1414+FAR EASTERN UNIVERSITY

INSTITUTEOF ACCOUNTS, BUSINESS AND FINANCE

Department of Accountancy & Internal Auditing

AUDITING PROBLEMS
First Semester AY 2017-2018
PRELIMINARY EXAMINATION
Name Date
(Family Name) (First Name) (Middle Name) Section
Professor Day/Time
Stud. No. Score
Room Rating

ANSWER SHEET
PART 1 – CORRECTING ENTRIES PREPARATION (20 POINTS)

Question 1 (2 POINTS):
Date Account Names Debit Credit
2016
Dec. 31 Accounts Receivable 50,000
Cash 50,000

Explanation:
The P 50,000 are customers’ post-dated check recorded by the client in December, 2016 as debit to cash and
credit to accounts receivable. These post-dated checks are collectible in 2017. There should be no entry to be
made in 2016 upon receipt of these checks. Therefore, the adjusting entry is to reverse the entry made.

Question 2 (2 POINTS):
Date Account Names Debit Credit
2016
Dec. 31 NO REQUIRED AJE

Explanation:
The original check issued in 2016 was cancelled on January 5, 2017and replaced by a new one on the same
date. Therefore, the check remains outstanding as at December 3, 2016. No adjusting journal entry is necessary
at the end of 2016.

Question 3 (2 POINTS):
Date Account Names Debit Credit
2016
Dec. 31 Accounts Receivable 15,000
Cash 15,000

Explanation:
The remaining NSF Check outstanding at December 31, 2016 is P 15,000. The P 30,000 checks were redeposited
and cleared in December. There is no need to prepare journal entries for the return and for the redeposit since
it has no effect in cash. The return of check will decrease the cash but the redeposit will increase the cash.
The adjusting entry is necessary for the P 15,000 because originally it was recorded as debit to cash upon
collection and credit to account receivable. No entry was made by the client when this check was returned by
bank. Therefore, there is no actual collection of cash and no decrease in accounts receivable.

Question 4 (2 POINTS):
Date Account Names Debit Credit
2016
Dec. 31 Accounts Receivable/Cash 30,000
Sales 30,000

Explanation:
The term is FOB shipping point and the goods were shipped on December 29, 2016. Therefore, the transfer of
ownership to the goods happened on this date. The client is the seller, therefore, as of this date or in year 2016,

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there must be recognition of sales revenue (but not recognized in accounting books). Therefore, this requires
adjusting entry.

Since there is already sales transaction, the goods must be excluded in the ending inventory which was
correctly done by the client. Therefore, no adjusting entry is necessary for the ending inventory balance.

Question 5 (2 POINTS):
Date Account Names Debit Credit
2016
Dec. 31 Sales 25,000
Accounts Receivable 25,000

Explanation:
There should be no sales transaction in December, 2016 because the goods were shipped only in January,
2017 but the company made an entry in 2016. Therefore, accounts receivable and sales account balances are
overstated. On the other hand, the inventory was correctly stated because at end of 2016, the items were still
included as part of the ending inventory balance.

Question 6 (2 POINTS):
Date Account Names Debit Credit
2016
Dec. 31 Doubtful Accounts Expense 15,000
Allowance for Doubtful Accounts 15,000

Explanation:
This is a bonus question.

Question 7 (4 POINTS):
Date Account Names Debit Credit
2016
Dec. 31 Subscription Receivable 600,000
Accounts Receivable 600,000

Subscribed Shares 100,000

Share Premium 100,000

COMPOUND ENTRY:
Subscription Receivable 600,000
Subscribed Shares 100,000
Accounts Receivable 600,000
Share Premium 100,000

Explanation:
The entry made is debit – Subscription Receivable (10,000 shares x P 60), P 600,000 and credit – Subscribed
Shares, P 600,000. The entry that should have been made must be debit to Subscription Receivable (10,000
shares x P 60), P 600,000; credit – Subscribed Share (10,000 shares x P 50 par), P 500,000; credit – Share
Premium, P 100,000. In effect, Subscribed shares is overstated by P 100,000 and Share Premium is understated
by P 100,000. Subscription Receivable is understated by P 600,000 while the Accounts Receivable is overstated
by P 600,000.

Question 8 (2 POINTS):
Date Account Names Debit Credit
2016
Dec. 31 Utility Expenses 400,000
Accrued Utility Expenses 400,000

Question 9 (2 POINTS):
Date Account Names Debit Credit
2016
Dec. 31 Retained Earnings 12,000
Depreciation Expense 12,000
Accumulated Depreciation 24,000

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 Entry Made Entry that should have been made Adjusting Journal Entry
No. Account Names Debit Credit Account Names Debit Credit Account Names Debit Credit
1. Cash 50,000 No Entry Accounts Receivable 50,000
Accounts Receivable 50,000 Cash 50,000

Transaction:
The cash counted on December 31, 2016, included two
customers’ checks amounting to P 50,000 both dated in
January, 2017. These checks were recorded in the books in
December and were accepted for deposit by the bank on due
dates.

2. Accounts Payable 100,000 Accounts Payable 10,0000 No AJE required

Cash 100,000 Cash 100,000

Transaction: Notes:
Your audit disclosed that checks with a total of P 100,000 as No entry is necessary for
payment to suppliers were prepared and taken up as debits to the replacement of check.
Accounts Payable. One of these checks in the amount of P
20,000 was cancelled on January 5, 2017, and replaced with
another for the correct amount of P 25,000. No entry was made
for the cancellation.

3. No entry Accounts Receivable 15,000 Accounts Receivable 15,000

Cash 15,000 Cash 15,000

Transaction: Notes:
Customers’ checks amounting to P 45,000 were returned during Of the total P 45,000 NSF
December, 2016 with the notation “NSF”. Of these checks P checks, P 30,000 are
30,000 had been redeposited and cleared the bank during the already cleared.
month. No entries were made for the return or redeposit. Therefore, the remaining
un-cleared and still
collectible was only P
15,000.

4. No Entry NO Entry Accounts Receivable 30,000

(Correctly excluded Sales 30,000
No Entry because the term is FOB
Transactions: Shipping Point)
Goods costing P 20,000 were excluded from the ending
Accounts Receivable 30,000
inventory. The selling price of these goods was P 30,000. These
Sales 30,000
goods were shipped by your client on December 29, 2016, FOB
shipping point. The transaction was not recorded in 2016.

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 Entry Made Entry that should have been made Adjusting Journal Entry
No. Account Names Debit Credit Account Names Debit Credit Account Names Debit Credit
5. Accounts Receivable 15,000 NO entry Sales 15,000
Sales 15,000 Accounts Receivable 15,000
There must be no sales
Transaction: transactions because
Merchandise costing P 15,000 were still included in ending goods are not yet
inventory, although these were already invoiced and recorded delivered at December 31,
as sales to customers on December 31, 2016. The sales invoice 2016. It is correct that the
totaling P 25,000 were no longer recorded when the goods were goods are still included in
delivered on January 5, 2016. inventory at year end.

6. Fighters Corporation decided that the allowance for doubtful BONUS

accounts should be adjusted to equal the estimated required
based on aging the accounts at December 31, 2016. The
following data were gathered: Allowance for Doubtful accounts,
January 1, 2016 – P 120,000; Provision for doubtful accounts
during 2016 (2% of P 3,000,000 sales) – P 60,000; Doubtful
accounts written off in 2016, P 75,000. This is a bonus
question because information is incomplete.

7. Accounts Receivable 600,000 Subscription Receivable 600,000 Subscription Receivable 600,000

Subscribed Shares 600,000 Subscribed Shares 500,000 Accounts Receivable 600,000
Share Premium 100,000
Transaction: Subscribed Shares 100,000
In November 2016, 10,000 ordinary shares were subscribed at Shares Premium
P 60. The par value of the ordinary shares is P 50. Subscriptions 100,000
were charged to Accounts Receivable at issue price which is the
same amount credited to Subscribed Ordinary Shares. The
subscription is collectible within six months from December 31,
2016.

8 No Entry Utility Expenses 40,000 Utility Expenses 40,000

Utility Payable 40,000 Utility Payable 40,000
Transaction:
Billings for utility services amounting to P 40,000 were received
on January 10, 2016. Accruals of income and expenses were
not recorded by your client at December 31, 2016.
9 No Entry made Retained Earnings 12,000 Retained Earnings 12,000
Accumulated Accumulated
Transaction: Depreciation 12,000 Depreciation 12,000
No depreciation amounting to P 12,000 was recorded in year
2015.

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PART 2 – CORRECTION OF ERRORS (20 POINTS):

Date Transactions Account Names Debit Credit

2016
Dec. 31 Unrecorded accrued salaries Retained Earnings 3,800
(1) expenses in 2015, P 3,800 Salaries Expense 3,800

(2) 31 Unrecorded accrued interest Interest Expense 4,500

expenses in 2016, P 4,500. Accrued Interest Expense 4,500

(3) 31 Unrecorded accrued interest Interest Income 1,900

income in 2015, P 1,900. Retained Earnings 1,900

(4) 31 Unrecorded accrued rent Accrued Rent Income 1,500

income in 2016, P 1,500. Rent Income 1,500

(5) 31 Unearned sales revenue in Retained Earnings 5,500

2015, P 5,500. Sales 5,500

(6) 31 Unearned sales revenue in Sales 5,000

2016, P 5,000 Unearned Sales Revenue 5,000

(7) 31 Prepaid insurance expense in Insurance Expense 12,000

2015, P 12,000. Retained Earnings 12,000

(8) 31 Prepaid subscription Prepaid Subscription Expense 8,000

expense in 2016, P 8,000. Subscription Expense 8,000

(9a) 31 Equipment acquired in 2015 Equipment 50,000

(charged to repairs expense; Retained Earnings 50,000
depreciation rate is 10%;
acquired on July 1)
(9b) 31 Retained Earnings 2,500
Depreciation Expense 5,000
Accumulated Depreciation 7,500

PART 3 – AUDIT OF CASH (30 POINTS):

1. Compute the petty cash fund shortage as at December 31, 2016. Show computation below in good
form. Use the solution guide below. This is indexed as Working Paper – A1

NEW LOOK COMPANY

Petty Cash Count Sheet
As at December 31, 2016

Currencies and coins P 1,100

Petty Cash Vouchers (Total amount) 3,000
Replenishment Check 6,000
Others (Specify): 0
Total petty cash per count (1 pt.) P 10,100
Petty cash fund per book 10,000
Overage (Shortage) (2 pts.) P 100

WP-A1

2. Prepare the adjusting entries in relation to petty cash fund as at December 31, 2016. In case AJE is
not necessary, indicate “NO AJE REQUIRED”.

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 Date Account Names Debit Credit
2016 (AJE No. 1)
Dec. 31 Supplies 300
2 pts. Advances to Employees 1,200
Petty Cash Fund 1,500

(AJE No. 2)
2 pts. 31 Petty Cash Fund 100
Miscellaneous Income 100

(AJE No. 3)
2 pts. 31 Cash 8,000
Salaries Payable 8,000

3. Prepare the adjusting entry for Un-deposited receipts. In case AJE is not necessary, indicate “NO AJE
REQUIRED”.
Date Account Names Debit Credit
2016 (AJE No. 3)
Dec. 31 Receivable from Cashier 2,000
2 pts. Undeposited Receipts 2,000

4. Prepare the Bank Reconciliation for December, 2016. Use the solution guide below which is marked
as Working Paper – A3.

NEW LOOK COMPANY

Bank Reconciliation
As of December, 2016

Book Bank
Unadjusted balances 2,000 49,000
Deposit in transit 40,000
Outstanding checks (90,000)
Bank service charges (3,000)
Adjusted balances (1,000) (1,000)
(2 pts.)

WP – A3

5. Prepare the Proof of Cash for December, 2016. Use the solution guide below which is marked as
Working Paper – A3.1.
NEW LOOK COMPANY
Proof of Cash
For the month of December, 2016

December
Dec.1 Receipts Payments Dec. 31
Unadjusted book balance 7,000 175,000 180,000 2,000
Bank Service Charges:
November
December (1 pt.) 3,000 (3,000)
NSF Check returned, redeposited,
and cleared in December (1 pt.) 60,000 60,000
Adjusted book balance (2 pts.) 7,000 235,000 243,000 (1,000)

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 December
Dec.1 Receipts Payments Dec. 31
Unadjusted bank balance 62,000 195,000 208,000 49,000
Deposit in transit:
November 30
December 31 (1 pt.) 40,000 40,000
Outstanding checks
November 30 (1 pt.) (55,000) (55,000)
December 31 (1 pt.) 90,000 (90,000)
Adjusted bank balance (2 pt.) 7,000 235,000 243,000 (1,000)

WP – A-3.1

6. Prepare the adjusting entries in relation to Cash in Bank – Metro Bank as at December 31, 2016. In
case AJE is not necessary, indicate “NO AJE REQUIRED”.

Date Account Names Debit Credit

2016 (AJE No. 4)
Dec. 31 Bank Service Charge 3,000
2 pts. Cash in Bank 3,000

(AJE No. 5)
2 pts. 31 Cash in Bank 1,000
Bank Overdraft 1,000

7. Complete the top schedule or lead sheet for cash below. In case the net adjustments is a negative
amount (more decrease than increase depending on the accounts affected and in adjusting entries),
put the amount inside the parenthesis. In case the net adjustment is zero or none, indicate the figure
“0”.
NEW LOOK COMPANY
Working Paper for Cash and Cash Equivalents
12.31.2016

WP Per Book, Net Per Audit,

Ref. 12.31.2016 Adjustments 12.31.2016

Petty Cash Fund A1 10,000 (1,100) 8,900

Un-deposited Receipts A2 40,000 (2,000) 38,000
Cash in Bank – Metro Bank A3 2,000 (2,000) 0
52,000 (5,100) 46,900
(1 pt. each per audit)

WP - A

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PART 4 - PROBLEMS (AUDIT OF RECEIVABLES) (30 POINTS)

MC Your Answer Here

Prob. (Use Capital Letter)
1 C
2 D
3 B
4 A
5 B

Straight Question
Prob. No. Your Answer Here
1 (1) P 37,500 Shortage
2 (1) P 0 (NONE)
3 (1) P 25,500
(2) P 35,500
(3) P 31,000
(4) Prepare the AGING OF ACCOUNTS
RECEIVABLE to determine if the increase in
accounts written off is justified. (1 point)
4 Use the solution guide below

Requirement 4(1) – 7 points:

BLANCHARD COMPANY
Aging Schedule of Accounts Receivable
As of December 31, 2016

AGE OF ACCOUNTS
Outstandin 0-30 31-60 61-90 91-120 Over 120
Customers g Balance days days days days days

Allison, Inc. 87,950 35,000 52,950

Banks Brothers 52,300 30,000 22,300
Ring, Inc. 79,000 79,000
Total 219,250 114,000 52,950 0 30,000 22,300
Bad Debts Rate 0.7% 1.4% 3.5% 10.2% 60%
Allowance for DA,
12.31.16, adjusted 17,979.30 798.00 741.30 0.00 3,060.00 13,380.00
Allowance for DA,
12.31.16, unadjusted 6,000.00
Doubtful Accounts
Expense, 2016 11,979.3.0

Requirement 4(2) – 2 points:

Date Account Names Debit Credit
2017
Sep. 15 Doubtful Accounts Expense 11,979.30
2 pts. Allowance for Doubtful Accounts 11,979.30

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 QUESTIONNAIRES
General Instructions:
This is a combination of multiple choice questions and straight problem. In addition, this is a combination
of review of financial accounting for accounts receivable and notes receivable, and applied auditing for the
same accounts. For multiple choice questions, choose the correct answer among the given choices.
Supporting computation is not necessary. Write the letter of your choice on the answer sheet provided. Use
CAPITAL LETTERS. For straight problems, write directly the needed or required figures or amounts in the
answer sheet provided. Supporting computation is not necessary. Write legibly.

NOTES:
Please be reminded of the following five (5) point deductions, if applicable in the circumstances:
a) For using abbreviation.
b) For using acronym.
c) For figures without single rule.
d) For figures without double rule.
e) For erasures not countersigned.
f) For using liquid papers.
g) For not having a heading (if part of the requirement)
h) For not using properly the money columns of the
i) worksheet or journals and ledgers
j) For using the back page of the worksheet.
k) For other inappropriate way of preparing working papers.
l) For poor presentation of working papers.
m) For not following instructions.

PART 1 – CORRECTING ENTRIES PREPARATION (20 POINTS):

You were engaged to examine the accounts of FIGHTERS CORPORATION as of December 31, 2016 and
your audit disclosed the information presented below. For each given case, prepare the necessary adjusting
or correcting entries. In case no adjusting entry is necessary, indicate “NO AJE REQUIRED” under the
“Account Names” column. Use the solution guide provided for this part of the examination.

Question 1 (2 POINTS):
The cash counted on December 31, 2016, included two customers’ checks amounting to P 50,000 both
dated in January, 2017. These checks were recorded in the books in December and were accepted for
deposit by the ban o due dates.

Question 2 (2 POINTS):
Your audit disclosed that checks with a total of P 100,000 as payment to suppliers were prepared and taken
up as debits to Accounts Payable. One of these checks in the amount of P 20,000 was cancelled on January
5, 2017, and replaced with another for the correct amount of P 25,000. No entry was made for the
cancellation.

Question 3 (2 POINTS):
Customers’ checks amounting to P 45,000 were returned during December, 2016 with the notation “NSF”.
Of these checks P 30,000 had been redeposited and cleared the bank during the month. No entries were
made for the return or redeposit.

Question 4 (2 POINTS):
Goods costing P 20,000 were excluded from the ending inventory. The selling price of these goods was P
30,000. These goods were shipped by your client on December 29, 2016, FOB shipping point. The
transaction was not recorded in 2016.

Question 5 (2 POINTS):
Merchandise costing P 15,000 were still included in ending inventory, although these were already invoiced
and recorded as sales to customers on December 31, 2016. The sales invoice totaling P 25,000 were no
longer recorded when the goods were delivered on January 5, 2016.

Question 6 (2 POINTS):
Fighters Corporation decided that the allowance for doubtful accounts should be adjusted to equal the
estimated required based on aging the accounts at December 31, 2016. The following data were gathered:

Allowance for doubtful accounts, January 1, 2016 P 120,000

Provision for doubtful accounts during 2016
(2% of P 3,000,000 sales) 60,000
Doubtful accounts written off in 2016 75,000

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Question 7 (4 POINTS):
In November 2016, 10,000 ordinary shares were subscribed at P 60. The par value of the ordinary shares
is P 50. Subscriptions were charged to Accounts Receivable at issue price which is the same amount
credited to Subscribed Ordinary Shares. The subscription is collectible within six months from December
31, 2016.

Question 8 (2 POINTS):
Billings for utility services amounting to P 40,000 were received on January 10, 2016. Accruals of income
and expenses were not recorded by your client at December 31, 2016.

Question 9 (2 POINTS):
No depreciation amounting to P 12,000 was recorded in year 2015. The adjusting entry is:

PART 2 – CORRECTION OF ERRORS (20 POINTS):

The first audit of the books for the AMENABLE CORPORATION was made for the year ended December
31, 2016. In reviewing the books, the auditor discovered that certain adjustments has been overlooked at
the end of 2015 and 2016 and also that other items had been improperly recorded. Omissions and other
failures for each year are summarized below:

Items overlooked Year 2015 Year 2016

(1) Unrecorded accrued salaries expenses in 2015 P 3,800

(2) Unrecorded accrued interest expenses in 2016 P 4,500
(3) Unrecorded accrued interest income in 2015 1,900
(4) Unrecorded accrued rent income in 2016 1,500
(5) Unearned sales revenue in 2015 5,500
(6) Unearned sales revenue in 2016 5,000
(7) Prepaid insurance expense in 2015 12,000
(8) Prepaid subscription expense in 2016 8,000
(9) Equipment acquired in 2015 (charged to repairs
expense; depreciation rate is 10%; acquired on 50,000
July 1)

Required:
Prepare the audit adjustment as of December 31, 2016: Use the solution guide provided for this part of the examination.

PART 3 – AUDIT OF CASH (30 POINTS):

New Look Company is the leading company in beauty cosmetics. Its audit committee contacted you to audit
its financial statements for the year 2016.

Today, January 4, 2017, your audit team is currently auditing the Cash and Accounts Receivable accounts.
Based on its financial statement of position as at December 31, 2016, the balances of these accounts,
including its related accounts, are as follows:

Cash 52,000
Accounts Receivable 325,000
Allowance for Doubtful Accounts (5,000) 320,000
Inventories 1,300,000
Prepaid Expenses 50,000

The accounting department provided you the following details as at December 31, 2016:

Account Names Balance per Book

Petty Cash Fund 10,000
Undeposited Receipts 40,000
Cash in Bank – BPI Checking account 2,000
Total 52,000

As your audit team goes along with the gathering of audit evidence, the following information arise:

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A. PETTY CASH FUND
The count started at 9:00 AM in the presence of its custodian, Mandy Dispalco. You prepare the petty
cash count sheet marked as WP – A1 (See Requirement 1). The following items were found by your
audit staff inside the petty cash box during the count.

Currencies and coins 1,100

Petty Cash Vouchers

Date Nature of Payments Amount
12/22/2016 Supplies purchased from NBS 300
12/26/2016 Vale – Dino Cot, Store Clerk 700
12/26/2016 Vale – Tino Khang, Messenger 500
1/3/2017 Postage Stamps 500
01/03/2017 Supplies purchased from Pandayan Bookshop 1,000 3,000

Unused Postage Stamps 200

You also found the following inside the petty cash box::
Check number 0210 payable to Mandy Dispalco; issued by New Look
Company; dated 12/28/2016 6,000

Unclaimed wages of Tina Casa, the company cashier, because she was
confined in the hospital from December 29 up to the date of your audit.
This envelope is intact and sealed. 8,000

B. UNDEPOSITED RECEIPTS
The physical count of Undeposited Receipts under the custody of the cashier, Tina Casan, is P 38,000.
Inside her cash drawer, you found a notice addressed to Mandy Dispalco and dated December 29,
2016 which said, “Mandy, pakibawas na lang sa pay envelope ko ang P 2,000 na hiniram ko sa
collection ko today. Need ko na talaga pumunta sa ospital. From Tina.” Mandy confirmed that she knew
the notice but decided to keep the pay envelope of Tina Casan intact and sealed.

C. CASH IN BANK – BPI CHECKING ACCOUNT

In your audit of cash in bank account, the accountant of the company provided you the cash book
during the month of December, 2016. This shows all collections during the month consisting mostly of
cash since sales are almost on cash basis. There are also instances that checks are received from
some valued customers who enjoyed credit sales on a case to case basis.

The cashbook of New Look Company during December, 2016 is presented on next page.

Date Transactions Ref. Receipts Payments Balance

2016
Dec. 01 Balance forwarded 7,000
05 Cash collection 35,000 42,000
06 Payment of accounts Check No. 251 10,000 32,000
10 Cash collection 40,000 72,000
11 Payment of accounts Check No. 252 20,000 52,000
15 Check collection (No. 1250) 60,000 112,000
15 Payroll Check No. 253 50,000 62,000
18 Payment of accounts Check No. 254 20,000 42,000
26 Payment of accounts Check No. 255 30,000 12,000
29 Cash collection 40,000 52,000
29 Payroll Check No. 256 50,000 2,000

TOTAL 175,000 180,000

You received the Bank Statement for December, 2016 on January 2, 2017. It shows the following
details:

Checking Account Name New Look Company

Checking Account Number 123-45678-0

Date Transactions Ref. Withdrawals Deposits Balance

2016
Dec. 01 Balance forwarded 62,000
02 Check payment Check 247 10,000 52,000

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 03 Check payment Check 248 10,000 42,000
06 Cash deposit 35,000 77,000
11 Cash deposit 40,000 117,000
13 Check payment Check 251 10,000 107,000
14 Check payment Check 249 20,000 87,000
15 Check payment Check 253 50,000 37,000
16 Check deposit (No. 1250) 60,000 97,000
18 Ret. Check (No. 1250) 60,000 37,000
19 Redeposit (No. 1250) 60,000 97,000
20 Check payment Check 250 15,000 82,000
26 Check payment Check 255 30,000 52,000
29 Bask service charges 3,000 49,000

TOTAL 208,000 195,000

Required:
1. Compute the petty cash fund shortage as at December 31, 2016. Show computation below in good
form. Use the solution guide provided. This is indexed as Working Paper – A1

2. Prepare the adjusting entries in relation to petty cash fund as at December 31, 2016. In case AJE is
not necessary, indicate “NO AJE REQUIRED”. Use the solution guide provided.

3. Prepare the adjusting entry for Un-deposited receipts. In case AJE is not necessary, indicate “NO AJE
REQUIRED”. Use the solution guide provided.

4. Prepare the Bank Reconciliation for December, 2016. Use the solution guide provided which is
marked as Working Paper – A3.

5. Prepare the Proof of Cash for December, 2016. Use the solution guide provided which is marked as
Working Paper – A3.1.

6. Prepare the adjusting entries in relation to Cash in Bank – BPI Checking Account as at December 31,
2016. In case AJE is not necessary, indicate “NO AJE REQUIRED”. Use the solution guide provided.

7. Complete the top schedule or lead sheet for cash below. In case the net adjustments is a negative
amount (more decrease than increase depending on the accounts affected and in adjusting entries),
put the amount inside the parenthesis. In case the net adjustment is zero or none, indicate the figure
“0”. Use the solution guide provided.

PART 4 - PROBLEMS (AUDIT OF RECEIVABLES) (30 POINTS)

Instructions: Choose the correct answer among the given choices. Supporting computation is not required.
Write the letter of your choice on the ANSWER SHEET provided.. Use CAPITAL LETTER. No credit for
not following instructions and reminders on page 2.

MC Problem 1
An analysis and aging of the accounts receivable of HAVE FAITH COMPANY at December 31, 2016,
revealed the following data:

Accounts receivable P 9,000,000

Allowance for uncollectible accounts per book 500,000
Amounts deemed uncollectible 640,000

The net realizable value of the accounts receivable at December 31, 2016 should be:
a. P 8,860,000
b. P 8,500,000
c. P 8,360,000
d. P 7,860,000

Solution:
Accounts receivable P 9,000,000
Amounts deemed uncollectible 640,000
Net realizable value at December 31, 2016 P 8,360,000

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Notes:
The allowance for uncollectible accounts per book of P 500,000 is the unadjusted balance while the
amounts deemed uncollectible is the required allowance for doubtful accounts at end of 2016.

MC Problem 2
TRUST YOURSELF CORPORATION began operations on January 1, 2016. The following information is
available for the year ended December 31, 2016:

Total merchandise purchases P 7,000,000

Merchandise inventory, December 31, 2016 1,400,000
Collections from customers 4,000,000

All merchandise is marked to sell at 40% above cost. Assume that all sales are credit sales and all
receivables are collectible. The balance in accounts receivable at December 31, 2016 should be:
a. P 1,600,000
b. P 2,440,000
c. P 3,000,000
d. P 3,840,000

Solution:
Total merchandise purchases P 7,000,000
Merchandise inventory, December 31, 2016 (1,400,000)
Cost of goods sold P 5,600,000
Multiply by mark-up of 140% (MU is 40% above cost) 140%
Total credit sales in 2016 P 7,840,000
Collections from customers in 2016 4,000,000
Accounts Receivable balance as at December 31, 2016 P 3,840,000

Notes:
There is no beginning balance of Accounts Receivable since the operations of the business began only on
January 1, 2016.

MC Problem 3
The Allowance for doubtful accounts in the books of BE BRAVE COMPANY had a credit balance of P
178,000 at the close of calendar year 2015. During 2016, uncollectible accounts of P 145,000 were written
off against the allowance. The provision for doubtful accounts is computed at 3% of the net sales for the
year. The credit balance of the allowance for doubtful accounts at December 31, 2016 amounted to P
295,500.

The net sales for 2016 was:

a. P 9,850,000
b. P 8,750,000
c. P 5,933,333
d. None of these

Solution:
Accounts receivable, December 31, 2016 P 295,500
Accounts written off during 2016 145,000
Accounts receivable, January 1, 2016 (178,000)
Doubtful accounts expense in 2016 (3% of net sales) P 262,500
Divide by 3% 3%
Total credit sales during 2016 P 8,750,000

MC Problem 4
Based on the aging of its accounts receivable at December 31, 2016, YES I CAN COMPANY determined
that the net realizable value of the receivables at that date is P 5,950,000. Additional information is as
follows:

Accounts Receivable at December 31, 2016 P 6,100,000

Allowance for doubtful accounts at January 1, 2016 160,000
Accounts written off as uncollectible at September 30, 2016 120,000

Yes I Can Company’s doubtful accounts expense for the year ended December 31, 2016 was:
a. P 110,000
b. P 130,000

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c. P 150,000
d. P 190,000

Solution:
Allowance for doubtful accounts at January 1, 2016 P 160,000
Accounts written off as uncollectible at September 30, 2016 (120,000)
Allowance for doubtful accounts, December 31, 2016, unadjusted P 40,000

Accounts Receivable at December 31, 2016 P 6,100,000

Allowance for doubtful accounts, December 31, 2016 (40,000)
Net realizable value of accounts receivable, December 31, 2016 P 6,060,000
Net realizable value of accounts receivable, January 1, 2016 (5,950,000)
Doubtful accounts expense for 2016 P 110,000

MC Problem 5
Based upon its past collection experience, THE FIGHTER COMPANY provides for bad debts expense at
the rate of 2% of credit sales. On January 1, 2016, the allowance for doubtful accounts balance was P
100,000. During 2016, the company wrote off P 180,000 of uncollectible receivables and recovered P
50,000 of bad debts written off in prior years. If credit sales for 2016 totaled P 10,000,000, the allowance
for doubtful accounts balance at December 31, 2016 should be:
a. P 120,000
b. P 170,000
c. P 200,000
d. P 300,000

Solution:
Allowance for doubtful accounts at January 1, 2016 P 100,000
Accounts written off as uncollectible during 2016 (180,000)
Bad debts recovery of accounts written off in prior years 50,000
Provision for doubtful accounts in 2016 (2% x P 10,000,000) 200,000
Allowance for doubtful accounts at December 31, 2016 P 170,000

Straight Problem 1
The following information from Jumbo Company’s first year of operations is to be used in testing the
accuracy of Accounts Receivable. The December 31, 2016 balance is P 360,000.

Collections from customers P 720,000

Merchandise purchased 980,000
Ending merchandise inventory 235,000
Goods sell at 50% above cost
All sales are on account

The amount of the Accounts Receivable shortage or overage is _______________.

Notes:
Indicate the word shortage or overage after the amount. No credit for not following instructions.

Solution:
Merchandise purchased P 980,000
Ending merchandise inventory (235,000)
Cost of goods sold P 745,000
Divide by mark-up based on cost 150%
Total sales on account P 1,117,500
Collections from customers (720,000)
Accounts Receivable balance per audit, 12.31.2016 P 397,500
Accounts Receivable balance, per book, 12/31/2016 360,000
Accounts Receivable shortage, 12.31.2016 P 37,500

Straight Problem 2
New Moon Company accepted a customer’s note from a customer a 2,000,000, 120 days, 12% note dated
August 16, 2017. On September 15, 2017, the entity discounted this note without recourse at 15%. During
your audit, you found out the following journal entries made by the entity. The note was dishonored at
maturity date.

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 Date Account Names Debit Credit
2017
Aug. 16 Notes Receivable 2,000,000
Accounts Receivable 2,000,000

Sep. 15 Cash 2,002,000

Interest Income 2,000
Notes Receivable 2,000,000

QUESTION:
How much is the understatement or overstatement of net income of New Moon Company in 2017 due to
error in recording the above transactions? Indicate the word overstated or understated after the
amount.

Answer:
NONE. Because accounts affected by the adjusting entries are both nominal accounts.

Date Account Names Debit Credit

2017 (Entry Made)
Sep. 15 Cash 2,002,000
Interest Income 2,000
Notes Receivable 2,000,000

(Entry that should have been made)

Sep. 15 Cash 2,002,000
Loss on Notes Receivable Discounting 18,000
Notes Receivable 2,000,000
Interest Income 20,000

(Adjusting Journal Entry)

AJE Loss on Notes Receivable Discounting 18,000
Interest Income 18,000

Supporting computation:
I = P 2,000,000 x 12% x 120/360 = P 80,000
MV = P 2,000,000 + P 80,000 = P 2,080,000
D = P 2,080,000 x 15% x 90/360 = P 78,000
P = P 2,080,000 – P 78,000 = P 2,002,000
Interest Income earned = P 2,000,000 x 12% x 30/360 = P 20,000

Straight Problem 3
The Transtech Publishing Company follows the procedure for debiting Doubtful Accounts Expense for 2%
of all new sales. Sales for four consecutive years and year end allowance accounts balances were as
follows:
Allowance for Doubtful Accounts,
Year Sales end of year balances
2013 2,100,000 21,500
2014 1,975,000 35,500
2015 2,500,000 50,000
2016 2,350,000 66,000

QUESTIONS:
1. What is the total amount of the accounts written off for 2014?
2. What is the total amount of the accounts written off for 2015?
3. What is the total amount of the accounts written off for 2016?

Solution:
USE THE WORK BACK PROCEDURE EACH YEAR.
The AR beginning balance of current year is the ending balance of last year.

Equation:
AR, beg. + DAE + Recovery – Written off = AR, end
Written off = AR, end – AR, beg. –Recovery + Written off

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 Bad Debts ADA,
Year Sales ADA, end Expense beginning Accounts
of year (2% of sales) of year written off
2013 2,100,000 21,500 (42,000) 0 20,500
2014 1,975,000 35,500 (39,500) (21,500) 25,500 No. 1
2015 2,500,000 50,000 (50,000) (35,500) 35,500 No. 2
2016 2,350,000 66,000 (47,000) (50,000) 31,000 No. 3

4. The financial statement auditors are concerned with the growing amount in the allowance account.
What action do you recommend the auditors take?

Answer:
Prepare the AGING OF ACCOUNTS RECEIVABLE to determine if the increase in accounts written off
is justified.

Straight Problem 4
Blanchard Company’s accounts receivable subsidiary ledger reveals the following information:

Account
Customer Balance INVOICE
12.31.16 Amounts Dates

Allison, Inc. 87,950 35,000 12/6/2016

52,950 11/29/2016

Banks Bros. 52,300 30,000 9/27/2016

22,300 8/20/2016

Ring, Inc. 79,000 48,000 12/12/2016

31,000 12/2/2016

Blanchard Company’s receivable collection experience indicates that, on the average, losses have
occurred as follows:

Age of Accounts Uncollectible %

0-30 days 0.7%

31-60 days 1.4%
61-90 days 3.5%
91-120 days 10.2%
121 days and over 60.0%

The allowance for doubtful accounts on December 31, 2016 was P 6,000 before adjustment.

REQUIREMENTS:
1. Complete the accounts receivable aging schedule provided on the solution guide.
2. Using the aging schedule in number (1), compute the allowance for doubtful accounts balance as of
December 31, 2016.

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