CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

AUDITING PROBLEMS
FINAL PREBOARD EXAMINATION Batch 87

SET A

INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING. FULLY SHADE
ONLY ONE BOX FOR EACH ITEM. STRICTLY NO ERASURES ALLOWED.

Situation 1

The MALABON COMPANY is an importer and wholesaler. Its merchandise is purchased from a
number of suppliers and is warehoused until sold to consumers.

In conducting his audit for the year ended December 31, 2020, the company’s CPA determined
that the system of internal control was good. Accordingly, he observed the physical inventory at
an interim date, November 30, 2020, instead of at year end.

The following information was obtained from the general ledger:

Inventory, January 1, 2020 P 90,000

Inventory, November 30, 2020 225,000
Sales for eleven months ended November 30, 2020 800,000
Sales for year ended December 31, 2020 950,000
Purchases for eleven months ended November 30, 2020 (before audit adjustments) 720,000
Purchases for year ended December 31, 2020 (before audit adjustments) 810,000

Additional information is as follows:

a. Goods received on November 28 but recorded as purchases in December 10,000

b. Deposits made in October 2020 for purchases to be made in 2021 but charged
to Purchases 14,000

c. Defective merchandise returned to suppliers:

Total at November 30, 2020 5,000
Total at December 31, 2020, excluding November items 7,000
The returns have not been recorded pending receipt of credit memos from the
suppliers. The defective goods were not included in the inventory.

d. Goods shipped in November under FOB destination and received in

December were recorded as purchases in November 18,500

e. Through the carelessness of the client’s warehouseman, certain goods

were damaged in December and sold in the same month at its cost. 20,000

f. Audit of the client’s November inventory summary revealed the following:

Items duplicated 3,000
Purchases in transit:
Under FOB shipping point 12,000
Under FOB destination 18,500
Items counted but not included in the inventory summary 7,000
Errors in extension that overvalued the items 4,000
Items included in the count specifically segregated per sales contract 8,000

Page 1 of 12 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING PROBLEMS Batch 87

Questions:

1. What is the correct amount of net purchases for the month of December 2020?
A. P83,000 B. P91,500 C. P82,500 D. P101,500

2. The correct inventory on November 30, 2020 is

A. P206,500 B. P214,500 C. P198,500 D. P218,500

3. What is the gross profit for eleven months ended November 30, 2020?
A. P234,000 B. P216,000 C. P224,000 D. P237,500

4. What is the cost of sales ratio for eleven months ended November 30, 2020?
A. 73% B. 70% C. 28% D. 72%

5. What is the estimated inventory on December 31, 2020?

A. P183,100 B. P175,100 C. P184,400 D. P190,000

<><><><><><><><><><><><><><><><><><><><><><><><>

Situation 2

Your audit of LUCBAN COMPANY’s property, plant, and equipment disclosed the following data at
December 31, 2019.
A S S E T
W A L E
Original cost P210,000 P306,000 P480,000 P480,000
Year purchased 2014 2015 2016 2018
Useful life 10 years 15,000 hours 15 years 10 years
Salvage value P 18,600 P 18,000 P 30,000 P 30,000
Double-
Depreciation Sum-of- declining-
method years’-digits Working hours Straight-line balance
Accumulated depreciation
through 2019 P 139,200 P 211,200 P 90,000 P 96,000

You noted that the client’s policy on depreciation is that no depreciation is recorded in the year
an asset is purchased, and full year depreciation is provided in the year an asset is disposed of.

The following transactions occurred during 2020:

1. On May 5, Asset W was sold for P78,000 cash. The company’s bookkeeper recorded this
retirement in the following manner in the cash receipts journal:
Cash 78,000
Asset W 78,000

2. On December 31, it was determined that Asset A had been used 2,100 hours during 2020.

3. On December 31, before computing depreciation expense on Asset L, the management of

Lucban decided the useful life remaining from January 1, 2020, was 10 years.

4. On December 31, it was discovered that a plant asset purchased in 2019 had been expensed
completely in the year. This asset costs P132,000 and has a useful life of 10 years and no
salvage value. Management has decided to use the double-declining balance method for this
asset, which can be referred to as “Asset Y”.

Page 2 of 12 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING PROBLEMS Batch 87

6. The 2020 depreciation expense on Asset W is

A. P17,400 B. P19,092 C. P20,880 D. P54,687

7. The gain to be reported on the sale of Asset W is

A. P 0 B. P24,600 C. P26,292 D. P28,080

8. The 2020 depreciation expense on Asset A is

A. P40,320 B. P42,840 C. P52,800 D. P58,320

9. The 2020 depreciation expense on Asset L is

D. P16,365 B. P36,000 C. P39,000 A. P51,429

10. The total depreciation expense in 2020 on the above-mentioned PPE items is
A. P191,640 B. P196,920 C. P199,920 D. P200,400

<><><><><><><><><><><><><><><><><><><><><><><><>

Situation 3

CUMBULSYON CO. holds debt securities within a business model whose objective is achieved both
by collecting contractual cash flows and selling the debt securities. The contractual cash flows
are solely payments of principal and interest on specified dates.

The following amortization schedule relates to its 5-year, P1,000,000, 7% bonds purchased on
December 31, 2018, for P1,086,565. The bonds were purchased to yield 5% interest.
Interest Interest Premium Amortized
Date Received Income Amortization Cost
12.31.18 P1,086,565
12.31.19 P 70,000 P 54,328 P 15,672 1,070,893
12.31.20 70,000 53,545 16,455 1,054,438
12.31.21 70,000 52,722 17,278 1,037,160
12.31.22 70,000 51,858 18,142 1,019,018
12.31.23 70,000 50,982* 19,018 1,000,000
*Adjustment due to rounding

The following schedule presents the amortized cost and fair value of the bonds at year-end.
Fair Value Amortized Cost
December 31, 2019 P1,065,000 P1,070,893
December 31, 2020 1,075,000 1,054,438
December 31, 2021 1,056,500 1,037,160
December 31, 2022 1,030,000 1,019,018
December 31, 2023 1,000,000 1,000,000

11. What amount should be reported as investment in bonds in the statement of financial
position of Cumbulsyon Co. on December 31, 2020?
A. P1,054,438 B. P1,065,000 C. P1,075,000 D. P1,086,565

12. What amount of unrealized gain should be shown as component of other comprehensive
income in the 2020 statement of comprehensive income?
A. P10,000 B. P16,455 C. P20,562 D. P26,455

13. What amount of unrealized loss should be shown as component of other comprehensive
income in the 2021 statement of comprehensive income?
A. P1,222 B. P14,393 C. P18,500 D. P19,340

14. What amount of unrealized loss should be shown as component of other comprehensive
income in the 2022 statement of comprehensive income?
A. P8,358 B. P9,792 C. P10,982 D. P26,500
Page 3 of 12 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING PROBLEMS Batch 87

15. What amount of unrealized gain should be shown in the 2022 statement of changes in
equity?
A. P10,990 B. P16,883 C. P25,233 D. P26,455

<><><><><><><><><><><><><><><><><><><><><><><><>

Situation 4

PEPITO COMPANY produces herbal tea and other slimming products that are sold throughout the
Philippines. While the company is experiencing a steady growth in sales, it has become noticeable
that collections of accounts receivable from customers are no longer as fast as they used to be.

Pepito Company’s products are sold on payment terms of 2/10, n/30. In the past, more than
75% of the credit customers have availed of the discount by paying within the discount period.

During the year ended December 31, 2020, there has been an increase in the number of
customers taking the full 30 days to pay. The company estimates that less than 60% of the
customers are taking advantage of the discount. Bad debt losses as a percentage of gross credit
sales have increased from the 1.5% provided in prior years to about 4% in the current year.

The deterioration of accounts receivable collections has prompted the company’s controller to
prepare the following report.

ACCOUNTS RECEIVABLE COLLECTIONS

December 31, 2020

a. It is normal that some receivables will prove uncollectible. In fact, annual bad debt write-offs
had been 1.5% of total credit sales for many years. However, this rate has increased to 4%
during the current year.

b. The accounts receivable balance at December 31, 2020, is P1,500,000. The condition of this
balance in terms of age and probability of collection is presented below.
Proportion Probability
of Total Age Categories of Collection
64% 1 to 10 days 99%
18% 11 to 30 days 97.5%
8% Past due 31 to 60 days 95%
5% Past due 61 to 120 days 80%
3% Past due 121 to 180 days 65%
2% Past due over 180 days 20%

c. The allowance for bad debts had a credit balance of P27,300 on January 1, 2020.

d. The P320,000 bad debt expense provided during the year is based on the assumption that
4% of total credit sales will be uncollectible.

e. Accounts written-off during the year totaled P292,500.

Questions:

16. What is the required allowance balance on December 31, 2020?

A. P27,500 B. 54,800 C. P77,100 D. P104,600

17. What year-end adjustment is necessary to bring Pepito Company’s allowance for doubtful
accounts to the balance indicated by the aging analysis?
A. Bad debt expense 5,200
Page 4 of 12 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING PROBLEMS Batch 87

Allowance for bad debts 5,200

B. Allowance for bad debts 5,200
Bad debt expense 5,200
C. Bad debt expense 22,300
Allowance for bad debts 22,300
D. Bad debt expense 77,100
Allowance for bad debts 77,100

18. What is the net realizable value of Pepito Company’s accounts receivable at December 31,
2020?
A. P837,900 B. P1,368,100 C. P1,422,900 D. P1,477,700

19. Pepito Company should report bad debt expense for 2020 of
A. P49,800 B. P297,700 C. P320,000 D. P342,300

20. Pepito Company’s total credit sales for 2020 is

A. P7,312,500 B. P8,000,000 C. P12,800,000 D. P21,333,333

<><><><><><><><><><><><><><><><><><><><><><><><>

Situation 5

OBANDO MUSIC EMPORIUM carries a wide variety of musical instruments, sound reproduction
equipment, recorded music, and sheet music. To promote the sale of its products, Obando uses
two promotion techniques—premiums and warranties.

PREMIUMS
The premium is offered on the recorded and sheet music. Customers receive a coupon for each
P10 spent on recorded music and sheet music. Customers may exchange 200 coupons and P200
for a pocket WIFI. Obando pays P340 for each pocket WIFI and estimates that 60% of the
coupons given to customers will be redeemed. A total of 6,500 pocket WIFIs used in the premium
program were purchased during the year and there were 1,200,000 coupons redeemed in 2020.

WARRANTIES
Musical instruments and sound reproduction equipment are sold with a one-year warranty for
replacement of parts and labor. The estimated warranty cost, based on past experience, is 2%
of sales. Replacement parts and labor for warranty work totaled P1,640,000 during 2020.

Obando uses the accrual method to account for the warranty and premium costs for financial
reporting purposes. Obando’s sales for 2020 totaled P72,000,000—P54,000,000 from musical
instruments and sound reproduction equipment and P18,000,000 from recorded music and sheet
music. The balances in the accounts related to warranties and premiums on January 1, 2020,
were as shown below:
Inventory of premium pocket WIFIs P 399,500
Estimated premium claims outstanding 448,000
Estimated liability from warranties 1,360,000

Based on the preceding information, determine the amounts that will be shown on the 2020
financial statements for the following:

21. Warranty expense

A. P360,000 B. P800,000 C. P1,080,000 D. P1,640,000

22. Estimated liability from warranties

A. P240,000 B. P800,000 C. P1,080,000 D. P1,920,000

23. Premium expense

A. P756,000 B. P840,000 C. P1,836,000 D. P2,189,500

Page 5 of 12 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING PROBLEMS Batch 87

24. Inventory of premium pocket WIFIs

A. P399,500 B. P569,500 C. P739,500 D. P2,210,000

25. Estimated premium claims outstanding

A. P364,000 B. P672,000 C. P756,000 D. P840,000

<><><><><><><><><><><><><><><><><><><><><><><><>

Situation 6

Shown below is the May 31, 2020, bank reconciliation prepared by your client’s staff.

RECONCILIATION
May 31, 2020
Bank balance P652,000
Add: Deposit in transit 10,000
Total P662,000
Less: Outstanding checks
No. 640 P10,000
652 8,000
653 2,000 20,000
Adjusted bank balance P642,000
Book balance P570,800
Add: Proceeds of note receivable collected in May P70,000
Deposit on May 31 not recorded on books until June 2,000 72,000
Total P642,800
Less: Bank service charge 800
Adjusted book balance P642,000

The June 2020 bank statement is shown below:

Pasig Bank
Period covered: May 31, 2020 – June 30, 2020
Account No.: 0021261

Date Checks Deposits

June 1 8,000 10,000
June 8 2,000
June 11 14,000 20,000
June 13 1,000 DM 1,000
June 16 4,000
June 21 12,000 56,000
June 27 18,000
June 29 1,000 EC 1,000 EC
June 30 200 SV
June 30 3,000 DM

SV - Service Charges DM - Debit Memo

EC - Error Corrected CM - Credit Memo

The paid checks accompanying this bank statement (all clearing in June) are the following:
No. 652 P8,000 No. 654 P14,000 No. 657 P12,000
No. 653 P2,000 No. 655 P4,000 No. 658 P18,000

The check register reveals that the last check issued in June is No. 659 for P5,000 and that check
no. 656 is for P2,600.

Cash received for the period June 22 through June 30 of P70,000 was deposited in the bank on
July 1.
Page 6 of 12 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING PROBLEMS Batch 87

The debit memos on June 13 and June 30 represent customers’ NSF checks returned by the bank.
The June 13 NSF check was immediately redeposited without entry. The June 30 NSF check was
redeposited on July 1 without entry.

26. What is the total bank receipts in June?

A. P77,000 B. P78,000 C. P87,000 D. P88,000

27. What is the total bank disbursements in June?

A. P58,000 B. P58,200 C. P59,200 D. P63,200

28. What is the total book receipts in June?

A. P88,000 B. P146,000 C. P218,000 D. P220,000

29. What is the total book disbursements in June?

A. P53,000 B. P56,400 C. P57,400 D. P63,200

30. What is the book balance on June 30, 2020?

A. P676,800 B. P732,200 C. P732,400 D. P729,200

<><><><><><><><><><><><><><><><><><><><><><><><>

Situation 7

ANDRES CORP. was incorporated on January 2, 2019. The corporation’s financial statements for
its first year’s operations were not examined by a CPA. You have been engaged to audit the
financial statements for the year ended December 31, 2020, and your audit is substantially
completed. The corporation’s trial balance appears below.

Andres Corp.
TRIAL BALANCE
December 31, 2020
Debit Credit
Cash P 450,000
Accounts receivable 2,190,000
Allowance for doubtful accounts P 43,800
Inventories 1,506,000
Machinery and equipment 3,570,000
Accumulated depreciation 786,000
Patents 3,846,000
Leasehold improvements 900,000
Prepaid expenses 1,350,000
Goodwill 900,000
Licensing agreement No. 1 1,800,000
Licensing agreement No. 2 1,680,000
Accounts payable 2,190,000
Unearned revenue 518,400
Share capital 9,000,000
Retained earnings, January 1, 2020 4,771,800
Sales 21,600,000
Cost of goods sold 14,250,000
Selling and administrative expenses 5,583,000
Interest expense 285,000
Loss on extinguishments of debt 600,000
Totals P38,910,000 P38,910,000

The following information relates to accounts that may yet require adjustment.

Page 7 of 12 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING PROBLEMS Batch 87

1. Patents for Andres Corp.’s manufacturing process were acquired January 2, 2020, at a cost
of P2,805,000. An additional P1,041,000 was spent on December 29, 2020, to improve
machinery covered by the patents and charged to the Patents account. Depreciation on
property, plant, and equipment has been properly recorded for 2020. Andres Corp. uses the
straight-line method for all depreciation and amortization and the legal life on its patents.

2. On January 3, 2019, Andres Corp. purchased Licensing Agreement No. 1, which was believed
to have an indefinite useful life. The balance in the Licensing Agreement No. 1 account
includes its purchase price of P1,710,000 and expenses of P90,000 related to the acquisition.
On January 1, 2020, Andres Corp. purchases Licensing Agreement No. 2, which has a life
expectancy of 10 years. The balance in the Licensing Agreement No. 2 account includes its
P1,620,000 purchase price and P180,000 in acquisition expenses, but it has been reduced by
a credit of P120,000 for the advance collection of 2021 revenue from the agreement.

In late December 2019, an explosion caused a permanent reduction in the expected revenue-
producing value of Licensing Agreement No. 1, and in January 2021, a flood caused additional
damage that rendered the agreement worthless. The recoverable amount of Licensing
Agreement No. 1 was determined to be P720,000 at December 31, 2019.

3. The balance in the Goodwill account represents amount paid on December 30, 2019, for a
four-year advertising program, estimated to assist in increasing Andres Corp.’s sales.

4. The Leasehold Improvements account includes (a) the P450,000 cost of improvements with
a total estimated useful life of 12 years, which Andres Corp. as tenant made to leased
premises in January 2019; and (b) a movable assembly line equipment costing P450,000 that
was installed in the leased premises in December 2020. Andres Corp. paid its rent in full
during 2020. A 10-year non-renewable lease was signed January 3, 2019, for the leased
building that Andres used in manufacturing operations.

31. What is the carrying value of Patents on December 31, 2020?

A. P2,664,750 B. P2,805,000 C. P3,653,700 D. P3,846,000

32. What amount of impairment loss should be recognized in 2019?

A. P 0 B. P990,000 C. P1,080,000 D. P1,710,000

33. What is the carrying value of Licensing Agreement no. 2 on December 31, 2020?
A. P1,620,000 B. P1,728,000 C. P1,800,000 D. P1,920,000

34. What is the carrying value of Leasehold Improvements on December 31, 2020?
A. P360,000 B. P375,000 C. P405,000 D. P720,000

35. What is the adjusted balance of the Machinery and Equipment account on December 31,
2020?
A. P3,570,000 B. P4,275,000 C. P4,611,000 D. P5,061,000

<><><><><><><><><><><><><><><><><><><><><><><><>

Situation 8

The following are selected unadjusted account balances and adjusting information of
TANDANG SORA COMPANY for the year ended December 31, 2020.

Retained earnings, January 1, 2020 P 1,322,010

Sales salaries and commissions 75,000
Advertising expense 48,270
Legal services 6,675
Insurance and licenses 23,040
Travel expense – sales representatives 13,680

Page 8 of 12 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING PROBLEMS Batch 87

Depreciation expense – sales/delivery equipment 18,300

Depreciation expense – office equipment 12,600
Interest revenue 1,650
Utilities 19,200
Telephone and postage 4,425
Office supplies inventory 6,540
Miscellaneous selling expenses 8,220
Dividends 99,000
Dividend revenue 15,450
Interest expense 13,560
Allowance for doubtful accounts (credit balance) 480
Officers’ salaries 109,800
Sales 1,353,000
Sales returns and allowances 11,700
Sales discounts 2,640
Gain on sale of assets 23,460
Inventory, January 1, 2020 269,100
Inventory, December 31, 2020 61,650
Purchases 424,800
Freight in 16,575
Accounts receivable, December 31, 2020 783,000
Income from discontinued operations (before income taxes) 120,000
Loss on sale of equipment 217,800
Ordinary shares outstanding 117,000

Adjusting information:

(a) Cost of inventory in the possession of consignees as of December 31, 2020,

was not included in the ending inventory balance ............................................... P55,800

(b) After preparing an analysis of aged accounts receivable, a decision was made
to increase the allowance for doubtful accounts to a percentage of the ending
accounts receivable balance ..................................................................................... 2%

(c) Purchase returns and allowances were unrecorded. They are computed as a
percentage of purchases (not including freight in) ..................................................... 6%

(d) Sales commissions for the last day of the year had not been accrued. Total
sales for the day ................................................................................................ P9,180
Average sales commissions as a percent of sales ....................................................... 3%

(e) No accrual had been made for a freight bill received on January 2, 2021, for
goods received on December 29, 2020 ................................................................ P1,710

(f) An advertising campaign was initiated November 2, 2020. This amount was
recorded as “Prepaid advertising” and should be amortized over a six-month
period. No amortization was recorded ................................................................. P5,454

Freight charges paid on sold merchandise were netted against sales. Freight
charges on sales during 2020 ............................................................................ P10,500

(g) Interest earned but not accrued .......................................................................... P1,680

(h) Depreciation expense on a new forklift purchased March 1, 2020, had not
been recognized. (Assume all equipment will have no salvage value and the
straight-line method is used. Depreciation is calculated to the nearest month.)
Purchase price ................................................................................................. P23,400
Estimated life in years ............................................................................................... 10

(i) A “real” account is debited upon the receipt of office supplies. Office supplies on hand at
Page 9 of 12 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING PROBLEMS Batch 87

year-end ........................................................................................................... P3,675

(j) Income tax rate (on all items) ................................................................................ 30%

Compute the adjusted balances of the following:

36. Gross profit

A. P779,913 B. P781,623 C. P769,413 D. P724,113

37. Distribution costs

A. P181,649 B. P167,513 C. P178,013 D. P176,453

38. Income from continuing operations before taxes

A. P231,360 B. P436,795 C. P218,995 D. P239,695

39. Allowance for doubtful accounts

A. P480 B. P15,180 C. P15,660 D. P16,140

40. Office supplies inventory

A. P 0 B. P2,865 C. P3,675 D. P6,540

<><><><><><><><><><><><><><><><><><><><><><><><>

Situation 9

On January 1, SAMANTHA CO. establishes a petty cash account and designates Orly Reyes as
petty cash custodian. The original amount included in the petty cash fund is P5,000. The
following disbursements are made from the fund:

Office supplies P1,730

Postage 1,120
Entertainment 420

The balance in the petty cash box is P1,630.

41. The person responsible, at all times, for the amount of the petty cash fund is the
A. Chairman of the Board of Directors.
B. President of the company.
C. Petty cash custodian.
D. General cashier.

42. The following are appropriate procedures for controlling the petty cash fund, except
A. To monitor variations in different types of expenditures, the petty cash custodian files
petty cash vouchers by category of expenditure after replenishing the fund.
B. To replenish the fund, the general cashier issues a company check to the petty cash
custodian, rather than cash.
C. To determine that the fund is being accounted for satisfactorily, surprise counts of the
fund are made from time to time by the internal auditor or other responsible official.
D. Each individual to whom petty cash is paid is required to present signed receipts to the
petty cash custodian.

43. The entry to replenish the fund is

A. Office supplies expense 1,730
Postage expense 1,120
Entertainment expense 420
Cash 3,270

B. Office supplies expense 1,730

Postage expense 1,120
Page 10 of 12 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING PROBLEMS Batch 87

Entertainment expense 420

Cash over and short 100
Cash 3,370

C. Office supplies expense 1,730

Postage expense 1,120
Entertainment expense 420
Cash over and short 100
Petty cash 3,370

D. Office supplies expense 1,730

Postage expense 1,120
Entertainment expense 420
Petty cash 3,270

44. The objective of establishing a petty cash fund is to

A. Cash checks for employees.
B. Account for all cash receipts and disbursements.
C. Account for cash sales.
D. Facilitate payment of small, miscellaneous items.

45. What is the effect of not replenishing the petty cash at year-end and not making the
appropriate adjusting entry?
A. A detailed audit is essential.
B. The petty cash custodian should turn over the petty cash to the general cashier.
C. Cash will be overstated and expenses understated.
D. Expenses will be overstated and cash will be understated.

<><><><><><><><><><><><><><><><><><><><><><><><>

Situation 10

Presented below are two (2) unrelated situations.

You started the audit of the financial statements of ARCHIE, INC. on January 15, 2021, for the
year ended December 31, 2020. The general ledger shows cash account balance of P247,200 as
at December 31, 2020.

The following items are included in the December 31, 2020, reconciliation prepared by the
cashier:

Cash per records, December 31, 2020 P247,200

Cash per bank statement, December 31, 2020 264,095
Outstanding checks 25,325
Check of Tsikoy Co., charged by bank in error on December 28, 2020;
corrected by bank on January 2, 2021 750
Deposit in transit 3,500

From January 2, 2021, to January 15, 2021, the date of your cash count, total cash receipts
appearing in the cash records amounted to P53,500. During the same period, the bank had
credited total deposits of P47,965.

The following cash and cash items were on hand at the close of business on January 15, 2021:
Currency P1,425
Customers’ checks 1,950
Expense vouchers 375
P 3,750

Your further investigation revealed the following:

Page 11 of 12 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING PROBLEMS Batch 87

a. Cash received on account from customers:

DATE AMOUNT ENTRY MADE
07/05/20 P4,000 Allowance for bad debts 4,000
Accounts receivable 4,000
12/10/20 P3,000 Inventory 3,000
Accounts receivable 3,000
12/15/20 P3,500 Not recorded

b. Unrecorded but deposited checks received from customers from January 2, 2021, to January
15, 2021, totaled P2,000.

c. The cashier presented receipts for collections from customers on January 10, 2021, totaling
P4,500; these were unrecorded and undeposited.

Questions:

46. What is the total cash shortage as of December 31, 2020?

A. P4,180 B. P14,680 C. P16,180 D. P21,180

47. What is the total cash shortage as of January 15, 2021?

A. P18,430 B. P24,930 C. P26,465 D. P27,965
----------------------------------------------------------------------------------------

The JUNNEL COMPANY had weak internal controls over its cash transactions. Facts about its
cash position at November 30, 2020, were as follows:

The cash books showed a balance of P94,508, which included undeposited receipts. A credit of
P500 on the bank’s records did not appear on the books of the company. The balance per bank
statement was P77,750. Outstanding checks were no. 8420 for P581, no. 8422 for P750, no.
8430 for P1,266, no. 8621 for P954, no. 8623 for P1,034, and no. 8632 for P726.

The cashier stole all undeposited receipts in excess of P18,972 and prepared the following
reconciliation:

Balance per books, Nov. 30, 2020 P94,508

Add: Outstanding checks
8621 P 954
8623 1,034
8632 726 2,214
96,722
Less: Undeposited receipts 18,972
Balance per bank, Nov. 30, 2020 77,750
Less: Unrecorded credit 500
True cash, Nov. 30, 2020 P77,250

Questions:

48. What is the correct amount of cash that should be on hand for deposit on November 30,
2020?
A. P18,972 B. P22,069 C. P22,569 D. P23,069

49. How much was stolen by the cashier?

A. P 0 B. P3,097 C. P3,597 D. P4,097

50. What is the adjusted cash balance as of November 30, 2020?

A. P87,814 B. P91,411 C. P94,008 D. P94,008

<><><><><><><><><><><><><><><><><><><><><><><><>
---END OF EXAMINATION---
Page 12 of 12 Pages