CAFOFORO, NEIL JOY P.

ESTRELLA, JOSE ENRIQUE A.

PATENIO, SANDRA FAYE S.
“RECEIVABLES”
PROBLEM NO. 1 - Composition of trade and other receivable
On December 31, 2015 the accounts receivable control account of Ipil-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) 10,000
Interest receivable on bonds
Other trade accounts receivable - unassigned
50,000
Subscriptions receivable for ordinary share capital due
55,000
in 30 days
Trade accounts receivable - assigned

15,000
Trade installment receivable duel - 18 months,
(including unearned finance charges, P2,000)
22,000
Trade receivables from officers, due currently

1,500
Trade accounts on which post-dated checks are held 5,000
(no entries were made on receipts of checks)
Total P 181,000

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

Items not included: 2,500 Write off

Accounts known to be worthless
Advances to affiliated companies 25,000 Noncurrent Trade
investment Customers' account with credit balance (15,000)
and other payables

PROBLEM NO. 2 - Computation of adjusted accounts receivables . In the

audit of Beatles Company, the auditor had an appreciation of the following
schedule and noted some comments for possible adjustments:
Beatles Company
Accounts Receivable Schedule
 December 31, 2015
Customer Balance Current Past Due

Love M. Do P92,000 P -
P92,000 Strawberry Fields 420,000 248,000
172,000 350,00 92,000
This Boy Company
258,000 374,000 212,000 162,000
Girl Corporation
Ticket To Ride 'Transport 160,000 124,000 -
160,000 Corp. Let It Be Corp. 60,000
64,000 4,000 . 4,000
Hex' Jude 256,000
Get Back Company 80,000
176,000 Yesterday Corp. 240,000 240,900
-
Totals P2,020,000 P936,000 Pl,084. 000

The Accounts Receivable control account balance was determined to be

P2,020,000.

The external auditor submitted the following audit comments for possible
adjustments:
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.

Account is good but usually pays late.

Merchandise worth P160,000. was destroyed while

in transit on May 31, 2015, terms FOB Destination.
The carrier was billed on June 15, 2015. (See Ticket
To Ride Corp. and Yesterday Corp.)

Customer billed twice in error for P40,000. Balance is

collectible.

Collected in full on January 31, Corp. 2016

Love M. Do
Strawberry Fields

This Boy Company

Girl Corporation

Ticket To Ride
Let It Be Corp. Paid in full on December 30, 2015 but not recorded.
Collections were deposited on January 2, 2016.

Hey Jude Received account confirmation from customer for

P44,000. Investigation revealed an erroneous credit for
P40,000. (See Get Back Company)

Get Back Company Neglected to post P40,000 credit to customer's

account.
Yesterday Corp. Customer wants to know reason for receipt of
P160,00() credit memo as their accounts payable
balance was P400,000.
REQUIRED:
1. Adjusting entries as of December 31, 2015.

2. Adjusted balance of Accounts Receivable - Trade as of December 31, 2015.

SOLUTION:
Requirement No. 1

1) Love M. Do
Sales returns 92,000 92,000
Accounts receivable
2) Strawberry Fields

No Entry

3) This Boy Company

No Entry

4) Girl Corporation

Sales 40,000
Accounts receivable 40,000
5) Ticket To Ride Corp.
 Accounts receivable-Nontrade 160,000
Accounts receivable 160,000
6) Let It Be Corp

Cash 124,000 124,000

Accounts receivable
7) Hey Jude

No Entry

8) Get Back Company

No Entry

9) Yesterday Corp

No Entry

Requirement No. 2
Unadjusted balance 2,020,000

Add (Deduct) adjustments: (92,000)

No. 1
No. 4 (40,000)
No. 5 160,000)
No. 6 (124,000)
Adjusted balance 1,604,000

PROBLEM NO. 3 – Audit of accounts receivable and related accounts

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:

Accounts receivable P442,500

Allowance for doubtful accounts 15,000
From the schedule of accounts receivable as of December 31, 2015, you
determined that this account includes the following:

Accounts with debit balances: P 238,500

60 days old and below
61 to 90 days 117,200 P 441,100
Over 90 days 85,400
Advances to officers 16,400
Accounts with credit balance (5,999)
Accounts receivable per GL P 442,500
The credit balance in customer's account represents collection from a customer
whose account had been written-off as uncollectible in 2014.

Accounts receivable for more than a year totaling P21,000 should be written off.

Confirmation replies received directly from customers disclosed the following

exceptions:

Customer Customer's Comments Audit Findings

Jessie The goods sold on December
1 were returned
December 16, 2015.
Robert We do not owe this amount
to (bad word). We did
not receive any merchandise Robert on December 29, 2015
terms
from your company.
The client failed to record
on credit memo no. 23 for
P12,000. The merchandise
Was included in ending inventory
At cost.
investigation revealed that goods
goods sold P16,000 were shipped
FOB shipping point. The goods

were lost in transit and the

shipping company has knowledge
its responsibility for the lost of
Customer customer’s comments merchandise.
audit findings
Ann I am entitled to a 10% Anne is an employee of

employee discount. Praktiscompany,

starting November 2015,
Your bill should be reduced
employees were
 by P1,200. Entitled to a special discount.

Jay-arWe have not yet sold the goods. Merchandise billed for
P18,000
We will remit the proceeds as soon as were consigned to Jay-ar on
the goods are sold. December 30, 2015. The
goods cost P13,000.

Roy We do not owe you P20,000. The sale of merchandise on

We already paid our December 18, 2015 was paid
accounts as evidenced by by Roy on January 6,
2016.
OR # 1234.

Carla Reduce your bill by P1,500 This amount represents

freight paid by the customer for the
merchandise shipped on
December 17, 2015, terms, FOB
destination-collect.

Based on your discussion -with PraktIS Credit Manager, you both agreed that an
allowance for doubtful accounts should be maintained using the following rates:

60 days old and below 1%

61 to 90 days 2%
Over 90 days 5%
REQUIRED: 1. Compute for the adjusted balances of following:

a. Accounts receivable P 387, 400

b. Allowance for doubtful accounts P 7,622

2. Adjusting entries as of December 31, 2015

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)
60 days old and below 238,500 4 (12,000)

205,800 5 (1,200)

6 (18,000)
7 (1,500)

61 to 90 days 117,200
117,200 85,400 3 (21,000)
Over 90 days
64,400
b. Allowance for doubtful accounts 15,000 2 15,000

7,622 3 (21,000)

8 (1,378)
Adjusting Entries: 16,400

1. Advances to officers and employees

Accounts receivable
16,400
2. Accounts receivable 15,000
Allowance for doubtful accounts
15,000
Erroneous recording of recovery from written off account
3. Allowance for doubtful accounts 21,000
Accounts receivable (>90 days)
21,000
Accounts that should be written off
4. Net sales 12,000
Accounts receivable (<60 days)
12,000
Unrecorded credit memo
5. Net sales 1,200
 Accounts receivable (<60 days)
1,200
Unrecorded employee discount
6. Net sales 18,000
Accounts receivable (<60 days)
18,000
Inventory 13,000

Cost of sales
13,000
Goods out on consignment erroneously billed
7. Freight out 1,500
Accounts receivable (<60 days) 1,500
Unrecorded freight-out
8. Allowance for doubtful accounts 1,378

Doubtful accounts expense 1,378

60 days old and below 205,800 1%

2,058 117,200 2%
61 to 90 days
2,344 64,400 5%
Over 90 days
3,220 7,622
Required allowance
Balance per books before this adjustment (15,000+15,000-21,000) 9,000

Adjustment
1,378

PROBLEM NO. 4 - Audit of allowance for doubtful accounts

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.

In response to your request for more information on the deterioration of accounts

receivable collections, the company's controller has prepared the following report:

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:

Proportion to total Age of accounts Probability of

64% 1 - 10 days Collection
99.0%
18% 11 - 30 days 97.5%
8% Past due 31 - 60 days 95.0%
5% Past due. 61 - 120 days 80.0%
3% Past due 121 - 180 days 65.0%
2% Past due over 180 days 20.0%

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 AR Balance Rate Allowance
Category Aging ratio
1 – 10 days 64% 960,000 1.00% 9,600
11 – 30 days 18% 270,000 2.50%
6,750 8% 120,000 5.00%
31 – 60 days
6,000 5% 75,000 20.00%
61 – 120 days
15,000 3% 45,000 35.00%
121 – 180 days
15,750 2% 30,000 80.00%
over 180 days
24,000 100% 1,500,000 77,100

Requirement No. 2 22,300

Doubtful accounts expense

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

PROBLEM NO. 5 - Analysis of accounts receivable and related accounts

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.

The following summary pertains only to retail sales since 2012:

Credit Sales Bad Debts Bad Debts.

2012 P1,110,000 Written off Recoveries
P26,000 P2,150
 2013 1,225,000 29,500 3,750
2014 1,465,000 30,000 3,600
2015 1,500,000 31,000 4,200

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.

REQUIRED: Determine the following:

1. Adjusted accounts receivable as of December 31, 2015
2. Adjusted allowance for doubtful accounts as of December 31, 2015

SOLUTION:
Requirement No. 1. 209,000
Accounts receivable, 1/1/12
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 7,600

Allowance for doubtful accounts, 1/1/12

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
Computation of doubtful accounts expense - 2012: 30,000

Doubtful accounts expense for 2012 (P1,500,000 x 2%)

Computation of bad debt rate: AR writen-off Recoveries Net

Year Credit sales

2009 1,110,000 26,000 2,150
23,850 29,500 3,750
2010 1,225,000
25,750 30,000 3,600
2011 1,465,000
26,400 76,000 3,800,000 85,500
9,500
Net accounts written off (2009 to 2011) 76,000
Divide by credit sales (2009 to 2011) 3,800,000
Percentage of uncollectible accounts to charge sales 2.00%

PROBLEM NO. 6 - Audit of accounts receivable and related accounts

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.

• An aging schedule of the accounts receivable as of December 31, 2015 is

presented below:
Net debit Percentage to be applied
Aging after correction have been
Balance
made P387,800 1 percent
60 days & under
61 to 90 days 307,100 2 percent
91 to 120 days 89,800 5 percent
Over 120 days 53,200 Definitely uncollectible,
P9,000; k P837,900 the remainder is estimated to be

25% uncollectible.

• The Allowance for Doubtful Accounts schedule is presented below:

Debit Credit
Balance
January 1, 2015 P19,700
November 30, 2015 P6,100
13,600
 December 31, 2015 (P837,900 x 5%) P41,895
P55,495

• Entries made to Doubtful Accounts Expense account were:

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.

• There is a credit balance in one account receivable (61 to 90 days) of

P11,000; it represents an advance on a sales contract.

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
837,900 387,800 307,100 89,800
Unadjusted balances
53,200
Add (deduct) adjustments: (9,000)
AJE No. 1 (9,000)
AJE No. 2 (6,100) 11,000 (6,100)
AJE No. 3 11,000
Adjusted balances 833,800 387,800 318,100 83,700

44,200
Requirement No. 1.b balance Rate Allowance

Age of accounts
60 387,800 1% 3,878
61 to 90 318,100 2% 6,362
91 to 120 83,700 5% 4,185
over 120 44,200 25% 11,050
833,800 25,475
Requirement No. 1.c
Unadjusted allowance for doubtful accounts 55,495

Add (deduct) adjustments:

AJE no. 1 (9,000) (30,020)
AJE no. 4 (squeeze) (21,020)
Required allowance (see no. 1.b) 25,475
Balance per books (P41,895 - P6,100) 35,795

Add (deduct) adjustments:

AJE no. 2 6,100 (21,020) (14,920)
AJE no. 4
Doubtful accounts expense per audit 20,875
Requirement No. 2

Adjusting journal entries: 9,000

1. Allowance for doubtful accounts 9,000
Accounts receivable - over 120 days
To write off definitely uncollectible accounts
2. Doubtful account expense 6,100

Accounts receivable - 91 to 120 days

6,100
To correct entry made in recording accounts written off
3. Accounts receivable - 61 to 90 days 11,000
Advances from customers
11,000
To reclassify advances from customers
4. Allowance for doubtful accounts 21,020
Doubtful account expense
21,020
To adjust allowance to required balance

PROBLEM NO. 7 - Analysis of notes receivable and related accounts

The balance sheet of Yoko Corporation reported the following long-term

receivables as of December 31, 2014:

Note receivable from sale of plant P6, 000,000

 Note receivable from officer 1,600,000
In connection with your audit, you were able to gather the following transactions during
2015 and other information pertaining to the company's long-term receivables:

a. The note receivable from sale of plant bears interest at 12% per annum. The
note is payable in 3 annual installments of •P2,000„000 plus interest on the
unpaid balance every April 1. The initial principal and interest payment was
made on April 1, 2015.
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 4,000,000
Balance, 12/31/12 (P6,000,000 - P2,000,000)
 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 637,600
Present value of note, 4/1/12 (P800,000 x 0.797)
Discount amortization-2012 (P637,600 x 12% x 9/12) 57,384
694,984 2,800,000
Note receivable from sale of land
Balance, 12/31/12 594,500
Less principal installment due on 7/1/13
2,205,500 be received
Total amount to
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)
154,00 514,000
Accrued interest receivable, 12/31/12

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)
154,000 911,384
Interest income

PROBLEM NO. 8 - Audit of notes receivable and related accounts

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 P600, 000
Notes receivable
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
Requirement No. 1.a 503,105
PV of consideration receivable (see computation b
Carrying amount of land (400,000)
Correct gain on sale of land 103,105
Present value of cash flows to determine initial CA: PV, 1/1/12 PV,

Date Principal Interest (4%) Total PVF (14%)

12/31/12 12/31/12 200,000 24,000 224,000 0.8772
196,493 16,000 216,000 0.7695 166,212
12/31/13 200,000
12/31/14 189,475 8,000 208,000 0.6750 140,400
200,000
160,056 503,105 349,531
600,000
Requirement No. 1.b

Amortization schedule using effective interest method:

Date EI (14%) NI (4%) Disc. Amort. Repayment
AC 503,105
1/1/12 70,435 24,000 46,435 200,000
12/31/12
349,540 16,000 32,936 200,000
12/31/13 48,936
182,476 12/31/14 25,524 8,000 17,524
200,000 -
Interest income - 2012 (P503,105 x .1) 70,435

Requirement No. 1.c 96,895

Gain on sale of land - overstated (P200,000 - P10

Interest income for 2012 - understated (P70,435 - (46,435)
Net overstatement of 2012 profit 50,460
Requirement No. 1.d 349,540
Carrying amount, 12/31/12
Requirement No. 1.e 400,000

Amount reported as notes receivable 167,064

Correct current portion of NR (P349,540 - P182,47
Overstatement of CA/working capital 232,936

PROBLEM NO. 9 - Audit of notes receivable and related accounts

My Love Corporation is a local company engaged in buying and selling manufacturing
equipment. On 1 January 2014, My Love Corporation sold equipment, with a cash price
of P1, 500,000, to Silly Love Company. The cost of the equipment is P750,000. Silly
Love signed a deferred payment contract that provides for a down payment of
P300,000 and a 5-year note for P1,705,900. The note is to be paid in 5 equal annual
payments of P341, 180. The payments include interest and are made on) December 31
of each year, beginning on December 31, 2014.

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 P341, 180

Cash
Notes receivable P341, 180
December 31 2015 P341, 180

Cash
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

Sales – over over (under)

2,005,900
Reported 505,900
Should be 1,500,000
Interest income –under 0
Reported
Should be 156,000
(156,000) 349,900
Net misstatement
Requirement No. 3 RE,

12/31/12
over
2011 profit overstated (see no. 2) (under )

349,900
2012 profit understated (interest income under)
Reported 0
Should be (refer to amortization schedule) 131,927
(131,927) 217,973
Net misstatement
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: Interest (13%) Principal CA

Date Payment
12/31/11 341,180 156,000 1,200,000
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

PROBLEM NO. 10 - Analysis of notes receivable and related accounts You are
examining the financial statements of Merlyn, .Inc., for the year ended December 31,
2015. Your analysis of the 2015 entries in the Notes Receivable account follows:

Merlyn, Inc.
Analysis of Notes Receivable
For the Year Ended December 31, 2015

Date debit credit

2015 Balance Forwarded Received
Jan. 1 P118,000
P25,000 6% note due 10/29/15
from Anna whose trade account
Feb. 28 was past due 24,960
Discounted Anna note
Mar. 31 Received non interest-bearing 6,200

demand note from Julia, the

corporation's treasurer for a loan
Aug. 30 Received principal and interest

due from Robinson in accordance

with agreement, two principal
34,200
payments in advance
Sept. 4 Paid protest fee on note 500

dishonored by Pepper

Nov. 1 Received check dated 2/1/16 in

settlement of Tripper note. 8,120
The check was included in cash on
hand 1.2/31/15
Date Debit Credit
2015 Paid protest fee and maturity
Nov. 4
value of Anna note to bank. 26,031
Note discounted 2/28/15 was
dishonored.
Dec. 27 Accepted equipment with a fair

market value of P24,000 in full

24,000
settlement from Anna
Dec. 31 Received check dated 1./2/16

from Julia in payment of 3/31/15

note. (The cash was included in
petty cash until 1/2/16 when it was 6,200
returned to Julia in exchange for new
demand note for the same amount.)
Dec. 31 Received principal and interest on 42,437

Pepper note
Dec. 31 Accrued interest on Robinson note 1,200

The following information is available P 151, 931 P 139,917

(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:
Robinson note of 8/31/08 payable in annual P70,000
installments of P10,000 principal plus accrued
interest at 6% each August 31
Tripper note discounted to Merlyn, Inc. at 6% 8,000

11/1/1.4 due 11/1/15

Pepper note for P40,000 plus 6% interest dated 40,000

12/31/14 due on 9/1/15

 (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 12,014
Unadjusted trade NR
Add (Deduct) adjustments: 25,000
1/1
2/28 24,960
3/29 (6,200)
8/30 4,200
9/4 (40,500)
11/1 8,120
11/4 (26,031)
12/27 (25,000)
24,000
12/31 6,200
12/31 42,437
12/31 (1,200)
Adjusted trade NR, 12/31/12 48,000
Composition: 40,000

Robinson (P70,000 - P30,000)

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. 1.b

Robinson: 2,800
Jan. to Aug. (P70,000 x .06 x 8/12)
Sept. to Dec. (P40,000 x .06 x 4/12) 800 3,600
Tripper (P8,000 x .06 x 12/12) 480
Pepper (P42,437 - P40,500) 1,937
Anna (P25,000 x .06 x 2/12) 250
Julia (non-interest bearing) -
Total interest income - 2012 6,267
Requirement No. 2 25,000
1/1 Notes receivable
Accounts receivable
25,000
2/28 Notes receivable 24,960

Loss on discounting (P25,250 - P24,960) 290

Notes receivable - discounted 25,000
Interest income (P25,000 x .06 x 2/12)
250
3/29 Notes receivable - Officers 6,200

Notes receivable 6,200

8/30 Notes receivable 4,200

Interest receivable 1,400

Interest income 2,800
9/4 Notes receivable dishonored 500

Notes receivable 500

Notes receivable dishonored 40,000

Notes receivable 40,000

11/1 Notes receivable 8,120

Cash 8,120
11/4 Notes receivable dishonored 26,031

Notes receivable 26,031

Notes receivable discounted 25,000
 Notes receivable 25,000
12/27 Notes receivable 24,000

Loss on settlement of NR 2,031

Notes receivable dishonored 26,031
12/31 Notes receivable 6,200 6,200

Petty cash fund

12/31 Notes receivable 42,437 40,500

Notes receivable dishonored

Interest income 1,937
12/31 Interest receivable (P40,000 x 6% x 4/12) 400 800

Interest income 1,200

Notes receivable
12/31 Interest receivable (P8,000 x 6% x 2/12) 80

Interest income 80
12/31 Unearned interest income 400 400

Interest income

PROBLEM NO. 11 - Loan impairment

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 130,900 10,000,000

Direct origination cost (500,000)
Origination fee received from borrower (P10M x .05)
Carrying amount, 1/1/12 9,630,900
Amortization schedule

Date EI(11%) NI (10%) Disc. Amort. C.A.

1/1/11 1,059,399 1,000,000 9,630,900

12/31/11 59,399
9,690,299 1,000,000 65,933
12/31/12 1,065,933
9,756,232 1,000,000 73,186
12/31/13 1,073,186
9,829,418 1,000,000 81,236
12/31/14 1,081,236
9,910,654 1,000,000 89,346
12/31/15 1,089,346
10,000,000

Requirement No. 3

Carrying amount, 12/31/12 (see schedule)

9,756,232 Less PV of expected cash flows:
12/31/14 (P4M x 0.8116) 3,246,400
12/31/16 (P4M x 0.6587) 2,634,800
5,881,200
Loan impairment (bad debt expense)
3,875,032

PROBLEM NO. 12 - Theory

Select the best answer for each of the following
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

3. The purpose of tests of controls over billing is to determine whether

a. It Billed goods have been shipped.
b. Shipments are billed.
c. Billing department personnel are competent.
d. Credit is approved before goods are billed.
ANSWER - A

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

5. Which of the following might be detected by an auditor's review of the client's

sales cut-off?
a. Excessive goods returned for credit .
b. Unrecorded sales discounts
c. Lapping of year-end accounts receivable
d. inflated sales for the year
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

9. Confirmation, which is a specific type of inquiry, is the process of obtaining a

representation of information or of an existing condition directly from a third
-party. Two assertions for which confirmation of accounts receivable
balances provides primary evidence are
a. Completeness and valuation
b. Rights and obligations and existence
c. Valuation and rights and obligations
d. Existence and completeness
ANSWER – B
10. The negative request form of accounts receivable be used when
the

Combined Assessed Number of consideration by

Level Of Inherent and Small balances the recipient is
Control Risk Is is likely
a. Low Many
b. low few unlikely
c. high few likely
d. High Many likely
ANSWER – A

11. Which of the following procedures would an auditor most likely perform for
year-end accounts receivable confirmations when the auditor did not receive
replies to second requests?
a. Review the cash receipts journal for the month prior to year-
end.
b. Intensify the study of internal control concerning the revenue cycle.

c. Increase the assessed level of detection risk for the existence

assertion
d. Inspect the shipping records documenting the merchandise
sold to the debtors.
ANSWER - D

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