University of San Jose-Recoletos

AUDITING PROBLEMS

Problem 1Ecleo CompanyTRIAL BALANCE

December 31, 2003

Debit CreditPetty Cash Fund P 3,000Cash in Bank 38,700Marketable Securities 300,000Accounts Receivable 698,000Allowance for Bad Debts P108,500Accounts Receivable – Employees 14,200Notes Receivable 45,000Interest Receivable 5,100Merchandise Inventory, 12/31/03 365,000Office Supplies on Hand 15,000Prepaid Insurance 90,000Investment in Stock 1,500,000Leasehold Improvements 180,000Accumulated Depreciation – Leasehold

Improvements 72,000Equipment 300,000Accumulated Depreciation – Equipment 27,000Delivery Van 510,000Accumulated Depreciation – Delivery Van 170,000Accounts Payable 864,000Notes Payable 340,000Interest Payable 5,000Common Stock 3,000,000Retained Earnings 1,128,500Sales 6,000,000Interest Income 13,000Dividend Income 120,000Repairs Expense 123,000Postage Expense 15,200Cost of Goods Sold 3,900,000Rent Expense 96,000Advertising Expense 55,000Taxes and licenses 45,000Salaries Expense 1,700,000Utilities Expense 413,500Commission Expense 264,000Interest Expense 34,000Miscellaneous Selling Expense 148,000Miscellaneous General Expense 132,000Cash Over or Short 8,300Loss on Damages 850,000 ___________

P11,848,000 P11,848,000Additional 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 152.00Postage stamps 29.00An I.O.U. from Favila, an employee

for cash advance 400.00Check payable to Ecleo from Yongco,

an employee, marked NSF 340.00Vouchers for the following:

Stamps P 200.00Computer repairs 1,843.50 2,043.50

P2,964.50

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 BooksNovember deposits P73,600 P71,100

November checks 62,900 61,300November service charge - 100November 30 balance 50,700 49,700December deposits 82,200 82,800December checks 94,100 92,200December service charge - 150Note collected by bank

in December - 10,150November 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 P45,0002001 130,000 68,0002002 165,000 89,5002003 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 P160,000December 31, 2002 Understated 210,000December 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 isa. P35.50 b. P206.50 c. P0 d. P64.50

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

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

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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 90,000b. Allowance for Bad Debts 18,500

Bad Debt Expense 18,500c. Bad Debt Expense 18,500

Allowance for Bad Debts 18,500d. 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 203,500b. Allowance for Bad Debts 18,500

Retained Earnings 18,500c. Allowance for Bad Debts 203,500

Retained Earnings 185,000Bad 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 understatementb. 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 understatementb. 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 overstatementb. P143,000 overstatement d. P277,000 understatement

20. What is the adjusting entry at December 31, 2003, to correct the inventory errors?a. Cost of Sales 277,000

Retained Earnings 210,000Merchandise Inventory, Ending 67,000

b. Cost of Sales 67,000Merchandise Inventory, Ending 67,000

c. Cost of Sales 277,000Merchandise Inventory, Ending 277,000

d. Retained Earnings 277,000Cost of Sales 210,000Merchandise Inventory, Ending 67,000

Problem 2Resilience 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:

Notes payableResilience 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 AmountApril 31, 2003 P 600,000July 31, 2003 900,000September 1, 2003 450,000

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February 1, 2004 450,000April 1, 2004 - March 31, 2005 2,700,000

P5,100,000

Estimated warrantiesResilience 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 P252,000Warranty claims honored on 2002 - 2003 sales 285,000Total P537,000

Trade payableAccounts payable for supplies, goods and services purchases on open account amount to P560,000 as of March 31, 2003.

DividendsOn 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 payableResilience 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 payablea. P262,000 b. P345,000 c. P630,000 d. P882,000

22. Unamortized bond discounta. P110,000 b. P200,000 c. P100,000 d. P90,000

23. Bond interest payablea. P0 b. P300,000 c. P150,000 d. P250,000

24. Total current liabilitiesa. P6,445,000 b. P5,105,000 c. P5,445,000 d. P3,815,000

25. Total non-current liabilitiesa. P7,700,000 b. P7,590,000 c. P7,500,000 d. P7,610,000

Problem 3The financial statements of Determination Company include the following:

December 31, 2002 December 31, 2003Accounts receivable P900,000Allowance for doubtful accounts 45,000Sales P7,500,000Cash collected from customers 6,540,000

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?

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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 expense for 2003 is:a. Doubtful accounts expense P127,500

Allowance for doubtful accounts P127,500b. Retained earnings P142,500

Allowance for doubtful accounts P142,500c. Doubtful accounts expense P 97,500

Allowance for doubtful accounts P 97,500d. Doubtful accounts expense P157,500

Allowance for doubtful accounts 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 240,800Accounts receivable 563,500Merchandise inventory 1,512,500Accounts payable 1,050,250Accrued expenses 107,750

During your audit, you noted that Charlotte Company held its cash books open after year-end. 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.

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 D31. Cash 240,800 170,250 167,150 173,35032. Accounts receivable 641,000 727,150 637,125 563,50033. Merchandise inventory 1,252,500 1,508,750 1,520,000 1,465,00034. Accounts payable 1,143,250 1,197,725 1,150,875

1,153,975

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35. Working capital 1,055,175 1,158,800 1,058,275 1,000,80036. Current ratio 2.00 2.01 1.84 1.83

END

GOD BLESS!!!

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