Audit problem
The Vigan Company included the following in its notes receivable as of December 31, 2010: Note
receivable from sale of land
P 880,000
Note receivable from consultation
1,600,000
1,200,000 Note receivable from sale of equipment
In connection with your audit, you were able to gather the following transactions during 2010 and other
information pertaining to the company’s notes receivable:
•
On January 1, 2010, Vigan Company sold a tract of land. The land, purchased 10 years ago, was
carried on Vigan Company’s books at a value of P500,000. Vigan received a noninterest – bearing note
for P880,000. The note is due on December 31, 2011. There is no readily available market value for the
land, but the current market rate of interest for comparable notes is 10%.
•
On January 1, 2010, Vigan Company finished consultation services and accepted in exchange a
promissory note with a face value of P1,200,000, a due date of December 31, 2012, and a stated rate of
5% with interest receivable at the end of each year. The fair value of the services is not readily
determinable and the note is not readily marketable. Under the circumstances, the note is considered to
have an appropriate imputed rate of interest of 10%.
•
On January 1, 2010, Vigan Company sold equipment with a carrying amount of P1,600,000 to X
company. As payment, X gave Vigan Company a P2,400,000 note. The note bears an interest rate of 4%
and is to be repaid in three annual installments of P800,000 (plus interest on outstanding balance). The
first payment was received on December 31, 2010. The market price of the equipment is not reliably
determinable. The prevailing rate of interest for notes of this type is 14%.
Questions: (Round off present value factors to four decimal places and final answers to nearest hundred)
1.
The consultation service fee revenue that should be recognized in 2010 is a. P1,050,800 c. P
901,600
b. P1,095,800 d. P1,200,000
2.
The gain on sale of equipment that should be recognized in 2010 is a. P331,600 c. P412,400
b. P257,280
3.
d. P800,000
The noncurrent notes receivable as of December 31, 2010 is a. P2,605,706
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c. P2,494,000
b. P1,825,800 d. P2,625,700
4.
The current portion of long term notes receivables as of December 31, 2010 is a. P1,600,000
c. P1,468,200
b. P1,680,000 d. P 800,000
5.
The interest income to be recognized in 2010 is a. P464,000
b. P435,800
c. P459,500
d. P156,000
EASY
1.
Orr Company prepared an aging of accounts receivable on December 31, 2018 and determined
that the net realizable value of the accounts receivable was ₱ 2,500,000.
Allowance for doubtful accounts on January 1
280,000
Accounts written off as uncollectible
230,000
Accounts receivable on December 31
2,700,000
Uncollectible accounts recovery 50,000
What amount should recognized as doubtful accounts expense for the current year? (Problem 19-1,
Practical Accounting 1, Valix, 2016)
2.
At the first year of operations, Water Company had a net realizable value of accounts receivable
of ₱ 5,000,000.
During the year, the entity recorded charges to bed debt expense of ₱ 800,000 and wrote of as
uncollectible accounts receivable of ₱ 200,000.
What is the year-end accounts receivable balance before the allowance for doubtful account? (Problem
19-5, Practical Accounting 1, Valix, 2016)
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3.
Seiko Company reported the following balances after adjustments at year-end:
2018
2017
Accounts Receivable
5,250,000
4,800,000
Net Realizable Value
5,100,000
4,725,000
During 2018, the entity wrote off accounts totalling ₱ 160,000 and collected ₱ 40,000 on accounts
written off in previous year.
What amount should be recognized as doubtful accounts expense for the year ended December 31,
2018? (Problem 19-2, Practical Accounting 1, Valix, 2016)
MODERATE
1.
Tara Company provided the following information pertaining to accounts receivable on
December 31, 2018:
Days Outstanding
Estimated Amount
0-60
1%
1,200,000
61-120 900,000
Over 121
Estimated Uncollectible
2%
1,000,000
60,000
During the current year, the entity wrote off ₱ 70,000 in accounts receivable and recovered ₱ 40,000 that
had been written off in prior years.
On January 1, 2018, the allowance for uncollectible accounts was ₱ 100,000.
Under the aging method, what amount of allowance for uncollectible accounts should be reported on
December 31, 2018? (Problem 19-6, Practical Accounting 1, Valix, 2016)
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2.
Beach Bank loaned Boracay Company ₱ 7,500,000 on January 1, 2014. The terms of the loan
were payment in full on January 1, 2018 plus annual interest payment at 11%. The interest payment was
made as scheduled in January 1, 2015. However, due to financial setbacks, Boracay Company was unable
to make the 2016 interest payment. Beach Bank considered the loan impaired and projected the cash
flow from the loan on December 31, 2015. The bank accrued the interest on December 31, 2015, but did
not continue to accrue interest for 2016 due to impairment of the loan. The projected cash flows are:
Date of cash flow
Amount projected on Dec. 31, 2016
December 31, 2017
500,000
December 31, 2018
1,000,000
December 31, 2019
2,000,000
December 31, 2020
4,000,000
The PV of 1 at 11% is 0.90 for one period, 0.81 for two periods, 0.73 for three periods, and 0.66 for four
periods.
What is the loan impairment loss on December 31, 2016? (Problem 25-1, Practical Accounting 1, Valix,
2016)
3.
On December 31, 2016, Macedon Bank has 5 year loan receivable with a face value of ₱
5,000,000 dated January 1, 2015 that is due on every December 31, 2019. Interest on the loan is payable
at 9% every December 31.
The borrower paid interest that was due on December 31, 2015 but informed the bank that interest
accrued in 2016 will be paid at maturity date.
There is high probability that the remaining interest payment will not be paid because of financial
difficulty.
The prevailing market rate of interest on December 31, 2016 is 10%. The PV of 1 for three periods is
0.772 at 9% and 0.751 at 10%.
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What is the loan impairment loss to be recognized on December 31, 2016? (Problem 25-4, Practical
Accounting 1, Valix, 2016)
DIFFICULT
1.
On December 31, 2016, Oregon Bank recorded an investment of ₱5,000,000 in a loan granted to
a client. The loan has a 10% effective interest rate payable annually every December 31. The principal is
due in full maturity on December 31, 2019.
Unfortunately, the borrower is experiencing significant difficulty and will have difficult time in making full
payment.
The bank projected that the entire principal will be paid at maturity date and 4% interest of ₱200,000
will be paid annually on December 31 of the next three years. There is no accrued interest on December
31, 2016.
The present value of 1 at 10% for three periods is 0.75 and the present value of an ordinary annuity of 1
at 10% for the three periods is 2.49.
a.
What is the loan impairment loss for 2016?
b.
What is the interest income for 2017?
c.
What is the carrying amount of the loan receivable on December 31, 2017? (Problem 25-6,
Practical Accounting 1, Valix, 2016)
2.
An aging of Maligaya Campany’s accounts receivable on December 31, 2012, reveals the
following information:
Time Outstanding
Amount of Account Receivables
Under 30 days ₱
80,000
30-60 days
16,000
61-120 days
12,000
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121-180 days
8,000
Over 180 days
Total
₱
4,000
120,000
Based on past experience, the company believes that the following uncollectible percentages are
appropriate: under 30 days, 1.5%; 30-60 days, 3%; 61-120 days, 15%; 121-180 days, 30%; Over 180 days,
60%.
Instructions:
Using the aging of accounts receivable variation of the balance sheet approach, prepare the adjusting
entry on December 31, 2012 to record estimated bad debts, assuming that the balance in the Allowance
for Doubtful Accounts before adjustments is:
a.
440 Cr
b.
560 Dr
(VI – 13, Auditing Problems, Cabrera, 2012-2013)
3.
Harding Corp. operates in an industry that has a high rate of bad debts. On December 31, 2012,
before any year-end adjustments, Harding’s Accounts receivable balance was ₱600,000 and its
Allowance for doubtful accounts balance was ₱25,000. The year-end balance reported in the statement
of financial position for the Allowance for doubtful accounts will be based on the aging schedule shown
as follows:
Time Outstanding
Amount of A/R Probability of Collection
Under 15 days ₱
300,000
0.98
16-30 days
200,000
0.90
31-45 days
50,000 0.80
46-60 days
50,000 0.70
61-75 days
10,000 0.65
Over 75 days
10,000 0.00
Instructions:
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a.
What is the appropriate balance for Allowance for Doubtful Accounts on December 31, 2012?
b.
Show how the accounts receivable would be presented on the balance sheet on December 31,
2012.
(VI – 14, Auditing Problems, Cabrera, 2012-2013)
Auditiing Problems (easy)
1.
Ladd Company provided the following information for the current year:
Allowance for doubtful accounts- Jan 1 180,000
Sales
9,500,000
Sales return and allowances
800,000
Sales Discounts 200,000
Accounts written off
200,000
The entity provided for doubtful accounts expense at the rate of 3 % of net sales. What is the allowance
of doubtful accounts at year-end?
2.
Barr company showed the following at year end:
Allowance for doubtful accounts
16,000 dr Net Sales
7,100,000
The entity estimated its uncollectible receivables at 2% of net sales. What is the allowance for doubtful
accounts at year-end?
3.
Effective with the year ended Dec 31, Hall co. adopted a new accounting method for estimating
the allowance for doubtful accounts at the amount indicated by the year-end aging of accounts
receivable. The following data are available:
Allowance for doubtful accounts, Jan. 1
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Provision for doubtful accounts during the current year 250,000
(2% of credit sales of 10,000,000)
Accounts written off
200,000
205,000
Estimated uncollectible accounts per aging on Dec. 31
220,000
After year-end adjustment, what is the doubtful account expense for current year?
Moderate
4.
Roth Co. received from a customer a one year, 500,000 note bearing annual interest of 8%. After
holding the note for six months, the entity discounted the note without recourse at 10%
What amount of cash was received from the bank?
5.
Star Co. assigned 4,000,000 of accounts receivable as collateral for a 2,000,000 6% loan with
bank. The entity also paid a finance fee of 5% on the transaction upfront.
What amount should be recorded as a gain or loss on the transfer of accounts receivable?
6.
Brooked Co. discounted its own 5,000,000 one-year note at a discount rate of 12%, when the
prime rate was 10%. In reporting the note prior to maturity.
What rate should be used for the recording of interest expense? Difficult
7.
Appari Bank granted a loan to a borrower on Jan 1 2013. The interest rate on the loan is 10%
payable annually starting Dec 31, 2013. The loan matures in 5 years on Dec 31, 2017. The data related to
the loan are:
Principal amount
4,000,000
Direct origination cost 61,500
Origination Fee received from a borrower
350,000
The effective interest rate on the loan after considering the direct origination fee received is 12% What is
the carrying amount of the loan receivable on Jan 1, 2013
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8.
On Dec 1, 2013, Nicole Co. gave Dawn Co a 200,000, 12% loan. Nicole Co. paid Proceeds of
194,000 after deduction of 6,000 non-refundable loan origination fee. Principal and interest are due in
60 monthly installments of 4,450, Beginning Jan 1 20114. The prepayments yield an effective interest
rate of 12% at present of 200,000 and 13.4% at a present value of 194,000.
What amount should be reported as accrued interest receivable on Dec 31, 2013?
9.
On Dec 31, 2013, Oregon Bank recorded an investment of 5,000,000 in a loan granted to a client.
The loan has a 10% effective interest rate payable annually every Dec 31. The principal is due a t maturity
on Dec. 31, 2016. Unfortunately, the borrower is experiencing significant financial difficulty in making
payments. The projected that the entire principal will be paid at
maturity and 4% interest or 200,000 will be paid annually in Dec 31 of the next three years. There is no
accrued interest on Dec. 31 2013.
What is the impairment loss for 2013?
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