ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY AP QUIZ 1

CPA Review Batch 48  October 2024 CPA Licensure Examination

AUDITING PRACTICE S. IRENEO  G. MACARIOLA  C. ESPENILLA  J. BINALUYO

1. The following attempt at a bank reconciliation statement that has been prepared by Q Co.:
Overdraft per bank statement 57,200
Add: Deposits not credited 82,400
Total 139,600
Less: Unpresented checks 6,600
Overdraft balance per general ledger account 133,000

Assuming the bank statement balance of P77,200 overdraft is correct, what should the bank general ledger account
balance be?
a. 153,000 overdrawn, as stated c. 1,400 overdrawn
b. 18,600 overdrawn d. 11,800 bank general ledger account

2. The following bank reconciliation statement has been prepared for a Red Co.
Balance per bank statement 39,800
Add: Deposits credited after date 64,100
Note Receivable collection by the bank 20,000
Total 123,900
Less: Unpresented checks presented after date 44,200
Customer NSF Checks 5,000
Balance per general ledger account 74,700

Assuming the bank statement balance of P39,800 is correct, what is the correct cash in bank balance that should
appear in the statement of financial statements?
a. 158,100 c. 68,500
b. 19,900 d. 59,700

3. The following trade receivables account has been prepared by a trainee accountant for the month of
January 2023:
Trade Receivables
Balance P318,650
Credit sales 163,010 Bank receipts from credit customers P181,140
Cash sales 84,260 Interest charged on overdue accounts 280
Irrecoverable debts written off 1,390
Sales returns from credit customers 3,990
Balance 379,120

What is the correct balance of the trade receivables after correcting the errors in the account?
a. 294,860 c. 295,420
b. 298,200 d. 379,680

4. An inexperienced bookkeeper has drawn the following trade receivables account:

Trade Receivables
Balance P180,000
Bank receipts from credit customers 232,200 Credit sales P190,000
Sales returns 8,000 Irrecoverable debts written-off 1,500
Refunds to credit customers 3,300 Contras against payables 2,400

Balance 229,600

What is the correct balance of the trade receivables after correcting the errors in the account?
a. 130,600 c. 142,400
b. 129,200 d. 214,600

5. The financial year of Mitex Co. ended on December 31, 2023. An inventory count on January 4, 2024 gave a total
inventory value of P527,300.

The following transactions occurred between January 1 and January 4:

Purchases of goods P7,900
Sales of goods (gross profit based on sales at 40%) 15,000
Goods returned to a supplier 800

What inventory value should be included in Mitex Co’s financial statements at December 31, 2023?
a. 525,400 c. 527,600
b. 529,200 d. 535,200

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP QUIZ 1
CASH AND CASH EQUIVALENTS, RECEIVABLES, AND INVENTORIES

6. You are auditing the financial statements for a business. The cost of the items in the closing inventory is P41,875. This
includes some items which cost P1,960 and which were damaged in transit. You have estimated that it will cost P360
to repair the items, and they can be sold for P1,200.

What is the correct inventory valuation for inclusion in the audited financial statements?
a. 39,915 c. 41,515
b. 40,755 d. 42,995

7. Bouani Co manufactures cycling equipment. It has a number of specialised frames in inventory which cost P20,000 to
manufacture. These frames were manufactured following an order from a customer at an agreed selling price of
P30,000. Due to recent technological advances, the current cost of manufacturing such frames is estimated to be
P15,000. Bouani Co also has inventory of 3,000 pedals with a cost of P20 each. These have become damaged. If Bouani
Co spends P5,000 to repair all of them, these could be sold for P21 each.

Which of the following statements regarding Bouani Co’s inventory is true?

a. The frames should be valued at P15,000; pedals should be valued at P30,000
b. The frames should be valued at P20,000; pedals should be valued at P58,000
c. The frames should be valued at P30,000; pedals should be valued at P58,000
d. The frames shluld be valued at P30,000; pedals should be valued at P60,000

ITEMS 8-11
The following is an extract from Diaz Co’s trial balance as at 31 December 20X4:
Debit Credit
Inventory at 31 December 20X4 8.6M
Trade receivables 6.2M
5% loan notes 9.0M

The inventory count was completed on 31 December 20X4, but two issues have been noted. First, products with a sales value
of P0.6m had been incorrectly excluded from the count. Second, items costing P0.2M which had been included in the count
were damaged and could only be sold for 50% of the normal selling price. Diaz Co makes a mark-up of 50% on both of these
items.

Diaz Co entered into a factoring agreement with Finaid Co on 31 December 20X4. In accordance with the agreement, Diaz Co
sold trade receivables with a carrying amount of P6.2M to Finaid Co for P6M. Under the terms of the factoring agreement, after
six months Finaid Co will return any unpaid receivables to Diaz Co. for collection. Finaid Co will also charge Diaz Co a fee of 5%
of any uncollected balances at the end of each month.

The 5% loan notes were issued for P9M on 1 July 20X4. Diaz Co incurred issue costs of P0.5M associated with this, which have
been expensed within finance costs. The loan note interest is payable each 30 June and the loan note is repayable at a premium,
giving them an effective interest rate of 8%.

8. In accordance with IAS 32 Financial Instruments: Presentation, which of the items in the trial balance would be classified
as financial instruments?
a. Closing inventory and trade receivables only
b. 5% loan notes only
c. Trade receivables and 5% loan notes only
d. Closing inventory, trade receivables and 5% loan notes

9. What is the correct carrying amount of inventory to be recognised in Diaz Co’s Financial statements as at 31 December
20X4?
a. P8.95M
b. P9.0M
c. P8.9M
d. P9.15M

10. Which of the following statements regarding the factoring arrangement is NOT true?
a. P6M received should be recorded in the liabilities of Diaz Co at 31 December 20X4
b. P0.2M should be expensed in Diaz Co’s statement of profit or loss for the year ended 31 December 20X4
c. A total of the 5% monthly fee should be expensed in Diaz Co’s statement of profit or loss for the year ended
31 December 20X5
d. The receivables will remain as an asset in the financial statements of Diaz Co at 31 December 20X4

11. In respect of the 5% loan notes, how much should be expensed within Diaz Co’s statement of profit or loss for the
year ended 31 December 20X4?
a. P0.68M
b. P0.45M
c. P0.72M
d. P0.34M

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP QUIZ 1
CASH AND CASH EQUIVALENTS, RECEIVABLES, AND INVENTORIES

ITEMS 12-14:
In relation to your audit of cash balances of your client, Starwars Corp. for the period ended December 31, 2023, the client’s
accountant provided the following information from its bank transfer schedule. Further investigation revealed that checks
are dated and issued on December 30, 2023.
Disbursement Date Receipt Date
Check Bank Accounts Per Per Per Per
No. From To Books Bank Books Bank
101 FEB TC PNB Dec. 30 Jan. 4 Dec. 30 Jan. 3
202 PCIB MBTC Jan. 3 Jan. 2 Dec. 30 Dec. 31
303 PNB CBC Dec. 31 Jan. 3 Jan. 2 Jan. 2
404 MBTC BPI Jan. 2 Jan. 2 Jan. 2 Dec. 31

12. Which of the following checks might indicate kiting?

a. #101 and #303.
b. #202 and #404.
c. #101 and #404.
d. #202 and #303.

13. Which of the following checks overstates the overall cash balance per books at December 31, 2024?
a. #101 and #202.
b. #202 only
c. #202 and #303.
d. #303 only.

14. Which specific Bank accounts are overstated as per your audit?
a. PCIB and MBTC
b. CBC and BPI
c. MBTC and BPI
d. CBC and MBTC

ITEMS 15-16:
Your cash count of the petty cash fund having an imprest balance of P30,000, of Equinox Corp. in line with your audit of its
financial statements for the period ended December 31, 2023 resulted to the following information:
Cash count date: January 4, 2024
Currencies and coins P12,100
Petty cash expense vouchers:
Date Particulars
12/26 Transportation 1,200
12/27 Office repairs 900
12/29 Office supplies 1,300
1/2 Gasoline and oil 600
1/3 Representation expenses 1,300
Checks:
Date Maker
12/20 Ace Corp., customer 8,400
12/26 June Cook, officer 4,500
12/27 Charlie Inc., customer 12,000
12/28 Equinox Corp. payable to the custodian 9,000
12/30 Beta Corp., customer* 6,000
*Marked NSF by the bank

Audit note: The undeposited collection which included cash and check collections, was also under the custody of the petty
cash custodian. Investigation revealed that the total undeposited collections as of the count date per records was at P22,500.

Required:
15. What is the petty cash shortage or overage as a result of your cash count?
a. 4,800
b. 2,100
c. 1,200
d. 800
16. What is the adjusted balance of the petty cash fund as of December 31, 2023?
a. 26,600
b. 24,400
c. 22,200
d. 25,400

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP QUIZ 1
CASH AND CASH EQUIVALENTS, RECEIVABLES, AND INVENTORIES

ITEMS 17-18:
The following information resulted from a count of Hippolyta Corp.’s cash on hand was conducted on January 3, 2023 in
relation to the audit of the entity’s financial statements for the period ended December 31, 2022:

a. Custodian’s accountability was petty cash fund with an imprest balance of P15,000 and undeposited collections
from December 27, 2022 to the date of count appearing in the cash records at P72,000.

b. The items on hand on the count date were:

Currencies and coins P32,800

Checks:
Date Payor Payee
12/10 ABC Corp. – Customer Hippolyta Corp. 20,000*
12/27 E. James – Employee Hippolyta Corp. 2,000
12/28 DEF Co. – Customer Hippolyta Corp. 12,000
12/29 Hippolyta Corp. Marawi Co. – Supplier 15,000
1/2 XYS Co – Customer Hippolyta Corp. 32,000
1/4 UVW Inc. – Customer Hippolyta Corp. 19,000
*returned by the bank marked NSF
Petty cash expense vouchers:
Date Particulars Amount
12/28 Office repairs 2,100
12/28 Postage stamps 3,000
12/29 Officers’ meals 2,500
1/2 Gas and oil 2,000
Employee IOUs 1,500
Unused postage stamps 2,500
Petty cash receipt vouchers:
Date Particulars Amount
12/29 Employee contributions for charity 3,200
12/30 Return of travel expense advance 500

Requirements:
17. What is the cash shortage/overage as a result from the cash count?
a. None c. 4,500
b. 2,900 d. 800

18. What is the adjusted petty cash fund balance as of December 31, 2022?
a. 3,100 c. 6,800
b. 5,100 d. 1,400

ITEMS 19-21:
You are auditing the cash in bank balance of Etta Co. in line with your firm’s audit of the entity’s financial statement as of
and for the period ended December 31, 2022. The following information are deemed relevant in your audit:
a. The bank statement for the month of December had the following information:
December 1, balance 2,580,000
Total bank credits 9,650,000
Total bank debits 8,990,000
December 31, balance ?

b. The November bank reconciliation statement prepared by the client included the following reconciling items.
November book reconciling items were eventually recorded in the books where necessary in December.
• A note receivable amounting to P220,000 was collected by the bank in November on the company’s
behalf. Interest on the note which was also collected by the bank was at P22,000.
• Total bank service charge for the month of November was P9,600.
• A collection check amounting to P90,000 was returned by the bank together with the November bank
statement and was marked NSF.
• Deposits in transit and outstanding checks by the end of November were at P520,000 and P920,000,
respectively.
• The company recorded a disbursement check at P125,000 in November. The November bank statement
showed the check clearing the bank at the correct amount which was P152,000. The error was
subsequently corrected by the company in December.
c. Audit examination revealed the following December items:

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP QUIZ 1
CASH AND CASH EQUIVALENTS, RECEIVABLES, AND INVENTORIES

• Deposits in transit and outstanding checks amounted to P786,000 and P889,000, respectively.
• The bank erroneously credited the company P120,000 for a customer collection of Atta Corp. The bank
discovered and immediately corrected the error in December.
• Bank also erroneously charged the company P86,000. The same has not been corrected however by
month end.
• Bank loan proceeds automatically credited to the company’s account by the end of December was at
P500,000. This has not been recorded in the books yet.
• A P80,000 customer check was returned by the bank in December marked NSF. The company redeposited
the same check in December upon notifying the customer and has since cleared the bank also in
December. The company did not record the checks return and redeposit anymore since the same will have
no effect to the cash balance.
• Bank service charge for the month of December was at P12,400.
d. The general ledger shows the following balances:
December 1, balance 2,064,600
December 31, balance 2,735,400

Requirements:
19. What is the correct cash in bank balance as of December 31, 2022?
a. 3,051,000 c. 3,223,000
b. 3,240,000 d. 3,137,000

20. What is the total cash debits appearing the company’s books for the month of December?
a. 9,538,000 c. 9,796,000
b. 9,578,000 d. 9,458,000

21. What is the total cash credits appearing the company’s books for the month of December?
a. 8,993,600 c. 8,753,000
b. 8,532,800 d. 8,787,200

22. Which of the following will least likely appear in an audit program for the audit of cash in bank accounts?
a. Verifying items listed as deposit in transit in the client-prepared bank reconciliation statement have been
processed as deposits on the cutoff bank statement as these should appear chronologically on the cut-off
bank statement.
b. Determining whether checks processed in the cut-off bank statement with dates after year-end, appears
as outstanding checks in the client-prepared bank reconciliation statement.
c. Confirmation with the bank regarding cash balances and liabilities to the bank.
d. Preparing schedule of interbank transfers to verify that both sides of the transfer are property accounted
for and to detect any kiting.

ITEMS 23-25:
The following receivable reconciliation was provided by Overlord Corp.’s accountant as part of your examination of its
receivable account balance as of December 31, 2023:

Balance per General Ledger 2,940,000

SI dated December 20 for goods delivered on December 20 FOB Destination (29,000)
SI dated December 30 for goods delivered on December 31 FOB Shipping Point, goods
still in transit as of December 31 (52,000)
SI dated October 11, where customer returned goods as there were errors in the items
delivered. Investigation revealed that credit memos were approved and recorded only
in January the following year. 25,000
OR dated December 29 for a customer collection check dated January 2, 2024 92,000
OR dated December 30 for a customer collection check dated December 30, 2023 85,000
Receivables deemed worthless (SI dated April 20) 24,000
Receivables deemed worthless (SI dated September 20) (30,000)
Balance per Subsidiary Ledger 3,055,000
*SI = Sales Invoice
OR = Official Receipt

There were no other write-off of receivables during the year. A P31,400 previously written off account was recovered during
the year. The January 1, 2024 balance of the allowance for bad debt amounted to P154,200. An aging of accounts receivable
schedule along with the managements estimate of collectability appears below:
Age Amount % of collectability
1-60 days 916,500 99%
61-120 days 1,222,000 95%
121-180 days 611,000 90%
More than 180 days 305,500 80%

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP QUIZ 1
CASH AND CASH EQUIVALENTS, RECEIVABLES, AND INVENTORIES

Required:
23. What is the adjusted accounts receivable balance gross of any allowances?
a. 3,032,000
b. 2,972,000
c. 3,002,000
d. 3,054,000

24. What is the correct amortized cost of accounts receivable as of December 31?
a. 2,800,625
b. 2,815,125
c. 2,813,225
d. 2,815,625

25. What is the correct bad debt expense for the year?
a. 54,775
b. 24,775
c. 30,775
d. 78,775
26. When reconciling Accounts Receivable general ledger and subsidiary ledger of an audit client, any unlocated
difference shall be an adjustment to the ______ with the corresponding debit or credit being made to _______.
a. Subsidiary Ledger; Bad debt expense
b. General Ledger: Allowance for bad debt
c. General Ledger; Sales
d. Subsidiary Ledgery; Sales

ITEMS 27-29:
You were assigned to audit the accounts receivable balance of your financial statements audit client Orochi Corp. for the
period ended December 31, 2023. The balance of the accounts receivable per the general ledger and the corresponding
year-end allowance for bad debts amounted to P2,910,000 and P215,200, respectively. The accountant of the client
furnished you the following receivable aging schedule based on its subsidiary ledger:
Age Amount % uncollectible
Current (1-60 days) 1,178,400 -
1-60 days past due 736,500 5%
61-120 days past due 589,200 10%
More than 120 days past due 441,900 25%

The following are the exceptions noted as a result of you’re the confirmation letters sent to selected customers:
Customer Amount Customer’s Reply Remarks
Moderna Co. P125,000 Amount is ok. We will remit the The amount is the selling price 50
amount due (less 10% agreed units of products delivered on
commission) upon selling the consignment. The company recorded
goods. As of December 31, only 20 the delivery in December as usual
units had been sold. sales, debiting receivables and
crediting sales at the said sales price.
Blazing Corp. 210,000 The amount is for an invoice dated The amount was overlooked when
October 11. The agreed purchase preparing the sales invoice. The
order price per unit is at P2,500. approved price should have been
The invoice price per unit was P2,500.
P3,000.
Venom Inc. 120,000 The invoice dated August 20 Credit Memo number 211 covering the
amounting to P40,000 should said return was appropriately
have been offset by a return of recorded in the general books but
merchandise in September. were overlooked in posting the
transactions to the subsidiary ledgers.
Saber Corp. 98,000 No reply for 2 sets of confirmation Management agreed to write-off
letters these receivables as worthless. The
account is more than 120 days past
due.

Required:
27. What is the unlocated difference between GL and SL as a result of your audit?
a. None
b. 4,000
c. 36,000
d. 44,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP QUIZ 1
CASH AND CASH EQUIVALENTS, RECEIVABLES, AND INVENTORIES

28. What is the correct amortized cost of accounts receivable as of December 31?
a. 2,512,970
b. 2,573,030
c. 2,517,030
d. 2,547,970

29. What is the correct bad debt expense for the year?
a. 39,230
b. 97,970
c. 93.230
d. 58,770

30. Which of the following is correct with regard the use of confirmation letter when auditing an audit client’s receivable
balances?
a. A positive confirmation letter is appropriate when an audit expects minimal to zero misstatement on the
accounts receivable based on previous year’s audit engagement with the same client.
b. A negative confirmation letter is appropriate when the customer account balances comprise of few accounts
with significant balances.
c. A blank confirmation letter is appropriate when the auditor expects an overstatement error in the account
balance.
d. A positive confirmation letter provides more persuasive evidence and entails more extensive audit procedure
than a negative confirmation letter.

ITEMS 31-33:
In line with your audit of Zodiac Distributions Inc.’s inventories as of the period ended December 31, 2023, you decided to
render cut-off procedures on its recorded sales and purchases. The physical count of the goods which resulted to P312,000,
was rendered on December 29, 2023. As a result all goods delivered on or before December 29 were excluded from the
count and all goods received on or before December 29 were included in the physical count.

A. PURCHASES CUT-OFF
DECEMBER PURCHASE JOURNAL ENTRIES
Receiving Receipt Date Amount Remarks
Report #
21291 Dec. 26 P5,300 FOB Shipping point
21292 Dec. 27 4,600 FOB Destination – Received from consignor
21293 Dec. 28 8,000 FOB Buyer
21295 Dec. 29 7,200 Free Alongside the Vessel
21296 Dec. 30 5,500 FOB Destination

JANUARY PURCHASE JOURNAL ENTRIES

Receiving Receipt Date Amount Remarks
Report #
21297 Dec. 31 P5,300 FOB Shipping point
21298 Jan. 2 4,600 FOB Destination – Goods in-transit as of Dec. 31
21299 Jan. 2 8,000 FOB Seller – Goods in transit as of Dec. 31
21300 Jan. 3 5,500 Purchased under “Bill and Hold” Agreement executed in December

Note that receiving report number 21294 were for goods costing P6,200 received on December 29. The sales invoice of the
suppliers is yet to be received by the client, thus it yet to be recorded in the purchases journal.

B. SALES CUT-OFF
DECEMBER SALES JOURNAL ENTRIES
Sales Delivery Date Amount Remarks
Invoice #
52284 Dec. 27 P18,000 FOB Shipping point
52285 Dec. 28 12,000 FOB Destination – Goods still in-transit as of Dec. 31
52286 Dec. 29 15,000 Goods delivered on a “Sale with repurchase agreement”
52287 Dec. 30 16,000 Free Alongside the Vessel – Goods still in-transit as of Dec. 31
52288 Dec. 30 20,000 FOB Destination

JANUARY SALES JOURNAL ENTRIES

Sales Delivery Date Amount Remarks
Invoice #
52289 Dec. 31 P10,000 FOB Buyer – Goods still in-transit as of Dec. 31
52290 Dec. 31 8,000 FOB Shipping Point – Goods still in-transit as of Dec. 31
52291 Dec. 31 14,000 FOB Seller – Goods still in transit as of Dec. 31
52292 Jan. 3 18,000 Sold under “Bill and Hold” Agreement executed in December

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP QUIZ 1
CASH AND CASH EQUIVALENTS, RECEIVABLES, AND INVENTORIES

Note that Sales Invoice number 52286 covering a sale with repurchase agreement requires the company to repurchase the
goods at the same selling price three months later, plus 10% interest on the amount. Gross profit based on all sales is at 40%.

Required:
31. What is the adjusted balance of the inventories as a result of your audit?
a. 302,300
b. 308,500
c. 296,800
d. 297,000

32. What is the net adjustment to accounts payable?

a. 20,400 credit
b. 25,000 credit
c. 14,200 credit
d. 4,600 debit

33. What is the net adjustment to accounts receivable?

a. 1,000 debit
b. 5,000 credit
c. 13,000 debit
d. 1,000 credit

ITEMS 34-36:
The following resulted from you audit staff’s sales cut-off procedures, in line with your audit of Funko Inc.’s financial
statements for the period ended December 31, 2022:

December Sales Journal Entries

SI Number Delivery Date Amount Remarks
21091 Dec. 27 P56,000 FOB Destination
21092 Dec. 28 120,000 Shipped to Consignee
21093 Dec. 29 90,000 FOB Destination (Still in-transit as of Dec. 31)
21094 Dec. 31 42,000 FOB Shipping Point (Still in-transit as of Dec. 31)
21095 Dec. 31 58,000 FOB Buyer’s Warehouse (Still in-transit as of Dec. 31)
21096 Jan. 1 60,000 FOB Supplier’s Warehouse

January Sales Journal Entries

SI Number Delivery Date Amount Remarks
21097 Dec. 30 P90,000 FOB Shipping Point (Still in-transit as of Dec. 31)
21098 Jan. 2 80,000 FOB Shipping Point
21099 Jan. 2 58,000 Sold under bill and hold agreement in Dec.
21100 Jan. 3 100,000 FOB Destination

Audit notes:
a. Physical count of goods was conducted by the client on December 30, 2022. As a result all goods delivered
on or before December 30 were no longer included in the physical count.
b. Gross profit rate on all sales was at 30%.
c. The consignee’s report regarding SI 21092 disclosed that 60% of the goods covered by the invoice
remained unsold. Commission rate as agreed upon with the consignee was at 10% of sales price.

Requirements: Based on the above information and the result of your audit, what are the net adjustments to the following:
34. Accounts receivable
a. 76,800 credit c. 136,800 credit
b. 132,000 credit d. 88,600 credit

35. Inventory
a. 84,000 debit c. 72,800 debit
b. 43,400 debit d. 7,000 credit

36. Effect of error to Net income

a. 94,000 decrease c. 93,400 decrease
b. 43,400 increase d. 14,000 increase

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP QUIZ 1
CASH AND CASH EQUIVALENTS, RECEIVABLES, AND INVENTORIES

37. An auditor examining an audit client’s sales cut-off procedure noted that a sales journal entry just before year-end was
supported by a delivery receipt which was dated after year-end. Which of the following is a possible implication of this
discovery?
a. Accounts receivable is correct.
b. Accounts receivable is understated
c. Accounts receivable is overstated
d. Inventory is overstated

ITEMS 38-40:
The accountant of James Corp. presented the following reconciliation in line with your audit of the company’s receivables
for the period ended December 31, 2022:
Balance per General Ledger P2,910,000
Invoice price of goods delivered on December 29. Received by the customer (80,000)
on December 31. Freight Term: FOB Buyer
Invoice price of goods delivered on December 30. Goods still in transit as of (50,000)
December 31. Freight term: FOB Destination
Invoice price of goods delivered on December 31. Goods still in transit as of 75,000
December 31. Freight term: FOB Shipping Point
Customer collection check dated November 30, in payment of an Invoice (120,000)
dated October 20, returned by the bank marked NSF
Customer collection check dated December 30, in payment of an Invoice 60,000
dated November 20
Customer collection check dated January 3, in payment of an invoice Dated 90,000
December 10
Credit memo for sales returns on sales invoice dated August 4 20,000
Preference shares subscriptions receivable, Due March 3, 2024 (250,000)
Write-off of worthless accounts (Sales invoice dates April 10 – P44,000; July 76,000
20 – P32,000)
Balance per Subsidiary Ledger P2,731,000

Audit notes:
a. The accountant also prepared the following aging schedule based on the subsidiary ledger and inquiries also
revealed their estimation policy regarding the portion estimated to be doubtful of collection:
Age Amount % Doubtful of collection
Current (1-60 days) P1,120,000 2%
1-60 days past due (61-120 days) 650,000 10%
61-120 days past due (121-180 days) 520,000 20%
More than 120 days past due (>180 days) 441,000 40%

b. The company sell under terms 5/20, n/60. The company further estimates per past experience that 25% of the
accounts that are current (1-60 days) will probably be collected within the discount period.
c. The allowance for bad debts had a January 1, 2022 balance of P302,800. The company had a P46,000 recovery of
previously written-off accounts during the year. There were write-off of accounts receivable during the year other
than that which appears in the reconciliation schedule.

Requirements:
38. What is the correct cash accounts receivable balance, gross of any allowances?
a. 2,795,000 c. 2,775,000
b. 2,990,000 d. 2,790,000

39. What is the correct amortized cost of accounts receivable as of December 31, 2022?
a. 2,424,550 c. 2,422,800
b. 2,440,550 d. 2,408,550

40. What is the correct bad debt expense for 2022?

a. 79,400 c. 75,400
b. 83,400 d. 67,400

ITEMS 41-43:
The following aging schedule based on accounts receivable subsidiary ledger has been prepared by the accountant of
Trevor Corp. in line with your audit of its financial statement for the period ended December 31, 2022:
Age Amount % Collectability
Current (1-60 days) P2,240,000 99%
1-60 days past due (61-120 days) 870,000 95
61-120 days past due (121-180 days) 740,000 80
More than 120 days past due (>180 days) 646,000 50

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Audit notes:
a. A credit balance in one of the customer’s account amounting to P20,000 is included in the current (1-60 days)
account. This resulted from the customer cash advance for a delivery to be made in 2023.
b. Another credit balance amounting to P28,000 resulting from a collection of a previously written-off account is
included in the current (1-60 days) account. Investigation revealed that the client failed to reverse the write-off
entry upon recovery and recorded only the cash collection.
c. The unadjusted December 31, 2022 balance of the allowance for bad debts was at P452,000.
d. The following exceptions were noted as a result of your accounts receivable confirmation procedures:
Customer Amount Exception noted
per Books
Diana Inc. P160,000 The customer claims the correct amount is P120,000. The
difference was for an invoice dated September 15 priced at
P160 per unit whereas the agreement per Sales Order was at
P120 per unit. Client acknowledges the invoice error.
Prince Co. 220,000 The customer claims the correct amount is at P195,000. The
difference was for a credit memo issued in December for a
sales returns in December. The goods return was covered by a
sales invoice originally dated August 24. Investigation revealed
that the credit memo was recorded in January 2023.
Steve Co. 250,000 The customer claims that the amount is the total selling price of
goods they receive on consignment from Trevor Corp. in
December. Steve Co. further reports that 40% of these goods
remained unsold. Commission rate as agreed upon between
parties was at 12% of the sales price. The client acknowledges
the customer’s report.
Barbra Inc. 60,000 No reply has been received from this customer even with the
second confirmation request sent. There has been no evidence
of subsequent collections either. The client admits receivable
are worthless. Further investigation revealed that outstanding
invoices to this customer were all dated April 2022.
Minerva Co. 120,000 The customer claims no amount owing to the client as the
customer has advanced P280,000 cash to the client in
December for all deliveries to be made in December and
January. Investigation revealed that the P120,000 outstanding
balance per books was for a delivery made in December. The
cash advance was recorded by the entity as Cash Sales in
December. Client acknowledges the error.

Requirements:
41. What is the correct cash accounts receivable balance, gross of any allowances?
a. 4,199,000 c. 4,137,000
b. 4,181,000 d. 4,149,000

42. What is the correct amortized cost of accounts receivable as of December 31, 2022?
a. 3,678,250 c. 3,683,000
b. 3,700,820 d. 3,801,800

43. What is the correct bad debt expense for 2022?

a. 78,000 c. 46,000
b. 18,000 d. 106,000

ITEMS 44-47:
The following accounts were lifted form the unadjusted trial balance of Penny Corp. as of December 31, 2022:
Cash P963,200
Accounts receivables 2,254,000
Inventory 6,050,000
Accounts payable 4,201,000

During your audit, you noted that Penny Corp. held its cash books open after year end. In addition, your audit revealed the
following information:
b. Receipts for January 2023 of P654,600 were recorded in December 2022 cash receipts journal. The receipts of
P360,100 represent cash sales and P294,500 represent collections of receivables from customers, net of 5% cash
discount.

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c. Accounts payable of P372,400 was paid in January 2023. The payments, on which discounts of P12,400 were taken,
were included in the December 2022 check register.

d. Merchandise inventory resulted from a physical count conduced on December 30, 2022. The following information
has been discovered relating to certain inventory transactions.
• Goods invoiced at P275,000 were shipped on consignment to a customer on December 28 and was
recorded as sales on account. Cost goods was at P210,000.

• Goods costing P216,000 were received from a vendor on January 4, 2023. The related invoice was
received and recorded on January 6, 2023. The goods were shipped on December 31, 2022, terms FOB
shipping point.

• Goods with the sales invoice price of P637,500 were shipped and recorded on December 31, 2022, and
were received by the customer on January 3, 2023. The terms of the invoice were FOB shipping point. The
goods costing P520,000 were included in the 2022 ending inventory physical count on December 30.

Requirements: Based on the above information and the result of your audit, what are the adjusted balances of the
following accounts:
44. Cash
a. 963,200 c. 668,600
b. 681,000 d. 688,600

45. Accounts receivable

a. 2,908,600 c. 2,289,000
b. 2,564,000 d. 2,548,500

46. Inventory
a. 5,956,000 c. 5,860,000
b. 6,035,000 d. 6,080,000

47. Accounts payable

a. 4,789,400 c. 4,790,900
b. 4,603,500 d. 4,573,000

ITEMS 48-50
Rockwell Co. maintains records under the periodic method and rendered physical count of inventories on December 31,
2023. Only goods that are physically with the company on the said count date were included in the physical count which
amounted to P345,000. This was then set-up by the client as part of its closing entries at year-end. As part of your
substantive analytical procedures however, you gathered the following information:
December 31, 2022 Inventories (traced to prior year’s working papers) P390,000
Payments to suppliers of inventories for the year 3,945,000
Purchase discounts taken on purchases 210,000
Purchase returns and allowances on purchases (all done before payments) 385,000
Normal spoilages (at sales price) 200,000
Abnormal spoilages (at cost) 120,000
Sales for the year 5,620,000
Sales discounts (taken by customers) 450,000
Special discounts granted to employees and officers 220,000
Sales returns 300,000
Sales allowance 124,000
Accounts payable, December 31, 2022 275,000
Accounts receivable, December 31, 2022 320,000
Accounts payable, December 31, 2023 310,000
Accounts receivable, December 31, 2023 254,000

Audit notes: Sales included the delivery to a customer in Baguio City on December 30, 2023. The goods which were invoiced
at P180,000 were still in-transit as of the balance sheet date. Freight term is FOB Baguio City.
48. What is the accrual basis gross purchases for the year?
a. 3,980,000
b. 4,190,000
c. 4,365,000
d. 4,575,000

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49. Assuming Gross Profit is 30% based on sales, what is the estimated ending inventory as a result of your audit?
a. 498,000
b. 232,000
c. 512,000
d. 358,000

50. Assuming Gross profit is 60% based on cost, what is the estimated inventory shortage as a result of your audit?
a. 304,000
b. 113,000
c. 317,500
d. 457,500

ITEMS 51-54:
You were assigned to audit the inventories of Gojo Corp. for the period ended December 31, 2021. In your review of the
client’s controls over inventory, you ascertained that controls are effective thus you allowed the client to render physical
count at an interim date, October 30, 2021. Inventory per count on December 31, 2020 was at P650,000. The result of the
count as well as other relevant information as of October 31, 2021 and as of December 31, respectively, were as follows:
October 31 December 31
Inventory, per count (October 31, 2021) 550,000 -
Purchases per books 2,450,000 3,410,000
Purchase discount 45,000 70,000
Freight in 60,000 90,000
Purchase returns and allowance 70,000 100,000
Sales 4,765,000 6,750,000
Sales discount 200,000 300,000
Sales returns and allowances 300,000 375,000
Employee discounts 150,000 150,000
Normal breakages (at selling price) 50,000 50,000

Additional information:
a. Deliveries in transit as of October 31 invoiced at P115,000 were delivered to customer on October 30 but were
recorded as sales in November. The freight term is FOB shipping point.
b. Goods invoiced by supplier at P90,000 were in transit as of October 31 and were received on November 3 from
the supplier. The said invoice was recorded in November. Freight terms however is FOB shipping point.
c. Merchandise received in December with a cost of P100,000 were damaged while in transit (FOB SP) from a supplier.
The same were sold at a 10% markup based on cost.
d. The physical count as of October 30, 2021 included all merchandise on hand on the same date.

Requirements: (hint: round off cost % to 2 decimal places e.g. xx%)

51. What is the cost of sales for the last 2 months ended December 31?
a. 1,037,500 b. 937,500 c. 895,500 d. 908,800

52. What is the estimated cost of sales for the entire year 2021?
a. 2,995,500 b. 3,005,500 c. 3,203,800 d. 3,332,500

53. What is the estimated cost of ending inventories as of December 31, 2021 as a result of your analytical procedure?
a. 645,600 b. 647,500 c. 600,500 d. 576,200

54. Assuming that the tolerable error limit assigned to inventories is at P60,000, which of the following will be the auditor’s
next appropriate action?
a. Since the possible error is within the tolerable error limit, the auditor can conclude that the inventories are
not materially misstated thus shall have no additional procedures.
b. Since the possible error is beyond the tolerable error limit, the auditor should issue either an adverse
opinion or a qualified opinion on the financial statements depending on whether the error is pervasive or
not.
c. Since the possible error is beyond the tolerable error limit the auditor should extend further auditor
procedures by rendering additional test of details of account balance or test of details of transactions.
d. Since the possible error is within the tolerable error limit, the auditor should extend further audit
procedures by rendering test of details of transactions.

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ITEMS 55-56:
You were assigned to test the reasonableness of the inventory account balance as reported by your client, Nobara Corp.
The following information is made available by Nobara Inc.’s accountant:

Cost Retail
Beginning inventory P598,400 P1,500,000
Purchases 3,048,400 5,500,000
Freight in 80,000
Purchase returns 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

Additional information:
a. Sales included goods invoiced at P90,000 to a customer delivered on December 30 and still in transit as at
December 31. The goods having a cost of P50,000 were shipped FOB destination.
b. Purchases included goods invoiced at P35,000 delivered by the supplier on December 29 and are still in transit as
at December 31. These goods were shipped FOB shipping point.

Ending inventory as a result of the physical count conducted on December 31, was at P649,000. All goods delivered on or
before December 31 were excluded from the physical count while all goods received on or before December 31 were
included in the physical count.

Requirements:
What is the amount of estimated inventory shortage, if any, as a result of your test of reasonableness under the following
assumed cost formula? (round-off cost percentage to 2 whole numbers)
55. Lower of cost or average/Conservative/Conventional Approach
a. 135,750 b. 170,750 c. 327,700 d. 479,350

56. Average Approach

a. 260,000 b. 176,050 c. 295,000 d. 327,700

ITEMS 58-59:
Megumi Corporation uses the lower of cost or net realizable value inventory. Data regarding the items in work-in-process
inventory are presented below:
Item A Item B Item C
Historical cost P24,000 P18,880 P30,000
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 price 20% 20% 20%
Cost to sell based on selling price 5% 10% 10%

Required:
57. What is the loss on write-down under the direct write-off method?
a. none b. 3,880 c. 3,320 d. 5,620

58. Assuming that Item A and Item B are of similar nature and that the company applied lower of cost or NRV on a per
group basis were applicable, what is the loss on write-down under the direct write-off method?
a. none b. 2,000 c. 1,320 d. 3,880

59. Assuming that Item B and Item C are of similar nature and that the company applied lower of cost or NRV on a per
group basis were applicable, what is the loss on write-down under under the allowance method, assuming that the
unadjusted balance of the allowance for inventory write-down is at P2,000?
a. none b. 1,120 c. 3,680 d. 1,880

60. In auditing the reasonableness of the client’s estimate of the inventories’ net realizable value, the auditor’s best
source of evidence shall be:
a. Tracing entries in the sales journal and purchase journal several days before the balance sheet date to
source documents including supplier’s sales invoice, receiving report and purchase orders.
b. Reviewing sales and purchases journal entries several days after the balance sheet date.
c. Comparing the company’s estimates against industry estimates.
d. All of the above are equally valid source of evidence.

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Suggested Answers and Solutions

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