Chapter 3 Caselette - Audit of Cash and Cash Equivalents PDF

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CHAPTER 3 - Audit of Cash &Cash EquivalentsProblem 1 The “CASH” account of Don Corporation’s ledger on December 31, 2006 showed the following:a. Petty cash fund (including P7,500 unreplenished voucher of which P2,400 is dated January 3, 2007) P 15, b. Redemption Fund Account – PNB 500, c. Tr...

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CHAPTER 3 - Audit of Cash & Cash Equivalents Problem 1 The “CASH” account of Don Corporation’s ledger on December 31, 2006 showed the following: a. b. c. d. e. f. g. h. i. j. k. l.

m. n. o. p. q. r. s. t. u.

Petty cash fund (including P7,500 unreplenished voucher of which P2,400 is dated January 3, 2007) P 15,000 Redemption Fund Account – PNB 500,000 Traveler’s check 100,000 Money order 10,000 Treasury bill, purchased December 1, 2006 (due on Feb. 1, 2007) 50,000 Time deposit due on March 31, 2007 50,000 180-day Treasury bill, due March 15, 2007 120,000 Note receivable in the possession of a collecting agency 20,000 PNB – Checking Account #211-009-091 325,900 Cash on hand, including customer postdated check of P15,000 23,000 Savings deposit, earmarked for acquisition of equipment 210,000 A check payable to San Ignacio Incorporated, dated January 5, 2007, that was included in the December 31 PNB Checking Account #211-009-091 50,000 Bond Sinking Fund (used to finance the maturing long-term obligation on March 31, 2007) 150,000 Overdraft in PNB Checking Account #211-099-085 ( 50,000) Check #801 in payment to Accounts Payable, dated Dec. 31, 2006 not mailed until January 5, 2007 20,000 Advances to Officers/Employees for Seminars (no liquidation is required) 80,000 Money market placement (due June 30, 2007) 600,000 Listed stock held as temporary investment 100,000 Check #789 in payment to Suppliers, dated January 5, 2007 and recorded December 31, 2006. 35,000 Customers’ certified checks 10,000 Pension Fund 150,000 TOTAL 2,568,900

Questions 1. The entry to correct/adjust item F is: a. Investment 50,000 Cash b. Other assets 50,000 Cash c. Short-term investment 50,000 Cash d. No adjustment 2. The entry to correct/adjust item L is: a. Accounts payable 50,000 Cash b. Cash 50,000 Other liabilities

50,000 50,000 50,000

50,000 50,000

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c. Cash Accounts payable d. No adjustment

50,000 50,000

3. The entry to correct/adjust item M is: a. Investment 150,000 Cash b. Other assets 150,000 Cash c. Short-tem investment 150,000 Cash d. No adjustment

150,000 150,000 150,000

4. DON CORPORATION’S cash and cash equivalents balance at December 31, 2006 is: a. Overstated by P1,950,100 c. Overstated by P 1,845,100 b. Overstated by P 1,895,100 d. Overstated by P 1,795,100 5. DON CORPORATION’S adjusted cash and cash equivalents balance at December 31, 2006 is: a. P 618,800 b. P 623,800 c. P 673,800 d. P 723,800 Solution a.

Operating expenses Cash b. Investment Cash c. No adjustment d. No adjustment e. No adjustment f. No adjustment g. Short-term investment Cash h. Notes receivable Cash i. No adjustment j. Accounts receivable Cash k. Cash – restricted Cash l. No adjustment m. Investment – current Cash n. No adjustment o. No adjustment p. Operating expenses Cash q. Short-term investment Cash r. Short-term investment Cash s. No adjustment t. No adjustment u. Investment Cash Answer: 1. D

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2. D

5,100 5,100 500,000 500,000

120,000 120,000 20,000 20,000 15,000 15,000 210,000 210,000 150,000 150,000

80,000 80,000 600,000 600,000 100,000 100,000

150,000 150,000

3. C

4. A

5. A

Problem 2 The following items are found in the cash account of Ivie Company at December 31, 2006. The company’s controller asks your opinion whether the items listed below should be considered as part of cash account and come up with adjusting entry to adjust the cash account. 1. 2.

Customers’ check dated December 25, 2006, P25,000. Company’s check (P30,000) dated December 26, 2006 which was drawn in payment for merchandise purchased on that date but not delivered until January 3, 2007. This check was deducted in the cash balance. 3. A check worth P196,000 from customer who paid the account net of the 2% discount. The company records the transaction as credit to Accounts Receivable for the proceeds. 4. Cash in closed bank (Urban Bank), P95,000. 5. Redemption fund, P100,000 6. Sinking fund, P100,000. This will be used on March 1, 2007 to redeem the bonds payable. 7. Metro Bank Checking Account No. 0004568, P210,000. 8. RCBC Checking Account No. 0002347, P115,000. 9. Overdraft in PNB Checking Account No. 00011256, P50,000. 10. Company’s check dated January 3, 2007 in payment of account, P50,000. This was recorded in the company’s disbursement ledger at December 31, 2006. 11. Overdraft in RCBC Checking Account No. 0056791, P15,000. 12. Postage stamps, P2,000. 13. 90-day Treasury Bills (purchase on November 1, 2006), P100,000 14. Treasury Bills that matures on February 1, 2007, P50,000. 15. Change fund, P10,000. 16. Customers’ certified check, P20,000. 17. Company’s certified check, P50,000. (This was included in the cash disbursement for December). Questions 1. The entry to correct/adjust item number 3 is: a. Accounts receivable 4,000 Sales discounts 4,000 b. Sales discounts 4,000 Accounts receivable 4,000 c. Accounts receivable 4,000 Sales 4,000 d. No adjustments 2. The entry to correct/adjust item number 10 is: a. Accounts payable 50,000 Cash 50,000 b. Other liabilities 50,000 Cash 50,000 c. Cash 50,000 Accounts payable 50,000 d. No adjustment 3. The entry to correct/adjust item number 17 is: a. Accounts payable 50,000

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Cash b. Cash Accounts receivable c. Cash Accounts payable d. No adjustments

50,000 50,000 50,000 50,000 50,000

4. The entry to correct/adjust item number 16 is: a. Accounts receivable 20,000 Cash 20,000 b. Cash 20,000 Accounts payable 20,000 c. Cash 20,000 Accounts receivable 20,000 d. No adjustments 5. IVIE COMPANY’S adjusted cash and cash equivalents balance at December 31, 2006 is: a. P 771,000 b. P 741,000 c. P 721,000s d. P 691,000 Solution Item Item Item Item Item Item Item Item Item Item Item Item Item Item Item Item Item

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Answer: 1. B

– – – – – – – –

Cash Cash Cash Other Assets Investment Investment – current Cash Cash Current liability Offset to cash Offset to Cash Unused supplies Cash as cash equivalents Short-term investment Cash Cash property recorded as disbursement

2. A

3. D

4. D

5. D

Problem 3 Your audit of the December 31, 2006, financial statements of Mato Corporation reveals the following: 1. 2. 3. 4. 5. 6.

Current account at PBCom Current account at PNB Treasury bills (acquired 3 months before maturity) Treasury bills (maturity date is 12/31/07) Payroll account Foreign bank account - restricted (translated using the 12/31/06 exchange rate) 7. Postage stamps 8. Employees’ checks marked “DAIF” 9. IOU from the vice-president 10. Credit memo from a supplier for a purchase returns

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P (35,000) 65,000 200,000 500,000 175,000 900,000 600 10,000 50,000 25,000

11. Traveler’s check 12. Money order 13. Company’s check dated 12/30/06 but not mailed at year-end 14. Petty cash fund (P4,000 in currency and expense receipts for (P6,000)

60,000 10,000 30,000 10,000

Questions 1. The entry to adjust the employees’ checks marked “DAIF” is: a. Accounts receivable 10,000 Cash 10,000 b. Cash 10,000 Accounts receivable 10,000 c. Employees’ advances 10,000 Cash 10,000 d. Cash 10,000 Employees’ advances 10,000 2. MATO CORPORATION’S adjusted cash and cash equivalents balance at December 31, 2006 is: a. P 560,000 c. P 514,000 d. P 509,000 b. P 544,000 Solution Current account at PNB Treasury bills acquired 3 mos. Before maturity Payroll account Traveler’s check Money order Company’s undelivered check Petty cash fund TOTAL Answer: 1. C

65,000 200,000 175,000 60,000 10,000 30,000 4,000 544,000

B. B

Problem 4 The controller of Pacatang Company is attempting to determine the amount of cash to be reported on its December 31, 2006 balance sheet. The following information is provided: a. b. c. d. e. f. g.

h.

Commercial savings account of P1,000,000 and a commercial checking account balance of P900,000 are held at Phil. Banking Corporation. Money market fund account held at Allied Bank, P600,000 Travel advance of P180,000 for executive travel for the first quarter of next year (employee to reimburse through salary reduction) A separate fund in the amount of P1,500,000 is restricted for the retirement of longterm debt. Petty cash fund, P5,000 An IOU from David Santos, a company officer, in the amount of P10,000. A bank overdraft of P110,000 has occurred at one of the banks the company uses to deposit its cash receipts. At the present time, the company has no other deposits at this bank. The company has two certificates of deposit, each totaling P500,000. These certificates of deposit have a maturity of 120 days.

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i.

Pacatang Company has received a check that is dated January 12, 2007 in the amount of P125,000. j. Currency and coins on hand amounted to P5,300. Questions 1. PACATANG COMPANY’S adjusted cash and cash equivalents balance at December 31, 2006 is: a. P 1,910,300 b. P 2,400,300 c. P 2,510,300 d. P 3,510,300

2. The travel advance of P180,000 for executive travel should be classified as: a. Accounts receivable c. Prepaid expenses b. Travel expenses d. Advances to employees

Solution Commercial savings account Commercial checking account Petty cash fund Currency and coin on hand Amount of cash to be reported on balance sheet at 12.31.03 (2) (3) (4) (6) (7)

Money market fund acct. Travel advance for executive travel (employee to reimburse through salary deduction) Bond Retirement Fund IOU from company officer Bank overdraft (the co. has no other deposits at this bank)

(8) (9)

Certificates of deposit (maturity of 120 days Postdated check January 12, 2004

Answer: 1. A

P1,000,000 900,000 5,000 5,300 P1,910,300 M/S or Temp. Investments Advances to Employees Long-term Investment Advance to officers Current Liabilities Marketable securities Receivable

2. D

Problem 5 Present journal entries to record the following transactions in the books of Marites Corporation, which uses a calendar year as accounting period. Assume that the company is using the imprest method in accounting for petty cash fund: a. A petty cash fund was set up on November 1, 2006 in the amount of P2,400. b. On November 29, 2006, a check was issued to replenish the fund, the composition of which was as follows: Currency – bills and coins 166 Vouchers showing expenditures for: Office supplies 270 Charges from purchased of supplies 124 Repairs and maintenance 350 Wages paid to casual employees 950 Charges from purchased of goods to be sold 400 c. On December 18, 2006, the fund was replenished and correspondingly increased to P3,000; its composition included the following: Currency – bills and coins 158 Vouchers showing expenditures for: Store supplies 304 Accounts payable 914

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Charges from purchased of goods to be sold Miscellaneous expenses

242 782

d. An examination on December 31, 2006, disclosed the following composition of the fund, although it was not replenished on this date: Currency – bills and coins 958 Check of office manager, dated January 5, 2007 1,000 Vouchers showing expenditures for: Office supplies 126 Miscellaneous expenses 90 Accounts payable 800 e. On January 5, 2007, the check of office manager was cashed and the proceeds were added to the petty cash fund. f.

On January 6, 2007, replenished disbursement from December 18, 2006 to January 5, 2007.

Questions 1. The entry to record the November 29 replenishment of petty cash fund is: a. Operating expenses 1,694 Freight-in 400 Cash short/over 140 Cash 2,234 b. Operating expenses 2,234 Petty cash fund 2,234 c. Operating expenses 1,694 Freight-in 400 Cash short/(over) 140 Petty cash fund 2,234 d. No entry since the company is using an impress fund system. 2. The adjusted Petty Cash Fund balance of MARITES CORPORATION at December 31, 2006 is: a. P 3,000 b. P 1,958 c. P 984 d. P 958 3. The entry to record the December 31, 2006 adjustment of petty cash fund is: a. Operating expenses 216 Accounts payable 800 Cash short/over 26 Petty cash fund 1,042 b. Operating expenses 216 Accounts payable 800 Cash short/over 26 Cash 1,042 c. Operating expenses 216 Accounts payable 800 Advances – employees 1,000 Cash short/(over) 26 Petty cash fund 2,042 d. No entry since there is no replenishment yet.

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4. The entry to record the January 6, 2004 replenishment of petty cash fund is: a. Operating expenses 216 Accounts payable 800 Cash short/over 26 Petty cash fund 1,042 b. Operating expenses 216 Accounts payable 800 Cash short/over 26 Cash 1,042 c. Operating expenses 216 Accounts payable 800 Advances – employees 1,000 Cash short/(over) 26 Cash 2,042 d. No entry since the account has been adjusted on December 31. Solution a. Petty cash fund Cash b. Operating expenses Freight-in Cash short/over Cash c. Operating expenses Accounts payable Freight-in Cash Petty cash fund Cash d. Operating expenses Advances to employees Accounts payable Cash short/over Petty cash fund Reversing entry – January 1 Petty cash fund Operating expenses Advances to employees Accounts payable Cash short/over e. f.

No entry Operating expenses Accounts payable Cash short/over Cash Answer: 1. A 2. D

2,400 2,400 1,694 400 140

TCAF Accountability Shortage

2,260 2,400

TCAF Accountability Shortage

2,400 2,400

TCAF Accountability Shortage

2,994 3,000

140

2,234 1,086 914 242

0

2,242 600 600 216 1,000 800 26

26

2,042

2,042 216 1,000 800 26

216 800 26 1,042 3. C

4. B

Problem 6 Your audit of the petty cash (P10,000) of Juliet Company as of December 31, 2006 revealed the following: (cash count date is January 3, 2007 at 5:00 pm) Bills: 10 - P500 bill 15 - P100 bill 18 - P50 15 - P20 5 - P10 Coins: P180 in P5 pieces; P42 in P1.00 pieces; P23 in P0.25 pieces. IOU’s submitted were:

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Dec. 18 Dec. 28 Dec. 30 Cashed checks: Dec. 28, 2006 Dec. 28, 2006 Dec. 30, 2006 Jan 1, 2007

Nap R. Ruel R. Sonny S. check check check check

P 750 125 500

drawn by drawn by drawn by drawn by

the manager an employee a customer an employee

P 1,125 500 350 1,250

The cashier informed you that owing to the lack of cash it was necessary for him to open certain payroll envelopes unclaimed by employees and use the cash found herein. They were as follows: Dec. 15, 2006 - Ed A. P 1,250 Dec. 30, 2006 - Andoy 1,750 Dec. 30, 2006 - Macky 650 Dec. 30, 2006 - Paz 1,000 The cashier also informed you that all cash sales receipts were passed through his fund and that cash sales tickets Nos. 2059 to 2061 under dates of Dec. 30, Jan. 3 and Jan. 4 for P350, 500 and P545, respectively, had not yet been turned over to the general cashier. The petty cash vouchers found in the petty cash box were as follows: Dec. 30, 2006Transportation P515 Dec. 30, 2006Token gifts to visitors 650 Dec. 30, 2006Freight for office supplies purchase 215 Jan. 1, 2007 Freight for mdse. purchased 125 Jan. 2, 2007 Freight for mdse. sold 575 Questions 1. JULIET COMPANY’S cash shortage at December 31, 2006 is: a. P 2,072.75 c. P 1,027.75 b. P 1,370.00

d. P 327.75

2. The adjusted petty cash balance of JULIET COMPANY at December 31, 2006 is: a. P 10,000 b. P 9,625 c. P 5,975 d. P 4,625 3. The entry to adjust the unclaimed payroll at December 31, 2006 is: c. Cash a. Petty Cash Fund Salaries expense Accrued salaries b. Salaries expense d. Accrued salaries Petty cash fund Cash 4. The cashed check dated January 1, 2007 a. Should be adjusted since it was dated January 1, 2007, hence a postdated check. b. Should be adjusted since it was received December 31, 2006 but the check is dated January 1, 2007, hence a postdated check. c. Should not be adjusted since the check is dated January 1, 2007. d. Should not be adjusted since the check was received December 31, 2007. 5. The Cash account (excluding PCF) of JULIET COMPANY is understated at December 31, 2006 by: a. P 4,650 c. P 6,045 d. P 6,370 b. P 4,900

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Solution Cash Count Bills Coins IOUs Checks Vouchers TCAF Accountability PCF per ledger Unclaimed payroll Undeposited sales Cash shortage

ANSWER: 1. B

7,750 245 1,375 3,225 2,080 14,675 (10,000) ( 4,650) ( 1,395) 1,370

2. D

3. C

Due to custodian Petty cash fund

1,370

Advances to employees Petty cash fund

1,375

1,370

1,375

Cash Sales

350 350

Advances to employees Petty cash fund

1,250

Cash Accrued salaries

4,650

Operating expenses Petty cash fund

1,380

4. B

1,250

4,650

1,380 5. B

Problem 7 You are making an audit of the Darwin Corporation for the past calendar year. The balance of the Petty Cash account at December 31, 2006 was P1,300. Your count of the imprest cash count made at 8:30 am on January 3, 2007, in the presence of the petty cash custodian, revealed: Currency and coins

571.38

Checks: Date 12/28/06 12/29/06 12/31/06 01/02/07 01/10/07

Maker Bank Macky, vice-president PNB 360.00 Andy, employee DBP 60.00 Bobot, customer RCBC 153.80 Neil, customer PNB 121.36 Jeff, employee PNB 60.00 (check received Dec. 29) (These checks were all considered good when deposited after dates shown on the checks. The first four checks were actually deposited Jan. 3; the last check was deposited Jan. 11; all five checks proved to be good.)

Vouchers: Dec. 11

Dec. 28 Dec. 29 Dec. 31 Jan. 2 IOU

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#261 Richard, shipping clerk – temporary advance for the use of the receiving department. Your count of Mr. Richard’s fund revealed: currency – P28.80; merchandise freight bills, P31.20. P 60.00 # 301 Postage 12.00 # 302 Freight bill on merchandise purchases 47.30 # 305 Freight bill on office supplies 88.93 # 500 Freight bill on merchandise purchases 29.36

Dec. 21

Mabel, employee

36.00

Sales Invoices (for cash sales, collections handled by the petty cashier): Invoice # 315 Dec. 30 P 120.00 328 Dec. 31 153.80 334 Jan. 2 121.36 (As a general rule, the petty cashier endeavored to turn over the proceeds of cash sales to the general cashier on the 10th, 20th and last days of each month. Proceeds on these sales were recorded and deposited by the general cashier.)

Postage Stamps: Three one-peso stamps. The petty cashier handled postage stamps. stamps represent the unused stamps purchased on Voucher # 301. Questions 1. The petty cash fund shortage at December 31, 2006 is: a. P 216.39 b. P 123.83 c. P 98.03

These

d. P 95.03

2. The adjusted petty cash fund balance of DARWIN CORPORATION at December 31, 2006 is: a. P 900.74 b. P 960.74 c. P 1,174.54d. P 1,234.54 3. DARWIN CORPORATION’S operating expenses found in the petty cash fund at December 31, 2006 is: a. P 208.23 b. P 205.75 c. P 174.03 d. P 97.93 4. The Cash account (excluding PCF) of DARWIN CORPORATION is understated at December 31, 2006 by: a. P 395.16 c. P 153.80 d. P 120.00 b. P 273.80

Solution Cash count Currency and coins Checks Vouchers IOU TCAF Accountability PCF per ledger Undeposited sales Cash shortage

571.38 755.16 237.59 36.00 1,600.13 (1,300.00) ( 395.16) 95.03

Due to custodian PCF Cash Sales (SI#328 & 315) Adv. to employee PCF Adv. to employee Operating expenses Freight-in PCF

95.03 95.03 273.80 273.80 60.00 60.00 60...