ReSA The Review School of Accountancy ‘BTel. No. 725-9807 & 734-3989 AUDITING PROBLEMS. IRENEO/ESPENILLA QUIZZER 5 - CASH AND CASH EQUIVALENTS, RECEIVABLES AND INVENTORIES: ROBLEM 1: resented below is a list of items that may or may not be reported as inventory in a company's December 31, balance sheet: Cost of goods out on consignment at another corapany’s store 2,400,000 Goods sold on installment basis 300,000 Goods in transit purchased FOB shipping po'nt 360,000 Goods in transit purchased FOB destination 600,000 Cost of goods sold to another company, for which the company has signed agreement to repurchase at a set price that covers all costs related to the inventory 900,000 Cost of goods sold where large returns are predictable 840,000 Cost of goods in transit sold FOB shipping point 360,000 Freight charges on goods purchased 240,000 Factory labor costs incurred on goods still unsoit 150,000 Interest cost incurred for inventories that are routinely manufactured 120,000 Costs incurred to advertise goods held for resale 60,000 Materials on hand not yet placed into production 1,050,000 Office supplies 30,000 Raw materials on which the company has started production, but which are not completely processed 840,000 Factory supplies 60,000 Cost of goods held on consignment from anather company 1,350,000 Costs identified with units completed but not yet sold 780,000 Cost of goods in transit sold FOB destination 120,000 Temp. investment in stocks and bonds that will be resold i the sear future 41,500,000 1. How much of these items would typically be reported as inventory in the financial statements? 2. 6,900,000 —b. 6,000,000. 6,780,000 —d,6,660,000 PROBLEM 2: The following accounts were extracted from the unadjusted trial balance of Silang Corp. as of December 31, 2014: Cash 963,200 Accounts receivables 2,254,000 Merchandise inventory 6,050,000 ‘Accounts payable 4,201,000 Accrued expenses 60,400 During your audit, you discovered that the client held its cash records open even after year end. ‘Audit notes: 'a. Collections for January 2015 of P654,600 were recorded in the December 2014 cash records. ‘The receipts of P360,100 represents cash sales with the balance representing collections from customers who paid within the 5% cash discount pertod. b. Accounts payable of P372,400 was paid in Jenuary 2015. The payments on which a P12,400 cash discount has been taken were include’ in the December 31, 2014 check register. c. Merchandise inventory as stated in the trial balance represented the result of the count conducted on December 30, 2014 on inventories on hand. The following information were found to be relevant in your audit of inventori + Goods valued at P275,000 are on consignment with a customer and were not included in the physical count + Goods costing P217,5¢0 were received from a vendor on January 4, 2015. The related Invoice was received and recorded cx: January 6, 2015. These goods were shipped by the vendor on December 31, 2014 urder an FOB shipping point terms.ReSA: The Review School of Accountancy Page 2 of 24 + Goods costing 637,500 were shipped on December 31, 2014, and were received by the customer on January 2, 2015. The terms of the invoice were FOB shipping point. The sales of P815,000 has been recorded in 2014. + A shipment of goods invoiced at P182,000 to a customer on December 29, terms FOB destination was recorded in 2015. The cost of the related goods amounted to P130,000 and were received by the customer on January 4, 2015. + The invoice for goods costing P175,000 was received and recorded as purchase on December 31, 2014. The related goods, shipped FOB Destination were received on January 4, 2015. * Goods valued at 612,800 are on consignment from a vendor. These goods were excluded from the physical count. Requirements: Based on the result of your audit ascertain the following: 2. Adjusted balance of Cash: a. 963,200 ¢. 681,000 b. 693,400 4. 668,600 3. Adjusted balance of Accounts receivable: a. 2,254,000 c. 2,564,000 b. 2,548,500 4. 2,908,600 4. Correct Inventory ending balance: 5,010,000 ¢. 6,035,000 b. 5,860,000 d. 6,080,000 5. Net adjustment to cost of sales: a. debit by P57,500 b. debit by P232,500 6. Adjusted accounts payable: credit by P580,000 |. credit by P555,300 a. 4,243,500 ¢. 4,615,900 b. 4,398,400 d. 4,790,900 7. Correct working capital ratio: a. 2.20, ©. 1.85 b. 1.98 4.1.80 PROBLEM 3: In your audit of the December 31, 2014 financial statements of Ivy Inc., you found the following inventory related transactions: ‘a. Goods costing P100,000 are on consignment with a customer. These goods were invoiced at normal profit margin which was at 40% based on cost and was recorded as 2014 sales. Being offsite on the count date which was on December 30, 2013, the goods were not included in the physical count. b. Goods costing P33,000 were delivered to Ivy Inc. on January 4, 2015. The invoice of these goods were received and recorded on January 10, 2015. The invoice showed the shipment was made on December 29, 2014, FOB shipping point. c. Goods costing P40,000 were shipped FOB shipping point on December 31, 2014, and were received by the customer on January 2, 2015. Although sale was recorded in 2014, these goods were included in the 2014 inventory. 4. Goods costing P16,000 were shipped to a customer on December 30, 2014, FOB destination. These goods were received by the customer on January 5, 2015 and were not included in the physical count. The sale was properly recorded in 2015. e. Goods costing P22,000 shipped by a vendor under FOB destination term, were received on January 3, 2015. The related invoice however, were received on December 31, 2014, thus was recorded as purchase in 2014. f. Goods costing P50,000 were received from a vendor under consignment term. These goods were Included in the physical count. No purchase related to the inventory had been recorded yet. 9. Ivy Inc., recorded as 2014 sale a P112,000 invoice for goods delivered to a customer on December 31, 2014, FOB Destination. The goods were received by the customer on January AP ~ CASH, RECEIVABLES AND INVENTORIESReSA: The Review School of Acouuntaicy Page 3 of 24 5, 2015. Having been delivered after the count date, the goods were included In the physical count. Requirements: 8. What is the net adjustment to Inventories as of December 31, 20147 a. 59,000 c. 50,000 b. 43,000 4. 66,000 9. Assuming all sales are on account, what is the net adjustment to accounts receivable as of December 31, 20147 a. 260,000 ©. 140,000 b. 252,000 d. 212,000 10. Assuming all purchases are on account, what is the net adjust ment to accounts payable? a. 22,000 ¢. 11,000 b. 33,000 d. 55,000 11. What is the effect of the errors to the 2014 net income? a. 194,000 <. 164,000 b. 220,000 d, 204,000 PROBLEM Bird Company Is @ manufacturer of sili oaks. The following information was obtained from the company’s accounting records for the year envied Necember 31, 2014: Inventory at December 31, 2014 (based on physical count in Bird's ‘warehouse at cost on December 31, 2014) 1,870,000 ‘Accounts payable at December 31, 2014 1,415,000 Net sales (sales less sales returns) 9,693,400 Your audit reveals the following information: ‘a. The physical count included tools to be shipped to a customer FOB shipping point on December 31, 2014, These tools cost P64, 000 and were billed at P78,500 and were recorded as December sales. They were physically segregated awaiting shipping instructions from the customer. b. Goods shipped FOB shipping point by a vendor were in transit on December 31, 2014. These Invoice amounting to P93,000 were received in January 2015 and were recorded as purchases upon receipt. c. Work in process inventory costing P27,000 was sent to a Job contractor for further processing. 4. Not included in the physica! count were goods returned by customers on December 31, 2014. ‘These goods costing P49,000 ware inspected and returned to inventory on January 7, 2015. Credit memos for P67,809 were issued to the customers at that date. e. In transit to a customer on December 31, 2014, were yoods costing P17,000 shipped FOB, destination on December 26, 2014. A sales invoice for P29,400 was issued on January 3, 2015, when Bird Company was notified by a customer that the tools had been received. f, At exactly 5:00 pm on December 31, 2014, goods costing P31,200 were received from a vendor. These were recorded on a receiving report dated January 2, 2015. The related Invoice was recorded on December 31, 2014, but the goods were not included in the physical count. 9. Included in the physical ccunt were goods received from a vendor on December 27, 2014. However, the related invoice sor 36,000 was not recorded because the accounting department's copy of the receiving report was lost. h. Amonthly freight bill for Pi6,000 was received on January 3, 2015. It specifically related to merchandise bought in December 31, 2014, one-half of which was still in the inventory at December 31, 2014. The freight was not included in either the inventory or in accounts payable at December 31, 2014. Based on the preceding Information, compute the December 31, 2014, adjusted balance of the following: A B c D 12. Inventory 2,095,200 2,031,200 2,046,200 2,078,200 13. Accounts payable 1,552,000 1,560,000 © 1,467,000 1,591,200 14. Net sales 9,614,900 9,576,500 9,625,600 9,547,100 AND INVENTORIES ———APO5 @)ReSA: The Review School of Accountancy Pag2 4 of 24 PROBLEM 5: You are making an audit of the Malaguku Co. for the year ended December 31, 2014. You have observed the taking of physical inventory and have noted that all merchandise actually received up to the close of business, December 28, 2014, were included on the inventory sheets. The total of the physical inventory, at invoice cost, is P175,000, while the purchase account shows a balance of P1,750,000 as of December 31, 2014. ‘You noted also the following purchases invoices have been recorded in the voucher register as follows: DECEMBER RR. 2014 VOUCHER INVOICE DATE TERMS MERCHANDISE No. REGISTER RECEIVED 631 2,000 December 26 Shipping point December 29 632 4,000 December 26 —_—Destination January 5 633 9,000 January 2 Destination December 30 634 8,000 December 31 Shipping point January 4 635 1,000 January 7 Shipping point December 28 636 6,000 January 3 Shipping point January 6 JANUARY RR. 2015 VOUCEHR INVOICE DATE TERMS MERCHANDISE No. REGISTER RECEIVED 637 8,500 December 20 Destination January 8 638 7,200 January 2 Shipping point December 27 639 11,700 December 28 Destination January 7 640 6900 December 30 Destination January 6 eat 4,100 January 2 Destination December 25 Requirements: 15. What is the adjusted balance of Purchases for the period ended December 31, 20147 a. 1,751,300 ¢. 1,753,200 b. 1,743,800 d. 1,751,200 16. What Is the adjusted balance of the Inventory account as of December 31, 2014? a. 175,000 . 194,000 b. 186,000 6. 198,100 PROBLEM 6: You are engaged in the audit of the inventory of the Kula Inc. as of December 31, 2014. The company is on physical inventory basis. The physical inventory was actually taken on December 29, 2014 rather than the evening of December 31, so that the company employees might enjoy the New Year's festivities. You have observed the taking of the physical inventory. As taken, the physical inventory included only merchandise received through December 29. The subsequent compilation of the inventory includes only the merchandise physically counted and is not yet recorded on the books. After having completed appropriate work on the inventory as compiled, you make additional tests to determine: . a. The correct cut off the purchases account for the year 2014. (it is the company policy to recognize purchases based on freight terms and the passage of title). The ledger balance is 650,000. b. The correct amount of the inventory to be stated on a comparable basis with acquisition costs (purchases) and sales. The inventory summary shows a total of P27,000. Listed in the table below are certain matters developed in the course of your tests. Certain voucher register entries are as follows: Dates Mdse. F.0.8. Terms Shipped _—Received Invoice No. Amount December, 2014 Destination 12-26-14 1401 250 Shipping point 12-30-14 9176 310 Shipping point 12-31-14 0010 180 Destination 12-29-14 1307 550 ‘Shipping point 1-2-15 6609 690 Destination 12-31-14 6610 420 Destination 1-3-15 0481 750 Shipping point 12-30-14 3671 290 AP — CASH, RECEIVABLES ANDINVENTORIES = APOS GedReSA: The Review School of Accountancy Page 5 of 24 Shipping point 1215 14-15 6098 350 January, 2015 Destination 12-2644 L245 7611 680 Shipping point W224 12-30-1477 460 Destination 32-27-14 12-29-14 9001 770 Destination 12-28-14 1-2-15 8345 205 Shipping point 12-28-14 1-3-15 4678 315 ‘Shipping point 12-29-14 12-31-14 981 595 Destination 42-29-14 12-31-14 7263 610 Destination 12-31-14 1-4-15 4915 375 Shipping point 12-15 15-15 5666 805 ‘The physical inventory compilation includes P750 of merchandise received on consignment from a supplier. The company has other consigned stocks on hand which were not included in the physical Inventory compilation and which cost P5,200 if purchased, Shipments of December 31, 2014 were properly recorded on the books as sales. You computed the cost of these sales as being P 1,900. Requirements: Adjusted balances at December 31, 2014 of 17. Inventory ‘a. 30,120 c. 27,300 b. 28,220 4. 26,430 18. Purchases . 649,675 ¢. 650,585 b. 649,990 4. 651,650 PROBLEM 7: Flores Company cans two food commodities which it stores at various warehouses. The company uses 2 perpetual inventory system under which the finished goods inventory Is charged with production and credited for sales at standard cost. The detail of the finished goods inventory is maintained on punched cards by the tabulating department in units and pesos for the various warehouses. ‘The accounting department receives copies v7 daily production reports and sales invoices. Units are then extended at standard cost and a summary of the day's activity Is posted to the Finished Goods: Inventory general ledger control accaunt. Next the sales invoices and production reports are sent to the tabulating department for processing. Every month the control account and detailed tab records are reconciled and adjustments recorded. ‘The last reconciliation and adjustments were made at November 30, 2014. ‘Your CPA firm observed the taking of the physical inventory at all locations in December 31, 2014. The Inventory count began at 4:00 p.m. and was completed at 8:00 p.m. The company’s figure for the physical Inventory is 342,400. The general ledyer control account balance at December 31 was £364,900, and the final "cab un” of the Inventory punched cards showed a total of P403,300. Unit cost data for the company’s two products are as follows: Product ‘Standard Cost A P2 B 3 ‘A review of December transactions disclosed the following: 1. Sales invoice no, 1310, December 2, was priced at standard cost for P13,700 but was listed on the accounting department's daily summary at P11,200. 2. A production report for 23,900, December 15, was processed twice in error by the tabulating department. 3. Sales invoice no. 1423, December 9, for 1,200 units of product A, was priced at a standard cost of P1.50 per unit by the accounting department. The tabulating department corrected the error but did not notify the accounting department of the error. 4. Asshipment of 3,400 units of Product A was invoiced by the billing department as 3,000 units ‘on sales Involce no. 1504, December 27. the error was discovered by your review of transactions. AAP - CASH, RECEIVABLES ANDReSA: The Review School of Accountancy Page 6 of 24 5. On December 27 the Pampanga warehouse notified the tabulating department to remove 2,200 unsalable units of Product A from the finished goods inventory, which it did without receiving @ special Invoice from the accounting department. The accounting department received @ copy of the Pampanga warehouse notification on December 29 and prepared a special Invoice which was processed in the normal manner. The units were not included in the physical Inventory. 6. A report for the production on January 3 of P2,500 units of Product B was processed for the Bulacan plant as of December 31. 7. A shipment of 300 units of Product 8 was made from Tarlac warehouse to Ken's Markets, Inc., at 8:30 p.m. on December 31 as an emergency service. The sales invoice was processed as of December 31. Flores Company prefers to treat the transaction as a sale in 2014 8. The working papers of the auditor observing the physical count at the Bataan warehouse revealed that 700 units of Product B were omitted from Flores's physical count. Flores concurred that the units were omitted in error. 9. Asales invoice for 600 units of Product A shipped from the Zambales warehouse was mislaid and was not processed until January 5. The units were shipped on December 30. 10. ‘The physical inventory of the Angeles warehouse excluded 350 units of Product A marked “reserved”. Investigation revealed that this merchandise was being stored as a convenience for Steve's Markets, Inc., a customer. This merchandise, which has not been recorded as a sale, Is billed as itis shipped. 11. A shipment of 10,000 units of Product 8 was made on December 27 from the Zambales warehouse to the Bataan warehouse. The shipment arrived on January 6 but had been excluded from the physical inventories. Requirements: 19. What is the correct inventory balance to be presented in the balance sheet as of December 31, 2014? a. 344,300 . 383,000 b. 375,500 6. 374,300 20. What is the inventory shortage/overage? a. 7,500 over . 1,500 over b. 7,500 shortage 4.0 PROBLEM 8: (On May 31, 2014, a fire completely destroyed the work-in process inventory of Alder Paints, Physical inventory figures were published as follows As of January 1, 2014 As of May 31, 2014 P 15,000 30,000 Work-in Process 50,000 Finished Goods 70,000 60,000 Sales for the first five months of 2014 were P150,000. Raw materials purchased were P50,000. Fi ‘on purchases was P5,000. Direct labor for the five months was P40,000. To determine the value of the lost inventory, the insurance adjusters have agreed to use an average gross profit rate of 32.5%. ‘Assume that manufacturing overhead was 45% of direct labor cost. Requirements: 21. The value of the goods manufactured and completed as of May 31, 2014 was ‘a. P60,000 c. P95,000 b. P90,000 d. 91,250 22. Raw materials used during the first five months of 2014 were a. P25,000 cc. P40,000 b. P35,000 d. P45,000 23. The total value of goods put in process during the five-month period amounted to ‘a. P143,000 ¢. P168,000 b. P150,000 4. P148,000 24. The value of the destroyed work-in process inventory as determined by the insurance adjusters would be a. P56,750 c. P86,750 b. P65,750 d. P57,650 = CASH, RECEIVABLES AND INVENTORIESReSA: The Review School of nccountency Page 7 of 24 PROBLEM 9: On May 21, 2014, a fire destroyed the entire merchandise inventory on hand of Natural Corporation. The following information is available: Sales, January 1 through May 2, 2914 380,000 Sales return (covering the same period) 20,000 Sales allowance (covering the sare period) 10,000 Sales discounts (covering the same period) 25,000 Inventory, January 1, 7014 80,000 Purchases, January 1 throug ftey 2, 2014 (including P40,000 of goods in transit on May 2, 2Ui4 shipped FOB shipping point) 400,000 Purchase discounts 40,000 Purchase returns and allowances 30,000 Mark-up percentage on cost 20% 25. What Is the estimated inventory cn May 2, 2014 Immediately prior to the fire? 2. 70,000. c. 146,000. b. 82,000. 4. 122,000. 26. How much should be recognized as inventory 1085? a. 30,000. ©. 70,690. b. 42,000. 4. 82,000. PROBLEM 10: ‘You were assigned to test the reasonableness of the inventory account balange as reported by your client, Surety Corp. The following information is made available by Surety Corp.'s accountant: Cost Retail Beginning inventory 598,400, P1,500,000 Purchases 3,048,400 5,500,000 Freight in 80,000 Purchase retuins 140,000 180,000 Mark-ups: 600,000 Mark-up cancellations 100,000 Mark-downs 1,300,000 Mark-down cancellations ‘385,000 Sales : 4,470,000 Sales returns 150,000 Sales discount 200,000 Employee discount 400,000 Ending Inventory as a result of the piysicat count conducted on December 31, was at P649,600. What is the amount of estimated inventary snortage, If any, as a result of your test of reasonableness under the following assumed cost formula? (round-off cost percentage to 2 whole numbers) 27. Lower of cost or average/Conservative/Conventional Approach a. none b. 176,050 ©. 327,700 4. 479,350 28. Average Approach = b. 176,050 c. 294,000 4. 327,700 |. FIFO Retail Approach 2 7050. 204,000 «. 378,250 4. 479,350 PROBLEM 11: Nancy Inc. had the following Items of merchandise inventories with related information about estimated selling price and cost to sel! as of December 31, 2014: (ian Tuan [un Ua Casto Sa Z-01 10,000 | PS Z-02 15,000 8 2-03 20,000 14 2-04 25,000 10 2-05 30,000 20 Ap ~ CASH, RECEIVABLES AND INVENTORIES: me alReSA: The Review School of Accountancy Page 8 of 24 Selling Price | Unit Cost to Sell P25 | iol Quantity [Unit Cost 20,000 Required: 30. What is the correct carrying value of inventories if the lower of cost or NRV valuation is employed on an item per item basis? 5,515,000. 5,831,000 ¢. 5,981,000 —-d. 6,100,000 31, What is the loss on inventory write-down, assuming that direct write-off method is used under requirement 1? @. none b, 119,000 ¢. 150,000 d. 466,000 32. What is the correct carrying value of i employéd on a per class basis? 3. 5,515,000. 5,831,000. 5,981,000 4. 6,100,000 /entories if the lower of cost or NRV valuation is 33. What is the loss on inventory write-down, assuming that direct write-off method is used under requirement 32 a. none b. 119,000 c. 150,000 d. 466,000 PROBLEM 12: The Savior Corporation uses the lower of cost or net realizable value inventory. Data regarding the items in work-in-process inventory are presented below. Markers Pens _—Pencils Historical cost 24,000 18,880 30,000 Selling price 36,000 21,800 38,000 Estimated cost to complete 3,000 2,620 6,200 Replacement cost 20,800 16,800 16,800 Normal profit margin as a % of selling 20% = 20% 20% price Cost to sell based on selling price 5% 10% 10% Required 34. What is the loss on write-down under the direct write-off method? a. none b. 3,880 ¢. 3,320 4. 5,620 35. What is the loss on write-down under the allowance method, assuming that the unadjusted balance of the allowance for inventory write-down is at P2,000? a. none b. 1,880 . 1,320 . 3,620 36. What is the gain on recovery of previous write-down under the allowance method, assuming that the unadjusted balance of the allowance for inventory write-down is at P5,000? a. none b. 1,120 c. 3,680, d. 1,380 37. What is the correct carrying value of inventories as of December 31? a. 72,880 b. 76,200 . 69,000 4. 67,200 a3: You observed the inventory count of the Solsons Company as of December 31, 2014. The client Prepared the summary presented below and gave it to you for verification. Quantity Cost NRV Amount A 360 units P3.60/dozen P3.64/dozen P1,310.40 8 24 units 4.70 each 4.80 each 112.80 c 28 units 16.50 each 16.50 each 1,353.00 D 43 units 5.15 each 5.20 each 176.80 E 400 units 9:10 each 8.10 each 3,640.00 F 70 dozens 2.00 each 2.00 each 140.00 G 95 grosses 144.00 per gross 132.00 per gross 13,780.00 38. How much should the inventory be presented in the 2014 balance sheet? a. 18,364.25. ©. 20,513.20. b. 19,604.25. 4. 20,315.00. AP - CASH, RECEIVABLES AND INVENTORIES APOS5SReSA: The Review School of Accountancy 4. In the course of your audit of OKNY Company's “Receivables” account as of December 31, 2014, you found out that the account cemprised the following Items: Trade accounts receivable Page 9 of 24 1,550,000 Trade accounts receivable, assigned (proceeds from assignment amounted to P650,000) Trade accounts receivable, factored! {proc a without-recourse basis amounted to P250,000 12% Trade notes receivable 20% Trade notes receivable, discounted at 40% upon receipt of the 180-day note on a without recourse basis Trade receivables rendered worthless Installments recelvable, normally due 1 year to two years Customers’ accounts reporting crea't balanzes. arising from sales returns ‘Advance payments for purchase of merchandise ‘Customers’ accounts reporting credit balances arising from advance payments Cash advances to subsidiary Claim from insurance company Subscription receivable due in 60 days, ‘Accrued interest receivable Deposit on contract bids Advances to stockholders (collectible in 2017) Requirements: 39. How much is the total trede receivables? a. 3,650,000 . 3,000,000 750,000 s from factoring done on 300,000 200,000 300,000 50,000 600,000 60,000 300,000 40,000 800,000 30,000 600,000 20,000 500,000 2,000,000 b. 3,100,000 4. 2,950,000 40. How much is the amount to be presented as “trade and other receivables” under current assets? a. 7,350,000 c. 4,850,000 b. 5,350,000 d. 4,050,000 41. How much loss from receivable financing should be recognized in the income statements? ‘a. 36,000 b. 50,000 c. 86,000 4. 105,000 PROBLEM 15: In relation to your audit of inuyashe Inc ’s accounts receivable you ascertained the following Information: a. The general ledger balances of the client's receivable and related accounts were: ‘Accounts receivables 3,225,300 Allowance for bad debts (169,000) . Amortized cost 3,056,300 b. Inuyasha Inc. estimates its bad debt losses by aging its accounts recetvable, the aging schedule of accounts receivable at December 31, 2014, is presented below: ‘Age of accounts. ‘Amount Current P1,686,400 1 to 30 days past due 922,000 31 to 60 days past due 384,800 61 to 90 days past due 153,300 ‘Over 90 days past due 78,800 c. The company normally selts n/30. d. Furthermore, the company’s uncotlectibie accounts experience for the past 5 years are in the schedule that foilows: 31-60 days PD 9% 10% 11% 12% 8%, 2% = CASH, RECEIVABLES AND INVENTURLES 1-90 More than daysPD 90 days PD 23% 55% 18% 60% 16% 45% 2% 45% 21% 45% —APOS5ReSA: The Review School of Accountancy Page 10 of 24 Requirements: 42, What are the corresponding percentages to be used per age category in computing for the client's require allowance for bad debts? Current 1-30 31-60 1-90 290 a | 1% 3% 10% 20% + 45% b. 1.5% 5% 10% 25% © 50% < 2% 5% 10% 20% = 50% 4. 2% 3% 10% 25% «© 45% 43. The required allowance for bad debt expense is: a. 173,653 ¢. 188,368 b. 185,415 4d. 220,842 44. ‘The net realizable value of the company’s accounts receivable on December 31, 2014, should be: a. 3,036,932 €. 2,986,345 b. 3,004,458 4, 2,976,540 PROBLEM 16: The Mexican Corp. grants its customers 30 days credit. The company uses the allowance method for its uncollectible accounts receivable. During the year, a monthly bad debt accrual is made by multiplying 2% by the amount of credit sales for the month. At the fiscal year-end of December 31, an aging of accounts receivable schedule is prepared and the allowance for uncollectible accounts is adjusted accordingly. At the end of 2014 before any audit adjustments, the general ledger accounts showed balances of account receivable at P1,230,000 and the allowance for bad debt at P106,000. Accounts receivable activity for 2014 included the following Credit sales P12,800,000 Write offs, 82,000 The company’s controller prepared the following aging summary of year-end accounts receivable: Age Group Amount Percent Collectible 0 - 60 days 825,000 98% 61 - 90 days 220,000 90% 91 - 120 days 50,000 70% Over 120 days 128,000 60% Total P1,223,000 It was ascertained that P40,000 from the over 120 days accounts are absolutely worthless. Requirements: ‘45. How much is the unreconciled difference between the general ledger and the subsidiary ledger balance of accounts receivable and how should it be accounted for: ‘a. 7,000; GL prevailing over SL, with the difference being charged against sales. b. 10,000; GL prevailing over SL, with the difference being charged to bad debt expense. . P7,000; SL prevailing over GL, with the difference being charged against sales. d. 10,000; SL prevailing over Gl, with the difference being charged to bad debt expense. 46. How much is the total bad debt expense for 2014? a. 304,700. ¢. 280,700. b. 278,700. 4. 294,700 47. How much is the net realizable value of accounts receivable at December 31, 2014? a. 1,123,000. ¢, 1,094,300. b. 1/18/30. 4. 1,223,000. Pr 47: You are auditing the Accounts Receivable of Rovers Inc. as of December 31, 2014. You found the following information in the general journal: . ‘Accounts receivable 1,466,720 Less: Allowance for doubtful accounts (46,720) ‘Accounts receivable net 1,420,000 The accounts receivable subsidiary ledger had the following details: Customer Invoice date Amount Balance Gudang 9/12/2014 139,200 139,200 Tisoy 12/12/2014 153,600 AP - CASH, RECEIVABLES AND INVENTORIES APOS5ReSA: The Review School of Accountancy Page 11 of 24 12/02/2014 99,200 252,800 Gusoy 11/17/2014 485,120 16/08/2014 176,000 361,120 Naning 12/08/2014 160,000 10/25/2014 44,800 8/20/2014 40,000 244,800 Nanong 9/27/2014 96,000 96,000 Balong 9/20/2014 71,360 71,360 Peejorg 42/06/2014 112,000 11/29/2014 169,440 _ 281,440 Total Pi, 446,720 ‘Additional information: a. You discovered based on your review of subsequent events that Balong recently went bankrupt, thus your suggested that the amount receivable from the same shall be written off. b. You also discovered that che invoice dated 12/02/2014 has already been settled by Tisoy per OR number 34675. This amount however has been erroneously posted against Gusoy’s subsidiary ledger as a settlement for an invoice dated 11/05/2014 for the same amount. c. The estimated bad debt rates below are based on the company’s receivable collection experience: ‘Age of accounts % of Collectibility 0- 30 deys 8% 31 - 60 days 95% 61 - 90 days 0% 91 - 120 ways 86% Over 120 days 50% Required: 48. Assuming that there were no other entries to the allowance for doubtful accounts, what is the correct bad debt expense for the year? a. 95,680 c 141,984 b. 92,704 d. 144,960 49. What Is the correct allowance for bad debt expense for the year ended December 31, 2014? a. 156,000 129,320 b. 153,024 @ 197,348 50. What is the net adjustment tz the Accounts receivable in the general ledger? a. 172,560 c. 91,350 b. 119,200 d. 71,360 51. What it the carrying value of the company’s accounts receivable as of December 31, 2014? 1,255,040 1,275,040 1,258,016 4. 1,295,040 52. What is the necessary adjusting entry to adjust any unlocated difference between the SL and GL? Bad debt expense 29,000 ‘Accounts receivable 20,000 b. Sales 20,000 ‘Accounts receivable 20,000 Accounts receivable 20,000 Other income 20,000 d. Nonecessary entry ‘APO2 EXERCISE 18: ‘You were assigned to audit Natasha inc.’s accounts receivable which had an unadjysted balance per books of P755,142, net of an aliowarce for bad debts amounting to P32,858. Your inquiries and investigations revealed the following inlormation: a. The only entries in the Bad debt expense account were: rR credit for P1,296 on December 1, 2014, because a customer remitted in full, an account charged off on October 31, 2014. = Adebit on December 31, for the amount of the credit to Allowance for bad debt on the same date. b. The allowance for bad debt accounts had the following details: Jan, 4, balance P15,250 —APOS £9 AP ~ CASH, RECEIVABLES AND INVENTORIESReSA: The Review Schoo! of Accountancy Page 12 of 24 June. 30, write off of accounts (1,296) ‘Aug. 31, write off of accounts (3,280) Oct. 31, write off of accounts (2,256) Dec. 31, Bad debt expense (3%*788,000) _ 23,640 Dec. 31, balance 32,858 Records revealed that the December 31, 2014 bad debt expense was debited to the bad debt expense account and credited to allowance for bad debt for the amount shown above, while the write offs credited to accounts receivable amounted only to P6,032. Further investigation revealed that the correct amounts to be written off were shown in the analysis above. ¢. Anaging schedule of the accounts receivable as of December 31, 2014, and the decisions are as shown in the table below: Amount to which the allowance is to be adjusted after adjustments and corrections. Age Net debit _ have been made bal. 0 - 1 month P372,960 1% 1 - 3 months 307,280 2% 3-6 months 88,720 3% Over 6 months 24,000 Definitely uncollectible, P4,000; P8,000 is considered to be 50% uncollectible; the remainder Is estimated to be 80% collectible. There is a credit balance in one accounts receivable (0 ~ 1 months) of P8,000; it represents an advance on a sales contract; also there is a credit balance in one of the 1 - 3 months accounts receivable of P2,000 for which merchandise will be accepted by the customer. e. The accounts receivable contro! account is not in agreement with the subsidiary ledger. The differences cannot be located, and the company’s accountant decides to adjust the control to the sum of the subsidiaries after corrections are made. Requirements: 53. What is the correct bad debt expense for the year? a. 10,296 c. 13,343 b. 10,640 d. 14,640 54. What Is the adjusting journal entry to record the remaining unlocated difference between the general ledger and the subsidiary ledger after consideration of all adjustments? ‘a. Accounts receivable 5,760 Bad debt expense P5,760 b. Accounts receivable 5,760 Sales . 5,760 c. Accounts receivable 4,960 Sales 4,960 4. Accounts receivable 9,760 Bad debt expense 9,760 55. What is the accounts receivable balance on December 31, 20142 a. 793,200 <. 798,960 b. 798,160 4. 808,960 56. What is the required allowance for bad debt expense on December 31, 2014? a. 19,057 c. 29,357 b. 19,857 d. 32,857 57. What is the accounts receivable net of allowance for bad debts? . a. 774,143 ¢. 779,503 b. 779,103 4. 779,903 PROBLEM 1 You are auditing the accounts receivable and the related allowance for bad debts account of Sayote Inc. The control account of the aforementioned accounts had the following balances: ‘Accounts Receivable 1,270,000 Less: Allowance for bad debt _ (78,000) Net Book Value 1,192,000 “APOS ‘CASH, RECEIVABLES AND INVENTORIES |ReSA: The Review School of Accountancy Page 13 of 24 Upon your investigation, you found wut the fo'lowing Information: a. The company’s normal sates tern ts 15/30. b. The allowance for bad debt account had following details in the general ledger: Allowance for Bad Debts July 31 Write off 74,000] Jan.1 Balance 30,000 | Dec. 31 Provision 72,000 c. The subsidiary ledger balances of the compeny’s accounts receivable as of December 31, 2014 contained the following infurmation Debit palances Credit balances Under one month 540,000 Kamote Co. P12,000 ‘One to six months $382,000 Kutchay Corp. 21,000 Over six months 228,000. ——‘Kalachuchi Inc. 27,000 “Fi/323,000 60,000 Additional information + The credit balance with Katnote Co. was for an overpayment from the customer. The company delivered additional -nerchandise to Kamote Co. on January 3, 2015 to cover such overstatement. + The credit balance of Kutchay Corp. was due to a posting error, the amount should have been credited to Kutchara Carp for a 60 day outstanding receivable. + The credit balance from Kakschuchi Inc. was a cash advance for a delivery to be made on January 15, 2015. d. It was estimated that 1 percent of accounts under one month Is doubtful of collection while 2 Percent of accounts one to six months are expected to require an allowance for doubtful of collection. The accounts over six months are analyzed as follow: Definitely uncollectibte 72,000 Doubtful (estimated to be 50% collectible) 36,000 Apparently good, but slow (estimated to be 90% collectible) 120,000 Total 228,000, Required: Based on your audit, answer the following: 58. What Is the entry to adjust any uniocated difference between the control account and the ‘subsidiary ledger? ‘a. Sales 10,000 ‘Accounts receivable 10,000 b. Accounts receivable 10,000 Sales 10,000 c. Sales 14,000 Accounts receivable 14,000 4. No uniocated difference 59. The adjusted accounts receivaole balance on December 31, 2014, should be a. 1,212,000 c. 1,239,000 b. 1,227,000 d. 1,260,000 60. The required balance of the aliovance for bad debts account on December 31, 2014, Is a. 46,020 ¢. 64,020 b. 46,440 4. 142,020 61. The entry to adjust the allowance for bad debts account is a. Bad debts expense 46,020 Allowance for bad debts 46,020 b. Bad debts expense 52,020 Allowance for bad debts 52,020 c. Allowance for bad debts 6,000 Bad debts expense 6,000 d. Bad debts expense 40,020 Allowance for bad debts 40,020 PROBLEM 20: ‘The substantiate the existence of the accounts receivable balances as at December 31, 2014 of Lucrative Company, you have decided to send cniinmation requests to customers. Below is a summary of the confirmation requests to custimers. Below Is a summary of the confirmation replies together with the exceptions ari audit tirtings. Gross profit on sales is 20%. The company Is under the perpetual inventory method. Ae > CASH, RECETVABLES Ano inventors ~ AP O5 Ga)ReSA: The Review School of Accountancy Page 14 of 24 Name of Customer Balance Per Books Comments from Customers Audit Findings Cruz 50,000 30,000 was returned on Returned goods were January 2, 2015. Correct _received January 5, balance is P20,000. 2015. Frias. 10,000 Your CM representing price The CM was taken up adjustment dated December by Lucrative in 2015. 29, 2014 cancels this. Lazo 48,000 You have overpriced us by The complaint is, P50. Correct price should be valid. P100. Sia 37,500 We received the gods only Term is shipping on January 5, 2015 point. Shipped in 2014 Yao 45,000 Balance was offset by our _Lucrative credited December shipment of your accounts payable for raw materials. 45,000 to record purchases. Yao is a supplier Requirements: 62. If the necessary adjusting journal entry is made regarding the case of Mr. Cruz, the net income will: a. increase by —b. decrease by cc. decrease by _d. increase by 6,000 30,000 6,000 30,000 63. The effect on 2014 net income of Lucrative Company of its failure to record CM involving transaction with Mr. Frias: a. P10,000 over —b. P10,000 under c. P2,000 over d. 2,000 under . The actual number of units sold to Mr. Lazo is: - 960 b. 320 c. 480 4. 1,920 of 65. The overstatement of receivable from Mr. Lazo is: a. 32,000 b. 8,000 c. 24,000 4d. 16,000 66. The accounts receivable from Mr. Sia is: ‘a. correctly stated. 37,500 over c. 37,500 under. 75,000 over 67. The adjusting journal entry to correct the receivable from Mr. Yao i 2. Purchases 45,000 ‘Accounts receivable 45,000 b. Accounts payable 45,000 Purchases 45,000 . Accounts receivable 45,000 ‘Accounts payable 45,000 4. Accounts payable 45,000 ‘Accounts receivable 45,000 PROBLEM 21: On December 31, 2013, ISIAH Company, a financing institution lent P4,000,000 to PSALMS Corp. due 3 years after. The loan is supported by an 8% note receivable. Transaction costs incurred to originate the loan amounted to P248,000. P374,000 was chargeable to Psalms as origination fees. Interest on the loan are collectible at the end of each year. The yield rate on the loan is 9.25%. Isiah was able to collect interest as it became due at the end of 2014. During 2015, 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 2015. After reviewing all available evidence at December 31, 2015, Isiah Company determined that it was probable that Psalms would pay back only P3,400,000 collectible as follows: December 31, 2017 1,400,000 December 31, 2018 1,000,000 December 31, 2019 600,000 December 31, 2020 400,000 As of December 31, 2015, the prevailing rate of interest for all debt instruments is 14%. Based on the above information and on your audit, answer the following requirements: APOSReSA: The Review Schoo! of Arcountancy Page 15 of 24 68. What Is the carrying value of the loans receivables as of December 31, 20147 @. 3,874,000. 3,912,345 c. 3,954,237 d. 4,000,000 69. What Is the impairment loss to be recognized in the 2015 statement of comprehensive income? a. 1,336,188 —b. 1,294,296. 1,094,018 d. 1,656,187 70. What is the interest income co be recognized in the 2017 statement of comprehensive Income? a. 228,818 b. 264,570 ¢ 159,542. 242,170 71, What Is the correct carrying value of the loans receivable as of December 31, 20177 2. 2,860,219 Db. 2,013,832 c. 1,724,789 d._ 1,884,332 PROBLEM 22: Visage Corp. had the following receivable financing transactions during the year + On March 1, 2014, Visage Corp. factored #500,000 of Its accounts receivables to BPI. As of the date of factoring, it was ascertained that 20,000 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 (legai fees and other professional 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. + On May 1, 2014, Visage Corp. assigned P800,000 of Its outstanding accounts recelvable 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 agrced between parties that monthly collections shall be remitted to the bank as partial payment of the loan and interest. + On duly 1, 2014, Visage Corp. accepted from a customer a 6-month P600,000, 12% notes receivable for the sale of merchandise, On October 31, 2014, 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: 72. How much should be reperted as gain/lots in the income statement on the transfer of ‘receivables on the factoring of receivable on March 17 ‘a. 90,000 b. 100,026 . 80,000 d. none 73. 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 b. 126,000 cc. 316,000 4. none 74. What is the carrying value of the accounts receivable-assigned as of June 30? a. 391,000 'b. 400,000 ¢. 450,000 d. none 75. What ts the carrying vaive of the loans payable related to the accounts receivable assigned as of June 30? a. 150,000 b. 166,206 cc. 310,000 d. none 76. 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? a. 10,600 b. 1,400 c. 24,000 4. none PROBLEM 23: Fre cash account In the ledger of Tlang-flang Company had a balance of P105,600 at December 31, 2014. An examination of the account, however, disclosed the following: 1. The sales book was left open up to January 5, 2015, and cash sales totaling P15,000 were considered as sales in December. 2. Checks of P9,300 In payment of liabilities were prepared before December 31, 2014, recorded in the books, but not mailed or delivered to payees Ap ~ CASH, RECEIVABLES AND INVENTORIES APO5ReSA: The Review School of Accountancy Page 16 of 24 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 P1,500 deposited with but returned by bank, “NSF”, on December 27, 2014. 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. 77. ‘The cash balance to be shown on the balance sheet on December 31, 2014 should be: a. P105,600 c. P58,400 b. P50,600 d. P60,500 PROBLEM 24: In connection with your audit of BIG BROTHER CORP. for the year ended December 31, 2014, 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 Money orders 90,000 Petty cash fund (P12,000 in currency and expense < 30,000 vouchers for P18,000) Treasury bills, due 3/31/15 (purchased 12/31/14) 600,000 Treasury bills, due 1/31/15 (purchased 1/1/14) 900,000 Change fund 10,000 Bond sinking fund 1,000,000 «*current exchange rate as of December 31, 2014 Is at P50 for every USD1- Requirements: | 2 eens the total cash and cash equivalent to be reported by the company in its December 31, 2014 balance sheet? a. 9,262,000 c, 8,362,000 b. 8,380,000 d. 8,122,000 79. How much from the list above should be presented as part of Noncurrent assets? a. 1,000,000 ¢. 4,900,000 b. 4,000,000 d, 5,500,000 PROBLEM 25: UHAWSAIYO COMPANY General and Petty Cash Count Audit Year: 2014 Date of count - January 5, 2015, 9:10 am Bills and Coins Bahai. Bundles of 100 pcs Rolls of SO coins Loose 500 ‘ 9 100 2 2 50 a 5 20 s 4 10 10 5 6 4 1 10 20 25 40 16 Checks Maker Payee Date ‘Amount “0 Unawsalyo 12/30/14 11,920 T. Otis - customer Ap ~ CASH, RECEIVABLES AND TNVENTORIES |