Chapter 9

AUDIT OF CASH
Cash and cash equivalents
● Cash Fund
- if set aside for current operation/current obligation→current asset
- Ex. Petty Cash Fund, Payroll Fund, Travel Fund Interest Fund, Dividend Fund
and Tax Fund
- if set aside for noncurrent purpose→long-term investment
- Ex. Sinking Fund,preference share redemption fund, contingent fund, insurance
fund and fund for acquisition/construction of PPE
● Undelivered check, not included in CCE, will be restored by debit cash credit A/P
● Postdated, not included
● Compensating balance, not legally restricted as to withdrawal, not included in CCE

Compensating Balance
- legally restricted as to withdrawal; long term excluded in cash
- not legally restricted as to withdrawal; short term, CCE

Bank reconciliation
Credit memo
- Addition
- not yet recorded by the book

Debit Memo
-deduction
-not yet recorded by the book

Deposit in Transit
-addition
-not yet recorded by the bank

Outstanding Check
-deduction
-not yet recorded by the bank

In order to get the balance of the book, work back/squeeze the adjusted cash in bank and vice
versa.

Bank reconciliation
Book Bank
Credit memo Deposit in transit
- Addition - addition
Debit memo Outstanding check
 - Deduction - deduction
Proof of cash
Collection
- Actual collection by company
Receipts
- Debit, cash in bank

Book
Disbursement
- Credit, cash
Issued checks
- Company issued check to payee

Bank
Receipts
- From customer
- Cr, company name
Deposit
- Cash from company
Disbursement
- Dr, depositor’s account
Payment of check
- Dr, depositor’s account
- Cr, cash on hand

Petty cash accounted

Coins and currencies
Unexpended employees contributions
Cash collections of accounts receivable or sales
Unclaimed salary
Checks for deposits
Stale checks
Post-dated check
Unreplenished vouchers
● Unused stamps → not part of the unreimbursed vouchers, if there is already the
unreimbursed vouchers

Petty cash accountabilities

PC fund ledger balance
Petty cash impurities, except checks issued in settlement of cash advance
Unexpended employees contributions
Collections of accounts receivable
Unclaimed salary
Stale checks
Company’s check in payment of a liability

When unexpended employees contributions, unclaimed salary and cash collections of accounts
receivable or sales are intact or the envelope is still closed on the cash count date, included in the
accounted only.
It is included in cash accountabilities whether intact or not

Problem 9-1
The controller of the LYRIC CO. is trying to determine the amount of cash and cash equivalents
to be reported on its December 31, 2014, statement of financial position. The following
information is provided:

1. Balances in the company's accounts at the Monte Bank:

● Checking account-P540,000
● Savings account-P884,000
2. Undeposited customer checks of P208,000.
3. Currency and coins on hand of P23,200.
4. Savings account at the Naic Bank with a balance of P350,000. This account is being used to
accumulate cash for future plant expansion (in 2016).
5. P800,000 balance in a checking account at the Naic Bank. In exchange for a line of credit,
Lyric Co. has agreed to maintain a minimum balance of P100,000 in this account.
6. Treasury bills; 30-day maturity bills totaling P600,000, and 180 day bills totaling P800,000.

What total amount of "cash and cash equivalents" should be reported in the current asset section
of the 2014 statement of financial position?
A. P3,055,200
B. P2,455,200
C. P2,955,200
D. P2,355,200

Solution:
Monte bank - checking account 540,000
Monte bank - savings account 884,000
Undeposited customers check 208,000
Currency and coins on hand 23,200
Naic bank - checking account 800,000
Treasury bills 600,000
Total cash and cash equivalents 3,055,200
Savings account in Naic bank is not included because the balance is allotted for a future plant
expansion. If the amount is being used for future PPE, it is not included in the cash and cash
equivalents. The treasury bills of 800,000 maturing 180 day is not included because the maturity
date should be within 3 months.

Problem 9-2
Your audit of the December 31, 2014, financial statements of DIONISIO CORP. reveals the
following:
Current account at Prime Bank (30,000)
Current account at Prudent Bank 135,000
Treasury bills (acquired 3 months before maturity) 300,000
Treasury bills (maturity date is Dec. 31, 2015) 1,500,000
Payroll account 390,000
Foreign bank account - restricted
(translated using the December 31, 2014, exchange rate) 2,000,000
Postage stamps 1,250
Employee's postdated check 4,500
IOU from the vice-president 8,000
Credit memo from a supplier for a purchase return 8,100
Traveler's check 21,000
Money order 12,900
Petty cash fund (P3,000 in currency and expense receipts for P12,000) 15,000

What amount would be reported as "cash and cash equivalents" in the statement of financial
position on December 31, 2014?
A. P840,050
B. P873,900
C. P849,400
D. P861,900

Solution:
Current account at Prudent Bank 135,000
Treasury bills (acquired 3 months before maturity) 300,000
Payroll account 390,000
Traveler's check 21,000
Money order 12,900
Petty cash fund 3,000
Total cash and cash equivalents 861,900
Current account at Prime bank is not included because it is negative and the treasury bills which
mature exceeding 3 months. Petty cash fund is recorded as 3,000 because 12,000 is an expense.
Problem 9-3
The following information has been extracted from the accounting records of the HAZELNUT
COMPANY at December 31, 2014:
1. Cash on hand (undeposited sales receipts) 40,800
2. Certificate of time deposit with maturity of 3 months 1,000,000
3. Customer's note receivable 40,000
4. Reconciled balance in AA Bank checking account (14,000)
5. Reconciled balance in BB Bank checking account 374,000
6. Balance in CC savings account 342,000
7. Customer's postdated check 54,000
8. Employee travel advances 64,000
9. Cash in bond sinking fund 48,000
10. Bond sinking fund investments 323,600
11. Postage stamps 17,200

What total amount should Hazelnut Company report as "cash" at December 31, 2014?
A. P805,200
B. P757,200
C. P743,200
D. P703,200

Solution:
Cash on hand (undeposited sales receipts) 40,800
Reconciled balance in BB Bank checking account 374,000
Balance in CC savings account 342,000
Total cash 757,200
The balance in AA bank checking account is not included because it is negative and the
customer’s postdated check is not yet a cash, since it is not yet encash therefore we cannot
consider it as cash. Cash in bond sinking fund is for a noncurrent purpose like long-term
investment.

Problem 9-4
The controller of the OTO COMPANY is in the process of preparing the company's December
31, 2014 financial statements. He is trying to determine the correct balance of cash and cash
equivalents to be reported as a current asset in the statement of financial position. The following
items are being considered:

1. Savings account of P900,000 and a checking account balance of P1,200,000 are held at Manila
Bank.
2. Money market placement with maturity of 3 months, P7,500,000.
3. Currency and coins on hand amounted to P11,550.
4. Travel advances of P270,000 for the first quarter of next year(employee reimbursement will be
through salary deduction).
5. Oto Company has purchased P3,150,000 of commercial paper of Mendez Corp. which is due
in 60 days.
6. A separate cash fund amounting to P2,250,000 is restricted for the retirement of long-term
debt.
7. Petty cash fund of P1,500.
8. An IOU from an employee of Oto Company in the amount of P2,000.
9. Two certificates of deposit, each totaling P500,000. These CDs have a maturity of 120 days.
10. Oto Company has received a check from a customer in the amount of P187,500 dated
January 15, 2015.
11. Oto Company has agreed to maintain a cash balance of P50,000 at all times at Manila Bank
to ensure future credit availability.
12. On January 1, 2014, Oto Company purchased marketable equity securities to be held as
"trading" for P3,000,000. On December 31, 2014, its market value is P4,300,000.

What amount should be reported as cash and cash equivalents on December 31, 2014?
A. P13,763,050
B. P12,575,550
C. P121,751,500
D. P12,763,050

Solution:
Manila bank - savings account 900,000
Manila bank - checking account 1,200,000
Money market 7,500,000
Currency and coins 11,550
Commercial paper 3,150,000
Petty cash fund 1,500
Total cash and cash equivalents 12,763,050
Savings and checking accounts are both included because they are from the same bank. The cash
balance of 50,000 at Manila bank is not included because it is for the future credit availability.
Restricted money is not included in cash and cash equivalents.

Problem 9-5
The auditor for SAMANTHA, INC. examined the petty cash fund immediately after the close of
business, July 31, 2014, the end of the company's natural business year. The petty cash custodian
presented the following during the count:

Currency 1,650
Petty cash vouchers:
 Postage
Office supplies expense
Transportation expense
Computer repairs
Advances to office staff
A check drawn by Samantha, Inc., payable
to the petty cash custodian 16,000
Postage stamps
An employee's check, returned by bank, marked NSF 1,000
An envelope containing currency of P1,890 for a gift for
a retiring employee

The general ledger shows an imprest petty cash fund balance of P16,000.

1. How much is the petty cash shortage or overage?

A. P2,190 overage
B. P2,190 shortage
C. P1,890 shortage
D. P1,890 overage

Solution:
Currency 1,650
Petty cash vouchers 3,960
Replenishment check 7,200
Employee’s NSF check 1,000
Petty cash accounted 13,810
Petty cash fund per ledger(custodian’s accountability) 16,000
Petty cash shortage 2,190
Petty cash results in shortage when the petty cash accountability is higher than the petty cash
account.

2. What is the adjusted balance of the petty cash fund at July 31, 2014?
A. P10,740
B. P3,540
C. P7,200
D. P8,850

Solution;
Currency 1,650
Replenishment check 7,200
Adjusted petty cash balance 8,850
Problem 9-6
Your client, a successful small business, has never given much attention to a sound internal
control. In its employ is Alex Coopit, the company's cashier-bookkeeper. Alex handles cash
receipts, makes small disbursements from the cash receipts, maintains accounting records, and
prepares the monthly bank reconciliation.

The bank statement for the month ended March 31, 2014, shows a cash balance of P590,000. The
following checks are outstanding on March 31:
No. 7163 P8,623
No. 7284 7,320
No. 7285 10,612
No. 8722 6,322
No. 8724 12,280
No. 8733 6,200
The company's general ledger shows a cash balance of P696,499 on March 31, 2014.

Realizing that being the cashier-accountant of the company he can easily misappropriate
collections and conceal it, Alex removed all the cash on hand in excess of P127,301, and then
prepared the following reconciliation in an effort to conceal this theft.
BANK RECONCILIATION
Balance per accounting records 696,499
Add: Outstanding checks
No. 8722 6,322
No. 8724 12,280
No. 8733 6,200 20,802
Total 717,301
Deduct: Cash on hand 127,301
Balance per bank statement, March 31 590,000

1. How much was taken by the cashier-accountant?

A. P30,555
B. P157,856
C. P4,000
D. P26,555

Solution:
Book Bank
Unadjusted balances 696,499 590,000
Outstanding checks:
No. 7163 8,623
 No. 7284 7,320
No. 7285 10,612
No. 8722 6,322
No. 8724 12,280
No. 8733 6,200 (51,357)
Undeposited collections ________ 127,301
Corrected balances 696,499 665,944
Cash shortage (30,555) -
Adjusted balances 665,944 665,944

2. What is the amount of cash that should be on hand in November 2014?

A. P127,301
B. P131,301
C. P157,856
D. P30,555

Solution:
Cash on hand 127,301
Add: cash shortage 30,555
Cash that should be on hand, Nov. 15 157,856
We can check the cash shortage or overage by the difference between balances of the bank and
book.

Problem 9-7
Data for the ANNABELLE, INC. are shown below:
Nov. 30 Dec. 31
Cash account balance 20,340 48,540
Bank statement balance 107,060 137,820
Deposits in transit 8,200 12,880
Outstanding checks 27,700 30,100
Bank service charges for the month,
not shown on company books 720 600
NSF checks returned by bank, not shown on company books 4,300 8,240
Bank collections from company customers,
not shown on company books 72,240 80,900

Additional information:
1. Deposits and credit memos per bank statement 249,100
2. Canceled checks and debit memos per bank statement 218,340
3. Cash receipts per cash book 172,880
4. Checks written per cash book 211,900
1. What is the total book receipts in December?
A. P172,880
B. P245,120
C. P253,780
D. P181,540

Solution:
Cash receipts per cash book 172,880
Add: November bank collection 72,240
Total book receipts (debits) in December 245,120

2. What is the total book disbursements in December?

A. P211,900
B. P216,200
C. P211,180
D. P216,920

Solution:
Checks written per cash book 211,900
Add: Bank service charges in November 720
NSF checks returned in November 4,300 5,020
Total book disbursements (credits) in December 216,920

Balance December Balance

Nov. 30 Receipts Disbursements Dec.31
Unadj. Book balances 20,340 245,120 216,920 48,540
Bank service charges:
Nov. 30 (720) (720)
Dec. 31 600 (600)
NSF checks:
Nov. 30 (4,300) (4,300)
Dec. 31 8,240 (8,240)
Bank collections:
Nov. 30 72,240 (72,240)
Dec. 31 _______ 80,900 __________ 80,900
Adj, book balances 87,560 253,780 220,740 120,600

Balance December Balance

Nov. 30 Receipts Disbursements Dec. 31
Unadj. Bank balance 107,060 249,100 218,340 137,820
Deposits in transit:
Nov. 30 8,200 (8,200)
Dec. 31 12,880 12,880
Outstanding checks:
Nov. 30 (27,700) (27,700)
Dec. 31 _______ ______ 30,100 (30,200)
Adj. bank balances 87,560 253,780 220,740 120,600

3. What is the adjusted cash balance on November 307

A. P89,000
B. P87,560
C. P71,160
D. P96,160

Solution:
Adjusted cash balance, Nov. 30 87,560

4. What is the adjusted cash balance on December 31?

A. P120,600
B. P94,840
C. P137,080
D. P155,040

Solution:
Adjusted cash balance, Dec. 31 120,600

5. What is the adjusted book receipts in December?

A. P253,780
B. P236,460
C. P244,420
D. P270,180

Solution:
Adjusted book receipts in december 253,780

6. What is the adjusted bank disbursements in December

A. P215,940
B. P220,740
C. P248,440
D. P204,260
Solution:
Adjusted bank disbursements in december 220,740
If we have a bank collection in november, we will receive it by december therefore there is a
need to deduct it in the receipt of december because it was supposed to be in november.

Problem 9-8
The following table summarizes the cash receipts and disbursements of LOI COMPANY for the
last six months of 2014:

Month Receipts Disbursements

July 102,000 60,000
August 70,000 110,000
September 120,000 68,000
October 172,000 92,000
November 260,000 122,000
December 280,000 180,000
964,000 668,000

Additional information:
1. Bank balance, July 1, 2014 200,000
2. Bank balance, December 31, 2014 524,000
3. Outstanding checks, December 31, 2014
(No checks were outstanding on July 1) 42,000
4. Undeposited receipts, December 31, 2014
(included in the December receipts) 24,000
5. Bank deposits, July 1 through December 31 914,000

What is the total shortage?

A. P0
B. P76,000
C. P30,000
D. P66,000

Solution:
Book balance, July 1 (see note 1) 200,000
Add: Total book receipts as corrected (see note 2) 1,004,000
Total 1,204,000
Less: Total book disbursements as corrected (see note 2), 632,000
Corrected book balance, December 31 572,000

Bank balance, December 31 524,000

Add: Undeposited receipts 24,000
Total 548,000
Less: Outstanding checks 42,000
Adjusted bank balance 506,000
Corrected book balance (accountability) (572,000)
Cash shortage (66,000)
Since there were no book and bank reconciling items on July 1, the bank balance on that date
was also the cash balance per book. The receipts column of the table of cash receipts and
disbursements is underfooted by 40,000 (1,004,000 correct total - 964,000) while the
disbursements column is over footed by 36,000 (668,000 - 632,000 correct total).

Problem 9-9
Anying Velasco is reviewing the cash accounting for ABX, Inc. Anying's review will focus on
the petty cash fund account and the bank reconciliation for the month ended May 31, 2014. She
has collected the following information from ABX's bookkeeper for this task.

Petty Cash Fund

1. The petty cash fund was established on May 2, 2014, in the amount of P10,000.
2. Expenditures from the fund by the custodian as of May 31, 2014, were evidenced by
approved petty cash vouchers for the following:
Various office supplies 3,920
IOU from employees 1,200
Shipping charges 2,298
Miscellaneous expense 1,526
On May 31, 2014, the petty cash fund was replenished and increased to P12,000, currency and
coins in the fund at that time totaled P756.
Bank reconciliation
Shore bank
Bank statement
Disbursements Receipts Balance
Balance, May 1, 2014 350,760
Deposits 1,120,000
Note payment direct from
customer (interest of 1,200) 37,200
Checks cleared during May 1,246,000
Bank service charges 1,080
Balance, May 31, 2014 260,880

ABX, Inc.’s cash account

Balance, May 1, 2014 354,000
Deposits during May 2014 1,240,000
Checks written during May 2014 1,273,400
Deposits in transit are determined to be 120,0000, and checks outstanding at May 31 total
34,000. Cash on hand (besides petty cash) at May 31, 2014 is 9,840/

1. What is the amount of petty cash shortage?

a. 2,300
b. 11,244
c. 300
d. 0
Solution:
Coins and currency 756
Fund disbursements (3,920+1,200+2,298+1,526) 8,944
Petty cash accounted 9,700
Custodian’s accountability 10,000
Petty cash shortage 300

2. The journal entry to record the replenishment of and increase in the petty cash fund
includes a credit to
a. Cash of 10,944
b. Cash of 11,244
c. Petty cash fund of 1,944
d. Petty cash fund of 11,244
Solution:
Petty cash fund 2,000
Office supplies 3,920
Accounts receivable-employees 1,200
Shipping expense 2,298
Miscellaneous expense 1,526
Cash short/over 300
Cash 11,244

3. What amount of cash should be reported in the May 31, 2014, statement of financial
position?
a. 368,720
b. 356,720
c. 368,420
d. 358,880
Solution:
Book Bank
Unadj. Balances 320,600 260,880
Deposit in transit 120,000
Cash on hand 9,840
Outstanding checks (34,000)
Note collected by bank 37,200
Bank service charge (1,080) _______
Adj. balances 356,720 356,720

Adj. cash balance (356,720 + 12,000) 368,720

Problem 9-10
Your audit assistant prepared the following bank reconciliation for a client:
Balance 9/2012 Balance
8/31 Receipts Disbursements 9/30
Per bank statement 110,530 660,600 653,230 117,960
Deposit in transit:
Aug. 31 2,050 (2,050)
Sept. 30 3,220 3,220
Outstanding checks:
Aug. 31 (2,140) (2,140)
Sept. 30 1,030 (1,030)
Customer’s check returned
By bank, sept. 29 _______ _______ (110) 110
Per books 110,440 661,830 652,010 120,260

The adjusted balance of cash in bank, september 30 is

a. 120,370
b. 120,260
c. 120,150
d. 120,500

Solution:
Cash balance per bank statement, sept. 30 is 117,960
Add: deposit in transit 3,220
Total 121,180
Les: outstanding checks (1,030)
Adjusted cash balance, sept. 30, 2012 120,150
In computing the adjusted balance of cash in the bank, deposit in transit is added while
outstanding checks are deducted.
Chapter 10
LOANS AND RECEIVABLES
Initial recognition:
Trade - transaction price
Others - FV + transaction costs
Subsequent to initial recognition:
Amortized cost using effective interest method

FV of loan and receivables

Short term = face value/transaction price
Longterm:
Interest bearing
- realistic/market rate = Face value/ transaction price
- unrealistic/not at market rate
1. Cash price
2. PV of cash flows discounted using prevailing IT

Non-interesting bearing:
1. Cash price
2. PV of cash flows discounted using prevailing IT

Discount = maturity amount > initial CA

Premium = maturity amount < initial CA

Financial asset/financial liab measured at amortized cost using effective interest method:
CA = PV of cash flows

Problem 10-1
ORCHIDS COMPANY's accounts receivable at December 31, 2014 had a balance of
P1,200,000. The allowance for bad debts account had a credit balance of P40,000. Net sales in
2014 were P6,704,000 (net of sales discounts of P56,000). An aging schedule shows that
P150,000 of the outstanding accounts receivable are doubtful.

What is the adjusting entry for estimated bad debt expense?

Bad debt expense 110,000
Allowance for bad debt 110,000

Required allowance 150,000

Allowance balance (40,000)
Increase in allowance 110,000
Problem 10-2
You were engaged to audit the books of accounts of A. Bonifacio Contractors which had a 3-year
construction contract in 2012 for P900,000. A. Bonifacio uses the percentage-of-cost-completion
method for financial statement purposes. Income to be recognized each year is based on the ratio
of cost incurred to total estimated cost to complete the contract. Data on this contract follows:

Accounts receivable construction contract billings 30,000

Construction in progress 93,750
Less: Amounts billed 84,375
10% retention 9,375
Net income recognized in 2012 (before tax) 15,000

A. Bonifacio Contractors maintains a separate bank account for each construction contract. Bank
deposits to this contract amounted to P50,000.

1. How much cash collected on the contract was not yet deposited as at December 31, 2012?
a. P 4,375
b. P13,750
c. P19,375
d. P28,750
Solution:
Progress Billings 84,375
Less: Accounts Receivable 30,000
Amount Collected 54,375
Less: Bank deposits 50,000
Cash collected not yet deposited 4,375

2. What was the estimated total income before tax on this contract?
a. P45,000
b. P94,000
c. P135,000
d. P144,000
e. None of these
Solution:
Let TC = total cost
93,750 - 15,000 x (900,000 - TC) = 15,000
TC
TC = 756,000
Estimated total income = 900,000 - 756,000
= 144,000

Problem 10-3
When examining the accounts of Tripoli Company, you ascertain that balances relating to both
receivables and payables are included in a single controlling account (called receivables), which
has a P23,050 debit balance. An analysis of the details of this account revealed the following:

Items Debit Credit

Accounts receivable - customers 40,000
Accounts receivable - officers (current collection expected) 2,500
Debit balances - creditors 450
Expense advances to salespersons 1,000
Share capital subscriptions receivable 4,600
Accounts payable for merchandise 19,250
Unpaid salaries 3,300
Credit balance in customer accounts 2,000
Cash received in advance from customers for goods not yet shipped 450
Expected bad debts, cumulative 500

REQUIRED:
1. Give the journal entry to eliminate the above account and to set up the appropriate accounts to
replace it.

Accounts receivable, trade 40,000

Advances to suppliers 450
Due from officers 2,500
Subscriptions receivable - share capital 4,600
Expense advances to salespeople 1,000
accounts payable, trade(19,250 - 450) 19,250
Advances from customers on sales contracts 450
Salaries payable 3,300
Allowance for doubtful accounts 500
Receivables (to close permanently) 23,050
Customers’ credit balances 2,000

Accounts payable, trade is netted against normal balances to reflect control balances; but if
material in amount, they should be reported separately on the balance sheet.

2. How should the items be reported on Tripoli Company's statement of financial position?
Current assets:
Accounts receivable, trade 40,000
Less allowance for doubtful accounts 500 39,500
Creditors’ debit balances 450
Due from officers 2,500
Subscriptions receivable - ordinary shares 4,600
Expense advances to salespeople 1,000

Current liabilities:
Accounts payable, trade 19,250
Customers’ credit balances 2,000
Cash advances from customers on sales(not yet shipped) 450
Salaries payable 3,300

Subscriptions receivable are considered current assets only if currently collectible. All items are
assumed to be material in amount.

Problem 10-4
An examination of the accounting records for the Amy Corporation indicates that all receivables
are being recorded in a single account entitled Receivables. An analysis of the account reveals
the following:
Accounts receivable (trade) 15,500
Accounts receivable (officers) 3,600
Ordinary shares subscriptions receivable (current) 12,000
Advances to employees Notes receivable (trade), due in 3 years 1,800
Deposit to guarantee contract performance 6,000
Utility deposit 5,000
Total 44,400

REQUIRED:
1. Prepare a journal entry to separate the preceding items into their proper accounts.
Accounts Receivable (Trade) 15,500
Accounts Receivable (Officer) 3,600
Ordinary Shares Subscriptions Receivable 12,000
Advances to Employees 1,800
Notes Receivable (Trade) 6,000
Deposit to Guarantee Contract Performance 5,000
Utility Deposit 500
Receivables 44,400
2. How would each of the preceding items normally be reflected on Amy's statement of financial
position?
Accounts receivable (trade) → current asset, trade receivable
Accounts receivable (officer) → normally current non trade receivable
Ordinary shares subscription receivable → current or noncurrent asset, depending on due date;
non trade receivable
Advances to employees → current asset, non trade receivable
Notes receivable (trade) → noncurrent asset, trade receivable
Deposit to guarantee contract performance → separately classify, could be current or noncurrent
asset, depending on the length of the contract; non trade receivable
Utility deposit → separately classify, probably noncurrent non trade receivable

Problem 10-5
Jane's, a large department store located in a metropolitan area, has been experiencing difficulty in
estimating its bad debts. The company has decided to prepare an aging schedule for its
outstanding accounts receivable and estimate bad debts by the due dates of its receivables. This
analysis discloses the following information:

Balance Age of receivables Estimated % uncollectible

193,000 under 30 days 0.8%
114,000 30-60 days 2.0%
73,000 61-120 days 5.0%
41,000 121-240 days 20.0%
25,000 241-360 days 35.0%
19,000 over 360 days 60.0%
465,000

REQUIRED:
1. Use the preceding analysis to compute the estimated amount of uncollectible receivables.
Age Balance Estimated % uncollectible Estimated Amount
uncollectible
Under 30 days 193,000 0.008 1,544
30-60 days 114,000 0.020 2,280
61-120 days 73,000 0.050 3,650
121-240 days 41,000 0.200 8,200
241-360 days 25,000 0.350 8,750
over 360 days 19,000 0.600 11,400
465,000 35,824
2. Prepare the journal entry to record Jane's estimated uncollectibles, assuming the balance in the
Allowance for Doubtful Accounts prior to adjustment is:
a. 0
Bad debt expense 35,824
Allowance for doubtful accounts 35,824

b. P3,000 (debit)
Bad debt expense(35,824 + 3,000) 38,824
Allowance for doubtful accounts 38,824

c. P2,800 (credit)
Bad debt expense(35,824 - 2,800) 33,024
Allowance for doubtful accounts 33,024

Problem 10-6
The following selected transactions occurred during the year ended December 31, 2014:
Gross sales (cash and credit) P750,000
Collections from credit customers, net of 2% cash discount 245,000
Cash sales 150,000
Uncollectible accounts written off 16,000
Credit memos issued to credit customers for sales
returns and allowances 8,400
Cash refunds given to cash customers for sales returns and allowances 12,640
Recoveries on accounts receivable written off in prior years
(not included in cash received stated above) 5,421

At year-end, the company provides for estimated bad debt losses by crediting the Allowance for
Bad Debts account for 2% of its net credit sales for the year.
A. What is the company's net credit sales in 2014?
Gross credit sales (750,000 - 150,000) 600,000
Sales discount (245,000 / 98% = 250,0000 * 2%) 5,000
Sales returns and allowances 8,400 (13,400)
Net credit sales 586,600

B. What is the bad debt expense for 2014?

Bad debt expense (586,000 * 2%) 11,732

Problem 10-7
COCONUT CO estimates its bad debt expense to be 3% of net sales The company's unadjusted
trial balance at December 31, 2014, included the following accounts.
 Debit Credit
Allowance for bad debts 8,000
Sales 2,600,000
Sales returns and allowances 45,000

What is the company's bad debt expense for 2014?

Net sales (2,600,000 - 45,000) 2,555,000
Bad debt rate * 3%
Bad debt expense 76,650
In this problem, we computed net sales because stated in the problem that 3% of net sales is the
bad debt expense.

Problem 10-8
BANAWE, INC. estimates its uncollectible accounts to be 3% of the accounts receivable
balance. The following information was taken from the company's statement of financial position
at December 31, 2014:
Debit Credit
Net sales (including cash sales of P825,000) 3,460,000
Allowance for bad debts 69,000
Accounts receivable 2,460,000

What is the bad debt expense to be reported for 2014?

Required allowance, 12/31/2014 (2,460,000 * 3%) 73,800
Allowance balance before adjustment - debit 69,000
Bad debt expense for 2014 142,800
We got the 3% of accounts receivable and added the given balance of bad debts to compute the
overall bad debts in 2014.

Problem 10-9
The AUTOMATIC COMPANY sells plastic products to wholesalers. The end of the company's
reporting period is December 31. During 2014, the following transactions related to receivables
occurred:

Mar. 31 Sold merchandise to Mismo Co. and accepted a 10% note. Payment of P120,000
principal plus interest is due on March 31, 2015.

April 12 Sold merchandise to Abe Co. for P20,000 with terms 2/10, n/30. Automatic uses
the gross method to account for cash discounts.

21 Collected the entire amount due from Abe Co.

 27 A customer returned merchandise costing Automatic P60,000. Automatic reduced
the customers receivable balance by P80,000, the sales price of the merchandise. The company
records sales returns as they occur.

May 30 Transferred receivables of P1,000,000 to a factor without recourse. The factor

charged Automatic a 2% finance charge on the receivables transferred. The criteria to de
recognize the asset are met.

July 31 Sold merchandise to Fabon Company for P150,000 and accepted an 8%, 6-month
note. 8% is an appropriate rate 31 for this type of note.

September 31 Discounted the Fabon Company note at the bank. The bank's discount rate is 12%.
The note was discounted without recourse.

Required:
1. Prepare the necessary journal entries to account for the above transactions. For transactions
involving the sale of merchandise, ignore the entry for the cost of goods sold.

Mar. 31 notes receivable 120,000

Sales 120,000
April 12 accounts receivable 20,000
Sales 20,000
21 cash(20,000 *98%) 19,600
Sales discounts(20,000 * 2%) 400
accounts receivable 20,000
27 sales returns 80,000
accounts receivable 80,000
Inventory 60,000
cost of goods sold 60,000
May 30 cash(1,000,000 * 98%) 980,000
Loss on factoring(1,000,000 * 2%) 20,000
accounts receivable 1,000,000
July 31 notes receivable 150,000
Sales 150,000
Sep. 30 cash 149,760
Loss on note receivable discounting 2,240
Notes receivable 150,000
Interest income 2,000
2. Prepare any necessary adjusting entries on December 31, 2014. Adjusting entries are only
recorded at year-end.
Net proceeds:
Principal 150,000
Interest (150,000 * 8% * 6/12) 6,000
Maturity value 156,000
Discount (156,000 * 12 % * 4/12) (6,240) 149,760
Book value:
Principal 150,000
Accrued interest (150,000 * 8% * 2/12) 2,000 152,000
Loss on discounting 2,240

Problem 10-10
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:

1. Notes amounting to P845,000 were received from customers during the year.
2. Notes of P416,000 were collected on due dates and notes amounting to P221,000 were
discounted at the Aggressive Bank. The Notes Receivable account was credited for the notes
discounted.
3. 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.
4. 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.
5. A note for P50,000 was pledged as collateral for a bank loan.
6. 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.

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. 260,800
B. 323,200
C. 364,800
D. 175,000

Solution:
Unadjusted balance
(P845,000-P416,000 - P221,000+ P31,200) 239,200
Partial collection recorded as a liability (33,000)
Notes receivable discounted still outstanding
(P221,000-P104,000-P31,200) 85,800
Dishonored note (31,2000)
Adjusted balance 260,800

Chapter 1
Chapter 9 Cash
9-7
A surprise count of the Pampanga Company's imprest petty cash fund, carried on its records at P5,000 was made
on November 10, 2017.

The Company acts as agent for an express company in the issuance and sale of money orders. Blank money orders
are held by the cashier for issuance upon payment of the designated amounts by employees. Settlement with the
express company is made weekly with its representative, who calls at the Pampanga Company office. At that
time, he collects for orders issued, accounts for unissued orders, and leaves additional blank money orders, serially
numbered.
The count of the items presented by the cashier as composing the fund was as follows:
Currency (bills & coins) 2,200
Cashed checks 500
Vouchers (made out in pencil and signed by recipients) 740
NSF checks (dated June 10 and 15, 2017) 260
Copy of petty cash receipt vouchers:
Return of expense advance 200
Sale of money orders (No. A11-20) 100 300
Blank money orders claimed to have been purchased for P100
each from the express company (No. A21-29) 600
At the time of the count, there were also on hand the following:
Unissued money orders, No. A30-40
Unclaimed wage envelopes (sealed and amounts not shown)

The following day, the custodian of the fund produced vouchers aggregating P400 and explained that these
vouchers had been temporarily misplaced the previous day. They were for wage advances to employees.

REQUIRED:
a. Show the proper composition of the fund at November 10, 2017.
Proper composition of the fund, 11/10/06
Currency and coins 2,200
Cashed checks 500
Vouchers 740
NSF checks 260
Total 3,700
Less: Petty cash receipt vouchers
Return of expense advance 200
Sale of money orders 100 300
Bal. of fund per count 3,400
Bal. of fund per records 5,000
Shortage (1,600)

b. State the audit procedures necessary for the verification of the items in the fund.
Audit Procedures
a. Cashed checks
Examine checks as to payee, date, endorsements and subsequent deposit.
Determine if checks were cashed with prior approval of a responsible official.

b. Vouchers not yet replenished

Vouch supporting documents, invoices, etc.
Examine vouchers as to approval by authorized officials, signature of payee, etc.

c. NSF checks
Determine reason why NSF checks are still on hand.
Confirm directly with drawers.

d. Return of excess travel advance

Examine liquidation of travel advance as reported and determine accuracy of the amount returned.
Vouch supporting invoices.

e. Sale of money orders

Examine latest report of the Pampanga Co. to establish proper accountability.
Confirm directly with the Pampanga Co. all unreported money orders sold as well as unissued as of November
10.

f. Vouchers subsequently presented

Examine vouchers as to date, approval, amount and nature of expenditures.
Confirm directly with employees those items representing wage advance.

g. Book balance of the Petty Cash Fund.

Trace to the general ledger the balance of the fund.

9-8 Bank Reconciliation Error

Your first assignment as a summer trainee with a local CPA firm is to prepare the bank reconciliation for a client
firm, which provides you with the following information for June:
Client checks written but which have not yet cleared the bank 6,000
Client deposits placed into night depository June 30,
not appearing on bank statement 16,000
Check written on the account of a customer of the client,
returned by the client's bank marked "NSF" 4,000
Balance per June bank statement for the client account 18,000
Bank service charges for June 120
Proceeds from a note owed by a customer to the client bank
(Includes P60 interest not yet recorded by the client) 1,860
Check written by client for a P944 advertising bill returned with
the other canceled checks. The client recorded the check
and expense for P944, the correct amount, in the journal,
but the check was written for P854. The client has already
been notified by the advertiser, who decided to cash the
 check and bill the client for the remainder due.
Balance per ledger account ?

REQUIRED:
1. Prepare the bank reconciliation for June.
Bank Books
Balances, June 1 18,000 30,170
Additions:
DIT 16,000
Notes & interest collected 1,860
Recording error (944 – 854) 90
Deductions:
Outstanding checks (6,000)
NSF check (4,000)
Service charge (120)
Correct cash balance 28,000 28,000

9-9 cash shortage

The Form Company did not exercise adequate internal control over its cash transactions. During an audit you
found the following data concerning its cash position as of June 30, 2017. On the company's records the balance
of cash on hand and in bank was P34,700. A credit of P500 for a note collected by the bank did not appear on the
company's records. The bank statement balance was P27,000. Outstanding checks were as follows:
Number Amount
192 1,040
193 720
194 816
195 692
The cashier prepared the following reconciliation:
Bal. per bank statement 27,000
Deduct: outstanding checks
193 720
194 816
195 692 2,028
24,972
Add: cash on hand 9,228
Collected note 500 9,728
Cash per company records, 6/30/2017 34,700

REQUIRED:
a. Prepare a correct reconciliation.
b. What is the amount of the shortage?
2,240

C. How did the cashier attempt to conceal the shortage?

The cashier attempted to conceal the shortage by:
1. Understating the outstanding checks
(a) Excluding check # 192 1,040
(b) Underfooting list of outstanding checks 200

2. Adding instead of deducting note

collected by bank thereby covering up 1,000
total 2,240

d. In the light of this situation, what internal control improvements would you propose?
Suggestions to improve internal control:
1. bank reconciliation statement should be prepared by someone other than cashier.
2. collections should be deposited intact

9-11
Apple Company carries its checking account with Commerce Bank. The company is ready to prepare its
December 31 bank reconciliation and has requested you as auditor to prepare it for them. The following data are
available:
a. The November 30 bank reconciliation showed the following: (1) cash on hand (held back each day by Apple
Company for change), P400 (included in Apple's Cash account); (2) deposit in transit, #51, P2,000; and (3) checks
outstanding, #121, P1,000; # 130, P2,000; and #142, P3,000.

b. Apple Company Cash account for December:

Balance, December 1 64,000
Deposits: #52 - #55, P186,500; #56, P3,500 190,000
Checks: #143 - #176, P191,000; #177, P2,500; 178, P3,000; and #179, P1,500 (198,000)
Balance, December 31 (includes P400 cash held each day for change) 56,000

c. Bank statement, December 31:

Balance, December 1 67,600
Deposits: #51 - #55 188,500
Checks: #130, P2,000; # 142, P3,000; #143 - #176, 191,000 (196,000)
Note collected for Apple Company (including P720 interest) 6,720
Fund transfer received for foreign revenue (not yet recorded by Apple Company) 10,000
NSF check, Customer Belinda (200)
United Fund (per transfer authorization signed by Apple Co.) (50)
Bank service charges (20)
Balance, December 31 76,550

REQUIRED:
1. Identify by number and amount the December 31 deposits in transit and checks outstanding.
(a) Deposits in-transit- All deposits (#51 through #56) except #56 have been recorded by the bank; therefore, the
deposit in-transit is: #56, P3.500. This amount can be verified as: P2,000+ P190,000-P188,500-P3.500.

(b) Checks outstanding: Inspection of the check numbers reveals that the following are outstanding: #121, P1,000
; # 177, P2,500; # 178, P3,000; and # 179, P1,500; total, P8,000. This amount can be verified as: P6,000 +
P198,000-P196,000 P8.000.

2. Prepare the December 31 bank reconciliation. Use bank and book balance to correct cash balance format.
Bank Books
Balances, December 1 76,550 56,000
Additions:
Cash on hand 400
DIT #56 3,500
Note collected:
Principal 6,000
Interest 720
Funds received from foreign
revenue 10,000
Deductions:
Outstanding checks(121,177-179) (8,000)
NSF check, customer Belinda (200)
United fund transfer (50)
Bank service charge (20)
Correct cash balance 72,450 72,450

3. Give all journal entries that should be made at December 31 based on your bank reconciliation.
Cash 16,720
N/R 6,000
Interest revenue 720
Foreign revenue 10,000
A/R, NSF check, customer Belinda 200
United fund expense 50
Bank service charge 20
Cash 270

9-13 proof of cash

The following data are to be used in reconciling the May 31, 2017 bank balance of Asia Envelope Company:

2017
April May
Cash in bank balance - at end of month 3,561 4,629.72
Bank statement balance - end of month 7,403.50 3,862.20
Bank service charges for the month 6 6.80
Checks marked NSF 815 118
Deposits in transit- end of month 950 925.40
Drafts collected by the bank (unrecorded by the company
until the month following collection) 1,500 202
Outstanding checks at end of month 4,463 149.68
Checks of Asia Engine Corporation charged to the company's
account in error 349.50 60
Check number 6129 erroneously recorded in the check register
at P78; the correct amount is (This check is outstanding
on 5/31/2017.) 87
receipts during the month 42,400.17
total credits to cash in bank 41,631.45
total charges on bank statement 45,317.57

required:
prepare a proof of cash (use adjusted balance method)
Balance 5/1/2006 May Balance
5/31/2006
Receipts disbursement
Unadjusted book balance 3,561 42,700.17 41,631.45 4,629.72
Add (deduct):
Bank service charges:
April 30 (6) (6)
May 31 6.80 (6.80)
NSF checks returned:
April 30 (815) (815)
May 31 118 (118)
Draft collected by bank:
April 1,500 (1,500)
May 202
Checks no. 6129
erroneously recorded in
the check register:
Correct amount 87
 Recorded as 78 9 (9)
Adjusted book balance 4,240 41,402.17 40,944.25 4,697.92
Add (deduct)
DIT:
April 30 950 (950)
May 31 925.40 925.40
Outstanding checks:
April 30 (4,463) (4,463)
May 31 149.68 (149.68)
Checks of asia engine
corp. erroneously
charges to company’s
account:
April 349.50 (349.50)
May (60) 60
Adjusted bank balance 4,240 41,402.17 40,944.25 4,697.92

9-14
You have been assigned to the audit of Tarlac Company. You acquired the following information:
a. Balances of cash account per the general ledger at November 30, 2017 and December 31, 2017 were P38,020
and P9,770 respectively.
b. Balance of demand deposits at the Philippine National Bank at December 31, 2017 per the bank confirmation
was P10,000.
c. Outstanding checks at December 31 amounted to P4,000.
d. An NSF check for P245 was charged to the bank account in December. This check was obtained from a
customer on account.
e. Deposits in transit at the beginning and end of month of December were P2,500 and P3,500 respectively.
f. Exchange and collection charges deducted by the bank in the amount of P25 for December have not been
recorded. The charges for the month of November totaled P20 and these were recorded in December.
g. The reconciliation data as of November 30 showed that the balance per bank statement was P45,240 and the
outstanding checks totaled P10,000.
h. In November, the bank charged in error a P260 check to the Tarlac Company account. It was corrected by the
bank in December.
i. Total deposits shown by the bank statement for December amounted to P100,000.
j. Following is a summary of cash receipts and disbursements for the months indicated:
November december
Receipts 102,470 100,740
Disbursements 129,880 128,990

REQUIRED:
Prepare a proof of cash for December, make the necessary adjusting entries and state the amount of cash you
would show in the statement of financial position of December 31, 2017. (Use bank to book method.)
Balance 11/30/2006 december Balance
12/31/2006
Receipts disbursement
 Balance per bank 45,240 100,000 135,240 10,000
statement
Add (deduct):
OC:
11/30 (10,000) (10,000)
13/31 4,000 (4,000)
NSF checks returned in
December (245) 245
DIT:
11/30 2,500 (2,500)
12/31 3,500 3,500
Bank charges:
11 20 20
12
Checks of another
company erroneously
charged by bank in
November, corrected in
december (25) 25
Balance per books 38,020 100,740 128,990 9,770

Journal entries
A/R 245
Cash in bank 245

Bank charges 25
Cash in bank 25

Balance per books-12/31/06 9,770

Less:
AJR 245
25 270
Balance as adjusted 9,500

9-16
For each of the items listed in the table below, place an X in the column indicating the correct classification for
statement of financial position purposes. The first one is completed for you.

Statement of Financial Position Classification

Cash Cash Equivalent ST Investments Other
Checking account X
Savings account X
Rare coins kept long-term speculation X
Postdated checks received X
Money orders received X
Petty cash fund X
Treasury bills purchased when two
 months remain in term X
Compensating balance for a short-term loan X
Sinking fund to retire a bond in five years X
Certificate of deposit (six-month term) X
Short-term investment in marketable
equity securities X

9-17
You are conducting an audit of the Cordial Company for the year ended December 31, 2017. The internal control
procedures surrounding cash transactions were not adequate. Ethel Diaz, the bookkeeper-cashier, handles cash
receipts, maintains accounting records, and prepares the monthly reconciliations of the bank account.

The bookkeeper-cashier prepared the following reconciliation at the end of the year:
Balance per bank statement 350,000
Add: Deposit in transit 175,250
Note collected by bank 15,000 190,000
Balance 540,250
Less: Outstanding checks 246,750
Balance per general ledger 293,500

In the process of your audit, you gathered the following:

a. At December 31, 2017, the bank statement and the general ledger showed balances of P350,000 and P293,500,
respectively.
B. The cut-off bank statement showed a bank charge on January 2, 2018mfor P30,000 representing a correction
of an erroneous bank credit.
c. Included in the list of the outstanding checks were the following:
A check payable to a supplier, dated December 29, 2017, in the amount of P14,750, released on January
5, 2018.
A check representing advance payment to a supplier in the amount of P37,210, the date of which is January
4, 2018, and released in December, 2017.
d. On December 31, 2017, the company received and recorded customer's postdated check amounting to P50,000.

REQUIRED:
Compute for the following:
1. The adjusted deposit in transit as at December 31, 2017:
a. P175,250
b. P125,250
c. P225,250
d. P125,000
e. None of these

2. The adjusted outstanding checks as at December 31, 2017:

a. P298,710
b. P232,000
c. P209,540
d. 194,790

3. The adjusted cash to be presented in the statement of financial position as at December 31, 2017?
a. P235,460
b. P250,460
c. P265,460
d. P310,460
e. None of these

4. The cash shortage:

a. P45,000
b. P58,040
c. P60,000
d. P 8,040
e. None of these

5. The net adjustment to the cash account:

a. P43,040
b. P60,000
c. P58,040
d. 45,000
e. none of these

6. The net adjustment to the accounts payable account:

a. P14,750 debit
b. P14,750 credit
c. P51,960 debit
d. 51,960 credit
e. none of these
9-20
Bob Hernandez is reviewing the cash accounting for Kartero, Inc., a local mailing service. Hernandez's review
will focus on the petty cash account and the bank reconciliation for the month ended May 31, 2017. He has
collected the following information from Kartero's bookkeeper for this task.
Petty Cash
1. The petty cash fund was established on May 10, 2017, in the amount of P250.
2. Expenditures from the fund by the custodian as of May 31, 2017, were evidenced by approved receipts for the
following:
Postage expense
Mailing labels and other supplies
1.O.U. from employees
Shipping charges
Newspaper advertising
Miscellaneous expense

On May 31, 2017, the petty cash fund was replenished and increased to P300; currency and coin in the fund at
that time totaled P16.40.
Bank Reconciliation
STANDARD BANK
Bank Statement
Disbursements
Receipts
P28,000
930
Balance, May 1, 2017
Deposits Note payment direct from customer (interest of P30)
Checks cleared during May
Bank service charge
Balance, May 31, 2017
Kartero's Cash Account
Balance, May 1, 2017
Deposits during May 2017 Checks written during May 2017
Balance P8,769
6,522
P31,150 27
P 9,150
31,000
(31,835)
Deposits in transit are determined to be P3,000, and checks outstanding at May 31 total P550. Cash on hand
(besides petty cash) at May 31, 2017, is P246.

What amount of cash should be reported in the May 31, 2017 statement of financial position?
a. P9,518
b. P8,672
c. P9,218
d. P8,972

Bal. per bank 6,522

Add:
Cash on hand 246
DIT 3,000 3,246
9,768
Deduct checks outstanding (550)
Adjusted bank bal. 9,218

Balance per books 8,315

Note collected 930
9,245
Deduct service charge (27)
Adjusted cash bal. may 31 9,218

9-21
Presented below is information related to Powder Inc
Balance per books at October 31 41,847.85
Receipts 173,523.91
Disbursements 166,193.54
Balance per bank statement, November 30 56,274.20

The following checks were outstanding at November 30.

1224 1,635.29
1230 2,468.30
1232 3,625.15
1233 482.17
Included with the November bank statement and not recorded by the company were a bank debit memo for P27.40
covering bank charges for the month, a debit memo for P572 13 for a customer's check returned and marked NSF,
and a credit memo for P1.400 representing bond interest collected by the bank in the name of Powder Inc Cash
on hand at November 30 recorded and awaiting deposit amounted to P1,915 40.

The adjusted cash balance as at November 30, 2017 is

a P49,178.22
b. P50,189.60
c P49,978.69
d P58,578.22

1-2
The accountant of SANTIAGO COMPANY is in the process of preparing the company's financial statements for
the year ended December 31, 2014. He is trying to determine the correct balance of cash and cash equivalents to
be reported as a current asset on the statement of finan cial position. The following items are being considered
Balances in the company's accounts at the Metropolitan Bank
Current account ➤ Savings account
P81,000 P132,600
Undeposited customer checks of P22,200 (including a customer check dated January 2, 2015 for P3,000).
Currency and coins on hand of P3,480.
Savings account at the Northern Philippines Bank with a balance of P2,400,000 This account is being used to
accumulate cash for future plant expansion (in 2015).
Petty cash of P4,000 (currency of P1,200 and unreplenished vouchers for P2,800).
. P120,000 in a current account at the Northern Philippines Bank. This represents a 20% compensating balance
for P600,000 loan with the bank. Santiago Company is legally restricted to with draw the funds until the loan is
due in 2017.
Treasury bills:
Two-month maturity bills Seven-month bills
Time deposit
P90,000 120,000
P100,000

What is the correct balance of cash and cash equivalents to be reported in the current assets section of the statement
of financial position?
A. P547,480
B. P427,480
c. 430,280
d. 327,480

SOLUTION:
Savings and current accounts Metropolitan Bank
(P132,600+ P81,000) 213,600
Undeposited customer checks (P22,200 P3,000) 19,200
Currency and coins on hand 3,480
Petty cash 1,200
Two-month treasury bill 90,000
Time deposit 100,000*
Total cash and cash equivalents 427,480
* It is assumed that the term is three months or less and therefore qualifies as a cash equivalent.

Chapter 10 Receivables
From inception of operations to December 31, 2017, Flores Corporation provided for uncollectible accounts
receivable under the allowance method provisions were made monthly at 2% of credit sales, bad debts written off
were charged to the allowance account, recoveries of bad debts previously written off were credited to the
allowance account, and no year.
end adjustments to the allocation account were made. Flores's usual credit terms are net 30 days.

The balance in the allowance for doubtful accounts was P130,000 at January 1, 2015. During 2015 credit sales
totaled P9,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, P90,000 of bad
debts were written off, and recoveries of accounts previously written off amounted to P15,000. Flores installed a
computer facility in November, 2015, and an aging of accounts receivable was prepared for the first time as of
December 31, 2015. A summary of the aging is as follows:

Classification by month of Sale

Nov Dec 2015
Jul - Oct
Jan - June
Prior to 1/1/2015

Balance in each Category

P1,140,000
130,000
P2,270,000

Based on the review of collectibility of the account balances in the "prior to 1/1/2015" aging category, additional
receivables totaling P60,000 were written off as of December 31, 2015. Effective with the year ended December
31, 2015, Flores adopted the revised accounting standards in recognizing bad debts.

REQUIRED:
1. Prepare schedule analyzing the changes in the allowance for doubtful accounts for the year ended December
31, 2015. Show supporting computations in good form.

2. Prepare the journal entry for the year-end adjustment to the allowance for doubtful accounts balance as of
December 31, 2015.
10-18
Rain Company sold a building and the land on which it is located on January 1, 2014. and received a P150.000
noninterest-bearing note receivable that matures December 31, 2016. The P150,000 is to be paid in full on the
maturity date. The sale was recorded as follows by Rain. Company
Note receivable 150,000
Accumulated depreciation, building 100,000
Building 150,000
Land 60,000
Gain on sale of assets 40,000

It has been determined that 12 percent is a realistic interest rate for this particular note The annual reporting period
ends December 31 The accounts have not been adjusted or closed for 2014.

REQUIRED:
1 Compute the present value of the note. Use compound interest.
150,000 * (PV1, 12% .3) (0.77178) = 106,767

2 Prepare a correction and collection schedule as follows:

Note Receivable
date Explanation and Interest Revenue Change Balance
Jan. 1, 2014 Originally recorded 150,000
Dec 31, 2014 Corrections to present value ? ?

10-19
Choose the correct statement among the alternatives for each question.
1. On December 31, 2014, Francisco Company, a real estate firm, received two P20,000 notes from customers in
exchange for services rendered. On both notes, simple interest is computed on the outstanding principal balance
at 3 percent and payable at maturity The note from Josefina Company is due in nine months, and the note from
Nicole Company due in five years. The market interest rate for similar notes on December 31, 2014, was 8 percent

At what Chapter 10 amounts should the two notes be reported in Francisco's December 31, 2014, statement of
financial position?
Josefina Nicole
a. 18,868 13,624
b. P18,868 P18,519
C. P20,000 13,624
d. P20,000 15,653
The Josefina note is a short-term note and is reported at face value although the note can be recorded at present
value. The Nicole note is reported at present value: [(P20,000 + 5(0.3) (P20,000)] (PV1, 8%, 5) = P23,000
(0.68058) = P15,653

2. Earthsavers, an environmental management firm, sold to STE a P10,000, 8 percent, five-year note that required
five equal annual year-end payments. This note was discounted to yield a 9 rate to STE. What is the total amount
of interest revenue to be recognized by STE on this note?
a. P4,500
b. P4,000
c. P2,781
d. P2,523
The annual payment is computed as: P10,000 (PVA, 8%, 5) = P10,000 / 3.99271 = P2,505.
Discounting this stream of payments at 9% yields cash proceeds of: P2,505 (PVA, 9%, 5) = P2,505 (3.88965) =
P9,744.
Total interest equals total payments less proceeds = 5 (P2,505) – P9,744 = P2,781.

3. On August 15, 2014, Learning, Inc., a firm specializing in educational software, sold software for which it
received a four month note dated July 15, 2014, bearing the market rate of interest on that date. The principal and
interest on the note are due November 15, 2014. When the note is recorded on August 15, which of the following
accounts is increased?
a. Unearned discount
b. Interest receivable
c. Prepaid interest

d. Interest revenue

4. On July 1, 2014, P. Jones Company, a maker of denim clothing, sold goods in exchange for a P100,000, eight-
month, noninterest-bearing note. At the time of the sale, the market rate of interest was 12 percent on similar
notes. What amount did P. Jones receive when it discounted the note at 10 percent on September 1, 2014?
a. P97,000
b. P96,900
C. P95,000
d. P94,000
Maturity value P100,000
Discount P100,000 (0.10) (6/12) (5,000)
Proceeds P 95,000

10-21
You are now in the process of reviewing the audit conducted by your staff af ETC Co and now concentrating on
working papers where possible adjusting journal entries may be drafted to arrive at the adjusted balances as at
May 31, 2015

The following are the working papers.

Cash – BPI
Balance per bank statement 15,646,340
Audit notes:
Inclusive of a customer’s check

REQUIRED
Select the amount that will best correspond to the final balances pertaining to the accounts indicated
1. Total cash in bank
a P16,131,199
b. P15,806,199
c. 16,056,199
d. 15,831,199

2. Accounts receivable
a P7,905,529
b P7,831,839
c. 7,794,339
d. 7,456,624

3. Allowance for doubtful accounts.

a. P771,439.50
b P836,532.50
c. 739,159
d. 662,067

cash
per books 15,825,000
AJE 225,000
(37,500)
10-28
The Gabe Company requires additional cash for its business Gabe has decided to use its accounts receivable to
raise the additional cash as follows

1 On June 30, 2016, Gabe assigned P200,000 of accounts receivable to the Belle Finance Company Gabe received
an advance from Belle of 85% of the assigned accounts receivable. less a commission on the advance of 3%. Prior
to December 31, 2016, Gabe collected P150,000 on the assigned accounts receivable and remitted P160,000 to
Belle, P10,000 of which represented interest on the advance from Belle.
2 On December 1, 2016, Gabe sold P300,000 of net accounts receivable to the Factoring Company for P260,000
The receivables were sold outright on a nonrecourse basis
3 On December 29, 2016, Gabe received an advance of P100,000 from the Domestic Bank by pledging P120,000
of Gabe's accounts receivable Gabe's first payment to Domestic is due on January 29, 2017

REQUIRED
Prepare a schedule showing the income statement effect for the year ended December 31, 2016, as a result of the
preceding facts Show supporting computations in good form
Chapter 11