ILLUSTRATIVE PROBLEM 1:

You were able to gather the following from the December 31, 2019 trial balance of
Tagum Corporation in connection with your audit of the company:

Cash on hand 372,000

Petty cash fund 10,000
BPI current account 950,000
Security Bank current account No. 01 1,280,000
Security Bank current account No. 02 (40,000)
PNB savings account 500,000
PNB time deposit 300,000

Cash on hand includes the following items:

a. Customer’s check for P60,000 returned by bank on December 26, 2019
due to insufficient fund but subsequently redeposited and cleared by the bank
on
January 8, 2020.
b. Customer’s check for P30,000 dated January 2, 2020, received on
December
29, 2019.
c. Postal money orders received from customers, P36,000.

The petty cash fund consisted of the following items as of December 31, 2019.
Currency and coins P2,100
Employees’ vales 1,600
Currency in an envelope marked “collections for charity” with
names attached 1,200
Unreplenished petty cash vouchers 800
Check drawn by Peso Corporation, payable to the
petty cashier 4,600
P10,3
00

Included among the checks drawn by Tagum Corporation against the BPI current
account and recorded in December 2019 are the following:
a. Check written and dated December 29, 2019 and delivered to payee on
January 2, 2020, P50,000.
b. Check written on December 27, 2019, dated January 2, 2020, delivered to
payee on December 29, 2019, P86,000.

The credit balance in the Security Bank current account No. 2 represents checks
drawn in excess of the deposit balance. These checks were still outstanding at
December 31, 2019.

The savings account deposit in PNB has been set aside by the board of directors for
acquisition of new equipment. This account is expected to be disbursed in the next
3months from the balance sheet date.
QUESTIONS:
Based on the above and the result of your audit, compute for the adjusted balances
of following:

1. Cash on hand
a. P282,000 b. P408,000 c. P246,000 d. P342,000

2. Petty cash fund

a. P6,700 b. P2,100 c. P9,100 d. P10,000

3. BPI current account

a. P1,086,000 b. P1,000,000 c. P914,000 d. P950,000

4. Cash and cash equivalents

a. P2,914,700 b. P2,614,700 c. P2,954,700 d. P3,414,700

SUGGESTED SOLUTIONS:

Requirement No. 1
Cash on hand, per trial balance 372,000
NSF check (60,000)
Post dated check received (30,000)
Cash on hand, as adjusted 282,000

Requirement No. 2
Petty cash fund per total 10,300
Employees' vales (1,600)
Currency in envelope marked "collections for charity" (1,200)
Unreplenished petty cash vouchers (800)
Petty cash fund, as adjusted 6,700

Requirement No. 3
BPI current account, per trial balance 950,000
Unreleased check 50,000
Post dated check delivered 86,000
BPI current account, as adjusted 1,086,000

Requirement No. 4
Cash on hand (see no. 1) 282,000
Petty cash fund (see no. 2) 6,700
BPI current account (see no. 3) 1,086,000
Security Bank current account no. 1 1,280,000
Security Bank current account no. 2 (40,000) 1,240,000
PNB time deposit (assumed can be preterminated) 300,000
Cash and cash equivalents, as adjusted 2,914,700

Note: The P500,000 PNB savings account will be presented separately from
cash and cash equivalents since it has been earmarked for the acquisition
of a noncurrent asset.

ILLUSTRATIVE PROBLEM 2:
The Cash in Bank account of Money Company disclosed a balance of P203,000 as
of December 31, 2019. The bank statement as of December 31, 2019 showed a
balance of P106,000. Upon comparing the bank statement with cash records, the
following facts were developed:

a. The company’s account was charged on December 26 for a customer’s

uncollectible check amounting to P30,000.

b. A two-month, 17% P60,000 customer’s note dated November 25, discounted on

December 12, was dishonored on December 25, and the bank charged the company
P62,000, which included a protest fee of P2,000.

c. A customer’s check for P15,400 was entered as P14,500 by both the depositor
and the bank but was later corrected by the bank. d. Check no. 142 for P12,425 was
entered in the cash disbursements journal at P12,245 and check no. 156 for P3,290
was entered as P32,900.

e. Bank service charges of P1,830 for December were not yet recorded on the
books.

f. A bank memo stated that a customer’s note for P25,000 and interest of P1,000 had
been collected on December 28; and the bank charged P500. (No entry was made
on the books when the note was sent to the bank for collection).

g. Receipts on December 31 for P24,000 were deposited on January 2.

h. The following checks were outstanding on December 31:

No. 123 P3,000 No. 154 P4,000

143 * 2,000 157 6,000
144 7,000 159 7,000
147 3,000 169 5,000
* Certified by the bank in December

i. A deposit of P20,000 was recorded by the bank on December 5, but it should have
been recorded for Motor Company rather than Money Company.

j. Petty cash of P10,000 was included in the Cash in Bank balance.

k. Proceeds from cash sales of P60,000 for December 18 were stolen. The company
expects to recover this amount from the insurance company. The cash receipts were
recorded in the books, but no entry was made for the loss.

l. The December 21 deposit included a check for P20,000 that had been returned
on December 15 marked NSF. Money Company had made no entry upon return of
the check. The redeposit of the check on December 21 was recorded in the cash
receipts journal of Money Company as a collection on account.

REQUIRED:
Prepare a bank reconciliation and necessary adjusting entries as of December 31,
2019.

SUGGESTED SOLUTIONS:

DOLLAR COMPANY
Bank Reconciliation
December 31, 2019

BANK BOOKS
Unadjusted balances, December 31 106,000 203,000
Add (deduct):
a) Customer's uncollectible check
(NSF) (30,000)
b) Dishonored note receivable
(including P2,000 protest fee) (62,000)
c) Book error in recording collection (P15,400 -
P14,500)
d) Book errors in recording disbursements
Check no. 142 (P12,425 - P12,245) – under (180)
Check no. 156 (P3,290 - P32,900) - over 29,610
e) December bank service charges (1,830)
f) Note collected by bank (including interest income
of P1,000 and net of service charge of P500) 25,500
g) Deposits in transit 24,000
h) Outstanding checks (35,000)
I) Bank error in recording
deposit (20,000)
j) Petty cash fund (10,000) k)
Stolen cash sales to be recovered from
insurance co. (60,000)
l) Double counted deposit -
NSF (20,000)
Adjusted balances, December 31 75,000 75,000

Adjusting Journal Entries

1) Accounts receivable 30,000

Cash in bank 30,000

2) Accounts receivable 62,000

Cash in bank 62,000
Notes receivable - discounted 60,000
Notes receivable 60,000

3) Cash in bank 900

Accounts receivable 900

4) Accounts payable 180

Cash in bank 180

5) Cash in bank 29,610

Accounts payable 29,610
6) Bank service charge 1,830
Cash in bank 1,830

7) Cash in bank 25,500

Bank service charge 500
Notes receivable 25,000
Interest income 1,000

8) Petty cash fund 10,000

Cash in bank 10,000

9) Claims from insurance co. 60,000

Cash in bank 60,000

10) Accounts receivable 20,000

Cash in bank 20,000

ILLUSTRATIVE PROBLEM 3:

You were able to obtain the following information during your audit of DITO
Company:

Reconciling items:
November30
December31
Undeposited collections P200,000 P120,000
Outstanding checks 80,000 60,000
Customer’s notes collected by bank 100,000 120,000
Bank service charges 2,000 3,000
Erroneous bank debits 10,000 20,000
Erroneous bank credits 40,000 30,000
NSF checks not redeposited 5,000 7,000
Customer's check deposited December
10, returned by bank on December 16
marked NSF, and redeposited
immediately; no entry made on books
for return or redeposit
10,000
Unadjusted balances:
Books ? 90,000
Bank 230,000 ?

November30
December31

December Transactions:
Bank Books
Receipts P420,000 P270,000
Disbursements 500,000 407,000
REQUIRED:
1. Prepare a 4-column bank reconciliation for the month of December, using the
form that reconciles both the book and bank balances to a correct cash amount.
2. Adjusting entries as of December 31, 2019.

Adjusting journal entries:

1) Cash in bank 120,000
Note receivable 120,000

2) Bank service charge 3,000

Cash in bank 3,000
3) Accounts receivable 7,000
Cash in bank 7,000
ULOB

ILLUSTRATIVE PROBLEM 1

In conjunction with your December 31, 2019, annual audit of the financial statements
of POGI Company, you have obtained and examined the December 31, 2019,
accounts payable trial balance. Your examination of this trial balance disclosed the
following open vouchers:

a. Voucher 761, containing a P380,000 credit to Accounts Payable. This voucher

covered a cash transfer to the factory payroll bank account for the pay period
ended December 28, 2019. The payroll cash transfer was made January 3, 2020,
and payroll checks covering this pay period were distributed to factory employees
on January 4, 2020.

b. Voucher 778, containing an P180,000 credit to Accounts Payable. The P180,000

credit covered the principal and interest due on a ten-year installment loan. The
loan was granted to POGI Company on January 1, 2019. Terms of the loan
agreement call for ten equal annual installment payments of P100,000, each plus
interest at 8 percent. Principal and interest payments are due January 5, 2020 –
2029. The voucher indicated that the Loan Payable and Interest Expense accounts
had been properly charged.

c. Voucher 741, containing a credit to Accounts Payable of P50,000. This voucher

covered on invoice from JC Company for a new computer machine. The computer
machine was installed December 10, 2019, and the Office Equipment account was
properly charged.

d. Voucher 775, containing a credit to Accounts Payable in the amount of P65,480.

This voucher covered income taxes withheld from employees during December
2019.
e. Voucher 779, containing a credit to Accounts Payable of P41,460. This credit
covered the total interest and principal due on a 180-day P40,000 note payable to
the KZ Company. Charges to the Note Payable and Interest Expense had been
properly handled.

f. Voucher 751, containing a P200,000 charge to Accounts Payable. This voucher

represented a P200,000 advance payment to JZ Company for a special order of
ten boxes. The P200,000 check was mailed to JZ Company on January 2, 2008
Questions
1. Accounts payable at year-end is
a. Overstated by P716,940 c. Overstated by P516,940
b. Overstated by P666,940 d. Overstated by P466,940

2. The entry to adjust Voucher # 778 is

a. Accounts payable 180,000 c. Loans payable 100,000
Loans payable 100,000 Interest expense 80,000
Interest payable 80,000 Accounts payable 180,000

b. Accounts payable 180,000 d. Loans payable 100,000

Loans payable 100,000 Interest payable 80,000
Interest expense 80,000 Accounts payable 180,000

3. The entry to adjust Voucher # 741 is

a. Accounts payable – others 50,000
Accounts payable 50,000
b. Accounts payable 50,000
Accounts payable – others 50,000
c. Accounts payable – others 50,000
Machinery 50,000
d. No adjustment
4. The current liability of the company at year-end is
a. Overstated by P340,000 c. Understated by P200,000
b. Overstated by P140,000 d. Understated by P 60,00

Solutions
1. Accounts payable 380,000
Salaries payable 380,000

2. Accounts payable 180,000

Loans payable 100,000
Interest payable 80,000

3. Accounts payable 50,000

AP – others 50,000

4. Accounts payable 65,480

Income tax payable 65,480

5. Accounts payable 41,460

Notes payable 40,000
Interest payable 1,460

6. Cash 200,000
Accounts payable 200,000

Answer:
1. C 2. A 3. B 4. C

ILLUSTRATIVE PROBLEM 2
ABS-GMA Music Emporium carries a wide variety of music promotion techniques -
warranties and premiums – to attract customers.

Musical instrument and sound equipment are sold in a one-year warranty for
replacement of parts and labor. The estimated warranty cost, based on past
experience, is 2% of sales.

The premium is offered on the recorded and sheet music. Customers receive a
coupon for each peso spent on recorded music or sheet music. Customers may
exchange 200 coupons and P20 for an AM/FM radio. ABS-GMA pays P34 for each
radio and estimates that 60% of the coupons given to customers will be redeemed.

ABS-GMA’s total sales for 2019 were P7,200,000 - P5,400,000 from musical
instrument and sound reproduction equipment and P1,800,000 from recorded music
and sheet music. Replacement parts and labor for warranty work totaled P164,000
during 2019. A total of 6,500 AM/FM radio used in the premium program were
purchased during the year and there were 1,200,000 coupons redeemed in 2019.
The accrual method is used by Pirates to account for the warranty and premium
costs
for financial reporting purposes. The balance in the accounts related to warranties
and premiums on January 1, 2019, were as shown below:
Inventory of Premium AM/FM radio P39,950
Estimated Premium Claims Outstanding 44,800
Estimated Liability from Warranties 136,000

QUESTIONS:
Based on the above and the result of your audit, determine the amounts that will be
shown on the 2019 financial statements for the following:
1. Warranty expense
a. P108,000 b. P164,000 c. P144,000 d. P80,000

2. Estimated liability from warranties

a. P108,000 b. P136,000 c. P164,000 d. P80,000

3. Premium expense
a. P 75,600 b. P108,000 c. P183,600 d. P126,000

4. Inventory of AM/FM radio

a. P46,950 b. P77,350 c. P39,950 d. P56,950

5. Estimated liability for premiums

a. P75,600 b. P63,450 c. P36,400 d. P44,800
Let’s Check

Activity 1. Mutiple Choice Questions. Encircle the letter that corresponds to your
answer.
1. Auditor confirmation of accounts payable balances at the balance sheet date
may be unnecessary because
a. This is a duplication of cutoff tests.
b. Accounts payable balances at the balance sheet date may not be paid
before the audit is completed.
c. Correspondence with the audit client's attorney will reveal all legal action by
vendors for nonpayment.
d. There is likely to be other reliable external evidence to support thebalances.

2. In auditing accounts payable, an auditor’s procedures most likely will focus

primarily on management’s assertion of
a. Existence or occurrence c. Completeness
b. Presentation and disclosure d. Valuation or allocation

3. An auditor performs a test to determine whether all merchandise for which the
client was billed was received. The population for this test consists of all
a. Merchandise received c. Canceled checks
b. Vendors’ invoices d. Receiving reports

4. The primary audit test to determine if accounts payable are valued properly is
a. Confirmation of accounts payable
b. Vouching accounts payable to supporting documentation
c. An analytical procedure
d. Verification that accounts payable was reported as a current liability in the
balance sheet.

5. Which of the following audit procedures is least likely to detect an unrecorded

liability?
a. Analysis and recomputation of interest expense.
b. Analysis and recomputation of depreciation expense.
c. Mailing of standard bank confirmation forms.
d. Reading of the minutes of meetings of the board directors.

6. Unrecorded liabilities are most likely to be found during the review of which of
the following documents?
a. Unpaid bills c. Bills of lading
b. Shipping records d. Unmatched sales invoices

7. Which of the following audit procedures is best for identifying unrecorded

trade accounts payable?
a. Reviewing cash disbursements recorded subsequent to the balance sheet
date to determine whether the related payables apply to the prior period.
b. Investigating payables recorded just prior to and just subsequent to the
balance sheet date to determine whether they are supported by receiving
reports.
c. Examining unusual relationships between monthly accounts payable
balances and recorded cash payments.
d. Reconciling vendors’ statement to the file of receiving reports to identify
items received just prior to the balance sheet date.

8. An auditor’s purpose in reviewing the renewal of a note payable shortly after

the balance sheet date most likely is to obtain evidence concerning
management’s assertions about
a. Existence or occurrence c. Completeness
b. Presentation and disclosure d. Valuation or allocation.
9. In conducting a search for unrecorded liabilities, the auditor should do all but
the following:
a. Examine paid invoices for a short period following the balance sheet
date and trace to client's year-end adjustment for unrecorded liabilities.
b. Examine unpaid invoices for a short period following the balance sheet
date and trace to client's year-end adjustment for unrecorded liabilities.
c. Examine prior year's audit workpapers to ascertain that adjustments for
unrecorded liabilities have not been overlooked.
d. Examine invoices paid a few days prior to the balance sheet date.

10. Which of the following errors is most likely to be detected by examining

unrecorded expenditure invoices on randomly selected dates during the
month after fiscal year-end?
a. Sales are overstated for the current month.
b. Expenses are overstated for the fiscal year just ended.
c. Accounts payable are understated at fiscal year end.
d. Accounts payable are overstated at fiscal year end.