Professional Documents
Culture Documents
URGEL BSA IV
RECEIVABLES
PROBLEM NO. 1 - Composition of trade and other receivable
On December 31, 2015 the accounts receivable control account ofipil- ipil Co. had a
balance of P181,000. An analysis of the account; receivable account showed the
following:
Accounts known to be worthless P 2,500
Advance payments to creditors on purchase orders 10,000
Advances to affiliated companies 25,000
Customers' accounts reporting credit balance arising from sales return (15,000)
Interest receivable on bonds 10,000
Other trade accounts receivable - unassigned 50,000
Subscriptions receivable for ordinary share capital due 55,000
in 30 days
REQUIRED:
Determine the trade and other receivables to be reported on the entity's December 31,
2015 statement of financial position.
SOLUTION:
Items included:
Trade accounts receivable (see computation below) ` 91,500
Advance payments to creditors on purchase orders 10,000
Interest receivable on bonds 10,000
Subscriptions receivable due in 30 days 55,000
Trade and other receivables 166,500
Composition of trade accounts receivable:
Other trade accounts receivable unassigned 50,000
Trade accounts receivable - assigned 15,000
Trade installment receivable due 1 18 months,
net of unearned finance charges of P2,000 20,000
Trade receivables from officers due currently 1,500
Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks) 5,000
Trade accounts receivable 91,500
The external auditor submitted the following audit comments for possible adjustments:
Love M. Do Merchandise found defective; returned by customer
on October 31, 2015 for credit, but the credit memo
was issued by Beatles only on January 15, 2016.
Strawberry Fields Account is good but usually pays late.
Let It Be Corp. Paid in full on December 30, 2015 but not recorded.
Collections were deposited on January 2, 2016.
REQUIRED:
1. Adjusting entries as of December 31, 2015.
SOLUTION:
Requirement No. 1
1) Love M. Do
2) Strawberry Fields
No Entry
3) This Boy Company
No Entry
4) Girl Corporation
Sales 40,000
Accounts receivable 40,000
6) Let It Be Corp
Cash 124,000
Accounts receivable 124,000
7) Hey Jude
No Entry
No Entry
9) Yesterday Corp
No Entry
Requirement No. 2
In connection with the of the financial statements of Praktis Corporation, your audit
senior instructed you to examine the company's accounts receivable.
Prior to any adjustments you were able to extract the following balances from Praktis'
trial balance as of December 31, 201.5:
From the schedule of accounts receivable as of December 31, 2015, you determined
that this account includes the following:
Accounts receivable for more than a year totaling P21,000 should be written off.
Jay-ar We have not yet sold the goods. Merchandise billed for P18,000
We will remit the proceeds as soon were consigned to Jay-ar on
as the goods are sold. December 30, 2015.
The goods cost P13,000.
Based on your discussion -with PraktIS Credit Manager, you both agreed that an
allowance for doubtful accounts should be maintained using the following rates:
SOLUTION:
Per Books Adjustments Per Audit
a. Accounts receivable 442,500 1 (16,400) 387,400
2 15,000
3 (21,000)
4 (12,000)
5 (1,200)
6 (18,000)
7 (1,500)
Adjusting Entries:
1. Advances to officers and employees 16,400
Accounts receivable 16,400
Professional Company produces paints and related products for sale to the construction
industry throughout Metro Manila. While sales have remained relatively stable despite a
decline in the amount of new construction, there has been a noticeable change in the
timeliness with which the company's customers are paying their bills.
The company sells its products on payment terms of 2/10, n/30. In the past, over 75
percent of the credit customers have taken advantage of the discount by paying within
10 days of the invoice date. During the year ended December 31, 2015, the number of
customers taking the full 30 days to pay has increased. Current indications are that less
than 60% -of the customers are now taking the discount. Uncollect.ible accounts as a
percentage of total credit sales have risen from the 1.5% provided in the past years to
4% in the current year.
Professional Company
Accounts Receivable Collections
December 31, 2015
The fact that some credit accounts will prove uncollectible is normal, and annual bad
debt write-offs had been 1.5% of total credit sales for many years. However, during the
year 2015, this .percentage increased to 4%. The accounts receivable balance is
P1,500,000, and the condition of this balance in terms of age and probability of
collection is shown below:
At the beginning of the year, the Allowance for Doubtful Accounts had a credit balance
of 1'27,300. The company has provided for a monthly bad 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 2015 amounted to P8,000,000, and write-offs of unc011ectible
accounts during the year totaled P292,500.
REQUIRED:
1. Adjusted balance of the allowance for doubtful accounts as of December 31,
2015
2. The necessary adjusting journal entry to adjust the allowance for doubtful
accounts as of December 31, 2015
SOLUTION:
Requirement No.1
Category Aging ratio AR Balance Rate Allowance
1 10 days 64% 960,000 1.00% 9,600
11 30 days 18% 270,000 2.50% 6,750
31 60 days 8% 120,000 5.00% 6,000
61 120 days 5% 75,000 20.00% 15,000
121 180 days 3% 45,000 35.00% 15,750
over 180 days 2% 30,000 80.00% 24,000
100% 1,500,000 77,100
Requirement No. 2
Doubtful accounts expense 22,300
Allowance for doubtful accounts 22,300
Allowance for doubtful accounts, 1/1 27,300
Add provisions (P8,000,000 x 4%) 320,000
Total 347,300
Less accounts written-off 292,500
Balance before adjustment 54,800
Required allowance (see no. 1) 77,100
Additional required allowance for doubtful accounts 22,300
The Poster Co. sells direct to retail customers and also to wholesalers. Accounts
receivable and an allowance for had debts are maintained separately for each division.
On January 1, 2015 the balance of the retail accounts receivable was P209,000 while
the bad debts with respect to retail customers was a credit of P7,600.
Bad debts are provided for as a percentage GI credit sales. The accountant calculates
the percentage annually by using the experience of the three years prior to the current
year. The formula is bad debts written off less recoveries expressed as a percentage of
the credit sales for the same period. Cash receipts in 2015 from credit sales to retail
customers was P1,380,200.
SOLUTION:
Requirement No. 1.
Accounts receivable, 1/1/12 209,000
Credit sales for 2012 1,500,000
Collections during 2012 (1,380,200)
Accounts written off - 2012 (31,000)
Accounts receivable, 12/31/12 297,800
Requirement No. 2
Allowance for doubtful accounts, 1/1/12 7,600
Doubtful accounts expense - 2012 (see computation below) 30,000
Accounts written off - 2012 (31,000)
Recovery of accounts written off - 2012 4,200
Allowance for doubtful accounts, 12/31/12 10,800
In connection with your examination of the financial statements of Ringo, Inc. for the
year ended December 31, 2015, you were able to obtain certain information during your
audit of the accounts receivable and related accounts.
The December 31, 2015 balance in the Accounts Receivable control accounts is
P837,900.
1 A debit on December 31 for the amount of the credit to the Allowance for Doubtful
Accounts.
2. A credit Or P6,100 on November 30, 2015, and a debit to Allowance for Doubtful
Accounts because of a bankruptcy. The related sales took place on October 1, 2015.
REQUIRED:
1. Determine the following as of and for the year ended December 31, 2015:
a. Accounts receivable
b. Allowance for doubtful account
c. Doubtful accounts expense
2. Adjusting entries as of December 31, 2015
SOLUTION:
Requirement No. 1.a
GL/SL 60 61 to 90 91 to 120 over 120
Unadjusted balances 837,900 387,800 307,100 89,800 53,200
Add (deduct) adjustments:
AJE No. 1 (9,000) (9,000)
AJE No. 2 (6,100) (6,100)
AJE No. 3 11,000 11,000
Adjusted balances 833,800 387,800 318,100 83,700 44,200
Requirement No. 2
Adjusting journal entries:
1. Allowance for doubtful accounts 9,000
Accounts receivable - over 120 days 9,000
To write off definitely uncollectible accounts
The balance sheet of Yoko Corporation reported the following long-term receivables as
of December 31, 2014:
b. The note receivable from officer is dated December 31, 2014, earns interest at
10% per annum, and is due on December 31, 2017. The 2015 interest was
received on December 31, 2015.
c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2015, in.
exchange for an P800,000 non-interest bearing note due on April 1., 2017. 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, 201.5,
was 12%.. The present value factor of 1 for two periods at 12% is 0.797.
d. A tract of land was sold by the corporation to No Co. on July 1, 2015, for
P4,000,000 under an installment sale contract. No Co. signed a 4-year 11% note
for P2,800,000 on July 1, 2015, in addition to the down payment of P1,200,000.
The equal annual payments of principal and interest on the note will be P902,500
payable on July 1, 2016, 2017, 2018,and 2019. The land had an established
cash price of P4,000,000, and its cost to the corporation was P3,000,000. The
collection of the-installments on this note is reasonably assured.
REQUIRED:
Determine the following as of and for the year ended December 31, 2015:
1. Noncurrent receivables
2. Current portion of long-term receivables
3. Accrued interest receivable
4. Interest income
SOLUTION:
Requirement No. 1
Note receivable from sale of plant
Balance, 12/31/12 (P6,000,000 - P2,000,000) 4,000,000
Less installment due on April 1, 2013 2,000,000 2,000,000
Note receivable from officer, due 12/31/14 1,600,000
Note receivable from sale of equipment
Present value of note, 4/1/12 (P800,000 x 0.797) 637,600
Discount amortization-2012 (P637,600 x 12% x 9/12) 57,384 694,984
Note receivable from sale of land 2,800,000
Balance, 12/31/12
Less principal installment due on 7/1/13 594,500 2,205,500
Total amount to be received 6,500,484
Less interest (P2,800,000 x 11%) 308,000
Total noncurrent receivables, 12/31/12 6,192,484
Requirement No. 2
Note receivable from sale of plant due on 4/1/13 2,000,000
Note receivable from sale of land (see no. 1) 594,500
Current portion of long-term receivables 2,594,500
Requirement No. 3
Note receivable from sale of plant (P4,000,000 x 12% x 9/12) 360,000
Note receivable from sale of land (P2,800,000 x 11% x 6/12) 154,00
Accrued interest receivable, 12/31/12 514,000
Requirement No. 4
Note receivable from sale of plant:
P6,000,000 x 12% x 3/12 180,000
P4,000,000 x 12% x 9/12 360,000 540,000
Note receivable from officer (P1,600,000 x 10%) 160,000
Note receivable from sale of equipment (P637,600 x 12% x 9/12) 57,384
Note receivable from sale of land (P2,800,000 x 11% x 6/12) 154,000
Interest income 911,384
On January 1, 2015, Pedro Company sold land that originally cost P400,00() to Buyer
Company. As payment, Buyer gave Pedro Company a P600,000 note. The note bears
an interest rate of 4% and is to be repaid in three annual installments of P200,000 (plus
interest on the outstanding balance). The first payment is due on December 3'1, 2015.
The market price of the land is not reliably determinable. The prevailing rate of interest
for notes of this type is 14% on January 1, 2015 and 15% on December 31, 2015.
Pedro made the following journal entries in relation to the sale of land and the related
note receivable:
January 1, 2015
Notes receivable P600, 000
Land P400, 000
Gain on sale of land 200,000
December 31, 2015
Cash P224,000
Notes receivable P200,000
Interest income 24,000
Pedro reported the notes receivable in its statement of financial position at December
31, 2015 as part of trade and other receivables.
REQUIRED:
1. Determine the following as of and for the year ended December 31, 2015:
a. Correct gain on sale of land
b. Correct interest income
c. Overstatement of profit
d. Correct carrying amount of note receivable
e. Overstatement of working capital
2. Adjusting entries as of December 31, 2015
My Love Corporation made the following entries in relation to the sale of the equipment
and the related note receivable:
January 1, 2014 P
Cash 300,000
Notes receivable 1,705,900
Cost of goods sold 750,000
Sales P2, 005,900
Inventory 750,000
December 31 2014
Cash P341, 180
Notes receivable P341, 180
December 31 2015
Cash P341, 180
Notes receivable P341, 180
My Love Corporation reported the notes receivable in its statement of financial position
at December 31, 2014 and 2015 as part of trade and other receivables.
REQUIRED:
Determine the following:
1. The effective interest rate
2. Overstatement of profit for 2014
3. Overstatement of retained earnings as of December 31, 2015
4. Overstatement of working capital as of December 31, 2015
SOLUTION:
Requirement No. 1
PVF used to calculate the annual payment (P1.2M/P341,180) 3.5172
Ordinary annuity factor at 13% for 5 periods 3.5172
Requirement No. 2
Profit
over (under)
Sales over
Reported 2,005,900
Should be 1,500,000 505,900
Interest income under
Reported 0
Should be 156,000 (156,000)
Net misstatement 349,900
Requirement No. 3
RE, 12/31/12
over (under)
2011 profit overstated (see no. 2) 349,900
2012 profit understated (interest income under)
Reported 0
Should be (refer to amortization schedule) 131,927 (131,927)
Net misstatement 217,973
Requirement No. 4
Amount reported under current assets
[P1,705,900 - (P341,180 x 2)] 1,023,540
should be 236,456
Net misstatement of WC, 12/31/12 - over (under) 787,084
Amortization schedule:
Date Payment Interest (13%) Principal CA
1,200,000
12/31/11 341,180 156,000 185,180 1,014,820
12/31/12 341,180 131,927 209,253 805,567
12/31/13 341,180 104,724 236,456 569,111
12/31/14 341,180 73,984 267,196 301,915
12/31/15 341,180 39,265 301,915 -
1,705,900
Merlyn, Inc.
Analysis of Notes Receivable
For the Year Ended December 31, 2015
Date
2015 debit credit
Jan. 1 Balance Forwarded Received P118,000
P25,000 6% note due 10/29/15
from Anna whose trade account
was past due
Feb. 28 Discounted Anna note 24,960
Date
2015 Debit Credit
Nov. 4 Paid protest fee and maturity
value of Anna note to bank.
Note discounted 2/28/15 was 26,031
dishonored.
(1) Balances at January 1, 2015, were a debit of P1,400 in the Accrued Interest
Receivable account and a credit of P400 in the Unearned Interest Income
account. The P118,000 debit in the Note Receivable account consisted the
following three notes:
(2) No entries were made during 2015 to the Accrued Interest Receivable or the
Unearned Interest Income account and only one entry for a credit of P1,200 on
December 31., appeared in the Interest Income account.
(3) All notes were from the trade customers unless otherwise indicated.
(4) Debits and credits affecting Notes Receivables were correctly recorded unless
the facts indicate otherwise.
REQUIRED:
1. Determine the following as of and for the year ended December 31, 2015:
a. Notes receivable-trade
b. Interest income
2. Adjusting entries as of December 31, 2015
SOLUTION:
Requirement No. 1.a
Unadjusted trade NR 12,014
Add (Deduct) adjustments:
1/1 25,000
2/28 24,960
3/29 (6,200)
8/30 4,200
9/4 (40,500)
11/1 8,120
11/4 (26,031)
(25,000)
12/27 24,000
12/31 6,200
12/31 42,437
12/31 (1,200)
Adjusted trade NR, 12/31/12 48,000
Composition:
Robinson (P70,000 - P30,000) 40,000
Tripper (received PDC on 11/1) 8,000
Adjusted notes receivable-trade, 12/31/12 48,000
Notes:
1) NR from Pepper - collected on 12/31/12
2) NR from Anna - accepted equipment in full settlement on 12/27/12
3) NR from Julia - non-trade
Requirement No. 2
1/1 Notes receivable 25,000
Accounts receivable 25,000
Bahrain Bank granted a loan to a borrower in the amount of P10, 000,000 on January 1,
2014. The interest rate on the loan is 10% payable annually starting December 31,
2014. The loan matures in five years on December 31, 2018. Bahrain Bank incurs
P130,900 of direct loan origination cost and P50,000 of indirect loan origination cost. In
addition, Bahrain Bank charges the borrower a 5-point nonrefundable loan origination
fee.
The borrower paid the interest due on December 31, 2014. However, during 2015 the
borrower began to experience financial difficulties, requiring the bank to reassess the
collectability of the loan. As of December 31, 2015, the bank expects that only
P8,000,000 of the principal will be recovered. The P8,000,000 principal amount is
expected to be collected in two equal installments on 'December 31, 2017 and
December 31, 2019. The prevailing interest rates for similar type of note as of
December 31, 2014 and 2015 are 15% and 16%, respectively.
REQUIRED:
Determine the following:
1. Interest income to be recognized in 2014
2. Carrying amount of the loan as of December 31, 2014
3. Loan impairment loss to be recognized in 2013
SOLUTION:
Requirement No. 1 & 2
Principal 10,000,000
Direct origination cost 130,900
Origination fee received from borrower (P10M x .05) (500,000)
Carrying amount, 1/1/12 9,630,900
Amortization schedule
Requirement No. 3
1. In the audit of which of the following general ledger accounts will tests of controls
be particularly appropriate?
a. Equipment
b. Bank charges
c. Bonds payable
d. Sales
ANSWER - D
2. The purpose of tests of controls over shipping is to determine whether
a. Billed goods have been shipped.
b. Shipments are billed.
c. Shipping department personnel are competent.
d. Credit is approved before goods are shipped.
ANSWER - B
4. An auditor most likely would review an entity's periodic accounting for the
numerical sequence of shipping documents and invoices to support
management's financial statement assertion of
a. Existence or occurrence
b. Rights and obligations
c. Valuation
d. Completeness
ANSWER - D
6. An auditor who has confirmed accounts receivable may discover that the sales
journal was held open past year-end if
a. Positive confirmations sent to debtors are not returned
b. Negative confirmations sent to debtors are not returned
c. Most of the returned negative confirmations indicate that the debtor owes a
larger balance that the amount being confirmed.
d. Most of the returned positive confirmations indicate that the debtor owes a
smaller balance than the amount being confirmed.
ANSWER - D
7. The auditor finds situation in which one person has the ability to collect
receivables, make deposits, issue credit memos and record receipt of payments.
The auditor suspects the individual may be stealing from cash receipts. Which of
the following audit procedures would be most effective in discovering fraud in this
scenario?
a. Send positive confirmations to a random selection of customers.
b. Send negative confirmations to all outstanding accounts receivable
customers.
c. Perform a detailed review of debits to customer discounts, sales returns, or
other debit accounts, excluding cash posted to the cash receipts journal.
d. Take a sample of bank deposits and trace the detail in each bank deposit
back to the entry in the cash receipts journal.
ANSWER - C
8. All of the following are examples of substantive tests to verify valuation of net
accounts receivable except
a. The Re-computation of the allowance for bad debts.
b. Inspection of accounts for current versus non-current status in the statement
of financial position.
c. Inspection of the aging schedule and credit records of past due accounts.
d. Comparison of the allowance for bad debts with past records.
ANSWER - B
10. The negative request form of accounts receivable be used when the
12. Which of the following is the greatest drawback of using subsequent collections
evidenced only by a deposit slip as an alternative procedure when responses to
positive accounts receivable confirmations are not received?
a. Checking of subsequent collections can never be used as an alternative
auditing procedure.
b. By examining a deposit slip only, the auditor does not know whether the
payment is for the receivable at the balance sheet date or a subsequent
transaction.
c. deposit slip is not received directly by the auditor.
d. A customer may not have made a payment on a timely basis.
ANSWER - B