Cash and Cash equivalents PDF

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AUDITING PROBLEMSAUDIT OF CASH AND CASH EQUIVALENTSPROBLEM NO. 1The following data were taken from your current working papers in connection with your audit of the Rizal Company’s financial statements for the year ended December 31, 2006.Cash account consists of the following items:Petty cash fund P...

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AUDITING PROBLEMS AUDIT OF CASH AND CASH EQUIVALENTS PROBLEM NO. 1 The following data were taken from your current working papers in connection with your audit of the Rizal Company’s financial statements for the year ended December 31, 2006. Cash account consists of the following items: Petty cash fund Security Bank checking account Allied Bank current account Total per GL

P 25,000 (37,500) 344,250 P331,750

a. The count of the cashier’s accountability on January 2, 2007, revealed total bills and coins of P9,000. Unreplenished vouchers for various expenses totaled P16,000, of which P3,000 pertains to January 2007. b. On December 29, 2006, a check for P87,500 was drawn against Security Bank current account resulting in bank overdraft of P37,500. The check was picked up by the supplier on January 3, 2007. c. Bank reconciliation statement prepared by the cashier for the Allied Bank account follows: Bank balance Add: Deposit in transit Bank service charges Total Less: Outstanding checks Check No. 214 219 225 228 Book balance @

P310,500 P61,250 1,250

Amount P 2,500 20,750 6,000 8,500

62,500 373,000 @

28,750 P344,250

Check certified by the bank in December 2006.

All reconciling items were traced to the bank statement. Further investigation indicated that the deposits in transit include a customer’s post-dated check amounting to P40,000. The check represents a collection from account customer for sales made in the middle of October 2006. QUESTIONS: Based on the application of the necessary audit procedures and appreciation of the above data, you are to provide the answers to the following: 1.

How much is the adjusted balance of petty cash fund as of December 31, 2006? a. P12,000 b. P13,000 c. P9,000 d. P16,000

2.

How much is the adjusted Allied Bank current account as of December 31, 2006? a. P336,500 b. P305,500 c. P296,500 d. P330,250

3.

How much is the cash shortage as of December 31, 2006? b. P6,500 a. P46,500 c. P9,000

d. P0

How much is the adjusted cash as of December 31, 2006? a. P355,500 b. P398,500 c. P367,500

d. P358,500

4.

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5.

An auditor would consider a cashier’s job description to contain compatible duties if the cashier receives remittance from the mailroom and also prepares the a. Daily deposit slip. c. Remittance advices. b. Prelist of individual checks. d. Monthly bank reconciliation.

PROBLEM NO. 2 (RPCPA 10.84) You obtained the following information on the current account of Bonifacio Company during your examination of its financial statements for the year ended December 31, 2006. The bank statement on November 30, 2006 showed a balance of P114,750. Among the bank credits in November was customer’s note for P37,500 collected for the account of the company which the company recognized in December among its receipts. Included in the bank debits were cost of checkbooks amounting to P450 and a P15,000 check which was charged by the bank in error against Bonifacio Co. account. Also in November you ascertained that there were deposits in transit amounting to P30,000 and outstanding checks totaling P63,750. The bank statement for the month of December showed total credits of P156,000 and total charges of P76,500. The company’s books for December showed total receipts of P275,850, disbursements of P152,700 and a balance of P182,100. Bank debit memos for December were: No. 245 for service charges, P600 and No. 246 on a customer’s returned check marked “DAIF” for P9,000. On December 31, 2006 the company placed with the bank a customer’s promissory note with a face value of P45,000 for collection. The company treated this note as part of its receipts although the bank was able to collect on the note only in January, 2007. A check for P1,485 was recorded in the company cash payments books in December as P14,850. QUESTIONS: Based on the application of the necessary audit procedures and appreciation of the above data, you are to provide the answers to the following: 1.

How much is the undeposited collections as of December 31, 2006? c. P82,350 d. P52,350 a. P127,350 b. P67,350

2.

How much is the outstanding checks as of December 31, 2006? b. P135,735 a. P71,985 c. P149,100 d. P136,185

3.

How much is the adjusted bank receipts for December? a. P238,350 b. P178,350 c. P163,350

d. P193,350

4.

How much is the adjusted book disbursements for December? a. P84,735 c. P161,850 d. P148,935 b. P148,485

5.

How much is the adjusted cash balance as of December 31, 2006? a. P234,615 b. P82,500 c. P140,865 d. P73,365

PROBLEM NO. 3 (RPCPA 5.80) On January 10, 2007, you started the audit of the financial records of the Del Pilar Company for the year ended December 31, 2006. From your investigation, you discovered the following:

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1. The bookkeeper also acts as the cashier. On December 31, 2006, the bookkeeper’s year-end cash reconciliation contains the following items. Cash per ledger, 12-31-06 Cash per bank, 12-31-06 Outstanding checks Joe Co. check charge by bank in error 12-20-06; corrected by bank on 1-5-07 Cash in transit, credited by bank on 1-2-07

P736,800 778,200 62,640 1,800 8,640

2. The cash account balances per ledger as of 12-31-06 were: Cash - P736,800; petty cash - P1,800 3. The count of the cash on hand at the close of business on January 10, 2007, including the petty cash, was as follows: Currency and coin Expense vouchers Employees’ IOU’s dated 1-5-07 Customers’ checks in payment of account

P4,620 240 660 3,480 P9,000

4. From January 2, 2007 to January 10, 2007, the date of your cash count, total cash receipts appearing in the cash records were P103,200. According to the bank statement for the period from January 2, 2007 to January 10, 2007, total deposits were P91,200. 5. On July 5, 2006, cash of P4,800 was received from an account customer; the Allowance for Doubtful Accounts was charged and Accounts Receivable credited. 6. On December 5, 2006, cash of P3,600 was received from an account customer; Inventory was charged and Accounts Receivable credited. 7. Cash of P8,760 received during 2006 was not recorded. 8. Checks received from customers from January 2, 2007 to January 10, 2007, totaling P5,040, were not recorded but were deposited in bank. 9. On July 1, 2006, the bank refunded interest of P240 because a note of the Del Pilar 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, 2007, totaling P10,200; these were unrecorded and undeposited. 11. In the outstanding checks, there is one for P600 made payable to a trade creditor; investigation shows that this check had been returned by the creditor on June 14, 2006 and a new check for P1,200 was issued in its place; the original check for P600 was made in error as to amount. QUESTIONS: Based on the above and the result of your audit, answer the following: 1. 2. 3.

The correct bank balance as of December 31, 2006 is a. P726,600 b. P754,800 c. P726,000

d. P724,800

The cash shortage as of December 31, 2006 is a. P28,800 b. P28,200 c. P27,600

d. P

0

The cash shortage for the period January 1 to 10, 2007 is b. P30,480 a. P20,040 c. P15,240

d. P

0

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4.

Which of the following internal control procedures will most likely prevent the concealment of a cash shortage resulting from improper write-off of a trade account receivable? a. Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence. b. Write-offs must be supported by an aging schedule showing that only receivables overdue for several months have been written off. c. Write-offs must be approved by the cashier who is in a position to know if the receivables have, in fact, been collected. d. Write-offs must be authorized by company field sales employees who are in a position to determine the financial standing of the customers.

5.

As an in-charge auditor, you are reviewing a write-up of internal control in cash receipt and disbursement procedures. Which of the following deficiencies alone should cause you the least concern? a. Checks are signed by only one person. b. Signed checks are distributed by the controller to approved payees. c. The treasurer fails to establish bona fide names and addresses of check payees. d. Cash disbursements are made directly out of cash receipts.

AUDIT OF RECEIVABLES PROBLEM NO. 4 (RPCPA 5.90) The December 31, 2005 adjusted trial balance of Aguinaldo Company shows the following: Accounts receivable Allowance for bad debts

Debit P50,000

Credit P 2,000

Additional information: Cash sales of the company represents 10% of gross sales. 90% of the credit sales customers do not take advantage of the 2/10, n/30 terms. It is expected that cash discount of P300 will be taken on accounts receivable outstanding at December 31, 2006. Sales returns in 2006 amounted to P20,000. All returns were from charge sales. During 2006, accounts totaling to P2,200 were written off as uncollectible; bad debt recoveries during the year amounted to P150. The allowance for bad debts is adjusted so that it represents certain percentage of the outstanding accounts receivable at year end. The required percentage at December 31, 2006 is 150% of the rate used on December 31, 2005. QUESTIONS: Based on the above and the result of your audit, determine the following: 1.

The accounts receivable as of December 31, 2006 is a. P150,000 b. P16,667 c. P15,000

d. P122,200

2.

The allowance for doubtful accounts as of December 31, 2006 is a. P1,000 c. P6,000 d. P7,332 b. P9,000

3.

The net realizable value of accounts receivable as of December 31, 2006 is c. P140,700 a. P15,367 b. P143,700 d. P114,568

4.

The doubtful account expense for the year 2006 is a. P9,050 b. P1,050 c. P6,050

5.

d. P7,382

A company uses the allowance method for recognizing doubtful accounts. The entry to record the writeoff of a specific uncollectible account a. Affects neither net income nor working capital b. Affects neither net income nor accounts receivable

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c. Decreases both net income and working capital d. Decreases both net income and accounts receivable PROBLEM NO. 5 (RPCPA 10.79) During your examination of the 2006 financial statements of the Mabini Company you find that the company does not provide allowance for doubtful accounts ever since it started operations in 2002. The company’s practice is to directly write-off as expense doubtful accounts and credit recoveries to income. The company’s contracts are generally for two years. Upon your recommendation, the company agreed to change its accounts for 2006 to give effect to doubtful treatment on the allowance basis. The allowance is to be based on a percentage of sales which is derived from the experience of prior years. Statistics for 2002 to 2006 are shown as follows: Year of Sale Charge Sales

2002

2003

2004

2005

2006

P600,000 P1,500,000 P1,800,000 P1,950,000 P1,650,000

Accounts Written off & Year of Sale 2002 2003 2004 2005 2006

3,300 9,000 3,000

6,000 24,000 7,200

7,800 27,000 16,200

9,000 30,000

8,400

Recoveries & Year of Sale

2002 2003 2004 2005 2006

600 2,400 3,000 3,600

Accounts receivable at December 31, 2005 were as follows: From 2005 sales From 2006 sales Total

P90,000 810,000 P900,000

REQUIRED: Based on the above and the result of your audit, you are to provide the answers to the following: 1.

The average percentage of net doubtful accounts to charge sales that should be used in setting up the 2006 allowance is a. 2.50% b. 2.05% c. 1.90% d. 1.77%

2.

How much is the doubtful accounts expense for 2006? a. P32,850 b. P54,600 c. P41,250

d. P43,800

3.

The doubtful accounts expense for 2006 is over(under) stated by b. P13,350 a. P55,950 c. (P32,850) d. (P41,250)

4.

The net realizable value of accounts receivable that should be presented on the December 31, 2006 balance sheet is b. P853,800 a. P831,600 c. P868,650 d. P810,000

5.

Which account balance is most likely to be misstated if an aging of accounts receivable is not performed? a. Allowance for bad debts. c. Accounts receivable. b. Sales returns and allowances. d. Sales revenue.

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PROBLEM NO. 6 (Stice, Stice and Skousen – 15th edition) Presented below are independent situations related to the notes receivable of GOMBURZA Company. Answer the following questions relating to each of the independent situations as requested. (Round-off present value factors to four decimal places) 1.

GOMBURZA Company has P6,000,000 note receivable from sale of plant bearing interest at 12% per annum. The note is dated April 1, 2005. The note is payable in 3 annual installments of P2,000,000 plus interest on the unpaid balance every April 1. The initial principal and interest payment was made on April 1, 2006. How much is the interest receivable as of December 31, 2006? a. P360,000 b. P540,000 c. P180,000 d. P120,000

2.

GOMBURZA Company sold a tract of land to RI Co. on July 1, 2006, for P4,000,000 under an installment sale contract. RI Co. signed a 4-year 11% note for P2,800,000 on July 1, 2006, in addition to the down payment of P1,200,000. The equal annual payments of principal and interest on the note will be P902,500 payable on July 1, 2007, 2008, 2009,and 2010. The land had an established cash price of P4,000,000, and its cost to the company was P3,000,000. The collection of the installments on this note is reasonably assured. How much is the noncurrent portion of the note receivable as of December 31, 2006? c. P2,205,500 a. P2,800,000 b. P1,897,500 d. P2,051,500

3.

On January 1, 2006, GOMBURZA Company sold a tract of land to three doctors as an investment. The land, purchased 10 years ago, was carried on GOMBURZA Company’s books at a value of P125,000. GOMBURZA received a noninterestbearing note for P220,000 from the doctors. The note is due on December 31, 2007. There is no readily available market value for the land, but the current market rate of interest for comparable notes is 10%. The carrying amount of the note receivable on December 31, 2006 is b. P199,989 a. P220,000 c. P181,819 d. P186,219

4.

On December 31, 2005, GOMBURZA Company finished consultation services and accepted in exchange a promissory note with a face value of P300,000, a due date of December 31, 2008, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not readily determinable and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%. How much is the interest income in 2006? a. P26,269 b. P15,000 c. P22,539

5.

d. P26,624

On January 1, 2006, GOMBURZA Company sold land that originally cost P400,000 to X Company. As payment, X gave GOMBURZA Company a P600,000 note. The note bears an interest rate of 4% and is to be repaid in three annual installments of P200,000 (plus interest on the outstanding balance). The first payment is due on December 31, 2006. The market price of the land is not reliably determinable. The prevailing rate of interest for notes of this type is 14%. The gain on sale of land is a. P5,000 b. P64,320

c. P103,105

d. P82,893

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AUDIT OF INVENTORIES PROBLEM NO. 7 (Kieso, Weygandt and Warfield – 10 th edition) Luna Company, a manufacturer of small tools, provided the following information from its accounting records for the year ended December 31, 2006: Inventory at December 31, 2006 (based on physical count on December 31, 2006) Accounts payable at December 31, 2006 Net sales (sales less sales returns)

P1,520,000 1,200,000 8,150,000

Additional information follows: a.

Included in the physical count were tools billed to a customer FOB shipping point on December 31, 2006. These tools had a cost of P31,000 and were billed at P40,000. The shipment was on Luna’s loading dock waiting to be picked up by the common carrier.

b.

Goods were in transit from a vendor to Luna on December 31, 2006. The invoice cost was P71,000, and the goods were shipped FOB shipping point on December 29, 2006.

c.

Work in process inventory costing P30,000 was sent to an outside processor for plating on December 30, 2006.

d.

Tools returned by customers and held pending inspection in the returned goods area on December 31, 2006, were not included in the physical count. On January 8, 2007, the tools costing P32,000 were inspected and returned to inventory. Credit memos totaling P47,000 were issued to the customers on the same date.

e.

Tools shipped to a customer FOB destination on December 26, 2006, were in transit at December 31, 2006, and had a cost of P21,000. Upon notification of receipt by the customer on January 2, 2007, Luna issued a sales invoice for P42,000.

f.

Goods, with an invoice cost of P27,000, received from a vendor at 5:00 p.m. on December 31, 2006, were recorded on a receiving report dated January 2, 2007. The goods were not included in the physical count, but the invoice was included in accounts payable at December 31, 2006.

g.

Goods received from a vendor on December 26, 2006, were included in the physical count. However, the related P56,000 vendor invoice was not included in accounts payable at December 31, 2006, because the accounts payable copy of the receiving report was lost.

h.

On January 3, 2007, a monthly freight bill in the amount of P6,000 was received. The bill specifically related to merchandise purchased in December 2006, one-half of which was still in the inventory at December 31, 2006. The freight charges were not included in either the inventory or accounts payable at December 31, 2006.

QUESTIONS: Based on the above and the result of your audit, answer the following: 1.

The adjusted balance of Inventory as of December 31, 2006 is c. P1,704,000 a. P1,673,000 b. P1,672,000 d. P1,670,000

2.

The adjusted balance of Accounts Payable as of December 31, 2006 is a. P1,333,000 b. P1,262,000 c. P1,327,000 d. P1,330,000

3.

The adjusted Net Sales fro the year ended December 31, 2006 is a. P8,103,000 b. P8,110,000 c. P8,150,000 d. P8,063,000

4.

When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to obtain evidence that

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a. All goods purchased before year end are received before the physical inventory count. b. All goods owned at year end are included in the inventory balance. c. No goods held on consignment for customers are included in the inventory balance. d. No goods observed during the physical count are pledged or sold. 5.

Which of the following audit procedures would provide the least reliable evidence that the client has legal title to inventories? a. Confirmation of inventories at locations o...