Problem 1

In reconciling the cash in bank account of Charmaine Company with the bank statement balance for the month of
July 2007, the following data are summarized:

Cash in bank:

Balance, June 30 1,000,000

Book debits for July including June CM for note collected, P300,000 4,000,000
Book credits for July including June NSF of P100,000 and service
charge of P4,000 3,600,000

Bank statement for July:

Balance, June 30 1,650,000

Bank debits for July including service charge of P1,000 and June
outstanding checks of P854,000 2,500,000
Bank credits for July including CM for bank loan of P500,000 and
June deposit in transit of P400,000 3,500,000

Questions:

1. Deposit in transit at July 31 is:

a. P 1,150,000 b. P 1,100,000 c. P 900,000 d. P 850,000

2. Outstanding checks at July 31 is:

a. P 1,851,000 b. P 1,954,000 c. P 1,951,000 d. P 1,861,000

3. Cash balance at June 30 is:

a. P 1,846,000 b. P 1,650,000 c. P 1,196,000 d. P 1,200,000

4. Cash balance at July 31 is:

a. P 1,599,000 b. P 1,846,000 c. P 1,899,000 d. P 2,300,000

Problem 2
Gaze Company sells directly to customers. On January 1, 2006, the balance of accounts receivable was P250,000
while allowance for doubtful accounts was a credit of P20,000. The following data are available since 2003:

Credit sales Write-off Recoveries

2003 1,100,000 26,000 2,000
2004 1,200,000 29,000 3,000
2005 1,500,000 30,000 4,000
2006 3,000,000 40,000 5,000

Doubtful accounts are provided for as a percentage of credit sales. The accountant calculates the percentage
annually by using the experience of the three years prior to the current year. The formula is accounts written off less
recoveries expressed as a percentage of the credit sales for the period. Cash receipts in 2006 from credit sales
amounted to P2,615,000.

Questions:

6. What is the percentage to be used in computing the allowance for doubtful accounts on December 31,
2006?
a. 1.63% b. 1.75% c. 2.00% d. 2.17%
7.How much is the provision for doubtful accounts for 2006?
a. P 65,100 b. P 60,000 c. P 52,500 d. P48,900
8.What is the ledger balance of accounts receivable on December 31, 2006?
a. P 615,000 b. P 600,000 c. P 534,900 d. P385,000

9. What is the ledger balance of the allowance for doubtful accounts afternecessary adjustments on December 31,
2006?
a. P 28,900 c. P 32,500 c. P 45,000 d. P 45,100

Problem 3
Metro Company has experience a critical cash flow problem largely occasioned by collection problems with
customers. Consequently, it has become involved in a number of transactions relating to note receivable. The
following transaction occurred during a period ending December 31:

May 1 Received a P200,000, 90-day, 12% interest bearing note from EF, a customer, in settlement of an
account.
 1 Received a P300,000, six month, 12% interest bearing note from MN, a customer, in settlement of
an account.
July 30 EF defaulted on the P200,000 note.
Aug. 1 Discounted the MN note at the bank at 15%.
Sept. 1 Received a one-year noninterest bearing note from DJ, a customer, in settlement of a P120,000
account receivable. The face of the note was P132,000.
28 Collected the defaulted EF note plus accrued interest 12% per annum on the total amount due.
Oct. 1 Received a P500,000, 90-day note from RS, a customer. The note was in payment for goods
purchased and was interest bearing at 12%.
Nov. 1 MN defaulted on the P300,000 note. Metro Company paid the bank the total amount due plus a
P12,000 protest fee and other bank charges.
Dec. 30 Collected RS note in full.
31 Collected from MN in full including interest on total amount due at 12% since default date.

Questions:

11. Proceeds in the discounting of note on August 1 is:

a. P 324,075.00 b. P 306,075.00 c. P 323,400.00 d. P 297,412.50

12. Proceeds in the collected note on September 28 of EF that was defaulted is:
a. P 210,120.00 b. P 206,000.00 c. P 204,000.00 d. P 202,000.00

13. Proceeds of RS note that was collected on December 30 is:

a. P 515,000.00 b. P 500,000.00 c. P 485,000.00 d. P 450,000.00

14. Proceeds of MN note that was collected on December 31 is:

a. P 318,000.00 b. P 324,000.00 c. P 336,600.00 d. P 336,000.00

Solution – Problem 1
a. Bank reconciliation – June 30
Book balance 1,000,000
Add: Credit memo for note collected 300,000
Total 1,300,000
Less: NSF check 100,000
Service charge 4,000 104,000
Adjusted book balance 1,196,000

Bank balance 1,650,000

Add: Deposit in transit 400,000
Total 2,050,000
Less: Outstanding checks 854,000
Adjusted bank balance 1,196,000
Bank reconciliation – July 31

Book balance 1,400,000

Add: Credit memo for bank loan 500,000
Total 1,900,000
Less: Service charge 1,000
Adjusted book balance 1,899,000

Bank balance 2,650,000

Add: Deposit in transit 1,100,000
Total 3,750,000
Less: Outstanding checks 1,851,000
Adjusted bank balance 1,899,000

b. Adjusting entries, July 31

1. Cash in bank 500,000
Bank loan payable 500,000
2. Bank service charge 1,000
Cash in bank 1,000

Computation of deposit in transit – July 31

Deposit in transit – June 30 400,000
Add: Deposits during July:
Book debits 4,000,000
Less: June credit memo for note collected 300,000 3 ,700,000
Total 4,100,000
Less: Deposits credited by bank during July:
Bank credits 3,500,000
Less: July credit memo for bank loan 500,000 3,000,000
Deposit in transit – July 31 1,100,000
Computation of outstanding checks – July 31
Outstanding checks, June 30 854,000
Add: Checks drawn by company during July:
Book credits 3,600,000
Less: June debit memos for
NSF check 100,000
Service charge 4,000 104,000 3,496,000
Total 4,350,000
Less: Checks paid by bank during July:
Bank debits 2,500,000
Less: July service charge 1,000 2,499,000
Outstanding checks, July 31 1,851,000

Answer –
6. c 7. b 8. b 9. c 10. d

Solution – Problem 2
2002 2003 2004 Total
6. Writeoff 26,000 29,000 30,000 85,000
Less: Recoveries 2,000 3,000 4,000 9,000
Net writeoff 24,000 26,000 26,000 76,000

76,000
Percentage to be used in computing the allowance = ------------- = 2%
3,800,000
7. Credit sales for 2005 3,000,000
Multiply by bad debt percentage 2%
Provision for doubtful accounts 60,000

8. Accounts receivable – January 1, 2005 250,000

Add: Credit sales for 2005 3,000,000
Recoveries 5,000 3,005,000
Total 3,255,000
Less: Collections in 2005 2,615,000
Writeoff 40,000 2,655,000
Accounts receivable – December 31, 2005 600,000

9. Allowance for doubtful accounts – January 1 20,000

Add: Doubtful accounts for 2005 60,000
Recoveries 5,000 65,000
Total 85,000
Less: Writeoff 40,000
Allowance for doubtful accounts – December 31 45,000

Answer –
11. b 12. a 13. a 14. c 15. c

Solution – Problem 3
May 1 Notes receivable 200,000
Accounts receivable 200,000
1 Notes receivable 300,000
Accounts receivable 300,000
July 30 Accounts receivable 206,000
Notes receivable 200,000
Interest income (200,000 x 12% x 90/360) 6,000
Aug. 1 Cash 306,075
Note receivable discounted 300,000
Interest income 6,075

Principal 300,000
Interest (300,000 x 12% x 6/12) 18,000
Maturity value 318,000
Less: Discount (318,000 x 15% x 3/12) 11,925
Net proceeds 306,075

Sept. 1 Notes receivable 132,000

Accounts receivable 120,000
Interest income 12,000
28 Cash 210,120
Accounts receivable 206,000
Interest income (206,000 x 12% x 60/360) 4,120
Oct. 1 Notes receivable 500,000
 Sales 500,000
Nov. 1 Accounts receivable 330,000
(318,000 + 12,000)
Cash 330,000
Notes receivable discounted 300,000
Notes receivable 300,000

Dec. 30 Cash 515,000

Notes receivable 500,000
Interest income (500,000 x 12% x 90/360) 15,000
31 Cash 336,600
Accounts receivable 330,000
Interest income (330,000 x 12% x 2/12) 6,600

REVIEW OF FINANCIAL ACCOUNTING THEORY AND PRACTICE

ACCOUNTS RECEIVABLE

1. Mangatarem Company had the following information relating to its accounts receivable for the year 2005:

Accounts receivable – January 1 P12,000,000

Credit sales 20,000,000
Collection from customers, excluding the recovery of accounts written off 17,000,000
Accounts written off as worthless 300,000
Sales returns 1,000,000
Recovery of accounts written off 100,000
Estimated future sales returns on December 31 400,000
Estimated uncollectible accounts on December 31, per aging 1,000,000

Mangatarem should report the December 31, 2005 accounts receivable, before allowance for sales returns and
uncollectible accounts, at
a. P13,700,000 c. P13,800,000
b. P12,300,000 d. P13,130,000

2. Binmaley Company operates in an industry that has a high rate of bad debts. On December 31, 2005, before
any year-end adjustments, the accounts receivable balance was P20,000,000 and its allowance for doubtful
accounts balance was P1,500,000. The year-end balance reported for the allowance for doubtful accounts is
based on the following schedule:

Time Outstanding Accounts Receivable Percent Uncollectible

Under 30 days P10,000,000 5%
31 - 180 days 5,000,000 10%
181 - 360 days 3,000,000 30%
More than one year 2,000,000 100%

The accounts which have been outstanding for more than one year and 100% uncollectible would be written off
immediately. What should be the doubtful accounts expense for the year ended December 31, 2005?
a. P1,900,000 c. P3,900,000
b. P2,400,000 d. P2,000,000

3. Calasiao Company determined that the net realizable value of its accounts receivable at December 31, 2005
based on an aging of the receivables, was P15,000,000. Additional information is as follows:

Allowance for uncollectible accounts – 1/1/2005 P1,500,000

Uncollectible accounts written off during 2005 1,000,000
Uncollectible accounts recovered during 2005 200,000
Accounts receivable – December 31, 2005 17,000,000

For 2005, what should be Calasiao’s uncollectible accounts expense?

a. P2,000,000 c. P1,800,000
b. P1,500,000 d. P1,300,000
4. Bayambang Company sells to wholesalers on terms of 5/15, net 30. Bayambang has no cash sale but 50% of
customers take advantage of the discount. Bayambang uses the gross method of recording sales. An analysis
of trade receivables at December 31, 2005 revealed the following:

Age Amount _ Collectible

0 - 15 days 15,000,000 100%
16 - 30 days 3,000,000 95%
Over 30 days 2,000,000 1,500,000

On the December 31, 2005 balance sheet, what amount should be reported as allowance for discounts?
a. P750,000 c. P375,000
b. P650,000 d. P500,000

5. The following accounts were abstracted from Villasis Company’s unadjusted trial balance at December 31, 2005:

Debit Credit
Accounts receivable P20,000,000
Allowance for doubtful accounts 300,000
Net credit sales P70,000,000

VilIasis estimates that 5% of the gross accounts receivable will become uncollectible. The doubtful accounts
expense for the year ended December 31, 2005 should be
a. P1,000,000 c. P1,300,000
b. P3,500,000 d. P 700,000

6. All of Urdaneta Company’s sales are on a credit basis. The following information is available for 2005:

Allowance for doubtful accounts, 1/1/2005 P1,000,000

Sales 22,000,000
Sales returns 2,000,000
Accounts written off as uncollectible 600,000
Recovery of accounts written off 200,000

Urdaneta provides for doubtful accounts expense at the rate of 10% of net sales. At December 31, 2005, the
allowance for doubtful accounts balance should be
a. P3,200,000 c. P2,800,000
b. P2,600,000 d. P2,000,000

7. On January 1, 2005, the balance of accounts receivable of Manaoag Company was P5,000,000 and the
allowance for doubtful accounts on same date was P800,000. The following data were gathered:

Credit sales Writeoffs Recoveries

2002 P10,000,000 P250,000 P20,000
2003 14,000,000 400,000 30,000
2004 16,000,000 650,000 50,000
2005 25,000,000 1,100,000 145,000

Doubtful accounts are provided for as percentage of credit sales. The accountant calculates the percentage
annually by using the experience of the three years prior to the current year. How much should be reported as
2005 doubtful accounts expense?
a. P750,000 c. P330,000
b. P812,500 d. P875,000

8. The Natividad Publishing Company follows the procedure of debiting Bad Debts Expense for 2% of all new sales.
Sales for 4 consecutive years and year-ended allowance account balances were as follows:

Allowance for Bad Debts End-

of-Year Credit Balance
Year Sales
2002 P2,100,000 P21,500
2003 1,975,000 35,500
2004 2,500,000 50,000
2005 2,350,000 66,000

Compute the amount of accounts written off for the year 2005.
a. P31,000 b. P25,500 c. P35,500 d. P5,500

9. Anda Corporation provided for uncollectible accounts receivable under the allowance method since the start of
its operations to December 31, 2005. Provisions were made monthly at 2 percent of credit sales; bad debts
 written off were charged to the allowance account; recoveries of bad debts previously written off were credited to
the allowance account; and no year-end adjustments to the allowance account were made. Anda's usual credit
terms are net 30 days.

The credit balance in the allowance for doubtful accounts was P260,000 at January 1, 2005. During 2005, credit
sales totaled P18,000,000, interim provisions for doubtful accounts were made at 2 percent of credit sales,
P180,000 of bad debts were written off, and recoveries of accounts previously written off amounted to P30,000.
Anda installed a computer system in November 2005 and an aging of accounts receivable was prepared for the
first time as of December 31, 2005. A summary of the aging is as follows:

Balance in Estimated % Uncollectible

Classifications by Month of Sale Each Category
November-December 2005 P2,280,000 2%
July-October 2005 1,200,000 15%
January-June 2005 800,000 25%
Prior to January 1, 2005 260,000 80%

Based on the review of collectibility of the account balances in the "prior to January 1, 2005" aging category,
additional receivables totaling P120,000 were written off as of December 31, 2005. Effective with the year ended
December 31, 2005, Anda adopted a new accounting method for estimating the allowance for doubtful accounts
at the amount indicated by the year-end aging analysis of accounts receivable.

QUESTIONS:

1. How much is the adjusted balance of the allowance for doubtful accounts as of December 31, 2005?
a. P537,600 b. P350,000 c. P633,600 d. P753,600

2. How much is the doubtful accounts for the year 2005?

a. P427,600 b. P577,600 c. P547,600 d. P457,600

3. The recorded allowance for doubtful accounts should be increased by

a. P283,600 b. P187,600 c. P67,600 d. P0

NOTES AND LOANS RECEIVABLE

Roth Company received from a customer a one-year, P500,000 note bearing annual interest of 8%. After holding the
note for six months, Roth discounted the note at Regional Bank at an effective interest rate of 10%
1. What amount of cash did Roth receive from the bank?
a. 540,000
b. 523,810
c. 513,000
d. 495,238

On July 1, 2006, Lee Company sold goods in exchange for P2,000,000, 8 – month, noninterest-bearing note
receivable. At the time of the sale, the note’s market rate of interest was 12%.
2. What amount did Lee receive when it discounted the note at 10% on September 1, 2006?
a. 1,940,000
b. 1,938,000
c. 1,900,000
d. 1,880,000

Apex Company accepted from a customer P1,000,000 face amount, 6-month, 8% note date April 15, 2006. On the
same date Apex discounted the note at Union Bank at a 10% discount rate.
3. How much cash should Apex receive from the bank on April 15, 2006?
a. 1,040,000
b. 990,000
c. 988,000
d. 972,000

On June 30, 2006, Ray Company discounted at the bank a customer’s P6,000,000, 6-month, 10% note receivable
dated April 30, 2006. The bank discounted the note at 12%.
4. Ray’s proceeds from this discounted note amounted to
a. 5,640,000
b. 5,760,000
c. 6,048,000
d. 6,174,000

On July 1, 2005, Kay Corporation sold equipment to Mando Company for P1,000,000. Kay accepted a 10% note
receivable for the entire sales price. This note is payable in two equal installments of P500,000 plus accrued interest
on December 31, 2005 and December 31, 2006. On July 1, 2006, Kay discounted the note at a bank at an interest
rate of 12%
5. Kay’s proceeds from the discounted note were
a. 484,000
b. 493,500
c. 503,500
d. 517,000

Rand Company accepted from a customer a P4,000,000, 90-day 12% interest bearing note dated August 31, 2006.
On September 30, 2006, Rand discounted the note at the Apex State Bank at 15%. However, the proceeds were not
received until October 1, 2006.
6. In the September 30,2006 balance sheet, the amount of receivable from the bank based on a 360-day year,
includes accrued interest revenue of
a. 17,000
b. 20,000
c. 30,000
d. 40,000

On November 1, 2006, Davis Company discounted with recourse at 10% a one-year, noninterest bearing,
P2,050,000 note receivable maturing on January 31, 2007.
7. What amount of contingent liability for this not must Davis disclose in its financial statements for the year ended
December 31, 2006?
a. 2,050,000
b. 2,000,000
c. 2,033,333
d. 0

On August 1, 2006, Vann Corporation’s P5,000,000 one-year, non-interest-bearing note due July 31, 2007, was
discounted at Homestead Bank at 10.8%. Vann uses the straight-line method of amortizing discount.
8. What amount should Vann report for note payable in its December 31, 2006 balance sheet?
a. 5,000,000
b. 4,775,000
c. 4,685,000
d. 4,460,000

Brooke Corporation discounted its own P5,000,000 one-year note at a bank, at a discount rate of 12%, when the
prime rate was 10%. In reporting the note on Brooke’s balance sheet prior to the note’s maturity,
9. what rate should Brooke use for the accrual of interest?
a. 10.0%
b. 10.7%
c. 12.0%
d. 13.6%

Frame Company has an 8% note receivable dated June 30, 2004, in the original amount of P1,500,000. Payments of
P500,000 in principal plus accrued interest are due annually on July 1, 2005, 2006 and 2007. In its June 30, 2006
balance sheet,
10. what amount should Frame report as a current asset for interest on the note receivable?
a. 120,000
b. 40,000
c. 80,000
d. 0

On June 1, 2006, Yola Corporation loaned Dale P500,000 on a 12% note, payable in five annual installments of
P100,000 beginning January 2, 2007. In connection with this loan, Dale was required to deposit P5,000 in a non-
interest bearing escrow account. The amount held in escrow is to be returned to Dale after all principal and interest
payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2006.
Dale made timely payments through November 1, 2006. On January 2, 2007, Yola received payment of the first
principal installment plus all interest due.
11. At December 31, 2006, Yola’s interest receivable on the loan to Dale should be
a. 0
b. 5,000
c. 10,000
d. 15,000

On December 31, 2006, Jet Company received two P1,000,000 notes receivables from customers in exchange for
services rendered. On both notes, interest is calculated on the outstanding principal balance at the annual rate of 3%
and payable at maturity. The note from Hart Corporation, made under customary trade terms, is due in nine months
and the note from Maxx Company is due in five years. The market interest rate for similar notes on December 31,
2006 was 8%. The compound interest factors to convert future value into present value at 8% follow:
Present value of 1 due in nine months .944
Present value of 1 due in five years .680
12. At what amounts should these two notes receivable be reported in Jet’s December 31, 2006 balance sheet?
Hart Maxx
a. 944,000 680,000
b. 965,200 782,000
c. 1,000,000 680,000
d. 1,000,000 782,000
On January 1, 2006 Ott Company sold goods to Fox Company. Fox signed a noninterest-bearing note requiring
payment of P600,000 annually for seven years. The first payment was made on January 1, 2006. The prevailing rate
of interest for this type of note at date of issuance was 10%. Information on present value factors is as follows:
Period Present value of 1 at 10% Present value of ordinary annuity of
1 at 10%
6 .56 4.36
7 .51 4.87
13. Ott should record sales revenue in January 2006 of
a. 3,216,000
b. 2,922,000
c. 2,616,000
d. 2,142,000

Rex Company accepted a P1,000,000, 2% interest bearing note from Brooks Company on December 31, 2006, in
exchange for a machine with a list price of P800,000 and a cash price of P750,000. The note is payable on
December 31, 2008.
14. In its 2006 income statement, Rex should report the sale at
a. 750,000
b. 800,000
c. 1,000,000
d. 1,040,000

On December 31, 2006, Park Company sold used equipment and received a noninterest-bearing note requiring
payment of P500,000 annually for ten years. The first payment is due December 31, 2007 and the prevailing rate of
interest for this type of note at date of issuance is 12%. Present value factors are as follows:
Present value of 1 at 12% for 10 periods 0.322
Present value of ordinary annuity of 1 at 12% for 10 periods 5.650
15. In its December 31, 2006 balance sheet, Park should report the carrying amount of the note at
a. 1,610,000
b. 2,175,000
c. 2,825,000
d. 5,000,000

On December 30, 2006, Chang Company sold a machine to Door Company in exchange for a noninterest bearing
note requiring ten annual payments of P100,000. Door made the first payment on December 30, 2006. The market
interest rate for similar notes at date of issuance was 8%. Information on present value factors is:
Present value Present value of ordinary annuity of 1
Period of 1 at 8% at 8%
9 0.50 6.25
10 0.46 6.71
16. In its December 31, 2006 balance sheet, what amount should Chang report as note receivable?
a. 450,000
b. 460,000
c. 625,000
d. 671,000

On January 2, 2006, Emme Company sold equipment with a carrying amount of P4,800,000 in exchange for a
P6,000,000 noninterest bearing note due January 2, 2009. There was no established exchange price for the
equipment. The prevailing rate of interest for a note of this type on January 2, 2006, was 10%. The present value of
1 at 10% for three periods is 0.75
17. In Emme’s 2006 income statement, what amount should be reported as interest income?
a. 90,000
b. 450,000
c. 500,000
d. 600,000

18. In Emme’s 2006 income statement, what amount should be reported as gain or loss on sale of equipment?
a. 300,000 loss
b. 300,000 gain
c. 1,200,000 gain
d. 2,700,000 gain

On January 1, 2006, Mill Company sold a building and received as consideration P1,000,000 cash and a P4,000,000
noninterest bearing note due on January 1, 2009. There was no established exchange price for the building, and the
note had no ready market. The prevailing rate of interest for a note of this type at January 1, 2006, was 10%. The
present value of 1 at 10% for three periods is 0.75.
19. What amount of interest revenue should be included in Mill’s 2006 income statement?
a. 370,000
b. 400,000
c. 300,000
d. 330,000
Pasadeñas Company sold some machinery to the Rodac Company on January 1, 2005, for which the cash selling
price was P7,582,000. Rodac entered into an installment sales contract with Pasadeña at an interest rate of 10%.
The contract required payments of P2,000,000 a year over five years with the first payment due on December 31,
2005.
20. What amount of interest income, if any, should be included in Pasadeña’s 2006 income statement using the
“interest method”?
a. 1,000,000
b. 634,020
c. 758,200
d. 0

Appari Bank granted a loan to a borrower on January 1, 2006. The interest rate on the loan is 10% payable annually
starting December 31, 2006. The loan matures in five years on December 31, 2010.
Principal amount 4,000,000
Direct origination cost 61,500
Origination fee received from borrower 350,000
The effective rate on the loan after considering the direct origination cost and origination fee received is 12%.
21. What is the carrying value of the loan receivable on January 1, 2006?
a. 4,000,000
b. 4,650,000
c. 4,411,500
d. 3,711,500

22. What is the interest income for 2006?

a. 400,000
b. 558,000
c. 529,380
d. 445,380

National Bank grants a 10-year loan to Abbo Company in the amount of P1,500,000 with a stated interest rate of 6%.
Payments are due monthly and are computed to be P16,650. National Bank incurs P40,000 of direct loan origination
cost and P20,000 of indirect loan origination cost. In addition, National Bank charges Abbo a 4-point nonrefundable
loan origination fee.
23. National Bank, the lender, has a carrying amount of
a. 1,440,000
b. 1,480,000
c. 1,500,000
d. 1,520,000

24. Abbo, the borrower, has a carrying amount of

a. 1,440,000
b. 1,480,000
c. 1,500,000
d. 1,520,000

Kalibo Bank loaned P5,000,000 to Caticlan Company on January 1, 2004. The terms of the loan require principal
payments of P1,000,000 each year for 5 years plus interest at 8%. The first principal and interest payment is due on
January 1, 2005. Caticlan Company made the required payments during 2005 and 2006. However, during 2006
Caticlan Company began to experience financial difficulties, requiring Kalibo to reassess the collectibility of the loan.
On December 31, 2006, Kalibo Bank determines that the remaining principal payment will be collected but the
collection of the interest is unlikely. The present value of 1 at 8% is as follows:
For one period 0.93
For two periods 0.86
For three periods 0.79
25. What is the loan impairment loss on December 31, 2006?
a. 420,000
b. 210,000
c. 630,000
d. 0

26. What is the interest income to be reported by Kalibo Bank in 2007?

a. 223,200
b. 143,200
c. 240,000
d. 0

Buswang Beach Bank loaned Boracay Company P7,500,000 on January 1, 2004. The terms of the loan were
payment in full on January 1, 2009 plus interest payment at 11%. The interest payment was made as scheduled on
January 1, 2005. However, due to financial setbacks, Boracay was unable to make its 2006 interest payment.
Buswang Beach considers the loan impaired and projects the cash flows from the loan as of December 31, 2006.
Assume that the bank accrued the interest at December 31, 2005, but did not continue to accrue interest due to the
impairment of the loan. The projected cash flows are:
Amount projected as of Dec. 31
Date of cash flow 2006
December 31, 2007 500,000
December 31, 2008 1,000,000
December 31, 2009 2,000,000
December 31, 2010 4,000,000
The present value of 1 at 11% is as follows:
For one period 0.90
For two period 0.81
For three period 0.73
For four period 0.66

27. How much is the loan impairment loss on December 31, 2006?
a. 2,965,000
b. 2,240,000
c. 5,360,000
d. 2,140,000

28. What is the interest income to be reported by Buswang Beach Bank in 2007?
a. 589,600
b. 534,600
c. 825,000
d. 599,456

REVIEW OF FINANCIAL ACCOUNTING THEORY AND PRACTICE

CASH AND CASH EQUIVALENTS

10. The following data pertain to Angat Corporation on December 31, 2005:

Current account at Metrobank P2,000,000

Current account at BPI (100,000)
Payroll account 500,000
Foreign bank account – restricted (in equivalent pesos) 1,000,000
Postage stamps 1,000
Employee’s post dated check 4,000
IOU from controller’s sister 10,000
Credit memo from a vendor for a purchase return 20,000
Traveler’s check 50,000
Not-sufficient-funds check 15,000
Money order 30,000
Petty cash fund (P4,000 in currency and expense receipts for P6,000)
10,000
Treasury bills, due 3/31/06 (purchased 12/31/05) 200,000
Treasury bills, due 1/31/06 (purchased 1/1/05) 300,000

Based on the above information, compute for the cash and cash equivalent that would be reported on the
December 31, 2005 balance sheet.
a. P2,784,000 c. P2,790,000
b. P3,084,000 d. P2,704,000

11. The following data pertain to Balagtas Corporation on December 31, 2005:

Checkbook balance P10,000,000

Bank statement balance 15,000,000
Check drawn on Balagtas’ account, payable to supplier, dated and recorded on Dec. 31,
2005, but not mailed until Jan. 15, 2006 3,000,000
Cash in sinking fund 4,000,000
Money market, three months due January 31, 2006 5,000,000

On December 31, 2005, how much should be reported as “cash and cash equivalents”?
c. P13,000,000 c. P18,000,000
d. P12,000,000 d. P17,000,000

12. On December 31, 2005, Baliuag Company had the following cash balances:

Cash in bank P15,000,000

Petty cash fund (all funds were reimbursed on December 31, 2005) 50,000
Time deposit 5,000,000
Saving deposit 2,000,000
 Cash in bank includes P500,000 of compensating balance against short term borrowing arrangement at
December 31, 2005. The compensating balance is legally restricted as to withdrawal by Baliuag. A check of
P300,000 dated January 15, 2006 in payment of accounts payable was recorded and mailed on December 31,
2005. In the current assets section of the December 31, 2005 balance sheet, what amount should be reported
as “cash and cash equivalents”?
c. P21,850,000 c. P21,800,000
d. P16,850,000 d. P14,850,000

13. Bocaue Company had the following account balances on December 31, 2005.

Petty cash fund P50,000

Cash in bank – current account 10,000,000
Cash in bank – payroll account 2,000,000
Cash on hand 500,000
Cash in bank – restricted account for plant additions, expected to
be disbursed in 2006 4,000,000
Treasury bills, due February 15, 2006 3,000,000

The petty cash fund includes unreplenished December 2005 petty cash expense vouchers of P20,000 and
employee IOUs of P10,000. The cash on hand includes a P100,000 check payable to Bocaue dated January 15,
2006. What should be reported as “cash and cash equivalents” on December 31, 2005?
c. P12,420,000 c. P15,420,000
d. P19,420,000 d. P15,450,000

14. Bulacan Corporation's checkbook balance on December 31, 2005, was P800,000. In addition, Bulacan held the
following items in its safe on December 31:

Check payable to Bulacan Corporation, dated January 2, 2006, not included in December 31
checkbook balance P200,000
Check payable to Bulacan Corporation, deposited December 20, and included in December
31 checkbook balance, but returned by bank on December 30, stamped "NSF." The
check was redeposited January 2, 2006, and cleared January 7
40,000
Post-dated checks 15,000
Check drawn on Bulacan Corporation's account, payable to a vendor, dated and recorded
December 31, but not mailed until January 15, 2006 100,000

The proper amount to be shown as cash on Bulacan's balance sheet at December 31, 2005, is
c. P760,000 c. P860,000
d. P800,000 d. P975,000

15. You noted the following composition of Hagonoy Company’s “cash account” as of December 31, 2005:

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, 2006) 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 check dated January 1, 2006 50,000
Customer check outstanding for 18 months 40,000
Total P7,760,000

Additional information follows:

c. Check of P200,000 in payment of accounts payable was recorded on December 31, 2005 but mailed to
suppliers on January 5, 2006.
d. Check of P100,000 dated January 15, 2006 in payment of accounts payable was recorded and mailed on
December 31, 2005.
e. The company uses the calendar year. The cash receipts journal was held open until January 15, 2006,
during which time P400,000 was collected and recorded on December 31, 2005.

The cash and cash equivalents to be shown on the December 31, 2005 balance sheet is
a. P3,310,000 c. P1,910,000
b. P2,910,000 d. P4,410,000
16. The following information pertains to Bustos Company as of December 31, 2005:

Cash balance per general ledger P15,000,000

Cash balance per bank statement 14,550,000
Checks outstanding (including certified check of P100,000) 1,000,000
Bank service charge shown in December bank statement 50,000
Error made by Bustos in recording a check that cleared the bank in
December (check was drawn in December for P500,000
but recorded at P700,000) 200,000
Deposit in transit 1,500,000

At the December 31, 2005 balance sheet cash in bank should be

b. P15,150,000 c. P14,250,000
c. P14,650,000 d. P14,550,000

17. The bookkeeper of Calumpit Company recently prepared the following bank reconciliation on December 31,
2005:

Balance per bank statement 20,000,000

Add: Deposit in transit 1,500,000
Checkbook and other bank charge 50,000
Error made by Calumpit in recording check No.
1005 (issued in December) 150,000
Customer check marked DAIF 500,000 2,200,000
Total 22,200,000
Deduct: Outstanding checks 1,900,000
Note collected by bank (includes P200,000 interest) 2,300,000 4,200,000
Balance per book 18,000,000

Calumpit has P1,000,000 cash on hand on December 31, 2005. The amount to be reported as cash on the
balance sheet as of December 31, 2005 should be
c. P19,600,000 c. P20,600,000
d. P18,600,000 d. P19,750,000

18. The petty cash fund of Guiguinto Company on December 31, 2005 is composed of the following:

Coins and currencies P14,000

Petty cash vouchers:
Gasoline payments 3,000
Supplies 1,000
Cash advances to employees 2,000
Employee’s check returned by bank marked NSF 5,000
Check drawn by the company payable to the order of Kristine
Anson, petty cash custodian, representing her salary 20,000
A sheet of paper with names of employees together with contribution
for a birthday gift of a co-employee in the amount of 8,000
Total P53,000

The petty cash ledger account has an imprest balance of P50,000. What is the correct amount of petty cash on
December 31, 2005?
4. P34,000 b. P39,000 c. P14,000 d. P42,000

19. The Plaridel Corporation was organized on January 3, 2005 with an authorized capital stock of P5,000,000. At
December 31, 2005 of the same year, the general ledger of said Company showed the following accounts and
balances:

Accounts receivable P 200,000

Merchandise inventory 250,000
Land 1,200,000
Building 1,600,000
Furniture and fixtures 400,000
Accounts payable 420,000
Notes payable – bank 500,000
Common stock 1,500,000
Additional paid capital 100,000
Sales 5,800,000
Expenses paid (excluding purchases) 725,000

Your review of the bank statement for December disclosed the following information:
 Bank balance, December 31, 2005 P 524,500
Bank service charge 6,000
Deposits in transit 62,500
Total checks not returned by the bank 128,000

Your review also revealed that the cash received of P62,500 on December 31, 2005 was deposited on January
2, 2006. The company’s mark up on sales is 40%.

How much is the adjusted cash balance as of December 31, 2005?

a. P459,000 c. P39,000
b. P536,000 d. P1,619,000

20. Reconciliation of Malolos Corporation’s bank account at November 30, 2005 follows:

Balance per bank statement P3,150,000

Deposits in transit 450,000
Checks outstanding (45,000)
Correct cash balance P3,555,000

Balance per books P3,558,000

Bank service charge (3,000)
Correct cash balance P3,555,000

December data are as follows:

Bank Books
Checks recorded P3,450,000 P3,540,000
Deposits recorded 2,430,000 2,700,000
Collection by bank (P600,000 plus interest) 630,000 -
NSF check returned with December bank statement 15,000 -
Balances 2,745,000 2,715,000

The checks outstanding on December 31, 2005 amount to

c. P45,000 b. P135,000 c. P90,000 d. P0