CHAPTER 4 – Audit of Receivables
Problem 1
The accounts receivable of FRANCO COMPANY were stated at P1,467,000 in a balance sheet
submitted to a banker for credit. You are called upon to audit the report and, upon
analysis, the asset was found to consist of the following items:
Due from customers on open account
Acknowledged claim for damages
Due from consignee at billed price – cost price
being P22,500
Investment in and advances to affiliated company
Loans to officers and employees
Deposits with municipalities – bids for contracts
Unpaid capital stock subscriptions
Advances to creditors for merchandise purchased
but not received
Cash advanced to salesmen for traveling expenses
Allowance for doubtful accounts
P 1,125,000
22,500
30,000
150,000
13,500
67,500
60,000
24,000
4,500
( 30,000)
P1,467,000
The amount of P1,125,000 due from customers was the remaining balance after deducting
accounts with credit balances of P6,000.
During your examination, you noted that on December 31, the company assigned P300,000
of customers’ accounts to secure a 17%, P240,000 note payable. A 1% commission based
on the accounts assigned was charged and deducted from the cash received. The client
recorded this transaction by a debit to cash and a credit to notes payable.
Questions
1. How much is the Accounts Receivable (gross) balance at December 31?
a. P 759,000
b. P 789,000
c. P 1,101,000
d. P 1,131,000
2. The total current non-trade receivable balance at December 31 is:
a. P 64,500
b. P 96,000
c. P 120,000
d. P 192,000
3. The liability for the accounts receivable – assigned is:
a. P 237,000
b. P 240,000
c. P 243,000
d. P 300,000
4. The total non-trade receivable balance at December 31 is:
a. P 342,000
b. P 318,000
c. P 313,500
d. P 245,000
Solution
(1) Claims Receivable
Accounts receivable
(2) Sales
Accounts receivable
(3) Advances to affiliates
Accounts receivable
(4) Receivables - officers/employee
Accounts receivable
(5) Deposits for contracts bidding
Accounts receivable
22,500
30,000
150,000
22,500
30,000
150,000
13,500
13,500
67,500
67,500
1
(6) Subscription receivable
Accounts receivable
(7) Advances to suppliers
Accounts receivable
(8) Advances to officers/employee
Accounts receivable
(9) Accounts receivable
Allowance for bad debts
(10) Accounts receivable
Customers with credit balance
(11)
OE: Cash
Notes payable
CE: Cash
Commission expense
Notes payable
Adj: Commission expense
Notes payable
Unadjusted AR
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Adjusted balance
60,000
24,000
4,500
30,000
6,000
60,000
24,000
4,500
30,000
6,000
237,000
237,000
237,000
3,000
300,000
3,000
3,000
1,467,000
( 22,500)
( 30,000)
( 150,000)
( 13,500)
( 67,500)
( 60,000)
( 24,000)
( 4,500)
30,000
6,000
1,131,000
Current non-trade AR
Claims receivable
Advances to off/empl
( 13,500 + 4,500)
Advances to suppliers
Total
Answer:
1. D
2. A
Non-trade AR
Claims receivable
Advances to affiliates
Advances to off/empl
( 13,500 + 4,500)
Deposit for contracts
Subscription receivable
Advances to suppliers
Total
22,500
150,000
18,000
67,500
60,000
24,000
__________
342,000
22,500
18,000
24,000
64,500
3. B
4. A
Problem 2
In your audit of MENDOZA COMPANY for the past calendar year, you find the following
accounts:
ACCOUNTS RECEIVABLES
Jan. 1, 2002
P 800,000
Jan. – Dec. 1992 collections P 5,900,000
Jan. – Dec. Sales
6,300,000
Jan. – Dec. write-off
100,000
Jan. – Dec. Write-off of
last year’s receivables
Write-off of this year’s
Receivables
P
ALLOWANCE FOR BAD DEBTS
Jan. 1, 2002
85,000
Dec. 31 provisions
P
95,000
315,000
15,000
In your examination, you find that the balance of Accounts Receivable represents sales of
the current audit year only; that credit balances in the subsidiary ledger for accounts
receivable totaled P80,000; and that the current year’s provision for bad debts expense was
5% of sales (as compared with 4½% last year, 4% of the year before, and 3½% the next
previous year). Sequential to aging the accounts receivable, you and the company’s
2
treasurer agree on an additional write-off of P50,000, and P300,000 as the probable loss to
be sustained on collection of the accounts receivable balance.
Questions
1. The adjusted Accounts Receivable balance is:
a. P 830,000
b. P 1,100,000
c. P 1,130,000
d. P 1,180,000
2. The adjusted Allowance for Bad Debts is:
a. P 260,000
b. P 300,000
c. P 315,000
d. P 355,000
3. The adjusted Bad Debts account is:
a. P 260,000
b. P 300,000
c. P 315,000
d. P 355,000
4. The provision per record at December 31 is:
a. P 260,000
b. P 300,000
c. P 315,000
d. P 355,000
Solution
Accounts Receivable
80,000
Customers’ credit balance
80,000
Allowance for bad debts
50,000
Accounts receivable
50,000
Bad debts expense
40,000
Allowance for bad debts
40,000
Computation:
Provision per records
315,000
* Provision per audit
355,000
Adjustment
40,000
Answer:
1. C
* Beg. balance
+ Provisions
- Write-off per book
- Additional write-off
Ending balance
2. B
95,000
355,000 squeezed figure
100,000
50,000
300,000
3. D
4. C
Problem 3
The following selected transactions occurred during the year ended December 31, 2006 of
DOMINGO COMPANY:
Gross sales (cash and credit)
Collections from credit customers, net of 2% cash discount
Cash sales
Uncollectible accounts written off
Credit memos issued to credit customers for sales ret./allow.
Cash refunds given to cash customers for sales ret./allow.
Recoveries on accounts receivable written-off in prior years
(not included in cash received stated above)
P 900,736.80
294,000.00
180,000.00
19,200.00
10,080.00
15,168.00
6,505.20
At year-end, the company provides for estimated bad debts losses by crediting the
Allowance for Bad Debts account for 2% of its net credit sales for the year. The allowance
for bad debts at the beginning of the year is P19,327.20.
Questions
1. How much is the DOMINGO COMPANY’s gross sales?
a. P 900,736.80
b. P 720,736.80
c. P 704,656.80
d. P 689,488.80
3
2. DOMINGO COMPANY’s credit sales at December 31, 2006 is:
a. P 900,736.80
b. P 720,736.80
c. P 704,656.80
d. P 689,488.80
3. How much is the DOMINGO COMPANY’s net credit sales?
a. P 900,736.80
b. P 720,736.80
c. P 704,656.80
d. P 689,488.80
4. The Bad Debts Expense of DOMINGO COMPANY at December 31, 2006 is:
a. P 20,725.54
b. P 14,093.14
c. P 8,030.74
d. P7,829.14
5. The Accounts Receivable of DOMINGO COMPANY at December31, 2006 is:
a. P 408.042.00
b. P 407,536.80
c. P 401,536.80
d. P 391,456.80
6. The Allowance for Bad Debts of DOMINGO COMPANY at December 31, 2006 is:
a. P 20,725.54
b. P 14,093.14
c. P 8,030.74
d. P7,829.14
Solution
Credit Sales
Recoveries
Ending bal.
Accounts Receivable
720,736.80
Collection
294,000.00
6,505.20
Sales discount
from credit cust.
6,000.00
Write-off
19,200.00
Sales returns from
credit customer
10,080.00
__________
Recoveries
6,505.20
727,242.00
335,785.20
391,456.80
Net credit sales:
Credit sales
- Sales discounts from credit sales
- Sales returns from credit sales
Net credit sales
720,736.80
( 6,000.00)
(10,080.00)
704,656.80
Bad debts:
Net credit sales
x % of uncollectible
Bad debts
704,656.80
2%
14,093.136
Allowance for bad debts:
Beg. balance
19,327.20
Provision for bad debts
14,093.14
Recoveries
6,505.20
Less: Write-off
( 19,200.00)
Allowance ending balance
20,725.54
Answer:
1. A
2. B
3. C
4. B
5. D
6. A
Problem 4
Presented below are unaudited balances of selected accounts of MARJORIE COMPANY as of
December 31, 2006:
Unaudited Balances, 12/31/06
Selected Accounts
Debit
Credit
Cash
P 500,000
Accounts receivable
1,300,000
Allowance for doubtful accounts
8,000
Net sales
P 6,750,000
4
Additional information are as follows:
a. Goods amounting to P50,000 were invoiced for the accounts of Joy Store & Co.,
recorded on January 2, 2007 with terms of net, 60 days, FOB shipping point. The goods
were shipped to Variety Store on December 30, 2006.
b. The bank returned on December 29, 2006, a customer’s check for P5,000 marked
“DAIF”, but no entry was made.
c. MARJORIE COMPANY estimates that allowance for uncollectible accounts should be one
and one-half percent (1½%) of the accounts receivable balance as of year-end. No
provision has yet been made for 2006.
Questions
1. What is the adjusted balance of Accounts Receivable on December 31, 2006?
a. P 1,355,000
b. P 1,350,000
c. P 1,305,000
d. P 1,300,000
2. What is the adjusted balance of Allowance for doubtful accounts on December 31, 2006?
a. P 36,325
b. P 28,325
c. P 20,325
d. P 8,000
3. What is the adjusted amount of 2006 Bad Debts Expense?
a. P 12,325
b. P 20,325
c. P 28,325
d. P 36,325
Solution
(1)
A
1,300,000 + 50,000 + 5,000
P1,355,000
(2)
C
P1,355,000 x 1 ½%
P20,325
(3)
C
P20,325 + P8,000 debit balance
P28,325
Problem 5
During December, 2006, the Accounts Receivable controlling account on the books of
FERNANDEZ COMPANY showed one debit posting and two credit postings. The debit
represents receivables from December sales, P780,000. One credit was for P470,400, made
a result of cash collections on November and December receivables; the second credit was
an adjustment for estimated uncollectibles, P90,000. The December 31 balance was
P270,000.
When receivables were collected, the bookkeeper credited Accounts Receivables for the cash
collected. All customers who paid their accounts during December took advantage of the
2% cash discount.
As of December 1, debit balance in customers’ subsidiary accounts totaled P177,000. An
adjustment for estimated doubtful accounts of P18,000 had been posted to the Accounts
Receivable controlling account at the end of 2002, and no write-offs were recorded during
2006. In addition, a number of customers had overpaid their accounts, and as a result,
some of the customers’ subsidiary accounts had credit balances on December 1. No
overpayments were made during December nor were any credit balances in customers’
accounts reduced during December.
5
Questions
1. The Accounts Receivable beginning balance (unadjusted) of FERNANDEZ COMPANY at
December 31, 2006 is:
a. P 50,400
b. P 68,400
c. P 252,000
d. P 270,000
2. The Accounts Receivable beginning balance (adjusted) of FERNANDEZ COMPANY at
December 31, 2006 is:
a. P 50,400
b. P 68,400
c. P 252,000
d. P 270,000
3. The Credit Balance of Accounts Receivable at the beginning of the year of FERNANDEZ
COMPANY is:
a. P 48,600
b. P 66,600
c. P 108,600
d. P 126,600
4. The Accounts Receivable balance of FERNANDEZ COMPANY at December 31, 2006 is:
a. P 50,400
b. P 68,400
c. P 252,000
d. P 270,000
Solution
Computation for unadjusted AR beginning balance:
Accounts Receivable
50,400
Collections
780,000
Allow. for BD
830,400
End bal.
270,000
* squeezed figure
* Beg. bal.
Sales
Ending balance of AR control account
Add: Credits during December
Less: Debits during December
Balance of AR control account – Dec. 1
Add: 2006 Est. allowance for BD
Adjusted AR control account – Dec. 1
Less: AR subsidiary account – Dec. 1
Credit balance of AR account – Dec. 1
Answer:
1. A
2. B
3. C
470,400
90,000
560,400
270,000
560,400
( 780,000)
50,400
18,000
68,400
177,000
108,600
4. D
Problem 6
You are examining the financial statements of MATIAS CORPORATION for the year ended
December 31, 2006. During the audit of the accounts receivable and other related
accounts, certain information was obtained.
The December 31, 2006 debit balance in the Accounts Receivable control account is
P197,000.
The only entries in the Bad Debts Expense account were: a credit for P324 on December
31, 2006, because Marlisa Company remitted in full for the accounts charged off October
31, 2006, and a debit on December 31 for the amount of the credit to the Allowance for
Doubtful Accounts.
6
The Allowance for Doubtful Accounts schedule is presented below:
Debit
Credit
January 1, 2006
October 21, 2006, Uncollectible;
Marlisa Co., - P324; Abonales Co.,
- P 820; Cherryl Co., - P564
P 1,508
December 31, 2006, 5% of P197,000
P 9,850
Balance
P 3,658
2,150
12,000
An aging schedule of the accounts receivable as of December 31, 2006 and the decision are
shown in the table below:
Age
____________
0 – 1 month
1 – 3 months
3 – 6 months
over 6 months
Net Debit Balance
_________________
P
93,240
76,820
22,180
6,000
Amount to which the Allow.
is to be adjusted after adjust.
and corrections have been made
1 percent
2 percent
3 percent
Definitely uncollectible, P1,000;
P2,000 is considered 50% uncollectible; the remainder is estimated to be 80% collectible.
There is a credit balance in one account receivable (0-1 month) of P2,000; it represents an
advance on a sales contract. Also, there is a credit balance in one of the 1-3 months
accounts receivable of P500 for which merchandise will be accepted by the customer.
The ledger accounts have not been closed as of December 31, 2006. The Accounts
Receivable control account is not in agreement with the subsidiary ledger. The difference
cannot be located, and the auditor decides to adjust the control to the sum of the
subsidiaries after corrections are made.
Questions
1. The adjusted balance of accounts receivable of MATIAS CORPORATION at December 31,
2006 is:
a. P 199,740
b. P 199,540
c. P 198,300
d. P 198,100
2. The adjusted write-off of accounts receivable balance of MATIAS CORPORATION at
December 31, 2006 is:
a. P 2,708.00
b. P 2,508.00
c. P 2,384.00
d. P 1,708.00
3. The adjusted allowance of bad debts account of MATIAS CORPORATION at December 31,
2006 is:
a. P 4,980.60
b. P 4,964.20
c. P 4,780.60
d. P 4,764.20
4. The bad debts expense per book of MATIAS CORPORATION at December 31, 2006 is:
a. P 9,850.00
c. P 4,764.20
b. P 6,359.80
d. Cannot be determined
5. The adjusted bad debts expense of MATIAS CORPORATION at December 31, 2006 is:
a. P 3,814.20
b. P 3,614.20
c. P 3,490.20
d. P 2,814.20
7
6. The entry to adjust the account of Marlisa Company is:
a. Bad debts
324
c. Allow. for BD
324
Allow. for BD
324
Bad debts
b. Bad debts
324
d. Accounts receiv. 324
Accounts receivable
324
Bad debts
324
324
7. The entry to reconcile the accounts receivable control ledger to subsidiary ledger is:
a. Accounts receivable 1,440
c. Accounts receiv. 1,440
Allow. for BD
1,440
Misc. income
1,440
b. Allow. for BD
1,440
d. No adjustment
Accounts receivable
1,440
8. The net realizable value of accounts receivable of MATIAS CORPORATION at December
31, 2006 is:
a. P 194,975.80
b. P 194,775.80
c. P 193,335.80
d.P193,319.40
Solution
Bal. before adjustments
Adjustments:
Add(Deduct)
(2) Correction to 10.31.02
entry
to
write-off
uncollectible accts.
(3) Write-off of acct.
considered
definitely
uncollectible
(4)
Reclassification of
credit balances
(5) To adjust the control
acct. to agree with SL
Adjusted balance
Per
Control
Acct.
P 197,000
0-1 mo.
P 93,240
PER SUBSIDIARY LEDGERS
Over
1-3 mos
3-6 mos.
6 mos.
P 76,820
P 22,180
P 6,000
Total
P 198,240
(200)
( 1,000)
P
2,500
198,300
2,000
P 95,240
500
P 77,320
P 22,180
(1,000)
(1,000)
P 5,000
2,500
P 199,740
1,440
P 199,740
Audit adjustments as of 12.31.06
(1)
Bad Debts expense
Allowance for doubtful accounts
324
(2)
Allowance for doubtful accounts
Accounts Receivable
200
(3)
Allowance for doubtful accounts
Accounts Receivable
1,000
(4)
Accounts Receivable
Customer’s Accounts with Credit Balances
2,500
(5)
Accounts Receivable
Miscellaneous Revenue
1,440
(6)
Allowance for Doubtful Accounts
Bad Debts Expense
6,359.80
8
324
200
1,000
2,500
1,440
6,359.80
Required allowance on 12.31.06
0-1 mo.
1-3 mos.
3-6 mos.
Over 6 mos.
P 95,240 x 1%
77,320 x 2 %
22,180 x 3%
3,000 x 20%
2,000 x 50%
Beg. balance
+ Provision per audit
(squeezed figure)
- Write-off
Ending balance
Provision per book
Provision per audit
Adjustment
Answer:
1. A
6. A
2. C
7. C
P
952.40
1,546.40
665.40
600.00
1,000.00
P 4,764.20
3,658.00
3,490.20
2,384.00
4,764.20
9,850.00
3,490.20
6,359.80
3. D
8. A
4. A
5. C
Problem 7
You are auditing the Accounts Receivable and the related Allowance for Bad Debts account
of ROY COMPANY. The following data are available:
Accounts Receivable, general ledger balance
Allowance for bad debts:
Beginning balance
Provision per general ledger
Write-offs
Balance, end
P 848,000
P
20,000
48,000
( 16,000)
P 52,000
Summary of Aging Schedule
The summary of the subsidiary ledger as of December 31, 2006, was totaled as follows:
Debit balances:
Under on month
One to six months
Over six months
Credit balances:
Almario
Peter
Bituin
P 360,000
368,000
152,000
P 880,000
P
8,000 - OK; additional billing in
January 2004
14,000 – Should have been credited
To Manuel Co. - 1-6 mos.
classification.
18,000 - Advance on a sales contract
P 40,000
The customers’ ledger is not in agreement with the accounts receivable control. The client
instructs the auditor to adjust the control to the subsidiary ledger after corrections are
made.
9
ALLOWANCE FOR DOUBTFUL ACCOUNTS
It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six
months are expected to require a reserve of 2 percent. Accounts over six months are
analyzed as follows:
Definitely bad
Doubtful (estimated to be 50% collectible)
Apparently good, but slow (90% collectible)
Total
P 48,000
24,000
80,000
P152,000
Questions
1. The entry to adjust the account of Almario is:
a. Accounts receivable 8,000
c. Accounts receivable
8,000
Sales
8,000
Cust. with Cr. bal.
8,000
b. Sales
8,000
d. No adjustment
Accounts receivable
8,000
2. The entry to adjust the account of Peter is:
a. Accounts receivable 14,000
Sales
14,000
b. Sales
14,000
Accounts receivable
14,000
c. Accounts receivable
14,000
Cust. with Cr. bal.
14,000
d. No adjustment
3. The entry to adjust the account of Bituin is:
a. Accounts receivable 18,000
Sales
18,000
b. Sales
18,000
Accounts receivable
18,000
c. Accounts receivable
18,000
Cust. with Cr. bal.
18,000
d. No adjustment
4. The entry to reconcile the control ledger to the subsidiary ledger is:
a. Miscellaneous loss
8,000
c. Accounts receivable 8,000
Accounts receivable
8,000
Sales
8,000
b. Accounts receivable 8,000
d. Sales
8,000
Miscellaneous gain
8,000
Accounts receivable
8,000
5. The entry to adjust the Bad Debts Expense is:
a. Bad Debts Expense 74,680
c. Bad Debts Expense 30,680
Allow. for BD
74,680
Allow. for BD
b. Bad Debts Expense 26,680
d. No adjustment
Allow. for BD
26,680
30,680
6. The Accounts Receivable balance at December 31, 2006 is:
a. P 840,000
b. P 826,000
c. P 818,000
d. P 786,000
7. The Allowance for Bad Debts at December 31, 2006 is:
a. P 74,680
b. P 48,000
c. P 30,680
d. P 26,680
8. The Bad Debts Expense at December 31, 2006 is:
a. P 74,680
b. P 48,000
c. P 30,680
d. P 26,680
10
Solution
* (1) Accounts receivable
Sales
8,000
8,000
(2) Accounts receivable
14,000
Accounts receivable
14,000
* (3) Accounts receivable 18,000
Customers’ deposit
18,000
(4) Allowance for bad debts
Accounts receivable
48,000
48,000
* (5) Miscellaneous losses 8,000
Accounts receivable
8,000
To reconcile control account with subsidiary ledger.
(6) Bad debts
Allowance for bad debts
26,680
26,680
* ignored in the aging of AR
Unadjusted balance
(1)
(2)
(3)
(4)
(5)
Adjusted balance 818,000
Control
Account
848,000
8,000
18,000
(48,000)
( 8,000)
Under 1 mo.
1 to 6 mos.
Over 6 mos.
Aging of AR
Under 1 to 6
Over 6
1 mo.
mos.
mos.
360,000 368,000 152,000
(14,000)
(48,000)
______ _______ _______
360,000 354,000 104,000
360,000 x 1%
354,000 x 2%
24,000 x 50%
80,000 x 10%
Required allowance for bad debts
Answer:
1. A
6. C
=
=
3,600
7,080
= 12,000
= 8,000
30,680
Provision for bad debts per audit:
Beginning balance
+ Provision – squeezed figure
- Write-off per book
- Additional Write-off
Ending balance
20,000
74,680
16,000
48,000
30,680
Provision per book
Provision per audit
Adjustment
48,000
74,680
26,680
2. D
7. C
3. C
8. A
4. A
5. B
11
Problem 8
KAREN COMPANY’s accounts receivable subsidiary ledger shows the following information:
Invoice
Customer
Account Balance – 12/31/06
Date
Amount
Penas
P 70,360
12/06/06
P 28,000
11/29/06
42,360
Jefferson
41,840
09/27/06
08/20/06
24,000
17,840
Junsay
61,200
12/08/06
10/25/06
40,000
21,200
Cherryl
90,280
11/17/06
10/09/06
46,280
44,000
Baron
63,200
12/12/06
12/02/06
38,400
24,800
Riza
34,800
09/12/06
34,800
The estimated bad debt rates below are based on Karen Company’s receivable collection
experience.
Age of Accounts
Rate
0 – 30 days
1%
31 – 60 days
1.5%
61 – 90 days
3%
91 – 120 days
10%
Over 120 days
50%
The allowance for bad debts account had a credit balance of P7,000 on December 31, 2006,
before adjustment.
Questions
1. The adjusted Accounts Receivable balance of KAREN COMPANY at December 31, 2006
is:
a. P 317,680
b. P 319,320
c. P 326,880
d. P 361,680
2. The adjusted balance of Allowance for Bad Debts of KAREN COMPANY at December 31,
2006 is:
a. P 9,698.80
b. P 10,188.80
c. P 12,397.60
d. P 19,397.60
3. The adjusted balance of Bad Debts Expense of KAREN COMPANY at December 31, 2006
is:
a. P 9,698.80
b. P 10,188.80
c. P 12,397.60
d. P 19,397.60
4. The net realizable value of Accounts Receivable of KAREN COMPANY at December 31,
2006 is:
a. P 342,282.40
b. P 349,282.40
c. P 307,482.40
d. P 314,482.40
12
Solution
Aging of AR
Balance 0-30
12/31/06
31-60
Days
61-90
Days
91-120
Days
Penas
P 70,360
Jefferson
41,840
Junsay
61,200
Cherryl
90,280
Baron
63,200
Riza
34,800
Total
P361,680
x % of uncollectibility
Required Allowance
28,000
42,360
Bad debts expense
Allowance for bad debts
(P19,397.60 – P7,000)
Answer:
1. D
2. D
12,397.60
12,397.60
40,000
46,280
63,200
______ ______
131,200 88,640
1%
1.5%
1,312
1,329.60
3. C
Over 120
Days
21,200
44,000
______
65,200
3%
1,956
24,000
34,800
58,800
10%
5,880
Days
17,840
_____
17,840
50%
8,920 = P 19,397.60
4. A
Problem 9
You are assigned to audit KENT COMPANY for the year ending December 31, 2006. The
accounts receivable were circularized as at December 31, 2006 and the following
exceptions/replies have not been disposed of at the date of your examination.
Customer
Balance
Duque
P 30,000
Comments
Audit Findings
Balance was paid Dec.
29, 2006.
Kent received mailed
January 2, 2007.
Odessa
74,000
Balance was offset by our
Dec. 10 shipment of goods.
Kent credited accounts
payable for P74,000 to
record purchase of goods
Solejon
16,200
The above balance has
been paid.
The payment was
Credited to Dairen – cust.
Rubin
23,700
We do not owe Kent anything as the goods were
received January, 2007,
FOB Destination
The shipment costing
P16,300 was made on
Dec. 29, 2006 and the
goods were not included
in recording the year-end
inventory.
150,000
Our deposit of P200,000
should cover this balance
Kent had previously
credited the deposit to
sales.
We never received these
goods.
The shipment was erroneously made to another
customer and the goods
worth P51,000 are now
on its way to Ocsio. The
shipment, FOB Shipping
Jamea
Ocsio
54,000
13
Point, was made on Dec.
30, 2006.
Dela Cruz
Ronel
100,000
We are rejecting the price,
which is too much
Kent’s clerk erroneously
computed the unit price
at P2,000. The correct
pricing should have been
at P1,200 per unit.
18,000
Amount is okay. Since
this is on consignment, we
will remit payment upon
selling the goods.
Goods cost P12,000 and
were appropriately included in Kent’s inventory
KENT COMPANY has not recorded yet its 2006 inventory. The balance of inventory and
Accounts Receivable at December 31, 2006 (per trial balance) is P 456,000 and P345,900,
respectively.
Questions
1. The entry to adjust the finding made in the account of Duque is:
a. Cash
30,000
c. Accounts receivable 30,000
Accounts receivable
30,000
Cash
30,000
b. Cash
30,000
d. No adjustment
Sales
30,000
2. The entry to adjust the finding made in the account of Odessa is:
a. Purchases
74,000
c. Accounts payable 74,000
Accounts receivable
74,000
Accounts receivable 74,000
b. Sales
74,000
d. No adjustment
Purchases
74,000
3. The entry to adjust the finding made in the account of Solejon is:
a. Accounts receivable 16,200
c. Accounts receivable 16,200
Accounts receivable
16,200
Accounts payable
16,200
b. Accounts payable
16,200
d. No adjustment
Accounts receivable
16,200
4. The entry to adjust the finding made in the account of Rubin is (for sales):
a. Sales
23,700
c. Accounts receivable 23,700
Accounts receivable
23,700
Sales
23,700
b. Accounts payable
23,700
d. No adjustment
Purchases
23,700
5. Entry to adjust the finding made in the account of Rubin is (for cost of sales):
a. Cost of sales
16,300
c. Retained earnings 16,300
Inventory
16,300
Inventory
16,300
b. Inventory
16,300
d. No adjustment
Cost of sales
16,300
14
6. The entry to adjust the finding made in the account of Jamea is:
a. Customers’ advances 150,000
c. Sales
200,000
Sales
150,000 Customers’ advances
50,000
Accounts receivable
150,000
b. Customers’ advances150,000
d. Sales
150,000
Accounts receivable
150,000
Customers’ advances 150,000
7. The entry to adjust the finding made in the account of Ocsio is:
a. No adjustment
c. Sales
54,000
Accounts receivable
54,000
b. Accounts receivable 51,000
d. Sales
3,000
Sales
51,000
Accounts receivable
3,000
8. The entry to adjust the finding made in the account of Dela Cruz is:
a. Accounts receivable 40,000
c. Sales
60,000
Sales
40,000
Accounts receivable
60,000
b. Sales
40,000
d. No adjustment
Accounts receivable
40,000
9. The adjusted balance of Kent Company’s inventory at December 31, 2006 is:
a. 451,700
b. P 460,300
c. P 472,300
d. P 484,300
10. The adjusted balance of Kent Company’s accounts receivable at December 31, 2006 is:
a. P 37,200
b. P 55,200
c. P 187,200
d. P 205,200
Solution
For Doque
For Odessa
For Solejon
For Rubin
For Jamea
For Ocsio.
For dela Cruz
For Ronel
No adjustment
Accounts payable
Accounts receivable
Accounts receivable
Accounts receivable
Sales
Accounts receivable
Inventory
Cost of sales
Sales
Customers’ advances
Accounts receivable
Sales
Accounts receivable
Sales
Accounts receivable
Sales
Accounts receivable
Unadjusted Inventory
Adjustment - Rubin
Adjusted balance
Answer:
1. D
6. C
2. C
7. D
456,000
16,300
_________
472,300
3. A
8. B
74,000
16,200
23,700
16,300
200,000
3,000
40,000
18,000
74,000
16,200
23,700
16,300
50,000
150,000
3,000
40,000
18,000
Unadjusted AR
Adjustment - Odessa
- Solejon
- Rubin
- Jamea
- Ocsio
- dela Cruz
- Ronel
Adjusted balance
4. A
9. C
345,900
( 74,000)
( 23,700)
(150,000)
( 3,000)
( 40,000)
( 18,000)
37,200
5. B
10. A
15
Problem 10
You have been assigned to audit the financial statement MALAQUI INCORPORATED. The
company is a distributor of a variety of electronic appliances and parts. The company uses
the calendar year for reporting purposes. Information regarding balances of MALAQUI
INCORPORATED’S Accounts Receivable and the related Allowance for Doubtful Accounts as
of December 31, 2006 and the related audit finding, is given below.
The schedule of accounts receivable furnished you by the accountant reflects some errors.
The total figure in the schedule does not tally with the balance per subsidiary ledger of
P919,000. Based on your review of sales invoices, purchase orders and other related
documents, you noted the following information:
1. Sales on account of various electronics totaling P36,480 were returned by the customer
on December 28, 2006, but no entry was made in the books. The goods were included
in the year-end physical count.
2. Based on the findings per confirmation reply from a customer, he indicated that he has
already paid his account of P23,980 in October, 2006. Your verification disclosed that
said collection was credited to net sales account.
3. Collection of P12,950 on November 5, 2006 from Diana Corporation was credited to the
account of DNA Corporation.
The allowance for doubtful accounts is set at 3% of the outstanding accounts receivable at
the end of the period. As of December 31, 2006, the Allowance for Doubtful Accounts has a
balance of P32,400 before adjustment.
Questions
1. What is the adjusted balance of Accounts Receivable as of December 31, 2006?
a. P 919,000
b. P 895,020
c. P 882,520
d. P 858,540
2. What is the adjusted balance of Allowance for Doubtful Accounts as of December 31,
2006?
a. P 27,570.00
b. P 26,850.60
c. P 26,475.60
d. P 25,756.20
Solution
Sales
Accounts receivable
Sales
Accounts receivable
Answer:
1. D
2. D
36,480
23,980
36,480
23,980
Problem 11
You audit of APAS COMPANY for the year 2006 disclosed the following:
1. The December 31 inventory was determined by a physical count on December 28 and
based on such count, the inventory was recorded by:
Inventory
1,400,000
Cost of sales
1,400,000
2. The 2006 ledger shows a sales balance of P20,000,000.
3. The company sells a mark-up of 20% based on sales.
16
4. The company recognizes sales upon passage of title to the customers.
5. All customers are within a four-day delivery area.
The sales register for December, 2006 and January, 2007, showed the following details:
December Register
Invoice No.
300
301
302
303
304
305
FOB Terms
Destination
Shipping point
Destination
Destination
Shipping point
Shipping point
Date Shipped
12/30
12/30
12/23
12/24
01/02
12/29
Amount
P 50,000
62,500
47,500
82,500
56,000
90,000
FOB Terms
Destination
Shipping point
Destination
Shipping point
Shipping point
Date Shipped
12/29
12/29
01/02
01/04
12/27
Amount
67,500
74,500
140,000
73,000
67,500
January Register
Invoice No.
306
307
308
309
310
Questions
1. The Sales for December is over/(under) by:
a. P 36,000 under
b. P 36,000 over
c. P 106,000 under
d. P 106,000 over
2. The Inventory for December is over/(under) by:
a. P 235,600 under
c. P 181,600 under
b. P 235,600 over
d. P 181,600 over
3. The adjusted inventory at December 31, 2006 is:
a. P 1,645,412
b. P 1,635,600
c. P 1,218,400
d. P 1,164,400
4. The adjusted sales at December 31, 2006 is:
a. P 20,106,000
b. P 20,036,000
c. P 19,964,000
d. P 19,894,000
5. How much sales for the month of December 2006 were erroneously recorded in January
2007?
a. P 282,000
b. P 272,500
c. P 198,000
d. P 142,000
6. How much sales for the month of January 2007 were erroneously recorded in December
2006?
a. P 228,500
b. P 188,500
c. P 180,500
d. P 106,000
Solution
(1) Sales
50,000
Accounts receivable
50,000
Invoice # 300
17
(2) Cost of sales
50,000
Inventory
(62,500 x 80%)
Invoice # 301
(3) Sales
56,000
Accounts receivable
Invoice # 304
(4) Cost of sales
72,000
Inventory
(90,000 x 80%)
Invoice # 305
(5) Accounts receiv.
74,500
Sales
Invoice # 307
(6) Cost of sales
59,600
Inventory
(74,500 x 80%)
(7) Accounts receiv.
67,500
Sales
Invoice # 310
Unadjusted Sales
(1)
(3)
(5)
(7)
Adjusted Sales
50,000
56,000
72,000
74,500
59,600
67,500
20,000,000
( 50,000)
( 56,000)
74,500
67,500
20,036,000
Unadjusted inventory
(2)
(4)
(6)
Adjusted inventory
1,400,000
( 50,000)
( 72,000)
( 59,600)
_________
1,218,400
Sales for the month of December that 2003
were erroneously recorded in January 2004:
Invoice # 307
74,500
Invoice # 310
67,500
Total
142,000
Sales for the month of January 2004
were erroneously recorded in December 2003:
Invoice # 300
50,000
Invoice # 304
56,000
Total
106,000
Answer:
1. A
2. D
3. C
4. B
5. D
6. D
Problem 12
You are engaged to perform an audit of the accounts of the JELLER CORPORATION for the
year ended December 31, 2006, and have observed the taking of the physical inventory of
the company on December 27, 2006. Only merchandise shipped by the Durian Corporation
to customers up to and including December 27, 2006 have been removed or excluded from
inventory. The inventory as determined by physical inventory count has been recorded on
the books by the company’s controller. No perpetual inventory records are maintained. All
sales are made on an FOB shipping point basis.
The following lists of sales invoices are entered in the sales books for the months of
December 2006 and January 2007, respectively.
December 2006
18
(a)
(b)
(c)
Sales Invoices
Date
Amount
Date Shipped
12/23/06
12/27/06
12/30/06
12/31/06
12/27/06
01/05/07
P 25,000
18,000
30,000
January 2007
(d)
(e)
(f)
(g)
(h)
12/22/06
12/28/06
12/03/06
12/31/06
12/31/06
(i)
(j)
(k)
(l)
12/31/06
12/27/06
01/08/07
01/10/07
12,000
16,000
8,000
20,000
14,000
7,500
11,000
9,000
5,000
01/08/07
12/29/06
12/05/06
01/07/07
12/31/06
12/29/06
01/04/07
01/09/07
12/31/06
Questions
1. How much sales for month of December 2006 were erroneously recorded in January
2007?
a. P 7,500
b. P 12,500
c. P 18,500
d. P 20,000
2. How much sales for the month of January 2007 were erroneously recorded in December
2006?
a. Zero
b. P 12,500
c. P 20,000
d. P 62,000
3. How much is the correct amount of sales for the month ended December 31, 2006?
a. P 143,000
b. P 155,500
c. P 93,500
d. P 81,000
Solution
(1)
B
Item (I)P7,500 and Item (l), P5,000
P12,500
(2)
D
Items c, d, g
P62,000
(3)
C
Recorded sales for December
December sales recorded in January
January sales recorded in December
Adjusted sales for December
P143,000
12,500
(62,000)
P 93,500
Problem 13
On September 1, DY COMPANY assigns specific receivables totaling P750,000 to Davao Bank
as collateral on a P625,000, 12% note. DY COMPANY will continue to collect the assigned
accounts receivable. Davao Bank also assesses a 2% service charge on the total accounts
receivable assigned. DY COMPANY is to make monthly payments to Davao Bank with cash
collected on assigned accounts receivable.
Collections of assigned accounts during
September totaled P260,000 less cash discounts of P3,500.
Questions
1. What were the proceeds from the assignment of DY COMPANYs’ accounts receivable on
September 1?
a. P 610,000
b. P 612,500
c. P 625,000
d. P 735,000
2. What amount is owed to Davao Bank by DY COMPANY for September collections plus
accrued interest on the note to September 30?
a. P 260,000
b. P 262,750
c. P 264,000
d. P 266,250
Solution
(1)
A
P625,000 – (2% x P750,000)
P610,000
(2)
P260,000 – P3,500 + (P625,000 x 12% x 1/12)
P262,750
B
19
Problem 14
On April 1, 2006, VAILOCES CORPORATION assigned accounts receivable totaling P400,000
as collateral on a P300,000, 16% note from Racel 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 P300,000 value of the note.
Additional information is as follows:
1. Collections of assigned accounts in April totaled P191,100, net of a 2% sales discount.
2. On May 1, VAILOCES CORPORATION paid the bank the amount owed for April collections
plus accrued interest on note to May 1.
3. The remaining accounts were collected by VAILOCES CORPORATION during May except
for P2,000 accounts written-off as worthless.
4. On June 1, VAILOCES CORPORATION paid the bank the remaining balance of the note
plus accrued interest.
Questions
1. The journal entry of VAILOCES CORPORATION in the assignment of accounts receivable
on April 1, 2006 is:
a. Cash
294,000
c. Cash
294,000
Finance charges
6,000
Finance charges
6,000
Accounts receivable
300,000
Notes payable
300,000
b. Cash
294,000
d. Cash
294,000
Finance charges
6,000
Commission exp.
6,000
AR – assigned
300,000
AR – assigned
300,000
2. The journal entry of VAILOCES CORPORATION in the assignment of accounts receivable
on April 1, 2006 assuming the assignment is on notification basis:
a. Cash
294,000
c. Cash
294,000
Finance charges
6,000
Finance charges
6,000
Accounts receivable
300,000
Notes payable
300,000
b. Cash
294,000
d. Cash
294,000
Finance charges
6,000
Commission exp.
6,000
AR – assigned
300,000
AR – assigned
300,000
3. The entry of VAILOCES CORPORATION on April collection of the assigned account is:
a. Cash
191,100
c. Cash
191,100
Sales discounts
3,900
Sales discounts
3,900
AR – assigned
195,000
Accounts receivable 195,000
b. Cash
191,100
d No journal entry
Accounts receivable
191,100
4. If the assignment is on notification basis, who should collect the assigned accounts
receivable?
a. Vailoces Corporation
c. A third party
b. Racel Bank
d. It is the option of the customer to
whom he/she will pay the account
20
5. Using the assumption in number 4 above, what will be the entry of VAILOCES
CORPORATION on the April collection of the assigned accounts receivable?
a. Cash
191,100
c. Cash
191,100
Sales discounts
3,900
Sales discounts
3,900
AR – assigned
195,000
Accounts receivable
195,000
b. Cash
191,100
d No journal entry
Accounts receivable
191,100
6. The journal entry of VAILOCES CORPORATION on the on May 1, 2006 is:
a. Notes payable
187,100
c. Notes payable
188,500
Interest expense
4,000
Interest expense
2,600
Cash
191,100
Cash
191,100
b. Notes payable
195,000
d. Notes payable
195,000
Interest expense
5,333
Interest expense
4,000
Cash
200,333
Cash
199,000
7. Using the same information in number 6 (May 1 transaction) except that the assignment
is done on a notification basis, the entry should be:
a. Notes payable
187,100
c. Notes payable
188,500
Interest expense
4,000
Interest expense
2,600
Accounts receivable
191,100
AR –assigned
191,100
b. Notes payable
195,000
d. No journal entry
Interest expense
4,000
AR - assigned
199,000
8. The total interest expense of VAILOCES CORPORATION on the assigned accounts
receivable is:
a. P 5,400
b. P 8,066
d. P 10,000
c. P 11,400
Solution
April
1
1
(1)
(2)
(3)
(4)
Answer:
1. C
6. D
Accounts receivable – assigned
400,000
Accounts receivable
Cash
294,000
Finance charges (300,000 x 2%)
6,000
Notes payable
Cash
191,100
Sales discounts
3,900
AR – assigned (191,100/98%)
Notes payable
195,000
Interest expense
4,000
(300,000 x 16% x 1/12)
Cash
Cash
203,000
Allowance for bad debts
2,000
AR – assigned
(400,000 – 195,000)
Notes payable (300,000 – 195,000)105,000
Interest expense
1,400
(105,000 x 16% x 1/12)
Cash
2. C
7. B
3. A
8. A
4. B
400,000
300,000
195,000
199,000
205,000
106,400
5. D
21
Problem 15
UY FINANCE CORPORATION purchases the accounts receivable of other companies on a
without recourse, notification basis. At the time the receivables are factored, 15% of the
amount factored is charged to the client as commission and recognized as revenue in UY’S
books. Also, 10% of the receivables factored is withheld by Uy as protection against sales
returns or other adjustments. This amount credited by Uy to the client Retainer account.
At the end of each month, payments are made by Uy to its clients so that the balance in the
Client Retainer account is equal to 10% of unpaid factored receivables. Based on Uy’s bad
debt loss experience, an allowance for bad debts of 5% of all factored receivables is to be
established, Uy makes adjusting entries at the end of each month.
On January 3, 2003, Jannette Company factored its accounts receivable totaling
P1,000,000. By January 31, P800,000 on these receivables had been collected by Uy.
Questions
1. The commission earned of Uy Finance Corporation from Jannette Company’s accounts
receivable factored is:
a. P 150,000
b. P 120,000
c. P 135,000
d. P 90,000
2. The proceeds received by Jannette Company on the accounts factored is:
a. P 810,000
b. P 780,000 c. P 765,000
d. P 750,000
3. How much is the Client Retainer account of Uy Finance Corporation at January 31, 2003
is:
a. P 0
b. P 20,000
c. P 60,000
d. P 80,000
4. How much is the bad debts expense of Uy Finance Corporation at January 31, 2003 is:
a. P 50,000
b. P 40,000
c. P 20,000
d. P 0
Solution
UY FINANCE CORPORATION’S BOOKS
Jan.
3
31
31
31
Accounts receivable factored
1,000,000
Commission income (P1 M x 15%)
Client Retainer (P1 M x 10%)
Cash
Cash
800,000
Accounts receivable factored
Client Retainer
80,000
Cash (100,000 – [10% x 200,000])
Bad debts expense
50,000
Allowance for bad debts (P1 M x 5%)
150,000
100,000
750,000
800,000
80,000
50,000
JANETTEE COMPANY’S BOOKS
Jan. 3
Cash
31
Answer:
1. A
22
Receivable from factor
Commission
Accounts receivable
Cash
Receivable from factor
2. D
3. B
750,000
100,000
150,000
80,000
4. A
1,000,000
80,000
Problem 16
During your audit of the LEILANI COMPANY for the calendar year 2006, you find the
following accounts:
NOTES RECEIVABLE
Sept. 1
Samson, 12%, due in 3 mos.
36,000
36,000
Nov. 1
Hazel, 15%, due in 6 mos.
90,000
126,000
Nov. 1
Salazar, no interest, due in one
year
75,000
201,000
Nov. 30 Rosa, Co. 12%, due in 13 mos.
15,000
216,000
Dec. 1
Rona, 15%, due in 15 mos.
36,000
252,000
Dec. 2
Anito, President, 18%, due in 3
mos.
18,000
270,000
Sept. 1
Nov. 1
Sept. 1
Nov. 1
NOTES RECEIVABLE DISCOUNTED
Samson note, discounted at
15%
Salazar note, discounted at
15%
INTEREST EXPENSE
310.50
11,250.00
Samson note
Salazar note
36,000
36,000
75,000
111,000
310.50
11,560.50
All notes are trade notes receivable unless otherwise specified. The Samson note was paid
December31, 2006. Interest income is credited only upon receipt of cash.
Questions
1. The accrued interest income at December 31, 2006 is:
a. P 2,748
b. P 3,018
c. P 3,120
d. P 4,200
2. The interest expense at December 31, 2006 is:
a. P 1,875.00
b. P 2,185.50c. P 4,060.50
d. P 11,560.50
3. The Notes Receivable at December 31, 2006 is:
a. P 141,000
b. P 159,000 c. P 216,000
d. P 252,000
4. The Notes Receivable – discounted at December 31, 2006 is:
a. P 63,750
b. P 73,125
c. P 75,000
d. P 111,000
5. How much is the proceeds in the discounting of notes receivable for the year?
a. P 99,439.50
b. P 100,060.50
c. P 111,000.00
d. P 111,310.50
Solution
1. C
Hazel
90,000 x
Rosa
15,000 x
Rona
36,000 x
Anito
18,000 x
Total accrued interest
2. B
Samson
Salazar
11,250 x
Total interest expense
15%
12%
15%
18%
2/12
x
x
x
x
2/12
1/12
1/12
1/12
= P 2,250
=
150
=
450
=
270
P 3,120
= P 310.50
= 1,875.00
= P2,185.50
23
3.
4.
5.
A
Hazel
90,000
Rosa
15,000
Rona
36,000
Total
141,000
C
Salazar
75,000
A
Samson
P 36,000 – P 310.50
Salazar
P 75,000 – P11,250
Total proceeds
= P 35,689.50
=
63,750.00
= P 99,439.50
Problem 17
On January 1, 2006, TUQUIB COMPANY sells its equipment with a carrying value of
P160,000. The company receives a non-interest-bearing note due in 3 years with a face
amount of P200,000. There is no established market value for the equipment. The
prevailing interest rate for a note of this type is 12%. The following are the present value
factors of 1 at 12%:
Present value of 1 for 3 periods
Present value of an ordinary annuity of 1 for 3 periods
0.71178
2.40183
Questions
1. The gain or loss on the sale of equipment is:
a. P 40,000
b. P
122
c. P 0
d. (P 17,644)
2. The discount on notes receivable is:
a. P 57,644
b. P 40,000
d. P 0
c. P 39,878
3. The entry to record the sale of equipment is:
a. Notes receivable
200,000
c. Notes receivable 200,000
Equipment
200,000
Loss on sale
17,644
Equipment
160,000
Discount on NR
57,644
b. Notes receivable
200,000
d. Notes receivable 200,000
Equipment
160,000
Equipment
160,000
Gain on sale
40,000
Gain on sale
122
Discount on NR
39,878
4. The discount amortization at the end of the second year using the effective-interest
amortization is:
a. P 17,083
b. P 19,133
c. P 21,428
d. P 36,216
5. The entry to record the discount amortization is:
a. Discount on NR
c. Interest income
Interest income
Discount on NR
b. Discount on NR
d. Interest expense
Interest expense
Discount on NR
Solution
1. D
Sales price – present value of note (P200,000 x 0.71178) 142,356
Book value of equipment
160,000
Loss on sale of equipment
(17,644)
24
2.
3.
4.
5.
A
Face value of note
Present value of note
Discount on notes receivable
C
Notes receivable
Loss on sale of equipment
Equipment
Discount on notes receivable
B
Present value of note, 1/1/03
Add: Interest earned in 2003
(142,356 x 12%)
Present value of note, 1/1/04
Add: interest earned in 2004
(159,439 x 12%)
Present value of note, 1/1/05
A
200,000
142,356
57,644
200,000
17,644
160,000
57,644
142,356
17,083
159,439
19,133
178,572
Problem 18
On January 2, 2006, a tract of land that originally cost P800,000 was sold by MAYLENE
CORPORATION. The company received a P1,200,000 note as payment. It bears interest
rate of 4% and is payable in 3 annual installments of P400,000 plus interest on the
outstanding balance. The prevailing rate of interest for a note of this type is 10%. The
present value table shows the following present value factors of 1 at 10%:
Present
Present
Present
Present
value
value
value
value
factor of 1 for 3 periods
factor of 1 for 2 periods
factor of 1 for 1 period
of an ordinary annuity of 1 for 3 periods
0.75132
0.82645
0.90909
2.48685
Questions
1. The gain on sale of land on January 2, 2006 is:
a. P 194,740
b. P 276,847
c. P 290,740
d. P 400,000
2. The interest income on the note receivable for the year ended December 31, 2006 using
effective interest method is:
a. P 120,000
b. P 109,074
c. P 107,685
d. P 99,474
3. How much cash will MYLENE CORPORATION received from notes receivable?
a. P 1,076,847
b. P 1,200,000
c. P 1,296,000
d. P 1,476,847
Solution
Amount of cash to be received:
Interest Principal Total
2003
48,000 *
400,000 448,000
2004
32,000 **
400,000 432,000
2005
16,000 ***
400,000 416,000
Total
1,296,000
* 1,200,000 x 4%
** 800,000 x 4%
*** 400,000 x 4%
2003
2004
2005
Total
Cash received
448,000
432,000
416,000
PV Factor
0.90909
0.82645
0.75132
Present Value
407,272
357,026
312,549
1,076,847
25
Present value of note
Cost of land
Gain on sale
1,076,847
800,000
276,847
Interest income for 2006 – P1,076,847 x 10% = P107,685
Answer:
1. B
2. C
3. C
Problem 19
The balance sheet of PERSEVERANCE CORPORATION on December 31, 2005, includes the
following cash and receivable balances:
Cash – Davao Bank
Currency and coins
Petty cash fund
Cash in bond sinking fund
Notes receivable (including discounted with
recourse, P15,500)
Accounts receivable
P 85,600
Less: Allow. for bad debts
(4,150)
Interest receivable
P 45,000
16,000
1,000
15,000
36,500
81,450
525
Current liability reported in the December 31, 2005, balance sheet included:
Obligation on discounted notes receivable
15,500
Transactions during 2006 included the following:
1. Sales on account were P767,000.
2. Cash collected on accounts totaled P576,500, including accounts of P93,000 with cash
discounts of 2%.
3. Notes received in settlement of accounts totaled P82,500.
4. Notes receivable discounted as of December 31, 2005, were paid at maturity with the
exception of one P3,000 note on which the company had to pay the bank P3,090, that
included interest and protest fees. It is expected that recovery will be made on this note
early in 2004.
5. Customer notes of P60,000 were discounted with recourse during the year, proceeds
from their transfer being P58,500. Of this total, P48,000 matured during the year
without notice of protest.
6. Customer accounts of P8,720 were written-off in prior year as worthless.
7. Recoveries of doubtful accounts written-off in prior years were P2,020. (not included in
the collection in number 2)
8. Notes receivable collected during the year totaled P27,000 and interest collected was
P2,450.
26
9. On December 31, accrued interest on notes receivable was P630.
10. Uncollectible accounts are estimated to be 5% of the December 31, 2006, accounts
receivable balance.
11. Cash of P35,000 was borrowed from Davao Bank, accounts receivable of P50,000 being
pledged on the loan. Collections of P19,500 had been made on these receivables
included in the total given in transaction (2) and this amount was applied on December
31, 2006, to payment of accrued interest on the loan of P600, and the balance to partial
payment of the loan.
12. Petty cash fund was reimbursed based on the following analysis of expenditure
vouchers:
Travel expenses
P 112
Entertainment expenses
78
Postage
93
Office supplies
173
Cash over
6
13. P3,000 cash was added to the bond sinking fund.
14. Currency on hand at December 31, 2006 was P12,000.
15. Total cash payment for all expenses during the year were P468,000. Charge to General
Expense
Based on the information above and some other analysis, answer the following questions:
Questions
1. PERSEVERANCE CORPORATION’s Cash balance at December 31, 2006 is:
a. P 269,430
b. P 265,430
c. P 252,430
d. P 219,930
2. PERSEVERANCE CORPORATION’s Accounts Receivable balance at December 31, 2006 is:
a. P178,8787.00
b. P 178,824.50
c. P176,804.50
d. P174,254.50
3. PERSEVERANCE CORPORATION’s Other Cash Item (Currency and coins & Petty Cash
Fund) at December 31, 2006 is:
a. P 16,000
b. P 13,000
c. P 12,550
d. P 12,000
4. PERSEVERANCE CORPORATION’s Notes Receivable at December 31, 2006 is:
a. P 46,500
b. P 31,000
c. P 30,910
d. P 28,500
5. PERSEVERANCE CORPORATION’s Obligation of Discounted of Note Receivable at
December 31, 2006 is:
a. P 15,500
b. P 12,000
c. P 11,910
d. P 3,500
6. PERSEVERANCE CORPORATION’s Interest Receivable at December 31, 2006 is:
a. P 2,555
b. P 1,155
c. P 630
d. P 525
7. PERSEVERANCE CORPORATION’s Bad debts at December 31, 2006 is:
a. P 16,005.20
b. P 13,875.50
c. P 11,855.50
d. P 11,825.50
27
8. PERSEVERANCE CORPORATION’s Allowance for bad debts at December 31, 2006 is:
a. P 9,406.50
b. P 9,305.50
c. P 9,252.00
d. P 4,150.00
9. PERSEVERANCE CORPORATION’s Sales balance at December 31, 2006 is:
a. P 767,000
b. P 765,140
c. P 765,102
d. P 757,330
10. PERSEVERANCE CORPORATION’s Interest income balance at December 31, 2006 is:
a. P 3,086
b. P 3,080
c. P 2,561
d. P 2,555
Solution
(1)
Accounts receivable
767,000
Sales
(2)
Cash
576,500
Sales discounts
1,860
Accounts receivable
(3)
Notes receivable
82,500
Accounts receivable
(4)
Obligation on discounted note
12,500
Notes receivable
Accounts receivable
3,090
Cash
Obligation on discounted note
3,000
Notes receivable
(5)
Cash
58,500
Interest expense
1,500
Obligation on discounted note
Obligation on discounted note
48,000
Notes receivable
(6)
Allowance for bad debts
8,720
Accounts receivable
(7)
Accounts receivable
2,020
Allowance for bad debts
Cash
2,020
Accounts receivable
(8)
Cash
27,000
Notes receivable
Cash
2,450
Interest receivable
Interest income
(9)
Interest receivable
630
Interest income
(10)
Bad debts
11,855.50
Allowance for bad debts
(11)
Cash
35,000
Notes payable
Interest expense
600
Notes payable
18,900
Cash
(12)
Operating expenses
456
Cash
Cash
6
Other income
(13)
Sinking fund
3,000
Cash
(14)
No entry
(15)
General expenses
468,000
Cash
Answer:
1. A
6. C
28
2. C
7. C
3. B
8. B
4. D
9. B
767,000
576,360
82,500
12,500
3,090
3,000
60,000
48,000
8,720
2,020
2,020
27,000
525
1,925
630
11,855.50
35,000
19,500
456
6
3,000
468,000
5. B
10. D
Problem 20
You are engaged in your fifth annual examination of the financial statements of NAVAL
CORPORATION. Your examination is for the year ended December 31, 2006. The client
prepared the following schedule of Trade Notes Receivable and Interest Receivable for you
at December 31, 2006. You have agreed the opening balances to your prior year’s audit
workpapers.
Maker
Rubin
Co.
Cardoza
NAVAL CORPORATION
TRADE NOTES RECEIVABLE AND RELATED INTEREST RECEIVABLE
Trade-Notes Receivable
Date
Terms
Int.
Bal.
2006
2006
Bal.
Rate 12/31/05
debits
credit
12/31/06
04/01/05
1-year
12%
P 60,000
P 60,000
05/01/06
Pancho
07/01/06
Betque
Gabuter
o
Noval
08/03/06
10/02/06
Gan
11/01/06
Due from
Rubin Co.
Pancho
Betque
Gabutero
Noval
Gan
Totals
11/01/06
90 days
after date
60 days
after date
Demand
60 days
after date
90 days
after date
90 days
after date
Balance
P 5,400
___________
P 5,400
-
P 30,000
12%
6,000
12%
12%
15,000
50,000
50,000
15,000
-
8%
42,000
35,000
7,000
12%
32,000
INTEREST RECEIVABLE
2006 debit
2006 credit
P 1,800
120
400
1,000
560
640
P 4,520
29,375
P
625
6,000
32,000
Balance
12/31/06
P 7,200
660
___________
P 7,860
P 120
400
340
560
640
P 2,060
Your examination reveals this information:
1. Interest is computed on a 360-day basis. In computing interest, it is the corporation’s
practice to exclude the first day of the note’s term and to include the due date.
2. The Cardoza’s 90-day non-interest bearing note was discounted on May 15 at 10%, and
the proceeds were credited to the Trade Notes Receivable account. The note was paid
at maturity.
3. Pancho became bankrupt on August 31, and the corporation will recover 75 cents on the
peso. All of Naval Corporation’s notes receivable provide for interest at a rate of 12% on
the maturity value of a dishonored note.
29
4. Betque, president of Naval Corporation, confirmed that she owed Naval Corporation
P15,000 and that she expected to pay the note within six months. You are satisfied that
the note is collectible.
5. Gabutero’s 60-day note was discounted on November 1 at 8%, and the proceeds were
credited to the Trade Notes Receivable and Interest Receivable accounts. On December
2, Naval Corporation received notice from the bank that GAbutero’s note was not paid at
maturity and that it had been charged against Naval’s checking account by the bank.
Upon receiving the notice from the bank, the bookkeeper recorded the note and the
accrued interest in the Trade Notes Receivable and Interest Receivable account.
Gabutero paid Naval Corporation the full amount due in January 2003.
6. Noval, 90-day note was pledged as collateral for P35,000, 60-day 10% loan from the
Davao National Bank on December 1.
7. On November 1, the corporation received four, P8,000, 90-day notes from Gan. On
December 1, the corporation received payment from Gan for one of the P8,000 notes
with accrued interest. Prepayment of the notes is allowed without penalty. The
bookkeeper credited the Gan’s Accounts Receivable account for the cash received.
Questions
1. At December 31, 2006, the note receivable from Cardoza has a balance of:
a. P 30,000
b. P 29,375
c. P 625
d. P 0
2. The interest income from Cardoza’s note at December 31, 2006 is:
a. P 750
b. P 625
c. P 500
d. P 0
3. At December 31, 2006, the note receivable from Pancho has a balance of:
a. P 6,370.92
b. P 6,366.00
c. P 6,120
d. P 0
4. The interest income from Pancho’s note at December 31, 2006 is:
a. P 370.92
b. P 250.92
c. P 246
d. P 0
5. At December 31, 2006, the note receivable from Betque has a balance of:
a. P 15,350
b. P 15,000
c. P 14,650
d. P 0
6. At December 31, 2006 the note receivable from Gabutero has a balance of:
a. P 150,000
b. P 100,000
c. P 50,000
d. P 0
7. At December 31, 2006 the note receivable from Noval has a balance of:
a. P 42,000
b. P 35,000
c. P 7,000
d. P 0
8. At December 31, 2006 the note receivable from Gan has a balance of:
a. P 32,480
b. P 32,000
c. P 24,000
d. P 23,950
9. The total Note Receivable – Trade at December 31, 2006 is:
a. P 89,000
b. P 81,000
c. P 72,366
d. P 66,000
10. The total Interest Receivable at December 31, 2006 is:
a. P 2,300
b. P 2,060
c. P 1,950
d. P 1,790
30
Solution
(2)
(3)
(4)
(5)
Cardoza
Pancho
Betque
Gabutero
Adjusting Entries as of Dec. 31, 2006
(a) Interest Expense
Trade Notes receivable
Maturity Value = Face Value
Discount (30,000 x 10% x 75/360)
Proceeds
(b) Accounts Receivable
Trade Notes Receivable
Interest Receivable
Interest Revenue
Face Value
Interest (6000 x 12% x60/360)
Maturity value
Add.’l interest from due date , 8.30.06 to
12.31.06 (6,120 x 12% x 123/360)
Total amount due, 12.31.06
625.00
P30,000
625
P29,375
6,370.92
P6,000.00
120.00
P6,120.00
15,000
350
OE: Cash
50,660
CE: Cash
NR – Discounted
Interest income
(d)
Adj: Notes Receivable
Interest Receivable
Interest income
NR – discounted
-----------------------------------------
50,660
50,000
660
-----------
OE: Notes Receivable
Interest Receivable
Cash
50,000
1,000
CE: Accounts Receivable
Cash
51,000
NR – discounted
Notes Receivable
(e)
Accounts Receivable
NR – discounted
Trade Notes Receivable
Interest Receivable
Face Value
Interest (50,000 x 12% x 60/360)
Maturity Value
Discount (50,000 x 8% x 30/360)
Proceeds
(f)
Accounts Receivable
Interest Revenue
(51,000 x 12% x 30/360)
6,000.00
120.00
250.92
250.92
P6,370.92
© Notes receivable- Officers
Interest Receivable
Interest Revenue
Trade Notes Receivable
Accrued Interest as of 12.31.06
(15,000 x 12% x 150/360) = P750
Notes Receivable
Interest Receivable
625.00
50,000
51,000
50,000
P50,000
1,000
P51,000
340
P50,660
510
350
15,000
50,000
660
50,000
660
660
50,000
----------
51,000
51,000
50,000
100,000
1,000
510
31
(6)
Noval
(g) Trade Notes Receivable
Notes Payable- bank
35,000
(7)
Gan
(h) Accounts Receivable
Trade Notes Receivable
Interest Revenue
(8,000 x 12% x 30/360) = P80
(I) Interest revenue
Interest Receivable
(Accrued Interest as of 12.31.06
24,000 x 12% x 60/360) = P480
8,080
ANSWER:
1. D
6. D
32
2. D
7. A
3. D
8. C
4. A
9. D
160
5. B
10. D
35,000
8,000
80
160