1.

In connection with your audit of Caloocan Corporation for the year ended December 31, 2006, you
gathered the following:
1. Current account at Metrobank P2,000,000
2. Current account at BPI (100,000)
3. Payroll account 500,000
4. Foreign bank account – restricted (in equivalent pesos) 1,000,000
5. Postage stamps 1,000
6. Employee’s post dated check 4,000
7. IOU from controller’s sister 10,000
8. Credit memo from a vendor for a purchase return 20,000
9. Traveler’s check 50,000
10. Not-sufficient-funds check 15,000
11. Money order 30,000
12. Petty cash fund (P4,000 in currency and expense
receipts for P6,000) 10,000
13. Treasury bills, due 3/31/07 (purchased 12/31/06) 200,000
14. Treasury bills, due 1/31/07 (purchased 1/1/06) 300,000

Question:
Based on the above information and the result of your audit, compute for the cash and cash
equivalent that would be reported on the December 31, 2006 balance sheet.
a. P2,784,000 c. P2,790,000
b. P3,084,000 d. P2,704,000

Suggested Solution:

Current account at Metrobank P2,000,000

Payroll account 500,000
Traveler’s check 50,000
Money order 30,000
Petty cash fund (P4,000 in currency) 4,000
Treasury bills, due 3/31/07 (purchased 12/31/06) 200,000
Total P2,784,000

Answer: A
2. In the course of your audit of the Las Piñas Corporation, its controller is attempting to determine
the amount of cash to be reported on its December 31, 2006 balance sheet. The following
information is provided:

1. Commercial savings account of P1,200,000 and a commercial checking account balance of

P1,800,000 are held at PS Bank.
2. Travel advances of P360,000 for executive travel for the first quarter of the next year (employee
to reimburse through salary deduction).
3. A separate cash fund in the amount of P3,000,000 is restricted for the retirement of a long term
debt.
4. Petty cash fund of P10,000.
5. An I.O.U. from a company officer in the amount of P40,000.
6. A bank overdraft of P250,000 has occurred at one of the banks the company uses to deposit its
cash receipts. At the present time, the company has no deposits at this bank.
7. The company has two certificates of deposit, each totaling P1,000,000. These certificates of
deposit have maturity of 120 days.
8. Las Piñas has received a check dated January 2, 2007 in the amount of P150,000.
9. Las Piñas has agreed to maintain a cash balance of P200,000 at all times at PS Bank to ensure
future credit availability.
10. Currency and coin on hand amounted to P15,000.

Question:
Based on the above and the result of your audit, how much will be reported as cash and cash
equivalent at December 31, 2006?
a. P3,025,000 c. P2,575,000
b. P2,825,000 d. P5,025,000
Suggested Solution:

Savings account at PS Bank P1,200,000

Checking account at PS Bank 1,800,000
Petty cash fund 10,000
Currency and coin 15,000
Total P3,025,000

Answer: A

3. The cash account of the Makati Corporation as of December 31, 2006 consists of the following:

On deposit in current account with Real Bank P 900,000

Cash collection not yet deposited to the bank 350,000
A customer’s check returned by the bank for insufficient 150,000
fund
A check drawn by the Vice-President of the Corporation
dated January 15, 2007 70,000
A check drawn by a supplier dated December 28, 2006 for
goods returned by the Corporation 60,000
A check dated May 31,2006 drawn by the Corporation
against the Piggy Bank in payment of customs duties.
Since the importation did not materialize, the check was
returned by the customs broker. This check was an
outstanding check in the reconciliation of the Piggy
Bank account 410,000
Petty Cash fund of which P5,000 is in currency; P3,600 in
form of employees’ I.O.U. s; and P1,400 is supported by
approved petty cash vouchers for expenses all dated
prior to closing of the books on December 31, 2006 10,000
Total 1,950,000
Less: Overdraft with Piggy Bank secured by a Chattel
mortgage on the inventories 300,000
Balance per ledger P1,650,000

Question:
At what amount will the account “Cash” appear on the December 31, 2006 balance sheet?
a. P1,315,000 c. P1,495,000
b. P1,425,000 d. P1,725,000

Suggested Solution:
Current account with Real Bank P 900,000
Undeposited collection 350,000
Supplier's check for goods returned by the Corporation 60,000
Unexpended petty cash 5,000
Current account with Piggy Bank (P410,000 - P300,000) 110,000
Total P1,425,000
Answer: B

4. You noted the following composition of Malabon Company’s “cash account” as of December 31,
2006 in connection with your audit:
Demand deposit account P2,000,000
Time deposit – 30 days 1,000,000
NSF check of customer 40,000
Money market placement (due June 30, 2007) 1,500,000
Savings deposit in a closed bank 100,000
IOU from employee 20,000
Pension fund 3,000,000
Petty cash fund 10,000
Customer’s check dated January 1, 2007 50,000
Customer’s check outstanding for 18 months 40,000
Total P7,760,000
Additional information follows:
a) Check of P200,000 in payment of accounts payable was recorded on December 31, 2006 but
mailed to suppliers on January 5, 2007.
b) Check of P100,000 dated January 15, 2007 in payment of accounts payable was recorded and
mailed on December 31, 2006.
c) The company uses the calendar year. The cash receipts journal was held open until January
15, 2007, during which time P400,000 was collected and recorded on December 31, 2006.

Question:
The cash and cash equivalents to be shown on the December 31, 2006 balance sheet is
a. P3,310,000 c. P2,910,000
b. P1,910,000 d. P4,410,000

Suggested Solution:

Demand deposit account as adjusted:

Demand deposit account per books P2,000,000
Undelivered check 200,000
Postdated check issued 100,000
Window dressing of collection (400,000) P1,900,000
Time deposit - 30 days 1,000,000
Petty cash fund 10,000
Cash and cash equivalents P2,910,000
Answer: C

5-8. You were able to gather the following from the December 31, 2006 trial balance of Mandaluyong
Corporation in connection with your audit of the company:
Cash on hand P 500,000
Petty cash fund 10,000
BPI current account 1,000,000
Security Bank current account No. 01 1,080,000
Security Bank current account No. 02 (80,000)
PNB savings account 1,200,000
PNB time deposit 500,000

Cash on hand includes the following items:

a. Customer’s check for P40,000 returned by bank on December 26, 2006 due to insufficient
fund but subsequently redeposited and cleared by the bank on January 8, 2007.
b. Customer’s check for P20,000 dated January 2, 2007, received on December 29, 2006.
c. Postal money orders received from customers, P30,000.

The petty cash fund consisted of the following items as of December 31, 2006.
Currency and coins P 2,000
Employees’ vales 1,600
Currency in an envelope marked “collections for charity” with
names attached 1,200
Unreplenished petty cash vouchers 1,300
Check drawn by Mandaluyong Corporation, payable to the
petty cashier 4,000
P10,100

Included among the checks drawn by Mandaluyong Corporation against the BPI current account
and recorded in December 2006 are the following:
a. Check written and dated December 29, 2006 and delivered to payee on January 2, 2007,
P80,000.
b. Check written on December 27, 2006, dated January 2, 2007, delivered to payee on
December 29, 2006, P40,000.

The credit balance in the Security Bank current account No. 2 represents checks drawn in excess of
the deposit balance. These checks were still outstanding at December 31, 2006.

The savings account deposit in PNB has been set aside by the board of directors for acquisition of
new equipment. This account is expected to be disbursed in the next 3 months from the balance
sheet date.
Questions:
Based on the above and the result of your audit, determine the adjusted balances of following:
5. Cash on hand
a. P410,000 c. P470,000
b. P530,000 d. P440,000
6. Petty cash fund
a. P6,000 c. P2,000
b. P7,200 d. P4,900
7. BPI current account
a. P1,000,000 c. P1,080,000
b. P1,120,000 d. P1,040,000
8. Cash and cash equivalents
a. P2,917,200 c. P3,052,000
b. P3,074,900 d. P3,066,000

Suggested Solution:

Question No. 5

Unadjusted cash on hand P500,000

NSF check (40,000)
Post dated check received (20,000)
Adjusted cash on hand P440,000

Question No. 6

Petty cash fund per total P10,100

Employees' vales (IOU) (1,600)
Currency in envelope marked "collections for charity" (1,200)
Unreplenished petty cash vouchers (1,300)
Petty cash fund, as adjusted P 6,000

Alternative computation:

Currency and coins P 2,000

Replenishment check 4,000
Petty cash fund, as adjusted P 6,000

Question No. 7

Unadjusted BPI current account P1,000,000

Unreleased check 80,000
Post dated check delivered 40,000
Adjusted BPI current account P1,120,000

Question No. 8

Cash on hand (see no. 5) P 440,000

Petty cash fund (see no. 6) 6,000
BPI current account (see no. 7) 1,120,000
Security Bank current account (net of
overdraft of P80,000) 1,000,000
PNB time deposit 500,000
Cash and cash equivalents, as adjusted P3,066,000

Answers: 5) D; 6) A; 7) B; 8) D

9-10. The books of Manila's Service, Inc. disclosed a cash balance of P687,570 on December 31,
2006. The bank statement as of December 31 showed a balance of P547,800. Additional information
that might be useful in reconciling the two balances follows:
(a) Check number 748 for P30,000 was originally recorded on the books as P45,000.
(b) A customer's note dated September 25 was discounted on October 12. The note was dishonored
on December 29 (maturity date). The bank charged Manila's account for P142,650, including a
protest fee of P2,650.
(c) The deposit of December 24 was recorded on the books as P28,950, but it was actually a deposit
of P27,000.
(d) Outstanding checks totaled P98,850 as of December 31.
(e) There were bank service charges for December of P2,100 not yet recorded on the books.
(f) Manila's account had been charged on December 26 for a customer's NSF check for P12,960.
(g) Manila properly deposited P6,000 on December 3 that was not recorded by the bank.
(h) Receipts of December 31 for P134,250 were recorded by the bank on January 2.
(i) A bank memo stated that a customer's note for P45,000 and interest of P1,650 had been
collected on December 27, and the bank charged a P360 collection fee.
Questions:
Based on the above and the result of your audit, determine the following:
9. Adjusted cash in bank balance
a. P583,200 c. P589,200
b. P577,200 d. P512,400
10. Net adjustment to cash as of December 31, 2006
a. P104,370 c. P 98,370
b. P110,370 d. P175,170

Suggested Solution:

Question No. 9
Balance per bank statement, 12/31/06 P547,800
Add: Deposits in transit P134,250
Bank error-deposit not recorded 6,000 140,250
Total 688,050
Less: Outstanding checks 98,850
Adjusted bank balance, 12/31/06 P589,200

Balance per books, 12/31/06 P687,570

Add: Book error - Check No. 748 P15,000
Customer note collected by bank 46,290 61,290
Total 748,860
Less: Dishonored note 142,650
Book error-improperly recorded 1,950
deposit
NSF check 12,960
Bank service charges 2,100 159,660
Adjusted book balance, 12/31/06 P589,200

Question No. 10

Unadjusted balance per books, 12/31/06 P687,570

Adjusted book balance, 12/31/06 589,200
Net adjustment to cash – credit P 98,370

Answers: 9) C; 10) C

11-15. Shown below is the bank reconciliation for Marikina Company for November 2006:
Balance per bank, Nov. 30, 2006 P150,000
Add: Deposits in transit 24,000
Total 174,000
Less: Outstanding checks P28,000
Bank credit recorded in error 10,000 38,000
Cash balance per books, Nov. 30, 2006 P136,000
The bank statement for December 2006 contains the following data:
Total deposits P110,000
Total charges, including an NSF check of P8,000 and a
service charge of P400 96,000

All outstanding checks on November 30, 2006, including the bank credit, were cleared in the bank
1n December 2006.

There were outstanding checks of P30,000 and deposits in transit of P38,000 on December 31,
2006.

Questions:
Based on the above and the result of your audit, answer the following:
11. How much is the cash balance per bank on December 31, 2006?
a. P154,000 c. P164,000
b. P150,000 d. P172,400
12. How much is the December receipts per books?
a. P124,000 c. P110,000
b. P 96,000 d. P148,000

13. How much is the December disbursements per books?

a. P96,000 c. P89,600
b. P79,600 d. P98,000
14. How much is the cash balance per books on December 31, 2006?
a. P150,000 c. P180,400
b. P170,400 d. P162,000
15. The adjusted cash in bank balance as of December 31, 2006 is
a. P141,600 c. P172,000
b. P162,000 d. P196,000

Suggested Solution:
Question No. 11
Balance per bank, Nov. 30, 2006 P150,000
Add: Total deposits per bank statement 110,000
Total 260,000
Less: Total charges per bank statement 96,000
Balance per bank, Dec. 31, 2006 P164,000

Question No. 12
Total deposits per bank statement P110,000
Less deposits in transit, Nov. 30 24,000
Dec. receipts cleared through the bank 86,000
Add deposits in transit, Dec. 31 38,000
December receipts per books P124,000

Question No. 13
Total charges per bank statement P96,000
Less: Outstanding checks, Nov. 30 P28,000
Correction of erroneous bank credit 10,000
December NSF check 8,000
December bank service charge 400 46,400
Dec. disb. cleared through the bank 49,600
Add outstanding checks, Dec. 31 30,000
December disbursements per books P79,600

Question No. 14
Balance per books, Nov. 30, 2006 P136,000
Add December receipts per books 124,000
Total 260,000
Less December disbursements per books 79,600
Balance per books, Dec. 31, 2006 P180,400
Question No. 15
Balance per bank statement, 12/31/06 P164,000
Deposits in transit 38,000
Outstanding checks ( 30,000)
Adjusted bank balance, 12/31/06 P172,000

Balance per books, 12/31/06 P180,400

NSF check ( 8,000)
Bank service charges ( 400)
Adjusted book balance, 12/31/06 P172,000

Answers: 11) C; 12) A; 13) B; 14) C; 15) C

16-20. The accountant for the Muntinlupa Company assembled the following data:
June 30 July 31
Cash account balance P 15,822 P 39,745
Bank statement balance 107,082 137,817
Deposits in transit 8,201 12,880
Outstanding checks 27,718 30,112
Bank service charge 72 60
Customer's check deposited July 10, returned by 8,250
bank on July 16 marked NSF, and redeposited
immediately; no entry made on books for
return or redeposit
Collection by bank of company's notes receivable 71,815 80,900

The bank statements and the company's cash records show these totals:

Disbursements in July per bank statement P218,373

Cash receipts in July per Muntinlupa's books 236,452

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:
16. How much is the adjusted cash balance as of June 30?
a. P87,565 c. P107,082
b. (P3,695) d. P15,822
17. How much is the adjusted bank receipts for July?
a. P253,787 c. P245,537
b. P214,802 d. P232,881
18. How much is the adjusted book disbursements for July?
a. P220,767 c. P181,782
b. P212,517 d. P206,673
19. How much is the adjusted cash balance as of July 31?
a. P137,817 c. P22,513
b. P112,335 d. P120,585
20. How much is the cash shortage as of July 31?
a. P8,250 c. P196,144
b. P71,815 d. P0
Suggested Solution:
Muntinlupa Company
Reconciliation of Receipts, Disbursements, and Bank Balance
For the month ended July 31
Beginning Ending
June 30 Receipts Disb. July 31
Balance per bank
statement P107,082 P249,108a P218,373 P137,817
Deposits in transit:
June 30 8,201 (8,201)
July 31 12,880 12,880
Outstanding checks:
June 30 (27,718) (27,718)
July 31 30,112 (30,112)
NSF check
redeposited (8,250) (8,250)
Adjusted bank
balance P 87,565 P245,537 P212,517 P120,585

Balance per books P 15,822 P236,452 P212,529b P 39,745

Bank service charge:
June (72) (72)
July 60 (60)
Collection of notes
receivable:
June 71,815 (71,815)
July 80,900 80,900
Adjusted book
balance P 87,565 P245,537 P212,517 P120,585
a (P137,817 + P218,373 – P107,082)
b (P15,822 + 236,452 – P39,745)
Answers: 16) A; 17) C; 18) B; 19) D; 20) D

21- 25. In the audit of Pasig Company’s cash account, you obtained the following information:
The company’s bookkeeper prepared the following bank reconciliation as of November 30, 2006:
Bank balance – November 30, 2006 P90,800
Undeposited collections 5,000
Bank service charges 100
Bank collection of customer’s note (8,000)
Outstanding checks:
Number Amount
7159 P3,000
7767 5,000
7915 2,000 (10,000)
Book balance – November 30, 2006 P77,900
Additional data are given as follows:
a. Company recordings for December:
Total collections from customers P165,000
Total checks drawn 98,000
b. Bank statement totals for December :
Charges P123,800
Credits 169,000
c. Check no. 7159 dated November 25, 2006, was entered as P3,000 in payment of a voucher for
P30,000. Upon examination of the checks returned by the bank, the actual amount of the
check was P30,000.
d. Check no. 8113 dated December 20, 2006 was issued to replace a mutilated check (no.7767),
which was returned by the payee. Both checks were recorded in the amount drawn, P5,000, but
no entry was made to cancel check no. 7767.
e. The December bank statement included a check drawn by Sipag Company for P1,500.
f. Undeposited collections on December 31, 2006 - P8,000.
g. The service charge for December was P150 which was charged by the bank to another client.
h. The bank collected a note receivable of P7,000 on December 28, 2006, but the collection was not
received on time to be recorded by Pasig.
i. The outstanding checks on December 31, 2006, were:
Check No. Amount Check No. Amount
7767 P5,000 8910 P2,300
8856 1,300 8925 4,100
QUESTIONS:
Based on the above and the result of your audit, determine the following:
21. Unadjusted cash balance per books as of December 31, 2006
a. P152,800 c. P144,900
b. P152,750 d. P165,700
22. Adjusted cash balance as of November 30, 2006
a. P85,800 c. P63,800
b. P58,800 d. P90,800
23. Adjusted book receipts for December 2006
a. P170,500 c. P172,000
b. P182,000 d. P173,000
24. Adjusted bank disbursement for December 2006
a. P120,150 c. P125,150
b. P 76,150 d. P 98,150
25. Adjusted cash balance as of December 31, 2006
a. P132,650 c. P137,800
b. P137,650 d. P134,650

Suggested Solution:
Question No. 21
Unadjusted book balance, 11/30/06 P77,900
Add unadjusted book receipts:
Collection from customers P165,000
Note collected by bank in Nov.
presumed recorded in Dec. 8,000 173,000
Total 250,900
Less unadjusted book disbursements:
Checks drawn 98,000
BSC for Nov. presumed recorded in Dec. 100 98,100
Unadjusted book balance, 12/31/06 P152,800

Question Nos. 22- 25

Pasig Company
Proof of Cash
For the month ended December 31, 2006
Beginning Ending
Nov. 30 Receipts Disb. Dec. 31
Balance per bank
statement P90,800 P169,000 P123,800 P136,000a
Deposits in transit:
November 30 5,000 (5,000)
December 31 8,000 8,000
Outstanding checks:
November 30 (32,000) (32,000)
December 31 7,700 (7,700)
Bank errors – Dec.
Check of Sipag Co. (1,500) 1,500
BSC charged to
another client 150 (150)
Adjusted bank
balance P63,800 P172,000 P 98,150 P137,650

Balance per books P77,900 P173,000 P98,100 P152,800

Customer's note
collected by bank:
November 8,000 (8,000)
December 7,000 7,000

Bank service charge:

November (100) (100)
December 150 (150)
 Beginning Ending
Nov. 30 Receipts Disb. Dec. 31
Book errors:
Check no. 7159
(P30,000-P3,000) (27,000) (27,000)
Check no. 7767
(mutilated check) 5,000 5,000
Adjusted book
balance P63,800 P172,000 P 98,150 P137,650
a (P90,800 + P169,000 – P123,800)

Answers: 21) A; 22) C; 23) C; 24) D; 25) B

26-31 You obtained the following information on the current account of Parañaque 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 P306,000. Among the bank credits
in November was customer’s note for P100,000 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 P1,200 and a P40,000 check which was charged by the bank in error
against Parañaque Co. account. Also in November you ascertained that there were deposits in
transit amounting to P80,000 and outstanding checks totaling P170,000.

The bank statement for the month of December showed total credits of P416,000 and total charges
of P204,000. The company’s books for December showed total debits of P735,600, total credits of
P407,200 and a balance of P485,600. Bank debit memos for December were: No. 121 for service
charges, P1,600 and No. 122 on a customer’s returned check marked “Refer to Drawer” for P24,000.

On December 31, 2006 the company placed with the bank a customer’s promissory note with a face
value of P120,000 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 P3,960 was recorded in the company cash payments books in December as P39,600.

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:
26. How much is the undeposited collections as of December 31, 2006?
a. P339,600 c. P219,600
b. P179,600 d. P139,600
27. How much is the outstanding checks as of December 31, 2006?
a. P191,960 c. P361,960
b. P397,600 d. P363,160
28. How much is the adjusted cash balance as of November 30, 2006?
a. P216,000 c. P176,000
b. P256,000 d. P157,200
29. How much is the adjusted bank receipts for December?
a. P635,600 c. P475,600
b. P515,600 d. P435,600
30. How much is the adjusted book disbursements for December?
a. P395,960 c. P225,960
b. P431,600 d. P397,160
31. How much is the adjusted cash balance as of December 31, 2006?
a. P625,640 c. P220,000
b. P195,640 d. P375,640
Suggested Solution:

Question No. 26

Deposits in transit, 11/30/06 P80,000

Add collections in December:
December book receipts P735,600
Less receipts not representing
collections in December:
Customer’s note collected by
bank in Nov. recorded in Dec. P100,000
Uncollected customer's note
treated as receipts 120,000 220,000 515,600
Total 595,600

Less deposits credited by the bank in

December:
December bank receipts P416,000
Less receipts not representing
deposits:
Erroneous bank debit, Nov.;
corrected Dec. 40,000 376,000
Deposits in transit, 12/31/06 P219,600

Question No. 27

Outstanding checks, 11/30/06 P170,000

Add checks issued in December:
December book disbursements P407,200
Less disbursements not
representing checks issued in
December:
Bank service charge, Nov.;
recorded Dec. P1,200
Error in recording a check
(should be P3,960, recorded
as P39,600) 35,640 36,840 370,360
Total 540,360
Less checks paid by the bank in
December:
December bank disbursements P204,000
Less disbursements not
representing checks:
Bank service charge, Dec. P1,600
NSF check, Dec. 24,000 25,600 178,400
Outstanding checks, 12/31/06 P361,960

Question Nos. 28 to 31
Parañaque Company
Proof of Cash
For the month ended December 31, 2006
Beginning Ending
Nov. 30 Receipts Disb. Dec. 31
Balance per bank
statement P306,000 P416,000 P204,000 P518,000a
Deposits in transit:
November 30 80,000 (80,000)
December 31 219,600 219,600
Outstanding checks:
November 30 (170,000) (170,000)
December 31 361,960 (361,960)
Erroneous bank
debit-November 40,000 (40,000)
Adjusted bank
balance P256,000 P515,600 P395,960 P375,640
 Beginning Ending
Nov. 30 Receipts Disb. Dec. 31
Balance per books P157,200b P735,600 P407,200 P485,600
Customer's note
collected by bank –
November 100,000 (100,000)
Bank service charge:
November (1,200) (1,200)
December 1,600 (1,600)
NSF check –
December 24,000 (24,000)
Book errors -
December
Uncollected
customer's note
treated as
Receipts (120,000) (120,000)
Error in recording
a check (should
be P3,960,
recorded as
P39,600) (35,640) 35,640
Adjusted book
balance P256,000 P515,600 P395,960 P375,640
a (P306,000 + P416,000 – P204,000)
b (P485,600 + 407,200 – P735,600)

Answers: 26) C; 27) C; 28) B; 29) B; 30) A; 31) D

32-36 You were able to obtain the following information in connection with your audit of the Cash
account of the Pasay Company as of December 31, 2006:
November 30 December 31
a. Balances per bank P480,000 P420,000
b. Balances per books 504,000 539,000
c. Undeposited collections 244,000 300,000
d. Outstanding checks 150,000 120,000

e. The bank statement for the month of December showed total credits of P240,000 while the
debits per books totaled P735,000.

f. NSF checks are recorded as a reduction of cash receipts. NSF checks which are later
redeposited are then recorded as regular receipts. Data regarding NSF checks are as follows:
1. Returned by the bank in Nov. and recorded by the company in Dec., P10,000.
2. Returned by the bank in Dec. and recorded by the company in Dec., P25,000.
3. Returned by the bank in Dec. and recorded by the company in Jan., P29,000.

g. Check of Pasaway Company amounting to P90,000 was charged to the company’s account by
the bank in error on December 31.

h. A bank memo stated that the company’s account was credited for the net proceeds of Anito’s
note for P106,000.

i. The company has hypothecated its accounts receivable with the bank under an agreement
whereby the bank lends the company 80% of the hypothecated accounts receivable. The
company performs accounting and collection of the accounts. Adjustments of the loan are made
from daily sales reports and deposits.

j. The bank credits the company account and increases the amount of the loan for 80% of the
reported sales. The loan agreement states specifically that the sales report must be accepted by
the bank before the company is credited. Sales reports are forwarded by the company to the
bank on the first day following the date of sale. The bank allocates each deposit 80% to the
payment of the loan, and 20% to the company account. Thus, only 80% of each day’s sales and
20% of each collection deposits are entered on the bank statement. The company accountant
records the hypothecation of new accounts receivable (80% of sales) as a debit to Cash and a
credit to the bank loan as of the date of sales. One hundred percent of the collection on
accounts receivable is recorded as a cash receipt; 80% of the collection is recorded in the cash
disbursements books as a payment on the loan. In connection with the hypothecation, the
following facts were determined:
  Included in the undeposited collections is cash from the hypothecation of accounts
receivable. Sales were P180,000 on November 30, and P200,000 at December 31. The
balance was made up from collections which were entered on the books in the manner
indicated above.
 Collections on accounts receivable deposited in December, other than deposits in transit,
totaled P725,000.
k. Interest on the bank loan for the month of December charged by the bank but not recorded in
the books, amounted to P38,000.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
32. How much is the adjusted cash balance as of November 30,
2006?
a. P574,000 c. P430,000
b. P394,000 d. P350,000
33. How much is the adjusted book receipts for December,
2006?
a. P860,000 c. P876,000
b. P280,000 d. P296,000
34. How much is the adjusted book disbursements for December,
2006?
a. P180,000 c. P180,000
b. P905,000 d. P760,000
35. How much is the adjusted cash balance as of December 31,
2006?
a. P690,000 c. P440,000
b. P530,000 d. P490,000
36. How much is the cash shortage as of December 31,
2006?
a. P32,000 c. P8,000
b. P90,000 d. P0
Suggested Solution:
Pasay Company
Proof of Cash
For the month ended December 31, 2006
Beginning Ending
Nov. 30 Receipts Disb. Dec. 31
Balance per bank
statement P480,000 P240,000 P300,000a P420,000
Deposits in transit:
November 30 100,000c (100,000)
December 31 140,000d 140,000
Outstanding checks:
November 30 (150,000) (150,000)
December 31 120,000 (120,000)
Erroneous bank
debit-December (90,000) 90,000
Deposits with loan
payment
(P725,000 x 80%) 580,000 580,000
Adjusted bank
balance P430,000 P860,000 P760,000 P530,000

Balance per books P504,000 P735,000 P700,000b P539,000

NSF checks:
Returned in Nov.,
recorded in Dec. (10,000) 10,000
Returned and
recorded in Dec. 25,000 25,000
Returned in Dec.,
recorded in Jan. 29,000 (29,000)
Customer's note
collected by bank –
December 106,000 106,000
 Anticipated loan
proceeds from AR
hypothecation:
Nov. 30 sales
(P180,000 x 80%) (144,000) 144,000
Dec. 31 sales
(160,000) (160,000)
(P200,000 x 80%)
Anticipated loan
payment from
undeposited
collections:
Nov. 30
(P100,000 x 80%) 80,000 80,000
Dec. 31
(P140,000 x 80%) (112,000) 112,000
Interest charge for
bank loan in Dec. 38,000 (38,000)
Adjusted book
balance P430,000 P860,000 P760,000 P530,000

a (P480,000 + P240,000 – P420,000)

b (P504,000 + 735,000 – P539,000)
c [P244,000 – (P180,000 x 80%)]
d [P300,000 – (P200,000 x 80%)]

Answers: 32) C; 33) A; 34) D; 35) B; 36) D

37-41 In connection with your audit, Quezon Metals Company presented to you the following
information:
Quezon Metals Company
Comparative Balance Sheets
December 31, 2006 and 2005
2006 2005
Assets
Current Assets:
Cash P 476,000 P 392,000
Available for sale securities 236,000 -
Accounts Receivable 1,248,000 1,016,000
Inventory 1,112,000 956,000
Prepaid expenses 140,000 84,000
Total Current Assets 3,212,000 2,448,000
Property, plant, and equipment 2,144,000 1,636,000
Accumulated depreciation (304,000) (212,000)
1,840,000 1,424,000
Total Assets P5,052,000 P3,872,000
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable P 848,000 P 792,000
Accrued expenses 392,000 304,000
Dividends Payable 160,000 -
Total Current Liabilities 1,400,000 1,096,000
Notes Payable - due 2008 500,000 -
Total Liabilities 1,900,000 1,096,000
Stockholders' Equity:
Common Stock 2,400,000 2,200,000
Retained earnings 752,000 576,000
Total Stockholders' Equity 3,152,000 2,776,000
Total Liabilities and Stockholders' Equity P5,052,000 P3,872,000

Quezon Metals Company

Condensed Comparative Income Statements
For the Years Ended December 31, 2006 and 2005
2006 2005
Net sales P14,244,000 P13,016,000
Cost of Goods Sold 11,156,000 10,272,000
Gross Profit 3,088,000 2,744,000
Expenses 2,084,000 1,944,000
Net Income P 1,004,000 P 800,000

Additional information for Quezon:

(a) All accounts receivable and accounts payable relate to trade merchandise.
(b) The proceeds from the notes payable were used to finance plant expansion.
(c) Capital stock was sold to provide additional working capital.

QUESTIONS:
Based on the above and the result of your audit, compute the following for 2006:
37. Cash collected from accounts receivable, assuming all sales are on account.
a. P14,012,000 c. P14,476,000
b. P 796,000 d. P16,508,000
38. Cash payments made on accounts payable to suppliers, assuming that all purchases of
inventory are on account.
a. P11,368,000 c. P10,944,000
b. P11,212,000 d. P11,256,000
39. Cash payments for dividends.
a. P 828,000 c. P 668,000
b. P1,020,000 d. P1,180,000
40. Cash receipts that were not provided by operations.
a. P192,000 c. P700,000
b. P500,000 d. P 0
41. Cash payments for assets that were not reflected in operations.
a. P1,412,000 c. P 508,000
b. P 744,000 d. P1,176,000
Suggested Solution:
Question No. 37
Accounts receivable, 1/1/06 P 1,016,000
Add sales for 2006 14,244,000
Total collectible accounts 15,260,000
Less accounts receivable, 12/31/06 1,248,000
Cash collected from accounts receivable P14,012,000

Question No. 38
Accounts payable, 1/1/06 P 792,000
Add purchases for 2006:
Cost of goods sold for 2006 P11,156,000
Add Inventory, 12/31/06 1,112,000
Total goods available for sale 12,268,000
Less Inventory, 1/1/06 956,000 11,312,000
Total accounts to be paid 12,104,000
Less accounts payable, 12/31/06 848,000
Cash payments made on AP P11,256,000
Question No. 39
Retained earnings, 1/1/06 P 576,000
Add net income for 2006 1,004,000
Total 1,580,000
Less retained earnings, 12/31/06 752,000
Total dividends declared 828,000
Less increase in dividends payable 160,000
Cash payments for dividends P 668,000
Question No. 40
Proceeds from notes payable P500,000
Proceeds from issuance of common stock
(P2,400,000 - P2,200,000) 200,000
Cash receipts not provided by operations
(cash provided from financing) P700,000
Question No. 41
Purchase of available for sale securities P236,000
Purchase of PPE (P2,144,000 - P1,636,000) 508,000
Cash payments for assets that were not reflected
in operations P744,000

Answers: 37) A; 38) D; 39) C; 40) C; 41) B

42-46 The Valenzuela Corporation was organized on January 15, 2006 and started operation soon
thereafter. The Company cashier who acted also as the bookkeeper had kept the accounting
records very haphazardly. The manager suspects him of defalcation and engaged you to audit his
account to find out the extent of the fraud, if there is any.
On November 15, when you started the examination of the accounts, you find the cash on hand to
be P25,700. From inquiry at the bank, it was ascertained that the balance of the Company’s bank
deposit in current account on the same date was P131,640. Verification revealed that the check
issued for P9,260 is not yet paid by the bank. The corporation sells at 40% above cost.
Your examination of the available records disclosed the following information:
Capital stock issued at par for cash P1,600,000
Real state purchased and paid in full 1,000,000
Mortgage liability secured by real state 400,000
Furniture and fixtures (gross) bought on which there
is still balance unpaid of P30,000 145,000
Outstanding notes due to bank 160,000
Total amount owed to creditors on open account 231,420
Total sales 1,615,040
Total amount still due from customers 426,900
Inventory of merchandise on November 15 at cost 469,600
Expenses paid excluding purchases 303,780
QUESTIONS:
Based on the above and the result of your audit, compute for the following as of November 15, 2006:
42. Collections from sales
a. P1,188,140 c. P1,615,040
b. P1,153,600 d. P2,041,940
43. Payments for purchases
a. P1,854,620 c. P1,207,204
b. P1,391,780 d. P 922,180
44. Total cash disbursements
a. P2,340,960 c. P2,810,560
b. P3,273,400 d. P2,625,984
45. Unadjusted cash balance
a. P 74,740 c. P1,007,180
b. P722,156 d. P 537,580
46. Cash shortage
a. P574,076 c. P859,100
b. P389,500 d. P 0
Suggested Solution:
Question No. 42
Sales P1,615,040
Less accounts receivable, 11/15 426,900
Collections from sales P1,188,140
Question No. 43
Cost of sales (P1,615,040/1.4) P1,153,600
Add Merchandise inventory, 11/15 469,600
Purchases 1,623,200
Less Accounts payable, 11/15 231,420
Payments for purchases P1,391,780
Question No. 44
Purchase of real estate P1,000,000
Payment for furniture and fixtures
(P145,000 - P30,000) 115,000
Expenses paid 303,780
Payments for purchases (see no. 2) 1,391,780
Total cash disbursements P2,810,560
Question No. 45
Proceeds from issuance of common stock P1,600,000
Proceeds from mortgage note payable 400,000
Proceeds from notes payable - bank 160,000
 Collections from sales (see no. 1) 1,188,140
Total cash receipts 3,348,140
Less cash disbursements (see no. 3) 2,810,560
Unadjusted cash balance P 537,580
Question No. 46
Cash accountability P537,580
Less cash accounted (Adjusted cash
balance):
Unadjusted bank balance P131,640
Deposit in transit 25,700
Outstanding checks (9,260) 148,080
Cash shortage P389,500

Answers: 42) A; 43) B; 44) C; 45) D; 46) B

47-50 You were engaged to audit the accounts of Taguig Corporation for the year ended December
31, 2006. In your examination, you determined that the Cash account represents both cash on
hand and cash in bank. You further noted that the company’s internal control over cash is very
poor.
You started the audit on January 15, 2007. Based on your cash count on this date, cash on hand
amounted to P19,200. Examination of the cash book and other evidence of transactions disclosed
the following:
a. January collections per duplicate receipts, P75,200.
b. Total duplicate deposit slips, all dated January, P44,000. This amount includes a deposit
representing collections on December 31.
c. Cash book balance at December 31, 2006 amounted to P186,000, representing both cash on
hand and cash in bank.
d. Bank statement for December showed a balance of P170,400.
e. Outstanding checks at December 31:
November checks December checks
No. 280 P1,800 No. 331 P2,400
290 6,600 339 1,600
345 20,000
353 3,600
364 10,000
f. Undeposited collections at December 31, 2006 amounted to P20,000.
g. An amount of P4,400 representing proceeds of a clean draft on a customer was credited by
bank, but is not yet taken up in the company’s books.
h. Bank service charges for December, P400.
The company cashier presented to you the following reconciliation statement for December, 2006,
which he has prepared:
Balance per books, December 31, 2006 P180,600
Add outstanding checks:
No. 331 P2,400
339 1,600
345 2,000
353 3,600
364 1,000 10,600
Total 191,200
Bank service charge (400)
Undeposited collections (20,400)
Balance per bank, December 31, 2006 P170,400
QUESTIONS:
Based on the above and the result of your audit, answer the following:
47. How much is the adjusted cash balance as of December 31, 2006?
a. P152,800 c. P180,200
b. P144,400 d. P 0
48. How much is the cash shortage as of December 31, 2006?
a. P45,600 c. P37,200
b. P 4,400 d. P41,200
 49. How much is the cash shortage for the period January 1 to 15,
2007? a. P30,800 c. P31,200
b. P32,400 d. P32,000
50. Which of the following is not a method used by the cashier to cover-up the shortage as
of December 31, 2006?
a. Understating outstanding checks by P27,000.
b. Not recording the bank collection of P4,400.
c. Understating the book balance by P5,400.
d. Overstatement of undeposited collections by P400.
Suggested Solution:
Questions No. 47 and 48
Bank Books
Unadjusted balances P170,400 P186,000
Add (deduct) adjustments:
Outstanding checks: (46,000)
Undeposited collections 20,000
Unrecorded bank collection 4,400
Bank service charge (400)
Balances 144,400 190,000
Shortage (45,600)
Adjusted balances P144,400 P144,400

Question No. 49
Collections per records P75,200
Add undeposited collections, Dec. 31 20,000
Total cash that should be deposited in January 95,200
Less January deposits 44,000
Undeposited collections, Jan. 15 51,200
Less undeposited collections per cash count 19,200
Shortage, Jan. 1 to 15, 2007 P32,000

Question No. 50
Cover-up for the December 31, 2006 shortage:
Non-recording of bank collection P 4,400
Understatement of book balance
(P186,000 - P180,600) 5,400
Understatement of outstanding checks
(P46,000 - P10,600) 35,400
Overstatement of undeposited collections
(P20,400 - P20,000) 400
Total shortage, December 31, 2006 P45,600

Answers: 47) B; 48) A; 49) D; 50) A

51-53. Your audit disclosed that on December 31, 2006, the accounts receivable control account of
Alilem Company had a balance of P2,865,000. An analysis of the accounts receivable account
showed the following:
Accounts known to be worthless P 37,500
Advance payments to creditors on purchase orders 150,000
Advances to affiliated companies 375,000
Customers’ accounts reporting credit balances arising from sales return
(225,000)
Interest receivable on bonds 150,000
Other trade accounts receivable – unassigned 750,000
Subscriptions receivable for common stock due in 30 days 825,000
Trade accounts receivable - assigned (Finance company’s equity in assigned
accounts is P150,000) 375,000
Trade installment receivable due 1 – 18 months, including unearned finance
charges of P30,000 330,000
Trade receivables from officers due currently 22,500
Trade accounts on which post-dated checks are held (no entries were made on
receipts of checks) 75,000
P2,865,000

Questions:

Based on the above and the result of your audit, determine the adjusted balance of following:
51. The trade accounts receivable as of December 31, 2006 is
a. P1,147,500 c. P1,485,000
b. P1,522,500 d. P1,447,500

52. The current trade and other receivables net as of December 31, 2006 is
a. P2,647,500 c. P2,272,500
b. P2,610,000 d. P1,822,500

53. How much of the foregoing will be presented under noncurrent assets as of December 31, 2006?
a. P1,200,000 c. P525,000
b. P 375,000 d. P 0

Suggested Solution:

Question No. 51
Other trade accounts receivable – unassigned P 750,000
Trade accounts receivable – assigned 375,000
Trade installment receivable due 1 – 18 months, net of unearned finance
charges of P30,000 300,000
Trade receivables from officers due currently 22,500
Trade accounts on which post-dated checks are held 75,000
Trade accounts receivable P1,522,500

Question No. 52
Trade accounts receivable (see no. 51) P1,522,500
Advance payments to creditors on purchase orders 150,000
Interest receivable on bonds 150,000
Subscriptions receivable, due in 30 days 825,000
Current trade and other receivables P2,647,500

Question No.53
Advances to affiliated companies P375,000

Note: Advances to affiliated companies are normally presented under noncurrent assets.

Answers: 51) B; 52) A; 53) B

54-56 Your audit of Banayoyo Corporation for the year ended December 31, 2006 revealed that the
Accounts Receivable account consists of the following:
Trade accounts receivable (current) P3,440,000
Past due trade accounts 640,000
Uncollectible accounts 128,000
Credit balances in customers’ accounts (80,000)
Notes receivable dishonored 240,000
Consignment shipments – at cost
The consignee sold goods costing P96,000 for P160,000. A 10%
commission was charged by the consignee and remitted the balance to
Banayoyo. The cash was received in January, 2007. 320,000
Total P4,688,000

The balance of the allowance for doubtful accounts before audit adjustment is a credit of P80,000.
It is estimated that an allowance should be maintained to equal 5% of trade receivables, net of
amount due from the consignee who is bonded. The company has not provided yet for the 2006 bad
debt expense.

Questions:
Based on the above and the result of your audit, determine the adjusted balance of following:
54. Trade accounts receivable
a. P4,080,000 c. P4,464,000
b. P3,440,000 d. P3,584,000
55. Allowance for doubtful accounts
a. P204,000 c. P172,000
b. P216,000 d. P179,200
56. Doubtful accounts expense
a. P264,000 c. P252,000
b. P220,000 d. P227,200

Suggested Solution:

Question No. 54
Trade receivables (current) P3,440,000
Past due trade accounts 640,000
Notes receivable dishonored 240,000
Consignment goods already sold (P160,000 x 90%) 144,000
Adjusted trade receivables P4,464,000

Question No. 55
Adjusted trade receivables P4,464,000
Less due from consignee 144,000
Basis of allowance for doubtful accounts 4,320,000
Bad debt rate 5%
Required allowance for doubtful accounts P 216,000

Question No. 56
Required allowance for doubtful accounts P216,000
Add write-off of uncollectible accounts 128,000
Total 344,000
Less allowance account before adjustment 80,000
Doubtful accounts expense P264,000
Answers: 54) C; 55) B; 56) A

Presented below are a series of unrelated situations. Answer the following questions relating to each
of the independent situations as requested.
57. Bantay Company’s unadjusted trial balance at December 31, 2006, included the following
accounts:
Debit Credit
Accounts receivable P1,00,000
Allowance for doubtful accounts 40,000
Sales P15,000,000
Sales returns and allowances 7 700,000
 Bantay Company estimates its bad debt expense to be 1 1/2% of net sales. Determine its bad
debt expense for 2006.
a. P225,000 c. P214,500
b. P254,500 d. P 55,000

58. An analysis and aging of Burgos Corp. accounts receivable at December 31, 2006, disclosed the
following:
Amounts estimated to be uncollectible P 1,800,000
Accounts receivable 17,500,000
Allowance for doubtful accounts (per books) 1,250,000
What is the net realizable value of Burgos’ receivables at December 31, 2006?
a. P15,700,000 c. P16,250,000
b. P17,500,000 d. P14,450,000

59. Cabugao Company provides for doubtful accounts based 3% of credit sales. The following data
are available for 2006.
Credit sales during 2006 P21,000,000
Allowance for doubtful accounts 1/1/06 170,000
Collection of accounts written off in prior years (Customer credit was
reestablished) 80,000
Customer accounts written off as uncollectible during 2006 300,000

What is the balance in allowance for doubtful accounts at December 31, 2006?
a. P630,000 c. P500,000
b. P420,000 d. P580,000

60. At the end of its first year of operations, December 31, 2006, Caoayan, Inc. reported the
following information:
Accounts receivable, net of allowance for doubtful accounts P9,500,000
Customer accounts written off as uncollectible during 2006 240,000
Bad debts expense for 2006 840,000

What should be the balance in accounts receivable at December 31, 2006, before subtracting
the allowance for doubtful accounts?
a. P10,100,000 c. P 9,740,000
b. P10,340,000 d. P10,580,000

61. The following accounts were taken from Cervantes Inc.’s balance sheet at December 31, 2006.
Debit Credit
Accounts receivable P4,10 0,000
Allowance for doubtful accounts 100,000
Net credit sales P7,500,000

If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be
reported for 2006.
a. P123,000 c. P223,000
b. P 23,000 d. P225,000

Suggested Solution:

Question No. 57
Sales P15,000,000
Less sales returns and allowances 700,000
Net sales 14,300,000
Multiply by bad debt rate 1 1/2%
Bad debt expense P 214,500
Question No. 58
Accounts receivable P17,500,000
Amount estimated to be uncollectible (1,800,000)
Net realizable value P15,700,000
Question No. 59
Allowance for doubtful accounts 1/1/06 P170,000
Establishment of accounts written off in prior years 80,000
Customer accounts written off in 2006 (300,000)
Bad debt expense for 2006 (P21,000,000 X 3%) 630,000
Allowance for doubtful accounts 12/31/06 P580,000
Question No. 60

Bad debt expense for 2006 P840,000

Customer accounts written off as uncollectible
during 2006 (240,000)
Allowance for doubtful accounts, 12/31/06 P600,000

Accounts receivable, net of allowance for doubtful

accounts P 9,500,000
Allowance for doubtful accounts, 12/31/06 600,000
Accounts receivable, before deducting allowance for
doubtful accounts P10,100,000
Question No. 61
Accounts receivable P4,100,000
Percentage 3%
Bad debt expense, before adjustment 123,000
Allowance for doubtful accounts (debit balance) 100,000
Bad debt expense for 2006 P 223,000

Answers: 57) C; 58) A; 59) D; 60) A, 61) C

62-65. The adjusted trial balance of Galimuyod Company as of December 31, 2005 shows the
following:
Debit Credit
Accounts receivable P100,000
Allowance for bad debts P40,000

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 P6,000 will be taken on accounts receivable outstanding at
December 31, 2006.
 Sales returns in 2006 amounted to P400,000. All returns were from charge sales.
 During 2006, accounts totaling to P44,000 were written off as uncollectible; bad debt recoveries
during the year amounted to P3,000.
 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, answer the following:
62. The accounts receivable as of December 31, 2006 is
a. P3,000,000 c. P 333,333
b. P 300,000 d. P2,444,000
63. The allowance for doubtful accounts as of December 31, 2006 is
a. P 20,000 c. P180,000
b. P120,000 d. P146,640
64. The net realizable value of accounts receivable as of December 31, 2006 is
a. P 307,340 c. P2,874,000
b. P2,814,000 d. P2,291,360
65. The doubtful account expense for the year 2006 is
a. P181,000 c. P 21,000
b. P121,000 d. P147,640

Suggested Solution:

Question No. 62
Expected cash discounts P 6,000
Divide by percentage of cash discount 0.02
Portion of AR that will be granted cash discounts 300,000
Divide by percentage of total AR estimated to take
advantage of the discount 0.10
Accounts receivable, 12/31/06 P3,000,000
Qu estion No. 63
Accounts receivable, 12/31/06 P3,000,000
Multiply by bad debt rate
[(P40,000/P1,000,000) x 1.5] 0.06
Allowance for doubtful accounts, 12/31/06 P 180,000

Question No. 64
Accounts receivable, 12/31/06 P3,000,000
Less: Allowance for doubtful accounts P180,000
Allowance for sales discounts 6,000 186,000
Net realizable value, 12/31/06 P2,814,000

Question No. 65
Allow. for doubtful accounts, 12/31/06 P180,000
Add accounts written off 44,000
Total 224,000
Less: Allow. for doubtful accounts, 12/31/05 P40,000
Bad debt recoveries 3,000 43,000
Doubtful accounts expense for 2006 P181,000

Answers: 62) A; 63) C; 64) B;65) A

66-68 In your audit of Lidlidda Plastic Products Co., you noted that the company’s balance sheet
shows the accounts receivable balance at December 31, 2005 as follows:
Accounts receivable P3,600,000
Allowance for doubtful accounts 72,000
P3,528,000

During 2006, transactions relating to the accounts were as follows:

 Sales on account, P38,400,000.
 Cash received from collection of current receivable totaled P31,360,000, after discount of
P640,000 were allowed for prompt payment.
 Customers’ accounts of P160,000 were ascertained to be worthless and were written off.
 Bad accounts previously written off prior to 2005 amounting to P40,000 were recovered.
 The company decided to provide P184,000 for doubtful accounts by journal entry at the end of
the year.
 Accounts receivable of P5,600,000 have been pledged to a local bank on a loan of P3,200,000.
Collections of P1,200,000 were made on these receivables (not included in the collections
previously given) and applied as partial payment to the loan.

Questions:
Based on the above and the result of your audit, answer the following:
66. The accounts receivable as of December 31, 2006 is
a. P8,680,000 c. P4,240,000
b. P9,840,000 d. P8,640,000
67. The allowance for doubtful accounts as of December 31, 2006 is
a. P 8,000 c. P184,000
b. P136,000 d. P176,000
68. The net realizable value of accounts receivable as of December 31, 2006 is
a. P8,544,000 c. P8,504,000
b. P8,456,000 d. P4,104,000
Suggested Solution:

Question No. 66
Accounts receivable, 12/31/05 P 3,600,000
Add: Sales on account 38,400,000
Bad debt recoveries 40,000
Total 42,040,000
Less: Current receivables collected,
before cash discounts
(P31,360,000 + P640,000) P32,000,000
Accounts written off 160,000
Bad debt recoveries 40,000
Collections made on AR pledged
as collateral 1,200,000 33,400,000
Accounts receivable, 12/31/06 P 8,640,000

Question No. 67
Allowance for doubtful accounts, 12/31/05 P 72,000
Add: Bad debt recoveries 40,000
Provision for doubtful accounts 184,000
Total 296,000
Less: Accounts written off 160,000
Allowance for doubtful accounts, 12/31/06 P136,000

Question No. 68
Accounts receivable, 12/31/06 P8,640,000
Less allowance for doubtful accounts, 12/31/06 136,000
Net realizable value, 12/31/06 P8,504,000

Answers: 66) D; 67) B; 68) C;

69-71 You were able to obtain the following information from your audit of Magsingal Corporation’s
Accounts Receivable and Allowance for Doubtful Accounts:

 From the general ledger you noted that the Accounts Receivable has a balance of P848,000 as of
December 31, 2006. Below is a transcript of the Allowance for Doubtful Accounts:
Debit Credit Balance
January 1 – Balance P20,000
July 31 – Write-off P16,000 4,000
December 31- Provision P48,000 P52,000

 The summary of the subsidiary ledger as of December 31, 2006 was totaled as follows:
Debit balances:
Under one month P360,000
One to six months 368,000
Over six months 152,000
P880,000

Credit balances:
Alien P 8,000 - OK; additional billing in January, 2006
T. Twister 14,000 - Should have been credited to Apol*
Dee Lah 18,000 - Advances on sales contract
P40,000
*Account is one to six months classification

The customers’ ledger is not in agreement with the accounts receivable control. The client
requested you to adjust the control account to the subsidiary ledger after corrections are made.

 It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six
months are expected to require a reserve of 2 percent. Accounts over six months are analyzed
as follows:
 Definitely bad P 48,000
Doubtful (estimated to be 50% collectible) 24,000
Apparently good, but slow (estimated to be 90% collectible) 80,000
Total P152,000

QUESTIONS:

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

69. How much is the adjusted balance of Accounts Receivable as of December 31, 2006?
a. P818,000 c. P832,000
b. P846,000 d. P826,000

70. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31,
2006?
a. P30,680 c. P30,960
b. P31,240 d. P30,760

71. How much the Doubtful Accounts expense for the year 2006?
a. P74,680 c. P74,960
b. P75,240 d. P74,760

Suggested Solution:

Question No. 69
SL
GL Debit Credit 0 to 1 1 to 6 Over 6
Unadjusted balances 848,000 880,000 40,000 360,000 368,000 152,000
Add (deduct):
Accounts w/ credit
Balances 26,000 (14,000) (40,000) (14,000)
Definitely uncollectible
accounts
(48,000) (48,000) (48,000)
Unlocated difference (8,000)
Adjusted balances 818,000 818,000 0 360,000 354,000 104,000

Question No. 70
Account Adjusted Required
classification balance Rate Allowance
0 to 1 month P360,000 1% P 3,600
1 to 6 months 354,000 2% 7,080
Over 6 months 104,000 P24,000 – 50% 12,000
P80,000 – 10% 8,000
P30,680

Question No. 71
Doubtful account expense, per books P48,000
Add adjustment to allowance:
Required allowance P30,680
Less balance before required
allowance (P52,000 – P48,000) 4,000 26,680
Doubtful Accounts expense for 2006 P74,680

Answers: 69) A; 70) A; 71) A

72-76 In connection with your examination of the financial statements of Nagbukel, Inc. for the year
ended December 31, 2006, you were able to obtain certain information during your audit of the
accounts receivable and related accounts.

The December 31, 2006 balance in the Accounts Receivable control accounts is P788,000.

The only entries in the Doubtful Accounts Expense account were:

 A credit for P1,296 on December 2, 2006 because Company A remitted in full for the
accounts charged off on October 31, 2006; and
 A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts.

The Allowance for Doubtful Accounts schedule is follows:

 Debit Credit Balance
January 1, 2006 P14,632
October 31, 2006
Uncollectible accounts:
Company A – P1,296
Company B – P3,280
Company C – P2,256 P6,032 8,600
December 31, 2006 P39,400 P48,000

An aging schedule of the accounts receivable as of December 31, 2006 is presented below:
Amount to which the Allowance is
Net debit to be adjusted after adjustments
Age balance and corrections have been made
0 to 1 month P372,960 1 percent
1 to 3 months 307,280 2 percent
3 to 6 months 88,720 3 percent
Over 6 months 24,000 Definitely uncollectible, P4,000;
P8,000 is considered 50%
uncollectible; the remainder is
estimated to be 80% collectible.

There is a credit balance in one account receivable (0 to 1 month) of P8,000; it represents an

advance on a sales contract. Also, there is a credit balance in one of the 1 to 3 months account
receivable of P2,000 for which merchandise will be accepted by the customer.

The ledger accounts have not been closed as of December 31, 2006. The Accounts Receivable
control account is not in agreement with the subsidiary ledger. The difference cannot be located,
and you decided to adjust the control account to the sum of the subsidiaries after corrections are
made.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
72. How much is the adjusted balance of Accounts Receivable as of December 31, 2006?
a. P794,000 c. P798,960
b. P793,200 d. P802,960
73. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31,
2006?
a. P63,552 c. P18,937
b. P23,057 d. P19,057
74. How much is the net adjustment to the Allowance for Doubtful Accounts?
a. P24,493 debit c. P28,943 debit
b. P15,552 credit d. P29,063 debit
75. How much is the Doubtful Accounts expense for the year 2006?
a. P13,961 b. P18,411 c. P58,456 d. P13,841
76. How much is the net adjustment to the Doubtful Accounts expense account?
c. P20,352 debit c. P24,143 credit
d. P24,263 credit d. P19,693 credit

Suggested Solution:

Question No. 72
GL SL 0 to 1 1 to 3 3 to 6 Over 6
Unadjusted balances 788,000 792,960 372,960 307,280 88,720 24,000
Add (deduct):
Understatement of
accounts written off
(P6,832-P6,032) (800)
Definitely uncollectible
Accounts (4,000) (4,000) (4,000)
Advances from
customers 8,000 8,000 8,000
Accounts w/ credit
balances 2,000 2,000 2,000
Unlocated difference 5,760
Adjusted balances 798,960 798,960 380,960 309,280 88,720 20,000
Que stion No. 73
Account Adjusted Required
classification balance Rate Allowance
0 to 1 month P380,960 1% P 3,809.60
1 to 3 months 309,280 2% 6,185.60
3 to 6 months 88,720 3% 2,661.60
Over 6 months 20,000 P8,000 – 50% 4,000.00
P12,000 – 20% 2,400.00
P19,056.80

Question No. 74
Balance per books P48,000
Add (deduct) adjustments:
AJE No. 1 P1,296
AJE No. 2 ( 800)
AJE No. 3 (4,000)
AJE No. 4 (25,439) (28,943)
Required allowance (See No. 73) P19,057

Adjusting entries affecting Allowance for Doubtful Accounts and Doubtful Accounts Expense
1) Doubtful account expense P1,296
Allowance for doubtful accounts P1,296
To correct entry made in recording recovery of account written off
2) Allowance for doubtful accounts P800
Accounts receivable P 800
To correct understatement of accounts written off
3) Allowance for doubtful accounts P4,000
Accounts receivable P4,000
To write off definitely uncollectible accounts
4) Allowance for doubtful accounts P25,439
Doubtful account expense P25,439
To adjust allowance to required balance

Questions No. 75 & 76

Balance per books (P39,400-P1,296) P38,104
Add (deduct) adjustments:
AJE No. 1 P1,296
AJE No. 4 (25,439) (24,143) (5)
Doubtful accounts expense per audit P13,961 (4)

Answers: 72) C; 73) D; 74) C; 75) A, 76) C

77-81 During your examination of the 2006 financial statements of the Narvacan 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 2002 2003 2004 2005 2006
Charge Sales P2,400,000 P6,000,000 P7,200,000 P7,800,000 P6,600,000
Accounts
Written off
& Year of
Sale
2002 13,200
2003 36,000 24,000
2004 12,000 96,000 31,200
2005 28,800 108,000 36,000
2006 64,800 120,000 33,600
Recoveries &
Year of
Sale
2002
2003 2,400
 Year of Sale 2002 2003 2004 2005 2006
2004 9,600
2005 12,000
2006 14,400

Accounts receivable at December 31, 2006 were as follows:

From 2005 sales P 360,000
From 2006 sales 3,240,000
Total P3,600,000

QUESTIONS:
Based on the above and the result of your audit, you are to provide the answers to the following:
77. The average percentage of net doubtful accounts to charge sales that should be used in setting
up the 2006 allowance is
a. 2.50% c. 2.05%
b. 1.90% d. 1.77%
78. How much is the doubtful accounts expense for 2006?
a. P131,400 c. P165,000
b. P218,400 d. P175,200
79. The doubtful accounts expense for 2006 is over(under) stated by
a. P223,800 c. (P131,400)
b. P 53,400 d. (P165,000)
80. The net realizable value of accounts receivable as of December 31, 2006 balance sheet is
a. P3,415,200 c. P3,326,400
b. P3,474,600 d. P3,240,000
81. The adjusting journal entry necessary to set up the allowance for doubtful accounts as of
December 31, 2006 will include a debit to Retained Earnings of
a. P223,800 c. P165,000
b. P184,800 d. P 0

Suggested Solution:

Question No. 77
Net AR
Year Charge sales AR written-off Recoveries written-off
2002 P 2,400,000 P 61,200 P 2,400 P 58,800
2003 6,000,000 148,800 9,600 139,200
2004 7,200,000 204,000 12,000 192,000
P15,600,000 P414,000 P24,000 P390,000

Net AR written off P 390,000

Divide by charge sales P15,600,000
Percentage 2.50%

Question No. 78
Doubtful accounts expense for 2006 (P6,600,000 x P2.50%) P165,000

Question No. 79
Recorded doubtful accounts expense
(P64,800 + P120,000 + P33,600) P214,800
Should be doubtful accounts expense for 2006 165,000
Overstatement of doubtful accounts expense P 53,400

Question No. 80
Accounts receivable, 12/31/06 P3,600,000
Required allowance for doubtful accounts
(see computation below) 184,800
Net realizable value, 12/31/06 P3,415,200

(A) (B) (C) (D)

(A) x 2.5% AR (B)-(C)+(D)
Year Charge sales D/A expense written-off Recoveries Allowance
2005 P 7,800,000 P195,000 P156,000 P14,400 P 53,400
2006 6,600,000 165,000 33,600 - 131,400
P14,400,000 P360,000 P189,600 P14,400 P184,800
Question No. 81
Adjusting journal entry necessary to set up the allowance for doubtful accounts as of December
31, 2006:
Bad debt recovery P 14,400
Retained earnings (see below) 223,800
Doubtful account expense P53,400
Allowance for doubtful accounts 184,800

2002 2003 2004 2005 Total

D/A exp P 13,200 P 60,000 P139,200 P172,800 P 385,200
provided
Less recoveries - 2,400 9,600 12,000 24,000
Net 13,200 57,600 129,600 160,800 361,200
Should be D/A
exp (Sales x
2.5%) 60,000 150,000 180,000 195,000 585,000
Over (Under) (P46,800) (P92,400) (P50,400) (P34,200) (P223,800)

Answers: 77) A; 78) C; 79) B; 80) A, 81) A

82-85 Unless otherwise identified, the notes receivable of the Quirino Company on December 31,
2006, were trade notes receivable. On this date the balance of the account, P3,036,915, consisted of
the following notes all received during the calendar year under audit:

Maker Date Term Rate Amount Remarks

A Co. Oct. 1 6 mos. 18% P 57,416 Four notes to settle
Oct. 1 12 mos. 18% 100,000 past due account.
Oct. 1 18 mos. 18% 100,000 Current billings are
Oct. 1 24 mos. 18% 100,000 on a 10 – day credit
basis.
B Co. July 1 36 mos. 18% 500,000 This note is for a
cash loan made to
this customer. No
interest has been
collected to date.
C Co. Oct. 1 4 mos. 15% 251,636 All interest collected
on Oct. 1.
Mr. Pogi Feb. 1 Demand 18% 1,000,000 Loan approved in
(Company minutes book, Jan.
President) 20. On Aug. 1 this
note was pledged as
collateral for a bank
loan P500,000.
D Co. Nov. 1 12 mos. 15% 546,387 Interest payable at
maturity
E, Inc. Dec. 90 days 18% Interest payable at
10 381,476 maturity
P3,036,915

All of the above notes are considered good except that of A Company which is somewhat doubtful.
An allowance of 25% should be established against the notes receivable of this company.

QUESTIONS:
Based on the above and the result of your audit, compute the following:
82. Adjusted balance of Trade Notes Receivable as of December 31, 2006
a. P1,179,499 c. P2,036,915
b. P 927,863 d. P1,536,915
83. Net realizable value of Trade Notes Receivable as of December 31, 2006
a. P1,447,561 c. P1,090,145
b. P1,947,561 d. P 838,509
84. Interest income for the year ended December 31, 2006
a. P243,749 c. P208,185
b. P253,185 d. P 43,185
85. Accrued interest income as of December 31, 2006
a. P253,185 c. P243,749
b. P 78,749 d. P198,749
Suggested Solution:

Question No. 82
Unadjusted Trade Notes Receivable P3,036,915
Less Non-Trade Notes Receivable:
B Company (Cash Loan) P 500,000
Mr. Pogi (Loan to officer) 1,000,000 1,500,000
Adjusted Trade Notes Receivable P1,536,915

Question No. 83
Adjusted Trade Notes Receivable P1,536,915
Less allowance for doubtful accounts
(P357,416 x 25%) 89,354
Net realizable value P1,447,561

Questions No. 84 & 85

Interest
Maker Date Amount Rate Income AIR
A Co. Oct. 1 P 57,416 18% P 2,584 P 2,584
Oct. 1 100,000 18% 4,500 4,500
Oct. 1 100,000 18% 4,500 4,500
Oct. 1 100,000 18% 4,500 4,500
B Co. Jul. 1 500,000 18% 45,000 45,000
C Co. Oct. 1 251,636 15% 9,436 -
Mr. Pogi Feb. 1 1,000,000 18% 165,000 165,000
D Co. Nov. 1 546,387 15% 13,660 13,660
E, Inc. Dec. 10 381,476 18% 4,005 4,005
) P253,185 P243,749

Answers: 82) D; 83) A; 84) B; 85) C

86-89 In connection with your audit of the Salcedo Corporation, you noted that the company’s Notes
Receivable consists of the following:
a. A 4-month note dated November 30, 2006, from AA Company, P200,000; interest rate, 16%;
discounted on November 30, 2006 at 16%.
b. A draft drawn payable 30 days after for P900,000 by the BB Company on the Charlie Company
in favor of the Delta Company, endorsed to Salcedo Corp. on December 2, 2006 and accepted on
December 4, 2006.
c. A 90-day note dated November 1, 2006 from E. Dy, P500,000; interest at 16%; the note is for
subscription to 5,000 shares of the preferred stock of Salcedo Corp. at P100 per share.
d. A 60-day note dated May 3, 2006, from CC Company, P600,000; interest rate, 16%; dishonored
at maturity; judgment obtained on October 10, 2006. Collection within the next twelve months
is doubtful.
e. A 90-day note dated January 4, 2006, from Apol Bobads, president of Salcedo, P160,000; no
interest; note not renewed; president confirmed.
f. A 120-day note dated September 14, 2006, from DD Company, P120,000; interest rate, 16%;
note is held by bank as collateral.

QUESTIONS:
Based on the above and the result of your audit, you are to provide the answers to the following:
86. The adjusted balance of Notes Receivable as of December 31, 2006 is
a. P2,480,000 c. P1,020,000
b. P1,220,000 d. P 900,000
87. How much of foregoing notes receivable will be reported in the current assets section of the
balance sheet?
a. P1,220,000 c. P1,680,000
b. P2,480,000 d. P1,520,000
88. How much is the net interest income from the foregoing notes receivable for 2006?
a. P19,093 c. P166,613
b. P70,613 d. P 35,093
89. The adjusted balance of Interest Receivable as of December 31, 2006 is
a. P19,093 c. P70,613
b. P 5,760 d. P 0
Suggested Solution:

Question No. 86
AA Company P 200,000
BB Company 900,000
DD Company 120,000
Adjusted balance of Notes Receivable P1,220,000
Notes:
1) AA Company will still be included in the balance of “Notes Receivable” since “Notes
Receivable-Discounted” account will be credited upon discounting. If the question is Notes
Receivable that will be reported in the balance sheet, the Notes Receivable – Discounted will be
excluded from the total Notes Receivable with disclosure of contingent liability.
2) E. Dy note was excluded since that will be reclassified to Subscriptions Receivable.
3) CC Company note was excluded because the note was dishonored. It will be reclassified to
Accounts Receivable, including the accrued interest.
4) Apol Bobads note was excluded due to the fact that it will be reclassified to Advances to
Officers.
5) The fact that DD Company note is held by bank as collateral should be disclosed but the note
will still be included in the Notes Receivable.

Question No. 87
Notes receivable – trade (excluding note discounted
amounting to P200,000) P1,020,000
Subscriptions receivable 500,000
Advances to officers 160,000
Amount that will be reported in the current assets
section of the balance sheet P1,680,000

Questions No. 88 & 89

Interest
Maker Date Amount Rate Income AIR
E. Dy Nov. 1 P500,000 16% P 13,333 P 13,333
CC Com. May 3 600,000 16% 16,000 -
DD Co. Sep. 14 120,000 16% 5,760 5,760
) P35,093 P19,093

Answers: 86) B; 87) C; 88) D; 89) A

90-93 The balance sheet of Santiago Corporation reported the following long-term receivables as of
December 31, 2005:
Note receivable from sale of plant P9,000,000
Note receivable from officer 2,400,000

In connection with your audit, you were able to gather the following transactions during 2006 and
other information pertaining to the company’s long-term receivables:
a. The note receivable from sale of plant bears interest at 12% per annum. The note is payable in
3 annual installments of P3,000,000 plus interest on the unpaid balance every April 1. The
initial principal and interest payment was made on April 1, 2006.
b. The note receivable from officer is dated December 31, 2005, earns interest at 10% per annum,
and is due on December 31, 2008. The 2006 interest was received on December 31, 2006.
c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2006, in exchange for an
P1,200,000 non-interest bearing note due on April 1, 2008. The note had no ready market, and
there was no established exchange price for the equipment. The prevailing interest rate for a
note of this type at April 1, 2006, was 12%. The present value factor of 1 for two periods at
12% is 0.797 while the present value factor of ordinary annuity of 1 for two periods at 12% is
1.690.
d. A tract of land was sold by the corporation to No Co. on July 1, 2006, for P6,000,000 under an
installment sale contract. No Co. signed a 4-year 11% note for P4,200,000 on July 1, 2006, in
addition to the down payment of P1,800,000. The equal annual payments of principal and
interest on the note will be P1,353,750 payable on July 1, 2007, 2008, 2009,and 2010. The
land had an established cash price of P6,000,000, and its cost to the corporation was
P4,500,000. The collection of the installments on this note is reasonably assured.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
90. Noncurrent notes receivable as of December 31, 2006
a. P13,556,400 c. P10,556,400
b. P 9,664,650 d. P 9,750,726
91. Current portion of long-term notes receivable as of December 31, 2006
a. P3,891,750 c. P3,000,000
b. P4,353,750 d. P 0
92. Accrued interest receivable as of December 31, 2006
a. P771,000 c. P 540,000
b. P857,076 d. P1,011,000
93. Interest income for the year 2006
a. P1,281,000 c. P1,367,076
b. P1,637,076 d. P1,512,000

Suggested Solution:

Question No. 90
NR from sale of plant
Balance, 12/31/06
(P9,000,000 - P3,000,000) P6,000,000
Less inst. due on 4/1/07 3,000,000 P3,000,000
NR from officer, due 12/31/08 2,400,000
NR from sale of equipment
Present value of note, 4/1/06
(P1,200,000 x 0.797) 956,400
Add interest earned for 2006
(P956,400 x 12% x 9/12) 86,076 1,042,476
NR from sale of land
Balance, 12/31/06 4,200,000
Less principal installment due
on 7/1/07
Total amount to be received P1,353,750
Less interest
(P4,200,000 x 11%) 462,000 891,750 3,308,250
Total P9,750,726

Question No. 91
Note receivable from sale of plant due, 4/1/07 P3,000,000
Note receivable from sale of land (see no. 1) 891,750
Current portion of long-term notes receivable P3,891,750

Question No. 92
NR from sale of plant (P6,000,000 x 12% x 9/12) P540,000
NR from sale of land (P4,200,000 x 11% x 6/12) 231,000
Accrued interest receivable, 12/31/06 P771,000

Question No. 93
NR from sale of plant:
1/1 to 3/31 - P9,000,000 x 12% x 3/12 P 270,000
4/1 to 12/31 - P6,000,000 x 12% x 9/12 540,000
810,000
NR from officer (P2,400,000 x 10%) 240,000
NR from sale of equipment (P956,400 x 12% x 9/12) 86,076
NR from sale of land (P4,200,000 x 11% x 6/12) 231,000
Interest income for 2006 P1,367,076

Answers: 90) D; 91) A; 92) A; 93) C

94-98 Sigay Company has been using the cash method to account for income since its first year of
operation in 2005. All sales are made on credit with notes receivable given by the customers. The
income statements for 2005 and 2006 included the following amounts:
2005 2006
Revenues – collection on principal P1,600,000 P2,500,000
Revenues – interest 180,000 275,000
Cost of goods purchased* 2,260,000 2,601,000
 * Includes increase in inventory of goods on hand of P100,000 in 2005 and P400,000 in 2006.

The balances due on the notes at the end of each year were as follows:
2005 2006
Notes receivable (gross) - 2005 P3,100,000 P1,800,000
Notes receivable (gross) – 2006 - 3,000,000
Unearned interest income – 2005 358,350 278,950
Unearned interest income – 2006 - 402,150

QUESTIONS:
Your client requested you to compute for the following using the installment sales method:
94. Installment sales for the year 2005
a. P4,700,000 c. P4,521,650
b. P4,341,650 d. P4,062,700
95. Realized gross profit in 2005
a. P804,000 c. P835,680
b. P864,640 d. P749,280
96. Installment sales for the year 2006
a. P4,200,000 c. P3,877,250
b. P3,797,850 d. P4,152,250
97. Realized gross profit in 2006 on 2005 installment sales
a. P853,265 c. P637,519
b. P440,975 d. P613,352
98. Realized gross profit in 2006 on 2006 installment sales
a. P504,600 c. P653,250
b. P730,413 d. P553,085

Suggested Solution:

Question No. 94
Principal amount collected on 2005 note P1,600,000
Add uncollected 2005 note, net – 12/31/05
(P3,100,000-P358,350) 2,741,650
Installment sales for 2005 P4,341,650
Note: Installment sales is equal to the original amount of notes receivable, net of unearned interest
income.

Question No. 95
Principal amount collected on 2005 note P1,600,000
Multiply by gross profit rate in 2005 50.25%
Realized gross profit in 2005 on 2005 inst. sales P 804,000

Computation of gross profit rate in 2005:

Installment sales for 2005 P4,341,650
Less cost of installment sales (P2,260,000 - P100,000) 2,160,000
Gross profit for 2005 2,181,650
Divide by installment sales for 2005 4,341,650
Gross profit rate in 2005 50.25%

Question No. 96
Total principal amount collected in 2006 P2,500,000
Principal amount collected in 2006 on 2005
note:
Uncollected 2005 note, net - 12/31/05 P2,741,650
Less uncollected 2005 note, net -
12/31/06 (P1,800,000-P278,950) 1,521,050 1,220,600
Principal amount collected on 2006 note 1,279,400
Uncollected 2006 note, net – 12/31/06
(P3,000,000-P402,150) 2,597,850
Installment sales for 2006 P3,877,250

Question No. 97
Principal amount collected in 2006 on 2005 note P1,220,600
Multiply by gross profit rate in 2005 50.25%
Realized gross profit in 2006 on 2005 inst. sales P 613,352
Question No. 98
Principal amount collected in 2006 on 2006 note P1,279,400
Multiply by gross profit rate in 2006 43.23%
Realized gross profit in 2006 on 2006 inst. sales P 553,085
Computation of gross profit rate in 2006:
Installment sales for 2006 P3,877,250
Less cost of installment sales (P2,601,000 - P400,000) 2,201,000
Gross profit for 2006 1,676,250
Divide by installment sales for 2006 3,877,250
Gross profit rate in 2006 43.23%
Answers: 94) B; 95) A; 96) C; 97) D, 98) D

99-100 On January 1, 2004, Sinait Company loaned P3,000,000 to Ilocos Company. The terms of
the loan were payment in full on January 1, 2009, plus annual interest payments at 11%. The
interest payment was made as scheduled on January 1, 2005; however, due to financial setbacks,
Ilocos was unable to make its 2006 interest payment. Sinait considers the loan impaired and
projects the following cash flows from the loan as of December 31, 2006 and 2007. Assume that
Sinait accrued the interest at December 31, 2005, but did not continue to accrue interest due to the
impairment of the loan.
Amount projected as of
Date of Flow Dec. 31, 2006 Dec. 31, 2007
December 31, 2007 P 200,000 P 200,000
December 31, 2008 400,000 600,000
December 31, 2009 800,000 1,200,000
December 31, 2010 1,200,000 1,000,000
December 31, 2011 400,000
QUESTIONS:
Your client requested you to determine the following: (Round-off present value factors to four decimal
places)
99. Loan impairment (bad debt expense) for the year 2006
a. P 882,380 c. P1,212,380
b. P1,549,500 d. P1,542,380
100. Carrying amount of loan receivable as of December 31,
2008
a. P1,672,570 c. P1,645,641
b. P2,150,558 d. P1,892,683

Suggested Solution:
Question No. 99
Principal P3,000,000
Add accrued interest in 2005 (P3,000,000 x 11%) 330,000
Carrying amount, 12/31/06 3,330,000
Less PV of projected cash flows (see below) 2,117,620
Loan impairment (bad debt expense) P1,212,380

Date Collection Period PVF at 11% Present value

Dec. 31, 2007 P 200,000 1 year 0.9009 P 180,180
Dec. 31, 2008 400,000 2 years 0.8116 324,640
Dec. 31, 2009 800,000 3 years 0.7312 584,960
Dec. 31, 2010 1,200,000 4 years 0.6587 790,440
Dec. 31, 2011 400,000 5 years 0.5935 237,400
P3,000,000 P2,117,620
 Journal entry to record the loan impairment:
Bad debt expense P1,212,380
Interest receivable P 330,000
Allowance for loan impairment 882,380

Note: PAS 39 par. 63 states that the carrying amount of the asset shall be reduced either directly
or through the use of an allowance account. The use of allowance account is preferable since this
will inform the users of the gross amount of the impaired loan receivable.

Interest income for 2007 (P2,117,620 x 11%) P232,938

Incidentally, the following are the journal entries to record the collection:
Cash P200,000
Loan receivable P200,000
Allowance for loan impairment P232,938
Interest income P232,938

Principal, 12/31/07 (P3,000,000 - P200,000) P2,800,000

Less PV of projected cash flows (see below) 2,245,660
Allowance for loan impairment, 12/31/07 P 554,340

Date Collection Period PVF at 11% Present value

Dec. 31, 2008 P 600,000 1 year 0.9009 P 540,540
Dec. 31, 2009 1,200,000 2 years 0.8116 973,920
Dec. 31, 2010 1,000,000 3 years 0.7312 731,200
P2,800,000 P2,245,660

Journal entry to adjust net loan receivable to present value of new cash flow projections.
Allowance for loan impairment
(P882,380 - P232,938 - P554,340) P95,102
Bad debt expense P95,102

Interest income for 2008 (P2,245,660 x 11%) P247,023

Question No. 100

Principal, 12/31/08 (P2,800,000 - P600,000) P2,200,000
Less allowance for loan impairment, 12/31/08
(P554,340 - P247,023) 307,317
Carrying value, 12/31/08 P1,892,683

Answers: 99) C; 100) D