2 AUDIT OF RECEIVABLES

AUDIT PROGRAM FOR RECEIVABLES

Audit Objectives
To determine that:
a. Receivables represent valid claims against customers and other parties and have been
properly recorded.
b. The related allowance for doubtful accounts, returns and allowances, and discounts are
reasonably adequate.
c. Receivables are properly described.
d. Disclosures with respect to the accounts are adequate.

Audit Procedures
1. Obtain a list of aged receivable balances from the subsidiary ledger, and:
a. Foot and cross-foot the list.
b. Check if the list reconciles with the general ledger control account.
c. Trace individual balances to the subsidiary ledger.
d. Test the accuracy of the aging.
e. Adjust non-trade accounts erroneously included in customers' accounts.
f. Investigate and reclassify significant credit balances.

2. Test accuracy of balances appearing in the subsidiary ledger.

3. Confirm accuracy of individual balances by direct communication with customers.

a. Investigate exceptions reported by customers and discuss with appropriate officer
for proper disposal
b. Send a second request for positive confirmation requests without any replies from
customers.
c. If the second request does not produce a reply from the customer, perform extended
procedures, like:
aa. Reviewing collections after year-end.
bb. Checking supporting documents.
cc. Discussing the account with appropriate officer.
d. Discuss with appropriate officer, confirmation requests returned by the post office and
and perform extended procedures
e. Prepare a summary of confirmation results.

4. Review correspondence with customers for possible adjustments.

5. Test propriety of cutoff:

a. Examine sales recorded and shipments made a week before and after the balance
sheet date and ascertain whether the sales were recorded in the proper period.
b. Investigate large amounts of sales returns shortly after the balance sheet date.
6. Perform analytical procedures, like:
a. Gross profit ratio.
b. Accounts receivable turnover.
c. Ratio of accounts written off to sales or balance of accounts receivable.
Compare with prior year and industry average.

7. Review individual balances and age of accounts with appropriate officer, and:
a. Determine accounts that should be written off.
b. Determine the adequacy of allowance for doubtful accounts.

8. Obtain analysis of significant other receivables.

9. Ascertain whether some receivables are pledged, factored, discounted, or assigned.

10. Determine financial statement presentation and adequacy of disclosures.

11. Obtain receivable representation letter from client.

 2 problems
Problem 2-1
DETERMINING THE ACCOUNTS RECEIVABLE BALANCE

The following information is from Gerald Company's first year of operations:

Merchandise purchased $ 392,000

Ending merchandise inventory 94,000
Collections from customers 288,000
All sales are on account and goods sell at 50% above cost.

Required:
Determine the accounts receivable balance at the end of the company's first year of operation.

Problem 2-2
DETERMINING THE ALLOWANCE FOR BAD DEBTS BALANCE
The following information pertains to Acer Company for the year ended December 31, 2018.

Credit sales during 2018 $ 3,450,000

Collections of accounts written off in prior periods 165,000
Worthless accounts written off in 2018 189,000
Allowance for doubtful accounts, 1/1/18 145,000

Acer company provides for doubtful accounts based on 1 1/2% of credit sales.

Required:
Compute the balance of the allowance account at December 31, 2018.

Problem 2-3
COMPUTING NET SALES
The Allowance for Doubtful Accounts had a credit balance of $146,000 at December 31, 2017
During 2018, uncollectible accounts of $22,000 had been written off. The company estimates its
bad debts expense to be 3% of net sales. The balance of the allowance account at the end of
2018 was $424,220.

Required:
Compute the net sales for 2018.
Problem 2-4
COMPUTING THE AMOUNT OF
ACCOUNTS RECEIVABLE WRITTEN OFF
The policy of Bloomberg Company is to debit Bad Debt Expense for 3% of all new sales. The
following are the company's sales and allowance for bad debts for the past four years.
Allowance for Bad Debts
Year Sales Year-end Balance
2015 $ 3,000,000 $ 45,000
2016 2,950,000 56,000
2017 3,120,000 60,000
2018 2,420,000 75,000

Required:
Compute the amount of accounts written off for the years 2016, 2017, and 2018.

Problem 2-5
PREPARING AN ACCOUNTS RECEIVABLE AGING SCHEDULE
Carlyle Company's accounts receivable subsidiary ledger shows the following information:
Account Balance Invoice
Customer December 31, 2018 Date Amount

Axle, Inc. $ 35,180 12/06/18 $ 14,000

11/29/18 21,180

Naïve Corp. 20,920 09/27/18 12,000

08/20/18 8,920

Sailor Co. 30,600 12/08/18 20,000

10/25/18 10,600

Tiffany, Inc. 45,140 11/17/18 23,140

10/09/18 22,000

Uganda Co. 31,600 12/12/18 19,200

12/02/18 12,400

Xyclope Corp. 17,400 09/12/18 17,400

The estimated bad debts rates below are based on Carlyle Company's receivable collection
experience.
Age of Accounts Rate

0 - 30 days 1.0%
31 - 60 days 1.5%
61 - 90 days 3.0%
91 - 120 days 10.0%
Over 120 days 50.0%

The allowance for Bad Debts account had a credit balance of $3,500 on December 31, 2018
before adjustment.

Required:
1. Prepare an aging schedule of accounts receivable on December 31, 2018.
2. Compute the required allowance on December 31, 2018.
3. Prepare the December 31, 2018 adjusting entry.

Problem 2-6
ESTIMATING BAD DEBTS EXPENSE
BY AGING ACCOUNTS RECEIVABLE
Yellow Bell Company estimates its bad debt losses by aging its accounts receivable. The aging
schedule of accounts receivable at December 31, 2018 is presented below:

Age of Accounts Amount

0 - 30 days $ 843,200
31 - 60 days 461,000
61 - 90 days 192,400
91 - 120 days 76,650
Over 120 days 39,400
$ 1,612,650

Yellow Bell Company's uncollectible accounts experience for the past 5 years are summarized in
the following schedule:
A/R Balance Over 120
Year Dec. 31 0-30 days 31-60 days 61-90 days 91-120 days days
2017 $ 1,312,500 0.30% 1.80% 12.00% 38.00% 65.00%
2016 999,999 0.50% 1.60% 11.00% 41.00% 70.00%
2015 465,000 0.20% 1.50% 9.00% 50.00% 69.00%
2014 816,000 0.40% 1.70% 10.20% 47.00% 81.00%
2013 1,243,667 0.90% 2.00% 9.70% 33.00% 95.00%
The balance of the allowance for bad debts account at December 31, 2018 (before adjustment)
is $84,500.

Required:
Prepare the necessary journal entry to adjust the allowance for bad debts account at December 31, 2018.

Problem 2-7
FACTORING OF ACCOUNTS RECEIVABLE
On December 5, 2018, Bandit Company sold its accounts receivable (net realizable value, $260,000) for
cash of $230,000. Ten percent of the proceeds was withheld by the factor to allow for possible customer
returns and other account adjustments. The related allowance for bad debts is $40,000.

Required:
1. Compute the loss/gain on factoring of accounts receivable.
2. Prepare the necessary journal entry to record the sale of the accounts receivable.

Problem 2-8
ASSIGNMENT OF ACCOUNTS RECEIVABLE
On April 1, 2018, Sunvalley Hill Company assigned accounts receivable totaling $400,000 as collateral
on a $300,000, 16% note from Irwig Bank. The assignment was done on a nonnotification basis. In
addition to the interest on the note, the bank also receives a 2% service fee, deducted in advance on
the $300,000 value of the note.
Additional information:

1. Collections of assigned accounts in April totaled $191,100, net of a 2% sales discount.

2. On May 1, Sunvalley Hill Company paid the bank the amount owed for April collections plus
accrued interest on note to May 1.
3. The remaining accounts were collected by Sunvalley Hill Company during May except for
$2,000 accounts written off as worthless.
4. On June 1, Sunvalley Hill Company paid the bank the remaining balance of the note plus
accrued interest.

Required:
Prepare the journal entries to record the above transactions on the books of Sunvalley Hill Company.

Problem 2-9
NOTES RECEIVABLE: CURRENT AND NONCURRENT
PORTIONS, ACCRUED INTEREST, AND INTEREST EARNED
The following long-term receivables were reported in the December 2018, balance sheet of
Mangrove Corporation:
Note receivable from sale of plant $ 3,000,000
Note receivable from officer 800,000
The following transactions during 2018 and other information relate to the company's long-term
receivables:

1. The note receivable from sale of plant bears interest at 12% per annum. The note is payable
in 3 annual installments of $1,000,000 plus interest on the unpaid balance every April 1.
The initial principal and interest payment was made on April 1, 2018.

2. The note receivable from officer is dated December 31, 2017, earns interest at 10% per annum
and is due on December 31, 2020. The 2018 interest was received on December 31, 2018.
3. Mangrove Corporation sold a piece of equipment to Bahamas, Inc. on April 1, 2018, in exchange
for a $400,000 noninterest-bearing note due on April 1, 2020. The note had no ready market,
and there is no established exchange price for the equipment. The prevailing interest rate for a
note of this type at April 1, 2018, was 12%. The present value factor of 1 for two periods at
12% is 0.797.

4. A tract of land was sold by Mangrove Corporation to Orlane, Inc. on July 1, 2018, for $2,000,000
under an installment sale contract. Orlane Inc., signed a 4-year 11% note for $1,400,000 on
July 1, 2018, in addition to the down payment of $600,000. The equal annual payments of
principal and interest on the note will be $451,250 payable on July 1, 2019, 2020, 2021, 2022.
The land had an establish cash price of $2,000,000, and its cost to Mangrove Corporation
was $1,500,000. The collection of the installments on this note is reasonably assured.

Required:
Compute the following:
a. Noncurrent receivables.
b. Current portion of noncurrent receivables.
c. Accrued interest receivable at December 31, 2018.
d. Interest income for the year ended December 31, 2018.
Eye Openers
1. Define receivables.

2. Explain the classification and presentation of receivables in the statement

of financial position.

3. Explain the allowance method and direct write-off method of accounting

for bad debts.

4. Give the proforma entry under the allowance method for each of the following:

a. Doubtful accounts
b. Accounts receivable proved to be worthless
c. Recovery of accounts previously written-off

4. Give the proforma entry under the direct-write off method for each of the
following:

a. Doubtful accounts
b. Accounts receivable proved to be worthless
c. Recovery of accounts previously written-off

5. Explain the presentation of doubtful accounts in the income statement.

6. What are the three methods of estimating doubtful accounts?

7. When is an account past due?

8. What does a debit balance in the allowance for doubtful accounts indicate?

9. Define notes receivable.

10. What is a negotiable promissory note?

11. Explain the treatment of dishonored notes receivable.

12. What is the meaning of "present value" of notes receivable.

13 Explain fully receivable financing.

14 What are the four common forms of receivable financing? Explain

 each.

15 Distinguish pledge and assignment of accounts receivable.

16. What is the meaning of nonnotification and notification basis with

respect to assignment of accounts receivable?

17 Explain casual factoring and factoring as a continuing agreement.

18. Explain discounting of note receivable.

19. Give the formula in computing net proceeds from discounting of note
receivable.

20. Explain maturity value.

21. Explain discounting without recourse.

22. What is the formula in computing "discount"?