PROBLEM 1 In auditing the Batya Company, yout obtain directly from the bank with which it docs business the bank statement, canccled checks, and other memorandums that relate to the company’s bank account for June, 1983. In reconciling the bank balance at June 30, 1983, with that shown on the company's books, you observe the facts set forth below: 1, Balance per bank statement, 6/30/83 P89,A65.73 2, Balance per books, 6/30/83 60,159.68, 3. Outstanding checks, 6/30/83 31,280.24 4. Receipts of 6/30/83, deposited 7/1/83 $,732.30 5, Service charge for May, 1983, per bank memo of 6/8/83 3.85 6. Proceeds of bank loan, 6/24/83, discounted for 3 months @ 5% per annum, omitted from company books 9,875.00 Check of Botyok Products Co, charged back on 6/22/83 for absence of countersignature and redeposited with complete signature on 7/8/83, no entry on the books having been made for the charge-back or the redeposit =” 8. Deposits of 6/25/83 omitted from bank statement 2,298.14 9, Error on bank statement in entering deposit of 6/15/83: Correct amount P3,182.40 Entered in statement 381.40 1,00 10. Check No. 1936 of Betsy Manufacturing Co., charged by bank in error to company's account 2,580.00 . Proceeds of note of Singkamas and Co. collected by bank, 6/8/83 not entered in cash book: Principal 2,500.00 Interest 25.00 P2,525.00 Less — collection charge $.00 2,520.00 12, Erroneous debit memo of 6/22/83, to charge company’s account with settlement of bank loan, which was paid by check No. 7481 on same date 5,000.00 13, Error on bank statement in entering deposit of 6/4/8. Entered as 4,187.10 Correct amount ~ * 4,177.10 10.00 14, Deposits of Betsy Manufacturing Co. of 6/8/83 = credited in error to this company 1,981.20 Required: a) ee a reconciliation of the Batya Company’s cash account at June 30, b) Prepare one or more journal entries to adjust the Batya Company's books to record the correct bank balance at June 30, 1983.Problem 2 Wizards Enterprises loaned P1,000,000 to Washington Inc. on January 1, 2004. The terms of the loan require principal payments of P200,000 each year for 5 years plus interest at 8%. The first principal and interest payment is due on January 1, 2005. Washington made the required payments during 2005 and 2006. However, during 2006 Washington began to experience financial difficulties, requinng Wizards to reassess the collectibility of the loan. On December 31. 2006, Wizards determines that the remaining principal payments will be collected, but the collection of interest is unlikely. The prevailing interest rate for similar type of note as of December 31, 2006 is 10%. QUESTIONS: Based on the above and the result of your audit, answer the following: 1. The present value of the expected future cash flows as of December 31, 2006 is 2. The loan impairment for the year 2006 is 3. How much is the interest income for the year 2007, assuming that Wizards’ assessment of the collectibility of the loan has not changed.PROBLEM 3 The Sebah Company has the following cash accounts at December 31, 1983, the end of its fiscal year, with the balances shown: Philippine National Bank — General P'18,559.18 Prudential Bank — General 4,904.16 Prudential Bank — Bond Sinking Fund 4,673.29 Cash on Hand 9,765.00 Petty Cash 200.00 In the course of your examination of Sabah Company’s books early in January 1984 you discover the following information relative to the various cash accounts. All cash receipts are debited to cash on hand, When deposits are made, a bank accounts debited and cash on hand credited. The imprest petty cash system is used. The December 31 bank statemen‘s showed balances as follows: Philippine National Bank — General Prudential Bank — General 44,389.34 Prudential Bank — Bond Sinking Fund ie i Checks have been returned by the Philippine Nati ee pine National Bank marked NS.F, as Tunkud Company, P564.20; Wasak Brothers, P200; Malis Inc., P345.15 Arrangements have been made with Tunkud Company id sent their check after the expiration of 30 days. The Malin, Tt Brothers to repre- No entries were made in the books upon retum of the checks,” ”” “MCCk is worthless.The bookkeeper holds a 200 1.0.U, signed by the president of the company as part of the cash on hand, On December 20, the bookkeeper sent a note for PS00 with P15 interest accrued thereon to the Philippine National Bank for collection and made the following entry: Cash on Hand 515 Notes Receivable 500 Interest Income 15 The bank returned the note on December 29 as uncollectible but investigation reveals that payment will eventually be received, No entry was made on return of the note. Upon reimbursement of the petty cash fund approximately three months ago, the fund was found to be P2S short. Two checks were drawn on Philippine National Bank = General, one for the amount of the vouichers in the fund and the other, No, 984, for P25. whichwas charged to Miscellaneous General Expense. This check is still held in the petty cash drawer, A check for P980, was sent to Abdul Company on December 13 in payment of an invoice of P1,000 subject to 2 percent cash discount. The Abdul Company returned the check since the discount period had expired. A new check was issued on December 18 for #1,000. The off-setting debit in both instances was made to Accounts Payable ~ Abdul Company. The first check is still being held by the bookkeeper. The Sabah Company submitted a certified check No. 2007, for P500 with a bid to supply certain merchandise to the Caloocan City, debiting Accounts Receivable — Caloocan City. The bid was not accepted and the check was retumed. No entry was made, and the check is still in the possession of the bookkeeper. Upon investigation at the Philippine National Bank you find that payment has been stopped on check No. 1942 for P400 to Grant Britanga, debited to Office Supplies Expense. The bookkeeper explains that the payee lost the check and No. 1984 was issued in its place for the same amount. Miscellaneous General Expense was charged upon issuance of No. 1984. A check was drawn on Philippine National Bank — General for P5,000 on Decem- ber 31 payable to Prudential Bank Company. An entry was made as follows: Prudential Bank Company — General 5,000 Philippine National Bank — General 5,000 Transfer of Funds The check was deposited in the Prudential Bank Company — General account Jan- uary 2, No entry was made at the time of the deposit. The Philippine National Bank has charged a check drawn by Sabah Company for P789 to Sabah Company's account. . 8,567.45 was deposited to PNB on December 28 but due to an error, the Pruden- tial Bank Company ~ General account was debited on Sabah Company's books. Checks and bond coupons representing interest on sinking fund investments havebeen accumulating awaiting deposit, Entries have been made upon receipt of these amounts having the following effect: Prudential Bank Company ~ Bond Sinking Fund 4,291.15 Bond Sinking Fund Income 4291.15 ‘These amounts were deposited in the bank account on January 15. Cheeks outstanding at December 31 were: Phitippine National Bank — Prudential Bank Company — Genen ___General_ No. 984. P 25.00 No, 2648 1,141.15 1901 980.00 2649 843.20 1942 400.00 2650 1,495.40 1998 1,954.00 2655 1,391.16 1999 $87.60 2656 985.35 2 84.30 2657 2,974.15 2001 22.15 : 2002 1,980.00 2005 381.16 2006 1,002.45 2007 500,00 2009 875.16 2010 599.48 2011 3,284.15 2012 1,004.16 2013 ‘981.45 2014 5,000.00 Required: (1) Reconeile the bank accounts; (2) Determine the amounts to be shown in the December 31 balance sheet as cash": (3) Prepare entries to correct the books as of December 31, assur s ming that all t tions subsequent to December 31 have been correctly handled Raat Eee the contrary, 7Problem 4 mber 31, 1983. The ot Dest 1,200,000. as You are conducti Pe ot is ducting an auait of the Perry C Cas general ledger is balano balance oo the accounts receivable (control) account on t lysis of lance reveals the following information: 5 cust Debit balance in accounts with trade total: 7450,000 is due for pay! tomers of this mont in 3 months oF less. 101,000 is due for payment in 3.1 to 6 months. 721000 is due for payment in 6.1 to 12 months. Percoll aie fer paymeat i12-1\t0p2 mao 34000 w erendie for pajroent by 0.1 to. months, 36,000 is overdue for payment by 3.1 to 6 months. 9°000 is everdue for payment by 6.1 to 9 months. 5,000 is overdue for payment by 9.1 to 12 months. 15,000 Credit balances accounts with trade customers. 1 Cash deposits with National Company, representing a 5% down payment on a contract on merchandise to be purchased from this company over the next 6 months. 5,000 ‘Advances to employees on future pay checks. 10,000 Notes receivable (loans to employees), all due in 7 months orless. 75,000 Advance to Joe Perry, President. This advance is covered by an unsecured note due two years from now. 50,000 Amount due on capital stock subscriptions of P150,000. 184,000 Sales to consignment customers. The merchandise which cost P 100,000 are now in the hands of consignees. 10,000 Working fund advances to travelling salesmen. 100,000 Advances to subsidiary, Santi-Perry Co. Repayment is to be made in 1987, 14,000 Sales billed on December 31, 1983 the merchandise being shipped two days later. This merchandise (cost, ? 10,000) was included in the end-of-year inventory 1,400,000. 4,000 Claims filed against insurance company. 12,000 Unordered merchandise shipped sight draft order bill of lading-dre‘ts not -yet collected. ™ schandise cost 8,000.Additional Information: Not included in the above account was 2,000 of unrecorded cash received from a ‘customer as a 20% down payment on merchandise (now in stock}to be shipped to him]on January 12, 1984, Unrecorded cash received from customers on December 31, 1983, P5,000, These collections applied to the’ accounts receivable of P101,000 above. Accounts receiv. ables known to be uncollectible, but not yet writteil off, amount to 9,000. Of this amount, 3,000 was overdue for payment by 3.1 to 6 months, P2,000 by 6.1 to9 months, and P4,000 by 10 months, There is no balance in the allowance for Bad Debts account nor have any entries been made in this account during the year just closed. For each of the “overdue” groupings of accounts receivables, the estimated current unollectibility of these accounts is fixed at 20%, 30%, 60%, and 80%. The balance of the Cash account in the ledger was P106,000. Required: Adjusting entries.THEORIES 1. Which of the following statements would an auditor most likely to add to the negative form of confirmations of accounts. receivable to encourage timely consideration by the recipient? a. “This is not a request for payment; remittances should not be sent to our auditors; in the enclosed envelope” b. “Report any difference on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your records.” ¢. “If you do not report any difference within 15 days, it will be assumed that this statement is correct.” d. “The following invoices have been selected for confirmation and represent amounts that are overdue.” 2. Auditing standards define a confirmation as “the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions” Two assertions for which confirmation of accounts receivable balances provides primary evidence are a. Completeness and valuation c. Rights and obligations and existence b. Valuation and rights and obligations d. Existence and completeness 3. Auditor may use positive or negative forms of confirmations requests for accounts receivable. An auditor most likely will use a. The positive form to confirm all balances regardless of the size. b. A combination of the two forms, with the positive form used for large balances and the negative for the small balances c. Acombination of the two forms, with the positive form used for trade receivables and the negative form for other receivables. d. The positive form when the combined assessed level of inherent and control risk for assertions related to receivables is acceptably low, and the negative form when itis unacceptably high. 4. Inthe confirmation of accounts receivable, the auditor would most likely a. Request confirmation of a sample of the inactive accounts b. Seek to obtain positive confirmations for at least 50% of the total dollar amount of the receivables. c. Require confirmation of all receivables from agencies of the federal government. d, Require that confirmation requests be sent within 1 month of the fiscal year-end. 5. Negative confirmations of accounts receivable is less effective than positive confirmation of accounts receivable because a. A majority of recipients usually lack the willingness to respond objectively. b. Some recipients may report incorrect balances that require extensive follow-up. c. The auditor cannot infer that all non-respondents have verified their account information. d. Negative confirmations do not produce evidence that is statistically quantifiable.