EMILIO AGUINALDO COLLEGE – CAVITE

CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

HANDOUT 1
ACCOUNTING PROCESS

Instructions:
1. Prepare the audit adjustments required in the problems.
2. Post the net adjustment at the Working Balance Sheet (WBS) and Working Profit and
Loss (WPL).
3. Compute the final balances of each account on your WBS and WPL, proceed to the
questionnaires and transfer all answers to the final answer sheet.
4. Assume no other issues, except those discussed on the problem.

On November 20, 20x2 you have substantially completed your fieldwork relative to your
audit of RUCHELL Corporation, engaged in the sale of rechargeable lamps. Its rented store
and office is located in Davao City.

Based on your review of the records you have found out that the company’s financial
statements at the end of its fiscal year September 30, 20x2 submitted by their account is
subject to the adjustments you noted in your audit.

Audit finding No. 1

Included in the Cash account is a customer’s check for P1,100 deposited on September 30,
20x2 but returned by the bank on September 30, 20x2 for insufficiency of drawer’s funds.
The check was redeposited on October 3, 20x2. No entry was made by the company for the
return nor the redeposit of the check.

Audit finding No. 2

The debit balance of P1,500 in the allowance for bad debts resulted from write-offs of
uncollectible accounts in excess of the beginning balance of the allowance. Further analysis
of the customer’s accounts disclosed the need for setting up an allowance as at September
30, 20x2 to 5% of outstanding balance as of date.

Audit finding No. 3

Goods shipped out on consignment basis in September 20x2, still unsold as at the end of
the month, were recorded as sales for P4,900 which included 40% gross profit on cost. This
was not included in the physical inventory.

Audit finding No. 4

A physical inventory taken of the merchandise on September 30, 20x2 amounted to
P41,500.
Audit finding No. 5
Notes receivable included a 120-day 8% for P9,000 dated July 1, 20x2 from J. Ramos,
interest due on maturity date (assume 30 days per month).

Audit finding No. 6

Furniture and equipment costing P3,000 acquired on October 1, 2003, and a book value of
P2,400 at September 30, 20x1, was sold for P2,000 cash on October 1, 20x2. The sales
price was credited to Furniture and Equipment.

Audit finding No. 7

Depreciation for the fiscal year has not been recorded. Estimated life of the furniture and
equipment is 10 years.

Audit finding No. 8

A one-year insurance policy was taken by the company on June 30, 20x2 and paid the
annual of P1,200.

Audit finding No. 9

The company paid P11,700 representing rent for 13 months ending on October 31, 20x2.

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

Audit finding No. 10

The 120-day note payable of P6,000, bearing 12% interest was discounted with the bank on
August 15, 20x2. Interest expense was debited.

Audit finding No. 11

The excess of P110 issue price over the 100 par value upon sale of 200 shares was credited
to retained earnings.

Audit finding No. 12

Goodwill account was set-up with a credit to Retained Earnings on the basis of a resolution
of the Board of Directors.

Audit finding No. 13

Office salaries unpaid as of September 30, 20x2, P1,200, were not taken up as accrued
expense.

Audit finding No. 14

Patents were acquired by purchase on September 30, 20x1 for P20,000. It has as estimated
useful life of 4 years.

Audit finding No. 15

An analysis of the investment account shows that on September 20x2 25 shares were sold
for P200 per share. This was recorded as a debit balance to Cash, P5,000 and a credit to
Investments in A Co., P5,000.

Audit finding No. 16

A repayment of non-interest bearing note payable for P5,000 was erroneously debited to
Advertising.

Audit finding No. 17

A payment of P1,000 for Taxes on September 29, 20x2 was not recorded in the books.

Audit finding No. 18

On September 30, 20x2 RUCHELL Company declared a 10% stock dividend distributable on
October 21, 20x2. The market value per share is P120 at the time of declaration. This has
not been taken up in the books.

Audit finding No. 19

On September 30, 20x2 a Land was donated by a stockholder. The stockholder bought the
Land in 1998 for P26,000. The appraised value of the land at present is P50,000.

Audit finding No. 20

Marketable Securities which cost P15,000 has a market value of P16,000.

Audit finding No. 21

A payment to supplier within the discount period was made on June 20, 20x2. The discount
of P20 was credited to Sales discounts instead of purchase discounts.

Audit finding No. 22

RUCHELL Corporation has a pending lawsuit from a customer, asking for a P100,000
damages. The lawyers of the company believe that it is remote that the case of the
customer will prosper in court.

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

RUCHELL Corporation
Working Balance Sheet
September 30, 20x2

PER AUDIT FINAL

BOOK ADJUSTMENT BALANCES
Current
Cash 10,500
Marketable Securities 15,000
Account Receivable – trade 57,200
Allowance for doubtful accounts 1,500 dr.
Notes Receivable 21,500
Inventories 39,500
Investment in A, Co. –100 shares 25,000
Interest Receivable -
Prepayments 1,750
TOTAL 171,950

Land
Furniture & Equipment 50,850
Accumulated Depreciation (12,170)
TOTAL 38,680

Goodwill 10,000
Patents 20,000
TOTAL 30,000
Total Assets 240,630

Liabilities
Accounts payable 35,420
Accrued expenses -
Notes payable 31,000
Stockholders’ equity
Capital Stock, P100 75,000
Additional paid in capital -
Stock dividend distributable -
Donated capital -
Retained Earnings 99,210
Total Liab. & S. E 240,630

RUCHELL CORPORATION
Working Profit and Loss
Year Ended September 30, 20x2
PER AUDIT FINAL
BOOKS ADJUSTMENT BALANCES

Sales 269,810
Sales returns ( 1,950)
Sales discounts ( 1,700)
Net sales 266,160

Cost of sales
Inventory, beg. 39,500
Purchases 189,360
Purchase returns ( 3,700)

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

Purchase discounts ( 1,970)

Inventory, end (41,500)
181,690
Gross Profit 84,470
Advertising ( 7,210)
Doubtful Accounts -
Salesman’s Salaries (21,650)
Miscellaneous Selling expenses ( 1,940)
Rent expense (11,700)
Insurance expense ( 1,200)
Light and water ( 300)
Taxes ( 1,510)
Office salaries ( 3,330)
Miscellaneous office expense ( 1,560)
Loss on sale -
Amortization of Intangibles -
Interest Expense ( 4,060)
Other Income 430
Net Income 30,440

Questions

1. Cash
a. P 9,500 b. P8,400 c. P10,600 d. P5,800

2. Accounts receivable – trade

a. P57,200 b. P53,400 c. P50,000 d. P58,300

3. Allowance for doubtful accounts

a. P1,500 b. P2,670 c. P2.860 d. P4,115
4. Interest Receivable
a. P60 b. P180 c. P240 d. 90

5. Inventories
a. P41,500 b. P46,400 c. P45,000 d. 40,000

6. Doubtful accounts
a. P2,980 b. P2,670 c. P4,170 d. P4,000

7. Prepayments
a. P2,980 b. P3,700 c. p2,050 d. P2,650

8. Furniture and Equipment

a. P57,850 b. P62,850 c. P60,850 d. P50,850

9. Depreciation
a. P5,085 b. P6,285 c. P6,085 d. P4.985

10. Accounts payable

a. P35,420 b. P34,420 c. P36,000 d. P32,988

11. Capital Stock

a. P75,000 b. P77,000 c. P0 d. P73,000

12. Sales
a. P269,810 b. P274,710 c. P264,910 d. P260,100

13. Purchases
a. P189,360 b. P187,360 c. P180,000 d. P200,160

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

14. Interest expense

a. P4,030 b. P4.060 c. P4,090 d. P3,910

15. Other Income

P430 b. P610 c. P400 d. 0

16. Goodwill
a. P0 b. P10,000 c. P5,000 d. P6,000

17. Office salaries

a. P2,130 b. P22,850 c. P4,530 d. P1,200

18. Patents
a. P0 b. P10,000 c. P15,000 d. P5,000

19. Additional Paid in Capital

a. P3,500 b. P500 c. P2,000 d. P200

20. Investment in a Co.

a. P23,750 b. P26,000 c. P24,000 d. P25,000

21. Advertising
a. P7,210 b. P5,210 c. P2,210 d. P5,000
22. Light and Power
a. P500 b. P5,300 c. P300 d. P0

23. Taxes
a. P1,970 b. P2,510 c. P1,000 d. P300

24. RUCHELL Company should record stock dividend payable at

a. P7,500 b. P9,000 c. P0 d. P1,500

25. Land
a. P0 b. P50,000 c. p26,000 d. P24,000

26. The appropriate account to be credited for the donation is

a. Retained Earnings c. Donated Capital
b. Capital Stock d. Other Income

27. Marketable securities, net of any allowance for decline

a. P14,000 b. P15,000 c. P16,000 d. P0

28. Sales discount

a. P1,680 b. P1,720 c. P1,200 d. P1,500

29. Salesman’s salaries

a. P21,650 b. P22,850 c. P20,000 d. P25,000

30. RUCHELL Company should recognize liability from damages for

a. P0 b. P100,000 c. P50,000 d.P200,000

Answer:
1. B 2. B 3. B 4. B 5. C 6. C 7. B 8. D 9. A 10. A
11. A 12. C 13. A 14. D 15. B 16. A 17. C 18. C 19. A 20. C
21. C 22. C 23. B 24. A 25. B 26. C 27. B 28. B 29. A 30. A

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

Entries:
Finding 1 Finding 8
Accounts receivable 1,100 Prepayments 900
Cash 1,100 Insurance expense 900
Finding 2 Finding 9
Bad debts 4,170 Prepayments 900
Allow. For BD 4,170 Rent expense 900
Finding 3 Finding 10
Sales 4,900 Prepayment 150
Accounts receivable 4,900 Interest expense 150
Inventory 3,500 Finding 11
COS 3,500 Retained earnings 2,000
Finding 4 APIC 2,000
COS 39,500 Finding 12
Inventory 39,500 Retained earnings 10,000
Inventory 41,500 Goodwill 10,000
COS 41,500 Finding 13
*39,500 daw kase yung nakarecord na Inv,
End, eh 41,500 pala dapat so tinaggal muna
Yung 39,500 saka ang ipinasok is 41,500

Finding 5 Office salaries 1,200

Interest receivable 180 Accrued expenses 1,200
Interest income 180 Finding 14
Finding 6 Amortization 5,000
No adjustments Patents 5,000
Finding 7
Depreciation 5,085
AD 5,085

Finding 15 Finding 18
Loss on sale 1,000 Retained earnings 9,000
Investment 1,000 Stock div. distr. 7,500
Finding 16 APIC 1,500
Note payable 5,000 Finding 19
Advertising 5,000 Land 50,000
Donated capital 50,000
Finding 17
Taxes 1,000 Finding 20
Cash 1,000 No adjustment
Finding 21
Sales discount 20
Purchase discount 20

WORKING PAPER
Per books Per audit
2,100.0
Cash 10,500.00 0 8,400.00
Marketable securities 15,000.00 15,000.00
1,100.0 4,900.0
Accounts receivable - trade 57,200.00 0 0 53,400.00
4,170.0 (2,670.0
Allow.for bd - debit balance 1,500.00 0 0)
Notes receivable 21,500.00 21,500.00
45,000.0 39,500.0
Inventories 39,500.00 0 0 45,000.00
1,000.0
Investment in A. Co. - 100 shares 25,000.00 0 24,000.00
Interest receivable - 180.00 180.00
1,950.0
Prepayments 1,750.00 0 3,700.00
50,000.0
Land - 0 50,000.00
Furniture & Equipment 50,850.00 50,850.00
(12,170.0 5,085.0 (17,255.0
Accumulated depreciation 0) 0 0)
10,000.0
Goodwill 10,000.00 0 -
5,000.0
Patents 20,000.00 0 15,000.00
240,630.0 267,105.0
0 0

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

Accounts payable 35,420.00 35,420.00

1,200.0
Accrued expenses - 0 1,200.00
5,000.0
Notes payable 31,000.00 0 26,000.00
Capital stock, P100 75,000.00 75,000.00
3,500.0
Additional paid in capital - 0 3,500.00
7,500.0
Stock dividend distributable - 0 7,500.00
50,000.0
Donated capital - 0 50,000.00
Retained earnings 99,210.00 68,485.00
240,630.0 267,105.0
0 0

4,900.0
Sales 269,810.00 0 264,910.00
(1,950.0 (1,950.0
Sales returns 0) 0)
(1,700.0 (1,720.0
Sales discounts 0) 20.00 0)
Net sales 266,160.00 261,240.00
39,500.0
Cost of sales *** 181,690.00 0 20.00
41,500.0
0
3,500.0
0 176,170.00
Gross profit 84,470.00 85,070.00
Other income 430.00 180.00 610.00
TOTAL 84,900.00 85,680.00
Operating expenses
(7,210.0 5,000.0 (2,210.0
Advertising 0) 0 0)
4,170.0 (4,170.0
Doubtful accounts - 0 0)
(21,650.0 (21,650.0
Salesmen's salaries 0) 0)
(1,940.0 (1,940.0
Miscellaneous selling expenses 0) 0)
(11,700.0 (10,800.0
Rent expenses 0) 900.00 0)
(1,200.0 (300.00
Insurance expense 0) 900.00 )
(300.00 (300.00
Light and water ) )
(1,510.0 1,000.0 (2,510.0
Taxes 0) 0 0)
(3,330.0 1,200.0 (4,530.0
Office salaries 0) 0 0)
(1,560.0 (1,560.0
Miscellaneous office expenses 0) 0)
1,000.0 (1,000.0
Loss on sale - 0 0)
5,085.0 (5,085.0
Depreciation - 0 0)
5,000.0 (5,000.0
Amortization of intangibles - 0 0)
Income from operations 34,500.00 24,625.00
(4,060.0 (3,910.0
Interest expense 0) 150.00 0)
Net income 30,440.00 20,715.00
12,000.0
Retained beginning 68,770.00 0 56,770.00
9,000.0 (9,000.0
Dividends - 0 0)
Retained end 99,210.00 68,485.00

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

186,105.0 186,105.0
0 0
*** COS
Inventory - beg. 39,500.00
Purchases 189,360.00
(3,700.0
Purchase returns 0)
(1,970.0
Purchase discounts 0)
TGAS 223,190.00
(41,500.0
Inventory - end 0)
COS 181,690.00

NOTES:
 HINDI PORKE, SINEND NA YUNG GOODS OUT ON CONSIGNMENT, EH
MAY SALES NA AGAD HA, PAGKASEND MO KAY CONSIGNEE, WALA
PANG SALES NON, UNLESS INOTIF KA NI CONSIGNEE NA MAY SALES
NA
 HINDI RIN TINATANGGAL PAG SINEND NA YUNG INVENTORY FOR
CONSIGNMENT GOODS, TATANGGALIN LANG SIYA KAPAG NAKABENTA
NA SI CONSIGNEE, HINDI RIN DINADAGDAG SA INVENTORY PAG MAY
NIRETURN SI CONSIGNEE, KASE NAKAINCLUDE NAMAN NA TALAGA
SIYA SA INVENTORY NI CONSIGNOR KAYA DINA INAADD PA ULIT SA
INVENTORY
 PAG SINABING INTEREST DUE ON MATURITY DATE, DUN PA LANG
SIYA MABABAYARAN NG INTEREST, SA NGAYON ANG COCOMPUTIN
MUNA NATENG INTEREST, IS RECEIVABLE O PAYABLE MUNA
 INTEREST RECEIVABLE, INTEREST INCOME
 INTEREST EXPENSE, INTEREST PAYABLE
 PREPAYMENTS, PAG MGA PREPAYMENTS, ANG EENTRYHAN LAGI
NATEN IS YUNG AMOUNT NA NATIRA, PAG SILENT ANG METHOD NA
GINAMIT, KASE IBIG SABIHIN EXPENSE METHOD ANG GINAMIT NIYA
SA INITIAL ENTRY, TAPOS PAGDATING SA ADJUSTMENT,YUNG
MATITIRA ANG IRERECORD
 INITIAL ENTRY= EXPENSE METHOD, ADJUSTING ENTRY= NATIRA
o KAYA NATIRA SA AE, KASE EXPENSE SIYA LAHAT NON, KAYA
MAGTITIRA TAYO NG HINDI NAGAMIT
 IE= PREPAID METHOD, ADJ ENTRY= NAGASTOS
o KAYA GASTOS YUNG SA AE, KASE ANG INIRECORD NON IS WALA
PANG NAGAGALAW DON SA PREPAYMENT KAYA SA AE TAYO
MAGEEXEPNSE
 SO, HINDI KA PWEDENG BASTA BASTANG NAGSESETUP NG GOODWILL
ACCOUNT KASE NAGKAKARON LANG NON PAG MAY BUSINESS
COMBINATION, HINDI YUNG NAPAGUSAPAN LANG NG BOD, KAYA
KAPAG MAY KINREATE SILA, DAPAT TANGGALIN NATEN

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

 AS TIME GOES BY, YUNG MGA INTANGIBLE ASSETS NATEN,

NAGAAMORTIZE YON HA, ANG IRERECORD NA AMOUNT IS YUNG
INAMORTIZE NILA
 STOCK DIVIDEND, ANG IBABAWAS SA RE IS YUNG MARKET VALUE,
PERO ANG IKECREDIT NA STOCK DIVIDEND IS YUNG 2 PAR, TAPOS
PASOK NA LANG SA SHARE PREMIUM YUNG EXCESS

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