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AUDITING PROBLEMS
AUDIT OF RECEIVABLES MIDTERMS
Problem 1
On December 15 of the current year, Darwin, who owns Herald Corporation, asks you to investigate the
cash-handling activities in his firm. He thinks that an employee might be stealing funds. I have no proof
he say, but Im fairly certain that the November 30 undeposited receipts amounted to more than P6,000
although the November 30 bank reconciliation prepared by the cashier shows only P3,619.20. Also, the
November bank reconciliation doesnt show several checks that have been outstanding for a long time. The
cashier told me that these checks neednt appear on the reconciliation because he has notified the bank to
stop payment on them and he had made the necessary payment on the books.
At your request, Darwin showed you the following November 30 bank reconciliation prepared by the
cashier.
Bal. Per bank statement P 2,360.12 Bal. Per Books P 5,385.22
Deposit in transit 3,619.20 Bank Service charge ( 30.00)
Outstanding checks Unrecorded bank CM ( 600.00)
# 2351 550.10
2353 289.16
2354 484.84 ( 1,224.10) ________
Adjusted Balance P 4,755.22 Adjusted Balance P 4,755.22
You discover that the P600 unrecorded bank credit represents a note collected by the bank on Darwins
behalf. It appears in the deposits column of the November bank statement. Your investigation also reveals
that the October 31 bank reconciliation showed three checks that had been outstanding longer than 10
months: No. 1432 for P300, No. 1458 for P233.45, and No. 1512 for P126.55.
You also discover that these items were never added back into the cash account in the books. In confirming
that the checks shown on the cashiers November 30 bank reconciliation were outstanding on that date,
you discover that check No. 2353 was actually a payment of P829.16 and had been recorded on the books
for the amount.
To confirm the amount of undeposited receipts at November 30, you request a bank statement for
December 1-12 (called a cut-off bank statement). This indeed shows a December 1 deposit of P3,619.20.
Questions
1. The amount of fund stolen by the cashier is:
a. P 3,160 b. P 2,500 c. P 1,840 d. P 580
Analysis of the bank data reveals that the credits consist of P78,000 of July deposits and a credit
memorandum of P2,070 for collection of a P2,000 note plus interest revenue of P70. The July debits per
bank consist of checks cleared, P74,700 and a debit memorandum of P40 for printing additional company
checks.
You also discover the following errors involving July checks: (1) a check for P230 to a creditor on account
that cleared the bank in July was journalized and posted as P320, and (2) a salary check to an employee
for P255 was recorded by the bank for P155.
The June 30 bank reconciliation contained only two reconciling items: deposits in transit, P1,000 and
outstanding checks, P2,600.
Questions
1. The deposit in transit of JULIET COMPANY at July 31 is
a. P 5,000 c. P 1,000
b. P 2,930 d. Cannot be determined
Problem 3
The following selected transactions occurred during the year ended December 31, 2006 of DOMINGO
COMPANY:
At year-end, the company provides for estimated bad debts losses by crediting the Allowance for Bad Debts
account for 2% of its net credit sales for the year. The allowance for bad debts at the beginning of the year
is P19,327.20. Beginning balance of accounts receivable amounts to P267,435.10.
Questions:
1. How much is the DOMINGO COMPANYs gross sales?
a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80
4. The Bad Debts Expense of DOMINGO COMPANY at December 31, 2006 is:
a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14
6. The Allowance for Bad Debts of DOMINGO COMPANY at December 31, 2006 is:
a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14
Problem 4
During December 2006, the Accounts Receivable controlling account on the books of FERNANDEZ
COMPANY showed one debit posting and two credit postings. The debit represents receivables from
December sales, P780,000. One credit was for P470,400, made a result of cash collections on November
and December receivables; the second credit was an adjustment for estimated uncollectibles, P90,000. The
December 31 balance was P270,000.
When receivables were collected, the bookkeeper credited Accounts Receivables for the cash collected. All
customers who paid their accounts during December took advantage of the 2% cash discount.
As of December 1, debit balance in customers subsidiary accounts totaled P177,000. An adjustment for
estimated doubtful accounts of P18,000 had been posted to the Accounts Receivable controlling account
at the end of 2002, and no write-offs were recorded during 2006. In addition, a number of customers had
overpaid their accounts, and as a result, some of the customers subsidiary accounts had credit balances
on December 1. No overpayments were made during December nor were any credit balances in customers
accounts reduced during December.
Questions:
1. The Accounts Receivable beginning balance (unadjusted) of FERNANDEZ COMPANY at December 31,
2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000
2. The Accounts Receivable beginning balance (adjusted) of FERNANDEZ COMPANY at December 31, 2006
is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000
3. The Credit Balance of Accounts Receivable at the beginning of the year of FERNANDEZ COMPANY is:
a. P 48,600 b. P 66,600 c. P 108,600 d. P 126,600
4. The Accounts Receivable balance of FERNANDEZ COMPANY at December 31, 2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000
Problem 5
KAREN COMPANYs accounts receivable subsidiary ledger shows the following information:
The estimated bad debt rates below are based on Karen Companys receivable collection experience.
Age of Accounts Rate
0 30 days 1%
31 60 days 1.5%
61 90 days 3%
91 120 days 10%
Over 120 days 50%
The allowance for bad debts account had a credit balance of P7,000 on December 31, 2006, before
adjustment.
Questions
1. The adjusted Accounts Receivable balance of KAREN COMPANY at December 31, 2006 is:
a. P 317,680 b. P 319,320 c. P 326,880 d. P 361,680
2. The adjusted balance of Allowance for Bad Debts of KAREN COMPANY at December 31, 2006 is:
a. P 9,698.80 b. P 10,188.80 c. P 12,397.60 d. P 19,397.60
3. The adjusted balance of Bad Debts Expense of KAREN COMPANY at December 31, 2006 is:
a. P 9,698.80 b. P 10,188.80 c. P 12,397.60 d. P 19,397.60
4. The net realizable value of Accounts Receivable of KAREN COMPANY at December 31, 2006 is:
a. P 342,282.40 b. P 349,282.40 c. P 307,482.40 d. P 314,482.40
Problem 6
On September 1, DY COMPANY assigns specific receivables totaling P750,000 to Davao Bank as collateral
on a P625,000, 12% note. DY COMPANY will continue to collect the assigned accounts receivable. Davao
Bank also assesses a 2% service charge on the total accounts receivable assigned. DY COMPANY is to make
monthly payments to Davao Bank with cash collected on assigned accounts receivable. Collections of
assigned accounts during September totaled P260,000 less cash discounts of P3,500.
Questions
1. What were the proceeds from the assignment of DY COMPANYs accounts receivable on September 1?
a. P 610,000 b. P 612,500 c. P 625,000 d. P 735,000
2. What amount is owed to Davao Bank by DY COMPANY for September collections plus accrued interest
on the note to September 30?
a. P 260,000 b. P 262,750 c. P 264,000 d. P 266,250
Problem 7
On January 1, 2006, TUQUIB COMPANY sells its equipment with a carrying value of P160,000. The company
receives a non-interest-bearing note due in 3 years with a face amount of P200,000. There is no established
market value for the equipment. The prevailing interest rate for a note of this type is 12%. The following
are the present value factors of 1 at 12%:
Present value of 1 for 3 periods 0.71178
Present value of an ordinary annuity of 1 for 3 periods 2.40183
Questions
1. The gain or loss on the sale of equipment is:
a. P 40,000 b. P 122 c. P 0 d. (P 17,644)
4. The discount amortization at the end of the second year using the effective-interest amortization is:
a. P 17,083 b. P 19,133 c. P 21,428 d. P 36,216
Problem 8
The balance sheet of PERSEVERANCE CORPORATION on December 31, 2005, includes the following cash
and receivable balances:
Cash Davao Bank P 45,000
Currency and coins 16,000
Petty cash fund 1,000
Cash in bond sinking fund 15,000
Notes receivable (including discounted with recourse, P15,500) 36,500
Accounts receivable P 85,600
Less: Allow. for bad debts (4,150) 81,450
Interest receivable 525
Current liability reported in the December 31, 2005, balance sheet included:
Obligation on discounted notes receivable 15,500
Based on the information above and some other analysis, answer the following questions:
3. PERSEVERANCE CORPORATIONs Other Cash Item (Currency and coins & Petty Cash Fund) at December
31, 2006 is:
a. P 16,000 b. P 13,000 c. P 12,550 d. P 12,000
5. PERSEVERANCE CORPORATIONs Obligation of Discounted of Note Receivable at December 31, 2006 is:
a. P 15,500 b. P 12,000 c. P 11,910 d. P 3,500
8. PERSEVERANCE CORPORATIONs Allowance for bad debts at December 31, 2006 is:
a. P 9,406.50 b. P 9,305.50 c. P 9,252.00 d. P 4,150.00
10. PERSEVERANCE CORPORATIONs Interest income balance at December 31, 2006 is:
a. P 3,086 b. P 3,080 c. P 2,561 d. P 2,555