CASE 1
In connection with your examination of the financial statements of Twice Inc. for the year
ended December 31, 2020, you were able to obtain certain information during your audit
of the accounts receivable and related accounts.
A.
The December 31, 2020 net debit balance in the Accounts Receivable control
accounts is P1,230,000.
B.
An aging schedule of the accounts receivable as of December 31, 2020 is
presented below:
% in the net debit balance
% uncollectible to apply
(before adjustment)
30 days and below
40%
1%
31 to 60 days
15%
5%
61 to 90 days
12%
10%
91 to 120 days
8%
20%
Over 120 days
25%
30%
You were able to obtain the following information with respect to specific customer
accounts included in Twice’s accounts receivable control accounts:
Age
C.
A purchase of goods on December 28 under freight term FOB Shipping point was
recorded by the accountant as follows:
Purchases
23,000
Accounts Receivable
23,000
Further inquiries revealed that the goods are still in transit as of December 31,
2020.
D.
A confirmation of a customer account revealed the following items:
Per books
Per
confirmation
Sana
33,250
32,000
Mina
32,000
30,000
Customer
Remarks
The invoice dated 11/10/20 was
erroneously priced at P33.25, agreed price
per customer sales invoice is P32.
The difference was due to invoice dated
12/15/20 was not received by Mina as the
goods were damaged by fire in the loading
dock of Jihyo Shipping, the logistic
company hired by Twice to deliver the
goods. Twice paid P200 freight. Terms
FOB Destination.
Dahyun
56,700
46,000
Chaeyoung
12,000
-
The difference was due to the invoice
dated 12/27/20. Goods have not been
received by Dahyun yet as of 12/31/20.
Term of sale FOB Shipping point.
Chaeyoung is liquidating for few months.
Chaeyoung informed Twice that only 50%
will be paid from the available resources of
Chaeyoung as of December 31. The credit
and collection manager issued a credit
memo for the write off of the uncollectible
accounts. The invoice of Chaeyoung was
dated June 15, 2020.
E.
Sales made on account last October 15, 2020 in the amount P38,000 was paid by
the customer on December 5, 2020 and was recorded twice by Twice accounting
department.
F.
Your test of journal entries was made in the Doubtful Accounts Expense account
during the period:
• A debit on April 30 and December 31 for the amount of credit to the
Allowance for Doubtful Accounts representing provisions for the year.
• A credit of P10,000 on November 30, 2020, and a debit to Allowance for
Doubtful Accounts because of bankruptcy. The related sales took place on
October 28, 2020.
G.
The Allowance for Doubtful Accounts schedule is presented below:
Debit
Credit
Balance
January 1, 2020
P12,725
April 30, 2020
P10,250
22,975
November 30, 2020
P10,000
12,975
December 31, 2020
7,500
P20,475
Determine the following as a result of your audit:
1. What is the correct gross balance of Accounts Receivable as of December 31?
a. P1,282,450
b. P1,261,050
c. P1,271,750
d. P1,281,450
2. What is the balance of allowance for doubtful accounts as of December 31?
a. P141,983
b. P142,090
c. P141,623
d. P141,876
3. How much is the doubtful accounts expense in 2020?
a. P145,365
b. P145,258
c. P144,898
d. P145,151
4. What is the proposed adjusting journal entry to adjust the balance of allowance will
include accredit to allowance of?
a. P127,876
b. P127,148
c. P127,615
d. P127,508
5. The write-off of Chaeyoung’s account is evidenced by a credit memo issued by the
credit and collection manager. As an auditor, do you think the action of the credit
and collection manager is appropriate and the account shall be written off? What
is your reason?
a. No, because the credit memo shall be issued by the accounting department and
not by credit and collection
department.
b. No, there is no sufficient and appropriate evidence to support the write-off of the
account. The credit memo is an
internal document and shall not be used alone to support the write-off of the
account.
c. Yes, the credit and collection department have the authority to assess and
approve the write-off of account. There
is enough evidence to write-off the account.
d. Yes, because there is no confirmation reply received from the customer
therefore, it follows that the accounts
receivable is no longer collectible and needs to be written-off. Nevertheless, credit
memo was issued in relation to
this account.
CASE 2
In connection with your examination of the financial statements of DMA, Inc. for the year
ended December 31, 2021, you were able to obtain certain information during your audit
of the accounts receivable related accounts.
A.
The December 31, 2021 balance in the Accounts Receivable control accounts is
P558,600.
B.
An aging schedule of the accounts receivable as of December 31, 2021 is
presented below:
% to be applied after
corrections have been made
60 days & under
1 percent
61 to 90 days
3 percent
91 to 120 days
6 percent
C.
Definitely uncollectible,
P6,300; the remainder is
Over 120 days
35,466
estimated to be 25%
uncollectible
The entries made affecting the Doubtful Accounts Expense account were:
• A debit on December 31 for the amount of credit to the Allowance for Doubtful
Accounts
• A credit for P4,110 on November 30, 2021, and a debit to Allowance for Doubtful
Accounts because of a bankruptcy. The related sales took place on October 1,
2021
Age
Net debit
balance
258,513
204,735
59,886
D.
The Allowance for Doubtful Accounts schedule is presented below:
Debit
Credit
Balance
January 1, 2020
P13,125
November 30, 2020
P10,000
9,015
December 31, 2020
P27,930
P36,945
E.
There is a credit balance in one account receivable (61 to 90 days) of P7,260; it
represents an advance on a sales contract.
Based on the given information and the result of your audit, answer the following:
1. How much is the adjusted balance of Accounts Receivable as of December 31, 2021?
a. P540,930
c. P555,450
b. P548,190
d. P559,560
2. How much is the adjusted balance of Allowance for Doubtful Accounts as of December
31, 2021?
a. P19,147
c. P19, 706
b. P19,583
d. P19,830
3. How much is the Doubtful Accounts Expense for the year 2021?
a. P16,868
c. P17,115
b. P16,991
d. P27,930
4. How much is the net adjustment to the Doubtful Accounts expense account?
a. P4,110 debit
c. P6,892 credit
b. P6,705 credit
d. P6,952 credit
5. Which accounts balance is most likely to be misstated if an aging of accounts
receivable is not performed?
a. Sales return and allowances
b. Sales revenue
c. Allowance for bad debts
d. Accounts Receivable
CASE 3
In connection with the audit of the financial statements of DMA 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 Ellery’s trial
balance as of Dec. 31, 2021;
Accounts receivable
Allowance for Doubtful Accounts
P442,500
15,000
From the schedule of accounts receivable as of December 31, 2021, you determined that
this account includes the following:
Accounts with debit balances:
60 days old and below
61 to 90 days
Over 90 days
Advances to officers
Accounts with credit balance
Accounts receivable per GL
P238,500
117,200
85,400
P441,100
16,400
(15,000)
P442,500
The credit balance in customer’s account represents collection from customer whose
account had been written-off as uncollectible in 2020.
Accounts receivable for more than a year totaling to P21,000 should be written off.
Confirmation replies received directly from customers disclosed the following exceptions:
Customer
Customer’s Comments
Audit Findings
Jasper
Kim
Norrinne
Misty
Hannah
Nicole
The client failed to record a
The goods sold on Dec. 1
credit memo for P12,000.
were returned on Dec. 16,
The merchandise was
2021.
included in the ending
inventory at cost.
Investigation revealed that
goods sold for P16,000
were shipped to Kim on
We do not owe this
Dec. 29, 2021, terms FOB
amount *%#$!!!
Shipping Point. The goods
(censored). We did not
were lost in transit and the
receive any merchandise
shipping company has
from your company
acknowledged its
responsibility for the loss of
merchandise.
Norrinne is an employee of
I am entitled to a 10%
DMA. Starting Nov. 2021,
employee discount. Your
all company employees
bill should be reduced by
were entitled to a special
P1,200
discount.
We have not yet sold the
Merchandise billed for
goods. We will remit the
P18,000 were consigned
proceeds as soon as the
to Misty on Dec. 30, 2021.
goods are sold
The goods costs P13,000.
We do not owe you
The sale of merchandise
P20,000. We already paid on Dec. 18, 2021 was paid
our accounts as evidenced by Hannah on January 6,
by OR # 1234
2022.
This amount represents
freight paid by the
customer for the
Reduce your bill by P1,500
merchandise shipped on
Dec. 17, 2021, terms, FOB
destination-collect.
Based on your discussion with DMA’s credit manager, you both agreed that an allowance
for doubtful accounts should be maintained using the following rates:
60 days old and below
61 to 90 days
Over 90 days
1%
2%
5%
Based on the given information and the result of your audit, answer the following:
1. In relation to Customer Jasper, the necessary adjusting journal entry include a debit to
a. Claims Against Shipping Company of P16,000
b. Sales of P16,000
c. Loss of P16,000
d. None of these
2. In relation to Customer Norrinne, the necessary adjusting journal entry includes
a. A debit to Inventory of P18,000
b. A credit to Cost of Sales of P13,000
c. A credit to Sales of P18,000
d. None of these
3. The adjusted balance of accounts receivable as of Dec. 31, 2021 is
a. P371,400
c. P402,400
b. P387,400
d. P403,800
4. The adjusted allowance for doubtful accounts as of Dec. 31, 2021 is
a. P7,462
c. P7,786
b. P7,622
d. P8,372
5. To gather audit evidence about the proper credit approval of sales, the auditor would
select a sample of documents from the population represented by the
a. Bill of lading file.
b. Sales invoice file.
c. Customer order file.
d. Subsidiary customers’ accounts ledger.
ANSWER KEY
CASE 1
CASE 2
CASE 3