Name: _________________________________________ Date: ______________

AUDITING PROBLEMS
AUDIT OF RECEIVABLES MIDTERMS

Problem 1
On December 15 of the current year, Darwin, who owns Herald Corporation, asks you to investigate the
cash-handling activities in his firm. He thinks that an employee might be stealing funds. I have no proof
he say, but Im fairly certain that the November 30 undeposited receipts amounted to more than P6,000
although the November 30 bank reconciliation prepared by the cashier shows only P3,619.20. Also, the
November bank reconciliation doesnt show several checks that have been outstanding for a long time. The
cashier told me that these checks neednt appear on the reconciliation because he has notified the bank to
stop payment on them and he had made the necessary payment on the books.

At your request, Darwin showed you the following November 30 bank reconciliation prepared by the
cashier.
Bal. Per bank statement P 2,360.12 Bal. Per Books P 5,385.22
Deposit in transit 3,619.20 Bank Service charge ( 30.00)
Outstanding checks Unrecorded bank CM ( 600.00)
# 2351 550.10
2353 289.16
2354 484.84 ( 1,224.10) ________
Adjusted Balance P 4,755.22 Adjusted Balance P 4,755.22

You discover that the P600 unrecorded bank credit represents a note collected by the bank on Darwins
behalf. It appears in the deposits column of the November bank statement. Your investigation also reveals
that the October 31 bank reconciliation showed three checks that had been outstanding longer than 10
months: No. 1432 for P300, No. 1458 for P233.45, and No. 1512 for P126.55.

You also discover that these items were never added back into the cash account in the books. In confirming
that the checks shown on the cashiers November 30 bank reconciliation were outstanding on that date,
you discover that check No. 2353 was actually a payment of P829.16 and had been recorded on the books
for the amount.

To confirm the amount of undeposited receipts at November 30, you request a bank statement for
December 1-12 (called a cut-off bank statement). This indeed shows a December 1 deposit of P3,619.20.

Questions
1. The amount of fund stolen by the cashier is:
a. P 3,160 b. P 2,500 c. P 1,840 d. P 580

2. The total outstanding checks of HERALD CORPORATION at November 30 is:

a. P 2,524.10 b. P 1,884.10 c. P 1,864.10 d. P1,224.10

3. The adjusted cash balance of HERALD CORPORATION at November 30 is:

a. P 5,955.22 b. P 5,355.22 c. P 4,115.22 d. P 3,455.22
Problem 2
Juliet Company maintains a checking account at the Davao Bank. At July 31, selected data from the ledger
balance and the bank statement are as follows:
Cash in Bank
Per Books Per Bank
Balance, July 1 P 17,600 P 19,200
July Receipts 82,000
July Credits 80,070
July Disbursement 76,900
July Debits . 74,740
P 22,700 P 24,530

Analysis of the bank data reveals that the credits consist of P78,000 of July deposits and a credit
memorandum of P2,070 for collection of a P2,000 note plus interest revenue of P70. The July debits per
bank consist of checks cleared, P74,700 and a debit memorandum of P40 for printing additional company
checks.
You also discover the following errors involving July checks: (1) a check for P230 to a creditor on account
that cleared the bank in July was journalized and posted as P320, and (2) a salary check to an employee
for P255 was recorded by the bank for P155.

The June 30 bank reconciliation contained only two reconciling items: deposits in transit, P1,000 and
outstanding checks, P2,600.

Assume that the interest on the note has been accrued.

Questions
1. The deposit in transit of JULIET COMPANY at July 31 is
a. P 5,000 c. P 1,000
b. P 2,930 d. Cannot be determined

2. The outstanding check of JULIET COMPANY at July 31 is:

a. P 4,700 b. P 4,660 c. P 4,610 d. P 4,520

3. The adjusted cash ledger balance of JULIET COMPANY at July 31 is:

a. P 25,020 b. P 24,820 c. P 24,730 d. P 24,640

4. The adjusted cash bank balance of JULIET COMPANY at July 31 is:

a. P 25,020 b. P 24,820 c. P 24,730 d. P 24,640

5. The cash shortage is

a. P 200 b. P 90 c. P 180 d. 0

Problem 3
The following selected transactions occurred during the year ended December 31, 2006 of DOMINGO
COMPANY:

Gross sales (cash and credit) P 900,736.80

Collections from credit customers, net of 2% cash discount 294,000.00
 Cash sales 180,000.00
Uncollectible accounts written off 19,200.00
Credit memos issued to credit customers for sales ret./allow. 10,080.00
Cash refunds given to cash customers for sales ret./allow. 15,168.00
Recoveries on accounts receivable written-off in prior years
(not included in cash received stated above) 6,505.20

At year-end, the company provides for estimated bad debts losses by crediting the Allowance for Bad Debts
account for 2% of its net credit sales for the year. The allowance for bad debts at the beginning of the year
is P19,327.20. Beginning balance of accounts receivable amounts to P267,435.10.

Questions:
1. How much is the DOMINGO COMPANYs gross sales?
a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80

2. DOMINGO COMPANYs credit sales at December 31, 2006 is:

a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80

3. How much is the DOMINGO COMPANYs net credit sales?

a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80

4. The Bad Debts Expense of DOMINGO COMPANY at December 31, 2006 is:
a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14

5. The Accounts Receivable of DOMINGO COMPANY at December31, 2006 is:

a. P 675,477.10 b. P 674,971.90 c. P 668,971.90 d. P 658,891.90

6. The Allowance for Bad Debts of DOMINGO COMPANY at December 31, 2006 is:
a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14

Problem 4
During December 2006, the Accounts Receivable controlling account on the books of FERNANDEZ
COMPANY showed one debit posting and two credit postings. The debit represents receivables from
December sales, P780,000. One credit was for P470,400, made a result of cash collections on November
and December receivables; the second credit was an adjustment for estimated uncollectibles, P90,000. The
December 31 balance was P270,000.

When receivables were collected, the bookkeeper credited Accounts Receivables for the cash collected. All
customers who paid their accounts during December took advantage of the 2% cash discount.

As of December 1, debit balance in customers subsidiary accounts totaled P177,000. An adjustment for
estimated doubtful accounts of P18,000 had been posted to the Accounts Receivable controlling account
at the end of 2002, and no write-offs were recorded during 2006. In addition, a number of customers had
overpaid their accounts, and as a result, some of the customers subsidiary accounts had credit balances
on December 1. No overpayments were made during December nor were any credit balances in customers
accounts reduced during December.
Questions:
1. The Accounts Receivable beginning balance (unadjusted) of FERNANDEZ COMPANY at December 31,
2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

2. The Accounts Receivable beginning balance (adjusted) of FERNANDEZ COMPANY at December 31, 2006
is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

3. The Credit Balance of Accounts Receivable at the beginning of the year of FERNANDEZ COMPANY is:
a. P 48,600 b. P 66,600 c. P 108,600 d. P 126,600

4. The Accounts Receivable balance of FERNANDEZ COMPANY at December 31, 2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

Problem 5
KAREN COMPANYs accounts receivable subsidiary ledger shows the following information:

Account Balance Invoice

Customer Date
12/31/06 Amount
Penas P 70,360 12/06/06 P 28,000
11/29/06 42,360
Jefferson 41,840 09/27/06 24,000
08/20/06 17,840
Junsay 61,200 12/08/06 40,000
10/25/06 21,200
Cherryl 90,280 11/17/06 46,280
10/09/06 44,000
Baron 63,200 12/12/06 38,400
12/02/06 24,800
Riza 34,800 09/12/06 34,800

The estimated bad debt rates below are based on Karen Companys receivable collection experience.
Age of Accounts Rate
0 30 days 1%
31 60 days 1.5%
61 90 days 3%
91 120 days 10%
Over 120 days 50%

The allowance for bad debts account had a credit balance of P7,000 on December 31, 2006, before
adjustment.

Questions
1. The adjusted Accounts Receivable balance of KAREN COMPANY at December 31, 2006 is:
 a. P 317,680 b. P 319,320 c. P 326,880 d. P 361,680

2. The adjusted balance of Allowance for Bad Debts of KAREN COMPANY at December 31, 2006 is:
a. P 9,698.80 b. P 10,188.80 c. P 12,397.60 d. P 19,397.60

3. The adjusted balance of Bad Debts Expense of KAREN COMPANY at December 31, 2006 is:
a. P 9,698.80 b. P 10,188.80 c. P 12,397.60 d. P 19,397.60

4. The net realizable value of Accounts Receivable of KAREN COMPANY at December 31, 2006 is:
a. P 342,282.40 b. P 349,282.40 c. P 307,482.40 d. P 314,482.40

Problem 6
On September 1, DY COMPANY assigns specific receivables totaling P750,000 to Davao Bank as collateral
on a P625,000, 12% note. DY COMPANY will continue to collect the assigned accounts receivable. Davao
Bank also assesses a 2% service charge on the total accounts receivable assigned. DY COMPANY is to make
monthly payments to Davao Bank with cash collected on assigned accounts receivable. Collections of
assigned accounts during September totaled P260,000 less cash discounts of P3,500.

Questions
1. What were the proceeds from the assignment of DY COMPANYs accounts receivable on September 1?
a. P 610,000 b. P 612,500 c. P 625,000 d. P 735,000

2. What amount is owed to Davao Bank by DY COMPANY for September collections plus accrued interest
on the note to September 30?
a. P 260,000 b. P 262,750 c. P 264,000 d. P 266,250

3. On September 30, how much is the equity over assigned account?

a. P 125,000 b. P 121,500 c. P 131,250 d. P 136,500

Problem 7
On January 1, 2006, TUQUIB COMPANY sells its equipment with a carrying value of P160,000. The company
receives a non-interest-bearing note due in 3 years with a face amount of P200,000. There is no established
market value for the equipment. The prevailing interest rate for a note of this type is 12%. The following
are the present value factors of 1 at 12%:
Present value of 1 for 3 periods 0.71178
Present value of an ordinary annuity of 1 for 3 periods 2.40183

Questions
1. The gain or loss on the sale of equipment is:
a. P 40,000 b. P 122 c. P 0 d. (P 17,644)

2. The discount on notes receivable is:

a. P 57,644 b. P 40,000 c. P 39,878 d. P 0

3. The entry to record the sale of equipment is:

a. Notes receivable 200,000 c. Notes receivable 200,000
Equipment 200,000 Loss on sale 17,644
Equipment 160,000
 Discount on NR 57,644

b. Notes receivable 200,000 d. Notes receivable 200,000

Equipment 160, 000 Equipment 160,000
Gain on sale 40,000 Gain on sale 122
Discount on NR 39,878

4. The discount amortization at the end of the second year using the effective-interest amortization is:
a. P 17,083 b. P 19,133 c. P 21,428 d. P 36,216

5. The entry to record the discount amortization is:

a. (dr) Discount on NR c. (dr) Interest income
(cr) Interest income (cr) Discount on NR

b. (dr) Discount on NR d. (dr) Interest expense

(cr) Interest expense (cr) Discount on NR

Problem 8
The balance sheet of PERSEVERANCE CORPORATION on December 31, 2005, includes the following cash
and receivable balances:
Cash Davao Bank P 45,000
Currency and coins 16,000
Petty cash fund 1,000
Cash in bond sinking fund 15,000
Notes receivable (including discounted with recourse, P15,500) 36,500
Accounts receivable P 85,600
Less: Allow. for bad debts (4,150) 81,450
Interest receivable 525

Current liability reported in the December 31, 2005, balance sheet included:
Obligation on discounted notes receivable 15,500

Transactions during 2006 included the following:

1. Sales on account were P767,000.
2. Cash collected on accounts totaled P576,500, including accounts of P93,000 with cash discounts of
2%.
3. Notes received in settlement of accounts totaled P82,500.
4. Notes receivable discounted as of December 31, 2005, were paid at maturity with the exception of
one P3,000 note on which the company had to pay the bank P3,090, that included interest and
protest fees. It is expected that recovery will be made on this note early in 2004.
5. Customer notes of P60,000 were discounted with recourse during the year, proceeds from their
transfer being P58,500. Of this total, P48,000 matured during the year without notice of protest.
6. Customer accounts of P8,720 were written-off in prior year as worthless.
7. Recoveries of doubtful accounts written-off in prior years were P2,020. (not included in the
collection in number 2)
8. Notes receivable collected during the year totaled P27,000 and interest collected was P2,450.
9. On December 31, accrued interest on notes receivable was P630.
 10. Uncollectible accounts are estimated to be 5% of the December 31, 2006, accounts receivable
balance.
11. Cash of P35,000 was borrowed from Davao Bank, accounts receivable of P50,000 being pledged on
the loan. Collections of P19,500 had been made on these receivables included in the total given in
transaction (2) and this amount was applied on December 31, 2006, to payment of accrued interest
on the loan of P600, and the balance to partial payment of the loan.
12. Petty cash fund was reimbursed based on the following analysis of expenditure vouchers:
Travel expenses P 112
Entertainment expenses 78
Postage 93
Office supplies 173
Cash over 6
13. P3,000 cash was added to the bond sinking fund.
14. Currency on hand at December 31, 2006 was P12,000.
15. Total cash payment for all expenses during the year were P468,000. Charge to General Expense

Based on the information above and some other analysis, answer the following questions:

1. PERSEVERANCE CORPORATIONs Cash balance at December 31, 2006 is:

a. P 269,430 b. P 265,430 c. P 252,430 d. P 219,930

2. PERSEVERANCE CORPORATIONs Accounts Receivable balance at December 31, 2006 is:

a. P178,8787.00 b. P 178,824.50 c. P176,804.50 d. P174,254.50

3. PERSEVERANCE CORPORATIONs Other Cash Item (Currency and coins & Petty Cash Fund) at December
31, 2006 is:
a. P 16,000 b. P 13,000 c. P 12,550 d. P 12,000

4. PERSEVERANCE CORPORATIONs Notes Receivable at December 31, 2006 is:

a. P 46,500 b. P 31,000 c. P 30,910 d. P 28,500

5. PERSEVERANCE CORPORATIONs Obligation of Discounted of Note Receivable at December 31, 2006 is:
a. P 15,500 b. P 12,000 c. P 11,910 d. P 3,500

6. PERSEVERANCE CORPORATIONs Interest Receivable at December 31, 2006 is:

a. P 2,555 b. P 1,155 c. P 630 d. P 525

7. PERSEVERANCE CORPORATIONs Bad debts at December 31, 2006 is:

a. P 16,005.20 b. P 13,875.50 c. P 11,855.50 d. P 11,825.50

8. PERSEVERANCE CORPORATIONs Allowance for bad debts at December 31, 2006 is:
a. P 9,406.50 b. P 9,305.50 c. P 9,252.00 d. P 4,150.00

9. PERSEVERANCE CORPORATIONs net sales in 2006 is:

a. P 767,000 b. P 765,140 c. P 765,102 d. P 757,330

10. PERSEVERANCE CORPORATIONs Interest income balance at December 31, 2006 is:
a. P 3,086 b. P 3,080 c. P 2,561 d. P 2,555