Practice Problem 2

Prob. 1. You are auditing general cash for the DION COMPANY for the fiscal year ended July
31,2014. The client has not prepared the July 31 bank reconciliation. After a brief discussion with the
owner you agree to prepare the reconciliation, with assistance from one of Dion Company’s clerks.
You obtain the following information:
General Bank
Ledger Statement
Beginning balance P 46,110 P 57,530
Deposits 250,560
Cash receipts journal 254,560
Checks cleared (236,150)
Cash disbursement journal (218,110)
July bank service charge (870)
Note paid directly (61,000)
NSF check ________ (3,110)
Ending balance P82,560 P 6,960

June 30 Bank Reconciliation

Information in General Ledger and Bank Statement

Balance per bank P 57,530

Deposit in transit 6,000
Outstanding checks 17,420
Balance per books 46,110

Additional information obtained is:

a. Checks clearing that were outstanding on June 30 totalled P16,920.
b. Checks clearing that were recorded in the July disbursements journal totalled P204,670.
c. A check for P10,600 cleared the bank, but had not been recorded in the cash disbursements
journal. It was for an acquisition of inventory. Dion uses the periodic inventory method.
d. A check for P3,960 was charged to Dion Company but had been written on a different company’s
bank account.
e. Deposits included P6,000 form June and P244,560 for July.
f. The bank charged Dion Company’s account for a not-sufficient-fund check totalling P3,110. The
credit manager concluded that the customer intentionally closed its account and the owner left the
city.
The check was turned over to a collection agency.
g. A note for P58,000, plus interest, was paid directly to the bank under an agreement signed four
months ago. The note payable was recorded at P58,000 0n Dion Company’s books.

1. The checks outstanding on June 30 amount to

A. P9,980 C. P13,940
B. P10,830 D. P3,340

2. The deposits in transit on June 30 amount to

 A. P6,890 C. P6,000
B. P10,000 D. P9,110

3. The adjusted cash balance on July 31 is

A. P6,980 C.P3,870
B. P10,940 D. P3,020

Prob. 2. The following long-term receivables were reported in the December 31, 2013, statement of
financial position of MANGO CORPORATION:

Note receivable from sale of plant P3,000,000

Note receivable from officer 800,000

The following transactions during 2014 and other information relate to the company’s long-term
receivables:

a. The note receivable from sale of plant bears interest at 12% per annum. The note is payable in 3
annual instalments of P1,000,000 plus interest on the unpaid balance every April 1. The initial
principal and interest payment was made on April 1, 2014.

b. The note receivable from officer is dated December 31, 2013, earns interest at 10% per annum,
and due on December 31, 2016. The 2014 interest was received on December 31, 2014.

c. Mango sold a piece of equipment to Banana, Inc. on April 1, 2014, in exchange for a P400,000
non-interest bearing note due on April 1, 2016. The note had no ready market, and there was no
established exchange price for the equipment. The prevailing interest rate for a note of this type at
April 1, 2014, was 12%. The present value factor of 1 for two periods at 12% is 0.797.

d. A tract of land was sold by Mango to Orange, Inc. on July 1, 2014, for P2,000,000 under an
instalment sale contract. Orange signed a 4-year 11% note for P1,400,000 on July 1, 2014, in
addition to the down payment of P600,000. The equal annual payments of principal and interest on
the note will be P451,250 payable on July 1,2015, 2016, 2017, and 2018. The land had an
established cash price of P2,000,000, and its cost to Mango was P1,500,000. The collection of the
instalments on this note is reasonably assured.

4. The amount to be reported as noncurrent receivables in the statement of financial position at

December 31, 2014, is
A. P3,096,242 C. P3,221,550
B. P3,067,550 D. P3,250,242

5. The accrued interest receivable on December 31, 2014, should be

A. P257,000 C. P285,692
B. P180, 000 D. P334,000

6. The total interest income for the year ended December 31, 2014, should be
A. P427,000 C. P375,692
B. P455,692 D. P532,692
Prob. 3. The notes Receivable account of BUNSOY CO. has a debit balance of P239,200 on
December 31, 2014. There was no balance at the beginning of the year. Your analysis of the
account reveals the following:

a. Notes amounting to P845,000 were received from customers during the year.

b. Notes of P416,000 were collected on due dates and notes amounting to P221,000 were
discounted at the Aggressive Bank. The Note Receivable account was credited for the notes
discounted.

c. Of the P221,000 notes discounted, P104,000 was paid on maturity date while a note for P31,200
was dishonored and was charged back to Notes Receivable account.

d. Cash of P33,000 was received as partial payment on notes not yet due. The amount received was
credited to Liability on Partial Payments account.

e. A note for P50,000 was pledged as collateral for a bank loan.

f. Included in the company’s cash account balance is a three-month note from an officer amounting
to P8,000 which is over a month past due.

7. Assuming that Bunsoy Co. will use a Notes Receivable Discounted account, the adjusted balance
of the Notes Receivable account on December 31, 2014, is
A. P260,800 C. P364,800
B. P323,200 D. P175,000

Prob. 4. SAMANTHA, INC. grants its customers 30 days credit. The company uses the allowance
method for its uncollectible accounts receivable. During the year, a monthly bad debt accrual is
made by multiplying 2% times the amount of credit sales for the month. At the fiscal year-end of
December 31, an aging of accounts receivable schedule is prepared and the allowance for
uncollectible accounts is adjusted accordingly.

At the end of 2010, accounts receivable were P1,250,000 and the allowance account had a credit
balance of P106,000. Accounts receivable activity for 2011 was as follows:

Credit sales P3,800,000

Write-offs 82,000
Collections ?

The company’s controller prepared the following aging summary of year-end accounts receivable:

Age Group Amount Percent uncollectible

0-60 days P825,000 2%
 61-90 days 220,000 10%
91-120 days 50,000 30%
Over 120 days _128,000 40%
Total P1,223,000

Based on the preceding information, determine the following:

8. Allowance for uncollectible accounts before year-end adjustment
A. P100,000 B. P104,700 C. P106,000 D. P76,000

9. Required balance in the allowance for uncollectible accounts at December 31, 2011
A. P100,000 B. P76,000 C. P104,700 D. P106,000

10. Correct bad debt expense for 2011

A. P76,000 B. P71,300 C. P4,700 D. P80,700

11. Net realizable value of accounts receivable at December 31, 2011

A. P1,123,000 B. P1,118,300 C. P 1.233,000 D. P1,142,300

12. Collections from customers during 2011

A. P1,332,000 B. P4,968,000 C. P4,941,000 D. P3,745,000

Prob. 5. In testing the sales cut-off for the BIG LOVE COMPANY in connection with an audit for the
year ended October 31,2016, you find the following information.
A physical inventory was taken as of the close of business on October 31, 2016. All customers are
within a three-day delivery area of the company’s plant. The unadjusted balances of Sales and
Inventories are P7,500,000 and P330,000, respectively.
Invoice Date Date
Number FOB Terms Shipped Recorded Sales Cost
6671 Destination Oct. 20 Oct. 31 P 3,000 P 2,700
6672 Shipping Point Oct. 31 Nov. 2 7,500 6,000
6673 Shipping Point Oct. 25 Oct. 31 5,400 3,600
6674 Destination Oct. 31 Oct. 29 12,600 9,300
6675 Destination Oct. 31 Nov. 2 27,600 24,000
6676 Shipping Point Nov. 2 Oct. 23 19,500 15,300
6677 Shipping Point Nov. 5 Nov. 6 22,500 17,400
6678 Destination Oct. 25 Nov. 3 11,700 6,000
6679 Shipping Point Nov. 4 Oct. 31 25,800 24,600
6680 Destination Oct. 5 Nov. 2 15,000 12,000

Based on the foregoing information, compute the October 31, 2016, adjusted balances of the
following accounts:

13. Sales
A. P7,461,300 C. P7,499,600
B. P7,455,900 D. P7,487,100
14. Inventories
A. P354,000 C. P348,000
B. P363,300 D. P357,300

Prob. 6. The management of PIG, INC. has engaged you to assist in the preparation of year-end
(December 31) financial statements. You are told that on November 30, the correct inventory level
was 145,730 units. During the month of December, sales totalled 138,630 units including 40,000
units shipped on consignment to AA Corp. A letter received from AA indicates that as of December
31, it has sold 15,200 units and was still trying to sell the remainder.

A review of the December purchase orders to various suppliers shows the following:

Purchase Order Invoice Quantity Date Date

Date Date in Units Shipped Received Terms

12/31/16 01/02/17 4,200 01/02/17 01/05/17 FOB Destination

12/05/16 01/02/17 3,600 12/17/16 12/22/16 FOB Destination
12/06/16 01/03/17 7,900 01/05/17 01/07/17 FOB Shipping Point
12/18/16 12/20/17 8,000 12/29/16 01/02/17 FOB Shipping Point
12/22/16 01/05/17 4,600 01/04/17 01/06/17 FOB Destination
12/27/16 01/07/17 3,500 01/05/17 01/07/17 FOB Destination

PIG, Inc uses the “ passing of legal title” for inventory recognition.

15. Goods purchased during December totalled

A. 11,600 units C. 19,500 units
B. 15,800 units D. 8,000 units

16. How many units were sold during December?

A. 138,630 units C. 98,630 units
B. 113,830 units D. 153,830 units

17. How many units should be included in Pig, Inc.’s inventory at December 31, 2016?
A. 18,700 units C. 43,500 units
B. 39,900 units D. 47,700 units