquiry to appropriate parties or communication with the predecessor auditor.
Matters to be discussed with predecessor auditor include the following: (RID)

a. The predecessor's understanding as to the Reasons for change in auditors;
b. Information that might bear on the Integrity of the management; and
c. Disagreements between the predecessor auditor and management as to accounting principles, auditing procedures, etc.
Note: Every time communication is made to parties other than the client, the auditor shall seek permission from the client and document the items discussed.
6. Agree on the terms of the engagement and prepare an engagement letter.
Ø Agreeing the Terms of Audit Engagements

The auditor and the client shall agree on the terms of engagement. The agreed terms would need to be recorded in an audit engagement letter or
other suitable form of contract.
It is in the interest of both client and the auditor that the auditor sends an engagement letter, preferably before the commencement of the
engagement to help avoid misunderstandings with respect to the engagement. The engagement letter documents and confirms:
a. Auditor's acceptance of the engagement

b. Objective and scope of the audit
c. Extent of auditor's responsibilities to the client
d. Form of any reports
Contents of engagement letter (RA FORMS)

The form and content of audit engagement letters may vary for each client, but they would generally include reference to:
a. The presence of audit Risk

b. Unrestricted Access to whatever records
c. The financial reporting Framework used
d. Objective of the audit
e. The form of any Reports or other communication
f. Management's responsibility
g. The Scope of the audit
The auditor may also wish to include in the letter: (FRAP Reports)
a. Basis in which Fees are computed and any billing arrangements

b. Expectation of receiving Representation letter
c. Acknowledgment of management of terms of agreement
d. Arrangements regarding the Planning of the audit
e. Description of any other letters or Reports
When relevant, the following points could also be made:
• Arrangements concerning the involvement of other auditors and experts in some aspects of the audit.
• Arrangements concerning the involvement of internal auditors and other staff.
• Arrangements to be made with the predecessor auditor, if any, in the case of initial.
• Any restriction of the auditor's liability when such possibility exists.
• A reference to any further agreements between the auditor and the client.
Ø Audit of Components
When the auditor of a parent entity is also the auditor of its subsidiary, branch, or division (component), the factors that influence the decision whether
to send a separate engagement letter to the component include the following:
• Who appoints the Component auditor;

• Legal requirements in relation to audit appointments;
• Degree of Ownership by parent;
• Whether a Separate auditor's report is to be issued on the component; and
• Degree of Independence of the component's management from the parent entity.
Ø Recurring Audits
On recurring audits, the auditor should consider whether circumstances require the terms of the engagement to be revised and whether there is a need
to remind the client of the existing terms of the engagement. The auditor may decide not to send a new engagement letter each period.
However, the following factors may make it appropriate to send a new letter:
• Any indication that the client misunderstands the objective and scope of the audit.
• Any revised or special terms of the engagement.
• A recent change of management, board of directors or ownership
• A significant change in ownership.
• A significant change in nature or size of the client's business.
• A change in legal or regulatory requirements.
• A change in financial reporting framework adopted in the preparation of the financial statements.
• A change in other reporting requirements.
Ø Acceptance of a Change in Engagement

a. Stop performing the old engagement
b. Stop referring to the old engagement, except when the new engagement involves
Yes
agreed-upon procedures
Is there a reasonable c. Start performing the new engagement
justification?
a. Continue the original audit engagement
No
b. When prohibited to continue, withdraw from the audit engagement
Note: Every time withdrawal is made, the auditor should consider the necessity of communicating the
reasons to appropriate level of management.
Ø Circumstances that could lead to Change in Engagement

Circumstances Justifiable?
1. Change in circumstances affecting the need for the service ✓
2. A misunderstanding as to the nature of an audit or related services originally requested ✓
3. A restriction on the scope of the engagement, whether imposed by management or caused by circumstances ✘
4. If the change relates to information that is incorrect, incomplete or otherwise unsatisfactory ✘
5. The auditor is unable to obtain sufficient appropriate audit evidence regarding assertions ✘
CHAPTER 2: AUDIT PLANNING - INTRODUCTION AND RISK ASSESSMENT PROCEDURES
PLANNING AN AUDIT OF FINANCIAL STATEMENTS

The primary objective of the auditor is to plan the audit so that the audit will be performed in an effective manner. However, adequate planning also leads to
an efficient and timely audit engagement.
Ø The Role and Timing of Planning

Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan. Adequate planning benefits the audit
of financial statements in several ways, including the following:
• Appropriate attention is devoted to important areas

• Potential problems are identified and resolved on a timely basis
• Proper organization and management of the audit engagement leading to an effective and efficient performance
• Work are properly assigned to appropriate engagement team members
• Assistance in coordinating work done by other auditors and experts
• Assistance in facilitating direction, supervision and review
The Nature and extent of planning activities will vary according to the: (SECTa)
• Size and complexity of the entity

• Previous Experience with the entity of key engagement team members (partner, manager, and staff-in-charge)
• Changes in circumstances that occur during the audit engagement
• Timing of the Appointment of the independent auditor
Ø Planning as a phase of the audit process

Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the
completion of the previous audit and continues until the completion of the current audit engagement.
Ø Major Audit Planning Activities

The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan
after performing the following procedures:
a. Obtaining an understanding of the client and its environment

b. Determining the need for experts
c. Establishing materiality and assessing risks
d. Assessing the possibility of non-compliance
e. Identifying related parties
f. Performing preliminary analytical procedures
g. Development of the overall audit strategy and detailed audit plan
h. Preparation of preliminary audit programs.
THE OVERALL AUDIT STRATEGY AND AUDIT PLAN

Ø Overall Audit Strategy
In establishing the overall audit strategy, the auditor shall:
• Identify the characteristics of the engagement that define its scope;

• Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required;
• Consider the factors that, in the auditor's professional judgment, are significant in directing the engagement team's efforts
• Consider the results of preliminary engagement activities and, where practicable, whether knowledge gained on other engagements performed by
the engagement partner for the entity is relevant
• Ascertain the nature, timing and extent of resources necessary to perform the engagement
Ø Audit Plan
After the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy,
taking into account the need to achieve the audit objectives through the efficient use of the auditor's resources.
The audit plan is more detailed than the overall audit strategy in that it includes the nature, timing and extent of audit procedures to be performed by
engagement team members. These procedures may be documented in an audit program.
The audit program shall serve as a:
✓ Set of instructions to assistants involved in the audit; and

✓ Means to control and record the proper execution of the work.
The audit program also contains:
✓ The audit objectives for each area; and

✓ A time budget in which hours are budgeted for the various audit areas or procedures.
Ø Changes to Planning Decisions during the Course of the Audit
The overall audit plan and the audit program should be revised as necessary during the course of the audit. Planning is continuous throughout the
engagement because of changes in conditions or unexpected results of audit procedures.
Ø Completion of Overall Strategy and Audit Plan

The establishment of the overall audit strategy and the detailed audit plan are not necessarily discrete or sequential processes, but are closely inter-related
since changes in one may result in consequential changes to the other. Also, preferably, a plan shall be initially completed prior to consideration of internal
controls or performance of specific procedures.
Ø Planning documentation
The auditor shall document:
a. the overall audit strategy

b. the audit plan
c. any significant changes made during the audit engagement to the overall strategy or audit plan, and the reasons for such changes
Ø Additional Considerations in Initial Audit Engagements

After performing preliminary engagement activities, for an initial audit, the auditor may need to expand the planning activities because he/she does not
ordinarily have the previous experience with the entity that is considered when planning recurring engagements. For initial audits, additional matters the
auditor may consider in developing the overall audit strategy and audit plan include the following:
• Arrangements to be made with the predecessor auditor to review prior years' working papers;
• Any major issues discussed with management in connection with the initial selection as auditors, the communication of these matters to those
charged with governance and how these matters affect the overall audit strategy and audit plan;
• The planned audit procedures to obtain sufficient appropriate audit evidence regarding opening balances; and
• Other procedures required by the firm's system of quality control for initial audit engagements.
DIRECTION, SUPERVISION AND REVIEW

The auditor should plan the nature, timing and extent of direction and supervision of engagement team members and review of their work.
The nature, timing and extent of the direction and supervision of engagement team members and review of their work vary depending on many factors, including
✓ the assessed risks of material misstatement;

✓ size and complexity of the entity;
✓ the area of audit; and
✓ capabilities and competence of personnel performing the audit work.
Ø Considerations Specific to Smaller Entities

When an audit is carried out entirely by an audit engagement partner, who may be a sole practitioner, it may be desirable to consult with other suitably-experienced
auditors or the auditor's professional body.
RISK ASSESSMENT PROCEDURES

Ø Identifying And Assessing The Risks Of Material Misstatement Through Understanding The Entity And Its Environment
It is the objective of the auditor to identify and assess risks of material misstatements, whether due to fraud or error, at the financial statement and assertion
levels, through understanding the entity and its environment, including the entity's internal control, thereby providing a basis for designing and implementing
responses to the assessed risks of material misstatements.
Risk assessment procedures are audit procedures performed to obtain an understanding of the entity and its environment, including the entity's internal
control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels.
Ø Risk Assessment Procedures and Related Activities

The auditor shall:
a. Identify risks throughout the process of obtaining an understanding of the entity and its environment, including relevant controls that relate to
the risks, and consider the classes of transactions, account balances, and disclosures in the financial statements;
b. Relate the identified risks to what can go wrong at the assertion level;
c. Consider whether the risks are of a magnitude that could result in a material misstatement of the financial statements; and
d. Consider the likelihood that the risks could result in a material misstatement of the financial statements.
The risk assessment procedures shall include the following:
a. Inquiries of management, and of others within the entity who in the auditor's judgment may have information that is likely to assist in identifying
risks of material misstatement due to fraud or error;
b. Analytical procedures; and
C. Observation and inspection.
Note: Risk assessment procedures by themselves, however, do not provide sufficient appropriate audit evidence on which to base the audit opinion.
Ø Analytical Procedures during Planning Stage
Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and non-financial data.
Analytical procedures also encompass the investigation of identified fluctuations and relationships that are consistent with other relevant information or that
differ from expected values by a significant amount.
Analytical procedure is required to be performed during planning stage. It is designed to assist the auditor in planning the nature, timing and extent of other
auditing procedures.
Ø The Required Understanding of the Entity and its Environment

The auditor shall obtain an understanding of the following:
a. Relevant industry, regulatory, and other external factors including the applicable financial reporting framework;
b. The nature of the entity, including its operations; ownership and governance structure; types of investments that the entity is making and plans
to make; and the way the entity is structured and how it is financed;
c. Entity's selection and application of accounting policies, including reasons for changes thereto;
d. Entity's objectives and strategies, and those related business risks that may result in risk of material misstatement;
e. The measurement and review of the entity's financial performance; and
f. Internal control
ASSESSMENT OF AUDIT RISK AND MATERIALITY

Materiality and audit risk affect the application of PSA, and are reflected in the auditor's report. The auditor must make judgments about materiality and audit
risk in determining the nature, timing and extent of procedures to apply and in evaluating the results.
Ø Materiality
Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.
Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement.
The concept of materiality recognizes that some matters, but not all, are important for fair presentation of the financial statements in conformity with PFRS.
The auditor should consider materiality and its relationship with audit risk when conducting an audit. The auditor's purpose in considering materiality at the
planning stage of the audit is to determine the appropriate scope of their audit procedures.
Using professional judgment, the auditor shall determine materiality at
• Financial statement level → the smallest aggregate amount of misstatement applicable to all financial statements.
• Assertion level for classes of transaction, account balances and disclosures → largest tolerable misstatement.
Ø Audit Risk
Audit Risk is the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated.
Components of Audit risk
a. Risk of material misstatement
• Inherent Risk is the susceptibility of an account balance or class of transactions to misstatement that could be material, individually or when
aggregated with misstatements in other balances or classes, assuming that there were no related controls.
• Control Risk is the risk that a misstatement, that could occur in an account balance or class of transactions that could be material, individually
or when aggregated with misstatements in other balances or classes, will not be prevented or detected and corrected on a timely basis by the
accounting and internal control systems.
b. Risk of not Detecting the Misstatement
• Detection Risk is the risk that the auditor's substantive procedures will not detect a misstatement that exists in an account balance or class of
transactions that could be material, individually or when aggregated with misstatements in other balances or classes.
If the auditor wishes to reduce detection risk, procedures to be performed shall be

1. As to nature → more effective procedures
2. As to timing → closer or nearer to year-end
3. As to extent → larger sample size
Ø Interrelationship of the Components of Audit Risk

Auditor's Assessment of control risk is
High Medium Low
Auditor's High Lowest Lower Medium
assessment of Medium Lower Medium Higher
inherent risk Lower Medium Higher Highest
Ø Relationships of Risk and Materiality to substantive procedures

Risk of material misstatement (inherent and control risks) Direct
Risk of not detecting the misstatement (detection risk) Inverse
Materiality Inverse
Ø Summary of Procedures Performed in Planning an Audit
Obtain an understanding of Consider Materiality and Assess Determine the acceptable Identify Detection Risk to determine the nature,
the entity's environment Risk of Material Misstatements level of Audit Risk timing and extent of further audit procedures
CHAPTER 3: INTERNAL CONTROL CONSIDERATION
INTERNAL CONTROL CONSIDERATION

The auditor should obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach.
The auditor uses the understanding of internal control to identify (1) types of potential misstatements, (2) consider factors that affect the risks of material misstatement,
and (3) design the nature, timing, and extent of further audit procedures.
ACCOUNTING AND INTERNAL CONTROL SYSTEMS

Accounting system is a series of tasks and records of an entity by which transactions are processed as a means of maintaining financial records. Such systems
identify, assemble, analyze, calculate, classify, record, summarize and report transactions and other events.
Internal Control System means all the policies and procedures (internal controls) adopted by the management of an entity to assist in achieving management's
objective of ensuring, as far as practicable:
• orderly and efficient conduct of its business, including adherence to management policies;
• safeguarding of assets;
• prevention and detection of fraud and error;
• accuracy and completeness of the accounting records; and
• timely preparation of reliable financial information.
The internal control system extends beyond those matters which relate directly to the functions of the accounting system.
ENTITY'S INTERNAL CONTROL

Internal control is a process, effected by those charged with governance, management, and other personnel, designed to provide reasonable assurance regarding
the achievement of objectives in the following categories:
a. Effectiveness and efficiency of operations;

b. Reliability of financial reporting; and
c. Compliance with applicable laws and regulations.
Ø Assurance provided by internal control

There is a direct relationship between an entity's objectives and the controls which are implemented to provide assurance of their achievement. However,
no matter how well designed and operated, internal control can only provide reasonable assurance.
Ø Inherent Limitations of Internal Control
The internal control can only provide reasonable assurance because of inherent limitations that may affect the effectiveness of internal controls. Such
limitations include: (COC CHA)
• Management usual requirement that a control be cost-effective (Cost-benefit consideration);

• The possibility that a person responsible for exercising control could abuse that responsibility (Management Overriding the control);
• The possibility of circumvention of controls through Collusion with parties outside the entity or with employees of the entity;
• The possibility that procedures may become inadequate due to Changes in condition and compliance with procedures may deteriorate;
• The potential for Human error due to carelessness, distraction, mistakes of judgment or the misunderstanding of instructions; and
• The fact that most controls tend to be directed at Anticipated types (routine) of transactions and not at unusual (non-routine) transactions.
Ø Areas of Internal Control

Areas of internal control can be classified as either administrative control or accounting control.
Administrative control includes, but is not limited to, plan of organization and the procedures and records that are concerned with the decision processes
leading to management's authorization of transactions. Administrative controls promote operational efficiency and adherence to managerial policies.
On the other hand, accounting control comprises the plan of organization and the procedures and records that are concerned with the safeguarding of assets
and the reliability of financial records. It involves systems of authorization and approval controls over assets, internal audit and all other financial matters.
Ø Controls Relevant to the Audit

The auditor's risk assessment process relates to controls pertaining to the entity's objective of preparing financial statements for external purposes and the
management risk that may give rise to a material misstatement in those financial statements.
It is a matter of professional judgment, subject to the requirements of PSA, whether a control, individually or in combination with others, is relevant to the
auditor's considerations in assessing the risks of material misstatement and designing and performing further procedures in response to assessed risks. In
exercising that judgment, the auditor considers the applicable component and factors such as the following:
a. The auditor's judgment about materiality;

b. The size of the entity;
C. The nature of the entity's business, including its organization and ownership characteristics;
d. The diversity and complexity of the entity's operations;
e. Applicable legal and regulatory requirements; and
f. The nature and complexity of the systems that are part of the entity's internal control, including the use of service organizations.
Ø Components of Internal Control

Internal control, as discussed in PSA 315 (Redrafted), consists of the following components: (CRIME)
a. Control Environment
b. Entity's Risk assessment process
c. Information and communication systems
d. Control Activities
e. Monitoring of Controls
A. The control environment

The control environment includes the governance and management functions and the attitudes, awareness, and actions of those charged with governance
and management concerning the entity's internal control and its importance in the entity.
Elements of control environment: (IM CPA HO)
1. Communication and enforcement of Integrity and ethical values;

2. Management's philosophy and operating style;
3. Commitment to competence;
4. Participation by those charged with governance;
5. Assignment of authority and responsibility;
6. Human resources policies and procedures; and
7. Organizational structure.
B. The entity's risk assessment process

An entity's risk assessment process is the process of identifying and responding to business risks and the results thereof.
For financial reporting purposes, the entity's risk assessment process includes how management identifies risks relevant to the preparation of financial
statements that are presented fairly, in all material respects in accordance with the entity's applicable financial reporting framework, estimates their
significance, assesses the likelihood of their occurrence, and decides upon actions to manage them.
Risks can arise or change due to circumstances such as the following:

a. Changes in operating environment
b. New personnel
c. New or revamped information systems
d. Rapid growth
e. New technology
f. New business models, products, or activities
g. Corporate restructurings
h. Expanded foreign operations
i. New accounting pronouncements
The auditor shall obtain an understanding of whether the entity has a process for: (IAM)
✓ Identifying business risks relevant to financial reporting objectives

✓ Assessing the significance of risks and the likelihood of their occurrence
✓ Deciding how to Manage those risks
C. The information system, including the related business processes relevant to financial reporting, and communication.
An information system consists of
a. Infrastructure (physical and hardware components);

b. Software (processes and procedures);
c. People;
d. Input or data; and
e. Output or meaningful information.
NOTE: Infrastructure and software will be absent, or have less significance in systems that are exclusively or primarily manual.
The information system relevant to financial reporting objectives, such as the financial reporting system, consists of the procedures and records established
to initiate, record, process, and report entity transactions (as well as events and conditions) and to maintain accountability for the related assets, liabilities,
and equity.
Communication of financial reporting roles and responsibilities and significant matters relating to financial reporting includes:
✓ Communications between management and those charged with governance and

✓ External communications, such as those with regulatory authorities
D. Control activities relevant to the audit

Control activities are the policies and procedures to help ensure that management directives are carried out.
Examples of control activities include those relating to the following: (APIPS)
a. Authorization
✓ Specific authorization (for unusual, material, or infrequent projects)
✓ General authorization (for regular transactions)
b. Performance reviews (actual performance versus budget, forecasts, and prior period performance)
C. Information processing (from initiation up to the eventual inclusion of transaction in financial reports)
d. Physical controls (for both assets and documents)
e. Segregation of duties
To achieve optimum segregation of responsibilities, the following functions should be performed by different employees: (I CARE)
• Independent checks
• Custody of assets
• Authorization of transactions
• Recording of transactions
• Execution of transactions
E. Monitoring of controls.
Monitoring is the process of assessing the quality of internal control performance over time. It involves assessing the design and operations of controls
on a timely basis and taking necessary corrective actions. Monitoring is done to ensure that controls continue to operate effectively.
Monitoring can be accomplished through
a. Ongoing monitoring activities (performed by persons within the same line function)
b. Separate evaluations (performed by internal auditors, audit committee, and/or external auditors
c. Combination of the two.
RESPONSES TO ASSESSED RISKS

The auditor shall design and implement overall responses to address the assessed risks of material misstatement at the financial statement level.
Moreover, the auditor shall design and perform further audit procedures whose nature, timing, and extent are based on and are responsive to the assessed risks
of material misstatement at the assertion level.
In designing the further audit procedures to be performed, the auditor shall:
a. Consider the reasons for the assessment given to the risk of material misstatement at the assertion level for each class of transactions, account balance,
and disclosure, including:
i. The likelihood of material misstatement due to the particular characteristics of the relevant class of transactions, account balance, or disclosure
(i.e., the inherent risk); and
ii. Whether the risk assessment takes account of relevant controls (i.e., the control risk), thereby requiring the auditor to obtain audit evidence to
determine whether the controls are operating effectively i.e., the auditor intends to rely on the operating effectiveness of controls in determining
the nature, timing and extent of substantive procedures); and
b. Obtain more persuasive audit evidence, the higher the auditor's assessment of risk.
TESTS OF CONTROLS
The auditor should give adequate consideration to controls relevant to the audit. The quality of the entity's internal control can have a significant impact in
determining the nature, timing and extent of the audit procedures in gathering audit evidence related to class of transactions, account balances and
disclosures.
The auditor shall design and perform tests of controls to obtain sufficient appropriate audit evidence as to the operating effectiveness of relevant controls when:
a. The auditor's assessment of risks of material misstatement at the assertion level includes an expectation that the controls are operating effectively (i.e.,
the auditor intends to rely on the operating effectiveness of controls in determining the nature, timing and extent of substantive procedures); or
b. Substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion level.
Tests of controls over the design of a policy or procedure include Inquiry, Observation, Inspection, Reperformance, and Walk-through tests.
SUBSTANTIVE PROCEDURES
Irrespective of the assessed risks of material misstatement, the auditor shall design and perform substantive procedures for each material class or transactions,
account balance, and disclosure.
Ø Summary of Procedures Performed in Consideration of Internal Control

Risk assessment procedures Further audit procedures
Obtain an Control risk at Perform

understanding of maximum level Substantive
the internal control tests
focusing on the Make a preliminary
design and assessment of Control Risk Control risk at
implementation of below Perform Tests of
the controls maximum level controls
Control risk at Perform

maximum level Substantive
tests
Make a reassessment of
Control Risk
Control risk at
below Perform
maximum level Substantive
tests
Ø Effect of the reassessment of control risk on the audit approach

Reassessment of Control Risk Audit Approach Effect on Substantive Test
CR assessment remains at Less than High Reliance approach • Less effective procedures
• Interim testing may be appropriate
• Smaller sample size
CR assessment is changed to High Switch to no Reliance approach • More effective procedures
• Test nearer or at year-end
• Larger sample size
Ø Documentation requirements
Control Risk Understanding of Control risk Basis for the control
Assessment Internal Control assessment risk assessment
High Yes Yes No
Less than High Yes Yes Yesy
CHAPTER 4: TRANSACTION CYCLES - TEST OF CONTROL
TRANSACTION CYCLES
Transaction cycles are the means through which an accounting system processed transactions of related activities such as sale of goods to customers, acquisition
of merchandise and payment to vendors, production of finished products for sale, and payment to employees for services they had rendered.
A transaction is an agreement between two entities to exchange goods or services or any other event that can be measured in economic terms by an organization.
Ø Categories of Transaction Cycles

These cycles can be categorized into five interrelated major cycles:
Category Inclusion
Revenue and receipt • sale of goods or services to customers • collection of cash
Expenditure and disbursement • acquisition of goods and services • payment for the goods and services acquired
Human resources and payroll • acquisition of services from employees • payment for the services acquired
Production or conversion • production of entity's product for sale
Financing and investing • generation of capital funds from outside investors • investment of capital funds to other profitable activities
Figure 4-1: Flowcharting Symbols

→ used to check any condition
→ indicates the input or or take decision for which
output of information there are two answers.
Input/Output Decision point Yes (True) or No (False)
→ computer operation/ → off-line processing of

process data in a system by
manual technique
Process Manual operation
→ if flow line cross, they → indicates the entry or exit

are not related position in a system.
Cross flow line Terminator
→ for the addition of → to create a cross-reference

comments; may be and hyperlink from a process
connected to a on one page to a process
Annotation symbol of flow line. Off-page connector from another page
→ ie. sales invoice, → exit to, or entry from, another

purchase order, part of the flowchart on the
check, remittance same page.
Document advice. Connector
→ represents offline data → represents online data

storage ie. sales in OCR, storage ie. hard disks,
data in punched card. The magnetic drums or other
Off-line storage method of storage may be On-line storage storage devices.
indicated inside the symbol.
→ represents data input or
→ using any kind of punched output from and to a
card in an input/ouput magnetic disc.
Punched card Magnetic disc
REVENUE AND RECEIPT CYCLE

Business functions Two major business functions are
• Resources are distributed to customers in exchange for promises of future payments
• Customers pay cash for resources distributed to them
Accounts affected Accounts affected include the following:
• Sales and related sales returns, allowances and discount
• Receivable, allowance for bad debts and Bad debts expense
• Cash
Departments involved Significant departments affecting the cycle are;
Revenue Receipt
• Sales or customer order • Mail room or receptionist
• Credit • Treasury
• Inventory control or warehouse • Accounting (receivable and general)
• Shipping
• Billing
• Accounting (inventory, receivable and general)
Ø Forms or documents received, initiated and processed

Form Description Initiated by: Distributed to:
Sales order (order slip; Contains the details of goods ordered (quantity, Sales department • Customers
order) prices and payment terms) • Credit
• Shipping
• Billing
Shipping document (bill of Describes the goods to be shipped and serves as Shipping department • Carrier
lading or delivery receipt) contract between the entity and carrier • Customers
• Billing
Sales invoice (billing Describes the goods sold, amount due and the Billing department • Customers
statement) terms of payment • Accounting
Remittance advice Intended to facilitate the accounting for cash Billing department • Customers
collection
Daily summaries Summarizes transactions and recorded during the Receivable for sales; • General accounting
day by the different department. Treasury for collection. • Treasury and Receivable
Mail room for mail received.
Processing Customer Order:

✓ Customer Order
✓ Sales Order
Granting Credit:
- Before goods are shipped, a properly authorized person must approve credit to the customer for sales on account.
- Weak practices in credit approval often result in excessive bad debts and accounts receivable that may be uncollectible
Shipping Goods:
- Shipping department: prepared to initiate shipment of the goods, indicating the description of the merchandise, the quantity shipped and other relevant data.
- Usually in the form of bill of lading (contract between carrier and seller)
Billing Customers and Recording Sales:

The most important aspects of billing are:
• All shipments made have been billed (completeness)
• No shipment has been billed more than once (occurrence)
• Each one is billed for the proper amount (accuracy)
✓ Sales Invoice
✓ Sales Transaction File
✓ Sales Journal or Listing
✓ Accounts Receivable Master File / Customer Subsidiary Ledger
✓ Accounts Receivable Trial Balance
✓ Monthly Statement
Processing and Recording Cash Receipts

✓ Remittance Advice
✓ Prelisting of Cash Receipts
✓ Cash Receipts Transaction File
✓ Cash Receipts Journal or Listing
Processing and Recoding Sales Returns and Allowances

✓ Credit Memo
✓ Sales Returns and Allowances Journal
Writing of Uncollectible Accounts Receivable

✓ Uncollectible Account Authorization Form
Providing for Bad Debts

- Because companies cannot expect to collect on 100% of their sales, accounting principles require them to record bad debt expense for the amount they do not
expect to collect. Most companies record this transaction at the end of each month or quarter
DOCUMENTS AUDIT SIGNIFICANCE

Customer Purchase Order. A customer order is a request for merchandise by a customer. It may be A written purchase order from a customer
received by telephone, letter, a printed form that has been sent to prospective and existing provides evidence that a customer actually ordered
customers, through salespeople, electronic submission of the customer order through the the goods.
Internet, or other network linkage between the supplier and the customer.
Purchase order numbers are generally recorded on
Exhibit 1: Purchase Order sales invoices so that an auditor can determine the
purchase order to which an invoice relates. Sellers
generally maintain a file of each customer's
purchase orders.
Sales Order. A sales order is a document for communicating the description, quantity, and related A sales order contains the seller's understanding of
information for goods ordered by a customer. This is often used to indicate credit approval and the sales terms. A seller should account for the
authorization for shipment. numerical sequence to help ensure that shipments
are made for sales orders and that all sales are
Exhibit 2: Sales Order billed.
Shipping Document/Bill of lading. A shipping document is prepared to initiate shipment of the goods, The signature of the carrier or the customer on the
indicating the description of the merchandise, the quantity shipped, and other relevant data. The shipping document provides externally created
company sends the original to the customer and retains one or more copies. The shipping evidence that goods have been shipped. Sellers
document serves as a signal to bill the customer and may be in electronic or paper form. should account for the numerical sequence to help
ensure that all shipments are recorded as sales.
Exhibit 3: Bill of Lading
Sales invoice. The method of indicating to the customer the amount of sale and the payment due date A sales invoice indicates credit terms, shipping
terms, and price charged for merchandise. Sellers
Exhibit 4: Sales Invoice should account for the numerical sequence to help
ensure that all sales are recorded.
Credit Memo. A credit memo indicates a reduction in the amount due from a customer because of A credit memo provides evidence that a seller has
returned goods or an allowance. It often takes the same general form as a sales invoice, but it reduced the amount previously billed to a customer.
supports reductions in accounts receivable rather than increases. Sellers should account for the numerical sequence
to help ensure that all credit memos are recorded.
Exhibit 5: Credit Memo
Remittance Advice. A remittance advice is a document mailed to the customer and typically returned A remittance advice usually indicates the date and
to the seller with the cash payment. The document may be a turnaround document, a part of a check, amount of payment and the invoices paid. Sellers
or a statement identifying the invoices being paid. Remittance advices facilitate recording cash generally file remittance advices by date.
receipts. If a customer does not return a remittance advice, the employee opening the mail generally
prepares one.
Exhibit 6: Remittance Advice
Uncollectible Account Authorization Form. This is a document used internally to indicate authority to Sellers should account for the numerical sequence
write an account receivable off as uncollectible. to ensure that all write-offs are recorded.
Exhibit 7: Uncollectible Accounts Authorization Form

Monthly Statement. This is a document sent by mail or electronically to each customer indicating the A statement mailed to a customer reporting a
beginning balance of their accounts receivable, the amount and date of each sale, cash payments beginning balance and transactions that occurred
received, credit memos issued, and the ending balance due. during the period. If the statement is inaccurate,
many customers would contact the seller.
Exhibit 8: Monthly Statement
Sales Transaction File. This is a computer-generated file that includes all sales transactions processed
by the accounting system for a period, which could be a day, week, or month. These may include a
sales journal, accounts receivable master file, and transactions for a certain account balance or
division.
Exhibit 9: Sales Transactin File
Sales Journal or Listing. This is a listing or report generated from the sales transaction file that
typically includes the customer name, date, amount, and account classification or classifications for
each transaction, such as division or product line. The same transactions included in the journal or
listing are also posted simultaneously to the general ledger and, if they are on account, to the
accounts receivable master file. The journal or listing can also include returns and allowances or
there can be a separate journal or listing of those transactions.
Exhibit 10: Sales Journal

SALES JOURNAL NO.
SALES JOURNAL
Accounts
Cash Sales Sales Output Tax
DATE CUSTOMER INVOICE NO. F Receivable
Debit Credit Credit
Debit
SALES JOURNAL NO.
SALES JOURNAL
Accounts
Cash Sales Sales Output Tax
DATE CUSTOMER INVOICE NO. F Receivable
Debit Credit Credit
Debit
Sales returns and allowances journal. A journal similar to the sales journal except the merchandisers
use it to record returns of merchandise or adjustments to invoice prices. Many companies record
these transactions in the sales journal rather than in a separate journal.
Exhibit 11: Sales returns and allowances journal
Accounts Receivable Master File/Accounts Receivable Subsidiary Ledger. This is a computer file used
to record individual sales, cash receipts, and sales returns and allowances for each customer and to
maintain customer account balances. The master file is updated from the sales, sales returns and
allowances, and cash receipts computer transaction files.
Exhibit 12: Subsidiary Ledgers

SUBSIDIARY LEDGERS
NAME:
ADDRESS: TERMS:
DATE EXPLANATIONS F DEBIT CREDIT BALANCE
NAME:
ADDRESS: TERMS:
SUBSIDIARY LEDGERS
NAME:
ADDRESS: TERMS:
NAME:
ADDRESS: TERMS:
NAME:
ADDRESS: TERMS:
Accounts Receivable Trial Balance. This list or report shows the amount receivable from each
customer at a point in time. It is prepared directly from the accounts receivable master file, and is
usually an aged trial balance that includes the total balance outstanding and the number of days the
receivable has been outstanding, by category of days (ie., less than 30 days, 31 to 60 days and so on)
Exhibit 13: A/R Trial balance
Prelisting of Cash Receipts. This is a list prepared when cash is received by someone who has no
responsibility for recording sales, accounts receivable, or cash and who has no access to accounting
records. It is used to verify whether cash received was recorded and deposited at the correct amounts
and on a timely basis.
Exhibit 14: Cash Receipts Prelist
Cash Receipts Transaction File. This is a computer-generated file that includes all cash receipts
transactions processed by the accounting system for a period, such as a day, week, or month. It
includes the same type of information as the sales transaction file.
Exhibit 15: Cash Receipts Transaction File

Cash Receipts Journal or Listing. This listing or report is generated from the cash receipts transaction
file and includes all transactions for a time period. A journal for recording cash receipts from
collections, cash sales, and all other cash receipts.
Exhibit 16: Cash Receipts Journal

CASH RECEIPTS JOURNAL NO.
CASH RECEIPTS JOURNAL
Cash Sales Discount Accounts Receivable Cash Sales SUNDRY

Date Received from Explanation OR #
Debit Debit F Credit Credit Account title F Debit Credit
General journal. A journal in which all recorded transactions for which a special journal has not
been created. Sales and collections cycle transactions frequently recorded in the general journal
include entries to estimate uncollectible accounts expense and entries to write off accounts identified
as uncollectible.
Exhibit 17: General Journal

JOURNAL PAGE :
GENERAL JOURNAL
DATE ACCOUNTS & EXPLANATION F DEBIT CREDIT
General Ledger. A general ledger, or GL, is a means for keeping record of a company's total financial
accounts (assets, liabilities, and equity accounts).
Exhibit 18: General Ledger
GENERAL LEDGER
Accounts Receivable Account No:

DATE EXPLANATIONS Ref DEBIT CREDIT BALANCE
Ø Important notes to forms or documents processed

1. The department that initiated the processing approves the form.
2. The department that initiated the processing is accountable for unused forms. Also, access to those forms shall be limited to the said department.
3. The notification of forms does not necessarily mean a hard copy shall be forwarded. Notification can be done thru electronic mail.
4. The department that initiated, received or processed a form shall retain a copy for filing (not necessarily a hard copy).
Ø Summary of Functions of Departments in the Revenue Cycle

A. Sales department
Primary objective: To increase entity's sales
Activities Possible controls
1. Locates and encourages buyers Common controls adopted by different entities in this department include:
2. Negotiates terms with buyers • Sales department has an exclusive function to communicate with the
3. Accepts customer orders customers
4. Prepares sales order and distribute copies to customers, credit, • Entity maintains list of authorized customers to minimize exposure to high-risk
shipping and billing customers
5. Retains copy in unfilled order file • Entity maintains range of selling prices for its products
6. Monitors the status of the order
7. Updates customers as to the status of the order
B. Credit department
Primary objective: To minimize exposure to high-risk customers
1. Receives and review sales order from sales department Common controls adopted by different entities in this department include:
2. Conducts credit investigation • Entities establish a credit department that is independent with the sales department
3. Approves credit request by preparing a memo or placing an "approved" • Credit department issues list of authorized customers
mark in the sales order
4. Notifies sales department as to the approval/disapproval of the credit
request
5. Forwards the approved sales order to inventory control
C. Inventory control department

Primary objective: To control transfers of inventory in and out of storage areas, monitor inventory levels, and report slow-moving or damaged items
1. Reviews approved sales order received from credit department Common controls adopted by different entities in this department include:
2. Monitors the availability of goods ordered • Inventory control that provides access to sales department to inventory levels
3. Authorizes the issuance of goods to the shipping department • Different inventory management concepts which are applied to provide reasonable
4. Forwards the approved sales order to shipping department assurance the availability of goods when needed
D. Shipping department
Primary objective: To provide reasonable assurance that all shipments are authorized and customers are billed
1. Compares sales order from sales department with goods and approved Common controls adopted by different entities in this department include:
sales order from inventory control • Shipping documents that are pre-numbered and assure that related billings are made
2. Completes shipping documents and prepares goods for shipment on a periodic basis
3. Release goods to carrier and obtains receipt
4. Notifies sales department that goods have been shipped
5. Forwards the shipping documents and approved sales order to Billing
department
E. Billing department
Primary objective: To provide reasonable assurance that all billings are shipped
1. Compares the following documents: Common controls adopted by different entities in this department include:
a. sales order from sales department • Pre-numbered sales invoice
b. approved sales order and shipping document from shipping • Shipping document must be present before preparation of sales invoice.
department
2. Prepares sales invoice and send copies to customer (thru the carrier) and
to inventory accounting
3. Prepares remittance advice and send copy to customers (thru the carrier)
F. Accounting department
• Inventory: Provides cost information on the goods sold to be forwarded to general accounting and records transaction related to the cost of goods sold.
• General: Records the sale and forward sales invoice and related documents to Accounts receivable
• Accounts Receivable: Updates subsidiary ledger related to customer's account.
Ø Summary of Functions of Departments in the Receipt Cycle

Collections
A. Mail room or Receptionist
• Receives remittance advises and customer checks from customers (separate checks and remittance advice)
• Prepares list of receipts
• Endorses checks and list of receipts to the treasury department
• Endorses remittance advices and list of receipts to the accounts receivable department
B. Treasury department
• Reviews and checks the list of receipts received from the mailroom or receptionist.
• Updates cash records
• Prepares deposit slips and deposits collections to the bank on a daily basis.
• Prepares cash summaries, sends copy to Accounts receivable and general accounting, and retains a copy
C. Accounting department
• Accounts receivable: compares remittance advice from mail room and cash summaries from treasury, updates subsidiary ledgers, and prepares daily
summaries to be forwarded to general accounting.
• General: compares daily summaries from treasury and accounts receivable, then, updates general ledgers.
Ø Other activities in the revenue and receipt cycle

Uncollected accounts
1. Accounts receivable
• Review individual customer accounts periodically as a check against credit limits
• Prepare monthly accounts receivable trial balances for reconciliation with the general ledgers
2. Authorized Personnel independent of Credit department
• Review and age accounts receivable balances periodically
3. Authorized Personnel who reports to the treasurer and independent of recording functions or Treasurer to authorize the write-off
• In case of delinquent account, such account should be reviewed
• If judged to be uncollectible, written authorization to write off should be sent to Accounts receivable and General Accounting
Sales returns and allowances

1. Sales department
• Reviews customer's request for returns and allowances
• Grants sales returns and allowances and prepares credit memo w/ is forwarded to customer, accounts receivable (for recording), and inventory control (for returns)
2. Inventory control
• Compares goods received through the receiving department and credit memo
3. Accounting
• Inventory: updates inventory records upon receipt of goods and prepare daily summaries to be forwarded to general accounting
• Accounts receivable: update records based on the credit memo received and prepares daily summaries to be forwarded to general accounting.
• General: compares daily summaries from inventory and accounts receivable, then, updates general ledgers.
Sales Transactions Assertions/Risks

• Existence/Occurrence
→ Recorded Sales did not occur (SJ to SO, SI, BoL)
→ Recirded Sales were shipped (SJ to BoL)
→ Confirm receivables
• Completeness
→ Unrecorded Sales (Examines Entries SI to SJ)
→ Unrecorded Shipments (BoL to SJ)
→ Unbilled Shipments (BL to SI)
→ Unrecorded Billings (SI to SJ)
• Cut-off (AR and Sales)
→ Examine documents e.g. Sales Invoice
→ Perform Cut-Off Test
• Valuation and Measurement
→ Recalculation (Quantity Unit Cost)
→ AR (Recalculate-Aging)
→ Foot AR subsidiary ledger
• Rights and Obligations
→ Review minutes of BOD meeting
→ Confirm with lenders AR assigned, sold/pledged
→ Consignment
Cash Receipts
→ Fictitous cash receipts (JE testing, validated daily deposits)
→ Recorded balance exist (cash count, test for kiting)
• Completeness
→ Misappropriated Cash (daily listing of cash receipts and validated deposit ticket to CRJ)
→ All cash included (Proof of Cash)
→ Customer's account may be credited for biger amount (remittance advice)
→ Cash correctly valued (examine bank reconciliation)
Substantive Testing of Cash
→ Confirmation
→ Cash count procedure
→ Bank Reconciliation
→ Test for Kiting
• Completeness
→ Cut-off test
→ Proof of cash
• Rights and Obligations
→ Review bank replies to confimation letter
→ Review bank statements
→ Verify cash under receivership, subject to courts restraining order.
EXPENDITURE AND DISBURSEMENT CYCLE

• Resources are acquired from vendors in exchange for obligations to pay
• Entity pays cash to vendors and employees
Accounts affected Accounts affected include the following:
• Purchases (e.g. Inventory and Supplies) • Payables
• Purchase returns, allowances and discount • Cash
Departments involved Significant departments affecting the cycle are:
Expenditure Disbursement
• User (any department within the entity) • Treasury Accounting (receivable and general)
• Purchasing
• Receiving
• Accounting (accounts payable)
• Accounting (inventory and general)

Requisition slip (purchase Contains the details of the user department's User department • Purchasing
requisition) request
Purchase order Describes the goods to be acquired (quantity and Purchasing department • Vendor
description) • User
Receiving report Describes the goods received (quantity, description Receiving department • Receiving
and condition) • Accounts payable
Shipping document Describes the goods to be shipped and serves as Vendor (thru the carrier) • Purchasing
contract between the entity and carrier • Accounts payable
Vendors invoice Describes the goods sold, amount due and the Vendor • Receiving department
terms of payment • Accounts payable
Daily summaries Summarizes transactions recorded during the day Accounts payable (for purchases) • General accounting
by the different department Treasury (for payment)
Ø Summary of Functions of Departments in Expenditure Cycle

A. User department
Prepares requisition slip to be forwarded to purchasing and accounts payable departments
B. Purchasing (Procurement) department

Primary objective: To meet the specific needs of the user department at the least possible cost
1. Receives approved requisition slip from the user department Common controls adopted by different entities in this department include:
2. Locates vendor and negotiates with terms • Purchasing department has an exclusive function to communicate with the vendor
3. Prepares purchase orders and distributes copies to vendor, receiving and • Entity maintains list of authorized vendors
accounts payable • Entity compares purchase price to market prices
4. Monitors the status of the order
5. Updates customers as to the status of the order
C. Receiving department
Primary objective: To provide reasonable assurance that received good are based on approved purchase order
1. Files purchase orders until goods are received Common controls adopted different entities in this department include:
2. Upon receipt, counts and checks the goods for appropriate quantity and • To ensure that the receiving department will count and check the goods received,
condition the purchasing department sends a blank purchase order
3. Reviews and compares purchase orders from purchasing and shipping
document from the carrier
4. Prepares receiving reports to be forwarded to purchasing and accounts
payable accompanied by supporting documents (purchase orders from
purchasing and shipping document from the carrier)
D. Accounts (vouchers) payable department

Primary objective: To provide reasonable assurance that payments will only be made to shipments received
1. Reviews and compares requisition slip, purchase order, receiving report Common controls adopted by different entities in this department include:
and vendors invoice (3-way match) • Voucher should be supported by purchase order, receiving report and suppliers
2. Prepares voucher sales invoice or any other supporting documents
3. Prepares voucher (requisition slip, package purchase receiving report, • Accounts payable department files voucher package by due date so as to pay liability
order, vendors invoice, and voucher) and daily summary to be on time and take advantage of discounts, if any
forwarded to the treasury and general accounting, respectively
4. Receive cancelled voucher and check summary from treasury department.
5. Update AP master file and print cash disbursements journal
E. Treasury department (Disbursement)

1. Reviews voucher package received. (The voucher package comprises the Common controls adopted by different entities in this department include:
following: (a) requisition slip, (b) purchase order (c) receiving report, • The person last signing the check cancels the voucher package by placing a mark such
(d) vendor's invoice, and (e) voucher) as "paid", "cancelled" or check number.
2. Prepares check and have it signed by authorized signatories • Entity may adopt any of the following in relation to issuance of checks
3. Forwards checks to vendors - Check over a certain amount should have an identified payee
4. Prepares daily summary which is to be forwarded to general accounting and - No checks shall be issued without an identified payee
accounts payable department. - Checks should be signed by at least two authorized persons
5. Cancel voucher and supporting documents as represented by payment.
Forward cancelled voucher and voucher package to AP department.
F. General Accounting Department

• Receive check summary from treasury department.
• Post to general ledger
• Perform independent check of totals per check summary and amounts journalized and posted by AP department. (for checking purposes)
• Perform independent monthly bank reconciliation.
Ø Controls over petty cash

• There should be restricted access to petty cash fund where cash should be securely held. Only the custodian should have access.
• All expenditures should require an approval and signed voucher.
• The imprest system should be used in reimbursing funds.
• Vouchers shall be produced before the check is signed for reimbursement. After reimbursement, vouchers shall be cancelled.
• Rules should exist preferable preventing the issue of IOUs or the cashing or accomodation of checks.
HUMAN RESOURCES AND PAYROLL CYCLE

Human resources and payroll cycle is a continuation of the expenditure and disbursement cycle. This cycle covers the entity's acquisition of services from its employees
or personnel. The following are main reasons why the auditor is concerned with this cycle.
a. Payroll include different categories of employee benefits (short- term; post-employment, other long-term and retirement) that could significantly affect major
elements of financial statements; and
b. For most entities, significant amount of resources is incurred

• Services are received from employees in exchange for obligations to pay
• Entity pays cash to employees
Accounts affected Accounts affected include, but not limited to the following:
• Salaries and wages expense and payable • Inventories (for inventoriable salaries and wages)
• Premiums expense and payable • Cash
• Withholding taxes payable
Departments involved Significant departments affecting the cycle are:
Expenditure Disbursement and distribution
• User (any department within the entity) • Treasury
• Human resources (HR) or Personnel • Accounting (general)
• Payroll
• Accounting (inventory and general)

HR records (Personnel It contains all information related to entity's HR department • Payroll (limited to payroll
records or 201 file) employees from time they are hired up to their related information only)
eventual termination. It documents all actions taken
by the employees or management on behalf of an
employee. Commonly, it also documents salary
rates, deductions, and other payroll related
information
Daily time record (DTR) Describes the number of hours worked by an User department • Payroll
employee during a particular day covered by a pay
period
Payroll register Shows all related payroll information (gross pay, Payroll • Treasury
all deductions, and net pay) for each pay period • General accounting
Labor cost summary Shows payroll information which is capitalizable or Payroll • Inventory accounting
can be attributed to a particular job or customer
order
Employee earnings Shows the cumulative, year-to-date summary of Payroll • Accounts payable
record earnings and deductions of every employee
Daily summaries Summarizes transactions recorded during the day • Payroll (for liability recognition) • General accounting
by the different department • Inventory (for inventoriable
labor costs)
• Treasury (for payment)
Ø Summary of Functions of Departments in Human Resource and Payroll Cycle

A. User department
Primary objective: To ensure that time records prepared by employees represent actual hours worked during a pay period
1. Monitors and approves daily time records Common controls adopted by different entities in this department include:
• Appropriate review activities shall be made to ensure the validity of daily time
Note: However, due to introduction of computerized human resources records prepared by employees
systems, time records are commonly tracked through biometrics and • In case of computerized systems, approval of any exceptions shall be made by the user
access devices. department head
B. HR department
Primary objective: To ensure employees included in the payroll are rendering services to the entity
1. Initiates, updates and maintains HR records Common controls adopted by different entities in this department include:
2. Forwards payroll related information to payroll department (e.g. salary • Access, including initiating changes, to HR records shall be limited only to the HR
and wage rates, bonuses, overtime pays, and payroll deductions) department
3. Determines terms of settlement (lump-sum or installment) in case of • Information not relevant to payroll calculation shall not be shared to other departments
termination of employee/s
4. Immediately notify payroll department of terminated employee to avoid
inclusions of these employees in the subsequent payroll calculations
C. Payroll department
Primary objective: To provide reasonable assurance that the payroll calculation in every pay period is valid
1.Receives and reviews relevant payroll related information from HR and Common controls adopted by different entities in this department include:
user departments • Appropriate level of management (preferably a member who is not involved in
2. Considers any update on employees' pay rates and deductions payroll preparation) reviews the payroll register for accuracy and reasonableness
3. Prepares payroll register • To assure adequacy of segregation of duties, payroll department should be
4. Updates cumulative employee earnings records segregated form HR, Treasury, and some user departments.
5. Identifies and submits to inventory accounting capitalizable payroll in
case of servicing and manufacturing companies with inventoriable
labor costs
D. Treasury department (Disbursement)

Primary objective: To provide reasonable assurance that all payroll cash disbursements are based upon a recognized liability or actual services rendered by employees
1. Reviews payroll register received Common controls adopted by different entities in this department include:
2. Prepares check and have it signed by authorized signatories* • Separate bank account should be maintained exclusively for payroll disbursements
3. Distributes checks to employees • On a surprise basis, an employee independent from payroll and user departments
4. Prepares daily summary which is to be forwarded to general accounting may distribute paychecks. The purpose of this is to identify whether or not fictitious
employees exist
*Note: Most companies disburse payroll through bank fund transfers from • Unclaimed payroll checks shall be re-deposited to the bank
company's payroll fund to individual employees payroll account. In
this case, the treasury department should be the one authorizing the
bank transfer.
E. Accounting department
Primary objective: To provide reasonable assurance that items related to payroll are appropriately classified and recorded in correct accounting period at
appropriate amounts
• Inventory: Records inventoriable labor costs to appropriate jobs or customers account and forward a daily summary to general accounting.
• General: Reviews daily summaries and documents received from Payroll, Treasury and Inventory departments. It records the recognition of payroll related
expenses and liabilities in the general journal.
PRODUCTION OR CONVERSION CYCLE

Production or conversion cycle covers the production of entity's product for sale. It is where materials, labor and overhead are converted into finished goods.
The primary objective of this cycle is the proper valuation of inventories and cost of goods sold. Such objective encompasses the proper allocation of costs to each run
made by the production department. In order to attain this, the production department uses inputs from the expenditure and disbursement cycle and provides resources
and information to revenue and receipt cycle. The details of the processes used in this cycle have been discussed in Cost Accounting course. The focus of this discussion note
will be purely on controls over custody of resources involved, authorization of activities, and recording of transactions. As for the substantive test, you may refer to Chapter 11.
Ø Summary of control-related duties and responsibilities

Duties & responsibilities Person/s assigned to perform the function Procedures performed by auditor
Custody Physical custody of materials and labor documents is normally held by Auditor observes physical count and reconciles the result of such
the production department. count to entity's records.
Since most of the assets here are highly susceptible to theft and If held by other parties, auditor may send confirmation requests to the
misappropriation, adequate physical controls must be implemented. custodian (e.g. consignees, agents, or branches)
Authorization The production department is authorized to make normal production Auditor reviews production orders and related documents supporting
runs. production runs made by the department to determine whether it
bears the necessary authorization.
However, in case of special runs (to meet a special order), authorization
must come from the board of directors or its authorized representative.
Recording Transactions are recorded by the cost accounting. Daily summaries are Auditor normally reviews the
then prepared and forwarded to general accounting for recording and ✓ competency of the individuals making journal entries.
posting in the general journal and ledger, respectively. ✓ reconciliation of the general ledger
FINANCE AND INVESTMENT CYCLE

Finance and investment cycle generally involves three major categories of transactions: investments, long-term debts, and shareholders' equity. It covers complicated
processes such as accounting for investments, mergers, long-term liabilities, and equity transactions.
This cycle normally involves few but significant amounts of resources. Thus, auditor commonly employs substantive testing to gather sufficient appropriate evidence. However,
it must be noted that prior to designing of substantive test procedures, control-related duties and responsibilities is one of the major consideration of the auditor.
With this, similar with the production or conversion cycle, the focus of this discussion note will be on the different controls over custody, authorization, and recording of the
different transactions covered by this cycle. As for the substantive tests, you may refer to Chapters 13, 24 and 28.
Ø Summary of control-related duties and responsibilities

A. Finance cycle
Custody Unissued equity and debt certificates must be kept by appropriate Auditor inquires directly to assigned custodians.
internal official (e.g. Corporate Secretary) or independent external
custodian. If held internally, auditor observes the accounting of unissued
certificates
Authorization As mentioned. transactions covered in this cycle involve large amounts Auditor reviews minutes of the board of directors meetings.
of cash or other resources. With this, transactions shall be approved by
the board of directors.
Recording Transactions are recorded in the general journal by personnel in the Auditor normally reviews the
general accounting. ✓ competency of the individuals making journal entries.
✓ reconciliation of the subsidiary and general ledgers
Important notes:
1. In case of settlement of equity or debt securities previously issued, the certificate is cancelled thru perforation (e.g. the certificate is shredded). The purpose of
this is to avoid duplicate payments. The supporting records and documents are then kept as audit trail of the transactions.
2. In case of debt instruments, the general accounting shall appropriately monitor any accruing interests from the liabilities.
B. Investment cycle
Custody Generally, investment certificates are kept as follows: Auditor inquires directly to assigned custodians thru sending of
• Negotiable certificates brokerage account confirmation requests.
• Titles to real estate may be kept in a safe with the entity or bank
safe deposit box If held internally, the auditor observes the accounting for certificates
held.
Authorization As mentioned, transactions covered in this cycle involve large amounts Auditor reviews minutes of the board of directors meetings.
of cash or other resources. With this, transactions shall be approved by
the board of directors or by an investment committee.
Recording Transactions are recorded in the general journal by personnel in the Auditor normally reviews the
general accounting. ✓ competency of the individuals making journal entries.
✓ periodic reconciliation subsidiary of and general ledgers
Moreover, most companies monitor transactions in the investment
cycle through a subsidiary ledger/s maintained by the treasury
department.
Important notes:
1. Regardless of the manner of safekeeping, access to these certificates is given to at least two high-ranking officers (e.g. President, Treasurer, CEO, COO, CFO,
or Chairman of the board). This control is sometimes called dual control or joint custody.
2. The auditor normally requests for the conduct of securities count in the financial institutions holding the client's certificates.
INTERNAL CONTROL FLOWCHART FOR PROCESSING SALES
Sales Credit Warehouse Shipping Billing Inventory
Receive customer Sales Sales Sales Warehouse Sales

order Shipping Billing
Customer 2 2 3 2 4 2
Approved Sales Order Approved 3
order Sales Order Sales Order Bill of lading 2 Sales Invoice
Sales Order Sales Order Approved
Sales Order
Compare the Sales Order from

Prepare sales Approve Sales Dept. and Approved Sales Compare the Sales Order from Provides cost
order credit Release goods Order from Warehouse Dept. Sales Dept. and Approved Sales information on
to Shipping Order and Billd of Lading from the goods sold
Warehouse Dept. and record
transaction
related to COGS
1 2 2 Prepares Bill
Sales Order 34 Approved 2 of Lading
5 Sales Order Approved
Sales Order 2
Prepare Sales Invoice
Prepare
Sales Invoice Remittance
1 2 Advice
Bill of lading 2 Approved
3 Sales Order
Numerically
12
Sales Invoice 3 Remittance
Copy Warehouse Advice
Shipping
2
3
Shipping
General
Credit
Billing
Billing
Customer Customer
(thru carrier) (thru carrier)
Shipping
Customer
Inventory
Customer
Carrier
Copy
ES CASH RECEIPTS FROM CU
Accounting
nventory General Accounts Receivable Mailroom / Receptionist Treasurer / Cashier Controll
Receives Remittance
Billing Inventory General advice and Checks from Mailroom Mailroom
Customer
2 2 2 3
ales Invoice Sales Invoice Sales Invoice 1 Prelisting
Separate checks from Check Prelisting
remittance advice and Prepare
restrictively endorse prelisting
checks of checks
rovides cost Updates

formation on Record the sales Subsidiary Agree prelistin
e goods sold Ledger Prepare
ticket and
and record deposit
1 receipts e
transaction Remittance Check Prelisting 2 3
lated to COGS Advice 4
Prepare cash
2 receipts
Sales Invoice To bank summary
2
ales Invoice
12
Cash receipts 3
summary
Accounts
Accounts Receivable Treasurer Controller
Receivable
General Copy
General
Accounts
Receivable
Copy
FROM CUSTOMERS FLOWCHART
Accounting
Controller General Accounts Receivable
ailroom From Bank Accounts

Treasury Mailroom
Receivable Treasurer
3 Deposit 2
elisting Daily 3
Ticker Cash Receipts 2 Cash Receipts
Summary Summary Remittance
Advice Prelisting Summary
Compares daily summaries Compares remittance advice

from treasury and accounts from mail room and cash
Agree prelisting, deposit receivable summaries from treasury
ticket and cash
receipts entry
Updates
Subsidiary
Ledger
Upadate Record
General cash receipts
Ledgers
Prepares
Daily
Summary
Daily
Summary
Daily
Summary
General
CHAPTER 7: SUBSTANTIVE TEST OF CASH
TEST OF CONTROLS FOR CASH RECEIPTS

✓ Observe control procedures in the mailroon regarding cash receipts via post.
✓ Review procedures for segregation of duties.
✓ Inspect evidence that entries in the cash receipts journal have been independently compared with daily cash summaries and postings to the receivable subsidiary ledger.
✓ Select samples of recorded cash receipts and vouch them to validated bank deposit slips and remittance advices. These provide evidence that recorded cash receipts
represent cash actually collected from customers.
✓ Select samples of daily cash summaries and trace to entries in cash receipts journal, general ledger and bank statement. These provide evidece that all cash receipts are
recorded.
TEST OF CONTROLS FOR CASH DISBURSEMENTS

✓ Review procedures for segregration of duties
✓ Observe the process of independent check made by treasury staff.
✓ Inspect sample checks for proper approval and signature.
✓ Test the numerical sequence of checks issued.
✓ Observe cancellation of checks and vouchers.
✓ Compare debits to accounts payable to properly cancel voucher packages.
✓ Trace cancelled voucher package to cash disbursements journal entries.
✓ Vouch cash disbursement journal entries to cancelled voucher packages.
TEST OF CONTROLS FOR BANK RECONCILIATION

✓ Examine evidence of regular bank reconciliation.
✓ Examine evidence of independent check on bank reconciliation.
✓ Examine evidence of follow-up to old outstanding items on bank reconciliation. Focus on disbursements via check that might be considered as stale.
TEST OF CONTROLS FOR PETTY CASH FUND

✓ Test petty cash voucher for approval
✓ Test cancellation of paid petty cash vouchers
✓ Test for evidence of arithmetical on petty cash records.
✓ Examine evidence of independent check of petty cash balance.
INTRODUCTION TO SUBSTANTIVE TEST OF CASH

• Cash refers to unrestricted items and are immediately available for use.
• Under good cash management, cash balance is not that significant as compared to total assets presented in balance sheet.
• Nevertheless, auditors devote more audit time in examining cash balances due to its high inherent risk (ie. susceptibility to theft).
ASSERTIONS
Assertions used by the auditor fall into the following three broad categories:
1. Assertions about classes of transactions and events for the period under audit:
a. Occurrence - transactions and events that have been recorded have occurred and pertain to the entity.
b. Completeness - all transactions and events that should have been recorded have been recorded.
c. Accuracy- amounts and other data relating to recorded transactions and events have been recorded appropriately.
d. Cutoff - transactions and events have been recorded in the correct accounting period.
e. Classification - transactions and events have been recorded in the proper accounts.
2. Assertions about account balances at the period end:

a. Existence - assets, liabilities, and equity interests exist.
b. Completeness - all assets, liabilities and equity interests that should have been recorded have been recorded.
c. Rights and obligations - the entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
d. Valuation and allocation - assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or
allocation adjustments are appropriately recorded.
3. Assertions about presentation and disclosure:

a. Occurrence and rights and obligations - disclosed events, transactions, and other matters have occurred and pertain to the entity.
b. Completeness - all disclosures that should have been included in the financial statements have been included.
c. Accuracy and valuation - financial and other information are disclosed fairly and at appropriate amounts.
d. Classification and understandability - financial information is appropriately presented and described, and disclosures are clearly expressed.
Assertions about classes of transactions and events for the period under audit pertains to assertions in the statement of comprehensive income while assertions about account
balances at the period end pertains to assertions in the statement of financial position. Assertions about presentation and disclosure can be found in all the component of the
complete set of financial statements.
AUDIT OBJECTIVES
When auditing cash and cash equivalents, the principal objective for the substantive tests is to determine the following:
Assertion Category Account Balances Audit Objectives
Existence All cash on the statement of financial position at a given date is held by the entity or by others (e.g., a bank) for the entity.
Completeness All cash owned by the entity at the reporting date is included on the statement of financial position.
Valuation and Allocation Cash, including bank balances, is stated at realizable value and agrees with supporting schedules.
Rights and Obligations The entity owns, or has a legal right to, and has unrestricted use on all the cash on the statement of financial position at the
reporting date.
Presentation and Disclosure Cash, including bank balances, is properly classified, described, and disclosed in the financial statements, including notes, in
accordance with PFRS. Lines of credit, loan guarantees, compensating balance agreement, and other restrictions (liens) on
cash balances are appropriately identified and disclosed.
AUDIT PROCEDURES FOR CASH

The auditor's primary substantive procedures for cash balances and transactions will typically include the following:
1. Sending confirmation to banks or financial institutions;
2. Conducting surprise cash counts;
3. Obtaining and testing bank reconciliation and if appropriate, preparing proof of cash;
4. Obtaining bank cutoff statement and tracing bank transfers;
5. Performing cash cutoff tests;
6. Checking the appropriate valuation of cash; and
7. Performing analytical procedures to assess the reasonableness of reported cash.
Ø Bank Confirmations
Primary audit objectives: Existence, Valuation, Rights and Obligations, Presentation and Disclosure
• This procedure is a direct approach in testing or proving the existence of cash. Bank confirmation are recognized by the Int'l Standards on Auditing as a more reliable
form of audit evidence.
• When determining whether to confirm a bank account, materiality of the account balance is not a consideration. Hence, bank confirmation letters should be:
a. Sent to all banks which the client has an account

b. On the auditor's letterhead but signed by the client entity.
c. Mailed by the auditor and returned directly to the auditor (direct-form of evidence).
• Contents of a bank confirmation letter: (What to confirm?)
✓ Balances due to or from the bank, maturity and interest terms

✓ Terms and repayments conditions of loans and overdrafts.
✓ Collateral given, if any
✓ Unused facilities credit and any right to offset
✓ Asset held in custody or safe.
✓ Contingent liabilities such as guarantees and endorsements.
✓ Lisitng of authorized account signers.
• In instances when the amount indicated in the confirmation request returned by the bank does not agree with the ledger balance or when repeated non-response are
obtained from the financing institution, the auditor shall obtain copies of bank reconciliation prepared by the client. (primary source documents in bank recon is bank statement)
• Bank overdrafts. Should be reported as current liabilities and should not be netted to other bank accounts with positive balance, unless it is part of the company's cash
management or the amount involved is immaterial.
• Lapping. It is done by misappropriating collections from one customer and concealing this defalcation by applying a subsequent collection made from another customer.
Exhibit 1: Standard Bank Confirmation

Attn: Janet Nafoolish, Senior Manager Bank of the Baguio Islands Lower Session Rd., Baguio City NCPAR. Inc. We have provided to our auditors the following information as of the close of business on Decemb
Ø Cash Count
Primary audit objectives: Existence, Valuation, Rights and Obligations
Accountability vs. Accounted

Accountability (should be) Valid support
(1) Petty Cash Fund (the Imprest Balance) ✓ Bills and coins
✓ Replenishment checks
✓ Unreplenished petty cash vouchers
✓ Post-dated checks, stale checks, NSF checks
✓ Employee IOUs
(2) Undeposited collections (balance per book adjusted for ✓ Bills and coins
unrecorded collections ✓ Checks for deposits
✓ Expense vouchers or other evidence
(3) Unclaimed salary and Unexpended employee contributions ✓ Bills and coins
✓ Envelop for unclaimed salary (should be intact)
In conducting cash counts, the following should be observed.

1. Surprise cash count. Cash counts must be performed without the custodian being informed in advance (i.e., on a surprise basis).
2. Control all cash funds, including marketable securities and other negotiable assets to prevent any 'transfers' or 'substitution' of floats to hide discrepancies, until the
completion of the count.
3. Count in the presence of the custodian to ensure the auditors cannot be blamed for any shortage;
4. List each item in the fund showing the denominations of notes and coins;
5. The custodian should sign the record as evidence of te return of all funds; and
6. Agree the total to the cash book balance and investigate difference; and
7. Follow-up disposition of items in cash counted:
✓ Undeposited collections shall be traced to bank reconciliation prepared during the month and to bank deposits subsequent to balance sheet date;
✓ Accomodated checks shall be deposited after the count to established validity;
✓ IOUs in the fund should be confirmed and traced to collections in the subsequent period;
✓ Expense vouchers should be traced to the succeding replenishment voucher.
Exhibit 2: Cash Count Sheet

Illustration 1: Petty Cash Fund
Your firm has been engaged to audit the financial statements of the Perlita Company for the year ended December 31, 2018. In connection with this audit,
you have been assigned to audit the petty cash fund. You conducted your count at 9:15 a.m. on January 4, 2019 in the presence of Mr. Rodel E. Ocon, the
cashier and at the same time the petty cash custodian. A count of the petty cash fund under the custody of Rodel E. Ocon showed its compositions as follows:
CURRENCIES
Denomination Quantity
Bills: ₱1,000 3
₱500 7
₱100 6
₱50 4
₱20 5
Coins: ₱10 48
₱5 20
₱1 20
CHECKS:
Maker Date Payee Particulars Amount
Rodel Ocon 03/01/18 Client Payment for cash advances drawn from the petty
Stale check
cash fund January 1, 2018 ₱9,600
Merilou - 12/02/18 Client Payment for cash advances drawn from the petty
Employee cash fund but was returned by the bank for
NSF check
insufficiency of fund ₱1,000
Debora - 12/20/18 Client Payment for cash advances drawn from the petty
President cash fund December 1, 2018 ₱3,000
Perlita Company 12/28/18 Petty Cash Replenishment of PCF ₱16,000
Custodian
VOUCHERS:
Particulars Date Amount
Taxi fare - OR No. 155 December 15, 2018 ₱2,400
Gasoline - or No. 688 December 16, 2018 ₱1,600
Office supplies December 22, 2018 ₱2,000
OR # 64794 - Post Office December 23, 2018 ₱1,200
IOU signed by Jigo - company messenger December 24, 2018 ₱4,800
OTHERS:
• Unused stamps, ₱400
• The general ledger shows an imprest petty cash fund balance of ₱50,000.
Required:
1) Prepare the working paper for Petty Cash Fund
2) Compute for the adjusted petty cash fund
3) Prepare the adjusting journal entries.
Solution:
Requirement #1: Working Paper for the Petty Cash Fund
Perlita Company
Petty Cash Count Sheet
January 4, 2019; 9:15 AM
Denomination Quantity Total

Bills ₱1,000 3 ₱3,000
₱500 7 ₱3,500
₱100 6 ₱600
₱50 4 ₱200
₱20 5 ₱100
Coins ₱10 48 ₱480
₱5 20 ₱100
₱1 20 ₱20
Total Bills and Coins ₱8,000
Checks for Deposits:

Maker Date Payee Particulars Amount
Merilou December 20, 2018 Client Payment of Cash Advances - NSF ₱1,000
Debora December 20, 2018 Client Payment of Cash Advances ₱3,000
Perlita Company December 28, 2018 Petty Cash Custodian PCF Replenishment ₱16,000
Total checks for deposit ₱20,000
Vouchers:
Particulars Date Amount
Taxi fare December 15, 2018 ₱2,400
Gasoline December 16, 2018 ₱1,600
Office supplies December 22, 2018 ₱2,000
Postage December 23, 2018 ₱1,200
Advances - employees December 24, 2018 ₱4,800
Total voucher payment ₱12,000
Bills and coins 8,000

Checks for deposit 20,000
Stale checks 9,600
Vouchers paid 12,000
Total Petty Cash Accounted 49,600
Less: Petty cash accountabilities
Petty cash imprest balance 50,000
Stale checks of Rodel Ocon 9,600 (59,600)
Petty Cash Shortage (10,000)
Acknowledgement
I hereby acknowledge that the above petty cash fund items were counted in my presence and the same were returned to me intact.
I further acknowledge a petty cash short of ten thousand pesos (₱10,000). I have no other fund accountabilities.
Rodel Ocon
Petty Cash Custodian
Requirement #2: Compute for the adjusted petty cash fund

Coins and currencies 8,000 Balance per ledger 50,000
Add: Replenishment check 16,000 Add (Deduct) Adjustments
Petty cash fund, 12/31/2018 24,000 AJE (a) To take up unreplenish (12,000)
AJE (c) To take up advances to (4,000)
AJE (d) To take up shortage per (10,000)
Balance as adjusted 24,000
Requirement #3: Adjusting Entries
a) Transportation expense 2,400
Gasoline and oil expense 1,600
Office supplies expense 2,000
Postage expense 1,200
Advances to employees 4,800
Petty cash fund 12,000 Vouchers
b) Unused postage stamps 400

Postage expense 400 Adjusting entry
c) Advances to employees 4,000

Petty cash fund 4,000 Checks for deposit (including NSF)
d) Receivable from custodian 10,000

Petty cash fund 10,000 Shortage
Illustration 2: Petty Cash Fund

You are examining the accounts of ABC Co. Your count of the imprest cash fund, made at 9:00 a.m. on January 4, 2019, in the presence of Stef Pangilinan petty
cashier, revealed:
Quantity Denomination Total

2 ₱1,000 ₱2,000
3 ₱500 ₱1,500
5 ₱200 ₱1,000
1 ₱100 ₱100
5 ₱20 ₱100
15 ₱10 ₱150
6 ₱5 ₱30
Checks Date Payee Amount

G. Na, Asst. Manager 12/12/2018 ABC Co ₱1,000
L. Thor, cashier 12/15/2018 ABC Co ₱500 NSF check
NSF check
(L. Thor's check was returned by the bank because of insuficiency of funds)
Unreimbursed vouchers
Payee Date Account charged Amount
A Co 12/12/2018 Advances to employees ₱150
B Na 12/15/2018 Supplies ₱200
C Da 12/18/2018 Freight ₱300
D Na 12/19/2018 Repairs ₱480
IOUs Date Amount

E. Na 12/12/2018 ₱550
F. Na 12/15/2018 ₱400
P. Cu 12/18/2018 ₱250
Additional information:
The balance of the petty cash fund per books is ₱11,000.
Required:
For each of the following independent cases, compute for the following:
1) Petty cash shortage or overage
2) Adjusted petty cash fund balance as of December 31, 2018
CASE NO. 1: Use the above data

1) Petty cash accounted:
Coins and currencies 4,880
Checks for deposits 1,500 ← NSF check for employees advances is part of accounted but not accountabilities
Unreplenished vouchers 1,130
IOUs 1,200 8,710
less: Petty cash accountabilities: 11,000
Shortage (2,290)
2) Coins and currencies 4,880 Balancer per ledger 11,000

Add: Employees' check (good check only, exclude NSF ch 1,000 add (deduct) adjustments (5,120)
Adjusted PCF balance 5,880 Adjusted PCF balance 5,880
L Thor's check was not included because of insufficiency of fund
Adjusting entries:
Advances to employees 150
Supplies Expense 200
Freight Expense 300
Repairs expense 480
Petty cash fund 1,130 Unreplenished Vouchers

Petty cash fund 1,200 IOUs

Petty cash fund 500 NSF
Receivable from custodian 2,290

CASE NO. 2: With replenishment check, check of customers for collection, stale checks, post-dated checks
Assume instead that the checks included the following:
Maker Date Payee Amount

Stef Pangilinan 02/15/2018 ABC Co ₱600 Stale check
J. Muel, customer 12/15/2018 ABC Co ₱1,000 Customer's check
G. Ma, bookeeper 12/15/2018 ABC Co ₱880 employee's check (good check)
ABC Co 12/15/2018 Stef Pangilinan ₱2,800 check of company representing cashier salary
ABC Co 12/26/2018 Utility Company ₱1,200 company's check in payment of liability
R. Hood, employee 01/15/2019 ABC Co ₱550 Postdated check

Checks for deposits 5,880
Stale check of Stef Pangilinan 600
Postdated check of R. Hood 550
IOUs 1,200 14,240
less: Petty cash accountabilities:
PCF ledger balance 11,000
Check for payment of utility company 1,200 ← if included in the petty cash accounted, must also be included in the accountabilities
Customer's checks 1,000
Stale check of Stef Pangilinan 600 13,800
Overage 440
2) Coins and currencies 4,880 Balance per ledger 11,000

Add: Check of the company in the name 2,800 add(deduct) adjustments (2,440)
Add: Employees' check (good check on 880 Adjusted petty cash fund 8,560
Adjusted petty cash fund 8,560
Adjusting entries:
Freight Expense 300
Repairs expense 480
Petty cash fund 1,130 unreplenished Vouchers


Petty cash fund 550 Checks for deposits
Petty cash fund 440

Payable to cashier 440 Overage
CASE NO. 3: With postage, unused stamps and expenses cash out of PCF after reporting period:
Go back to the original data and assume the following additional information:
Bureau of Posts 12/12/2018 Postage ₱800
M. Gaddo 01/02/2019 Supplies ₱300
Unused stamps, ₱50

Unreimbursed vouchers 2,230 ← unsued stamps (₱50) is not included since there is already disbursement for postage
IOUs 1,200 9,810
Shortage (1,190)

Add: Expenses paid out of the PCF after reporting date 300 add (deduct) adjustments (4,820)
Add: Employees' check (good check only, exclude NSF ch 1,000 Adjusted PCF 6,180
Adjusted PCF 6,180
Adjusting entries
Supplies Expense 200 ← excluded supplies expense after reporting date
Freight Expense 300
Repairs expense 480
Postage expense 800
Petty cash fund 1,930 Unreplenished

Petty cash fund 500 NSF Check

Receivable from cashier 1,190
CASE NO. 4: Without postage, with unused stamps and expenses cash out of PCF after reporting period:
M. Gaddo 01/02/2019 Supplies ₱300
Unused stamps, ₱50

Unreimbursed vouchers 1,430 ← supplies after reporting date is included
Unused stamps 50 ← unused stamp is included in the unreimbursed voucher since there is no disbursement for postage.
IOUs 1,200 9,060
Shortage (1,940)

Add: Expenses paid out of the PCF after reporting date 300 add (deduct) adjustments (4,820)
Adjusted PCF 6,180
Adjusting entries
Supplies Expense 200 ← excluded supplies expense after reporting date
Freight Expense 300
Repairs expense 480
Unused postage stamp 50 ← include unused postage



CASE NO. 5: With unexpended employees contributions and unclaimed salary (amounts are intact)
A sheet of paper with name of employees together with contribution for a birthday gift of a co-employee amounting to ₱500 was included in the petty cash. The
following employee's pay envelopes have not been opened and the money still intact. Each envelope was marked "unclaimed".
J. Masliyan ₱400
X. Humiwat ₱200

Unexpended employee contributions 500
Unclaimed salary 600
Unreimbursed vouchers 1,130
IOUs 1,200 9,810
Petty cash fund balance 11,000
Unexpended employee contribut 500 * Should be included in the accountabilities whether intact or not.
Unclaimed salary 600 12,100 * Should be included in the accountabilities whether intact or not.
Shortage (2,290)
Add: Employees' check (good check only, exclude NSF ch 1,000 add (deduct) adjustments (5,120)
Adjusted PCF 5,880 Adjusted PCF 5,880
Adjusting entries
Freight Expense 300
Repairs expense 480



CASE NO. 6: With unexpended employees contributions and unclaimed salary-amounts are not intact
A sheet of paper with name of employees together with contribution for a birthday gift of a co-employee amounting to ₱500 was included in the petty cash. The
following employee's pay envelopes have been opened and the money removed. Each envelope was marked "unclaimed".
J. Masliyan ₱400
X. Humiwat ₱200

Unexpended employee contributions 500
Unreimbursed vouchers 1,130
IOUs 1,200 9,210
Unexpended employee contribut 500 * Should be included in the accountabilities whether intact or not.
Unclaimed salaries 600 12,100 * Should be included in the accountabilities whether intact or not.
Shortage (2,890)

less: Unclaimed salaries (envelop opened) (600) add (deduct) adjustments (5,720)
Adjusted PCF 5,280
Adjusting entries
Freight Expense 300
Repairs expense 480



CASE NO. 7: With cash sales evidenced by sales invoice

Sales invoice (for cash sales, all in cash, no checks)
Invoices Date Amount
#143 12/30/2018 ₱2,000
#144 12/31/2018 ₱600
#145 01/02/2019 ₱2,050 still accountability
Assumed that for the purpose of computing the petty cash balance, available cash applies to cash collections and any remaining amount is for the petty cash fund.

IOUs 1,200 8,710
less: Petty cash accountabilities
Cash collections of sales 4,650 15,650
Shortage (6,940)

add: Employees good check 1,000 add (deduct) adjustments (9,770)
Total cash 5,880 Adjusted petty cash fund 1,230
less: Cash sales 4,650
Adjusting entries:
Freight Expense 300
Repairs expense 480
Petty cash fund 1,130

Petty cash fund 500

CASE NO. 8: With cash sales evidenced by sales records and deposits slips
Cash sales on January 2, 2019 amounted to ₱9,000 per sales records, while cash receipts book and deposit slip showed that only ₱8,000 was deposited in the
bank on January 3, 2019.

IOUs 1,200 8,710
less: Petty cash accountabilities
Undeposited collections 1,000 12,000
Shortage (3,290)

add: Employees good check 1,000 add (deduct) adjustments (6,120)
Total cash 5,880 Adjusted petty cash fund 4,880
less: Undeposited collections 1,000
Adjusting entries:
Freight Expense 300
Repairs expense 480

Petty cash fund 500


Ø Test of Bank Reconciliation

Primary audit objectives: Existence, Valuation, Completeness, Rights and Obligations.
• Bank reconciliation is customarily prepared monthly by the client as part of its internal control over cash.
• When auditing bank reconciliations, the auditor would obtain a copy of bank reconciliation prepared by the client. After obtaining a copy of bank reconciliation
prepared by the client, the auditor should:
1. Verify the cash balance used in the bank reconciliation:

a. Trace balance per books in the ledger, cash receipts and cash disbursement journal.
b. Trace balance per bank in the balance per bank statement, reply to bank confirmation and cutoff bank statement.
2. Check the accuracy of the footing in the bank reconciliation.
3. Obtain supporting documents for any book and bank reconciling items:
a. Bank reconciling items can be verified by obtaining "bank cutoff statement". A bank cutoff statement is normally prepared 8 - 10 business days after the
reporting date. Most items that were outstanding at year-end would have cleared when the cutoff statement is prepared (outstanding checks and deposits in
transit).
b. For book reconciling items, the auditor would normally examine the bank statement provided and examine any other supporting documents.
4. Examine whether there is an adjusting entry to reflect the book reconciling items.
• When testing bank reconciliation, the auditors should place more importance on items that may be omitted in the bank reconciliation to conceal cash shortage or
misappropriation of cash and any unusual transactions.
• Note that under normal banking practice, checks not encashed for a period exceeding six months from issue is considered outstanding.
• Any large or unusual transactions, especially checks payable to directors officers, employees, affiliated companies, or cash should be carefully reviewed by the auditors
to determine whether the transactions were properly authorized, recorded and are adequately disclosed in the FS as required by PAS 24 Related Party Transactions.
• An auditor shall consider preparing a proof of cash when it assesses internal control over cash receipts and cash disbursements to be weak or ineffective.
Exhibit 3: Bank Reconciliation Statement
Ø Tracing Bank Transfers

Primary audit objectives: Existence, Completeness, Rights and Obligations
• Many businesses maintain checking accounts with a number of banks and often find it necessary to transfer funds from one bank to another. When a check drawn
on one bank is deposited in another, normally three working days will pass before the check clears the bank on which it is drawn. During this period, the amount
of the check is included in the balance on deposit at both banks, thereby causing overstatement of cash balances. Due to this effect of the clearing period, an
employee may take advantage of this period and manipulate bank transfers to conceal cash shortage. This scheme is called kiting.
• To be able to detect this fraudulent scheme, the auditor ordinarily performs the following procedures:
1. Obtain a bank cutoff statement directly from the bank;
2. Prepare a schedule of bank transfers showing all transfers between the client's bank accounts during the last week of the audit period and the first week of
the subsequent period. The schedule should be prepared using cash receipts and payments journals, year-end reconciliation, year-end bank statement, and
cutoff bank statement; and
3. Trace all checks, deposits, and other cash changes from the cutoff statement to cash receipts and disbursements records, paying particular attention to dates and
amounts.
• The following rules should be observed by the auditor when tracing bank transfers:
1. Book entries for receiving and disbursing should have been made within same month;
2. Book entries compared with the bank entries may be made in an earlier month but not in a later month; and
3. The receiving per bank should not be in an earlier date than the disbursement per book.
Exhibit 4: Kiting
Ø Cash Cut-off Tests

Primary audit objectives: Existence, Completeness, Rights and Obligations.
• The auditor should perform cutoff procedures on cash receipts, disbursements and transfers to determine if these transactions are reflected in the proper period.
• Normally, the desire to show a more favorable current ratio may cause some entities to record cash disbursed in the first few days of a new accounting period as
disbursements of the preceding period or to record cash receipts of the first few days of the subsequent period as receipts of the preceding period. This scheme is called
window dressing.
• When testing cutoff of cash receipts and cash disbursements at the reporting date, audit procedure might include:
1. Comparing deposits on the bank statements immediately before and after the reporting date with entries in the cash receipts journal to establish the
reasonableness of the deposits in transit at the reporting date; and
2. Comparing the dates of the disbursement and receipt of intercompany payments or interbank transfers immediately before and after the reporting date to
establish that both receipts and disbursements were recorded in the proper periods.
Ø Cash Valuation
Primary audit objectives: Valuation, Presentation and Disclosure.
• Some companies may maintain its bank account in foreign currencies for some business purposes. If the bank account being reconciled is in a foreign currency, the
auditor should test the conversion of the cash balance to the presentation currency (e.g., Philippine peso) to determine whether cash is stated at its realizable value. The
auditor ordinarily should:
1. Obtain the period-end foreign exchange rate from an independent source;
2. Re-perform the conversion of the cash balance into the currency using this rate; and
3. Compare the resultant amount to the account balance in the general ledger and accounting for any differences.
• The main purpose of this substantive procedure is to examine proper valuations of cash and cash equivalents items such as:
a. Bank accounts in foreign currency shall be converted to the presentation currency (e.g. Philippine Peso) whether at stated value or net realizable value.
b. Cash deposits in banks undergoing bankruptcy shall be measured at net realizable value.
• Cash deposits in closed bank. Should be part of non-trade receivable.
Ø Analytical Procederes on Cash

Aside from the substantive test of balances and transactions, the auditor may need to perform analytical procedures to obtain evidence of reasonableness of the cash
reported in the financia statements. (ie., The auditor may investigate any unusual fluctuations and significant difference, etc.)
SUMMARY OF AUDIT PROCEDURES CLASSIFIED PER ASSERTION

Assertion Category Primary audit procedures
Existence ✓ Sending confirmation to banks or financial institutions
✓ Surprise cash count
✓ Obtaining and testing bank reconciliation and preparing proof cash (if appropriate)
✓ Obtaining bank cutoff statement and tracing bank transfers
✓ Cash cut-off test
Completeness ✓ Obtaining and testing bank reconciliation and preparing proof cash (if appropriate)
Valuation and Allocation ✓ Sending confirmation to banks or financial institutions
✓ Checking the appropriate valuation of cash
Rights and Obligations ✓ Sending confirmation to banks or financial institutions
Presentation and Disclosure ✓ Sending confirmation to banks or financial institutions
✓ Checking the appropriate valuation of cash
on December 31, 2018, regarding our deposit and loan balances. Please confirm the accuracy of the information, noting any exceptions to the information provided. If the balances have been left blank, please complete this form
e this form by furnishing the balance in the appropriate space below. Although we do not request nor expect you to conduct a comprehensive, detailed search of your records, if, during the process of completing this confirmati
confirmation, additional information about other deposit and loan accounts we may have with you comes to your attention, please include such information below. Please use the enclosed envelope to return the original direct
inal directly to our auditors, Asuncion, Ngina, Escala & Co. 1. At the close of business on the date listed above, our records indicated the following deposit balance(s): Account name Account no. Type of account Interest Balance
st Balance* rate Payroll account General account 12345678 23456789 Checking account 2% Checking account None P15,765,523 1,324,434 2. We were directly liable to the financial institution for loans at the close of business o
business on the date listed above as follows: Account no./ Date Description Balance* due 143-444 P1,321,432 3/2/23 Date through which Interest interest is rate paid 11.5% 12/31/18 Description of collateral Delivery equipme
y equipment Rojennon Beki, Mamager (Customer's Authorized Signature) January 14, 2019 (Date) - To be filled by the bank's authorized personnel ....… The information presented above by the customer is in agreement with ou
nt with our records. Although we have not conducted a comprehensive, detailed search of our records, no other deposit or loan accounts have come to our attention except as noted below.
CHAPTER 8: AUDIT OF CASH
Computation of Petty Cash Accounted and Petty Cash Accountabilities

Petty cash accounted:
Coins and currencies (excluding the amount of bday contributions found empty) ₱ xx,xxx
Unexpended employees contributions except for death/retiring employees (eg. Contributions for Xmas/bday party, etc.)* xx,xxx
Cash collections of accounts receivable or sales* xx,xxx
Unclaimed salary* xx,xxx
Checks for deposits*** xx,xxx
Stale checks xx,xxx
Post-dated checks (check dated after reporting AND cash count date) xx,xxx
Unreplenished vouchers (expenses, IOUs that are taken from the PCF)** xx,xxx xx,xxx
PCF ledger balance xx,xxx
Petty cash impurities***:
(1) Bills and coins and customers' checks from the cashier's collections (should've been in the general cash) xx,xxx
(2) Checks issued by the client in payment of utility bills (should have been delivered to payees) xx,xxx
✘ EXCEPT: Checks issued to the client in payment of personal advances (should have been in the general cash)
Unexpended employees contributions (eg. Contributions for Xmas/bday party, etc.)* xx,xxx
Cash collections of accounts receivable or sales (in cash or in check)* xx,xxx
Unclaimed salary* xx,xxx
Stale checks xx,xxx
Company's check in payment of a liability (e.g. utilities) if among the checks for deposits. xx,xxx xx,xxx
Cash (shortage)/overage ₱ xx,xxx
* Should be included in the accounted only when it is intact (envelope is still closed on the cash count date). Should be included in the accountabilities whether intact or not.
** Unused stamps are not part of the unreimbursed vouchers, if there is already a postage payment in the unreimbursed vouchers.
*** Examples of checks:

1.) Employees' checks (good, NSF, PDC) in settlement of cash advanced from the petty cash fund;
→ part of accounted but not part of accountabilities. These are accomodated checks (checks cash out from the fund).
→ if silent, a check in which the payee is to "Cash" is assumed accomodated check.
2.) Check of the company as a replenishment of PCF (replenishment check);
3.) Check of the company payable to the petty cash custodian representing his/her salary.
*** Examples of checks for deposits that are part of the petty cash impurities and if included in the petty cash accounted, must also be included in the accountabilities:
1.) Customer's checks - these are checks in the name of the client company and the maker is a customer. These represent collection of accounts receivable from a customer.
2.) Company's check in payment of a liability (e.g. utilities)
Computation of adjusted PCF balance:

Coins and currencies (excluding collections, unexpended employees contribution, and unclaimed salary) ₱ xx,xxx
Add: Expenses paid out of the PCF after reporting date xx,xxx
Add: Check of the company in the name of petty cash custodian (as a replenishment check or salary of custodian) xx,xxx
Add: Employees' check (good check only, exclude NSF check) xx,xxx
Adjusted PCF balance ₱ xx,xxx
Illustration 1: One-month Bank Reconciliation

On October 31, 2018, the bank statement for the checking account Driftwood Company shows a balance of P126,300, while the companys records show a balance of P123,310. Information that might be useful in prep
a) Outstanding checks are P14,300 which includes a certified check for P22,000.

b) The October 31 cash receipts of P7,850 are not deposited in the bank until November 2.
c) One check written in payment of utilities for P1,370 is correctly recorded by the bank but is recorded by Driftwood as a disbursement of
P1,730.
d) In accordance with prior authorization, the bank debited P6,500 directly from the checking account as payment of interest amounting to P500 and the principal amounting to P6,000. Driftwood has not yet recorde
e)
f) Bank service charges of P240 are listed on the bank statement.
A deposit of P5,670 is recorded by the bank on October 31, but it did not belong to Driftwood. The deposit should have been made to the checking account of Hollybuster Company, a separate company.
g) The bank statement includes a charge of P750 for an NSF check. The check is returned with the bank statement and the company will seek payment from the customer.
Required:
1 Prepare a bank reconciliation, using the adjusted balance method for the month of October.
2 Prepare the necessary adjusting journal entries.
Illustration 2: One-month Bank Reconciliation

You have gathered the following data in the preparation of bank
reconciliation on December 31, 2018 for Armelia Company:
a)
b) Balance checks,
Outstanding per bankP300,000.
statement, P2,000,000. Balance per book, P1,350,000.
Deposit in transit, P237,500.
Customer's NSF check charged back by bank, P25,000.
Check of Joy Company charged by the bank against Armelia account,
P75,000.
i) Customer's note collected by bank in favor of Armelia Company.
Face amo 200,000
Interest 20 000
Total 220,000
Less: Serof P50,000 incorrectly
Deposit 2,500 recorded 217,500
by bank as, P5,000.
Erroneous debit memo of December 28, to charge Armelia account with settlement of bank loan, P100,000.
1) Deposit of Joy Company credited to Armelia account, P150,000.
Required:
1 Prepare bank reconciliation as of December 31, 2018?
2 Prepare adjusting journal entries except for the amortization of
discount on loans payable.
Illustration 1: Computation of deposit in transit

The
D. following
Deposit indata are January
transit, available31,
forP200,000
the Cash in Bank of Ellen Company for February of the current year:
E. F. Customer's check representing receipts in January amounting to P21,000 was erroneously recorded by the company as P12,000.
Checkcompany
erroneously in January
recorded by amounting
the company to as
P2,000 was
P20,000.
Deposit acknowledged by the bank in February, P150,000. Erroneous bank charge in January, P13,000.
eful in preparing a bank reconciliation is as follows:
yet recorded the direct withdrawal.

PROBLEM 25:
The cash account in the ledger of Ilang-llang Company had a balance of P105,600 at December PROBLEM 25:
31, 2020. An examination of the account, however, disclosed the following: Unadjusted cash balanc
1. January 5 collecti
1) The sales book was left open up to January 5, 2021, and cash sales totaling P15,000 2. Undelivered che
were considered as sales in December. 3. Post-dated custo
4. NSF customer co
2) Checks of P9,300 in payment of liabilities were prepared before December 31, 2020, 5. Cash earmarked
recorded in the books, but not mailed or delivered to payees Adjusted cash balance,
3) Post-dated customer collection checks totaling P7,800 are being held by the cashier as
part of cash. The company's experience shows that post-dated checks are eventually
realized.
4) Customer's check for PI,500 deposited with but returned by bank, "NSF", on December
27, 2020. Return was not recorded in the books.
5) The cash account includes P40,000 earmarked for the purchase of a mini-computer
which will soon be delivered.
The cash balance to be shown on the balance sheet on December 31, 2020 should be:
a. P105,600 c. P58,400
b. P50,600 d. P60,500
PROBLEM 26:
In connection with your audit of BIG BROTHER CORP. for the year ended December 31, 2020, PROBLEM 26:
you gathered the following information:
Current account at
Current account at Bank of the Philippine Islands 6,000,000 Current account at
Current account at Equitable PCI Bank (300,000) Payroll account
Payroll account 1,500,000 Foreign bank accou
Foreign bank account — restricted (in USD) ** 60,000 Postage stamps
Postage stamps 3,000 Employee's post da
Employee's post dated check 12,000 IOU from a key offi
IOU from a key officer 30,000 Credit memo from
Credit memo from a vendor for a purchase return 60,000 Traveler's check
Traveler's check 150,000 Customer's not-suffi
Customer's not-sufficient-funds check 45,000 Money orders
Money orders 90,000 Petty cash fund (P1
Petty cash fund (P12,000 in currency and expense vouchers for P18,000) 30,000 Treasury bills, due
Treasury bills, due 3/31/21 (purchased 12/31/20) 600,000 Treasury bills, due
Treasury bills, due 1/31/21 (purchased 1/1/20) 900,000 Change fund
Change fund 10,000 Bond sinking fund
Bond sinking fund 1,000,000
**current exchange rate as of December 31, 2020 is at P50 for every USDI.
Requirements:
1. What is the total cash and cash equivalent to be reported by the company in its
31, 2020 balance sheet?
a. 9,262,000 c. 8,362,000
b. 8,380,000 d. 8,122,000
2. How much from the list above should be presented as part of Noncurrent assets?
a. 1,000,000 c. 4,900,000
b. 4,000,000 d. 5,500,000
PROBLEM 28:
The Silver Company's internal control over its cash transaction is very weak. The company's PROBLEM 28:
cash position at December 31, 2020 were as follows: Unadj. Balance per
add: Deposit in Tra
The cash book showed a balance of P15,000, which included cash on hand. A credit of P150 on less: Outstanding c
the bank's records did not appear on the company's books. The bank statement showed a Bank Errors:
balance of P12,300; and the outstanding checks were: 0100 — P120; 0201 P100; 0300 - P230; 4. Adjusted Balance p
1501 - P110; 1510 - P140; and 1515 - P150.
Unadj. Balance per
The cashier removed all of the cash on hand in excess of P3,000 and then prepared the add: Credit Memo
following reconciliation: less: Debit Memo
Unadjusted balanc
Balance per books, Dec. 31, 2020 ₱15,000
add: Outstanding checks: Correct cash balanc
No. 1501 110 Balance per book
1510 140 1. Cash shortage
1515 150 300
Total 15,300 2. Accountability
Deduct: Cash on hand 3,000
Balance per bank, Dec. 31 12,300 Undeposited collec
Deduct: Unrecorded credit 150 Shortage
True cash, Dec. 31, 2020 12,150 Accountability for
1. What is the cash shortage? 3. Adjusted cash in ban

a. 300 c. 500
b. 400 d. 700 Correct cash balanc
less: Cash on hand
2. A correct reconciliation will show that the cashier's accountability for cash on hand is: Cash in bank (only)
a. 3,300 c. 3,500
b. 3,400 d, 3,700
3. The adjusted cash in bank excluding cash on hand as of December 31, 2020 is:
a. 11,300 c. 11,600
b. 11,450 d. 11,850

4. The adjusted cash balance to be reported in the statement of Financial Position as of
December 31, 2020:
a. 14,300 c. 14,600
b. 14,450 d. 14,850
PROBLEM 30:
In the course of our audit of Volumatic Inc.'s cash in bank for the year ended December 31, Solution Problem 30:
2020, you ascertained the following information: PROOF OF CASH
For the month ended D
November 30 December 31
Cash per books 82,350 201,425 Unadjusted balance pe
Cash per bank statements 535,410 689,086 DIT (Undeposited collec
Undeposited collections 41,005 64,400 Nov
Outstanding checks 138,590 150,560 Dec
Bank service charges 3,600 3,000 OC:
Insufficient fund check 41,250 Nov
Company's notes receivable Dec
collected by bank 359,075 404,500 Adjusted balance per b
The bank statement and the company's cash records show the following totals:
Unadjusted balance pe
Checks and debit memos per bank statement 1,091,865 CM for note collected:
Cash receipts per cash records ? Nov.
Cash disbursements per cash records ? Dec.
Deposits and credit memos per bank statement 1,245,540 DM for bank service ch
Nov.
The insufficient fund check was redeposited in the same month. No entries are made to Dec.
take up the return and redeposit. DM for insufficient fund
Nov.
Requirements: Dec.
1. What is the unadjusted book receipts in December? Adjusted balance per b
a. 1,227,685 c. 1,160,660
b. 1,182,260 d. 823,185 1
The following are
2. What is the unadjusted book disbursements in December?

a. 1,059,585 c. 1,063,785
b. 1,063,185 d. 1,066,185
3. What is th adjusted book balance on November 30?

a. 434,825 c. 441,425
b. 437,825 d. 445,025
4. The adjusted bank receipts in December should be:
a. 1,268,935 c. 1,265,335
b. 1,268,337 d. 1,245,540
5. The adjusted bank disbursements in December should be:

a. 1,105,035 c. 1,097,835
b. 1,103,835 d. 1,091,865
6. What is the adjusted book balance on December 31?

a. 561, 075 c. 605,325
b. 602,925 d. 644,175
PROBLEM 33: Solution Problem 30:

The following information was obtained in connection with the audit of SOLEDAD COMPANY’s PROOF OF CASH
cash account as of December 31, 2020. For the month ended D
Outstanding checks, 11/30/20 16,250 Unadjusted balance pe

Outstanding checks, 12/31/20 12,500 DIT:
Deposit in transit, 11/30/20 12,500 Nov
Cash balance per general ledger 12/31/20 37,500 Dec
Actual company collections from its customers during December 152,500 OC:
Company checks paid by bank in December 130,000 Nov
Bank service charges recorded on company books in December 2,500 Dec
Bank service charges per December bank statement 3,250 Bank errors:
Deposits credited by bank during December 145,000 Nov
November bank service charges recorded on company books in December 1,500 Dec
Adjusted balance per b
The cash receipts book of December is underfooted by P2,500. + Book Error
2,500
The bank erroneously charged the company’s account for a P3,750 check of another Unadjusted balance pe
depositor. This bank error was corrected in January 2021. + Bank Error 3,750 CM for note collected:
Nov.
Requirements: Dec.
1. How much is the deposit in transit on December 31, 2020? DM for bank service ch
a. 5,000 c. 22,500 Nov.
b. 20,000 d. 17,500 Dec.
DM for insufficient fund
2. The total unrecorded bank service charge as of December 31, 2020? Nov.
a. 150,000 c. 1,750 Dec.
b. 2,250 d. 4,250 Book errors (underfoot
Nov.
3. What is the total book receipts in December? Dec.
a. 150,000 c. 155,000 Adjusted balance per b
b. 123,000 d. 147,500
4. What is the total amount of company checks issued in December? Company checks pa
a. 130,000 c. 133,75 Bank debits are no
b. 123,000 d. 126,250
Deposits credited b
5. What is the total book disbursements in December?
a. 123,750 c. 126,250 Bank service charge
b. 128,500 d. 128,750 November BSC rec
Recorded BSC in De
6. What is the book balance on November 30, 2020? December BSC reco
a. 16,250 c. 37,500 Unrecorded bank s
b. 21,250 d. 35,000
December BSC reco
7. What is the bank balance on November 30, 2020? November BSC rec
a. 23,000 c. 43,500 Unrecorded bank s
b. 18,500 d. 16,250 Bank service charge
8. What is the total bank receipts in December?

a. 120,000 c. 145,000
b. 140,000 d. 150,000
9. What is the total bank disbursements in December?

a. 154,500 c. 129,500
b. 132,500 d. 137,000
10. What is the bank balance on December 31, 2020?

a. 21,500 c. 31,000
b. 26,500 d. 33,250
PROBLEM 25:
Unadjusted cash balance 105,600
1. January 5 collections recorded in December (after cut-off) (15,000)
2. Undelivered check disbursements 9,300
3. Post-dated customer check collection (7,800)
4. NSF customer collection check (1,500)
5. Cash earmarked for noncurrent assets (40,000)
Adjusted cash balance, Dec. 31, 2020 50,600
PROBLEM 26:
CASH & CE NONCURRENT
Current account at Bank of the Philippine Isla 6,000,000
Current account at Equitable PCI Bank CURRENT LIABILITY
Payroll account 1,500,000
Foreign bank account — restricted (in USD) 3,000,000 if unrestricted, CASH EQUIVALENTS
Postage stamps PREPAID EXPENSES
Employee's post dated check OTHER RECEIVABLES
IOU from a key officer OTHER RECEIVABLES
Credit memo from a vendor since "Credit Memo", Debit to ACCOUNTS PAY
Traveler's check 150,000
Customer's not-sufficient-funds check ACCOUNTS RECEIVABLE
Money orders 90,000
Petty cash fund (P12,000 in currency and exp 12,000 ₱18,000 is EXPENSE
Treasury bills, due 3/31/21 600,000
Treasury bills, due 1/31/21 CURRENT INVESTMENT
Change fund 10,000
Bond sinking fund 1,000,000 if silent, NONCURRENT ASSET
8,362,000 4,000,000
PROBLEM 28:
Unadj. Balance per bank 12,300
add: Deposit in Transit 3,000 Cash on hand is DIT under "Imprest System".
less: Outstanding checks 850
Bank Errors: 0
Adjusted Balance per bank 14,450 correct cash balance per audit kasi may mga supporting documen
Unadj. Balance per book 15,000

add: Credit Memo 150
less: Debit Memo 0
Unadjusted balance per book 15,150 prepared only by cashier, not reliable, therefore, unadjusted
Correct cash balance per audit 14,450

Balance per book 15,150
Cash shortage (700)
2. Accountability
Undeposited collection 3,000

Shortage 700
Accountability for cash on hand 3,700
3. Adjusted cash in bank
Correct cash balance per audit 14,450

less: Cash on hand 3,000
Cash in bank (only) 11,450
Solution Problem 30:
PROOF OF CASH
For the month ended Dec. 31, 2020
Nov Bank Credits Bank Debits Dec
Unadjusted balance per bank 535,410 1,245,540 1,091,865 689,086
DIT (Undeposited collections):
Nov 41,005 (41,005)
Dec 64,400 64,400
Nov (138,590) (138,590)

Dec 150,560 (150,560)
Adjusted balance per bank 437,825 1,268,935 1,103,835 602,926
Nov Book Debits Book Credits Dec

Unadjusted balance per book 82,350 1,182,260 1,063,185 201,425
CM for note collected:
Nov. 359,075 (359,075)
Dec. 404,500 404,500
DM for bank service charge:
Nov. (3,600) (3,600)
Dec. 3,000 (3,000)
DM for insufficient fund:
Nov.
Dec. 41,250 41,250
Adjusted balance per book 437,825 1,268,935 1,103,835 602,925
1
The following are not recorded:
To record return of NSF check in Dec:
Accounds receivable 41,250
Cash in bank 41,250 → as Book Credit
To record redeposit of NSF check Dec.:

Cash in bank 41,250 → as Book Debit
Accounts Receivable 41,250
Solution Problem 30:
PROOF OF CASH
For the month ended Dec. 31, 2020
Nov Bank Credits Bank Debits Dec
Unadjusted balance per bank 18,500 145,000 137,000 26,500
Nov 12,500 (12,500)

Dec 20,000 20,000
Nov (16,250) (16,250)

Dec 12,500 (12,500)
Bank errors:
Nov
Dec (3,750) 3,750
Adjusted balance per bank 14,750 152,500 129,500 37,750
Nov Book Debits Book Credits Dec

Unadjusted balance per book 16,250 150,000 128,750 37,500
Nov.
Dec.
Nov. (1,500) (1,500)
Dec. 2,250 (2,250)
DM for insufficient fund:
Nov.
Dec.
Book errors (underfooted):
Nov.
Dec. 2,500 2,500
Adjusted balance per book 14,750 152,500 129,500 37,750
Company checks paid by bank in December is bank debits, but, bank debits are not just checks.
Bank debits are not just company checks.
Deposits credited by bank are all bank credit.
Bank service charge recorded in the company's books in Dec. 2,500 Company's checks paid - per bank
November BSC recorded in December (1,500) November OC recorded in December
Recorded BSC in December 1,000 Checks paid during December
December BSC recorded - per bank bank statement (3,250) December OC
Unrecorded bank service charge (2,250) Company checks issued - per book
December BSC recorded - per bank bank statement 3,250

November BSC recorded in December 1,500
Unrecorded bank service charge (2,250)
Bank service charge recorded in the company's books in Dec. 2,500
NT LIABILITY
stricted, CASH EQUIVALENTS

ID EXPENSES
RECEIVABLES
RECEIVABLES
Credit Memo", Debit to ACCOUNTS PAYABLE
UNTS RECEIVABLE
0 is EXPENSE
NT INVESTMENT
t, NONCURRENT ASSET
r "Imprest System".
audit kasi may mga supporting documents yung mga bank reconciling items.
not reliable, therefore, unadjusted

1
mpany's checks paid - per bank 130,000
vember OC recorded in December (16,250)
cks paid during December 113,750
12,500
mpany checks issued - per book 126,250
AUDIT OF CASH ASSIGNMENT
Problem 1 Solution 1:
Easy Five Minutes Company provided the following account balances on December 31, 2020:
Cash in bank, net of bank overdraft of 100,000 in another bank 4,000,000

Cash set aside by the Board of Directors for purchase of a plant site 2,000,000
Cash withheld from wages for income tax of employees 17,000
General cash 500,000
Cash in money market placement 300,000
Treasury bills purchased on November 1,2020 maturing January 31, 2021 2,500,000
Treasury bills purchased December 1, 2020 maturing March 31, 2021 2,000,000
Investment in equity (preference shares) 400,000
Cash in Sinking Fund set aside for bond payable due on June 30, 2021 1,000,000
Postal Money Order 200,000
Postage Stamp 100,000
Cash in bank included a 500,000 compensating balance against short-term borrowing. The
compensating balance is not legally restricted as to the withdrawal. General cash includes a
check written by customer dated March 31, 2020 amounting to 200,000. On December 27,
2020, the entity delivered and recorded a check dated January 2, 2021 to a supplier amounting
to 340,000. Adjusting entries:
1. What amount should be reported as part of cash and cash equivalent on
December 31, 2020? ₱8,757,000.
Assume that the petty cash fund was originally established at 10,000 on December 1, 2020. On Currency
December 31, no replenishment of the petty cash fund is made. A count and review of the Petty cash vouche
fund revealed the following composition: Replenishment ch
Petty cash accoun
Bills and Coins 2,200 Petty cash fund pe
Petty Cash Vouchers for Cash shortage
Transportation 1,500
Office Supplies 2,000
An employee advance 2,000
Representation 120
A check drawn by the company payable to the order of fund custodian 1,000
An employees check, returned by bank, stamped NSF 500
Several employees cash gift to departing employees 590
Determine the cash shortage. ₱1,180.

PCF per accountab
Replenishment
PCF balance, Dec.
You obtained the following information on the current account of DEL Company during your PER BOOK
examination of its financial statements for the year ended December 31, 2020.
Unadjusted balanc
The bank statement on November 30,2020 showed a balance of 303,000. Among the bank CM for note collec
credits in November was customer’s note for 120,000 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 1,400 and a 45,000 check which was charged by the bank DM for bank servi
in error against DEL Company account. Also in November, you ascertained that there were
deposit in transit amounting to 70,000 and outstanding checks totaling 160,000.
DM for NSF check
The bank statement for the month of December showed total credits of 436,000 and total
charges of 274,000. The company’ books for December showed a total debits of 735,600, total
credits of 407,200 and a balance of 467,800. Bank debit memo for December were: No. 121 for Promissory note
service charges, P1,900 and No. 122 on a customer’s returned checked marked “ Refer to Book error (overst
Drawer” for 24,000. Adjusted balance
On December 31, 2020, the company placed with the bank a customer’s promissory note with a PER BANK STATEM
face value of 160,000 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 2021. Unadjusted balanc
Bank error (under
A check for 3,960 was recorded in the company cash payments books in December as 39,600. Deposit in transit:
Determine the following:

1. Deposit in Transit, December 31, 2020. ₱134,600. Outstanding check
2. Outstanding Checks, December 31, 2020. ₱282,060.

Adjusted balance
3. Adjusted Total Receipts for the Month of December. ₱455,600.
4. Adjusted Total Disbursements for the Month of December. ₱396,060.
5. Adjusted Cash Balance, November 30, 2020. ₱258,000.
6. Adjusted Cash Balance, December 31, 2020. ₱317,540.

Problem 4
The Mayap Company bookkeeper prepares the following bank reconciliation as presented below. PER BOOK
November 30, 2020 Unadjusted balanc

CM for note collec
Balance per bank statement ₱28,500
Cash on hand 500
Total 29,000 Unadjusted cash i
Outstanding Checks
No. 2520 2,200 PER BANK STATEM
2521 1,400
2522 1,900 (3,500) Unadjusted balanc
Erroneous Bank Charge 5,000 Deposit in transit:
Erroneous Bank Credit (500)
Book Balance ₱30,000
Outstanding check
December 31, 2020
Balance per bank statement ₱135,000 Bank error for erro

Cash on hand 6,300
Total 141,300
Outstanding Checks Bank error for erro
No. 2674 51,000
No. 2675 10,300
No. 2676 5,000 (41,300) Adjusted balance
Erroneous bank charge 4,000
Erroneous bank credit (1,600) Shortage/(Overag
Book Balance ₱102,400
Computations of D
The Cash in Bank account in the general ledger shows the following debits and credits during
December:
Cash in Bank
Dec. 1 Balance 30,000 Dec 1-31 Checks Issued 115,600
Dec. 1-31 Received from Dec. 31 Balance 102,400
customers 188,000
Total 218,000 Total 218,000
The following transactions were taken from the bank statement for the month of December 2020:
Unaccounted cash
Balance December 1, 2020 22,500
Total Deposits 178,900
The total deposits per bank statement include:
a. Collection of notes receivable 5,000
b. Correction of November erroneous bank charge 5,000
c. December 10 deposit of Mapay Company
credited in error to Mayap 600 10,600
Total Checks 61,200
The total checks per bank statement include:
a. Correction of November bank credit 500
b. December check of Map Co. charged in error
to Mayap 4,000 4,500
Cash on hand per count in the morning of January 1, 2021 amounted to 3,000. Unaccounted cash
1.What is the adjusted cash balance on November 30, 2020? ₱22,000.
2.What is the total cash shortage as of December 31, 2020? ₱25,100.
3.What is the adjusted cash balance on December 31, 2020? ₱80,300.
November shorta
Solution 1:
Cash in bank 4,100,000
Cash withheld from wages of employees 17,000
General cash (₱300K less ₱200K stale check) 300,000
Cash in Money Market Placement 300,000
Treasury Bills purchased Nov. 1, 2020 2,500,000
Cash in sinking fund (for current purposes) 1,000,000
Postal money order 200,000
Company's Postdated check 340,000
Total Cash and Cash Equivalents 8,757,000
Bank overdraft ₱100,000 → offsetting is required if same bank (right to offset).

Cash set aside by BoD for noncurrent purposes → noncurrent investment
Investment in equity → long-term investments
Cash in sinking fund → GR: Noncurrent asset.
Postage stamp → Prepaid supplies (confimation letter).
Compensation balance → cash equivalents if not legally restricted.
Stale check → if not encashed within 6 months.
Adjusting entries:
Accounts receivable 200,000
Cash 200,000
Cash 340,000
Accounts Payable / Expense 340,000
Solution 2:
Currency 2,200
Petty cash vouchers 5,620
Replenishment check 1,000
Petty cash accounted 8,820
Petty cash fund per ledger (custodian's accountability) (10,000)
Cash shortage (1,180)
Adjusting entries:
Transportation 1,500
Office supplies 2,000
Representation expense 120
Cash short/over 1,180
PCF per accountability 10,000
Replenishment (6,800)
PCF balance, Dec. 31 3,200
Solution 3:
PER BOOK
Nov. 30 Book debit Book credit
Unadjusted balance per book 139,400 735,600 407,200
November 120,000 (120,000)
December
November (1,400) (1,400)
December 1,900
DM for NSF checks:
November
December 24,000
Promissory note (160,000)
Book error (overstatement of disbursements) (35,640)
Adjusted balance per book 258,000 455,600 396,060
PER BANK STATEMENT

Nov. 30 Bank credit Bank debit
Unadjusted balance per bank 303,000 436,000 274,000
Bank error (understatement of bank receipts) 45,000 (45,000)
Deposit in transit:
November 70,000 (70,000)
December 134,600
Outstanding checks:
November (160,000) (160,000)
December 282,060
Adjusted balance per bank 258,000 455,600 396,060
PER BOOK
Nov. 30 Book debit Book credit
Unadjusted balance per book 28,000 188,000 115,600
November
December 5,000
Unadjusted cash in bank balance per book 28,000 193,000 115,600
PER BANK STATEMENT

Nov. 30 Bank credit Bank debit
Unadjusted balance per bank 22,500 178,900 61,200
Deposit in transit:
November 500 (500)
December 3,000
Outstanding checks:
November (5,500) (5,500)
December
Bank error for erroneous bank charge:
November 5,000 (5,000)
December (4,000)
Bank error for erroneous bank credit:
November (500) (500)
December (600)
Adjusted balance per bank 22,000 175,800 51,200
Shortage/(Overage) 6,000 17,200 64,400
Computations of December Cash Shortage:

Correct cash balance, Dec. 1 28,000
Collections from customers 188,000
Checks issued (115,600)
Collection of notes receivable 5,000
Correct cash balance, Dec. 31 105,400
Adjusted cash balance, Dec. 31 80,300
Cash shortage, Dec. 31 25,100
another solution: 25,100
Unaccounted cash deposit or on hand:

Deposit In Transit, Nov. 30 500
add: Cash receipts deposited during Dec:
Book debits 188,000
less: Nov. CM 0 188,000
Total deposits to be acknowledged by bank 188,500
less: Deposits acknowledged by bank during December:
Bank credits 178,900
less: Dec. CM (5,000)
less: Bank errors (5,600) 168,300
Deposit in transit, Dec. 31 20,200
Cash per count (3,000)
Unaccounted cash deposit or on hand 17,200
Unaccounted cash for expenses:

Outstanding checks, Nov. 30 5,500
add: Checks drawn by depositor during December
Book credits 115,600
less: Nov. DM 0 115,600
Total checks to be issued by bank during December 121,100
less: Checks paid by bank in December
Bank debits 61,200
less: Dec. DM 0
less: Bank errors (4,500) 56,700
Outstanding checks, Dec. 31 64,400
Per record (66,300)
Unaccounted cash for expenses (1,900)
November shortage:
Cash per bank reconciliation - November 30 22,000
Correct cash balance if November footing is correct 28,000
November Cash shortage (6,000)
Dec. 31
467,800
(1,900)
(24,000)
(160,000)
35,640
317,540
Dec. 31
465,000
134,600
(282,060)
317,540
Dec. 31
100,400
5,000
105,400
Dec. 31
140,200
3,000 → Bank statement (₱3,000) is more reliable than the Bank Reconciliation (₱6,300).
(66,300)
4,000
(600) → Bank statement (₱600) is more reliable than the Bank Reconciliation (₱1,600).
80,300
25,100
CHAPTER 09 - SUBSTANTIVE TEST OF RECEIVABLE
CHAPTER 10 - LOANS AND RECEIVABLE
ACCOUNTS RECEIVABLE
ILLUSTRATION: Freight Terms
Assume the following data for Nafoolish Company:
List price of merchandise sold ₱200,000

Trade discount 10, 20
Sales discount 3/10, 2/15, n/30
Invoice price of the merchandise returned on Jan. 8 ₱10,000
Data of sale January 5, 2018
Date collected January 20, 2018
Freight cost ₱2,000
Assume the following freight terms:

CASE No. 1: FOB destination point, freight prepaid
CASE No. 2: FOB destination point, freight collect
CASE No. 3: FOB shipping point, freight collect
CASE No. 4: FOB shipping point, freight prepaid
Required: Using the above independent cases:

1) Prepare the journal entries for the freight both on the part of the buyer and seller.
2) Compute for the net cash collection on January 20, 2018.
SOLUTION:
Case No. 1: FOB destination, freight prepaid
Requirement No. 1
SELLER BUYER
Accounts receivable 144,000 Inventory (Purchases)
Sales 144,000 Accounts payable
Freight out 2,000 No journal entry

Cash 2,000
Sales returns 10,000 Accounts payable

Accounts receivable 10,000 Purchase returns
Cash 131,320 Accounts payable

Sales discount 2,680 Purchase discount
Accounts receivable 134,000 Cash
Requirement No. 2
Invoice price of merchandise sold or purchased
less: Invoice price of merchandise returned
Net invoice price
Less: Sales or Purchase discount (% x Net invoice price above)
(if collection or payment is within the discount period)
Net collection or payment before freight
Less: Freight paid by the buyer - (if the term is FOB Destination, freight collect)
Add: Freight paid by seller - (if the term is FOB shipping point, freight prepaid)
Total Net Cash Collection or Payment
Case No. 2: FOB destination, freight collect

Requirement No. 1
SELLER BUYER
Freight out 2,000 Accounts payable



Requirement No. 2
Net invoice price
Case No. 3: FOB shipping point, freight collect

Requirement No. 1
SELLER BUYER
No journal entry Freight in

Cash


Requirement No. 2
Net invoice price
Case No. 3: FOB shipping point, freight prepaid

Requirement No. 1
SELLER BUYER
Accounts receivable 2,000 Freight in



Requirement No. 2
Net invoice price
ILLUSTRATION: Sales Discount (PAS 18 vs. PFRS 15)

Judycel Company originated a receivable of P100,000 On December 25, 2018. It is accounting its sales under the gross metho
estimates that only 50% cash discounts will be availed by the customer. 60% of the customer paid on January 4, 2019. The ba
Required: Prepare the journal entry to record the sale, allowance for sales discount (if any) and cash discount availed by the
SOLUTION: (PAS 18) SOLUTION: (PFRS 15)

1.) Accounts receivable 100,000 1.) Accounts receivable
Sales 100,000 Sales
2.) Sales discount 1,000 2.) No journal entry

Allowance for sales discount 1,000
3.) Cash 58,800 3.) Cash (₱60,000 x 98%)

Allowance for sales discount 1,000 Sales
Sales discount 200 Accounts receivable
Required sales discount 1,200

Debit balance 1,000
Debit Adjustment 200
4.) Cash 40,000 4.) Cash

Accounts receivable 40,000 Accounts receivable
Illustration: PFRS 15 - Sales Discount (Millan 2019)

An entity sells inventory with a list price of ₱10,000 on account under credit terms of 20%, 10%, 2/10, n/30.
The entity estimates that only 80% of the cash discount will be taken and concludes that it is highly probable
that a significant reversal in the cumulative amount of revenue recognized will not occur as the uncertainty
is resolved.
1.) Sale on account

Sales 7,200 Sales
Sales discount 115.20

Allowance for sales discount 115.20
2.) Portion collected within discount period Assume that 80% of the discount is actu
Cash 5,645 Cash
Allowance for sales discount 115 Accounts receivable
3.) Portion collected beyond the discount period Portion collected beyond the discount p
Cash 1,440 Cash
Accounts receivable, end 7,200 Accounts receivable, end

less: Allowance for sales discount (115) less: Allowance for sales discount
Net realizable value 7,085 Net realizable value
Sales 7,200 Sales

less: Sales discount (115) less: Sales discount
Net sales 7,085 Net sales
Assume that only 70% of the discount is

Cash
Accounts receivable
Accounts receivable
Sales
Sales
less: Sales discount
Required sales
Credit balance
Credit adjustments
Portion collected beyond the discount p

Cash
Accounts receivable
Illustration: PFRS 15 - Sales Discount Subsequent Measurement (Millan 2019)

An entity sells inventory with a list price of ₱10,000 on account under credit terms of 20%, 10%, 2/10, n/30. The entity estima
be taken and concludes that it is highly probable that a significant reversal in the cumulative amount of revenue recognized w
1.) Sale on account

Sales 7,200 Sales

Allowance for sales discount 115.20
The accounts receivable is not yet settled

and the entity changes its estimate of ca
2.) Adjusting entry
Accounts receivable
Sales
Required Sales
less: Debit balance
Increase in transaction price
ILLUSTRATION 1: Allowance for Sales Return (PAS 18 vs PFRS 15)

On December 31, 2018, Jimar Co. sold goods costing P100,000 and with sales price of P150,000 to Rex, Inc. on account. To in
right to return goods within 30 days upon purchase if the buyers are not satisfied with the goods. The company uses perpetu
Required: Provide all the necessary entries under PAS 18 and PFRS 15 assuming:
1) Jimar Co. can reliably estimate that 30% of the goods sold will be returned within the agreed period of time. On January
returned and the balance of receivable was collected.
2) Jimar Co. cannot reliably estimate future returns. On February 1, 2019, the customer did not return any of the goods.
SOLUTION:
Requirement No. 1 PAS 18 Requirement No. 1 PFRS 15
Dec. 31, 2018 Dec. 31, 2018
Sales 150,000 Sales
Cost of sales 100,000 Cost of sales

Merchandise inventory 100,000 Asset for right to recover product to
Merchandise inventory
Sales returns 45,000
Allowance for sales return 45,000
Jan. 5, 2019
Cash 82,500 Jan. 5, 2019
Sales returns 22,500 Cash
Allowance for sales return 45,000 Sales returns
Required return 67,500 Merchandise inventory

Debit balance 45,000 Cost of sales
Debit adjustment 22,500 Asset for right to recover produc
Requirement No. 2 PAS 18 Requirement No. 2 PFRS 15

Dec. 31, 2018 Dec. 31, 2018
No journal entry. No revenue is recognized because the company cannot Asset for right to recover product to
estimate reliably any future returns. Merchandise inventory
Feb. 1, 2019 (after the right of return period of 30 days) Feb. 1, 2019 (after the right of return pe
Sales 150,000 Sales
Cost of sales 100,000 Cost of sales
Merchandise inventory 100,000 Asset for right to recover produc
Note: Revenue is recognized since the time period for rejecting/accepting has lapsed. Note: Revenue is recognized since the time pe
ILLUSTRATION 2: Right of Return

PAP Company enters into 200 contracts with customers. Each contract includes the sale of one product for P15,000. Cash is r
entity's customary business practice is to allow a customer to return any unused product within 30 days and receive a full ref
Because the contract allows a customer to return the products, the consideration received from the customer is variable. To
entity will be entitled, the entity decides to use the expected value method and the entity estimates that 97 products will not
PPAP Company determines that although the returns are outside the entity's influence, it has significant experience in estima
In addition, the uncertainty will be resolved within a short time frame (i.e. the 30-day return period). Thus, PPAP Company co
reversal in the cumulative amount of revenue recognized will not occur as the uncertainty is resolved (i.e. over the return pe
PPAP Company estimates that the costs of recovering the products will be immaterial and expects that the returned product
In addition to the foregoing data, assume the following independent cases:

CASE NO. 1: The estimated 3% returned the goods.
CASE NO. 2: The estimated 3% did not return any goods.
CASE NO. 3: The return period has lapsed.
CASE NO. 4: The customer returned 5% of goods.
CASE NO. 5: The customer returned only 1% of the goods.
Required: Based on the foregoing data, prepare the journal entries in accordance with PFRS 15 assuming the company uses p
SOLUTION:
Accounts receivable / Contract asset 3,000,000
Sales (₱3M x 97%) 2,910,000
Refund liability (₱3M x 3%) 90,000
Cost of sales (₱1.2M x 97%) 1,164,000

Asset for right to recover product to be returned (1.2M x 3%) 36,000
Merchandise inventory 1,200,000
CASE NO. 1
Refund liability 90,000
Accounts receivable / Contract asset 90,000
Merchandise inventory 36,000

Asset for right to recover product to be returned 36,000
CASE NO. 2 & 3

Sales 90,000
Cost of sales 36,000

CASE NO. 4
Sales return 60,000
Cash or receivable (₱3M x 5%) 150,000
Merchandise inventory (₱1.2M x 5%) 60,000

CASE NO. 5
Sales 60,000
Cash or receivable (₱3M x 1%) 30,000
Merchandise inventory (₱1.2M x 1%) 12,000

Cost of sakes 24,000
ILLUSTRATION: Audit of A/R and related accounts

You are engaged to perform an audit of the accounts of the Marianne Co. for the year ended December 31, 2018 and have o
the company on December 30, 2018. Only merchandise shipped by the Marianne Co. to customer up to and including Decem
The inventory as determined by physical inventory count has been recorded on the books by the company's controller. No pe
sales are made on an FOB shipping point basis. You are to assume that all other data not presented herein are correct.
The following lists of sales invoices are entered in the sales books for the months of December 2018 and January 2019, respe
December 2018:
Cost of
Sales invoice Sales Invoice Merchandise Date
Amount Date Sold Shipped
A. 30,000 December 20 20,000 December 31, 2018
B. 20,000 December 31 8,000 November 8, 2018
C. 10,000 December 29 6,000 December 30, 2018
D. 40,000 December 31 24,000 January 4, 2019
E. 100,000 December 30 56,000 December 29, 2018 (shipped to consignee)
January 2019:
F. 60,000 December 20 40,000 December 30, 2018
G. 40,000 January 5 23,000 January 3, 2019
H. 80,000 January 4 55,000 December 31, 2018
Required:
Prepare the necessary adjusting entries on December 31, 2018 in connection with the foregoing data.
SOLUTION:
Use the following guide questions:
1. Was there a valid sale? Y Y
2. Was the sale recorded? Y no AJE N A/r | Sales
3. Were the inventories excluded in the count? Y no AJE N COGS | Invty
(Y - Yes; N - No)
A. YYN Cost of sales 20,000
Merchandise inventory, end 20,000
B. YYY No adjusting journal entry
C. YYY No adjusting journal entry
D. NYN Sales 40,000

E. NYY Sales 100,000

Merchandise inventory - end 56,000

F. YNY Accounts receivable 60,000

Sales 60,000
G. NNN No adjusting journal entry
F. YNN Accounts receivable 80,000

Sales 80,000

Merchandise inventory, end 55,000
LONG-TERM NOTES RECEIVABLE

INITIAL MEASUREMENT: LONG-TERM NOTES RECEIVABLE
A. Interest Bearing Notes Receivable - With Realistic/Reasonable Interest Rate
→ initially measured at fair value which is equal to its face value.
B. Interest Bearing Notes Receivable - With Unrealistic Interest Rate

→ are discounted using the imputed interest rate that approximates the market rate of interest for the same note.
→ unrealistic interest rates - interest bearing note with a nominal rate which is significantly different from prevailing int
→ Discount is same as unearned interest income/unearned finance charge. Discount is an addition (amortized as revenu
i. One time collection of the PV of Principal (Principal x PV of 1)

principal amount of the NR add: PV of interest payments (Interest x PV of OA)
PV of notes receivable
ii. Uniform collection of the Principal amount of Principal

the NR each year (collection made after 1 year) YEAR 1 10,000
YEAR 2 10,000
20,000
C. Non-Interest Bearing Notes Receivable / Zero-Interest Bearing

→ discounted to arrive at the fair value or the present value of future cash flows using the prevailing market rate of inte
i. Periodic payment (w/ available cash price) The PV of note is equal to cash price.
ii. One-time collection of principal (no available cash price) PV of note receivable (Face value x PV of 1)
iii. Uniform collection of principal annually

(no available cash price) PV of note receivable (Face value x PV of OA)
SUBSEQUENT MEASUREMENT: LONG-TERM NOTES RECEIVABLE

A. Interest Bearing Notes Receivable - With Realistic/Reasonable Interest Rate
→ at amortized cost, which is its face value.
B. Interest Bearing Notes Receivable - With Unrealistic Interest Rate & Non-Interest Bearing Notes Receivable / Zero-Inte
→ amortized cost, computed as follows:
Face amount xxx

add: Premium on notes receivable xxx
less: Discount on notes receivable (xxx)
less: Loss allowance (xxx)
Amortized cost xxx
ILLUSTRATION 1: Interest-Bearing Note with Realistic Interest Rate

On January 1, 2018, Florendo Co. sold a machine to Gregorio Co. In lieu of cash payment, Gregorio gave Florendo a 4-year, P1
to be paid annually on December 31. The machinery has a cost of P500,000 and accumulated depreciation as of January 1, 20
The 10% interest rate is a realistic rate of interest for a note of this type.
Required:
A. Compute for the following as of December 31, 2018:
1) Gain or loss on sale of machinery.
2) Interest income
3) Current portion of the Notes Receivable
4) Noncurrent portion of the Notes Receivable
B. Prepare all the necessary entries in 2018.
Requirement A.1.
PV of Note 100,000
add: Downpayment 0
Selling price 100,000
less: Carrying amount of machinery
Cost 500,000
less: Accumulated depreciation 350,000 150,000
Loss on sale (50,000)
Requirement A.2.
Intereset income (₱100,000 x 10%) = ₱10,000.
Requirement A.3.
Zero, since no principal amount is collectible within one year from the reporting date.
Requirement A.4.
The entire principal amount of notes receivable (P100,000) is treated as noncurrent portion since it is collectible beyond
Journal Entries:
Jan. 1, 2018
Note receivable 100,000
Accumulated depreciation 350,000
Loss on sale 50,000
Machinery 500,000
Dec. 31, 2018

Cash 10,000
Interest income 10,000
ILLUSTRATION 2: Interest-Bearing Note with Unrealistic Interest Rate, One-Time Collection of Principal
On January 1, 2018, Gregorio Co. sold a machine to Florendo Co. In lieu of cash payment, Florendo gave Gregorio a 4-year, P1
to be paid annually on December 31. The machinery has a cost of P500,000 and accumulated depreciation as of January 1, 20
The prevailing rate of interest for a note of this type is 16%. 10% vs. 16% = Unrealistic/Below market r
Required:
2) Interest income
Requirement A.1.
Face amount 100,000
PV of Note
PV of principal 0.5523 55,229
PV of interest 2.7982 27,982 83,211
Unearned interest income 16,789
PV of note 83,211
add: Downpayment 0
Cost 500,000
Requirement A.2.
Amortization Table
Date 10% Int. Col. 16% Int. Inc. Discount Amort. Present Value
Jan. 1, 2018 83,211
Dec. 31, 2018 10,000 13,314 (3,314) 86,525
Dec. 31, 2019 10,000 13,844 (3,844) 90,369
Dec. 31, 2020 10,000 14,459 (4,459) 94,828
Dec. 31, 2021 10,000 15,172 (5,172) 100,000
Requirement A.3.
Requirement A.4.
The entire principal amount of notes receivable (P86,525) is treated as noncurrent portion since it is collectible beyond o
Journal Entries:
Jan. 1, 2018
Loss on sale 66,789
Machinery 500,000
Dec. 31, 2018

Cash 10,000
ILLUSTRATION: Interest-Bearing Note with Unrealistic Interest Rate, One-Time Collection of Principal, Interest due at the b
On January 1, 20x1, Gregorio Co. sold a machine to Florendo Co. In lieu of cash payment, Florendo gave Gregorio a 3-year, P1
1, 20x4 but interest is due annually every January 1. The machinery has a cost of P2,000,000 and accumulated depreciation a
The prevailing rate of interest for a note of this type is 12%.
Required:
2) Interest income
Requirement A.1.
Face amount 1,000,000
PV of Note
PV of interest 2.4018 72,055 783,835
PV of note 783,835
add: Downpayment 0
Cost 2,000,000
less: Accumulated depreciation 950,000 1,050,000
Requirement A.2.
Amortization Table
Jan. 1, 20x1 783,835
Jan. 1, 20x2 30,000 94,060 (64,060) 847,895
Jan. 1, 20x3 30,000 101,747 (71,747) 919,643
Jan. 1, 20x4 30,000 110,357 (80,357) 1,000,000
Journal Entries:
Jan. 1, 20x1
Note receivable 1,000,000
Loss on sale 266,165
Machinery 2,000,000
Dec. 31, 20x1

Accrued interest receivable 30,000
Jan. 1, 20x2
Cash 30,000
ILLUSTRATION 3: Interest-Bearing Note with Unrealistic Interest Rate, One-Time Collection of Principal, Interest is payable
On January 1, 2018, Gregorio Co. sold a machine to Florendo Co. In lieu of cash payment, Florendo gave Gregorio a 4-year, P1
to be paid semi-annually every June 30 and December 31. The machinery has a cost of P500,000 and accumulated depreciati
The prevailing rate of interest for a note of this type is 16%.
Required:
2) Interest income.
3) Current portion of the Notes Receivable.
4) Noncurrent portion of the Notes Receivable.
Requirement A.1.
Face amount 100,000
PV of Note
PV of interest 5.7466 28,733 82,760
PV of note 82,760
add: Downpayment 0
Cost 500,000
Requirement A.2.
Amortization Table
Jan. 1, 2018 82,760
June 30, 2018 5,000 6,621 (1,621) 84,381
Dec. 31, 2018 5,000 6,750 (1,750) 86,131
June 30, 2019 5,000 6,891 (1,891) 88,022
Dec. 31, 2019 5,000 7,042 (2,042) 90,064
June 30, 2020 5,000 7,205 (2,205) 92,269
Dec. 31, 2020 5,000 7,381 (2,381) 94,650
June 30, 2021 5,000 7,572 (2,572) 97,222
Dec. 31, 2021 5,000 7,778 (2,778) 100,000
Requirement A.3.
Requirement A.4.
The entire principal amount of notes receivable (P86,131) is treated as noncurrent portion since it is collectible beyond o
Journal Entries:
Jan. 1, 2018
Loss on sale 67,240
Machinery 500,000
Jun. 30, 2018

Cash 5,000
Dec. 31, 2018

Cash 5,000

Illustration 4: Interest-bearing Note with Unrealistic Interest Rate, Uniform Collection of Principal
On January 1, 2018, Candido Co. sold a machine to Teofilo Co. In lieu of cash payment, Teofilo gave Candido a 4-year, P100,0
paid annually on December 31. The machinery has a cost of P500,000 and accumulated depreciation as of January 1, 2018 of
The prevailing rate of interest for a note of this type is 16% and the principal amount of the note is to be paid in four equal a
Required:
2) Interest income
Requirement A.1.
Date Principal 10% Int. Col. Total Collection PV of 1
Dec. 31, 2018 25,000 10,000 35,000 0.8621
Dec. 31, 2019 25,000 7,500 32,500 0.7432
Dec. 31, 2020 25,000 5,000 30,000 0.6407
Dec. 31, 2021 25,000 2,500 27,500 0.5523
100,000 Total Present Value
PV of note 88,733
add: Downpayment 0
Cost 500,000
Requirement A.2.
Amortization Table
Date 10% Int. Col. 16% Int. Inc. Discount Amort. Principal Col.
Jan. 1, 2018
Dec. 31, 2018 10,000 14,197 (4,197) 25,000
Dec. 31, 2019 7,500 10,869 (3,369) 25,000
Dec. 31, 2020 5,000 7,408 (2,408) 25,000
Dec. 31, 2021 2,500 3,793 (1,293) 25,000
Requirement A.3. & A.4.

Carrying amount of Notes receivable - Dec. 31, 2018
Nocurrent portion of notes receivable - Dec. 31, 2017 46,299 or
Current portion of notes receivable - Dec. 31, 2018 21,631 or
Journal Entries:
Jan. 1, 2018
Loss on sale 61,267
Machinery 500,000
Dec. 31, 2018

Cash 10,000
Cash 25,000
Notes receivable 25,000
Illustration 1: Noninterest-bearing Note, One-time Collection of Principal

On January 1, 2018, Rosenio Co. sold a machine to Rose Co. In lieu of cash payment, Rose gave Rosenio a 5-year, P500,000 no
and accumulated depreciation as of January 1, 2018 of P150,000. The note is a non-interest bearing note and the prevailing r
Required:
2) Interest income
Requirement A.1.
Face amount 500,000
PV of Note
PV of note 310,461
add: Downpayment 0
Cost 500,000
Requirement A.2.
Amortization Table
Date 10% Int. Inc. Unearned int. Present Value
Jan. 1, 2018 189,539 310,461
Dec. 31, 2018 31,046 158,493 341,507
Dec. 31, 2019 34,151 124,343 375,657
Dec. 31, 2020 37,566 86,777 413,223
Dec. 31, 2021 41,322 45,455 454,545
Dec. 31, 2022 45,455 0 500,000
Requirement A.3.
Requirement A.4.
The entire principal amount of notes receivable (P375,657) is treated as noncurrent portion since it is collectible beyond
Journal Entries:
Jan. 1, 2018
Loss on sale 39,539
Machinery 500,000
Dec. 31, 2018

Illustration: Effective Interest rate not given (Goal Seek/Interpolation)

Effective interest rate
Amortization Table
Date Int. Inc. Unearned int. Present Value
Jan. 1, 2018 189,539 310,461
Dec. 31, 2018 0 189,539 310,461
Dec. 31, 2019 0 189,539 310,461
Dec. 31, 2020 0 189,539 310,461
Dec. 31, 2021 0 189,539 310,461
Dec. 31, 2022 0 189,539 310,461
9% 0.6499 324,966
3.8897 0 324,966
10% 0.6209 310,461 310,461 14,505
3.7908 0 310,461 0
Effective interest rate 10.0000%
Illustration: Noninterest-bearing Note, Uniform Collection of Principal

On January 1, 2018, Ronaldo Co. sold a machine to Ron Co. In lieu of cash payment, Ron gave Ronaldo a 3-year, P600,000 not
accumulated depreciation as of January 1, 2018 of P150,000. The note is a non-interest bearing note and the prevailing rate o
principal amount of the note is to be paid in three equal annual installments of P200,000 every December 31.
Required:
2) Interest income.
3) Current portion of the Notes Receivable as of December 31, 2018.
4) Noncurrent portion of the Notes Receivable as of December 31, 2018.
B. Prepare all the necessary entries in 2018
Requirement A.1.
Face amount 600,000
PV of annual principal payment 2.3216 464,326
PV of note 464,326
add: Downpayment 0
Cost 500,000
Gain on Sale 114,326
Requirement A.2.
Amortization Table
Date Annual Col. 14% Int. Inc. Amortization Present Value
Jan. 1, 2018 464,326
Dec. 31, 2018 200,000 65,006 134,994 329,332
Dec. 31, 2019 200,000 46,106 153,894 175,439
Dec. 31, 2020 200,000 24,561 175,439 0
Requirement A.3. & A.4.

Carrying amount of Notes receivable - Dec. 31, 2018
Nocurrent portion of notes receivable - Dec. 31, 2017 175,439 or
Current portion of notes receivable - Dec. 31, 2018
Journal Entries:
Jan. 1, 2018
Machinery 500,000
Gain on sale 114,326
Dec. 31, 2018

Cash 200,000

ILLUSTRATION: Noninterest Bearing Note Periodic Payment and With Available Cash Price
On January 1, 2018, Jasmin Co. sold a machine to Tabs Co. In lieu of cash payment, Tabs gave Jasmin a 3-year, P300,000 note
accumulated depreciation as of January 1, 2018 of P200,000. The machinery has a cash price of P288,000. The note is a non-i
installments of P100,000 every December 31 beginning December 31, 2018.
Required:
2) Interest income
3) Current portion of the Notes Receivable as of December 31, 2018.
4) Noncurrent portion of the Notes Receivable as of December 31, 2018.
Requirement A.1.
Face amount 300,000
PV of note = Cash price 288,000
PV of note 288,000
add: Downpayment 0
Cost 500,000
Gain on Sale (12,000)
Requirement A.2.
Amortization Table
Date Notes Outstanding Fraction Allocation
Dec. 31, 2018 300,000 3/6 6,000
Dec. 31, 2019 200,000 2/6 4,000
Dec. 31, 2020 100,000 1/6 2,000
600,000 12,000
Requirement A.3.
Principal collectible in 2019 100,000
less: Unearned interest income 4,000
Current portion of Notes Receivable, Dec. 31, 2018 96,000
Requirement A.3.
Principal collectible in 2020 100,000
Noncurrent portion of Notes Receivable, Dec. 31, 2018 98,000
Journal Entries:
Jan. 1, 2018
Loss on sale 12,000
Machinery 500,000
Dec. 31, 2018

Cash 100,000
Illustration: Noninterest-bearing note - non-uniform cash flows (Millan 2019)

On January 1, 20x1, ABC Co. sold machinery costing ₱2,000,000 with accumulated depreciation of ₱1,100,000 in exchange fo
note receivable due as follows:
Date Amount of installment

Dec. 31, 20x1 600,000
Dec. 31, 20x2 400,000
Dec. 31, 20x3 200,000
1,200,000
The prevailing rate of interest for this type of note is 10%.
The present value of note is computed as follows:
Date Collections PV of 1 Present Value

Dec. 31, 20x1 600,000 0.9091 545,455
Dec. 31, 20x2 400,000 0.8264 330,579
Dec. 31, 20x3 200,000 0.7513 150,263
1,026,296
Pv of note 1,026,296
add: downpayment 0
Selling price 1,026,296
less: Carrying amount of machinery 900,000
Amortization Table
Date Collections 10% Int Income Amortization Present Value
Jan. 1, 20x1 1,026,296
Dec. 31, 20x1 600,000 102,630 497,370 528,926
Dec. 31, 20x2 400,000 52,893 347,107 181,818
Dec. 31, 20x3 200,000 18,182 181,818 0

Accumulated depreciation 1,100,000
Machinery 2,000,000
Cash 600,000
Illustration: Computation of Annual Payment or Collection

On January 1, 2018, Jayzel Company sold an inventory to Joyce Company for P2,000,000. A note was received in exchange fo
installments will be made every December 31, starting December 31, 2018. The effective rate of the notes receivable which i
Required:
Compute for the:
1) Annual collection.
2) Interest income in 2018.
Case No. 1: Based on the given data.
Annual collection 630,942 WORKBACK

Multiply by: PV Factor 3.1699
PV of note 2,000,000
Amortization Table
Jan. 1, 2018 2,000,000
Dec. 31, 2018 630,942 200,000 430,942 1,569,058
Dec. 31, 2019 630,942 156,906 474,036 1,095,023
Dec. 31, 2020 630,942 109,502 521,439 573,583
Dec. 31, 2021 630,942 57,358 573,583 0
Case No. 2: Assume instead that the first payment is made on January 1, 2018.
Annual collection 573,583 WORKBACK

Multiply by: PV Factor 3.4869
PV of note 2,000,000
Amortization Table
Jan. 1, 2018 2,000,000
Jan. 1, 2018 573,583 573,583 1,426,417
Jan. 1, 2019 573,583 142,642 430,942 995,475
Jan. 1, 2020 573,583 99,548 474,036 521,439
Jan. 1, 2021 573,583 52,144 521,439 0

Sales 2,000,000
Cash 573,583

Illustration: PV of Deferred Annuity (Millan 2019)

An entity has developed a patent. On January 1, 20x1, the patent was sold in exchange for a ₱60,000 non-interest bearing no
₱10,000 each beginning on January 1, 20x6 and every January 1 thereafter. The last installment is due on January 1, 20x11. T
Solution:
Date Collections PV of 1 Present value
Jan. 1, 20x6 10,000 0.5674 5,674
Jan. 1, 20x7 10,000 0.5066 5,066
Jan. 1, 20x8 10,000 0.4523 4,523
Jan. 1, 20x9 10,000 0.4039 4,039
Jan. 1, 20x10 10,000 0.3606 3,606
Jan. 1, 20x11 10,000 0.3220 3,220
60,000 26,129 =
Illustration: Deferred Non-uniform Payments (Millan 2019)

On January 1, 20x1, ABC Co. sold a used equipment in exchange for a ₱3,000,000 non-interest bearing note due in three annu
Jan. 1, 20x4 1,500,000

Jan. 1, 20x5 1,000,000
Jan. 1, 20x6 500,000
3,000,000
The current market rate of interest on January 1, 20x1 is 12%.
Solution:
Date Collections PV of 1 Present value
Jan. 1, 20x4 1,500,000 0.7118 1,067,670
Jan. 1, 20x5 1,000,000 0.6355 635,518
Jan. 1, 20x6 500,000 0.5674 283,713
1,986,902
Amortization Table
Date Collections 12% Int. inc Amortization Present value
Jan. 1, 20x1 1,986,902
Jan. 1, 20x2 0 238,428 (238,428) 2,225,330
Jan. 1, 20x3 0 267,040 (267,040) 2,492,370
Jan. 1, 20x4 1,500,000 299,084 1,200,916 1,291,454
Jan. 1, 20x5 1,000,000 154,974 845,026 446,429
Jan. 1, 20x6 500,000 53,571 446,429 (0)
Illustration: Pre-acquisition of accrued interest income (Millan 2019)
On March 1, 20x1, ABC Co. received a ₱500,000, 12%, one-year note dated January 1, 20x1 from XYZ, Inc. in exchange for a ₱
Journal entries:
Mar. 1, 20x1
Interest income 10,000 The interest that has accrued prior to March 1 (pre-a
Gain on receipt of note 10,000 interest income but rather gain.
July. 1, 20x1
Cash 500,000
Cash 30,000
LOAN RECEIVABLE
INITIAL MEASUREMENT: LOAN RECEIVABLE
The initial carrying amount of the loans receivable may be computed as follows:
Principal amount xx
add: Direct origination cost xx → transaction cost not chargeable to customers.
less: Origination fee received (xx) → compensation for activities (i.e., evaluating the borrower's financial co
Initial carrying amount or present value xx and other security, negotiating the terms of the loan, preparing and pr
Indirect origination cost shall be treated as expense.
SUBSEQUENT MEASUREMENT: LOAN RECEIVABLE

Loans receivable is subsequently measured at amortized cost using effective interest method.
Illustration: Computation of Effective Interest Rate through Interpolation

On January 1, 2018, Loner granted a 4-year loan to a borrower in the amount of P5,000,000. The company incurs P200,000 o
nonrefundable origination fee amounting to P500,000. The stated interest is 10% payable annually every December 31.
Required:
A. Compute for the following:
1) Effective interest rate.
2) Interest income on December 31, 2018.
3) Carrying amount of the Loans receivable, December 31, 2018.
4) Current portion of the Loans receivable, December 31, 2018.
5) Noncurrent portion of the Loans receivable, December 31, 2018.
SOLUTION:
Requirement No. 1
Principal 5,000,000
add: Direct origination cost 200,000
less: Origination fees received (500,000)
Initial present value of loan receivable 4,700,000
Effective Interest rate: 11.97%

11% 0.6587 3,293,655
11% 3.1024 1,551,223 4,844,878
144,878
4,700,000
12% 0.6355 3,177,590 3,735
12% 3.0373 1,518,675 4,696,265
Requirement No. 2 & 3 12%

Date 10% Int. Rec. 12% Int. Inc. Amortization Present Value
Jan. 1, 2018 4,700,000
Dec. 31, 2018 500,000 562,590 (62,590) 4,762,590
Dec. 31, 2019 500,000 570,082 (70,082) 4,832,672
Dec. 31, 2020 500,000 578,471 (78,471) 4,911,143
Dec. 31, 2021 500,000 588,857 (88,857) 5,000,000
Requirement No. 3
Principal amount collectible beyond one year 5,000,000
Carrying amount of notes receivable 4,762,590
Requirement No. 4
Zero, the entire note receivable is collectible beyond one year.
Requirement No. 5
Principal amount collectible beyond one year 5,000,000
Carrying amount of notes receivable 4,762,590
Journal entries:
Jan. 1, 2018
Loans receivable 5,000,000
Cash 5,000,000
Cash 500,000
Unearned interest income (origination fee received) 500,000
Cash 200,000
Dec. 31, 2018

Cash 500,000
LOANS AND RECEIVABLE IMPAIRMENT

IMPAIRMENT OF RECEIVABLE
Carrying amount of the receivable XX
less: Present value of expected future cash flows
discounted using the original effective rate (XX)
Impairment loss XX
CARRYING AMOUNT OF LOAN RECEIVABLE

1.) For receivable (e.g. loan) originally issued without premium or discount, its effective rate is equal to the nominal rate.
Principal XX
add: Accrued inteerest (if recorded by the company) (XX)
Carrying amount of loan receivable XX
2.) For receivable (e.g. loan) originally issued with premium or discount:
CA of loan receivable = PV at the date of impairment plus any unpaid accrued interest recorded by the company.
Present value of expected future cash flows:

Date Cash Flow PV factor Total
Year 1 XX XX XX
Year 2 XX XX XX
Year n XX XX XX
Total PV of future cash flows XX
Illustration: Impairment Loss

On January 1, 2017, Kinakaya Pa Company granted a five year loan to a borrower amounting to P5,000,000. The loan bears in
On December 31, 2018, Kinakaya Pa considers the loan impaired and that only P4,000,000 principal amount will be collected
rate of interest for a loan of this type is 12%.
Assuming the following independent cases:

Case No. 1: Kinakaya Pa Company accrued the interest on December 31, 2018 and the entire P4,000,000 will be collected on
Case No. 2: Kinakaya Pa Company did not accrue the interest on December 31, 2018 and the entire P4,000,000 will be collect
Case No. 3: Kinakaya Pa Company did not accrue the interest on December 31, 2018 and the P4,000,000 will be collectible as
Date Amount
December 31, 2019 1,500,000
December 31, 2020 2,500,000
Case No. 4: Kinakaya Pa Company did not accrue the interest on December 31, 2018 and the P4,000,000 will be collectible as
Date Amount
January 1, 2019 1,000,000
December 31, 2019 2,000,000
December 31, 2020 1,000,000
Required:
A. Compute for the following:
1) Loan impairment loss in 2018.
2) Interest income in 2019.
3) Carrying amount of the loan, December 31, 2019.
B. Prepare the necessary entries from the date of impairment to 2019.
SOLUTION:
CASE NO. 1
Requirement No. 1
Carrying amount of receivable:
Principal 5,000,000
add: Accrued interest (₱5M x 10% x 12/12) 600,000 5,600,000
less: PV of expected cash flows:
Jan. 1, 2022 4,000,000 0.7513 3,005,200 3,005,200
Impairment loss - Dec. 31, 2018 2,594,800
Requirement No. 2 & 3

Amortization Table
Date 10% Int. Inc. Present Value
Dec. 31, 2018 3,005,200
Dec. 31, 2019 300,520 3,305,720
Dec. 31, 2020 330,572 3,636,292
Dec. 31, 2021 363,708 4,000,000
Requirement No. 3
Presentation in the Statement of Financial Position
Loan receivable 5,000,000
less: Allowance for loan impairment 1,694,280
Carrying amount of Loan Receivable 3,305,720
Journal entries:
Dec. 31, 2018
Impairment loss 2,594,800
Allowance for loan impairment 1,994,800
Dec. 31, 2019

Allowance for loan impairment 300,520
CASE NO. 2
Requirement No. 1
Principal 5,000,000
add: Accrued interest 0 5,000,000
Jan. 1, 2022 4,000,000 0.7513 3,005,200 3,005,200

Amortization Table
Dec. 31, 2018 3,005,200
Dec. 31, 2019 300,520 3,305,720
Dec. 31, 2020 330,572 3,636,292
Dec. 31, 2021 363,708 4,000,000
Requirement No. 3
Journal entries:
Dec. 31, 2018
Dec. 31, 2019

CASE NO.3
Requirement No. 1
Principal 5,000,000
add: Accrued interest 5,000,000
Dec. 31, 2019 1,500,000 0.9091 1,363,636
Dec. 31, 2020 2,500,000 0.8264 2,066,116 3,429,752

Amortization Table
Dec. 31, 2018 3,429,752
Dec. 31, 2019 1,500,000 342,975 1,157,025 2,272,727
Dec. 31, 2020 2,500,000 227,273 2,272,727 0
Requirement No. 3
Journal entries:
Dec. 31, 2018
Dec. 31, 2019

Cash 1,500,000
CASE NO. 4
Requirement No. 1
Principal 5,000,000
add: Accrued interest 5,000,000
Jan. 1, 2019 1,000,000 1.0000 1,000,000
Dec. 31, 2019 2,000,000 0.9091 1,818,182
Dec. 31, 2020 1,000,000 0.8264 826,446 3,644,628

Amortization Table
Dec. 31, 2018 3,644,628
Jan. 1, 2019 1,000,000 0 1,000,000 2,644,628
Dec. 31, 2019 2,000,000 264,463 1,735,537 909,091
Dec. 31, 2020 1,000,000 90,909 909,091 0
Requirement No. 3
Carrying amount of Loan Receivable 909,091
Journal entries:
Dec. 31, 2018
Jan. 1, 2019
Cash 1,000,000
Dec. 31, 2019

Cash 2,000,000
Illustration: Reversal of Impairment Loss

On January 1, 2019, Kinakaya Pa Company granted a five year loan to a borrower amounting to P5,000,000. The loan bears in
December 31.
On December 31, 2020, Kinakaya Pa considers the loan impaired and that only P4,000,000 principal amount will be collected
did not accrue the interest because of the impairment. The prevailing rate of interest for a loan of this type is 12%.
On December 31, 2021, the financial condition of the borrower has improved and that it can pay its entire unpaid obligation,
Required:
1) Compute for the gain on reversal of impairment loss in 2021
2) Prepare all the necessary entries in 2020 and 2021
SOLUTION:
2020 - Year of impairment
Carrying amount of loan 5,000,000
less: PV of future cash flows
Jan. 1, 2024 4,000,000 0.7513 3,005,259 3,005,259
Amortization Table
Dec. 31, 2020 3,005,259
Dec. 31, 2021 300,526 3,305,785
Dec. 31, 2022 330,579 3,636,364
Dec. 31, 2023 363,636 4,000,000
Journal entries:
Dec. 31, 2020
Dec. 31, 2021


Gain on reversal of impairment loss 2,479,339
2021 - Year of reversal

Carrying amount of loan - Dec. 31, 2021 (table) 3,305,785
less: PV of future cash flows
Jan. 1, 2024
Principal 5,000,000 0.8264 4,132,231
2021 Interest 500,000 0.8264 413,223
2022 Interest 500,000 0.8264 413,223
2023 Interest 500,000 0.8264 413,223
2024 Interest 500,000 0.8264 413,223 5,785,124
Gain on reversal of impairment loss (2,479,339)
RECEIVABLE FINANCING
Illustration: Pledging of Accounts Receivable
On October 1 of the current year, Blackberry Company borrowed P1,000,000 for one year from Samsung Bank with a stated i
Blackberry Company hypothecated its accounts receivable amounting to P1,500,000. Samsung Bank deducted the one year in
Required:
Prepare the entries in relation to the assignment of the accounts receivables, assuming amortization of interest deducted in a
loan term.
SOLUTION:
Oct. 1 Financial Statement Presentation:
Cash 880,000 Current Liability:
Discount on note payable 120,000 Loans
Note payable-bank 1,000,000 less: Discount
Carrying amount
Dec. 31
Interest expense 30,000 Notes to FS: "The note payable to bank ma
Discount on note payable 30,000 secured by accounts receivable with face v
ASSIGNMENT
The amount to be transferred to unassigned accounts may be computed as follows:
Total accounts receivable - assigned XX
less: Collections XX
Sales discount XX
Sales return XX
Worthless accounts XX (XX)
Balance XX
Illustration: Assignment - Non-notification Basis

On November 1, of the current year, Nokia Company assigned customers' accounts in the amount of P1,000,000 to Brayden C
P750,000 and a stated interest rate of 10%. Brayden Company charges 5% in relation to the amount borrowed. Nokia Compa
customers and will remit payment to Brayden Company.
On December 30, of the current year, cash collections on the assigned accounts amounted to P450,000.
On December 31, Nokia Company remitted in full the amount collected plus interest due on the outstanding balance of the lo
Required:
1) Compute for the cash received from assignment.
2) Prepare the journal entries in relation to the assignment of the accounts receivables.
3) Compute for the amount of equity over the assigned accounts to be disclosed on December 31.
SOLUTION:
Requirement No. 1
Notes payable 750,000
less: Service charge 37,500
Cash received 712,500
Requirement No. 2
Nov. 1
Accounts receivable - assigned 1,000,000
Accounts receivable 1,000,000
Cash 712,500
Service charge 37,500
Notes payable-bank 750,000
Dec. 30
Cash 450,000
Accounts receivable - assigned 450,000

Interest expense 12,500
Cash 462,500
Requirement No. 3
less: Notes payable-bank 300,000
Equity in assigned accounts to be disclosed in the notes 250,000
Illustration: Assignment - Notification Basis

Canon Company finances some of its current operations by assigning accounts receivable on a notification basis to Josiah Fin
under guarantee, specific accounts amounting to P2,000,000. Josiah Finance shall advance to Canon Company 80% of the acc
total accounts assigned.
On August 1, Canon Company received a statement that Josiah had collected P1,100,000 of these accounts and had made an
payable as of July 31. This charge is to be deducted at the time of the first remittance due to Canon Company from the Josiah
On September 1, Canon Company received a second statement from Josiah Finance, together with a check for the amount du
collected an additional of P600,000 and had made a further charge of 1% of the balance outstanding as of August 31.
Required:
1) Compute for the cash received from assignment.
2) Prepare the entries in relation to the assignment of the accounts receivable.
SOLUTION:
Requirement No. 1
Notes payable - bank 1,600,000
less: Service charge (20,000)
Cash received 1,580,000
Requirement No. 2
Jul. 1
Cash 1,580,000
Notes payable-bank 1,600,000
Aug. 1
Notes payable-bank 1,084,000
Sept. 1
Cash 78,840

FACTORING
Formulas (whether Casual factoring or Regular factoring)
Gross amount of receivable XX

less: Factoring fee (XX)
Finance charge and interest expense (XX)
Net selling price XX
less: Factors holdback (XX) → a current asset
Net cash received XX
Gross amount of receivable XX

less: Factoring fee (XX)
Finance charge and interest expense (XX)
Net selling price XX
less: Recourse obligation (if any) (XX) → a current liability
Net proceeds XX
less: Book value of Accounts receivable (XX)
Gain (loss) on sale XX
Casual Factoring: Without Recourse vs With Recourse

Without Recourse With Recourse
To record factoring:
Cash xxx Cash
Allowance for bad debt xxx Allowance for bad debt
Loss on factoring xxx Loss on factoring
Receivable from factor xxx Receivable from factor
Accounts receivable xxx Accounts receivable
Est. recourse obligation
To record the excess cash returned by the factor less sales return:
Cash xxx Cash
Sales return xxx Sales return
To record transfer of recourse obligation - no further payment was made:
N/A Est. recourse obligation
Gain on recourse obligation
To record transfer of recourse obligation - additional payment was made:
N/A Loss on factoring
Cash
Regular Factoring: Without Recourse vs With Recourse

Without Recourse With Recourse
To record factoring:
Cash xxx Cash
Allowance for bad debt xxx Allowance for bad debt
Factoring fee (net of allow. for DA) xxx Factoring fee (net of allow. for DA)
Interest expense xxx Interest expense
Accounts receivable xxx Accounts receivable
Loss on factoring
Est. recourse obligation
To record the excess cash returned by the factor less sales return:
Cash xxx Cash
Sales return xxx Sales return
To record transfer of recourse obligation - no further payment was made:
N/A Est. recourse obligation
Gain on recourse obligation
To record transfer of recourse obligation - additional payment was made:
N/A Loss on factoring
Cash
Illustration: Factoring of Accounts Receivable

Corny Company factored P100,000 of its accounts receivable to Horny Company for P85,000. An allowance for bad debts equ
account factored. Horny Company withheld 5% of the purchase price as protection against sales returns and allowance.
Case No. 1: Sale of receivable is without recourse.

Case No. 2: Sale of receivable is with recourse and the recourse obligation has an estimated fair value of P5,000.
Required:
For each of the above cases, determine the following;
1) Cash received
2) Cost of factoring
3) Journal entry to record the transaction
CASE NO. 1: Factoring without recourse CASE NO. 2: Factoring with recourse
Requirement No. 1 Requirement No. 1
Gross amount of receivable 100,000 Gross amount of receivable
less: Factoring fee 15,000 less: Factoring fee
Finance charge and interest expense 0 Finance charge and interest expe
Net selling price 85,000 Net selling price
less: Factors holdback 4,250 less: Factors holdback
Net cash received 80,750 Net cash received

Gross amount of receivable 100,000 Gross amount of receivable
less: Factoring fee 15,000 less: Factoring fee
Finance charge and interest expense 0 Finance charge and interest expe
Net selling price 85,000 Net selling price
less: Recourse obligation (if any) 0 less: Recourse obligation (if any)
Net proceeds 85,000 Net proceeds
less: Book value of Accounts receivable 97,000 less: Book value of Accounts receivab
Gain (loss) on sale (12,000) Gain (loss) on sale
Cost of factoring is equal to loss on factoring of ₱12,000. Cost of factoring is equal to loss on fa

Cash 80,750 Cash
Allowance for DA 3,000 Allowance for DA
Receivable from factor 4,250 Receivable from factor
Loss on factoring 12,000 Loss on factoring
Estimated recourse obligation
Illustration: Factoring of Accounts Receivable

Andrix Company factored P600,000 of its accounts receivable to Sabado Company on October 1. Control was surrendered by
of 3% and retained a holdback equal to 5% of the accounts receivable. In addition, the factor charged 15% interest computed
accounts receivable of 54 days. (Use 365 days in the computation of the interest)
Required:
1) What is the amount of cash initially received by Andrix Company from the factoring?
2) If all accounts are collected, what is the cost of factoring the accounts receivable?
SOLUTION:
Requirement No. 1
Gross amount of receivable 600,000
less: Factoring fee 18,000
Net selling price 568,685
less: Factors holdback 30,000
Net cash received 538,685
Requirement No. 2
Factoring fee 18,000
Cost of factoring 31,315
or
Gross amount of accounts receivable 600,000

less: Factoring fee/Int. exp 31,315
less: Recourse obligation (if any) 0
Net proceeds 568,685
less: Book value of accounts receivable 600,000
Loss on sale = Cost of factoring (31,315)
DISCOUNTING OF NOTES
Illustration: Notes Receivable Discounting
On January 16, Gerry Co. accepted a P600,000, 10%, 90 day note from a customer. On February 15, the note was discounted
and the bank charged a P2,500 protest fee.
Required:
Prepare all the necessary entries assuming the notes receivable was
1) Discounted without recourse
2) Discounted with recourse
a) Conditional sale recognizing contingent liability
b) Secured borrowing
SOLUTION:
Maturity value 615,000 < equal to 90 day term of the note
less: Discount 12,300 < equal to 60 day discount period
less: Carrying amount of note receivable:
Principal 600,000
add: Accrued interest 5,000 605,000 < equal to 30 day period
Loss on note discounting (2,300)
Requirement No. 1: Discounted without recourse

Cash 602,700
Loss on NR discounting 2,300
No entry on the dishonored.
Requirement No. 2: Discounted with recourse

A. Conditional sale recognizing contingent liability B. Secured borrowing
Cash 602,700 Cash
Loss on NR discounting 2,300 Interest expense
Note receivable discounted 600,000 Liability for NR discounted
Interest income 5,000 Interest income
Accounts receivable (or NR dishonored) 617,500 Accounts receivable (or NR dishonore

Cash 617,500 Cash
Note receivable discounted 600,000 Liability for NR discounted

Notes receivable 600,000 Notes receivable
FINANCIAL STATEMENT PRESENTATION:

Current Asset: Current Asset:
Notes receivable (before deducting NR discounted) XX Notes receivable (before deducting NR
less: Note receivable discounted (XX)
Trade and other receivables XX
NR discounted is also disclosed in the notes to FS.
Illustration: Discounting Own Note

On July 1, 2018, Boy Co. discounted its "own" P500,000, 1-year note at a bank, at a discount rate of 12%, when the prime rat
Required:
1) Determine the following:
a) Net proceeds from discounting
b) Effective rate
2) Prepare all the necessary entries for 2018.
SOLUTION:
Requirement No. 1
Note payable 500,000
less: Discount on note payable 60,000
Effective interest rate 14%
✓ Nominal or stated rate = Prime rate + spread.
Requirement No. 2
Jul. 1
Cash 440,000
Discount on notes payable 60,000
Dec. 31
Discount on note payable 30,000
Illustration: Financial Statement Presentation

On December 31, Miami Co's "Accounts receivable" balance per ledger of P1,250.000 includes:
1. MasterCard or VISA credit card sale of merchandise to customer

2. Overpayment to supplier for inventory purchased on account
3. Insurance claim on automobile accident
4. Advance to sales manager due in one year
5. 5-year note receivable due from company president (This was issued by the president for the loan granted to him.)
6. Interest due on 5-year note from company president, interest payable annually
7. Acceptance of 6-month note for past due-account arising from sale of inventory
8. Accrued interest receivable on the note above
9. Overpayment by customer of an account receivable
10. Accounts receivable to customers definitely uncollectible
11. Other trade accounts receivable-unassigned
12. Trade accounts receivable-assigned
13. Note receivable customer (this note is for a cash loan made to this customer collectible in 3 years.)
14. Claim for a tax refund from last year
15. Prepaid insurance-4 months remaining in the policy period
16. Advances to or receivables from stockholders (P100,000 is collectible currently)
17. Advances to affiliates
18. Subscription receivables
19. Special deposits on contract bids
20. Dividend receivables
21. Notes receivable dishonored
22. Accrued rent receivables
23. Claims against common carriers
24. Acceptance of 8-month note from employees arising from sale of inventory
25. Trade installment receivable due within 16 months, gross of unearned interest income of ₱20,000
TOTAL
Required:
Based on the above data, compute for the following:
1) Trade accounts receivable as of December 31
2) Trade notes receivable as of December 31
3) Trade and other receivables to be presented in the current asset section of the balance sheet
4) Noncurrent receivables as of December 31
5) Non-trade receivables as of December 31
Trade accounts
receivables
1. MasterCard or VISA credit card sale of merchandise to cu 10,000 10,000
11. Other trade accounts receivable-unassigned 50,000 50,000
12. Trade accounts receivable-assigned 10,000 10,000
21. Notes receivable dishonored 5,000 5,000
25. Trade installment receivable due within 16 months, gros 220,000 200,000
24. Acceptance of 8-month note from employees arising from 6,000
7. Acceptance of 6-month note for past due-account arising f 5,000
8. Accrued interest receivable on the note above 100
2. Overpayment to supplier for inventory purchased on acco 20,000
3. Insurance claim on automobile accident 2,000
4. Advance to sales manager due in one year 4,000
20. Dividend receivables 10,000
22. Accrued rent receivables 6,000
23. Claims against common carriers 4,900
6. Interest due on 5-year note from company president, inte 6,000
14. Claim for a tax refund from last year 3,000
16. Advances to or receivables from stockholders (P100,000 is 250,000
5. 5-year note receivable due from company president (This w 300,000
13. Note receivable customer (this note is for a cash loan mad 30,000
17. Advances to affiliates 125,000
19. Special deposits on contract bids 30,000
18. Subscription receivables 150,000
15. Prepaid insurance-4 months remaining in the policy perio 4,000
9. Overpayment by customer of an account receivable (5,000)
10. Accounts receivable to customers definitely uncollectible 4,000
TOTAL 1,097,000 275,000
Noncurrent receivable computation:

Unadjusted accounts receivable 1,097,000
less: Accounts not representing receivables (174,000)
less: Writeoff (4,000)
add back: Overpayment by customer of an AR 5,000
Total accounts receivable 924,000
less: Trade and other receivables current assets (442,000)
Noncurrent receivable 482,000
Total nontrade receivable computation:

Total accounts receivable 924,000
less: Trade accounts receivable (275,000)
less: Trade notes receivable (11,000)
Total nontrade receivables 638,000
BUYER
144,000
144,000
10,000
10,000
134,000
2,680
131,320
144,000
10,000
134,000
2,680
131,320
0
0
131,320
BUYER
144,000
144,000
2,000
2,000
10,000
10,000
132,000
2,640
129,360
144,000
10,000
134,000
2,680
131,320
2,000
0
129,320
BUYER
144,000
144,000
2,000
2,000
10,000
10,000
134,000
2,680
131,320
144,000
10,000
134,000
2,680
131,320
0
131,320
BUYER
144,000
144,000
2,000
2,000
10,000
10,000
136,000
2,720
133,280
144,000
10,000
134,000
2,680
131,320
0
2,000
133,320
nting its sales under the gross method. The credit term is 2/10, n/30. The entity, however,
omer paid on January 4, 2019. The balance was collected on January 31, 2019.
ny) and cash discount availed by the customer under PAS 18 and PFRS 15.
UTION: (PFRS 15)

99,000
No journal entry
Cash (₱60,000 x 98%) 58,800

600
39,600
%, 10%, 2/10, n/30.

it is highly probable
as the uncertainty
ounts receivable 7,084.8

7,084.8
ume that 80% of the discount is actually taken:

5,645
tion collected beyond the discount period
1,440
ounts receivable, end 7,085

Allowance for sales discount 0
realizable value 7,085
7,085
Sales discount 0
7,085
ume that only 70% of the discount is actually taken:

4,939
ounts receivable 14.4

14.4
7,200.0
7,099.2
7,084.8
dit adjustments 14.4
tion collected beyond the discount period

2,160
%, 10%, 2/10, n/30. The entity estimates that only 80% of the cash discount will
tive amount of revenue recognized will not occur as the uncertainty is resolved.
ounts receivable 7,084.8

7,084.8
accounts receivable is not yet settled by the end of the reporting period
the entity changes its estimate of cash discount to be taken to 40%.
Adjusting entry
ounts receivable 57.6
57.6
7,142.40
Debit balance 7,084.80
ease in transaction price 57.60
50,000 to Rex, Inc. on account. To induce sale, Jimar Co. provides its buyers the
he goods. The company uses perpetual inventory system in recording its inventories.
e agreed period of time. On January 5, 2019, 45% of the goods were actually
r did not return any of the goods.
uirement No. 1 PFRS 15

105,000

Asset for right to recover product to be return 30,000
82,500

uirement No. 2 PFRS 15
Asset for right to recover product to be return 100,000

1, 2019 (after the right of return period of 30 days)

150,000
te: Revenue is recognized since the time period for rejecting/accepting has lapsed.
of one product for P15,000. Cash is received when control of a product transfers. The
t within 30 days and receive a full refund. The entity's cost of each product is P6,000.
ed from the customer is variable. To estimate the variable consideration to which the
ty estimates that 97 products will not be returned.
t has significant experience in estimating returns for this product and customer class.
turn period). Thus, PPAP Company concludes that it is highly probable that a significant
ty is resolved (i.e. over the return period).
d expects that the returned products can be resold at a profit.
FRS 15 assuming the company uses perpetual inventon system.

Note that if the return period has lapsed or none of the
customers returned the goods, the refund liability is
transferred to revenue and corresponding cost of sales is recorded.
nded December 31, 2018 and have observed the taking of the physical inventory of
customer up to and including December 30, 2018 has been eliminated from inventory.
ks by the company's controller. No perpetual inventory records are maintained and all
t presented herein are correct.
ember 2018 and January 2019, respectively.
Was there a Was the sale Excluded

valid sale? recorded? in the count?
Yes Yes No
Yes Yes Yes
Yes Yes Yes
No Yes No
hipped to consignee) No Yes Yes
Yes No Yes
No No No
Yes No No
regoing data.
N N
N no AJE Yes Sales | A/R
N no AJE Yes Invty | COGS
There is already a valid sales therefore, the inventory must be excluded.
There is no sale yet because FOB Shipping Point. | Not excluded because Jan 2019.
There is no sale in consignment sales. | Excluded in the count, therefore, add back
Inventory is not excluded because Jan 2019

e of interest for the same note.
ificantly different from prevailing interest rate for similar notes.
t is an addition (amortized as revenue) of interest income while Premium is a reduction.
al x PV of 1) XX
ments (Interest x PV of OA) XX
xx
10% Interest col. Total Col. 16% PV of 1 Present Value

2,000 12,000 0.8621 10,345
1,000 11,000 0.7432 8,175
Total present value of notes receivable 18,520
ng the prevailing market rate of interest for the similar receivables.
to cash price.
Face value x PV of 1) xx
Face value x PV of OA) xx
Bearing Notes Receivable / Zero-Interest Bearing
NOTE: The interest rate used in computing the initial value of the receivable is
the rate to be used in amortizing the receivable.
, Gregorio gave Florendo a 4-year, P100,000, 10% note. The note requires interest
lated depreciation as of January 1, 2018 of P350,000.
portion since it is collectible beyond one year from the reporting date.
tion of Principal
, Florendo gave Gregorio a 4-year, P100,000, 10% note. The note requires interest
lated depreciation as of January 1, 2018 of P350,000.
s. 16% = Unrealistic/Below market rate

on of Principal, Interest due at the beginning of next year (Millan 2019)
, Florendo gave Gregorio a 3-year, P1,000,000, 3% note. Principal is due on January
000 and accumulated depreciation as of January 1, 2018 of P950,000.
tion of Principal, Interest is payable semi-annually
, Florendo gave Gregorio a 4-year, P100,000, 10% note. The note requires interest
P500,000 and accumulated depreciation as of January 1, 2018 of P350,000.
of Principal
eofilo gave Candido a 4-year, P100,000, 10% note. The note requires interest to be
depreciation as of January 1, 2018 of P350,000.
the note is to be paid in four equal annual installments of P25,000 every December 31.
Present Value
30,172
24,153
19,220
15,188
88,733
Present Value
88,733
67,930
46,299
23,707
0
67,930
46,299
21,631
e gave Rosenio a 5-year, P500,000 note. The machinery has a cost of P500,000
est bearing note and the prevailing rate of interest for a note of this type is 10%.
Step 1: → 0
Step 2: Go to Data > What if Analysis > Goal Seek:

Set cell: Present value at the end
To value: Face amount or Carrying amount on maturity
By changing cell: Effective interest rate
14,505
gave Ronaldo a 3-year, P600,000 note. The machinery has a cost of P500,000 and
bearing note and the prevailing rate of interest for a note of this type is 14% and the
00 every December 31.
329,332
175,439
153,894
gave Jasmin a 3-year, P300,000 note. The machinery has a cost of P500,000 and
price of P288,000. The note is a non-interest bearing and payable in three equal annual
ciation of ₱1,100,000 in exchange for a 3 year, ₱1,200,000 non-interest bearing
. A note was received in exchange for the product which provides that four equal annual
e rate of the notes receivable which is compounded annually is 10%.
Present Value - Jan. 1, 2018 1,426,417

add: Interest income - 2018 142,642
Carrying amount - Dec. 31, 2018 1,569,058
or
Carrying amount - Jan. 1, 2019 995,475
add back: Collection - Jan. 1, 2019 573,583
or
Journal entries 1,569,058
or a ₱60,000 non-interest bearing note collectible in six annual installments of

allment is due on January 1, 20x11. The appropriate discount rate is 12%.
PV of OA of 1 for 10 periods 5.6502

PV of OA of 1 for 4 periods (3.0373)
PV factor for the payment period 2.6129
Multiply by: 10,000
Present value of the note 26,129
terest bearing note due in three annual installments as follows:

0x1 from XYZ, Inc. in exchange for a ₱500,000 past due account.
erest that has accrued prior to March 1 (pre-acquisition period) is not recognized as
income but rather gain.
eable to customers.
es (i.e., evaluating the borrower's financial condition, evaluating guarantees, collateral
iating the terms of the loan, preparing and processing documents and closing the loan transaction.
000. The company incurs P200,000 of direct loan origination cost and receives
e annually every December 31.
Books of Borrower:
Principal 5,000,000
less: Discount on note (500,000)
Initial carrying amount 4,500,000
148,613
Journal entries on the books of borrower:

Jan. 1, 2018
Cash 4,500,000
Discount on note 500,000
Note payable 5,000,000
e rate is equal to the nominal rate.
rest recorded by the company.
ting to P5,000,000. The loan bears interest of 10% and is collectible every December 31.
00 principal amount will be collected. No cash was received in 2018. The prevailing
ntire P4,000,000 will be collected on the maturity date.

d the entire P4,000,000 will be collected on the maturity date.
d the P4,000,000 will be collectible as follows:
d the P4,000,000 will be collectible as follows:
ting to P5,000,000. The loan bears interest of 10% and to be collectible every
00 principal amount will be collected. No cash flows received in 2020 and the company
a loan of this type is 12%.
can pay its entire unpaid obligation, including principal and interest at maturity.
ar from Samsung Bank with a stated interest rate of 12%. As a security for the loan,
msung Bank deducted the one year interest in advance.
amortization of interest deducted in advance is to be made equally for the entire
cial Statement Presentation:
1,000,000
90,000
rrying amount 910,000
to FS: "The note payable to bank matures on October 1, 2020 and is

ed by accounts receivable with face value of P1,500,000."
e amount of P1,000,000 to Brayden Company as a security for a loan in the amount of

the amount borrowed. Nokia Company will continue to collect the accounts from
ed to P450,000.
e on the outstanding balance of the loan.

e on a notification basis to Josiah Finance. On July 1 of the current year, it assigned,
ce to Canon Company 80% of the accounts assigned, less a finance charge of 1% of the
0 of these accounts and had made an additional charge of 1% of the total outstanding
e to Canon Company from the Josiah Finance.
ether with a check for the amount due. The statement indicated that the Josiah had
outstanding as of August 31.
urrent liability
With Recourse
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
With Recourse
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
,000. An allowance for bad debts equal to P3,000 was previously established for the
nst sales returns and allowance.
ted fair value of P5,000.
NO. 2: Factoring with recourse

rement No. 1
ess: Factoring fee 15,000
Finance charge and interest expense 0
ess: Factors holdback 4,250
Net cash received 80,750
rement No. 2
ess: Factoring fee 15,000
Finance charge and interest expense 0
ess: Recourse obligation (if any) 5,000
Net proceeds 80,000
ess: Book value of Accounts receivable 97,000
Gain (loss) on sale (17,000)
ost of factoring is equal to loss on factoring of ₱17,000.
rement No. 3
80,750
Allowance for DA 3,000
eceivable from factor 4,250
oss on factoring 17,000
Estimated recourse obligation 5,000
tober 1. Control was surrendered by Andrix Company. The factor assessed a fee
actor charged 15% interest computed on a weighted average time to maturity of the
ebruary 15, the note was discounted at 12%. At maturity date, the note was dishonored
al to 90 day term of the note

al to 60 day discount period
al to 30 day period
ured borrowing
602,700
nterest expense 2,300
Liability for NR discounted 600,000
Accounts receivable (or NR dishonored) 617,500

617,500
iability for NR discounted 600,000

tes receivable (before deducting NR discounted) XX
unt rate of 12%, when the prime rate is 10%.

10,000
20,000
2,000
4,000
dent for the loan granted to him.) 300,000
6,000
5,000
100
(5,000)
4,000
50,000
10,000
lectible in 3 years.) 30,000
3,000
4,000
250,000
125,000
150,000
30,000
10,000
5,000
6,000
4,900
6,000
ncome of ₱20,000 220,000
1,250,000
Trade notes Trade and other Noncurrent Non-trade

receivables receivables receivables receivables
10,000
50,000
10,000
5,000
200,000
6,000 6,000
5,000 5,000
100 100
20,000 20,000
2,000 2,000
4,000 4,000
10,000 10,000
6,000 6,000
4,900 4,900
6,000 6,000
3,000 3,000
100,000 150,000 250,000
300,000 300,000
30,000 30,000
125,000 125,000
30,000 30,000
Deducted to SHE
Current asset
Current liability
11,000 442,000 635,000 791,000
Other receivables 156,000

add: Noncurrent receivables 635,000
Total nontrade receivables 791,000
PROBLEM 15:
In the course of your audit of DKNY Company's "Receivables" account as of December 31,
2020, you found out that the account comprised the following items:
Trade accounts receivable 1,550,000 Trade accounts r

Trade accounts receivable, assigned (proceeds from assignment Trade accounts r
amounted to P650,000) 750,000 Trade accounts r
Trade accounts receivable, factored (proceeds from factoring done 300,000 12% Trade notes
on a without-recourse basis amounted to P250,000 20% Trade notes
12% Trade notes receivable 200,000 Trade receivable
20% Trade notes receivable, discounted at 40% upon receipt Installments rece
of the 180-day note on a without recourse basis 300,000 Customers’ acco
Trade receivables rendered worthless 50,000 Advance paymen
Installments receivable, normally due 1 year to two years 600,000 Customers’ acco
Customers' accounts reporting credit balances arising from sales returns 60,000 Cash advances to
Advance payments for purchase of merchandise 300,000 Claim from insur
Customers' accounts reporting credit balances arising from advance payme 40,000 Subscription rece
Cash advances to subsidiary 800,000 Accrued interest
Claim from insurance company 30,000 Deposit on contr
Subscription receivable due in 60 days, 600,000 Advances to stoc
Accrued interest receivable 20,000 TOTAL
Deposit on contract bids 500,000
Advances to stockholders (collectible in 2023) 2,000,000 Trade accounts r
from factoring do
Requirements: basis amounted
1. How much is the total receivables? 20% Trade notes
a. 3,650,000 c. 3,000,000 40% upon receip
b. 3,100,000 d. 2,950,000 without recourse
2. How much is the amount to be presented as "trade and other receivables" under Proceeds from A
current assets? Carrying value of
a. 7,350,000 c. 4,850,000 Loss from Factor
b. 5,350,000 d. 4,050,000
Maturity Value (P
3. How much loss from receivable financing should be recognized in the income statements? Principal
a. 36,000 c. 86,000 Interest (P*r%*t)
b. 50,000 d. 105,000 Discount (MV*d%
Proceeds from N
Carrying value of
Loss from Discou
Total Loss from R
360 or 365 days?

1. Follow what th
2. If the problem
3. If you there is
4. Pray
Problem 22: Solution:
On December 31, 2019, ISIAH Company, a financing institution lend ₱4,000,000 to PSALMS Principal
Corp. due 3 years after. The loan is supported by an 8% note receivable. Transaction costs add: Origination
incurred to originate the loan amounted to ₱248,000. ₱374,000 was chargeable to Psalms as less: Origination
origination fees. Interest on the loan are collectible at the end of each year. The yield rate on Initial measurem
the loan is 9.25%. The company estimated at origination date that receivable is fully collectible
thus did not initially provide loss arising from 12 month expected credit loss (ECL).
Isiah was able to collect interest as it became due at the end of 2020. There was no evidence
of significant increase in credit risk by the end 2020 and that the receivable is determined to
have "low credit risk".
Amortization tab
During 2021, however, due to Psalms Corporation's business deterioration and due to
political instability and faltering global economy, the company was not able to collect
amounts due at the end 2021. After reviewing all available evidence at December 31, 2021,
Isiah Company determined that it was probable that Psalms would pay back only P3,400,000
collectible as follows:
December 31, 2023 1,400,000 2021 - Year of Im

December 31, 2024 1,000,000
December 31, 2025 600,000
December 31, 2026 400,000
As of December 31, 2021, the prevailing rate of interest for all debt instruments is 14%.
Based on the above information and on your audit, answer the following requirements:
1. What is the carrying value of the loans receivables as of December 31, 2020?
a. 3,874,000 c. 3,954,237
b. 3,912,474 d. 4,000,000 Amortization tab
2. What is the impairment loss to be recognized in the 2021 statement of comprehensive

income?
a. 1,336,188 c. 1,094,018
b. 1,294,296 d. 1,656,689
3. What is the interest income to be recognized in the 2023 statement of comprehensive

income?
a. 228,818 C. 159,542
b. 264,650 d. 242,170
4. What is the correct carrying value of the loans receivable as of December 31, 2023?
a. 2,860,219 C. 1,724,703
b. 2,013,832 d. 1,884,332
PROBLEM 24: Solution:

Visage Corp. had the following receivable financing transactions during the year: 1)
• On March 1, 2020, Visage Corp factored P500,000 of its accounts receivables to BPI. As
of the date of factoring, it was ascertained that P20,000 of the accounts receivable is
doubtful of collection. BPI advanced P350,000 cash to Visage Corp. and withheld P50,000
as factors holdback (to cover future sales discount and sales returns and allowances).
The company incurred P10,000 direct transaction costs (legal fees and other professional 2)
fees) related to the factoring. The factoring was done on a without-recourse basis, thus
transferring all significant risks and rewards associated to the receivable to BPI. 3)
• On May 1, 2020, Visage Corp. assigned P800,000 of its outstanding accounts receivable
to BPI in consideration of a P500,000, 24% loan. BPI charged the company 2% of the
accounts assigned as service charge. By the end of May, Visage Corp. collected P200,000
cash from the assigned accounts net of a P5,000 sales discount. By the end of June,
Visage Corp. collected another P150,000 from the assigned accounts after P4,000 sales
discount. The company accepted merchandise originally invoiced at P30,000 as sales
returns and wrote-off P20,000 of the assigned accounts as worthless. It was agreed
between parties that monthly collections shall be remitted to the bank as partial payment
of the loan and interest.
• On July 1, 2020, Visage Corp. accepted from a customer a 6-month P600,000, 12% notes
receivable for the sale of merchandise. On October 31, 2020, Visage Corp. discounted,
the note to BPI at a discount rate of 10%. The discounting was done on a without-recourse
basis, thus transferring all significant risks and rewards associated to the receivable to BPI.
Requirements:
1. How much should be reported as gain/loss in the income statement on the transfer of
receivables on the factoring of receivable on March 1?
a. 90,000 c. 80,000
b. 100.000 d. none
2. How much should be reported as gain/loss in the income statement on the transfer of
receivables on the assignment of receivable on May 1?
a. 16,000 c. 316,000
b. 126,000 d. none
3. What is the carrying value of the accounts receivable-assigned as of June 30?

a. 391,000 c. 450,000
b. 400,000 d. none
4. What is the carrying value of the loans payable related to the accounts receivable 4)
assigned as of June 30?
a. 150,000 C. 310,000
b. 166,200 d. none
5. How much should be reported as gain/loss in the income statement on the transfer of 5)
receivables on the discounting of the note receivable on July 1?
a. 10,600 c. 24,000
b. 1,400 d. none
GIVEN TRADE OTHER RECEIVABLES
TRADE & OTHER RECEIVABLES
Trade accounts receivable 1,550,000 1,550,000 1,550,000
Trade accounts receivable, as 750,000 750,000 750,000 assignment is just a collatera
Trade accounts receivable, fa 300,000 - -
12% Trade notes receivable 200,000 200,000 200,000
20% Trade notes receivable, di 300,000 - -
Trade receivables rendered wo 50,000 - - Expense: Bad Debts (Write-o
Installments receivable, norma 600,000 600,000 600,000
60,000 arising from sales returns
Customers’ accounts reporting credit balances - Current Liability: Advances f
300,000
Advance payments for purchase of merchandise 300,000 300,000
40,000 arising from advance payments
Customers’ accounts reporting credit balances - Current Liability: Advances f
Cash advances to subsidiary 800,000 - Noncurrent Asset: Investme
Claim from insurance compan 30,000 30,000 30,000
Subscription receivable due in 600,000 600,000 600,000
Accrued interest receivable 20,000 20,000 20,000
Deposit on contract bids 500,000 - Noncurrent Asset: Other Ass
Advances to stockholders (collectible2,000,000
in 2023) - Noncurrent Asset: Other Ass
TOTAL 3,100,000 950,000 4,050,000
Trade accounts receivable, factored (proceeds

from factoring done on a without-recourse
basis amounted to P250,000) 300,000
20% Trade notes receivable, discounted at
40% upon receipt of the 180-day note on a
without recourse basis 300,000
Proceeds from AR factored 250,000

Carrying value of AR factored (300,000)
Loss from Factoring (50,000)
Maturity Value (Principal + Interest)

Principal 300,000
Interest (P*r%*t) 30,000 330,000
Discount (MV*d%*remaining term) (66,000)
Proceeds from NR discounted 264,000
Carrying value of NR discounted (no interest) (300,000)
Loss from Discounting (36,000)
Total Loss from Receivable Financing (86,000)
360 or 365 days?

1. Follow what the problem said.
2. If the problem is SILENT, use 360 days.
3. If you there is no answer using 360 days, then try 365 days.
4. Pray
Year Current 1 – 30 31 – 60 1 – 90 More than 90 days PD

days PD days PD days PD
2,019 1% 6% 9% 23% 55%
2,018 2% 8% 10% 18% 60%
2,017 1% 4% 11% 16% 45%
2,016 3% 5% 12% 22% 45%
2,015 3% 2% 8% 21% 45%
Average 2.00% 5.00% 10.00% 20.00% 50.00%
A/R 1,686,400 922,000 384,800 153,300 78,800
Allowance 33,728 46,100 38,480 30,660 39,400
Bad Debts Expense 19,368

Allowance for Bad Debts 19,368
NOTE: Amortized Cost = Net Realizable Value = Carrying Value

12/31/2020
Invoice Age GL AMOUNT SL AMOUNT 0-30
Gudang 9/12/2020 -44085 139,200
Tisoy 12/12/2020 -44176 153,600 (44,176)
12/2/2020 -44166 99,200 (44,166)
Gusoy 11/17/2020 -44151 185,120
10/8/2020 -44111 176,000
Naning 12/8/2020 -44172 160,000 (44,172)
10/25/2020 -44128 44,800
8/20/2020 -44062 40,000
Nanong 9/27/2020 -44100 96,000
Balong 8/20/2020 -44062 71,360
Peejong 12/6/2020 -44170 112,000 (44,170)
11/29/2020 -44163 169,440
Unadjusted balances 1,466,720 1,446,720 (176,684)
Write-off of AR: Balong (71,360) (71,360)
Posting Error 11/5/2020 -44139 - - (99,200)
Adjusted balances 1,395,360 1,375,360 (275,884)
Unreconciled difference (20,000)
Adjusted balances 1,375,360
Required allowance for BD in % 2%
Required allowance for BD in Amount (53,465) (5,518)
Allow. For BD
71,360 46,720
- 28,825 DR Bad Debts Expense CR Allow. For BD
Allow. For BD
- 53,465 Accounts Receivable
Bad Debts Expense

Allow. For BD
Sales
Accounts Receivable
Write-off of AR
Unreconciled difference
Net Adjustments
Accounts Receivable
Allowance for BD
Carrying Value
Solution:
Principal 4,000,000
add: Origination cost 248,000
less: Origination fees (374,000)
Initial measurement 3,874,000
9% 0.7722 3,088,734
2.5313 810,014 3,898,748
10% 0.7513 3,005,259 3,874,000 24,748
2.4869 795,793 3,801,052 72,948 97,696
Amortization table: 8% 9.25% Correct Interest = Interest In

Date Nominal Int. Correct Int. Amortization Balance Effective Interest = Interest I
Dec. 31, 2019 3,874,000 Nominal Interest = Interest R
Dec. 31, 2020 320,000 358,474 (38,474) 3,912,474
Dec. 31, 2021 320,000 362,034 (42,034) 3,954,507
Dec. 31, 2022 320,000 365,493 (45,493) 4,000,000
2021 - Year of Impairment

Carrying amount of loan - Dec. 31, 2021
Present value - amortized cost 3,954,507
add: Accrued interest receivable 320,000 4,274,507
PV of future cash flows:
December 31, 2023 1,400,000 0.838 1,172,894
December 31, 2024 1,000,000 0.767 766,825
December 31, 2025 600,000 0.702 421,127
December 31, 2026 400,000 0.642 256,973 2,617,818
IMPAIRMENT LOSS 1,656,689
Amortization table: 9.25%

Date Collection Correct Int. Amortization Balance
Dec. 31, 2021 2,617,818
Dec. 31, 2022 0 242,235 (242,235) 2,860,053
Dec. 31, 2023 1,400,000 264,650 1,135,350 1,724,703
Dec. 31, 2024 1,000,000 159,592 840,408 884,295
Dec. 31, 2025 600,000 81,827 518,173 366,122
Dec. 31, 2026 400,000 33,878 366,122 0
Solution:
Net cash proceeds from factoring 340,000
add: Factors holdback 50,000
Total sales price of AR factored 390,000
less: CA of AR factored 480,000
Loss on factoring (90,000)
No gain or loss on assignment of AR because it is not a sale
May 1, 2020
AR-assigned 800,000
AR 800,000
Cash 484,000
Loan payable - BPI 500,000
May 31, 2020

Cash 200,000
Sales discount 5,000
AR-assigned 205,000

Cash 200,000
June 30, 2020

Cash 150,000
AR-assigned 154,000

Cash 150,000
Sales returns and allow 30,000
AR-assigned 50,000
Accounts receivable - assigned, June, 30, 2020 391,000
Payment 24% Interest Principal Balance

Loans payable 500,000
May 31 remittance 200,000 10,000 190,000 310,000
June 30 remittance 150,000 6,200 143,800 166,200
Maturity value 636,000

less: Discount 10,600 < remaining term: 2/6
Proceeds 625,400
less: CA of NR
Accrued interest 24,000 624,000 < lapsed term: 4/6
Gain or (loss) on note discouning 1,400
gnment is just a collateral for secured borrowing and NOT CONSIDERED SALE
ense: Bad Debts (Write-off)
rent Liability: Advances from Customers
rent Liability: Advances from Customers

ncurrent Asset: Investment in Subsidiary
ncurrent Asset: Other Assets

ncurrent Asset: Other Assets
re than 90 days PD
TOTAL
3,225,300
188,368
3,036,932
31-60 61-90 91-120 >120
(44,085)
(44,151)
(44,111)
(44,128)
(44,062)
(44,100)
(44,062)
(44,163)
(88,314) (88,239) (88,185) (88,124)
44,062
99,200
10,886 (88,239) (88,185) (44,062)
5% 10% 20% 50%

544 (8,824) (17,637) (22,031)
71,360
ounts Receivable 71,360
(28,825)
(28,825)
20,000
ounts Receivable 20,000
71,360
20,000
91,360
1,375,360
(53,465)
1,428,825
rect Interest = Interest Income
ctive Interest = Interest Income
minal Interest = Interest Receivable
AUDIT OF RECEIVABLE ASSIGNMENT
Problem 1
The unadjusted trial balance of Mama Baby Company as of December 31, 2020 showed Account
Receivable-trade with a balance of P688,500. Investigation revealed that it included amounts due
from officers-P71,000; claim pending against freight company-P8,000; and refund on insurance
policy-P4,300. The trial balance also showed total net sales of 1,000,000 during the year. It is
the company policy to provide allowance of 3% based on net sales. An aging schedule of account
receivable as of December 31, 2020 is presented below:
Percentage to be applied after

Age Net debit balance corrections have been made
60 days and under 259,618 1%
61-90 days 202,437 3%
91-120 days 51,686 5%
Over 120 days 31,331 Definitely uncollectible, 7,000;
the remainder is estimated to be
75% collectible.
Total 545,072
• The only entries made in the Bad Debt expense account were:
a. A debit on December 30 for the amount of the credit to the Allowance for Bad debts.
b. A credit of 4,190 on November 30, 2020 and a debit to Allowance for bad debts because
of bankruptcy. The related sale took place on October 1, 2020.
• The Allowance for Bad Debts schedule is presented below.
Debit Credit Balance

January 1, 2020 13,553
November 30,2020 4,190 9,363
December 30,2020 20,637 30,000
• There is a credit balance in one account receivable (61-90 days) of 7,500; it represents an
advance on a sale contract.
1. How much is the net realizable value of account receivable? ₱524,030.16.
2. How much is the net adjustment to the bad debt expense account? Indicate if debit or
credit. ₱1,458.16 credit adjustment
3. How much is the total bad debt expense for the year 2020? ₱14,988.84.
Problem 2
KAYA KO TO Inc. had the following long-term receivable account balances at December 31, 2020.
Note receivable from sale of division 2,100,000

Note receivable from officer 800,000
Transactions during 2021 and other information relating to KAYA KO TO long-term receivables
were as follows:
a. The 2,100,000 note receivable is dated May 1, 2020, bears an interest rate at 9% and
represents the balance of consideration received from the sale of KAYA KO TO products
to KERI. Principal payments of 700,000 plus appropriate interest are due on May 1, 2021,
2022 and 2023. The first principal and interest payment was made on May 1, 2021.
Collection of the note installments is reasonably assured.
b. The 800,000 note receivable is dated December 31, 2020, bears interest at 8% and is due
on December 31, 2023. The note is due from Luis, president of KAYA KO TO Inc. and is
collateralized by 10,000 shares of KAYA KO TO ordinary shares. Interest is payable
annually on December 31 and all interest payments were paid on their due dates
through December 31, 2021. The quoted market price of KAYA KO TO ordinary shares
was 90 per share on December 31, 2021.
c. On January 1, 2021, KAYA KO TO sold a building that has a carrying amount of 400,000
to RE Company. As payment, RE gave KAYA KO TO a P600,000 note. The note bears an
interest rate of 4% and is to be repaid in three annual installments of 200,000 plus
interest on the outstanding balance. The first payment due is due in December 31,
2021. The market price of the building is not reliably determinable. The prevailing rate
of interest for notes of this type is 13%.
d. On January 1, 2021, KAYA KO TO provides services and accepted in exchange a
promissory note with a face value of 500,000, a due date on December 31, 2023, and a
stated rate of 5% with interest receivable at the end of each year. The fair value of the
services is not readily determinable and the note is not readily marketable. Under the
circumstances, the note is considered to have an appropriate interest rate of interest
of 10%
e. On April 1, 2021, KAYA KO TO sold a patent to Pen Company in exchange of 100,00 zero-
interest bearing note due on April 1, 2023. There was no established exchange price for
the patent and the note had no ready market. The prevailing rate of interest for a note
of this type at April 1, 2021 was 12%. The patent had a carrying amount of 40,000 at
January 1, 2021 and the amortization for the year ended December 31, 2021 would
have been 8,000. The collection of the note receivable from Pen is reasonably assured.
f. On July 1, 2021, KAYA TO sold a parcel of land to Mabilis for 200,000 under an
installment sale contract. Mabilis made a 60,000 cash down payment on July 1, 2021
and signed a 4 year 13% note for the 140,000 balance. The equal annual payments
of principal and interest on the note will be 47,067 payables on July 1, 2022 through
July 1, 2025. The land could have been sold at an established cash price of 200,000.
The cost of the land to KAYA KO TO was 150,000. Circumstances are such that the
collection of installments of the note is reasonably assured.
1. Compute for the total amount of accrued interest receivable on December 31, 2021. ₱93,100.
2. Compute for the interest income for the year ended December 31, 2021. ₱337,558.
3. Compute for the current portion of long-term receivables on December 31, 2021. ₱898,841.
4. Compute for the total long term receivables on December 31, 2021. ₱2,338,709.
5. Compute for the total gain or loss on sale of non-cash assets for the year ended
December 31, 2021. ₱203,264.
1) 93,100
2) 337,558
3) 898,841
4) 2,338,709
5) 203,264
Problem 3
On January 1, 2020, Paulet Company loaned 5,000,000 to Delia Company. The terms of the loan
were payment in full on January 1, 2025, plus annual interest payments at 11%. The loan has a
10,000 direct origination cost and 5,000 indirect origination cost. It has also 10,000 non-
refundable origination fee. The interest payment was made as scheduled on January 1, 2021;
however, due to financial setbacks cause by the COVID-19 pandemic, Delia was unable to make
its 2022 interest payment. Paulets considers the loan impaired and projects the following cash
flows from the loan as of December 31, 2022 and 2023. Assume that Paulet accrued the interest
at December 31, 2021, but did not continue to accrue interest due to the impairment of the loan.
The prevailing interest rate for similar type of note as of December 31, 2022 and December 31,
2023, is 10% and 12%, respectively.
Amount projected as of Amount projected as of

Date of Cash Flow December 31, 2022 December 31, 2023
December 31, 2023 170,000 170,000
December 31, 2024 420,000 720,000
December 31, 2025 1,710,000 2,100,000
December 31, 2026 1,330,000 1,200,000
December 31, 2028 400,000
1. Loan Impairment loss in 2022. ₱2,715,660.
2. Interest Income for 2023 assuming the 170,000 was collected. ₱311,777.
3. Allowance for loan impairment as of December 31, 2023. ₱789,514.
4. Interest Income in 2024 assuming the 720,000 was collected on December 31, 2024 as
scheduled. ₱355,353.
5. Carrying amount of loan as of December 31, 2024. ₱2,865,839.

Problem 4
On April 1, 2020, Bibi Boy Company discounted with recourse a 10-month, 10% note dated
January 1, 2020 with face of 5,200,000. The bank discount rate is 12%. The discounting
transaction is accounted for as conditional sale with recognition of contingent liability.
On November 1, 2020, the maker dishonored the note receivable. The entity paid the bank the
maturity value of the note plus protest fee of 50,000.
On December 31, 2020, the entity collected the dishonored note in full plus 12% annual interest
on the total amount due.
1. What amounts was received from the note discounting on April 1,2020? ₱5,239,000.
2. What amount should be recognized as loss on note discounting? ₱91,000.
3. What is the total amount collected from the customer on December 31, 2020? ₱5,797,000.
4. If the discounting is treated as secured borrowing, what is the total loss on note
discounting? Zero.
Problem 5
On December 1, 2020, Easy Lang Company assigned on a non-notification basis account
receivable of 9,000,000 to a bank in consideration for a loan of 80% of the accounts less a 5%
service fee on the accounts assigned. The entity signed a note for the bank loan. On December
31, 2020, the entity collected assigned accounts of 3,000,000 less discount of 330,000. The entity
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. The entity accepted sales returns of 110,000 on the assigned accounts and
wrote off assigned accounts totaling 420,000.
1. What is the balance of account receivable assigned on December 31, 2020? ₱5,470,000.
2. What is the carrying amount of note payable on December 31, 2020? ₱4,602,000.
3. What is the equity of the assignor in assigned accounts on December 31, 2020? ₱868,000.
Problem 6
DAGUL Company provides financing to other companies by purchasing their account receivable
on a non-recourse basis. DAGUL charges its clients a commission of 12% on all receivable
factored and withholds 10% of receivables as protection against sales returns and other
adjustment. Experienced has led DAGUL to establish an allowance for bad debts of 4% of all
receivables purchased. In addition, DAGUL also charged 15% interest computed on a weighted-
average time to maturity of the receivables of 54 days.
On January 15, DAGUL purchased receivables from LATI Company totaling 8,000,000. LATI had
previously an allowance for bad debts for these receivables at 350,000. By January 31, DAGUL
had collected 1,500,000 on these receivables.
Question: What is the loss on factoring to be recognized by LATI Company? ₱787,534.

Solution 1:
1) NRV of AR
Unadjusted trade accounts receivable - Dec. 31, 2020 688,500
Amounts due from officers (71,000)
Claims against freight company (8,000)
Refund on insurance policy (4,300)
Balance of trade (General ledger) 605,200
vs.
Per aging (Subsidiary ledger) 545,072 ✓
Net sales (Trial balance) 1,000,000

Allowance for DA - Percent of net sales 3%
Net Debit Percent Required

Balance uncollectible allowance
0 - 60 days 259,618 1% 2,596
61 - 90 days bakit inadd back?1 209,937 3% 6,298
91 - 120 days 47,496 5% 2,375
Over 120 days 24,331 25% 6,083
AR, end 541,382 AFDA, end 17,352
Net Realizable Value 524,030.16
1
mali kasi entry ni bookkeeper (cr. A/R), dapat cr. Advances from customers.
Adjusting entry:
Nov. 30, 2020

Bad debts expense 4,190
Should be/Correct entry for write off:

Correcting Entry:
Oct 31
Nov 30
Dec 30
91 days past due
Dec. 30, 2020
(2) Net Adjustment to Bad debt expense | (3) Bad debts expense for the year
Allowance for doubtful accounts, Jan. 1 13,553
add: Bad debts expense 14,989
add: Recoveries 0
less: Write-off 11,190
Allowance for doubtful accounts, Dec. 31 17,352
Bad debts expense, Dec. 31 14,989

Debit balance 16,447
Credit adjustments (1,458)
Adjusting entry:
Allowance for doubtful accounts 1,458
Solution 2:
A. NR from sale of division | 9% ₱2,100,000 dated May 1, 2020 (Interest Bearing - Annual)
Amortization Table:
DATE PRINCIPAL 9% INTEREST BALANCE
May. 1, 2020 2,100,000
May. 1, 2021 700,000 189,000 1,400,000 → balance until Dec. 31, 2021
May. 1, 2022 700,000 126,000 700,000
May. 1, 2023 700,000 63,000 0
2,100,000
A.
1. Accrued interest receivable - Dec. 31, 2021 84,000
2. Interest income - Dec. 31, 2021 147,000
3. Current portion of long-term receivables - Dec. 31, 2021 700,000
4. Long-term receivables - Dec. 31, 2021 700,000
5. Gain or loss on sale - Dec. 31, 2021 0
B. NR from officer | 8% ₱800,000 dated Dec. 31, 2020 (Interest Bearing - Lump)
Amortization Table:
DATE PRINCIPAL 8% INTEREST BALANCE
Dec. 31, 2020 800,000
Dec. 31, 2021 64,000 800,000
Dec. 31, 2022 64,000 800,000
Dec. 31, 2023 800,000 64,000 0
B.
1. Accrued interest receivable - Dec. 31, 2021 0
3. Current portion of long-term receivables - Dec. 31, 2021 0 → none, all Long-term
5. Gain or loss on sale - Dec. 31, 2021 0
C. NR from RE Company | 4% ₱600,000 dated Jan. 1, 2021 (Interet Bearing - Uniform collection of Principal)
PV of Note 13%
DATE Principal Pay. 4% Int Received Total Payment PV Factor of 1
Jan. 1, 2021
Dec. 31, 2021 200,000 24,000 224,000 0.885
Dec. 31, 2022 200,000 16,000 216,000 0.783
Dec. 31, 2023 200,000 8,000 208,000 0.693
600,000 Total present value
less: Face amount
Discount on Note
Amortization Table
DATE 4% Int Received 13% Int Income Discount Amort. Principal Pay.
Jan. 1, 2021
Dec. 31, 2021 24,000 66,501 (42,501) 200,000
Dec. 31, 2022 16,000 46,026 (30,026) 200,000
Dec. 31, 2023 8,000 23,929 (15,929) 200,000
Journal Entry:
Building 400,000
Discount on NR 88,456
C
3. Current portion of long-term receivables - Dec. 31, 2021 169,974 169,974
5. Gain or loss on sale - Dec. 31, 2021 111,544
D. 5% | 10% ₱500,000 dated Jan. 1, 2020 (Interest Bearing - w nominal and effective/unrealistic rate)
PV of principial (₱500,000 x 0.751) 0.751 375,657

PV of interest (₱500,000 x 5% x 2.487) 2.487 62,171
Total Present value of Note 437,829
Amortization Table
DATE 5% Int. Rec. 10% Int Inc Discount Amort. Balance
Jan. 1, 2021 437,829
Dec. 31, 2021 25,000 43,783 (18,783) 456,612
Dec. 31, 2022 25,000 45,661 (20,661) 477,273
Dec. 31, 2023 25,000 47,727 (22,727) 500,000
D
3. Current portion of long-term receivables - Dec. 31, 2021 0
4. Long-term receivables - Dec. 31, 2021 456,612 → no principal payment in 2022, ther
5. Gain or loss on sale - Dec. 31, 2021 0 → no gain/loss because the sale is in t
E. ₱100,000, 12% noninterest bearing dated Apr. 1, 2021 (Noninterest bearing - Lump)
Face value of the note 100,000

PV of Principal (₱100,000 x 0.797) 79,719 0.797
PV of note 79,719
add: Downpayment 0
Sales price 79,719
less: CA of Patent at the date of sale 38,000
Gain/(Loss) on sale 41,719
Amortization Table
DATE 12% Int inc Unearned Int Inc Present Value
Apr. 1, 2021 20,281 79,719
Apr. 1, 2022 9,566 10,714 89,286
Apr. 1, 2023 10,714 0 100,000
E
1. Accrued interest receivable - Dec. 31, 2021 0 → Noninterest bearing note doesn't h
3. Current portion of long-term receivables - Dec. 31, 2021 0 → none, lump sum

less: Unearned int income 13,106
Carrying amount - Dec. 31, 2021 86,894
F. NR from Mabilis | ₱140,000 13% dated Jul. 1, 2021 (Noninterest bearing - Annual)
PV of note 140,000 Annual payment 47,067
add: Downp. 60,000 x PV Factor 2.974
Selling price 200,000 PV of Note 140,000
less: CA of land 150,000
Gain/(loss) on sale 50,000
Amortization Table
DATE Annual Col. 13% Int Inc. Amortization Present Value
Jul. 1, 2021 140,000
Jul. 1, 2022 47,067 18,200 28,867 111,133
Jul. 1, 2023 47,067 14,447 32,620 78,513
Jul. 1, 2024 47,067 10,207 36,861 41,652
Jul. 1, 2025 47,067 5,415 41,652 (0)
F
1. Accrued interest receivable - Dec. 31, 2021 9,100
3. Current portion of long-term receivables - Dec. 31, 2021 28,867
4. Long-term receivables - Dec. 31, 2021 111,133 111,133
Solution 3:
Principal amount 5,000,000
Direct origination cost 10,000
Origination fee (10,000)
Initial measurement 5,000,000 → no need to interpolate
Indirect origination cost 5,000 → expensed outright
Journal Entry:
Jan. 1, 2020
Cash 5,000,000
Dec. 31, 2020

Interes income 550,000
Jan. 1, 2021
Cash 550,000
Dec. 31, 2021
Interes income 550,000
2022 - Impairment
Carrying amount of loan:
Face value 5,000,000
Accrued interest 550,000 5,550,000
less: PV of future cash flows:
December 31, 2023 170,000 0.901 153,153
December 31, 2024 420,000 0.812 340,881
December 31, 2025 1,710,000 0.731 1,250,337
December 31, 2026 1,330,000 0.659 876,112
December 31, 2028 400,000 0.535 213,856 2,834,340
IMPAIRMENT LOSS 2,715,660
Amortization Table
DATE Annual Col. 11% Int Inc. Principal Present Value
Dec. 31, 2022 2,834,340
Dec. 31, 2023 170,000 311,777 (141,777) 2,976,118
Dec. 31, 2024 420,000 327,373 92,627 2,883,491
Dec. 31, 2025 1,710,000 317,184 1,392,816 1,490,675
Dec. 31, 2026 1,330,000 163,974 1,166,026 324,649
Dec. 31, 2027 35,711 (35,711) 360,360
Dec. 31, 2028 400,000 39,640 360,360 (0)
2,834,340
Journal Entry:
Dec. 2022

Note receivable 970,000 → evidenced of impairment
Principal amount 5,000,000

Expected cash flow 4,030,000
Evidenced of impairment 970,000
Note receivable - Dec. 31, 2022 4,030,000

Allowance for loan impairment - Dec. 31, 2022 (1,195,660) → use t-account or balancing figure
Carrying amount - Amortized Cost 2,834,340
Journal Entry:
Dec. 2023
Cash 170,000

2023 - Year of Reversal of Impairment

Carrying amount of loan - Dec. 31, 2023 2,976,118 2,976,118
less: PV of future cash flows:
December 31, 2024 720,000 0.901 648,649
December 31, 2025 2,100,000 0.812 1,704,407
December 31, 2026 1,200,000 0.731 877,430 3,230,485
GAIN ON REVERSAL OF IMPAIRMENT LOSS (254,368)

Gain on reversal 254,368

Carrying amount 4,830,000

Expected cash flow 4,020,000
Evidenced of impairment - 2023 810,000
less: Evidenced - 2022 (970,000)
Increase in NR (160,000)
Amortization Table
DATE Annual Col. 11% Int Inc. Principal Present Value
Dec. 31, 2023 3,230,485
Dec. 31, 2024 720,000 355,353 364,647 2,865,839
Dec. 31, 2025 2,100,000 315,242 1,784,758 1,081,081
Dec. 31, 2026 1,200,000 118,919 1,081,081 0

Allowance for loan impairment (789,515) → use t-account or balancing figure
Journal Entry:
Dec. 31, 2024
Cash 720,000

Allowance for loan impairment (434,161)
Solution 4:
1.
Maturity value 5,633,333 10
Discount 394,333 3
Net proceeds 5,239,000 7
2. Apr. 1, 2020
Cash 5,239,000
Loss on note receivable discounting 91,000
Note receivable discounted 5,200,000
Nov. 1, 2020
Cash 5,683,333

3. Dec. 31, 2020

Cash 5,797,000
4. Zero
Cash 5,239,000
Liability for note receivable discounted 5,200,000
Solution #5:
Dec. 1, 2020
Cash 6,750,000
Note payable - bank 7,200,000
Dec. 31, 2020

Cash 2,670,000
Note payable - bank 2,598,000

Cash 2,670,000

1. AR- assigned, Dec. 31, 2020 5,470,000

2. CA of note payable Dec. 31, 2020 4,602,000
3. Equity of the assignor 868,000
Solution #6:
Cash 6,062,466
Receivable from factor 800,000
Loss on factoring 787,534

less: Commission 960,000
less: Holdback 800,000
less: Interest 177,534
Net cash proceeds 6,062,466

Selling price/Total cash proceeds 6,862,466
less: CA of AR 7,650,000
nce until Dec. 31, 2021
e, all Long-term
on of Principal)
Present Value
198,230
169,160
144,154
511,544
600,000
(88,456)
Carrying amount
511,544
354,045
184,071
0
(20,661)
(22,727)
principal payment in 2022, therefore, the balance is long-term.

ain/loss because the sale is in the form of service.
interest bearing note doesn't have accrued receivables.
e, lump sum
enced of impairment
t-account or balancing figure

t-account or balancing figure
PROBLEM 1 Solution:
In connection with your audit of BIG BROTHER CORP. for the year ended December 31,
2021, you gathered the following information:
Current account at Bank of the Philippine Islands 6,000,000

Current account at Equitable PCI Bank (300,000)
Payroll account 1,500,000
Foreign bank account – restricted (in USD) ** 60,000
Postage stamps 3,000
Employee’s post dated check 12,000
IOU from a key officer 30,000
Credit memo from a vendor for a purchase return 60,000
Traveler’s check 150,000
Customer’s not-sufficient-funds check 45,000
Customer’s check outstanding for 18 months 18,000
Money orders 90,000
Petty cash fund (P12,000 in currency and check named to
petty cash custodian for P18,000) 30,000
Treasury bills, due 3/31/21 (purchased 12/31/20) 600,000
Treasury bills, due 1/31/21 (purchased 1/1/20) 900,000
Time deposit 15,000
Change fund 10,000
Bond sinking fund 1,000,000
**current exchange rate as of December 31, 2021 is at P51 for every USD1
1. How much from the list above should be presented as part of Noncurrent assets?
2. How much from the list above should be presented as part of Current Asset?
3. How much from the list above should be presented as part of Cash and Cash equivalents?
PROBLEM 2 Solution:
You were able to gather the following from the December 31, 2021 trial balance of Rhea Coins and currencie
Inc. in connection with your audit of the company: Check drawn payab
Petty cash fund - ad
Cash on hand – undeposited collections 1,500,000 or
Cash in bank – Metrobank current 4,000,000
Cash in bank – BDO Acct No. 1 3,160,000 Petty Cash Fund per
Cash in bank – BDO Acct No. 2 (160,000) Employee's vales (IO
Cash in bank – Coco bank savings 4,500,000 Currency in envelop
Other Cash Items 2,000,000 Unreplenished petty
Unused postage sta
Audit notes: Petty cash fund adj
1. The petty cash fund consisted of the following items as of December 31, 2021: Currency and coins
Currency and coins 10,000 IOUs
Employees’ vales 8,000 Unexpended emplo
Currencies/money in an envelope marked “collections Checks for deposits
for charity” with names attached 6,000 Unreplenished petty
Check drawn by Rhea Inc., payable to the petty cashier 20,000 Petty cash accounte
Unreplenished petty cash vouchers 6,500 less: Petty cash acco
Unused postage stamps 1,500
52,000 Shortage

2. Cash on hand represents undeposited collections as of December 31, 2021 and includes Cash on hand - unde
the following items: NSF check
Postdated check
2022. Customer’s check for P160,000 returned by bank on December 26, 2021 due to Stale check
insufficient fund but subsequently redeposited and cleared by the bank on January 3, Adjusted cash on ha
2023 Customer’s check for P80,000 dated January 2, 2022, received on December 29,
2024 A customer check for P90,000 dated June 1, 2021 received on the same date and Cash in bank – Metr
yet to be deposited and still on Company postdated
2025. Postal money orders received from customers, P100,000. Company's undelive
Company's stale che
3. Included among the checks drawn by Rhea against the Metrobank current account and Adjusted Cash in ba
recorded in December 2021 are the following:
Other cash items pe
1. Check written on December 29, 2021 dated January 2, 2022, delivered to payee on Time deposit due N
December 29, 2021, P160,000. 6-months money m
2. Check written and dated December 29, 2021 and delivered to payee on January 2, Adjusted other cash
2022, P200,000.
3. Check dated April 1, 2021 amounting to P90,000 still outstanding by December 31,
Petty cash fund
4. The credit balance in the BDO Current Account 2 represents checks drawn in excess of Cash on hand - unde
the deposit balance. These checks were still outstanding at December 31, 2021. Metro bank - curren
Cash in bank – BDO
5. The savings account deposit in Coco Bank has been set by the board of directors for Other cash items
acquisition of new computers. This account is expected to be disbursed in the next 3 Total cash and cash
months from the balance sheet
6. Other cash items included:

a) P1.2M time deposit with BPI which was purchased on November 1, 2021 and shall
mature on November 1, 2022;
b) P500,000 money market placements purchased December 1, 2021 and shall
Mature on March 1, 2022, and;
c) P300,000 6-months money market placements purchased on August 1, 2021
maturing on January 31,
Determine the audited balances of the following:

1. Cash in bank – Metrobank current
2. Petty cash fund adjusted
3. Undeposited collection adjusted
4. Cash shortage or overage
5. Total cash and cash equivalents
PROBLEM 3 Solution:
You obtained the following information on the current account of Bugs Corp. During your Unadjusted balance
examination of its financial statements for the year ended December 31, 2021. DIT
The bank statement on November 30, 2021 showed a balance of P918,000. Among the
bank credits in November was customer’s note for P300,000 collected for the account of OC
the company which the company recognized in December among its receipts. Included in
the bank debits were cost of checkbooks amounting to P3,600 and a P120,000 check which
was charged by the bank in error against Bugs Corp.’s account. Also in November you Erroneous bank deb
ascertained that there were deposits in transit amounting to P240,000 and outstanding
checks totaling P510,000.
The bank statement for the month of December showed total credits of P1,248,000 and Unadjusted balance
total charges of P612,000. The company’s books for December showed total debits of CM for customer's n
P2,206,800, total credits of 1,221,600 and a balance of P1,456,800. Bank debit memos for
December were: No. 121 for service charges, P4,800 and No. 122 on a customer’s DM for service char
returned check marked “Refer to Drawer” for P72,000.
On December 31, 2021 the company placed with the bank a customer’s promissory note NSF check
with a face value of P360,000 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, 2022. Book errors
A check for P11,880 was recorded in the company cash payments books in December as Adjusted book bala
P118,800. Requirements:
1. How much is the outstanding checks as of December 31? 1,085,880

2. How much is the adjusted cash balance as of November 30? 768,000
3. How much is the adjusted cash balance as of December 31? 1,126,920
4. How much is the undeposited collections as of December 31? 658,800
PROBLEM 4 Solution:
The following information was provided by Krame Inc. as of the fiscal year ended Unadjusted balance
September 30, 2021: DIT
August 31 Sept. 30

Loan proceeds directly credited by the bank 200,000 250,000 OC
Note payable payment by the bank 120,000 80,000
Undeposited collections 450,000 ?
Outstanding checks 180,000 ? Erroneous bank cre
Total credits per bank statement 1,955,000
Total debits per bank statement 1,655,000
Total debits per books 1,795,000
Total credits per books 1,800,000
Unadjusted balance
Additional information: CM for customer's n
1. A P100,000 collections was erroneously recorded twice in the books in September, the
company discovered the error and corrected the same immediately in
2. A P50,000 disbursement check was recorded in the books as P5,000 in August. The DM for note payabl
correction was made in
3. The bank erroneously credited the company P80,000 in August for a collection of Kare
Corp. The bank corrected the error in Book errors
4. The unadjusted balance per book in August was at P635,000. The unadjusted balance
per bank in September was at P785,000. Adjusted book bala
Requirements:
1. What is the correct cash in bank balance as of August 31? 825,000
2. What is the correct deposit in transit as of September 30? 260,000
3. What is the correct outstanding checks as of September 30? 240,000
4. What is the correct cash in bank balance as of September 30? 955,000
PROBLEM 5 Solution:
On December 1, 2020, Easy Lang Company assigned on a non-notification basis account AR-assigned
receivable of 9,000,000 to a bank in consideration for a loan of 80% of the accounts less a
5% service fee on the accounts assigned. The entity signed a note for the bank loan. On
December 31, 2020, the entity collected assigned accounts of 2,940,000 net of 2% sales Cash
discount. The entity remitted the collections to the bank in partial payment for the loan Service charge
plus the accrued interest for the month of December. The agreed interest is 1% per month
on the loan balance. The entity accepted sales returns of 110,000 on the assigned accounts
and wrote off assigned accounts totaling 410,000. Cash
Sales discount
What is the equity of the assignor in assigned accounts on December 31, 2020? 1,220,000
What is the carrying amount of note payable on December 31, 2020? 4,260,000
NP - bank
Interest exp
Sales return
Allowance for DA
AR-assigned
NP- bank
Equity of the assign
PROBLEM 6 Solution #6:

DAGUL Company provides financing to other companies by purchasing their account LATI:
receivable on a non-recourse basis. DAGUL charges its clients a commission of 12% on Cash
all receivable factored and withholds 10% of receivables as protection against sales Receivable from fac
returns and other adjustment. Experienced has led DAGUL to establish an allowance for Allowance for DA
bad debts of 4% of all receivables purchased. In addition, DAGUL also charged 15% Loss on factoring
interest computed on a weighted-average time to maturity of the receivables of 54 days.
On January 15, DAGUL purchased receivables from LATI Company totaling 8,000,000.
LATI had previously an allowance for bad debts for these receivables at 350,000. By
January 31, DAGUL had collected 1,500,000 on these receivables.
Question: What is the receivable from factor of LATI Company as of January 650,000
Cash
Receivable from fac
DAGUL:
Accounts receivable
Cash
Clients retainer
PROBLEM 7 1.
On May 1, 2020, Bibi Boy Company discounted with recourse a 10-month, 10% note dated
January 1, 2020 with face of 5,000,000. The bank discount rate is 12%. The discounting
transaction is accounted for as conditional sale with recognition of contingent liability.
2.
On November 1, 2020, the maker dishonored the note receivable. The entity paid the bank
the maturity value of the note plus protest fee of 70,000.
On December 31, 2020, the entity collected the dishonored note in full plus 12% annual
interest on the total amount due.
1. What amount should be recognized as loss on note discounting?
3.
PROBLEM 8 Solution:
The following information is based on first audit of PRINCE COMPANY. The client has not
prepared financial statements for 2018, 2019, or 2020. During these years, no accounts
have been written off as uncollectible and the rate of gross profit on sales has remained
constant for each of the three years.
Prior to January 1, 2018, the client used the accrual method of accounting. From January 1,
2018 to December 31, 2020, only cash receipts and disbursements records were maintained.
When sales on account were made, they were entered in the subsidiary account receivable
ledger. No general ledger postings have been made since December 31, 2017.
As a result of the examination, the correct data shown in the table below are available:
Accounts receivable balances 12/31/2017 12/31/2020

Less than 1 year old 15,400 28,200
One to two years old 1,200 1,800
Two to three years old 800
Over three years old 2,200
Total accounts receivable 16,600 33,000
Inventories 33,540 18,800
Accounts payable for inventory purchased 5,000 11,000
Cash received on accounts receivable are as follows:

2014 2015 2016
Applied to:
Current year collections 148,800 161,800 208,800
Accounts of the prior year 13,400 15,000 16,800
Accounts of two years prior 600 400 2,000
Total 162,800 177,200 227,600
Cash sales 17,000 26,000 31,200
Cash disbursement for inventory purchased 125,000 141,200 173,800
The company estimated that 3% of the total credit sales will be uncollectible. The company
also provided the probability of collections presented as follow:
Age Probability of collection

Less than 1 year old 98%
One to two years old 95%
Two to three years old 90%
Over three years old 50%
On the course of your audit, you found out that 1,000 of the receivables over three years
old as of December 31, 2020 will definitely uncollectible.
1. Net realizable value of Accounts Receivable (December 31, 2020) 30,666

2. Allowance for doubtful account (December 31, 2019) 972
3. Bad Debts expense for 2020 1,362
4. Gross Profit for 2019 61,920
PROBLEM 9
KAYA KO TO Inc. had the following long-term receivable account balances at December 31, 2020.
Note receivable from officer 800,000
Transactions during 2021 and other information relating to KAYA KO TO long-term

receivables were as follows:
• The 800,000 note receivable is dated June 1, 2020, bears interest at 6% and is due
June 1, 2023. The note is due from Luis, president of KAYA KO TO Inc. and is
collateralized by 10,000 shares of KAYA KO TO ordinary shares. Interest is payable
annually every June1 and all interest payments were paid on their due dates. The
quoted market price of KAYA KO TO ordinary shares was 90 per share on December
31, 2021.
• On January 1, 2021, KAYA KO TO sold a building that has a carrying amount of

400,000 to RE Company. As payment, RE gave KAYA KO TO a 600,000 note. The note
bears an interest rate of 4% and is to be repaid in three annual installments of
200,000 plus interest on the outstanding balance. The first payment due is due in
January 1, 2021. The second payment will be due on December 31, 2021 and the third
payment will be due on December 31, 2022. The market price of the building is not
reliably determinable. The prevailing rate of interest for notes of this type is 6%.
• On April 1, 2021, KAYA KO TO sold a patent to Pen Company in exchange of

100,00 zero-interest bearing note due on April 1, 2023. There was no established
exchange price for the patent and the note had no ready market. The prevailing rate
of interest for a note of this type at April 1, 2021 was 9%. The patent had a carrying
amount of 40,000 at January 1, 2021 and the amortization for the year ended
December 31, 2021 would have been 8,000. The collection of the note receivable
from Pen is reasonably assured.
• On July 1, 2021, KAYA TO sold a parcel of land to Mabilis for 200,000 under an
installment sale contract. Mabilis made a 60,000 cash down payment on July 1, 2021
and signed a 4 year 11% note for the 140,000 balance. The equal annual payments of
principal and interest on the note will starts on July 1, 2022 through July 1, 2025 . The
land could have been sold at an established cash price of 200,000. The cost of the
land to KAYA KO TO was 150,000. Circumstances are such that the collection of
installments of the note is reasonably assured.
1. Compute for the total amount of accrued interest receivable on December 31, 2021. 35,700
2. Compute for the total gain or loss on sale of non-cash assets for the year 285,060.84
3. Interest income for Dec. 31, 2022 84,715
4. Compute for the total long-term receivables on December 31, 2021 1,000,123.65
5. Compute for the current portion of long-term receivables on December 31, 2021 225,952.10
PROBLEM 10
On January 1, 2020, Paulet Company loaned 5,000,000 to Delia Company. The terms of the
loan were payment in full on January 1, 2025, plus annual interest payments at 11%. The
loan has a 103,571.46 direct origination cost and 5,000 indirect origination cost. It has also
10,000 non-refundable origination fee. The interest payment was made as scheduled on
January 1, 2021; however, due to financial setbacks cause by the COVID-19 pandemic,
Delia was unable to make its 2022 interest payment. Paulets considers the loan impaired
and projects the following cash flows from the loan as of December 31, 2022 and 2023.
Assume that Paulet accrued the interest at December 31, 2021, but did not continue to
accrue interest due to the impairment of the loan. The prevailing interest rate for similar
type of note as of December 31, 2022 and December 31, 2023, is 10% and 12%, respectively.
Amount projected as Amount projected as

of December 31, 2022 of December 31, 2023
Date of Cash Flow
December 31, 2023 470,000 470,000
December 31, 2024 420,000 720,000
December 31, 2025 1,710,000 2,100,000
December 31, 2026 1,330,000 1,200,000
December 31, 2027 400,000

1. Interest Income in 2024 assuming the 720,000 was collected on December 31, 2024 as scheduled
342,388.69
2. Carrying amount of loan as of December 31, 2024 2,883,233.35
3. Gain on reversal of impairment loss in 2023 226,251.98
4. Loan Impairment loss in 2022 2,378,422.91
Solution:
CASH CA NCA
6,000,000
current liab
1,500,000
3,060,000 Other assets
3,000
12,000 AR
30,000 AR
dr Sales return |cr AR
150,000
45,000 AR
18,000 AR
90,000
30,000
600,000
900,000
15,000 if SILENT, noncurrent asset
10,000
1,000,000 if SILENT, noncurrent asset
8,380,000 1,008,000 4,075,000
3) 8,380,000 1)
9,388,000
2)
Solution:
Check drawn payable to petty cashier 20,000
Petty cash fund - adjusted balance 30,000 2)
Petty Cash Fund per total 52,000

Employee's vales (IOU) (8,000)
Currency in envelope (6,000)
Unreplenished petty cash vouchers (6,500)
Unused postage stamps (1,500)
Petty cash fund adjusted 30,000 2)
Currency and coins 10,000
IOUs 8,000
Unexpended employee contributions 6,000
Unreplenished petty cash vouchers 6,500
Petty cash accounted 50,500
less: Petty cash accountability 50,000
Unexpended employee co 6,000 56,000
Shortage (5,500) 4)
Cash on hand - undeposited collections 1,500,000

NSF check (160,000)
Postdated check (80,000)
Stale check (90,000)
Adjusted cash on hand 1,170,000 3)
Cash in bank – Metrobank current 4,000,000

Company postdated check 160,000
Company's undelivered check 200,000
Company's stale check 90,000
Adjusted Cash in bank - Metrobank current 4,450,000 1)
Other cash items per total 2,000,000

Time deposit due Nov. 1, 2022 (1,200,000)
6-months money market (300,000)
Adjusted other cash items 500,000

Cash on hand - undeposited collections 1,170,000
Metro bank - current account 4,450,000
Cash in bank – BDO Acct No. 1 (net of overdra 3,000,000
Other cash items 500,000
Total cash and cash equivalents 9,150,000 5)
Solution:
Nov Bank credits Bank debits Dec
Unadjusted balance per bank 918,000 1,248,000 612,000 1,554,000
Nov 240,000 (240,000)

Dec 658,800 658,800 4) ✓
Nov (510,000) (510,000)

Dec 1,085,880 (1,085,880) 1) ✓
Erroneous bank debit 120,000 (120,000)
768,000 1,546,800 1,187,880 1,126,920
Nov Book debits Book credits Dec

Unadjusted balance per book 471,600 2,206,800 1,221,600 1,456,800
CM for customer's note
Nov 300,000 (300,000)
DM for service charge
Nov (3,600) (3,600)
Dec 4,800 (4,800)
NSF check
Dec 72,000 (72,000)
Book errors (360,000) (360,000)
(106,920) 106,920
Adjusted book balance 768,000 1,546,800 1,187,880 1,126,920
2) ✓ 3) ✓
Solution:
Aug Bank credits Bank debits Sept
Unadjusted balance per bank 635,000 1,955,000 1,655,000 935,000
Aug 450,000 (450,000)

Sept 260,000 260,000 2)
Aug (180,000) (180,000)
Sept 240,000 (240,000) 3)
Erroneous bank credit (80,000) 80,000
825,000 1,845,000 1,715,000 955,000 4)
1)
Aug Book debits Book credits Sept

Unadjusted balance per book 790,000 1,795,000 1,800,000 785,000
CM for customer's note
Aug 200,000 (200,000)
Sept 250,000 250,000
DM for note payable
Aug (120,000) (120,000)
Sept 80,000 (80,000)
Book errors
(45,000) (45,000)
Adjusted book balance 825,000 1,845,000 1,715,000 955,000
Solution:
AR-assigned 9,000,000
AR 9,000,000
Cash 6,750,000
NP - bank 7,200,000
Cash 2,940,000
NP - bank 2,940,000
Interest exp 72,000
Cash 3,012,000
Sales return 110,000

AR-assigned 520,000
NP- bank 4,260,000 2) ✓
Equity of the assignor 1,220,000 1)
Solution #6:
LATI:
Cash 6,062,466
Loss on factoring 787,534

less: Holdback 800,000
Net cash proceeds 6,062,466

Selling price 6,862,466
less: CA of AR 7,650,000
Cash 150,000
Receivable from factor - Jan. 31 650,000
DAGUL:
Commission income 960,000
Clients retainer 800,000
Cash 6,240,000
Cash 1,500,000
Clients retainer 150,000

Cash 150,000
Maturity value 5,416,667 10
Discount 325,000 3
Net proceeds 5,091,667 7
Apr. 1, 2020
Cash 5,091,667
Loss on note receivable discounting 75,000 1) ✓
Nov. 1, 2020
Cash 5,486,667

Dec. 31, 2020

Cash 5,596,400 2)
Solution:
QUESTION 36 Solution:
You have been assigned to audit the financial statements of KAPE KAPE UNO for the year 2019. PCF balance
A cash count was conducted by your staff on January 7, 2020. The petty cash fund of 60,000 Unreplenished
maintained by the company on an imprest basis reflected a balance of 22,750. Unreplenished
expenses totaled 37,250 of which 9,500 pertains to January 2020.
You were furnished a copy of the company’s bank reconciliation statement with Charot Bank
as follows: Bank Reconcilia
Balance per ban
Balance per bank 277,994 add: DIT
Add: Deposit in transit 248,836
Bank debit memos 712,750 less: OC
Returned check 63,000 Adjusted balan
Less: Outstanding checks (174,580)
Book error (72,000) Balance per boo
Balance per books 1,056,000 less: Postdated
less: DM for NP
Your review of the reconciliation statement disclosed the following: less: NSF
1. Postdated checks totaling 107,400 were included as part of the deposit in transit. These less: Unrecorde
represent collections from various customers whose accounts have been outstanding for add: Book error
less than three months. These checks were actually deposited on January 8,2020. Adjusted balan
2. Included in the deposit in transit is a check from customer for 63,000 which was returned by
the bank on December 27, 2019 for insufficiency of funds. This account has been outstanding
for over six months. The check was replaced by the customer on January 15,2020. Postdated chec
3. The bank debited the account of KAPE KAPE UNO for 710,000 as payment of notes payable
including interest of 10,000 due on December 26, 2019. This was not recorded as of year end.
4. A check was cleared by the bank as 30,900 but was recorded by the bookkeeper as 102,900.
This was in payment of accounts payable. NSF
5. Bank service charges totalling 2,750 were not recorded.
Based on the above information, determine the adjusted balances of:

Debit memo fo
Cash 277,100
QUESTION 37 Solution:
In connection of your audit of financial statements of RR Company for the year ended
December 31, 2020, you gathered the following information. Balance per ban
add: DIT
1. The company maintains its current account with Tsutsu TV Bank. The bank statement on
December 31, 2020, showed balance of 638,340. less: OC
Bank error for o
Your audit of the company’s account with Tsutsu TV Bank disclosed the following: Adjusted balan
• A check for 22,500 received from a customer whose account is current had been deposited Balance per boo
and then returned by the bank on December 28,2020. No entry was made for the return of add: CM for inte
this check. The customer replaced the check on January 15, 2021. Unrecorded em
• A check for 5,720 was cleared by the bank as 7,500. The bank made the corrections on less: DM for NS
January 2, 2021. less: Postdated
• A check for 3,500 representing payment of an employee advance was received and less: Various de
deposited on December 27,2020 but was not recorded until January 3, 2021. less: DM for ban
• Post-dated checks totalling 67,300 were included in the deposit in transit. These represent Adjusted balan
collections of current accounts receivable from customers. The checks were actually
deposited on January 5, 2021. Petty cash fund
• Various debit memos for draft purchased for payment of importation of equipment
totalling 230,000 were not yet recorded. These purchases were previously set up as
accounts payable. Said equipment arrived in December 2020.
• Interest earned on the bank balance for the 4th quarter of 2020, amounting to 1,950 was
not recorded.
• Bank service charges totalling 1,260 were not recorded.
• Deposit in transit and outstanding checks at December 31, 2020 totaled 136,250 and
276,380 , respectively.
2. Various expenses from the company’s imprest petty cash fund dated December 2020 totaled
16,250 while those dated January 2021 amounted to 5,903. Another disbursement from the
fund dated December 2020 was a cash advance to employee amounting to 3,000. A
replenishment of the petty cash fund was made on January 8, 2021.
3. The company’s trial balance on December 31, 2020, includes the following accounts:
Cash in bank-Tsutsu TV Bank 748,300

Cash in bank-Eink Bank(Restricted account for plant expansion,
expected to be disbursed in 2021) 700,000
Time deposit, placed on December 20,2020 and due on April 20,2021 1,000,000
Money market placement, Prudential Bank 4,000,000
1. What is the adjusted cash in bank? 432,690 432,690

2. What is the adjusted Petty Cash Fund on December 31, 2020 10,750 10,750
3. What is the cash and cash equivalent on December 31, 2020? 4,443,440 4,443,440
QUESTION 38
The following information is based on first audit of LENI COMPANY. The client has not
prepared financial statements for 2019, 2020, or 2021. During these years, no accounts
have been written off as uncollectible and the rate of gross profit on sales has remained
constant for each of the three years.
Prior to January 1, 2019, the client used the accrual method of accounting. From January 1,
2019 to December 31, 2021, only cash receipts and disbursements records were maintained.
When sales on account were made, they were entered in the subsidiary account receivable
ledger. No general ledger postings have been made since December 31, 2018.
As a result of the examination, the correct data shown in the table below are available:
Accounts receivable balances 12/31/2018 12/31/2021

Less than 1 year old 15,400 28,200
One to two years old 1,200 1,800
Two to three years old 800
Over three years old 2,200
Total accounts receivable 16,600 33,000
Inventories 11,600 18,800
Accounts payable for inventory purchased 5,000 11,000
Cash received on accounts receivable are as follows:

2019 2020 2021
Applied to:
Current year collections 148,000 161,000 208,000
Accounts of the prior year 13,400 15,000 16,800
Accounts of two years prior 600 400 2,000
Total 162,000 176,400 227,600
Cash sales 17,000 26,000 31,200
Cash disbursement for inventory purchased 125,000 141,200 194,060
1. What is the company’s total sales revenue for 2020? 205,600 205,600
2. What is the company’s aggregate amount of purchases for th 466,260 466,260
3. What is the company’s sales revenue for the three-year peri 655,800 655,800
4. What is the company’s gross profit for 2019? 54,840 54,840
QUESTION 42
ISKO Corp. had the following receivable financing transactions during the year: 1)
• On March 1, 2021, ISKO Corp. factored P500,000 of its accounts receivables to BPI. As
of the date of factoring, it was ascertained that P40,000 of the accounts receivable is
doubtful of collection. BPI advanced P350,000 cash to ISKO Corp. and withheld P60,000
as factors holdback (to cover future sales discount and sales returns and allowances).
The company incurred P15,000 direct transaction costs (legal fees and other professional 2)
fees) related to the factoring. The factoring was done on a without-recourse basis, thus
transferring all significant risks and rewards associated to the receivable to BPI. 3)
• On May 1, 2021, ISKO Corp. assigned P1,000,000 of its outstanding accounts receivable
to BPI in consideration of a P700,000, 20% loan. BPI charged the company 2% of the
accounts assigned as service charge. By the end of July, ISKO Corp. collected P300,000
cash from the assigned accounts net of a P10,000 sales discount. By the end of August,
ISKO Corp. collected another P250,000 from the assigned accounts after P14,000 sales
discount. The company accepted merchandise originally invoiced at P40,000 as sales
returns and wrote-off P30,000 of the assigned accounts as worthless. It was agreed
between parties that monthly collections shall be remitted to the bank as partial payment
of the loan and interest.
• On July 1, 2021, ISKO Corp. accepted from a customer a 9-month P500,000, 12% notes
receivable for the sale of merchandise. On December 31, 2021, ISKO Corp. discounted the
note to BPI at a discount rate of 10%. The discounting was done on a without-recourse
basis, thus transferring all significant risks and rewards associated to the receivable to BPI.
1. What is the carrying value of the loans payable related to th 700,000 700,000
2. How much should be reported as gain/loss in the income statement on the
transfer of receivables on the discounting of the note receivable on July 1?
(use dash “-“ to indicate negative / loss values) 1,375 1,375
transfer of receivables on the factoring of receivable on March 1?
(use dash “-“ to indicate negative / loss values) -65,000 (65,000)
4. What is the carrying value of the accounts receivable-assigne 356,000 695,000
transfer of receivables on the assignment of receivable on May 1?
(use dash “-“ to indicate negative / loss values) 0 Zero
4)
5)
Question 50
In the course of your audit of DKNY Company's "Receivables" account as of December 31,
2020, you found out that the account comprised the following items:
Trade accounts receivable 1,500,000 Trade accounts

Trade accounts receivable, assigned (proceeds from assignment Trade accounts
amounted to P675,000) 700,000 Trade accounts
Trade accounts receivable, factored (proceeds from factoring done 12% Trade note
on a without-recourse basis amounted to P270,000 300,000 20% Trade note
12% Trade notes receivable, received November 1, 2021 200,000 Trade receivabl
20% Trade notes receivable, discounted at 35% upon receipt Installments rec
of the 180-day note on a without recourse basis 300,000 Customers’ acco
Trade receivables rendered worthless 60,000 Advance payme
Installments receivable, normally due 1 year to two years 500,000 Customers’ acco
Customers' accounts reporting credit balances arising from sales returns 60,000 Cash advances
Advance payments for purchase of merchandise 310,000 Claim from insu
Customers' accounts reporting credit balances arising from advance payment 40,000 Subscription rec
Cash advances to subsidiary 750,000
Claim from insurance company 50,000 Deposit on cont
Subscription receivable due in 60 days, 650,000 Advances to sto
TOTAL
Deposit on contract bids 400,000
Advances to stockholders (collectible in 2023) 1,500,000 Trade accounts
from factoring d
Requirements: basis amounted
20% Trade note
40% upon recei
without recours
1. How much is the amount to be presented as "trade and other receivables" under Proceeds from A
current assets? 3,914,000 3,910,000 Carrying value o
Loss from Facto
Maturity Value
2. How much loss from receivable financing should be recognized in the income statements? Principal
-57,750 57,750 Interest (P*r%*
Discount (MV*d
Proceeds from N
3. How much is the total other receivables - current? 1,014,000 1,010,000 Carrying value o
Loss from Disco
Total Loss from
4. How much is the total noncurrent assets based on the lis 2,650,000 2,650,000
5. How much is the total trade receivables? 2,900,000 2,900,000
Problem 22: Solution:

On December 31, 2019, ISIAH Company, a financing institution lend ₱5,000,000 to PSALMS Principal
Corp. due 3 years after. The loan is supported by an 10% note receivable. Transaction costs add: Origination
incurred to originate the loan amounted to ₱248,000. ₱374,000 was chargeable to Psalms as less: Origination
origination fees. Interest on the loan are collectible at the end of each year. The yield rate on Initial measurem
the loan is 11.5%. The company estimated at origination date that receivable is fully collectible
thus did not initially provide loss arising from 12 month expected credit loss (ECL). Amortization ta
Isiah was able to collect interest as it became due at the end of 2020. There was no evidence
of significant increase in credit risk by the end 2020 and that the receivable is determined to
have "low credit risk".
During 2021, however, due to Psalms Corporation's business deterioration and due to
political instability and faltering global economy, the company was not able to collect 2021 - Year of I
amounts due at the end 2021. After reviewing all available evidence at December 31, 2021,
Isiah Company determined that it was probable that Psalms would pay back only P3,400,000
collectible as follows:
December 31, 2023 1,800,000

December 31, 2024 1,300,000
December 31, 2025 800,000
December 31, 2026 300,000
As of December 31, 2021, the prevailing rate of interest for all debt instruments is 14%.
Amortization ta
Based on the above information and on your audit, answer the following requirements:
1. What is the carrying value of the loans receivables as of December 31, 2020?
4,934,510 4,934,510
2. What is the impairment loss to be recognized in the 2021 statement of comprehensive

income? 2,424,638 2,424,638
3. What is the interest income to be recognized in the 2022 statement of comprehensive

income? 353,894 353,894
4. What is the correct carrying value of the loans receivab 958,797 958,797
5. What is the amortization to be recognized in the 2023? 394,592 394,592
6. What is the fair value of the loans receivables as of December 31, 2019?
4,874,000 4,874,000
Question 61
The cash account of Icheck Company shows the following activities:
Date Debit Credit Balane

11,263 Balance 345,000
37,591 November bank charges 150 344,850
38,322 November bank cre 30,000 374,850
42,339 NSF check 3,900 370,950
44,166 Loan proceeds 145,500 516,450
44,531 December bank charges 180 516,270
11,658 Cash receipt book 2,118,900 2,635,170
11,658 Cash disbursement book 1,224,000 1,411,170
CASH BOOKS
RECEIPTS PAYMENTS
Date OR No. Amount Check No. Amount
1 110-120 33,000 801 6,000
2 121-136 63,900 802 9,000
3 137-150 60,000 803 3,000
4 151-165 168,000 804 9,000
5 166-190 117,000 805 36,000
8 191-210 198,000 806 57,000
9 211-232 264,000 807 78,000
10 233-250 231,000 808 90,000
11 251-275 63,000 809 183,000
12 276-300 90,000 810 21,000
15 301-309 165,000 811 24,000
16 310-350 24,000 812 48,000
17 351-390 57,000 813 60,000
18 391-420 27,000 814 66,000
19 421-480 51,000 816 108,000
22 481-500 63,000 817 33,000
23 501-525 96,000 818 150,000
23 - - 819 21,000
23 - - 820 12,000
26 526-555 222,000 821 9,000
28 556-611 15,000 822 36,000
28 - - 823 39,000
29 612-630 111,000 824 87,000
29 - - 825 6,000
29 - - 826 33,000
Totals 2,118,900 1,224,000
BANK STATEMENT
Date Check Charges Credits
1 792 7,500 25,000
2 802 9,000 33,000
3- - 63,900
4 804 9,000 60,000
5 EC 243,000 243,000
8 805 36,000 285,000
9 CM16 - 40,000
10 799 21,150 462,000
11 DM 57 3,900 231,000
12 808 90,000 63,000
15 803 3,000 -
16 809 183,000 255,000
17 DM 61 180 24,000
18 813 60,000 57,000
19 CM 20 - 145,500
22 815 18,000 -
23 816 108,000 141,000
23 811 24,000 -
23 801 6,000 -
26 814 66,000 96,000
28 818 150,000 222,000
28 DM112 400 -
29 821 9,000 15,000
29 CM 36 - 38,000
29 820 12,000 -
Totals 1,059,130 2,499,400
Additional Information:
1. DMs 61 and 112 are for service charges
2. EC is error corrected
3. DM 57 is for an NSF Check
4. CM 20 is for loan proceeds, net of 450 interest charges for 90 days
5. CM 16 is for the correction of an erroneous November bank charge
6. CM 36 is for customers’ note collected by bank in December
7. Bank balance on December 31 is 1,778,770
Based on the preceding information, determine the following:
1. Unrecorded checks issued by the company for the month of December if there is any,
Solution:
PCF balance 22,750 PCF Balance 32,250
Unreplenished expenses
2019 27,750
2020 9,500 37,250
60,000
Bank Reconciliation
Balance per bank 277,994
add: DIT 248,836
less: Postdated check (107,400) 141,436
less: OC (174,580)
Adjusted balance per bank 244,850
Balance per book 1,056,000

less: Postdated check (107,400)
less: DM for NP (710,000)
less: NSF (63,000)
less: Unrecorded bank service charge (2,750)
add: Book error 72,000
Adjusted balance per book 244,850
Postdated check:
Cash in bank 107,400
NSF
Cash in bank 63,000
Debit memo for Note Payable:

Note payable 700,000
Cash in bank 710,000
Solution:
Balance per bank 638,340

add: DIT 136,250
less: Postdated check (67,300) 68,950
less: OC (276,380)
Bank error for overstatement of check: 1,780
Adjusted balance per bank 432,690
Balance per book 748,300
add: CM for interest earned 1,950
Unrecorded employee check (check for deposi 3,500
less: DM for NSF check (22,500)
less: Postdated check (67,300)
less: Various debit memos (230,000)
less: DM for bank service charge (1,260)
Adjusted balance per book 432,690
Petty cash fund balance per ledger 30,000
AR/SALES
AR, Jan. 1, 2019 16,600 AR, Dec. 31, 2020 33,000
Credit sales 582,400 Collections 566,000
TOTAL 599,000 TOTAL 599,000
Credit sales 582,400

Cash sales 74,200
Total sales 656,600
2019 2020 2021 TOTAL

Cash sales 17,000 26,000 31,200 74,200
Collection in:
2019 148,000 148,000
2020 15,000 161,000 176,000
2021 2,000 16,800 208,000 226,800
A/R, Dec. 31 800 1,800 28,200 30,800
Total sales 182,800 205,600 267,400 655,800
Multiply by GP ratio 30% 30% 30% 30%
Gross profit 54,840 61,680 80,220 196,740
AP/Purchases
AP, End 5,000 AR, Beg 11,000
Purchases 466,260 Payments 460,260
TOTAL 471,260 TOTAL 471,260
Sales 655,800
less: COGS:
Invety beg 11,600
add: Purchases 466,260
Inventory end 18,800 459,060
Grossprofit 196,740 30%
Net cash proceeds from factoring 335,000

add: Factors holdback 60,000
Total sales price of AR factored 395,000
less: CA of AR factored 460,000
No gain or loss on assignment of AR because it is not a sale

May 1, 2020
AR 1,000,000
Cash 680,000
May 31, 2020

Cash 300,000
AR-assigned 305,000

Cash 300,000
Aug. 31, 2020

Cash 250,000
AR-assigned 264,000

Cash 250,000
Sales returns and allow 40,000

AR-assigned 70,000
Accounts receivable - assigned, Jul, 31 2020 695,000
Payment 20% Interest Principal Balance

Loans payable 700,000
May 31 remittance 300,000 11,667 288,333 411,667
Aug 31 remittance 250,000 6,861 243,139 168,528
Maturity value 9 545,000

less: Discount 3 13,625
Proceeds 6 531,375
less: CA of NR
Accrued interest 30,000 530,000
Gain or (loss) on note discouning 1,375
GIVEN TRADE OTHER RECEIVABLES
TRADE & OTHER RECEIVABLES
Trade accounts receivable 1,500,000 1,500,000 1,500,000
Trade accounts receivable, 700,000 700,000 700,000 assignment is just a collateral fo
Trade accounts receivable, 300,000 - -
12% Trade notes receivable 200,000 200,000 200,000
20% Trade notes receivable, 300,000 - -
Trade receivables rendered 60,000 - - Expense: Bad Debts (Write-off)
Installments receivable, nor 500,000 500,000 500,000
Customers’ accounts reporting credit 60,000
balances arising from sales returns - Current Liability: Advances from
310,000
Advance payments for purchase of merchandise 310,000 310,000
40,000
Customers’ accounts reporting credit balances arising from advance payments - Current Liability: Advances from
Cash advances to subsidiary 750,000 - Noncurrent Asset: Investment in
Claim from insurance comp 50,000 50,000 50,000
Subscription receivable due 650,000 650,000 650,000
- -
Deposit on contract bids 400,000 - Noncurrent Asset: Other Assets
1,500,000
Advances to stockholders (collectible in 2023) - Noncurrent Asset: Other Assets
TOTAL 2,900,000 1,010,000 3,910,000
750,000
Trade accounts receivable, factored (proceeds 400,000
from factoring done on a without-recourse 1,500,000
basis amounted to P250,000) 300,000 2,650,000
20% Trade notes receivable, discounted at
40% upon receipt of the 180-day note on a
without recourse basis 300,000
Proceeds from AR factored 270,000

Carrying value of AR factored (300,000)
Loss from Factoring (30,000)
Maturity Value (Principal + Interest)

Principal 300,000
Interest (P*r%*t) 30,000 330,000
Discount (MV*d%*remaining term) (57,750)
Proceeds from NR discounted 272,250
Carrying value of NR discounted (no interest) (300,000)
Loss from Discounting (27,750)
Total Loss from Receivable Financing (57,750)
Solution:
Principal 5,000,000
add: Origination cost 248,000
less: Origination fees (374,000)
Initial measurement 4,874,000
Amortization table: 10% 11.50% Correct Interest = Interest Incom

Date Nominal Int. Correct Int. Amortization Balance Effective Interest = Interest Inco
Dec. 31, 2019 4,874,000 Nominal Interest = Interest Rece
Dec. 31, 2020 500,000 560,510 (60,510) 4,934,510 3
Dec. 31, 2021 500,000 567,469 (67,469) 5,001,979
Dec. 31, 2022 500,000 575,228 (75,228) 5,077,206
2021 - Year of Impairment

Carrying amount of loan - Dec. 31, 2021
Present value - amortized cost 5,001,979
add: Accrued interest receivable 500,000 5,501,979
PV of future cash flows:
December 31, 2023 1,800,000 0.804 1,447,847
December 31, 2024 1,300,000 0.721 937,818
December 31, 2025 800,000 0.647 517,596
December 31, 2026 300,000 0.580 174,079 3,077,340
IMPAIRMENT LOSS 2 2,424,638
Amortization table: 11.50%

Date Collection Correct Int. Amortization Balance
Dec. 31, 2021 3,077,340
Dec. 31, 2022 0 353,894 (353,894) 3,431,235
Dec. 31, 2023 1,800,000 394,592 1,405,408 2,025,827
Dec. 31, 2024 1,300,000 232,970 1,067,030 958,797
Dec. 31, 2025 800,000 110,262 689,738 269,058
Dec. 31, 2026 300,000 30,942 269,058 (0)
assignment is just a collateral for secured borrowing and NOT CONSIDERED SALE
Expense: Bad Debts (Write-off)
Current Liability: Advances from Customers
Current Liability: Advances from Customers

Noncurrent Asset: Investment in Subsidiary
Noncurrent Asset: Other Assets

Noncurrent Asset: Other Assets
Correct Interest = Interest Income
Effective Interest = Interest Income
Nominal Interest = Interest Receivable

Audit Problem (Aaconapps2 - Cash and Receivables

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What are the main phases of an audit process?

What are the main phases of an audit process?

What is the objective of audit planning?

What is the objective of audit planning?

CHAPTER 1: OVERVIEW OF AUDIT PROCESS AND PRE-ENGAGEMENT ACTIVITIES

This phase will always be performed by the auditor.

Furthermore, the auditor is expected to perform the following:

Matters to be discussed with predecessor auditor include the following: (RID)

6. Agree on the terms of the engagement and prepare an engagement letter.

Ø Agreeing the Terms of Audit Engagements

a. Auditor's acceptance of the engagement

Contents of engagement letter (RA FORMS)

a. The presence of audit Risk

a. Basis in which Fees are computed and any billing arrangements

When relevant, the following points could also be made:

• Who appoints the Component auditor;

Ø Acceptance of a Change in Engagement

Ø Circumstances that could lead to Change in Engagement

PLANNING AN AUDIT OF FINANCIAL STATEMENTS

Ø The Role and Timing of Planning

• Appropriate attention is devoted to important areas

• Size and complexity of the entity

Ø Planning as a phase of the audit process

Ø Major Audit Planning Activities

a. Obtaining an understanding of the client and its environment

THE OVERALL AUDIT STRATEGY AND AUDIT PLAN

• Identify the characteristics of the engagement that define its scope;

The audit program shall serve as a:

✓ Set of instructions to assistants involved in the audit; and

The audit program also contains:

✓ The audit objectives for each area; and

Ø Completion of Overall Strategy and Audit Plan

a. the overall audit strategy

Ø Additional Considerations in Initial Audit Engagements

DIRECTION, SUPERVISION AND REVIEW

✓ the assessed risks of material misstatement;

Ø Considerations Specific to Smaller Entities

RISK ASSESSMENT PROCEDURES

Ø Risk Assessment Procedures and Related Activities

The risk assessment procedures shall include the following:

Ø The Required Understanding of the Entity and its Environment

ASSESSMENT OF AUDIT RISK AND MATERIALITY

Components of Audit risk

a. Risk of material misstatement

b. Risk of not Detecting the Misstatement

If the auditor wishes to reduce detection risk, procedures to be performed shall be

Ø Interrelationship of the Components of Audit Risk

Ø Relationships of Risk and Materiality to substantive procedures

Ø Summary of Procedures Performed in Planning an Audit

INTERNAL CONTROL CONSIDERATION

ACCOUNTING AND INTERNAL CONTROL SYSTEMS

ENTITY'S INTERNAL CONTROL

a. Effectiveness and efficiency of operations;

Ø Assurance provided by internal control

• Management usual requirement that a control be cost-effective (Cost-benefit consideration);

Ø Areas of Internal Control

Ø Controls Relevant to the Audit

a. The auditor's judgment about materiality;

Ø Components of Internal Control

A. The control environment