Auditing Problems

Preliminary Examination
Mastery + Accuracy = Speed
Instructions: Write the letter that best corresponds to your answer in the booklet that was
given to you. Do not write on the test questions and return it after use. Thank you and
GODBLESS!

On January 10, 2014, you started the audit of the financial records of the PVG Company for
the year ended December 31, 2013. From your investigation, you discovered the following:
1. The bookkeeper also acts as the cashier. On December 31, 2013, the bookkeeper’s year-
end cash reconciliation contains the following items.
Cash per ledger, 12/31/2013 P491,200
Cash per bank, 12/31/2013 518,800
Outstanding checks 41,760
JRP Co. check charge by bank in error
12/20/2013; corrected by bank on 1/5/2014 1,200
Cash in transit, credited by bank on 1/2/2014 5,760
2. The cash account balances per ledger as of 12/31/2013 were: Cash – P491,200; petty
cash – P1,200.
3. The count of the cash on hand at the close of business on January 10, 2014, including the
petty cash, was as follows:
Currency and coin P3,080
Expense vouchers 160
Employees’ IOU’s dated 1/5/2014 440
Customers’ checks in payment of account 2,320
P6000
4. From January 2, 2014 to January 10, 2014, the date of your cash count, total cash
receipts appearing in the cash records were P 68,800 according to the bank statement
for the period from January 2, 2014 to January 10, 2014, total deposits were P60,800.
5. On July 5, 2013, cash of P3,200 was received from an account customer; the Allowance
Doubtful Accounts was charged and Accounts Receivable credited.
6. On December 5, 2013, cash of P2,400, was received from an account customer;
Inventory was charged and Accounts Receivable credited.
7. Cash of P 5,840 received during 2013 was not recorded.
8. Checks received from customers from January 2, 2014 to January 10, 2014 totalling
P3,360, were not recorded but were deposited in bank.
9. On July 1, 2013, the bank refunded interest of P160 because a note of the PVG Company
was paid before maturity. No entry had been made for the refund.
10. In the cashier’s petty cash, there were receipts for collections from customers on January
9, 2014, totalling P 6,800; these were unrecorded and undeposited.
11. In the outstanding checks, there is one for P400 made payable to a trade creditor;
investigation shows that this check had been returned by the creditor on June 14, 2013
and a new check for P800 was issued in its place; the original check for P400 was made
in error as to amount.

Questions:
Based on the above and the result of your audit, answer the following:
1. The correct bank balance as of December 31,2013 is
a. P484,400 c. P503,200
b. P484,000 d. P483,200
2. The cash shortage as of December 31, 2013 is
a. P19,200 c. P18,800
b. P18,400 d. P 0
3. The cash shortage for the period January 1 to 10, 2014 is
a. P13,360 c. P20,320
b. P10,160 d. P 0
The client, Owen Corporation, obtained bank statements for November 30, and
December 31, 2011 and reconciled the balances. You obtained directly the
statements of January 12, 2012 and obtained the necessary confirmation. You have
found that there are no errors in addition or subtraction in the client’s books.
11/30/11 12/31/11
Balance, bank statement P344,420 P275,020
Balance, company records 271,260 226,010
Deposits in transit 35,000 ?
Outstanding checks 88,240 ?

12/1-31/11 1/1-12/12

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Receipts, cash records P963,230 P292,500

Credits, bank statement 941,010 321,490
Disbursements, cash records 1,008,480 177,570
Charges, bank statements 1,010,410 230,180

The following information also was obtained:

a) Check no. 804 for 340 cleared by the bank in December as P1,340. This was
found in providing the bank statement. The bank made the correction on
January 8, 2012.
b) A note of P20,000, sent to the bank for collection on November 15,2011,was
collected and credited to the account on November 28, 2011, net of collection
fee of P80.The note was recorded in the cash receipts on December
21,2011,at which date the collection fee was entered as a disbursement.
c) The client records returned checks in red in the cash receipts journal. The
checks listed in the table were returned by the bank.

AmountReturnedRecordedRedeposited
Co. A P3,270 12/6/11 No entries12/8/11
Co. B P6,730 12/27/11 1/3/12 1/15/12
d) Two payroll checks for employee’s vacations totalling P5,500 were drawn on
January 3, 2012 and cleared the bank on January 8, 2012. These checks were
not entered in the client’s records because semi-monthly payroll summaries
are entered only on the 15th and the last day of each month.

Questions:
Based on the above and the result of your audit, compute for the following:
4. Deposits in transit as of December 31, 2011
a. P40,570 c.P37,220
b. P40,490 d. P57,220
5. Outstanding checks as of December 31,2011
a. P93,960 c. P97,230
b. P86,310 d. P97,310
6. Adjusted cash balance as of December 31, 2011
a. P219,280 c. P218,280
b. P217,280 d. P246,930
7. Deposits in transit as of January 12, 2012
a. P19,310 c.P19,230
b. P15,960 d.P12,500

8. Outstanding checks as of January 12, 2012

a. P46,850 c.P33,700
b. P56,850 d.P50,120

PROBLEM 7
King Company has an overdue note receivable from Kevin Company for P300,000.
The note was dated January 1, 2012. It has an annual interest rate of 9% and
interest is paid December 31 of each year. Kevin paid the interest on the note on
December 31, 2012, but Kevin did not pay the interest due in December 2013. The
current effective interest rate is 6%.
On January 1, 2014, King agrees to the following restructuring arrangement:
 Reduce the principal to P250,000.
 Forgive recorded accrued interest.
 Reduce the interest rate of 6%.
 Extend the maturity date of the note to December 31, 2016.

Questions:
Based on the above and the result of your audit, answer for the following: (Round off
present value factors to four decimal places.)
9. The present value of future cash flows of the restructured loan is
a. P250,000 c. P233,145
b. P231,020 d. P238,613
10. The loss on impairment of loans to be recognized by King in 2014 is
a. P95,980 c. P88,387
b. P77,000 d. P18,980

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11. The valuation allowance for impaired loans to be recognized on January 1, 2014
is
a. P16,855 c. P88, 387
b. P11,387 d. P18,980
12. The interest income to be recognized in 2014 is
a. P20,792 c. P21,475
b. P20,983 d. P15,000
13. The carrying amount of the loan as of December 31, 2014 is
a. P239,128 c. P236,812
b. P245,088 d.P250,000

On June 1, 2013, Clove Company sold an equipment with a carrying amount of

P400,000 and received as payment a 14%, P540,000 note. Principal payments of
P180,000 plus interest are due every June 1, from 2014 to 2016. The first principal
payment was made on June 1, 2014.
Clove Company uses the calendar year for reporting purposes.
14. The gain (loss) reported arising from the sale of land is 140,000
15. Interest income for 2013 44,100
16. Notes receivable reported at December 31, 2013 540,000
17. Interest income 2014 60,900
18. Notes receivable reported in the current asset section at December 31,2014

Thresh Company sold a condominium unit on January 2, 2013. Agreed price was
P4,650,000. A P650,000 dawn payment was received and Thresh Company accepted
a mortgage note for the balance. The note shall carry an 8% rate of interest
(computed on the unpaid balance) for a six year period. Annual payments of
P865,239 at the end of each year beginning December 31, 2013. Thresh Company’s
accounting period end on December 31.
19. The gain (loss) reported arising from the sale of land is
20. Interest income for 2013
21. Notes receivable reported at December 31, 2013
22. Interest income 2014
23. Notes receivable reported in the current asset section at December 31,2014
8% 4000000
2013 865,239 320,000 545,239 3,454,761
2014 865,239 276,381 588,858 2,865,903
2015 865,239 229,272 635,967 2,229,936
2016 865,239 178,395 686,844 1,543,092
2017 865,239 123,447 741,792 801,300
2018 865,239 64,104 801,135 165

On January 1, 2013, Snow Company sold used equipment to Coin Company and
received a non-interest bearing note requiring payment of P45,000 annually for ten
years. The first payment is due on December 31,2013 and the prevailing rate of
interest for this type of note at date of issuance was 9%. The equipment’s carrying
amount on January 1, 2013 was P125,000
24. The gain (loss) reported arising from the sale of land is
25. Interest income for 2013
26. Notes receivable reported at December 31, 2013
27. Interest income 2014
28. Notes receivable reported in the current asset section at December 31,2014
ANNUAL INTEREST
DATE RECEIVED INCOME AMORTIZATION BALANCE
9% 288,795
2013 45,000 25,992 19,008 269,786
2014 45,000 24,281 20,719 249,067
2015 45,000 22,416 22,584 226,483
2016 45,000 20,383 24,617 201,866
2017 45,000 18,168 26,832 175,034
2018 45,000 15,753 29,247 145,787
2019 45,000 13,121 31,879 113,908
2020 45,000 10,252 34,748 79,160
2021 45,000 7,124 37,876 41,284

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2022 45,000 3,716 41,284 0

Gain 163,795

1. On January 1, 2013, Boggs Company sold land that cost P400,000 to Cressida
Company. As payment, Cressida Company gave Boggs Company a P750,000
face value note. The note bears an interest rate of 6% and is to be repaid in 3
annual installments of P250,000, plus interest based on the outstanding
balance. The first payment is due on December 31, 2013. The market price of
the land is not reliably determinable. Prevailing interest rate for a note of this
type is 12%.
29. The gain (loss) reported arising from the sale of land is
30. Notes receivable reported at January 1, 2013
31. Interest income for 2013
32. Notes receivable reported at December 31, 2013
33. Interest income 2014
34. Notes receivable reported in the current asset section at December 31,2014
35. Interest income 2015

ANNUAL INTEREST
DATE RECEIVED INCOME AMORTIZATION BALANCE
12% 675,229
2013 295,000 81,027 213,973 461,256
2014 280,000 55,351 224,649 236,607
2015 265,000 28,393 236,607 -
Gain 275,229

2013 295,000 0.892857 263,393

2014 280,000 0.797194 223,214
2015 265,000 0.71178 188,622
TPV 675,229

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