Problem 1

You were hired by SUNSHINE TEXTILE, INC. for the year ended December 31, 2009. The
Company was newly incorporated on December 15, 2008 as a distributor and retailer of
textiles and other related accessories. It started its commercial operations on January 1, 2009
in a small rented building which is being used as office store space located in the central of
Makati.

You were provided with the documents pertaining to the organization of the company which
include articles of incorporation, by-laws, list of directors and officers, and other related
documents. You are now reviewing the working papers prepared by your audit staff. These
contain drafts of financial statements. Analyses and schedules, as well as audit findings which
may require audit adjustments to arrive at the final financial statements as of December 31,
2009.

A surprise count of cash and cash items was conducted by your audit staff on January 1, 2010.
The company has a petty cash fund of P35,000 which is maintained on an imprest basis. The
cash count sheet disclosed the following:

Petty cash
Currencies P18,095
Coins 325
Paid petty cash vouchers:
Overtime pay of some employees 5,500
Repair of computers 4,250
Representation and advertising expenses 3,970
Postage stamps and office supplies 2,860

Sunshine Textile maintains savings and current accounts with East West Bank and Banco de
Oro and prepares reconciliations of the bank and book balances on a monthly basis. The year-
end reconciliation statements provided to you by the chief accountant revealed the following
information:

1. A debit memo dated December 29, 2009 for P412,500 was included in the bank
statement for the month of December. This represents payment of a short-term granted
by East West Bank inclusive of interest of P12,500. This was not recorded as of year-
end.

2. Banco de Oro returned a customers check for P11,550 on December 28 for insufficiency
of funds. This was subsequently redeposited and cleared by the bank on January 4,
2010.

3. A transfer of funds from Banco de Oro to East West Bank amounting to P120,000 on
December 31, was not recorded.

4. A stale check of P6,830 which has been outstanding for than six months was included in
the list of outstanding checks. This was in payments of accounts payable.

5. Several deposits made in December, 2009 covered by bank validated deposit slips
totaling P33,400 were not recorded. These represent collections from customers whose
accounts are current.

6. Unreleased checks totaling P28,950 payable to suppliers were included among

outstanding checks. These were delivered on January 6, 2010.

7. Interest collection from maturing T-bill placement amounting to P13,260 which was
delivered in the afternoon of December 31 was not deposited on the same day and
neither recorded.
The schedule of accounts receivable furnished to you by the accountant reflects some errors.
The total figures in the schedule do not totally with the balance per general ledger. Based on
your review of sales invoices, purchase orders, and other related documents, you noted the
following information:

1. Sales on account of various accessories totaling P36,480 were returned by the customer
on December 28, 2009, but no entry was made in the books. The goods were included in
the year-end physical count.

2. Based on the findings per confirmation reply from a customer, he indicated that he has
already paid his account of P23,980 in October, 2009. Your verification disclosed that
said collection was credited to sales account.

3. Collection of P12,950 on November 5, 2009 from Digna Corporation was credited to the
account of Digman Corporation.

4. A sales invoice for P23,470 was prepared on November 29, 2009 for various textile
materials ordered by De Gaule Fashion of Cebu City in November but shipped only on
January 6, 2010 on FOB shipping point. Said invoice was not recorded as of December
31, 2009.

5. Advances to affiliates, officers, and staff totaling P108,000 were also included in the
schedule. These advances are collectible in 2000.

Sunshine set up a policy of providing allowance for doubtful accounts equivalent to 2% of the
outstanding accounts receivable at the end of the period. As of December 31, 2009, no
allowance set up in the records.

Sunshine granted a short-term loan of P850,000 to a subsidiary. A promissory note was

prepared with interest at 15.5% per annum, value dated on November 28, 2009 and maturing
after 90 days. On December 27, 2009, a partial payment of principal of P400,000 plus
corresponding interest was made. No accrual was made as of year-end.

A physical inventory was conducted simultaneously in the store and the warehouse in the
presence of your audit staff. Your review disclosed the following information:

1. Certain purchases of textile materials amounting to P153,000 were already paid and
recorded but the same have not been received as of date of count. Based on the
documents presented, these were shipped by the supplier on FOB shipping point on
December 28, 2009.

2. Shipping and other charges on some items purchased amounting to P21,300 were
charged to expenses. The related inventories were already included in the physical
count.

3. Several inventory items ordered from a supplier on FOB destination in late December
totaling P140,500 were received only on January 21, 2010. No payment was made yet
as of year-end.

4. A suppliers invoice for P38,200 worth of textile materials dated December 20, 2009 was
received through the mails on December 29, 2009. The goods were shipped on
December 26, but the goods arrived only on January 5, 2010. Shipment terms are FOB
shipping point while payment terms are 15 days. The goods were not included in the
year-end physical count.

You were furnished with the schedule of accounts payable and accrued expenses as of
December 31, 2009. Your verification disclosed the following:
1. A deposit to a supplier for various merchandise ordered amounting to P45,000 was
included in the schedule.
2. Payment to Sergs Company amounting to P12,000 was erroneously debited to the
account of Eldon Corporation
3. Advances from an officer amounting P55,000 was reflected as accounts payable.

The following unpaid vouchers have not been recorded as of year-end

1. Purchases of textile materials worth P95,300 which were already delivered and
included in the year-end physical count but terms are for 30 days.

2. Agents commissions for the month of December totaling P62,620.

3. Light and water bills for December totaling P42,800.
4. Representation and other advertising expenses totaling P8,200.

Draft of Financial Statement prepared by the Company contained the following information:

Petty Cash Fund 35,000

Cash 510,000
Accounts receivable trade 2,309,000
Allowance for bad debts -
Notes Receivable 450,000
Interest Receivable -
Inventories 4,320,000
Accounts payable 495,000
Accrued expenses 46,000

Questions: Based on the information above and all the necessary adjusting entries determine
the audited balances at December 31, 2009 of the following:

1. Petty Cash Fund

a. P 35,000 b. P 22,670 c. P 18,420 d. P 16,580

2. Cash
a. P 510,000 b. P 288,390 c. P 168,390 d. P 139,440

3. Accounts Receivable (gross)

a. P 2,309,000 b. P 2,226,690 c. P 2,117,890 d. P 2,141,360

4. Allowance for doubtful accounts

a. P 46,180 b. P 44,530 c. P 42,830 d. P 42,360

5. Notes and Related Interest Receivable

a. P 468,115 b. P 456,395 c. P 450,775 d, P 450,000

6. Inventories
a. P 4,442,500 b. P 4,383,000 c. P 4,289,500 d. P 4,230,000
7. Accounts payable
a. P654,280 b. P 609,280 c. P 535,330 d. P 495,000

8. Accrued expenses
a. P 254,410 b. P 159,620 c. P 140,790 d. P 46,000

Problem 2

You were hired by Victory Company to examine their accounts for the year ended
December 31, 2008 and the following are the items disclosed in your audit of the
cash accounts:
A. A surprise count of cash and cash items was conducted by your audit staff on
January 4, 2009. The company has a petty cash fund of P70,000 which is
maintained on an imprest basis. The cash count sheet disclosed the following:

Bills and coins 24,250

IOU notes of several employees all dated Dec. 2008 18,000
Paid petty cash vouchers unreplenished 25,750

B. The company maintains accounts with BDO and you were given a copy of the
bank reconciliation statement which showed the following:

Balance per bank 1,314,680

Add: Deposits in transit 272,500
Bank debit memos 550,000
Bank error 72,000
Less: Outstanding checks 552,760
Book error 18,000
Balance per books 1,638,420

You further analysis reflected the following:

1. A check for P90,000 received from a customer had been deposited and then
returned by the bank on December 26, 2008. No entry was made for the
returned check. The customer replaced the check on January 15, 2009.

2. Among the checks returned with the bank statement is a check issued by the
company in payment of accounts payable for P90,600 but was recorded in the
books as P108,600 and a check issued by Rhinna Ltd. for P72,000 incorrectly
charged by bank.

3. Postdated checks totaling P134,600 were included in the deposits in transit.

These represent collections of accounts receivable from customers. The
checks were actually deposited on January 8, 2009.

4. Various bank debit memos for drafts purchased for payment of importation of
computers totaling P460,000 were not yet recorded. These purchases were
previously set up as accounts payable. Said computers arrived in December
2008.

5. Included in the outstanding checks are checks in payment of accounts

payable for P230,000. These checks were prepared and recorded in
December 2008, but not released until January 10, 2009.

Questions:

8. What is the adjusted balance of Petty Cash Fund as of December 31, 2008?
a. P 70,000 b. P 38,366 c. P 31,634 d. P 24,250

9. Using the adjusted balance method in preparing bank reconciliation

statement, how much is the net adjustment to the balance per bank?
a. P 532,000 b. P 436,600 c. P 208,260 d. P 112,860
10. Using the adjusted balance method in preparing bank reconciliation
statement, how much is the net adjustment to the balance per books?
a. P 532,000 b. P 436,600 c. P 208,260 d. P 112,860

11. What is the adjusted balance of Cash in Bank as of December 31, 2008?
a. P 1,638,420 b. P 1,314,680 c. P 1,201,820 d. P 1,106,420

12. An auditor should trace bank transfers for the last part of the audit period and
first part of the subsequent period to detect whether
a. The cash receipts journal was held open for a few days after the year-
end.
b. The last checks recorded before the year end were actually mailed by
the year-end.
c. Cash balances were overstated because of kiting.
d. Any unusual payments to or receipts from related parties occurred.

Problem 3
You are auditing the cash account of HANSON MERCHANDISING as of the fiscal year
ended October 31,2007 and discovered the following information:

a. The bank statement as of October 31 showed a balance of P63,628.35.

b. Receipts totaling to P20,550 from October 29 to October 31 were

deposited on November 2.

c. Hansons account was debited on October 25 for a customers uncollectible

check amounting to P3,429.

d. The company and the bank recorded a customer check at P1,875 whereas
the correct amount should have been P2,175. The bank discovered the error and
corrected the same presenting the correction as a credit for the period.

e. Bank service charges for the month of October is at P118.29.

f. A 3-month, 9% P9,000 customers note dated July 25, discounted on

September 12, was dishonored October 26 and the bank charged Hanson P9,220,
which included a protest fee of P17.50.

g. Check no. 661 for P3,727.50 was entered in the cash disbursement book
at P3,277.50 and check no. 652 for P98.70 was entered as P987. The company
uses the voucher system of recording disbursements.

h. A bank memo stated that Linda Companys note for P7,500 and interest of
P187.50 had been collected on October 28, and the bank charged P37.50.

i. Upon your investigation, the following checks remained outstanding as of

October 31:

No. 620. P 3,750.00

No. 621. 10,344.69
No. 632. 7,215.75
No. 669. 5,326.14
No. 670. 2,977.50
 No. 671. 2,761.20
No. 675. 827.16
No. 679. 6,699.45

Check 670 has been certified by the bank

Questions:
1. What is the correct cash balance as of October 31, 2007?
a. 63,628.35 b. 47,253.96 c. 44,276.46 d. 51,169.44

2. What is the net adjustment to the Hansons cash account?

a. 3,502.39 b. 3,802.39 c. 4,378.99 d. 4,678.99

3. What is the unadjusted balance per books as of October 31, 2007 prior to the
reconciliation?
a. 52,232.95 b. 48,655.45 c. 51,632.95 d. 51,932.95