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University of San Jose-Recoletos AUDITING PROBLEMS

Problem 1 Ecleo Company TRIAL BALANCE December 31, 2003 Petty Cash Fund Cash in Bank Marketable Securities Accounts Receivable Allowance for Bad Debts Accounts Receivable – Employees Notes Receivable Interest Receivable Merchandise Inventory, 12/31/03 Office Supplies on Hand Prepaid Insurance Investment in Stock Leasehold Improvements Accumulated Depreciation – Leasehold Improvements Equipment Accumulated Depreciation – Equipment Delivery Van Accumulated Depreciation – Delivery Van Accounts Payable Notes Payable Interest Payable Common Stock Retained Earnings Sales Interest Income Dividend Income Repairs Expense Postage Expense Cost of Goods Sold Rent Expense Advertising Expense Taxes and licenses Salaries Expense Utilities Expense Commission Expense Interest Expense Miscellaneous Selling Expense Miscellaneous General Expense Cash Over or Short Loss on Damages

P

Debit 3,000 38,700 300,000 698,000

Credit

P108,500 14,200 45,000 5,100 365,000 15,000 90,000 1,500,000 180,000 72,000 300,000 27,000 510,000 170,000 864,000 340,000 5,000 3,000,000 1,128,500 6,000,000 13,000 120,000 123,000 15,200 3,900,000 96,000 55,000 45,000 1,700,000 413,500 264,000 34,000 148,000 132,000 8,300 850,000 P11,848,000

___________ P11,848,000

Additional information: 1. An examination of the petty cash fund on the morning of January 2, 2004, discloses the following items in the petty cash drawer. Coins and currency P 152.00 Postage stamps 29.00 An I.O.U. from Favila, an employee for cash advance 400.00 Check payable to Ecleo from Yongco, an employee, marked NSF 340.00 Vouchers for the following: Stamps P 200.00 Computer repairs 1,843.50 2,043.50 P2,964.50

2 2. The correct balance of the Cash in Bank account on November 1, 2003, was P40,000. Subsequent transactions during November and December relating to the records of Ecleo and Econg Bank are summarized below. Ecleo Books Econg Bank Books November deposits P73,600 P71,100 November checks 62,900 61,300 November service charge 100 November 30 balance 50,700 49,700 December deposits 82,200 82,800 December checks 94,100 92,200 December service charge 150 Note collected by bank in December 10,150 November service charge recorded in December 100 December 31 balance 38,700 50,300 3. An examination of the company’s allowance for bad debts reveals the following: Estimated Bad Debts Actual Bad Debts 2000 P111,000 P45,000 2001 130,000 68,000 2002 165,000 89,500 2003 No adjustment yet 95,000 In the past, the company has estimated that 3% of sales will be uncollectible. The company’s accountant has determined that the percentage used in estimating bad debts has been inappropriate. He would like to revise the estimate downward to 1.5%. The president of the company has stated that if the previous estimates of bad debt expense were incorrect, the financial statements should be restated using the more accurate estimate. 4. An examination of the company’s December 31, 2003, inventory revealed errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows: December 31, 2001 Understated P160,000 December 31, 2002 Understated 210,000 December 31, 2003 Overstated 67,000 QUESTIONS: 1. What is the correct amount of petty cash for the balance sheet? a. P87.50 b. P492.00 c. P152.00

d. P187.50

2. The petty cash shortage is a. P35.50 b. P206.50

d. P64.50

c. P0

3. What is the total bank receipts (credits) in December? a. P92,800 b. P81,250 c. P92,950

d. P82,800

4. What is the total bank disbursements (debits) in December? a. P92,350 b. P92,200 c. P92,450

d. P61,400

5. What is the total book disbursements (credits) in December? a. P94,200 b. P94,100 c. P94,350

d. P63,000

6. What is the total deposits in transit at November 30? a. P0 b. P2,500 c. P1,900

d. P2,250

7. What is the total deposits in transit at December 31? a. P2,250 b. P2,500 c. P1,900

d. P2,050

8. What is the total outstanding checks at November 30? a. P0 b. P1,550 c. P1,700

d. P1,600

9. What is the total outstanding checks at December 31? a. P3,500 b. P3,350 c. P3,250

d. P3,550

3 10. What is the correct cash in bank balance at November 30? a. P49,700 b. P50,700 c. P48,600

d. P50,600

11. What is the correct cash in bank balance at December 31? a. P49,200 b. P48,700 c. P48,550

d. P50,300

12. What is the correct book receipts in December? a. P 92,350 b. P102,950 c. P91,400

d. P92,750

13. What is the correct bank disbursements in December? a. P92,250 b. P94,150 c. P94,250

d. P94,350

14. What is the entry to record the bad debt expense for the year? a. Bad Debt Expense 90,000 Allowance for Bad Debts 90,000 b. Allowance for Bad Debts 18,500 Bad Debt Expense 18,500 c. Bad Debt Expense 18,500 Allowance for Bad Debts 18,500 d. No adjusting entry. 15. What catch-up entry would be made to correct the inaccurate estimates for previous years? a. Allowance for Bad Debts 203,500 Retained Earnings 203,500 b. Allowance for Bad Debts 18,500 Retained Earnings 18,500 c. Allowance for Bad Debts 203,500 Retained Earnings 185,000 Bad Debt Expense 18,500 d. No entry. 16. What is the adjusted balance of the allowance for bad debts at December 31, 2003? a. P 18,500 b. P198,500 c. P90,000 d. P0 17. What is the effect of the inventory errors on the company’s income in 2001? a. P160,000 understatement c. P117,000 understatement b. P160,000 overstatement d. No effect 18. What is the effect of the inventory errors on the company’s income in 2002? a. P50,000 overstatement c. P210,000 understatement b. P50,000 understatement d. P210,000 overstatement 19. What is the effect of the inventory errors on the company’s income in 2003? a. P67,000 understatement c. P277,000 overstatement b. P143,000 overstatement d. P277,000 understatement 20. What is the adjusting entry at December 31, a. Cost of Sales Retained Earnings Merchandise Inventory, Ending b. Cost of Sales Merchandise Inventory, Ending c. Cost of Sales Merchandise Inventory, Ending d. Retained Earnings Cost of Sales Merchandise Inventory, Ending

2003, to correct the inventory errors? 277,000 210,000 67,000 67,000 67,000 277,000 277,000 277,000 210,000 67,000

Problem 2 Resilience Corporation is selling audio and video appliances. The company's fiscal year ends on March 31. The following information relates the obligations of the company as of March 31, 2003:

4 Notes payable Resilience has signed several long-term notes with financial institutions. The maturities of these notes are given below. The total unpaid interest for all of these notes amounts to P340,000 on March 31, 2003. Due date Amount April 31, 2003 P 600,000 July 31, 2003 900,000 September 1, 2003 450,000 February 1, 2004 450,000 April 1, 2004 - March 31, 2005 2,700,000 P5,100,000 Estimated warranties Resilience has a one-year product warranty on some items. The estimated warranty liability on sales made during the 2001 - 2002 fiscal year and still outstanding as of March 31, 2002, amounted to P252,000.The warranty costs on sales made on April 1, 2002 to March 31, 2003, are estimated at P630,000. The actual warranty costs incurred during 2002 - 2003 fiscal year are as follows: Warranty claims honored on 2001 - 2002 sales P252,000 Warranty claims honored on 2002 - 2003 sales 285,000 Total P537,000 Trade payable Accounts payable for supplies, goods and services purchases on open account amount to P560,000 as of March 31, 2003. Dividends On March 10, 2003, Resilience board of directors declared a cash dividend of P9.30 per common share and a 10% common stock dividend. Both dividends were to be distributed on April 5, 2003 to common stockholders on record at the close of business on March 31, 2003. As of March 31, 2003, Resilience has 5 million, P2 par value, common shares issued and outstanding. Bonds payable Resilience issued P5,000,000, 12% bonds on October 1, 1997 at 96. The bonds will mature on October 1, 2007. Interest is paid semi-annually on October 1 and April 1. Resilience uses the straight line method to amortize bond discount. Based on the foregoing information, determine the adjusted balances of the following as of March 31, 2003: 21. Estimated warranty payable a. P262,000 b. P345,000

c. P630,000

d. P882,000

22. Unamortized bond discount a. P110,000 b. P200,000

c. P100,000

d. P90,000

23. Bond interest payable a. P0

c. P150,000

d. P250,000

24. Total current liabilities a. P6,445,000 P3,815,000

b. P300,000 b. P5,105,000

25. Total non-current liabilities a. P7,700,000 b. P7,590,000

c. P5,445,000

c. P7,500,000

d.

d. P7,610,000

Problem 3 The financial statements of Determination Company include the following: December 31, 2002 December 31, 2003 Accounts receivable P900,000 Allowance for doubtful accounts 45,000 Sales P7,500,000 Cash collected from customers 6,540,000

5 Among the cash collections was the recovery of P15,000 receivable from a customer whose account had been written off as worthless in 2002. During 2003, it was necessary to write-off uncollectible, customers' accounts at P75,000. On December 1, 2003, a customer settled his account by issuing a 12% six-month note for P300,000. On December 31, 2003, the accounts receivable included P450,000 at past due accounts. After careful study, the management estimated that the probable loss on past due accounts is 20% and that in addition, 5% of the current accounts may prove uncollectible. QUESTIONS: 26. What is the balance of accounts receivable on December 31, 2003? a. 1,500,000 b. 1,800,000 c. 1,485,000 d. 1,470,000 27. What is the balance of allowance for doubtful accounts before adjustment on December 31, 2003? a. 15,000 debit b. 45,000 credit c. 30,000 debit d. 60,000 debit 28. How much is the required allowance for doubtful accounts on December 31, 2003? a. 185,000 b. 90,000 c. 127,500 d. 142,500 29. How much increase in allowance for doubtful accounts is required on December 31, 2003? a. 127,500 b. 157,500 c. 97,500 d. 142,500 30. The adjusting entry to record the doubtful accounts a. Doubtful accounts expense Allowance for doubtful accounts b. Retained earnings Allowance for doubtful accounts c. Doubtful accounts expense Allowance for doubtful accounts d. Doubtful accounts expense Allowance for doubtful accounts

expense for 2003 is: P127,500 P127,500 P142,500 P142,500 P 97,500 P 97,500 P157,500 P157,500

Items 31 through 36 are based on the following data. The following accounts were included in the unadjusted trial balance of Charlotte Company as of December 31, 2003: Cash P 240,800 Accounts receivable 563,500 Merchandise inventory 1,512,500 Accounts payable 1,050,250 Accrued expenses 107,750 During your audit, you noted that Charlotte Company held its cash books open after yearend. In addition, your audit revealed the following: 1. Receipts for January 2004 of P163,650 were recorded in the December 2003 cash receipts book. The receipts of P90,025 represents cash sales and P73,625 represents collections from customers, net of 5% cash discounts. 2. Payments to suppliers made on January 2004 of P93,100, on which discounts of P3,100 were taken, were included in the December 2003 check register. 3. Merchandise inventory is valued at P1,512,500 prior to any adjustments. The following information has been found relating to certain inventory transactions. a. Goods valued at P68,750 are on consignment with a customer. These goods are not included in the P1,512,500 inventory figure. b. Goods costing P54,375 were received from a vendor on January 4, 2004. The related invoice was received and recorded on January 6, 2004. The goods were shipped on December 31, 2003, terms FOB shipping point. c. Goods costing P159,375 were shipped on December 31, 2003, and were delivered to the customer on January 3, 2004. The terms of the invoice were FOB shipping point. The goods were included in the 2003 ending inventory even though the sale was recorded in 2003. d. A P45,500 shipment of goods to a customer on December 30, terms FOB destination are not included in the year-end inventory. The goods cost P32,500 and were delivered to the customer on January 3, 2004. The sale was properly recorded in 2004.

6 e. The invoice for goods costing P43,750 was received and recorded as a purchase on December 31, 2003. The related goods, shipped FOB destination were received on January 4, 2004, and thus were not included in the physical inventory. f. Goods valued at P153,200 are on consignment from a vendor. These goods are not included in the physical inventory. Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2003. A B C D 31. Cash 240,800 170,250 167,150 173,350 32. Accounts receivable 641,000 727,150 637,125 563,500 33. Merchandise inventory 1,252,500 1,508,750 1,520,000 1,465,000 34. Accounts payable 1,143,250 1,197,725 1,150,875 1,153,975 35. Working capital 1,055,175 1,158,800 1,058,275 1,000,800 36. Current ratio 2.00 2.01 1.84 1.83

END

GOD BLESS!!!