Notes for this semester: Accountancy PDF

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PROBLEM 1: An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? a. Select and examine cancel...

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PROBLEM 1: 1.

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? a. Select and examine canceled checks, and ascertain that the related receiving reports are dated no earlier than the checks. b. Select and examine canceled checks, and ascertain that the related receiving reports are dated no later than the checks. c. Select and examine receiving reports, and ascertain that the related canceled checks are dated no earlier than the receiving reports. d. Select and examine receiving reports, and ascertain that the related canceled checks are dated no later than the receiving reports.

2.

The accounts payable department receives the purchase order to accomplish all the following except a. Comparing the invoice price to the purchase order price. b.

Ensuring that the purchase had been properly authorized.

c.

Ensuring that the goods had been received by the party requesting them.

d.

Comparing the quantity ordered to the quantity purchased.

3.

For effective internal control, which of the following individuals should be responsible for mailing signed checks? a. Receptionist b. Treasurer c. Accounts payable clerk d. Payroll check

4.

If internal control is properly designed, the same employee should not be permitted to a. Sign checks and cancel supporting documents. b. Receive merchandise and prepare a receiving report. c. Prepare disbursement vouchers and sign checks. d. Initiate a request to order merchandise and approve merchandise ordered.

5.

In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition, and receiving report have been verified. The next step in the system is to a. Cancel the supporting documents. b. Enter the check amount in the check register. c. Approve the voucher for payment. d. Post the voucher amount to the expense ledger.

6.

A client erroneously recorded a large purchase twice. Which of the following internal accounting control measures would be most likely to detect this error in a timely and efficient manner? a. Footing the purchases journal. b. Reconciling vendors’ monthly statements with subsidiary payable ledger accounts. c. Tracing totals from the purchases journal to the ledger accounts. d. Sending written quarterly confirmations to all vendors.

7.

For effective internal control purposes, which of the following individuals should be responsible for mailing signed checks? a. Receptionist. b. Treasurer. c. Accounts payable clerk. d. Payroll clerk.

8.

You are auditing the December 31, 2018, accounts payable balance of one of your firm’s divisions. The division controller’s office has provided you with a schedule listing the

creditors and the amount owed to each at December 31, 2018. Which of the following audit procedures would be your best choice for determining that no individual account payable has been omitted from the schedule? a. Send confirmation requests to a randomly selected sample of creditors listed on the schedule. b. Send confirmation requests to creditors that are listed on the schedule but not listed on the corresponding December 31, 2017, schedule. c. Examine support for selected January 2019 payments to creditors, ascertaining that those relating to 2018 are not on the schedule. d. Examine support for selected January 2019 payments to creditors, ascertaining that those relating to 2018 are on this schedule. 9.

A company uses an automated accounts payable system to process its disbursements. An internal auditor wants to reconcile the accounts payable balance listed in the firm’s monthend trial balance report to the master accounts payable file, which is stored on magnetic tape. Which of the following application audit techniques would be most appropriate to this task? a. Use general-purpose audit software to recomputed the file balance. b. Review a listing of the accounts payable program source code. c. Develop and use accounts payable data. d. Prepare an analytic audit flowchart of the automated accounts payable system.

10. A preliminary survey of the purchasing function indicates the following: a. Department managers initiate purchase requests, which must be approved by the plant superintendent. b. Purchase orders are typed by the purchasing department by using the prenumbered and controlled forms. c. Buyers regularly update the official vendor listing as new sources of supply become known. d. Rush orders can be placed with a vendor by telephone but must be followed by a written purchase order before delivery can be accepted. e. Vendor invoice payment requests must be accompanied by a purchase order and a receiving report. One possible fault of this system is that a. Purchases can be made at prices higher than normal from a vendor controlled by a buyer. b. Unnecessary supplies can be purchased by department managers. c. Payment can be made for supplies not received. d. Payment can be made for supplies received but not ordered by the purchasing department. 11. The treasurer makes disbursements by check and reconciles the monthly banks statement to accounting records. Which of the following best describes the control impact of this arrangement? a. Internal control will be enhanced because these are duties a treasurer should perform. b. The treasurer will be in position to make and conceal unauthorized payments. c. The treasurer will be able to make unauthorized adjustments to the cash account. d. Controls will be enhanced because the treasurer will have two opportunities to discover inappropriate disbursements. 12. Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? a. Vouch a sample of accounts payable entries recorded just before year end to the unmatched receiving report file. b. Compare a sample of purchase orders issued just after year end with the year-end accounts payable trial balance. c. Vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices. d. Scan the cash disbursements entries recorded just before year end for indications

of unusual transactions. 13. For effective internal control, the accounts payable department generally should a. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed. b. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized employee. c. Obliterate the quantity ordered on the receiving department copy of the purchase order. d. Establish the agreement of the vendor’s invoice with the receiving report and purchase order. 14. In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also a. Review the monthly bank reconciliation. b. Returns the checks to accounts payable. c. Is denied access to the supporting documents. d. Is responsible for mailing the checks. 15. To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is a. Supported by a vendor’s invoice. b. Stamped “paid” by the check signer. c. Prenumbered and accounted for. d. Approved for authorized purchases. 16. Which of the following internal control activities is not usually performed in the vouchers payable department? a. Matching the vendor’s invoice with the related receiving report. b. Approving vouchers for payment by having an authorized employee sign the vouchers. c. Indicating the asset and expense accounts to be debited. d.

Accounting for unused prenumbered purchase orders and receiving reports.

17. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support? a. Completeness b. Existence or occurrence c. Valuation or allocation. d. Rights and obligations. 18. Under properly designed internal control, the same employee most likely would match vendors’ invoices with receiving reports and also a. Post the detailed accounts payable records. b. Recompute the calculations on vendors’ invoices. c. Reconcile the accounts payable ledger. d. Cancel vendors’ invoices after payment. 19. An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to a. Identify unusually large purchase that should be investigated further. b. Verify that cash disbursements were for goods actually received. c. Determine that purchases were properly recorded. d. Test whether payments were for goods actually ordered.

PROBLEM 2:

On December 31, 2018, the bookkeeper of Mermaid Company provided the following information: Accounts payable, (net of P20,000 debit balance in creditors’ account) P640,000; Note payable (including note payable to bank on December 31, 2020 of P1,000,000) P1,500,000; Salaries payable, P800,000; SSS Payable, P30,000; Pag-ibig Payable, P5,000; Medicare Payable, P15,000; Withholding tax payable, P60,000; Vat Payable, P120,000; Customers’ accounts with credit balances, P50,000; Stock dividends payable, P800,000; Serial bonds (payable in semiannual installments of P1,000,000) P10,000,000; Accrued interest on bonds payable, P300,000; Estimated warranty payable, 420,000; Estimated liability for environmental damages, P50,000; Unearned rent income, for 3 years starting January 1, 2019, P150,000; Cash advances from shareholders, P200,000. Requirements: 1. How much from the items presented above comprise the company’s current liabilities? 2.

How much from the items presented above comprise the company’s non-current liabilities?

PROBLEM 3: You are auditing the 2018 liabilities of Jojo Inc. which follows the calendar year financial statements reporting. The following information were available with regard its currently maturing obligations: a.

On December 31, 2018, Jojo had P1M of short-term notes payable due February 7, 2019. On January 15, 2019, the company issued bonds with a face value of P900,000 at 96; brokerage fees and other costs of issuance were P3,450. On January 22, 2019, the proceeds from the bond issue plus additional cash held by the company on December 31, 2018 were used to liquidate the P1M of short-term notes.

b.

Another short-term debt in the form of notes payable totaling to P500,000 were due on June 1, 2019. On February 2, 2019, Jojo entered an agreement with National Life Insurance Co. whereby National will lend Jojo P400,000 payable in 5 years at 14%, the proceeds of which is intended to be used to partly refinance the said notes The money will be available to the company on May 20, 2019.

c.

Another P500,000 notes payable is due on June 15, 2019. At the financial statement date December 31, 2018, Jojo signed an agreement to borrow up to P500,000 to refinance the notes payable on a long-term basis. The financing agreement called for borrowings not to exceed 80 per cent of the value of the collateral Jojo was providing. At the date of issue of the December 31, 2018 financial statements, the value of the collateral was P600,000 and was not expected to fall below this amount during 2019.

d.

Jojo Inc. also have a P1,000,000, 10%, outstanding 5-year bonds payable due December 31, 2022. Interest on the bonds is payable every December 31. By the end of 2018 however, due to shortage in working capital, Jojo Inc. was not able to pay the interest due December 31, 2018. As a result, the liability became demandable by the bond holder. On December 31, 2018 Jojo Inc. was able to obtain a waiver (grace period) from the bond holder up to March 31, 2019 since by then Jojo Inc. expects to have enough cash to settle the interest due. The bondholder will not be demanding the payment of the bond during the said grace period.

Assuming that the financial statements of Jojo were authorized to be issued on March 31, 2019: 1. How much liabilities above are short term as of the balance sheet date? 2. How much liabilities above are long term as of the balance sheet date?

PROBLEM 4: The accountant of Tarbuck Inc. provided you the following reconciliation of accounts payable control account and subsidiary ledger account in connection with your audit of its accounts payable account for the period ended December 31, 2018: Balance per control account (General ledger) Goods received on December 30, purchase invoice not yet received from supplier Purchase invoice on goods still in transit as of December 31, 2018. Term FOB destination. Payments to suppliers in which checks were released on December 30, 2018 Payments to suppliers in which checks were released on January 2, 2019 Purchase returns Credit balance on a suppliers’ account Balance per subsidiary ledgers

P4,450,000 (400,000) 300,000 (520,000) 200,000 (50,000) 40,000 P4,020,000

What is the correct balance of the accounts payable as of December 31, 2018?

PROBLEM 5: Ronnie Company sells 500 computers in 2018 for P100,000 each. Each one has a one-year warranty. It estimated that the warranty cost will be P8,000 for each computer. Moreover, the company estimates that 20% of the computers sold will never be given back to the company for repairs. In 2018 Ronnie Company actually incurred warranty cost of P1,250,000. The pertinent entries prepared by the accountant of Ronnie Company were: Debit: Accounts receivable Credit: Sales

50M

Debit: Warranty expense Credit: Cash

1.25M

50M;

1.25M

Requirements: 1.

Adjust the entries prepared in 2018.

2.

What is the Correct Warranty expense in 2018?

3.

What is the Adjusted Estimated liability for warranties at the end of 2018?

PROBLEM 6: JDI Video and Sound sells compact stereo systems with a two-year warranty. Past experience indicates that 10% of all sets sold will need repair in the first year, and 20% will need repairs in the second year. The average repair cost is P500 per system. The company was able to sell 5,000 units and 6,000 units in 2018 and 2019, respectively. Actual repair costs were P325,000 in 2018 and P650,000 in 2019. All repair costs involved cash expenditures and were all charged to warranties expense on the year of incurrence. No accrual for additional warranty liability were made by the company at year end.

Requirements: 1. Prepare adjustments in 2019. 2.

What is the correct Warranties expense to be reported in 2018?

3.

What is the correct Warranties expense to be reported in 2019?

4.

What is the correct Estimated warranties liabilities to be reported at the end of 2018?

5.

What is the correct Estimated warranties liabilities to be reported at the end of 2019?

PROBLEM 7: To increase sales, on January 1, 2018, Sierra Appliance Corp. inaugurated a two-year sales promotional plan. The sales promotional plan entitles customer to purchase certain premium items at a very minimal price plus presentation of certain amount of accumulated official receipts on purchases. The following table summarizes the sales promotional plan mechanics:

Premium item Vacuum cleaner Industrial stand fan

Number of Required Purchase price premium items accumulated of the purchased during official receipt premium the period amount to be Minimal items presented purchase price P15,000 P500 1,000 P2,250 12,500 300 1,500 1,500

Total cash sales during the period amounted to P45,000,000. The company estimates that 30% of the total receipts for the year will be presented by the customers to redeem vacuum cleaner premium while 40% of the total receipts will be presented to redeem industrial stand fan. The company’s count of the premium items remaining on hand on December 31, 2018 revealed that there were 175 vacuum cleaners and 125 industrial stand fan on hand. Requirements: 1.

How much is the correct premiums expense for the year ended December 31, 2018?

2.

How much is the liability for premiums at the end of the year?

PROBLEM 8: During 2018, Nokia Corp. sells 3-year service contracts covering its product. During the first year, P400,000 was received on contracts, and expenses incurred for parts and labor in connection with these contracts totaled P45,000. The company estimated from past experience that the pattern of repairs, based on the total peso spent for repairs, is 25% in the first year of the contract, 30% in the second year, and 45% in the third year. The sales of the contracts are made evenly during the year. The above transactions were booked by the accountant as: Debit: Cash Credit: Unearned revenue

400,000 100,000

Debit: Service contract expense

45,000

Credit:

Cash

45,000.

REQUIRED: 1. What is the correct unearned revenue as of December 31, 2018? 2.

What is the correct unearned revenue as of December 31, 2019?

3.

What is the correct unearned revenue as of December 31, 2020?

PROBLEM 9: San Mig Corp. began operation on January 2, 2017 with 250 employees. The company provides its employees 2 weeks paid sick leave and 2 weeks paid vacation leave for every operating year. The company’s policy on sick leave and vacation leave allows each employee to carry over accumulated leaves for the current period over the next year only. The same shall be forfeited if not availed of over the said period allowed. On December 31, 2017, records show that there are 55 employees who are yet to avail of any leaves, while there are 25 employees who have remaining 2 weeks unused vacation and sick leaves combined. Employees had an average daily wage rate of P250 for a 5-day weekly operation in 2017. On December 31, 2018, records show that 925 days vacation and sick leaves carried over from the last operating period were exercised and paid in 2018. In addition, there are 30 employees who have 6 weeks accumulated unused sick leaves and vacation leaves combined; 25 employees who have accumulated 3 weeks unused sick leaves and 2 weeks unused vacation leaves; 30 employees who have accumulated 3 weeks unused sick leaves and vacation leaves combined; 10 employees who have accumulated 1 week unused sick leaves and 1 week unused vacation leaves. Employees had an average daily wage rate of P275 for a 5-day weekly operation in 2018. You have observed that there has been no accrual made by the client to accrue salaries payable for the unused leaves at the end of 2017 and 2018. Requirements: 1. What is the retroactive adjustment to retained earnings, beg. as a result of your audit? 2.

How much liability for compensated absences should be included as current liabilities as of December 31, 2018?

PROBLEM 10: You have conducted several wrap-up audit procedures for Baro Corp.’s financial statements audit for the calendar year ended December 31, 2018. The financial statements were authorized for issue by Baro Corp.’s board on March 30, 2019. As part of these procedures you gathered corroborating evidences with regard the provisions and contingencies. Case 1: On December 31, the company is a defendant in a pending lawsuit which arose from an alleged product defect that the company sold in 2018. The lawyers, in response to a letter of audit inquiry, stated that it is probable that the company have to pay between P300,000 to P700,000, with P400,000 as the best estimate. Moreover, it is reasonably pos...