Download Accounting Problems and Solutions: A Comprehensive Guide to Financial Statement Analysis and more Lab Reports Financial Accounting in PDF only on Docsity!
Accounting Adjustments and
Financial Reporting
Auditing Problems
Problem No. 1
The following accounts were included in the unadjusted trial balance of Pistons Company as of December 31, 2006:
Cash: ₱481, Accounts receivable: ₱1,127, Merchandise inventory: ₱3,025, Accounts payable: ₱2,100, Other current liabilities: ₱215,
During the audit, it was noted that Pistons held its cash books open after year-end to prepare a more favorable balance sheet for credit purposes. The following information was provided:
January cash receipts recorded in the December cash book totaled ₱327,300, of which ₱180,050 represents cash sales and ₱147, represents collections on account with cash discounts of ₱7,750 given. January cash disbursements recorded in the December check register liquidated accounts payable of ₱186,200 on which discounts of ₱6, were taken. The amount shown as inventory was determined by physical count on December 31, 2006.
Questions:
The adjusted cash balance as of December 31, 2006 is: a. ₱481,600 b. ₱154,
The adjusted working capital as of December 31, 2006 is: a. ₱2,317, b. ₱2,139,100 c. ₱2,143,750 d. ₱2,368,
The adjusted current ratio as of December 31, 2006 is: a. 2.00 b. 1.85 c. 1.86 d. 2.
The majority of checks listed as outstanding at December 31 had not cleared the bank, indicating: a. A high possibility of kiting b. A high possibility of lapping c. That the cash disbursement journal had been held open past December 31 d. That the cash disbursement journal had been closed prior to December 31
Making the financial statements indicate a more favorable position by giving effect to transactions in a period other than that in which these
actually occurred is called: a. Pro-forma balance sheet b. Financial projections c. Lapping d. Window dressing
Problem No. 2
On January 10, 2007, the audit of the financial records of the Heats Company for the year ended December 31, 2006 began. The following information was discovered:
The bookkeeper also acts as the cashier. The bookkeeper's year-end cash reconciliation contains the following items: Cash per ledger, 12-31-06: ₱491, Cash per bank, 12-31-06: ₱518, Outstanding checks: ₱41, Miami Co. check charge by bank in error on 12-20-06, corrected by bank on 1-5-07: ₱1, Cash in transit, credited by bank on 1-2-07: ₱5, The cash account balances per ledger as of 12-31-06 were: Cash - ₱491,200; petty cash - ₱1,200. The count of the cash on hand at the close of business on January 10, 2007, including the petty cash, was as follows: Currency and coin: ₱3, Expense vouchers: ₱ Employees' IOU's dated 1-5-07: ₱ Customers' checks in payment of account: ₱2, Total: ₱6, From January 2, 2007 to January 10, 2007, the total cash receipts appearing in the cash records were ₱68,800, while the bank statement for the same period showed total credits of ₱60,800. On July 5, 2006, cash of ₱3,200 was received from an account customer; the Allowance for Doubtful Accounts was charged and Accounts Receivable credited. On December 5, 2006, cash of ₱2,400 was received from an account customer; Inventory was charged and Accounts Receivable credited. Cash of ₱5,840 received during 2006 was not recorded. Checks received from customers from January 2, 2007 to January 10, 2007, totaling ₱3,360, were not recorded but were deposited in the bank. On July 1, 2006, the bank refunded interest of ₱160 because a note of the Heats Company was paid before maturity. No entry had been made for the refund. In the cashier's petty cash, there were receipts for collections from customers on January 9, 2007, totaling ₱6,800; these were unrecorded and undeposited. In the outstanding checks, there is one for ₱400 made payable to a trade creditor; investigation shows that this check had been returned by the creditor on June 14, 2006, and a new check for ₱800 was issued in its place; the original check for ₱400 was made in error as to the amount.
debt expense accrual during the year based on the assumption that 4% of total credit sales will be uncollectible. Total credit sales for the year 2006 amounted to ₱8,000,000, and write-offs of uncollectible accounts during the year totaled ₱292,500.
Questions:
The adjusted balance of the allowance for doubtful accounts as of December 31, 2006 is: a. ₱104,400 b. ₱49,800 c. ₱77,100 d. ₱27,
The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of December 31, 2006 would include a credit to the allowance for doubtful accounts of: a. ₱27,300 b. ₱49,800 c. ₱77,100 d. ₱22,
An aging analysis of accounts receivable would provide an indication as to the: a. Validity of the accounts b. Collectibility of the accounts c. Integrity of the credit grantors d. Solvency of customers
For good internal control, the billing department should be under the direction of the: a. Credit manager b. Sales manager c. Controller d. Treasurer
To achieve sound internal accounting control, the activities of matching shipping documents with sales orders and preparing daily sales summaries should be performed by the: a. Billing department b. Credit department c. Shipping department d. Sales order department
Problem No. 4
In connection with the examination of the financial statements of Cavaliers, Inc. for the year ended December 31, 2006, the following information was obtained during the audit of the accounts receivable and related accounts:
The December 31, 2006 balance in the Accounts Receivable control account is ₱558,600. An aging schedule of the accounts receivable as of December 31, 2006 is presented below:
| Age | Net debit balance | Percentage to be applied after corrections have been made | | --- | ----------------- | ----------------------------------------------------------- | | 60 days & under | ₱258,513 | 1 percent | | 61 to 90 days | ₱204,735 | 3 percent | | 91 to 120 days | ₱59,886 | 6 percent | | Over 120 days | ₱35,466 | Definitely uncollectible, ₱6,300; the remainder is estimated to be 25% uncollectible. | | Total | ₱558,600 | |
Two entries were made in the Doubtful Accounts Expense account: A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts. A credit for ₱4,110 on November 30, 2006, and a debit to Allowance for Doubtful Accounts because of a bankruptcy. The related sales took place on October 1, 2006.
The Allowance for Doubtful Accounts schedule is presented below:
| Debit | Credit | Balance | | ----- | ------ | ------- | | January 1, 2006 | | ₱13,125 | | November 30, 2006 | ₱4,110 | ₱9,015 | | December 31, 2006 (₱558,600 x 5%) | | |
There is a credit balance in one account receivable (61 to 90 days) of ₱7,260; it represents an advance on a sales contract.
Questions:
The adjusted balance of Accounts Receivable as of December 31, 2006 is: a. ₱555,450 b. ₱552,
The adjusted balance of the Allowance for Doubtful Accounts as of December 31, 2006 is: a. ₱19,706 b. ₱19,583 c. ₱19,830 d. ₱19,
The Doubtful Accounts expense for the year 2006 is: a. ₱16,991 b. ₱16,868 c. ₱17,115 d. ₱27,
The net adjustment to the Doubtful Accounts expense account is: a. ₱6,952 credit b. ₱6,705 credit c. ₱6,829 credit d. ₱4,110 debit
Authorization for the write-off of accounts receivable should be the responsibility of the: a. Credit Manager b. Controller c. Accounts receivable clerk d. Treasurer
Problem No. 5
Wizards Enterprises loaned ₱1,000,000 to Washington Inc. on January 1,
- The terms of the loan require principal payments of ₱200,000 each year for 5 years plus interest at 8%. The first principal and interest payment is due on January 1, 2005. Washington made the required payments during 2005 and 2006. However, during 2006 Washington began to experience financial difficulties, requiring Wizards to reassess the collectibility of the loan. On December 31, 2006, Wizards determines that the remaining principal payments will be collected, but the collection of interest is unlikely. The prevailing interest rate for a similar type of note as of December 31, 2006 is 10%.
Questions:
The present value of the expected future cash flows as of December 31, 2006 is: a. ₱547,100 b. ₱515,400 c. ₱556,640 d. ₱600,
The loan impairment for the year 2006 is: a. ₱84,600 b. ₱43,360 c. ₱52,900 d. ₱
The interest income for the year 2007, assuming that Wizards' assessment of the collectibility of the loan has not changed, is: a. ₱27,768 b. ₱28,531 c. ₱25,232 d. ₱32,
The ₱27,000 invoice for goods received on December 31, 2006 was included in accounts payable.
One-half of the ₱6,000 freight bill received on January 3, 2007 related to merchandise purchased in December 2006 and should be included in accounts payable.
Net Sales Adjustment
The ₱40,000 sale of tools billed to a customer on December 31, 2006 should be included in net sales.
The ₱42,000 sale of tools shipped to a customer on December 26, 2006 should be included in net sales.
The ₱47,000 in credit memos issued for returned tools on January 8, 2007 should be deducted from net sales.
Audit Procedures
Inventory Existence
Performing a purchase cutoff test helps obtain evidence that all goods purchased before year-end are received before the physical inventory count.
Confirming inventories at locations outside the client's facilities provides the most reliable evidence that the client has legal title to the inventories.
Bulls Manufacturing Company
Inventory Calculations
Number of units on hand, July 1:
Calculated as 50,000 units ending inventory + 99,000 cost of goods sold - 118,800 total cost of units available for sale = 41,580 units
Units sold during July:
Calculated as 118,800 total cost of units available for sale - 50, ending inventory = 162,250 units
Unit cost of inventory at July 31:
Calculated as 118,800 total cost of units available for sale / 235, total units available = ₱0.506 per unit
Value of inventory at July 31:
Calculated as 50,000 units x ₱0.506 per unit = ₱25,
Investments
BSA Inc. and CPA Corp.
Income from investment in BSA Inc. in 2006:
Calculated as 100,000 shares x ₱6.00 per share dividend = ₱30,
Income from investment in CPA Corp. in 2005:
Calculated as 250,000 shares x ₱0.25 per share dividend = ₱62,
Carrying value of Investment in BSA Inc. as of December 31, 2006:
Calculated as 100,000 shares x ₱5.00 per share cost = ₱500,
Carrying value of Investment in CPA Corp. as of December 31, 2006:
Calculated as 250,000 shares x ₱10.00 per share cost = ₱2,500,
Unrealized gain or loss as of December 31, 2006:
Calculated as (100,000 shares x ₱6.50 per share market value) - ₱500,000 carrying value = ₱150,000 gain
Property, Plant and Equipment
Spurs Corporation
Land:
Calculated as ₱400,000 + ₱4,000,000 + ₱60,000 + ₱800,000 - ₱120,000 + ₱2,400,000 = ₱7,540,
Buildings:
Calculated as ₱3,200,000 + ₱400,000 + ₱600,000 + ₱44,000 + ₱32,000 + ₱4,000 + ₱24,000 = ₱4,304,
Leasehold Improvements:
Calculated as ₱2,000,000 + ₱500,000 - ₱160,000 + ₱260,000 = ₱2,600,
Machinery and Equipment:
Calculated as ₱2,800,000 + ₱300,000 + ₱8,000 + ₱6,000 = ₱3,114,
Notes Payable - Trade
P190,
All trade notes payable are due within six months of the balance sheet date.
Notes Payable - Bank
P800,
Includes two separate notes payable to Allied Bank Interest is payable every six months One note was a 1-year, P500,000, 11 1/2% note issued on January 2, 2006 On December 30, 2006, Mavericks negotiated a written agreement with Allied Bank to replace the note with a 2-year, P500,000, 10% note to be issued on January 2, 2007 The interest was paid on December 31, 2006
Wages and Salaries Payable
P15,
Interest Payable
The interest payable as of December 31, 2006 is P215,000.
Mortgage Notes Payable - 10%
P600,
Issued on October 1, 2003, with a term of 10 years The terms of the note give the holder the right to demand immediate payment if the company fails to make a monthly interest payment within 10 days of the date the payment is due As of December 31, 2006, Mavericks is three months behind in paying its required interest payment
Mortgage Notes Payable - 12%
P1,500,
Issued on May 1, 2000, with a term of 20 years Principal and interest payable annually on April 30 A payment of P220,000 is due on April 30, 2007, which includes interest of P180,
Bonds Payable
P2,000,
10-year, 8% bonds, issued on June 30, 1997 Interest is payable semi-annually every June 30 and December 31
Questions and Answers
1. Interest payable as of December 31, 2006
The correct answer is d. P215,000.
2. The portion of the Note Payable-bank to be reported
under current liabilities as of December 31, 2006
The correct answer is b. P500,000.
3. Total current liabilities as of December 31, 2006
The correct answer is d. P3,998,000.
4. Total noncurrent liabilities as of December 31, 2006
The correct answer is c. P3,960,000.
5. Regarding the classification of financial liabilities
The correct answer is c. When an entity breaches an undertaking under a long-term loan agreement on or before the balance sheet date with the effect that the liability becomes payable on demand, the liability is classified as non-current, if, after the balance sheet date, and before the financial statements are authorized for issue, the lender has agreed not to demand payment as a consequence of the breach.
