Quiz 2 - Auditing

A trial balance before adjustments included the following:

Debit Credit
Sales P850,000
Sales returns and allowance P28,000
Accounts receivable 86,000
Allowance for doubtful accounts 1,520

1. If the estimate of uncollectibles is made by taking 2% of net sales, the amount of the
adjustment is
($850,000 – $28,000) × .02 = $16,440

2. If the estimate of uncollectibles is made by taking 10% of gross account receivables, the
amount of the adjustment is
($86,000 × .10) – $1,520 = $7,080

3. Lankton Company has the following account balances at year-end:

Accounts receivable P80,000
Allowance for doubtful accounts 4,800
Sales discounts 3,200
Lankton should report accounts receivable at a net amount of
$80,000 – $4,800 = $75,200

4. Smithson Corporation had a 1/1/20 balance in the Allowance for Doubtful Accounts of
P20,000. During 2020, it wrote off P14,400 of accounts and collected P4,200 on
accounts previously written off. The balance in Accounts Receivable was P400,000 at 1/1
and P480,000 at 12/31. At 12/31/20, Smithson estimates that 5% of accounts receivable
will prove to be uncollectible. What is Bad Debt Expense for 2020?
($480,000 × .05) – [$20,000 – ($14,400 – $4,200)] = $14,200

5. Black Corporation had a 1/1/20 balance in the Allowance for Doubtful Accounts of
P18,000. During 2020, it wrote off P12,960 of accounts and collected P3,780 on
accounts previously written off. The balance in Accounts Receivable was P360,000 at 1/1
and P432,000 at 12/31. At 12/31/20, Black estimates that 5% of accounts receivable will
prove to be uncollectible. What should Black report as its Allowance for Doubtful
Accounts at 12/31/20?
$432,000 × .05 = $21,600

6. Shelton Company has the following account balances at year-end:

Accounts receivable P120,000
Allowance for doubtful accounts 7,200
Sales discounts 4,800
Shelton should report accounts receivable at a net amount of
$120,000 – $7,200 = $112,800

7. Vasguez Corporation had a 1/1/20 balance in the Allowance for Doubtful Accounts of
Quiz 2 - Auditing

P30,000. During 2020, it wrote off P21,600 of accounts and collected P6,300 on
accounts previously written off. The balance in Accounts Receivable was P600,000 at
1/1 and
 P720,000 at 12/31. At 12/31/20, Vasguez estimates that 5% of accounts receivable will
prove to be uncollectible. What is Bad Debt Expense for 2020?
$720,000 × .05 – [$30,000 – ($21,600 – $6,300)] = $21,300

8. McGlone Corporation had a 1/1/20 balance in the Allowance for Doubtful Accounts of
P25,000. During 2020, it wrote off P18,000 of accounts and collected P5,250 on
accounts previously written off. The balance in Accounts Receivable was P500,000 at 1/1
and P600,000 at 12/31. At 12/31/20, McGlone estimates that 5% of accounts receivable
will prove to be uncollectible. What should McGlone report as its Allowance for
Doubtful Accounts at 12/31/20?
$600,000 × .05 = $30,000

9. Lester Company received a seven-year zero-interest-bearing note on February 22, 2020,

in exchange for property it sold to Porter Company. There was no established exchange
price for this property and the note has no ready market. The prevailing rate of interest
for a note of this type was 7% on February 22, 2020, 7.5% on December 31, 2020, 7.7%
on February 22, 2021, and 8% on December 31, 2021. What interest rate should be used
to calculate the interest revenue from this transaction for the years ended December
31, 2020 and 2021, respectively?
7% and 7%.

10. On December 31, 2020, Flint Corporation sold for P100,000 an old machine having an
original cost of P180,000 and a book value of P80,000. The terms of the sale were as
follows:
P20,000 down payment
P40,000 payable on December 31 each of the next two years
The agreement of sale made no mention of interest; however, 9% would be a fair rate
for this type of transaction. What should be the amount of the notes receivable net of
the unamortized discount on December 31, 2020 rounded to the nearest peso? (The
present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.)
$40,000 × 1.75911 = $70,364

11. Assume Royal Palm Corp., an equipment distributor, sells a piece of machinery with a
list price of P600,000 to Arch Inc. Arch Inc. will pay P650,000 in one year. Royal Palm
Corp. normally sells this type of equipment for 90% of list price. How much should be
recorded as revenue?
($600,000 × .90) = $540,000

Problems
Your audit disclosed that on December 31, 2021, the accounts receivable control account of
Aliwanag Company had a balance of P2,865,000. An analysis of the accounts receivable account
showed the following:
Accounts known to be worthless P 37,500
Advance payments to creditors on purchase orders 150,000
Advances to affiliated companies 375,000
Customers’ accounts reporting credit balances arising from sales return (225,000)
Interest receivable on bonds 150,000
Other trade accounts receivable – unassigned 750,000
 Subscriptions receivable for common stock due in 30 days 825,000
Trade accounts receivable - assigned (Finance company’s equity in assigned
accounts is P150,000) 375,000

Trade installment receivable due 1 – 18 months, including unearned finance

charges of P30,000 330,000
Trade receivables from officers due currently 22,500
Trade accounts on which post-dated checks are held (no entries were made on
receipts of checks) 75,000

P2,865,000

Questions:

Based on the above and the result of your audit, determine the adjusted balance of following:

12. The trade accounts receivable as of December 31, 2021 is

1,522,500

13. The current trade and other receivables net as of December 31, 2021 is
2,647,500

14. How much of the foregoing will be presented under noncurrent assets as of December
31, 2021?
375,000

The balance sheet of Santiago Corporation reported the following long-term receivables as
of December 31, 2020:
Note receivable from sale of plant P9,000,000
Note receivable from officer 2,400,000

In connection with your audit, you were able to gather the following transactions during
2021 and other information pertaining 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 installments of P3,000,000 plus interest on the unpaid balance every April 1.
The initial principal and interest payment was made on April 1, 2021.
b. The note receivable from officer is dated December 31, 2020, earns interest at 10% per
annum, and is due on December 31, 2023. The 2021 interest was received on December 31,
2021.
c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2021, in exchange for an
P1,200,000 non-interest bearing note due on April 1, 2023. 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, 2021, was 12%. The present value factor of 1 for two
periods at 12% is 0.797 while the present value factor of ordinary annuity of 1 for two
periods at 12% is 1.690.
d. A tract of land was sold by the corporation to No Co. on July 1, 2021, for P6,000,000 under an
installment sale contract. No Co. signed a 4-year 11% note for P4,200,000 on July 1, 2021, in
addition to the down payment of P1,800,000. The equal annual payments of principal and
interest on the note will be P1,353,750 payable on July 1, 2022, 2023, 2024,and 2025. The
land had an established cash price of P6,000,000, and its cost to the corporation was
P4,500,000. The collection of the installments on this note is reasonably assured.
Questions:
Based on the above and the result of your audit, determine the following:
15. Noncurrent notes receivable as of December 31, 2021
9,750,726
16. Current portion of long-term notes receivable as of December 31, 2021
3,891,750
17. Accrued interest receivable as of December 31, 2021
771,000
18. Interest income for the year 2021
1,367,076
On January 1, 2019, Sinait Company loaned P3,000,000 to Ilocos Company. The terms of the
loan were payment in full on January 1, 2024, plus annual interest payments at 11%. The
interest payment was made as scheduled on January 1, 2020; however, due to financial
setbacks, Ilocos was unable to make its 2021 interest payment. Sinait considers the loan
impaired and projects the following cash flows from the loan as of December 31, 2021 and
2022. Assume that Sinait accrued the interest at December 31, 2020, but did not continue to
accrue interest due to the impairment of the loan.
Amount projected as of
Date of Flow Dec. 31, 2021 Dec. 31, 2022
December 31, 2022 P 200,000 P 200,000
December 31, 2023 400,000 600,000
December 31, 2024 800,000 1,200,000
December 31, 2025 1,200,000 1,000,000
December 31, 2026 400,000
QUESTIONS:
Your client requested you to determine the following: (Round-off present value factors to
four decimal places)
19. Loan impairment (bad debt expense) for the year 2021
1,212,380
20. Interest income for 2022 assuming the P200,000 was collected on December 31, 2022
as scheduled
232,938

21. Allowance for loan impairment as of December 31, 2022

554,340
22. Interest income for 2023 assuming the P600,000 was collected on December 31, 2023
as scheduled
247,023

23. Carrying amount of loan receivable as of December 31, 2023

1,892,683
24.Dole Corp.'s accounts payable at December 31, 2020, totaled P650,000 before any necessary
year-end adjustments relating to the following transactions:
 On December 27, 2020, Dole wrote and recorded checks to creditors totaling
P350,000 causing an overdraft of P100,000 in Dole's bank account at December 31,
2020. The checks were mailed out on January 10, 2021.
 On December 28, 2020, Dole purchased and received goods for P150,000, terms
2/10, n/30. Dole records purchases and accounts payable at net amounts. The
invoice was recorded and paid January 3, 2021.
 Goods shipped f.o.b. destination on December 20, 2020 from a vendor to Dole were
received January 2, 2021. The invoice cost was P65,000.
At December 31, 2020, what amount should Dole report as total accounts payable?
a. P1,212,000.
b. P1,147,000.
c. P900,000.
d. P800,000.
Solution: $650,000 + $350,000 + $147,000 = $1,147,000

25. The balance in Moon Co.'s accounts payable account at December 31, 2020 was
P900,000 before any necessary year-end adjustments relating to the following:
 Goods were in transit to Moon from a vendor on December 31, 2020. The invoice
cost was P40,000. The goods were shipped f.o.b. shipping point on December 29, 2020
and were received on January 4, 2021.
 Goods shipped f.o.b. destination on December 21, 2020 from a vendor to Moon
were received on January 6, 2021. The invoice cost was P25,000.
 On December 27, 2020, Moon wrote and recorded checks to creditors totaling
P30,000 that were mailed on January 10, 2021.
In Moon's December 31, 2020 balance sheet, the accounts payable should be
a. P930,000.
b. P940,000.
c. P965,000.
d. P970,000.
Solution: $900,000 + $40,000 + $30,000 = $970,000

26. Kerr Co.'s accounts payable balance at December 31, 2020 was P1,300,000 before
considering the following transactions:
 Goods were in transit from a vendor to Kerr on December 31, 2020. The invoice
price was P70,000, and the goods were shipped f.o.b. shipping point on December
29, 2020. The goods were received on January 4, 2021.
  Goods shipped to Kerr, f.o.b. shipping point on December 20, 2020, from a vendor
were lost in transit. The invoice price was P50,000. On January 5, 2021, Kerr filed a
P50,000 claim against the common carrier.
In its December 31, 2020 balance sheet, Kerr should report accounts payable
of a. P1,420,000.
b. P1,370,000.
c. P1,350,000.
d. P1,300,000.
Solution: $1,300,000 + $70,000 + $50,000 = $1,420,000

27. Walsh Retailers purchased merchandise with a list price of P75,000, subject to trade
discounts of 20% and 10%, with no cash discounts allowable. Walsh should record the
cost of this merchandise as
a. P52,500.
b. P54,000.
c. P58,500.
d. P75,000.
Solution: $75,000 × .8 × .9 = $54,000

28. On June 1, 2020, Penny Corp. sold merchandise with a list price of P40,000 to Linn on
account. Penny allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40
and the sale was made f.o.b. shipping point. Penny prepaid P800 of delivery costs for
Ison as an accommodation. On June 12, 2020, Penny received from Linn a remittance in
full payment amounting to
a. P21,952.
b. P22,736.
c. P22,752.
d. P22,392.
Solution: $40,000 × .7 × .8 = $22,400
($22,400 × .98) + 800 = $22,752.

29. Groh Co. recorded the following data pertaining to raw material X during January 2020:
Units
Date Received Cost Issued On Hand
1/1/20 Inventory P4.00 3,200
1/11/20 Issue 1,600 1,600
1/22/20 Purchase 4,000 P4.70 5,600
The moving-average unit cost of X inventory at January 31, 2020 is
a. P4.35.
b. P4.42.
c. P4.50.
d. P4.70.
Solution:
[(1,600 × $4.00) + (4,000 × $4.70)] ÷ 5,600 = $4.50
 You were engaged by Asingan Corporation for the audit of the company’s financial statements
for the year ended December 31, 2021. The company is engaged in the wholesale business and
makes all sales at 25% over cost.

The following were gathered from the client’s accounting records:

SALES PURCHASES
Date Reference Amount Date Reference Amount
Balance forwarded P7,800,000 Balance forwarded P4,200,000
12/27 SI No. 965 60,000 12/28 RR #1059 36,000
12/28 SI No. 966 225,000 12/30 RR #1061 105,000
12/28 SI No. 967 15,000 12/31 RR #1062 63,000
12/31 SI No. 969 69,000 12/31 RR #1063 96,000
12/31 SI No. 970 102,000 12/31 Closing entry (4,500,000)
12/31 SI No. 971 24,000 P - .
12/31 Closing entry (8,295,000)
P -
Note: SI = Sales Invoice RR = Receiving Report

Accounts receivable P750,000

Inventory 900,000
Accounts payable 600,000

You observed the physical inventory of goods in the warehouse on December 31 and were
satisfied that it was properly taken.

When performing sales and purchases cut-off tests, you found that at December 31, the
last Receiving Report which had been used was No. 1063 and that no shipments had been
made on any Sales Invoices whose number is larger than No. 968. You also obtained the
following additional information:
a) Included in the warehouse physical inventory at December 31 were goods which had
been purchased and received on Receiving Report No. 1060 but for which the invoice was not
received until the following year. Cost was P27,000.
b) On the evening of December 31, there were two trucks in the company siding:
∙ Truck No. XXX 888 was unloaded on January 2 of the following year and
received on Receiving Report No. 1063. The freight was paid by the vendor.
∙ Truck No. MGM 357 was loaded and sealed on December 31 but leave the
company premises on January 2. This order was sold for P150,000 per Sales Invoice No.
968.
c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute
to ABC Trading Corporation. ABC received the goods, which were sold on Sales Invoice No.
966 terms FOB Destination, the next day.
d) Enroute to the client on December 31 was a truckload of goods, which was received on
Receiving Report No. 1064. The goods were shipped FOB Destination, and freight of P2,000 was
paid by the client. However, the freight was deducted from the purchase price of P800,000.
Questions:
Based on the above and the result of your audit, determine the following:
30. Sales for the year ended December 31, 2021
7,875,000

31. Purchases for the year ended December 31, 2021

4,527,000
32. Accounts receivable as of December 31, 2021
330,000
33. Inventory as of December 31, 2021
1,296,000
34. Accounts payable as of December 31, 2021
627,000
Balungao Company engaged you to examine its books and records for the fiscal year ended
June 30, 2021. The company’s accountant has furnished you not only the copy of trial balance
as of June 30, 2021 but also the copy of company’s balance sheet and income statement as at
said date. The following data appears in the cost of goods sold section of the income
statement:

Inventory, July 1, 2020 P 500,000

Add Purchases 3,600,000
Total goods available for sale 4,100,000
Less Inventory, June 30, 2021 700,000
Cost of goods sold P3,400,000

The beginning and ending inventories of the year were ascertained thru physical count except
that no reconciling items were considered. Even though the books have been closed, your
 working paper trial balance show all account with activity during the year. All purchases are
FOB shipping point. The company is on a periodic inventory basis.

In your examination of inventory cut-offs at the beginning and end of the year, you took note
of the following:
July 1, 2020
a. June invoices totaling to P130,000 were entered in the voucher register in
June. The corresponding goods not received until July.
b. Invoices totaling P54,000 were entered in the voucher register in July but the
goods received during June.
June 30, 2021
c. Invoices with an aggregate value of P186,000 were entered in the voucher register in
July, and the goods were received in July. The invoices, however, were date June.
d. June invoices totaling P74,000 were entered in the voucher register in June but the
goods were not received until July.
e. Invoices totaling P108,000 (the corresponding goods for which were received in
June) were entered the voucher register, July.
f. Sales on account in the total amount of P176,000 were made on June 30 and the
goods delivered at that time. Book entries relating to the sales were made in June.
Questions:
Based on the above and the result of your cut-off tests, answer the following:
35. How much is the adjusted Inventory as of July 1, 2020? 630,000
36. How much is the adjusted Purchases for the fiscal year ended June
30, 2021? 3,840,000
37. How much is the adjusted Inventory as of June 30, 2021? 960,000
38. How much is the adjusted Cost of Goods Sold for the fiscal year ended June
30, 2021? 3,510,000
39. The necessary compound adjusting journal entry as of June 30, 2021 would include
a net adjustment to Retained Earnings of
76,000

40. Bonus nalang