Audit of
receivables
AUDIT PROGRAM FOR RECEIVABLES
Audit objectives:
To determine that:
1. Receivables represent valid claims against customers and other parties and have been
properly recorded.
2. The related allowance for doubtful accounts, returns and allowances, and discounts are
reasonably adequate.
3. Receivables are properly describe
4. Disclosures with respect to the accounts are adequate.
Audit Procedures:
1. Obtain a list of aged accounts receivable balances from the subsidiary ledger, and:
 Foot and cross-foot the list.
 Check if the list reconciles with the general ledger control account.
 Trace individual balances to the subsidiary ledger.
 Test the accuracy of the aging
 Adjust non-trade accounts erroneously include in customers’ accounts.
 Investigate and reclassify significant credit balances.
2. Test accuracy of balances appearing in the subsidiary ledger.
3. Confirm accuracy of individual balances by direct communication with customers.
 Investigate exceptions reported by customers and discuss with appropriate officer for
proper disposal.
 Send a second request for positive confirmation requests without any replies from
customers.
 If the second request does not produce a reply from the customer, perform extended
procedures, like:





Reviewing collections after year-end
Checking, supporting documents.
Discussing the account with appropriate officer.
Discuss with appropriate officer, confirmation request returned by the post office and
perform extended procedures.
Prepare a summary of confirmation results.
4. Review correspondence with customers for possible adjustments.
5. Test propriety of cutoff:
 Examine sales recorded and shipments made a week before and after the end of the
reporting period and ascertain whether the sales were recorded in the proper period.

Investigate large amounts of sales returned shortly after the end of the reporting period.
6. Perform analytical procedures, like:
 Gross profile ratio
 Accounts receivable turnover
 Ratio of accounts written off to sales or balance of accounts receivable.
 Compare with prior year and industry averages.
7. Review individual balances and age of accounts with appropriate officer, and:
 Determine accounts that should be written off.
 Determine adequacy of allowance for doubtful accounts.
8. Obtain analyses of significant other receivables.
9. Ascertain whether some receivables are pledged, factored, discounted, or assigned.
10. Determine financial statement presentation and adequacy of disclosures.
11. Obtain receivable representation letter from client.
Problem 2-1
Computaton of Accounts Receivable Balance
Shown below is Gorospe COMPANY’ S aging schedule of its accounts receivable on December 31, 2010.
Customers
AA Co.
BB, Inc.
CC Corp.
DD, Inc.
EE Transport
FF, Inc.
GG Co.
HH Corp.
II Company
Balance
Due
P 23,000
105,000
87,500
93,500
40,000
31,000
1,000
64,000
60,000
Totals
P 505,000
P
Current
0
62,000
23,000
53,000
0
15,000
1,000
20,000
60,000
Days Past Due
1-30
P
0
20,000
14,500
20,500
0
16,000
0
18,000
0
P 234,000
P89,000
31-60
P 23,000
13,000
10,000
10,000
0
0
0
16,000
0
P 72,000
Over 60
0
10,000
40,000
10,000
40,000
0
0
10,000
0
P110,000
The accounts receivable balance per general ledger is P505,000 on December 31, 2010.
The following are audit comments for possible adjustments:
AA Company
Merchandise found defective; returned by the customer on November 10 for credit, but the credit
memo was issued by Gorospe only on January 2, 2011
BB, Inc
Account is good but usually pays late.
CC Corp.
Merchandise worth P40,000 destroyed in transit on June 4, 2010. The carrier was billed on July 1.( See
EE Transport and II Company)
DD Inc.
Customer billed twice in error for P10,000. Balance is collectible.
EE Transport
Collected in full in January 15, 2011.
FF, Inc.
Paid in full o December 29, 2010 but not recorded. Collections were deposited January3, 2011.
GG Co.
Received account confirmation from customer for P11,000. Investigation revealed an erroneous credit
for P10,000 ( see HHCorp.)
HH Corp.
Neglected to post P10,000 credit to customer’s account.
II Company
Customers wants to know the reason for receipt of P40,000 credit memo as its accounts payable is
P100,000.
Based on the foregoing information, what should be the adjusted balance of the Accounts Receivabletrade at December 31, 2010?
Solution 2-1
Accounts Receivable per general ledger
P 505,000
AA Co. – delayed issuance of credit memo
( 23,000)
CC Corp. – Damaged merchandise credited to II Company
( 40,000)
DD, Inc. -Double billing
( 10,000)
FF Inc. - Collection not recorded
(31,000)
GG Co. –Erroneous posting of credit for HH Corp.
10,000
HH Corp. – Payment credited in error to GG Co.
( 10,000)
II Company- credit for CC corp. erroneously posted to II Co . 40,000
Adjusted balance of accounts receivable- trade
P441,000
Problem 2-2
DAFFODIL AUTO PARTS sells new parts to auto dealers. Company policy requires that a prenumbered
shipping document be issued for each sale. At the time of pick-up or shipment, the shipping clerk writes
the date on the shipping document. The last shipment made in the year ended December 31, 2010, was
recorded on document 3167. Shipments are billed in the order that the billing clerk receives the
shipping documents.
For late December 31, 2010 and early January 2011, Shipping Documents are billed on sales invoices as
follows:
Shipping
Document No.
3163
3164
3165
3166
3167
3168
3169
3170
3171
3172
Sales
Invoice No.
5332
5326
5327
5330
5331
5328
5329
5333
5335
5334
The December 2010 and January 2011 sales journal have the following information included:
SALES JOURNAL-DECEMBER 2010
Day of
Month
30
30
31
31
31
Sales
Invoice No.
5326
5329
5327
5328
5330
Amount
of Sale
Sales
Invoice No.
5332
5331
5333
5335
5334
Amount
of Sale
P 264,131
10,639
85, 206
125,050
64,658
P 72,611
191,430
41,983
62,022
4,774
SALES JOURNAL- 2011
Day of
Month
1
1
1
2
2
1. What is the net overstatement (understatement) of Daffodil’s sale for the year ended December
31, 2010?
A.
B.
C.
D.
P21,318
P253,452
(P253,452)
(P 21,318 )
2. What adjusting entry is necessary to correct Daffodil’s financial statements for the year ended
December 31, 2010?
A. Accounts Receivable
Sales
B. Accounts Receivable
Sales
C. Sales
Accounts Receivable
D. Sales
Accounts Receivable
21,318
21,318
253,452
253,452
21,318
21,318
253,452
253,452
3. Cutoff test designed to detect credit sales made before the end of the year that have been
recorded in the subsequent year provide assurance about management’s assertion of
A.
B.
C.
D.
Rights and Obligation
Completeness
Existence
Valuation and Allocation
4. Tracing shipping documents to prenumbered sales invoices provides evidence that
A.
B.
C.
D.
No duplicate shipments or billings occurred
Shipments to customers were properly invoiced
All goods ordered by customers were shipped.
All prenumbered sales invoices were accounted for
5. An author 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
B. Rights and Obligations
C. Valuation and allocation
D. Completeness
Solution 2-2
1.
December
Shipping
Misstatemen
Overstatement or
2010 Sales
Invoice No.
5326
5329
5327
5328
5330
t
Documen
t
No.
3164
3169
3165
3168
3166
In Sales
Cutoff
Understatement of
December 31 Sales
P191,430
Overstatement
62,022
overstatement
253,452
January
2011 Sales
5332
5331
5333
5335
5334
3163
3167
3170
3171
3172
264,131
10,639
Understatement
Understatement
21,318
Answer: D
2. Accounts receivable
21,318
Sales
Answer: A
3. Completeness
Answer: B
4. Shipments to customers were properly invoiced.
Answer: B
5. Completeness
Answer: D
21,318
Problem 2-3
Recording Sales, Sales Returns and Collections
HOOLAND TULIPS, INC. sold goods costing P12, 000 on account for P18, 000 on March 21. It collected
P12, 000 off this account on April 3. Also on this date, the customer reported that the goods did not
meet the required specifications and returned goods costing P4, 000(with a sales price of P16, 000).
Holland Tulips, Inc. uses a perpetual inventory system.
Prepare the journal entries necessary on March 21 and April 3.
Solution 2-3
JOURNAL ENTRIES
March 21 Accounts Receivable
18,000
April
Sales
21 Cost of goods sold
Inventory
3 Cash
Accounts Receivable
3 Sales returns and allowance
Accounts Receivable
3 Inventory
Cost of goods sold
18,000
12,000
12,000
12,000
12,000
6,000
6,000
4,000
4,000
Problem 2-4
Computation of Accounts Receivable Balance
The following information is from GUMAMELA CORP.’ first year of operation:
1.
2.
3.
4.
Merchandise purchased
P450,000
Ending merchandise inventory
123,000
Collections from customers
150,000
All sales are on account and goods sell at
30% above cost.
What is the accounts receivable balance at the end of the company’s first year of operations?
A. P275,100
B. P78,900
C. P595,000
D. P435,000
Solution 2-4
Purchases
Less: Merchandise inventory, ending
Cost of goods sold
Multiply by sales ratio
Sales
Less : Collections from customers
Accounts receivable, ending
P450, 000
(123,000)
327,000
X 130%
425,100
(150,000)
P275,100
Answer: A
Problem 2-5
Computation of Accounts Receivable Balance
BANABA CO. reported the following information at the end of its first year operations, December 31,
2010:
Bad debt expense for 2010
P271,000
Uncollectible accounts written off during 2010
Net realizable value of accounts receivable
35,400
895,000
What is the accounts receivable balance at December 31, 2010?
A.
B.
C.
D.
P 1,166,000
P930,400
P1,201,400
P1,130,600
SOLUTION 2-5
Bad debt expense for 2010
P271, 000
Less: Accounts Written Off during 2010
(35,400)
Allowance for bad debts, December 31, 2010
235,600
Add: Net Realizable value of the accounts
Receivables, Dec. 31, 2010
895,000
Accounts Receivable, Dec. 31, 2010
P1,130,600
Answer : D
Problem 2-6
Computation of Accounts Receivable and Allowance for bad debts
SUNFLOWER COMPANY sells a variety of imports goods. By selling on credit, Sunflower cannot expect to
collect 100% of its accounts receivable. At December 31, 2009, Sunflower reported the following on its
statement of financial position:
Accounts Receivable
LESS: Allowance for bad debts
Accounts receivable, net
P 2197,500
(133,500)
P 2,064,000
During the year ended December 31, 2010, Sunflower earned sales revenue of P537,702,500 and
collected cash of 528,070,500 from customers. Assume bad debts expense for the year was 1% of sales
revenue and that sunflower wrote off uncollectible accounts receivable totaling P5,439,500.
1. What is the accounts receivable balance at December 31, 2010?
A. P 6390,000
C. P 11,829,500
B. P 2197,500
D. P 6,318,975
2. What is the December 31, 2010, balance of the Allowance for bad debts account?
A. P 133,500
B. P 71,025
C. P 61,975
D. P71,525
Solution 2-6
1. Accounts Receivable, Jan. 1, 2010
Sales
Collections
Accounts written off
Accounts receivables, Dec. 31, 2010
Answer: A
Allowance for bad debts, Jan.1 2010
Bad debt expense (537,702,500 x 1 %)
Accounts written off
Allowance for bad debts, December 31, 2010
Answer: B
P 2,197,500
537,702,500
528,070,500
(5,439,500)
6,390,000
P 133,500
5,377,025
5,439,500
P 71,025
Problem 2-7
Determining the allowances for bad debts
The following information pertains to ACACIA, INC. for the year ended December 31, 2010:
Credit sales during 2010
Collection of accounts written off in prior periods
Worthless accounts written off in 2010
Allowance for doubtful accounts, Jan. 1, 2010
P4, 450,000
170,000
191,000
155,000
Acacia, Inc provides for doubtful accounts based on 1 ½ % of credit sales.
What is the balance of the allowance for doubtful accounts at December 31, 2010?
A. P345,750
B. P66,750
C. P200,750
D. P242,750
Solution 2-7
Allowance for Doubtful Accounts
Accounts written off
P 155,000 Balance, Jan 1, 2010
In 2010
P191,000
66,750 Bad debt expense
For 2010
(4,450,000 x 1 ½ %)
170,000 Recovery of accounts
Written off
P 200,750 Balance, 12/31/2010
Answer: C
Problem 2-8
Computing the net realizable value of accounts receivable
MAHOGANY COMPAY’S analysis and aging of its account receivable at December 31, 2010 disclosed the
following:
Accounts receivable
P 460,000
Accounts estimated to be uncollectible (per aging) 95,000
Allowance for bad debts (per books)
103,000
What is the net realizable value of mahogany’s receivable at December 31, 2010?
A. P357,000
C. P460,000
B. P262,000
D. P365,000
Solution 2-8
Accounts receivable
P 460,000
Less: accounts estimated to be uncollectible 95,000
Net realizable value
365,000
Answer: D
Problem 2-9
Computation of Net Sales
The allowance for doubtful accounts has a credit balance of P150,000 at December 31,2009. During
2010, uncollectible accounts of P35,000 had been written off. The company estimates its bad debt
expense to be2% of net sales. The balance of the allowance account at the end of 2010 was P437,000.
The company’s Net Sales for 2010 amounted to
A. P 12,600,000
B. P16,000,000
C. P21,850,000
D. P14,350,000
Solution 2-9
Allowance for bad debts, Jan. 1, 2010
Uncollectible Accounts written off
Bad debts expense( SQUEEZE)
Allowance for bad debts, December 31, 2010
Bad Debt expense= 2 % of net Sales
Net sales(P322,000\2%)
P150,000
(35,000)
322,000
P437,000
P16,100,000
Answer: B
Problem 2-10
Computation Accounts Receivable Balance
The following amounts are shown on the 2010 and 2009 financial statements of SAN FRANCISCO CO.:
2010
?
20,000
2,600,000
1,900,000
Accounts Receivable
Allowance for Bad debts
Net Sales
Cost of goods sold
2009
P 470,000
10,000
2,400,000
1,752,000
San Francisco Co.’s accounts receivable turnover for 2010 is 6.5 times.
What is the accounts receivable balance at December 31, 2010?
A. P820,000
C. P360,000
B. P340,000
D. P470,000
Solution 2-10
(X=Net receivable, December 31, 2010)
A\R turnover
6.5
=net sales \ Ave. net receivables
=P2,600,000\P460,000+ X
2
P2,990,000+6.5X= P2,600,000
2
P2,990,000+6.5X=P 5,200,000
6.5X=P 2,210,000
X = P 340,000
Net receivables, December 31, 2010
P340,000
Add: Allowance for bad debts Dec. 31, 2010
20,000
Accounts receivable, Dec. 31, 2010
P360,000
Answer: C
Problem 2-11
Computation of accounts receivable written off
The policy of ILANG-ILANG, INC. is to debit bad debt expense for 3% of all new sales. The following are
the company’s sales and allowance for bad debts for the past four years.
Year
Sales
2007
2008
P3,000,000
2,950,000
Allowance for Bad Debts
Year-end Balance
P45,000
56,000
2009
2010
3,120,000
2,420,000
60,000
75,000
The accounts written off in 2008, 2009, and 2010 amounted to
A.
B.
C.
D.
2008
P99,500
77,500
11,000
12,500
2009
P97,600
89,600
4,000
22,400
2010
P 87,600
57,600
15,000
62,400
Solution 2-11
Allowance balance, beginning
Add: Estimated uncollectible*
Total allowance before write-off
Less: Allowances balance, ending
Accounts written off
2008
P45,000
88,500
133,500
(56,000)
77,500
2009
P56,000
93,600
149,600
(60,000)
89,600
2010
P60,000
72,600
132,600
(75,000)
57,600
*3% of sales
Answer: B
Problem 2-12
ROSES, INC. offers sales discount to customers who will pay their accounts in full within 10 days from
date of sale. On October 1, it sold goods on account for P420, 000. Payment of P411, 600 in satisfaction
of this account was received on October 9.
What is the sales discount rate?
A.
B.
C.
D.
2%
0%
2.04%
0.04%
Solution 2-12
Gross Receivables
Less: Amount Received
Sales Discount
Divide by gross receivable
Sales Discount Rate
P 420,000
411,600
P 8,400
P420,000
2%
Answer: A
Problem 2-13
Accounts Receivable Aging Schedule
CALACHUCHI CORP.’S accounts receivable subsidiary ledger shows the following information:
CUSTOMER
Aruy, Inc.
ACCOUNT
BALANCE
DEC. 31, 2010
P 35,180
Naku Co.
20,920
Syak Corp.
30,600
Trip Co.
45,140
Uy Co.
31,600
Xak Corp.
17,400
INVOICE
DATE
12/06/10
11/29/10
09/27/10
08/20/10
12/08/10
10/25/10
11/17/10
10/09/10
12/12/10
12/02/10
09/12/10
AMOUNT
P14,000
21,180
12,000
8,920
20,000
10,600
23,140
22,000
19,200
12,400
17,400
The estimated bad debt rates below are based on Calachuchi Corp.’s receivable collection
experience.
Age of Accounts
0-30 days
31-60 days
61-90days
91- 120 days
Over 120 days
Rate
1%
1.5%
3%
10%
50%
The allowance for bad of debts account had a debit balance of P5, 500 on December 31, 2010, before
adjustment.
1. The company’s accounts receivable under “61-90 days” category should be
A. P32,600
B. P44,230
C. P44,600
D. P42,000
2. The company’s accounts receivable under “ 91-120 days” category should be
A. P38,320
C. P29,400
B. P 40,000
D. P12,000
3. The allowance for bad debts to be reported on the state of financial position at December 31,
2010 is
A. P 9,699
C. 4,199
B. P15,199
D. 5,500
4. What entry should be made on December 31, 2010 to adjust the allowance for bad debts
account?
A. Bad debt expense
15,199
Allowance for bad debts
15,199
B. Bad debt expense
4,199
Allowance for bad debts
4,199
C. Allowance for Bad debts
5,500
Bad Debt Expense
5,500
D. Bad Debt Expense
9,699
Allowance for Bad Debts
9,699
5.
A.
B.
C.
D.
What is the net realizable value of accounts at December 31, 2010?
P165, 641
P171, 141
P196,039
P186, 340
Solution 2-13
Customer
Aruy, Inc.
Naku Co.
Syak Corp.
Trip Co.
Uy Co.
Xak Corp.
Balance
12-31-10
P 35, 180
20,920
30,600
45,140
31,600
17,400
180,140
Calachuchi Corp
ACCOUTS RECEIVABLE AGING SCHEDULE
December 31,2010
0-30
31-60
61-90
Days
Days
Days
P14,000
P21,180
20,000
23,140
10,600
22,000
P44,320
P32,600
Days
Days
Days
Days
Over 120
Days
12,000
8,920
P29,400
P8,920
31,600
P65,600
1. Answer: A
2. Answer : C
3. COMPUTATION OF REQUIRED ALLOWANCE
DECEMBER 31, 2010
0-30
31-60
61-90
91-120
91-120
Days
P65,600
44,320
32,600
29,400
X
X
X
X
1%
1.50%
3%
10%
=
=
=
=
P 656
665
978
2,940
Over 120
Days
8,920
X
Answer: A
4. Bad debt expense
Allowance for Bad debts
50%
=
4,460
9,699
15,199
15,199
Required allowance (see no. 2)
Add: Allowance balance-debit
Increase in allowance
P9,699
5,500
P15,199
Answer: A
5.
Accounts receivable
Less: Allowance for bad debts (see no. 2)
Net realizable value, Dec. 31, 2010
Answer: B
P180, 840
( 9,699)
P171,141
Problem 2-14
Adjusting Entry for Estimated Bad Debts
ORCHID COMPANYS accounts receivable at December 31, 2010 had a balance of P 1,200,000. The
allowance for bad debts account had a credit balance of P40, 000. Net sales in 2010 were P
6,704,000(net of sales discount of P56, 000). An aging schedule shows that P150, 000 of the outstanding
accounts receivable are doubtful.
What is the adjusting entry for estimated bad debt expense?
A. Bad debt expense
Allowance for bad debts
B. Bad debt expense
Allowance for bad debts
C. Bad debt expense
Allowance for bad debts
D. Allowance for bad debts
Bad debt expense
Solution 2-15
150,000
150,000
110,000
110,000
190,000
190,000
110,000
110,000
Bad debt expense
Allowance for bad debts
110,000
110,000
Required allowance
P150,000
Less: Allowance balance 40,000
Increase in Allowance P110,000
Answer: B
Problem 2-15
Estimating Bad Debt Expense by Aging Accounts Receivable
YELLOW BELL’S, INC. estimates its bad debt losses by aging its accounts receivable. The aging schedule of
accounts receivable at December 31, 2010, is presented below:
Age of Accounts
0-30 days
31-60 days
61-90 days
91-120 days
over 120 days
Amount
P
843,200
461,000
192,400
76,650
39,400
P
1,612,650
Yellow Bells Inc.’s uncollectible accounts experiences for the past years are summarized in the following
schedule:
Year
2009
2008
2007
2006
2005
A/R Balance 0-30
Dec. 31
Days
1,312,500
0.3%
999,999
0.5%
465,000
0.2%
816,000
0.4%
1,243,667
0.9%
31-60
Days
1.8%
1.6%
1.5%
1.7%
2.0%
61-90
Days
12%
11%
9%
10.2%
9.7%
91-120
Days
38%
41%
50%
47%
33%
over
120
Days
65%
70%
69%
81%
95%
The balance of the allowance for bad debts account at December 31, 2010, (before adjustment) is P84,
500.
1. What is the average bad debt expense rate rate for “91-120” days accounts?
A. 76%
B. 8.6 %
C. 10.38%
D. 41.80 %
2. What is the average bad debt expense rate for “ 31-60 days
A. 10.38 %
B. 41,80%
C. .46%
D. 1.72%
3. The net realizable value of the Company’s account receivable on December 31, 2010, should be
A. P1,518,887
B. P1,612, 650
C. P1,528,150
D. P1, 603, 358
4. What entry should be made to adjust the allowance for bad debts on Dec. 31, 2010?
A. Bad debt expense
178,263
Allowance for bad debts
178,263
B. Bad debt expense
93,763
Allowance for bad debts
93,763
C. Bad debt expense
9,263
Allowance for bad debts
9,263
D. Allowance for bad debts
9,263
Bad debt expense
9,263
5. In evaluating the adequacy of the allowance for bad debts, an auditor most likely reviews the
entity’s aging of receivables to support management’s financial statement of
A. Existence
B. Valuation and Allocation
C. Completeness
D. Rights and obligation
Solution 2-15
1. COMPUTATION OF AVERAGE BAD DEBT EXPENSE
RATE
0-30
31-60
61-90
91-120
Over 120
Year
Days
Days
Days
Days
Days
2009
0.3%
1.8%
12%
38%
65%
2008
0.5
1.6
11
41
70
2007
0.2
1.5
9
50
69
2006
0.4
1.7
10.2
47
81
2005
0.9
0.9
9.7
33
95
Total
2.3%
8.6%
51.9%
209%
380%
0.46
10.38
Average
%
1.7%
%
41.38%
76%
1.ANSWER : D
2. Answer: D
3.
COMPUTATION OF REQUIRED ALLOWANCE BALANCE
AR Balance
Age of Accounts
12/31/10
Rate
Estimated Uncollectible
0-30 days
P 843, 200
0.46%
P 3,878.72
31-60 days
461,000
1.72
7,929.20
61-90 days
192,400
10.38
19,971.12
91-120 days
76,650
41.8
32,039.70
over 120 days
39,400
76
29,944.00
P1612, 650
P93,762.74
Accounts receivable
P1,612, 650
Less: Required allowance balance per aging
( 93,763)
Net Realizable value, December, 2010
P1,518,887
Answer: A
4. Bad debt expense
Allowance for bad debts
9,263
9,263
Required allowance per aging
P 93,763
Less: Allowance balance before adjustment (84,500)
Increase in allowance
9,263
Answer: C
5.Assertions about valuation and allocation concern whether assets, liabilities and equity interest are
included in the financial statements at appropriate amounts and any resulting valuation or allocation
adjustment are properly recorded, Management for example, asserts that account receivable are stated
at net realizable value, e.i, the amount that is expected to be received from its customers(gross
receivable minus allowance for bad debts ) Aging the receivable is a procedure for assessing the
reasonableness of the allowance for bad debts.
Answer: B
PROBLEM 2-16: Estimating Bad Debts Using the Percentage of Sales Method
The following selected transactions occurred during the year ended December 31, 2010:
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 returns and allowances
Cash refunds given to cash customers for sales returns and allowances
Recoveries on accounts receivable written off in prior years (not included
in cash received stated above)
P750,000
245,000
150,000
16,000
8,400
12,640
5,421
At year-end, the company provides for estimated bad debt losses by crediting the Allowance for
Bad Debts account for 2% of its net credit sales for the year.
1. What is the company’s net credit sales in 2010?
A. P600,000
B. P586,600
C. P591,600
D. P595,000
2. The bad debts expense for 2010 is
A. P11,832
B. P11,900
C. P11,732
D. P12,000
Solution 2-16
1. Gross credit sales (P750,000 – P150,000)
Less: Sales discount
(P245,000 ÷ 98% = P250,000 x 2%)
Sales returns and allowances
Net credit sales
P600,000
P5,000
8,400
13,400
P586,600
Answer: B
2. Bad debt expense (P586,600 x 2%)
P11,732
Answer: C
PROBLEM 2-17: Estimating Bad Debts Expense
COCONUT CO. estimates its bad debts expense to be 3% of net sales. The company’s
unadjusted trial balance at December 31, 2010, includes the following accounts:
Debit
Allowance for bad debts
Sales
Sales return and allowances
Credit
P8,000
2,600,000
P45,000
What is the company’s bad debt expense for 2010?
A. P76,650
C. P68,650
B. P78,000
D. P70,000
Solution 2-17
Net sales (P2,600,000 – P45,000)
Multiply by bad debt rate
Bad debt expense
P2,555,000
x 3%
P 76,650
Answer: A
PROBLEM 2-18: Estimating Bad Debts Expense
BANAWE, INC. estimates its uncollectible accounts to be 3% of the accounts receivable
balance. The following information was taken from the company’s statement of financial
position at December 31, 2010:
Debit
Net sales (including cash sales of P825,000)
Allowance for bad debts
Accounts receivable
P
Credit
P3,460,000
69,000
2,460,000
What is the bad debt expense to be reported for 2010?
A. P79,050
C. P73,800
B. P69,000
D. P142,800
Solution 2-18
Required allowance, Dec. 31, 2010 (P2,460,000 x 3%)
Add: Allowance balance before adjustment-debit
Bad debts expense for 2010
P
3,800
69,000
P142,800
Answer:D
PROBLEM 2-19: Accounts Receivable Factoring
On December 5, 2010, BANDERA ESPAÑOLA, INC. sold its accounts receivable (net
realizable value, P260,000) for cash of P230,000. Ten percent of the proceeds was withheld by
the factor to allow for possible customer returns and other account adjustments. The related
allowance for bad debts is P40,000.
1. The loss on factoring of accounts receivable is
A. P10,000
C. P20,000
B. P30,000
D. P0
2. What is the entry to record the factoring of accounts receivable?
A. Cash
Allowance for bad debts
Loss on factoring
Accounts receivable
B. Cash
230,000
40,000
30,000
300,000
207,000
Loss on factoring
Receivable from factor
Accounts receivable
30,000
23,000
C. Cash
Loss on factoring
Accounts receivable
230,000
30,000
D. Cash
Allowance for bad debts
Loss on factoring
Receivable from factor
Accounts receivable
207,000
40,000
30,000
23,000
260,000
260,000
300,000
Solution 2-19
1. Net realizable value of accounts receivable
Less: Cash proceeds
Loss on factoring
P260,000
230,000
P 30,000
Answer: B
2. Cash (P230,000 x 90%)
Allowance for bad debts
Loss on factoring
Receivable from factor (P230,000 x 10%)
Accounts receivable
207,000
40,000
30,000
23,000
300,000
Answer: D
PROBLEM 2-20: Assignment of Accounts Receivable
On April 1, 2010, SAMPAGUITA CORPORATION assigned accounts receivable totalling
P400,000 as collateral on a P300,000, 16% note from Iwahig 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 totalled P191,100, net of a 2% discount.
2. On May 1, Sampaguita 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 Sampaguita Corporation during May except for
P2,000 accounts written off as worthless.
4. On June 1, Sampaguita Corporation paid the bank the remaining balance of the note plus
accrued interest.
Prepare the journal entries to record the above transactions on the books of Sampaguita
Corporation.
Solution 2-20
April 1
Accounts receivable - assigned
Accounts receivable
400,000
Cash
Finance charge (P300,000 x 2%)
Notes payable
294,000
6,000
(1) Cash
Sales discounts
Accounts receivable - assigned (P191,100 ÷ 98% )
191,100
3,900
(2) Notes Payable
Interest Expense (P300,000 x 16% x 1/12)
Cash
195,000
4,000
(3) Cash
Allowance for bad debts
Accounts receivable - assigned (P400,000 - P195,000 )
203,000
2,000
(4) Notes Payable (P300,000 - P195,000)
Interest Expense (P105,000 x 16% x 1/12)
Cash
105,000
1,400
1
400,000
300,000
195,000
199,000
205,000
106,400
PROBLEM 2-21: Estimating Bad Debts
LAGUNDI COMPANY applies the allowance method to value its accounts receivable. The
company estimates its bad debts based on past experiences, which indicates that 1.5% of net
credit sales will be uncollectible. Its total sales for the year ended December 31, 2010, amounted
to P4,000,000 including cash sales of P400,000. After a thorough evaluation of the accounts
receivable from Nolog company amounting to P20,000, Lagundi has decided to write off this
account before year-ended adjustments are made.
Shown below are Lagundi’s account balances at December 31, 2010, before any adjustments and
the P20,000 write off,
Sales
Accounts receivable
Sales discounts
Allowance for bad debts
Sales return and allowances
Bad debt expense
P4,000,000
1,500,000
250,000
33,000
350,000
0
Lagundi has decided to value its accounts receivable using the statement of financial position
approach as suggested by its external auditors. Presented below is the aging of the accounts
receivable subsidiary ledger accounts at December 31, 2010.
Account
Antiporda
Balbakwa
Curdapia
Dagul
Empoy
Total
% collectible
Balance
P 100,000
256,000
654,000
50,000
420,000
P1,480,000
Less than
60 days
P100,000
180,000
500,000
61-90
days
91-120
days
Over
120 days
P76,000
154,000
50,000
P780,000
P230,000
P420,000
P420,000
99%
95%
85%
P50,000
60%
1. The entry to write off Lagundi’s accounts receivable from Nolog of P20,000 will
A. Decrease total assets and net income for 2010
B. Increase total assets and decrease net income for 2010
C. Have no effect on total assets and net income for 2010
D. Have no effect on total assets and increase net income for 2010
2. Lagundi’s estimated bad debt expense for 2010 based on net credit sales is
A. P60,000
C. P45,000
B. P12,000
D. P56,250
3. The final entry to adjust the allowance for bad debts account is
A. Bad debt expense
Allowance for bad debts
B. Bad debt expense
Allowance for bad debts
C. Bad debt expense
Allowance for bad debts
D. Allowance for bad debts
Bad debt expense
44,300
44,300
45,000
45,000
24,300
24,300
24,300
24,300
4. What is the net realizable value of Lagundi’s account receivable on December 31, 2010?
A. P1,435,700
C. P1,397,700
B. P1,435,000
D. P1,377,700
5. Which of the following most likely would give the most assurance concerning the valuation
and allocation assertions of accounts receivable?
A. Vouching amounts in the subsidiary ledger to details on shipping documents.
B. Comparing receivable turnover ratios with industry statistics for reasonableness.
C. Inquiring about receivables pledged under loan agreements.
D. Assessing the allowance for uncollectible amounts for reasonableness.
Solution 2-21
1. No effect on total assets and net income for 2010. The entry to record the write off is:
Allowance for bad debts
Accounts receivable
20,000
20,000
Answer: C
2. Credit sales (P4,000,000 - P400,000)
Less: Sales discounts
Sales return and allowances
Net Sales
Multiply by bad debt rate
Bad debt expense
P3,600,000
P250,000
350,000
600,000
3,000,000
x 1.5%
P 45,000
Answer: C
3. Bad debt expense
Sales return and allowances
44,300
44,300
A/R
Balance
P780,000
230,000
420,000
50,000
Age
Less than 60 days
61 - 90 days
91 - 120 days
Over 120 days
Required allowance
Allowance balance (P33,000 + P45,000 – P20,000)
Adjustment – increase in allowance
Rate
1%
5%
15%
40%
Amount
P 7,800
11,500
63,000
20,000
102,300
58,000
P 44,300
Answer: A
4. Accounts receivable
Less: Allowance for bad debts (see no. 3)
Net realizable value, Dec. 31, 2010
Answer: C
P1,480,000
102,300
P1,377,700
5. Assessing the allowance for uncollectible accounts for reasonableness.
Answer: C
PROBLEM 2-22: Estimating Bad Debts
From inception of operations to December 31, 2010, MAKAHIYA CORP. provided for
uncollectible accounts receivable under the allowance method: provisions were made monthly at
2% of credit sales; bad debts written off were charged to the Allowance account; recoveries of
bad debts previously written off were credited to the Allowance account; and no year-end
adjustments to the Allowance account were made. Makahiya’s usual credit terms are net 30 days.
The balance in the Allowance for Bad Debts account was P143,000 at January 1, 2010. During
2010, credit sales totalled P15,000,000, interim provisions for doubtful accounts were made at
2% of credit sales, P140,000 of bad debts were written off, and recoveries of accounts previously
written off amounted to P43,000. Makahiya installed a computer facility in November 2010 and
an aging of accounts receivable was prepared for the first time as of December 31, 2010. A
summary of the aging is as follows:
Classification by
Month of Sale
November – December 2010
July – October 2010
January to June
Prior to January 1, 2010
Balance in
Each Category
P2,160,000
1,300,000
840,000
300,000
P4,600,000
Estimated %
Uncollectible
2%
10%
25%
70%
Based on the review of collectibility of the account balances in the “prior to January 1, 2010”
aging category, additional receivables totalling P120,000 were written off as of December 31,
2010. The 70% uncollectible estimate applies to the remaining P180,000 in the category.
Effective with the year ended December 31, 2010, Makahiya adopted a new accounting method
for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging
analysis of accounts receivable.
1. What is the balance of the allowance for Bad Debts accounts before the change in accounting
estimate?
A. P300,000
C. P226,000
B. P143,000
D. P346,000
2. What is the journal entry for the year-end adjustment to the Allowance for Bad Debt account
balance as of December 31, 2010?
A. Bad Debts Expense
283,200
Allowance for Bad Debts
283,200
B. Bad Debts Expense
163,200
Allowance for Bad Debts
C. Allowance for Bad Debts
Bad Debts Expense
D. Bad Debts Expense
Allowance for Bad Debts
163,200
143,000
143,000
509,200
509,200
3. For the year ended December 31, 2010, Makahiya’s bad debt expense would be
A. P626,200
C. P300,000
B. P283,200
D. P583,200
4. The net realizable value of Makahiya’s accounts receivable at December 31, 2010 should be
A. P4,374,000
C. P3,970,800
B. P3,896,800
D. P4,090,800
5. An auditor’s purpose in reviewing credit ratings of customers with delinquent accounts
receivable most likely is to obtain evidence concerning management’s ascertain about
A. Completeness
B. Existence
C. Rights and obligations
D. Valuation and allocation
Solution 2-22
1. Allowance for bad debts, Jan. 1
Add: Bad debt expense for 2010 (P15,000,000 x 2%)
Recoveries of accounts previously written off
Total
Less: Accounts written off (P140,000 + P120,000)
Allowance for bad debts, Dec. 31
P143,000
P300,000
43,000
343,000
486,000
260,000
P226,000
Answer: C
2. Bad debts expense
Allowance for bad debts
Classification
Balance
November – December 2010
P2,160,000
July – October 2010
1,300,000
January – June 2010
840,000
Prior to January 1, 2010
(P300,000 – P120,000 write off)
180,000
Required Allowance balance, Dec. 31, 2010
Less: Allowance balance before adjustment (see no. 1)
Increase in allowance
Answer:A
283,200
283,200
Rate
2%
10%
25%
Amount
P 43,200
130,000
210,000
70%
126,000
P509,200
226,000
P283,200
3. Bad debt expense recorded
Additional bad debt expense to arrive at the required allowance based on aging
Correct bad debt expense for 2010
P300,000
283,200
P343,000
Answer: D
4. Accounts receivable (P4,600,000 – P120,000)
Less: Required allowance per aging
Net realizable value, Dec. 31, 2010
P4,480,000
509,200
P3,970,800
Answer: C
5. Valuation and allocation
Answer: D
PROBLEM 2-23: Various Adjustments to Correct Accounts Receivable and Related Accounts
You are examining the financial statements of SALUYOT COMPANY for the year ended
December 31, 2010. Your audit of the accounts receivable and other related accounts disclosed
the following information:
1. The December 31, 2010 balance in the Accounts Receivable control account is P788,000.
2. The only entries in the Bad Debts Expense account were:
a. A credit of P1,296 on December 1, 2010, because customer A remitted in full for the
account charged off October 31, 2010.
b. A debit on December 31 for the amount of the credit to Allowance for Bad Debts.
3. The Allowance for Bad Debts account is presented below:
Date
Particulars
Jan.
1 Balance
Oct.
31 Uncollectible:
Customer A
B
C
Dec.
31 3% of P788,000
Debit
P1,296
3,280
2,256
Credit
P6,032
P23,640
Balance
P15,250
9,218
32,858
4. An aging schedule of the accounts receivable as of December 31, 2010, and the decisions are
shown in the table below:
AGE
Net Debit
Amount to which the allowance is to be adjusted after
0-1 month
1-3 months
3-6 months
Over 6 months
Balance
P372
,960
307,
280
88,7
20
24,0
00
adjustments and corrections have been made
1%
2%
3%
Definitely uncollectible, P4,000; P8,000 is considered to be
50% uncollectible; the remainder is estimated to be 80%
collectible
.
P792
,960
5. There is a credit balance in one account receivable (0-1 month) of P8,000; it represents an
advance on a sales contract; also there is a credit balance in one of the 1-3 months accounts
receivable of P2,000 for which merchandise will be accepted by the customer.
6. The Accounts Receivable control account is not in agreement with the subsidiary ledger. The
differences cannot be located, and the company’s accountant decides to adjust the control to
the sum of the subsidiaries after corrections are made.
1. The adjustment to correct the entry made on December 31, 2010, is
A. Bad Debts Expense
Accounts receivable
B. Bad Debts Expense
Allowance for Bad Debts
C. Accounts receivable
Allowance for Bad Debts
D. No adjusting entry is necessary.
1,296
1,296
1,296
1,296
1,296
1,296
2. The required allowance balance (per aging) on December 31, 2010, is
A. P29,354
C. P19,858
B. P19,058
D. P32,858
3. The net realizable value of Saluyot’s accounts receivable on (per aging) on December 31,
2010, is
A. P779,902
C. P793,200
B. P774,142
D. P788,664
4. Saluyot should report bad debt expense for 2010 of
A. P13,344
C. P10,296
B. P22,344
D. P33,936
5. What entry is necessary to adjust the allowance account at December 31, 2010?
A. Bad Debts Expense
Allowance for Bad Debts
B. Bad Debts Expense
Allowance for Bad Debts
C. Allowance for Bad Debts
Bad Debts Expense
D. Allowance for Bad Debts
Bad Debts Expense
10,296
10,296
13,800
13,800
10,296
10,296
13,800
13,800
Solution 2-23
1. ADJUSTING ENTRY
Bad debts expense
Allowance for bad debts
1,296
1,296
ENTRY MADE
Cash
1,296
Bad debt expense
1,296
CORRECT ENTRIES
Accounts receivable
Allowance for bad debts
#
Cash
Accounts receivable
1,296
1,296
1,296
1,296
Answer: B
2.
Age
0-1 month
1-3 months
3-6 months
Over 6 months
Net Debit
Balance
P372,960
307,280
88,720
24,000
Adjustment
P8,000
2,000
(4,000)
Total
P792,960
P6,000
Adjusted
Balance
P380,960
309,280
88,720
8,000
12,000
P798,960
Rate
1%
2%
3%
50%
20%
Required
Allowance
P3,810
6,186
2,662
4,000
2,400
P19,058
Answer: B
3.
Unadjusted balances
Understatement of accounts written off
Control
Account
P788,000
Subsidiary
Ledgers
P792,960
on October 31 (P6,832 – P6,032)
Write off of uncollectible accounts in the
“over 6 months” category
Customers’ credit balances (P8,000 + P2,000)
Corrected balance
Unlocated difference (P798,960 – P793,200)
Adjusted balances
(800)
(4,000)
10,000
793,200
5,760
P798,960
Accounts receivable, Dec. 31, 2010
Less: Required allowance per aging
Net realizable value, Dec. 31, 2010
(4,000)
10,000
798,960
P798,960
P798,960
19,058
P779,902
Answer:A
4. Bad debt expense recorded
Adjustment to arrive at the required allowance
Correct bad debt expense for 2010
P23,640
(10,296)
P13,344
Answer: A
5. Allowance for bad debt
Bad debt expense
Required allowance balance (see no. 2)
Allowance balance, December 31:
Per books
Recovery of account written off
Understatement of write off on Oct 1 (P6,832 – P6,032)
Unrecorded write off
Adjustment – decrease in allowance
P10,296
P10,296
P19,058
P32,858
1,296
(800)
(4,000)
29,354
P10,296
Answer:C
PROBLEM 2-24: Analysis of Accounts Receivable and Related Accounts
The following information is based on a first audit of SABILA COMPANY. The client has not
prepared financial statements for 2008, 2009 nor 2010. During these years, no accounts have
been written off as uncollectible, and the rate of gross income on sales has remained constant for
each of the three years.
Prior to January 1, 2008, the client used the accrual method of accounting. From January 1, 2008
to December 31, 2010, only cash receipts and disbursements records were maintained. When
sales on account were made, they were entered in the subsidiary accounts receivable ledger. No
general ledger postings have been made since December 31, 2007.
As a result of your examination, the correct data shown in the table below are available:
Account receivable balances:
Less than one year old
One to two years old
Two to three years old
Over three years old
Total accounts receivable
Inventories
12/31/07
12/31/10
P15,400
1,200
P16,600
P28,200
1,800
800
2,200
P33,000
P11,600
P18,800
P5,000
P11,000
Accounts payable for inventory purchased
Cash received on accounts receivable in:
Applied to:
Current year collections
Accounts of the prior year
Accounts of two years prior
Total
Cash sales
Cash disbursements for inventory purchased
2008
2009
2010
P148,800
13,400
600
P162,800
P161,800
15,000
400
P177,200
P208,800
16,800
2,000
P227,600
P17,000
P26,000
P31,200
P125,000
P141,200
P173,800
1. The company’s sales revenue for the three-year period amounted to
A. P658,200
C. P625,400
B. P74,200
D. P415,300
2. What is the company’s total sales revenue for 2009?
A. P206,400
C. P268,200
B. P183,600
D. P180,400
3. The aggregate amount of purchases for the three-year period is
A. P131,000
C. P434,000
B. P440,000
D. P446,000
4. What is the company’s gross income ratio in each of the three-year period?
A. 33.33%
C. 35.16%
B. 28.35%
D. 31.15%
5. What is the company’s gross income for each of the three-year period?
2008
2009
2010
A.
B.
C.
D.
P60,933
55,533
122,400
61,200
P68,200
60,133
137,600
68,800
P80,000
79,000
178,800
89,400
Solution 2-24
1. Accounts receivable, Dec. 31, 2010
Add: Collections, 2008 – 2010
Total
Less: Accounts receivable, Jan. 1, 2008
Total credit sales
Add: Cash sales, 2008 – 2010
Total sales, 2008 – 2010
P 33,000
567,600
600,600
16,600
584,000
74,200
P658,200
Answer:A
2. Sales revenue for 2009 (see no. 5)
P206,400
Answer: A
3. Accounts payable, Dec. 31, 2010
Add: payments to suppliers
Total
Less: Accounts payable, Jan. 1, 2010
Total purchases, 2008 – 2010
P 11,000
440,000
451,000
5,000
P446,000
Answer:D
4. Sales (see no. 1)
Less: Cost of sales
Inventory, Jan. 1, 2008
Add: Purchases (see no. 3)
Goods available for sale
Less: Inventory, Dec. 31, 2010
Gross Income
Gross income ratio (P219,400 ÷ P658,200)
P658,200
P 11,600
446,000
457,600
18,800
438,800
P219,400
33 1/3%
Answer:A
5.
Cash sales
Collections in:
2008
2009
2010
2008
P 17,000
2009
P26,000
2010
P31,200
Total
P74,200
148,800
15,000
2,000
161,800
16,800
208,800
148,800
176,800
227,600
A/R, Dec. 31
Total sales
Multiply by gross income ratio
Gross income
800
183,600
33 1/3%
P61,200
1,800
206,400
33 1/3%
P68,800
28,200
268,200
33 1/3%
P89,400
30,800
658,200
33 1/3%
P219,400
Answer:D
PROBLEM 2-25 Analysis of Account Receivable and Allowance for Bad Debts
You are auditing the accounts receivable and the related allowance for bad debts account of
IKEBANA COMPANY.
The following data are available:
General Ledger
Accounts Receivable
2010
Dec. 31
424,000
Allowance for Bad Debts
2010
July 31
GJ – Write off
8,000
2010
Jan. 1
Dec. 31
Balance
GJ – Provision
Summary of Aging Schedule
The summary of the subsidiary ledger balances as of December 31, 2010 is shown below:
Debit balances:
Under one month
One to six months
Over six months
Credit balances:
AA Co.
BB Co.
CC Co.
P180,000
184,000
76,000
P440,000
P 4,000 - OK; additional billing in Jan. 2011
7,000 - Should have been credited to DD Co.*
9,000 - Advance on a sale contract
P20,000
* Account is in “one to six months” classification.
10,000
24,000
The customer’s 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.
Allowance for Bad Debts Requirements
It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six months
are expected to require an allowance of 2 percent. Accounts over six months are analysed as
follows:
Definitely bad
Doubtful (estimated to be 50% collectible)
Apparently good, but slow (estimated to be 90% collectible)
Total
P24,000
12,000
40,000
P76,000
1. The adjusted balance of Ikebana’s “1 to 6 months” accounts receivable is
A. P164,000
C. P177,000
B. P171,000
D. P184,000
2. The adjusted balance of Ikebana’s “over 6 months” accounts receivable is
A. P74,000
C. P69,000
B. P52,000
D. P45,000
3. The adjusted accounts receivable balance on December 31, 2010 should be
A. P404,000
C. P409,000
B. P420,000
D. P413,000
4. The required balance of the allowance for bad debts account on December 31, 2010 is
A. P47,340
C. P15,480
B. P15,340
D. P21,340
5. The entry to adjust the allowance for bad debts account is
A. Bad debts expense
Allowance for bad debts
B. Allowance for bad debts
Bad debts expense
C. Bad debts expense
Allowance for bad debts
D. Bad debts expense
Allowance for bad debts
13,340
13,340
2,000
2,000
17,340
17,340
15,340
15,340
Solution 2-25
Control
Account
Subsidiary Ledger
CR
DR
A G I N G
Under 1
1 to 6
Over 6
Month
Months
Months
Unadjusted balances
Accounts with credit balances
Write off
Unlocated difference
P424,000
13,000
(24,000)
(4,000
P409,000
1. Answer: C
4.
Under 1 month
1 to 6 months
Over 6 months:
Doubtful
Good but slow
Required allowance
P20,000
(20,000)
P440,000 P180,000 P184,000 P76,000
(7,000)
(7,000)
(24,000)
(24,000)
--
P409,000 P180,000 P177,000 P52,000
2. Answer: B
Adjusted Balance
P180,000
177,000
12,000
40,000
3. Answer: C
Rate
1%
2%
Amount
P 1,800
3,540
50%
10%
6,000
4,000
P15,340
Answer: B
5. Bad debts expense
Allowance for bad debts
13,340
Required allowance (see no. 4)
Allowance balance (P10,000 + P24,000 – P24,000 – P8,000)
Adjustment – increase in allowance
13,340
P15,340
2,000
P13,340
Answer: A
Problem 2-26
Estimating Bad Debts
PITO-PITO COMPANY produces herbal tea and other slimming products that are sold
throughout the Philippines. While the company is experiencing a steady growth in sales,
it has become noticeable that collections of accounts receivable from customers are no
longer as fast as they used to be.
Pito-Pito Company’s products are sold on payment terms of 2/10, n/30. In the past,
more than 75% of the credit customers have availed of the discount by paying within the
discount period. During the year ended December 31, 2010, there has been an increase
in the number of customers taking the full 30 days to pay. The company estimates that
less than 60% of the customers are taking advantage of the discount. Bad debt losses
as a percentage of gross credit sales have increased from the 1.5% provided in prior
years to about 4% in the current year.
The determination of accounts receivable collections has prompted the company’s
controller to prepare the following report.
ACCOUNTS RECEIVALBE COLLECTIONS
December 31, 2010
A. It is normal that some receivables will prove uncollectible. In fact, annual bad
debt write-offs has been 1.5% of total credit sales for many years. However, this
rate has increased to 4% during the current year.
B. The accounts receivable balance at December 31, 2010, is P3,000,000. The
condition of this balance in terms of age and probability of collection is presented
below.
Proportion of Total
Age Categories
Probability of Collection
64%
1 to 10 days
99%
18%
11 to 30 days
97.5%
8%
Past due 31 to 60 days
95%
5%
Past due 61 to 120 days
80%
3%
Past due 121 to 180 days
65%
2%
Past due to over 180 days
20%
C. The allowance for bad debts has a credit balance of P54,600 on January 1,
2010.
D. The P 640,000 bad debts expense provided during the year is based on the
assumption that 4% of total credit sales will be uncollectible.
E. Accounts written-off during the year totalled P 585,000.
1. What is the required allowance balance on December 31, 2010?
A. P 154,200
C. P 109,600
B. P 209,200
D. P 55,000
2. What year-end adjustment is necessary to bring Pito-Pito Company’s allowance for
doubtful accounts to the balance indicated by the aging analysis?
A. Bad debts expense
Allowance for doubtful accounts
10,400
10,400
B. Allowance for doubtful accounts
10,400
Bad debts expense
10,400
C. Bad debts expense
44,600
Allowance for doubtful accounts
D. Bad debts expense
44,600
154,200
Allowance for doubtful accounts
154,200
3. What is the net realizable value of Pito-Pito Company’s accounts receivable at
December 31, 2010?
A. P 2,955,400
C. P 2,736,200
B. P 2,845,800
D. P 1,675,800
4. Pito-Pito should report bad debts expense for 2010 of.
A. P 9,600
C.
P 640,000
B. P 595,400
D.
P 686,600
5. Pito-Pito’s total credit sales for 2010 is
A. P 16,000,000
C.
P 25,600,000
B. P 42,666,667
D.
P 14,625,000
SOLUTION 2-26
1. AGING SCHEDULE
Category
1 to 10 days
11 to 30 days
Past due 31 to 60 days
Past due 61 to 120 days
Aging
Ratio
64%
18%
8%
5%
Account
Receivable
Balances
P 1, 920,000
540,000
240,000
150,000
Uncollectible
Rate
Amount
1%
2.5%
5%
20%
P 19,200
13,500
12,000
30,000
Past due 121 to 180 days
Past due over 180 days
Total
3%
2%
90,000
60,000
P 3,000,000
35%
80%
31,500
48,000
P 154,200
Answer: A
2.
Bad debts expense
Allowance for bad debts
44,600
44,600
Allowance for bad debts, January 1, 2010
Add: 2010 bad debts expense
Total
Less: Accounts written off
Allowance balance before adjustment, December 31,
2010
Required allowance per aging
Adjustment – increase in allowance
Answer: C
3.
Accounts receivable
Less: Allowance for bad debts
Net realizable value, December 31, 2010
P 3,000,000
154,200
P 2, 845, 800
Answer: B
4.
Bad debts expense recorded
Add: Adjustment to bring the allowance
balance to the amount indicated by the
aging analysis (see no.2)
Correct bad debts expense for 2010
Answer: D
Alternative computation
P 640,000
44,6000
P 684,000
P 54,600
640,000
694,600
585,000
109,600
154,200
P 44,600
Allowance for bad debts, January 1, 2010
Accounts written off
Bad debts expense (SQUEEZE)
Allowance for bad debts, December 31, 2010
P 54,600
(585,000)
684,000
154,200
5. Total credit sales for 2010 (P 640,000/4%) P 16,000,000
Answer: A
Problem 2-27
Factoring of Accounts Receivable
ROSAL FINANCE CORP. purchase 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
Rosal’s books. Also, 10% of the receivables factored is withheld by Rosal as protection
against sales return and other adjustments. This amount is credited by Rosal to the
Client Retainer account. At the end of each month, payments are made by Rosal to its
client so that the balance in the Client Retainer account is equal to 10% of unpaid
factored receivables. Based on Rosal’s bad debts of 5% of all factored receivables is to
be established. Rosal makes adjusting entries at the end of each month.
On January 3, 2010, Poor, Inc. factored its account receivable totalling P 1,000,000. By
January 31, P 800,000 on these receivables had been collected by Rosal.
Prepare the entries on Rosal’s and Poor’s books to record the above information.
Solution 2-27
ROSAL’S BOOKS
2010
January
3
31
Accounts receivable factored
Commission Income
(P 1,000,000 x 15%)
Client Retainer
(P 1,000,000 x 10%)
Cash
Cash
1,000,000
150,000
100,000
750,000
800,000
Accounts receivable factored
31
Client Retainer
Cash
31
Bad debts expense
Allowance for bad debts
(P 1,000,000 x 5%)
800,000
80,000
80,000
50,000
50,000
POOR, INC.’s BOOKS
2010
January
3
31
Cash
Receivable from factor
750,000
100,000
Commission
Accounts receivable
150,000
1,000,000
Cash
80,000
Receivable from factor
80,000
Problem 2-28
Noninterest-bearing Note
On January 1, 2010, WALING-WALING CO. sells its equipment with a carrying value of
P 160,000. The company receives a non-interest bearing note due in 3 years with a
face amount of P 200,000. There is no established market value for the equipment. The
prevailing interest rate for a note of this type is 21%. The following are the present value
factors of 1 at 12%
Present value of 1 for 3 periods
.071178
Present value of an ordinary annuity of 1 at 3 periods
2.40183
1. What is the gain or loss to be recognized on the sale of the equipment?
A. P 17,644 loss
C. P 17,644 gain
B. P 122 gain
D. P 40,000 gain
2. The discount on note receivable on January 1, 2010, is
A. P 57,644
C. P 40,000
B. P 0
D. P 17,644
3. The discount amortization at the end of the third year using the effective interest
method is
A. P 13,333
C. P 21,428
B. P 19,215
D. P 0
Solution 2-28
1.
Sales price/Present value of note
(P 200,000 x 0.71178)
Less: Book value of equipment
Loss on sale of equipment
P 142,356
160,000
P 17, 644
Answer: A
2.
Face value of note
Less: Present value of note (see no. 1)
Discount of note receivable
P 200,000
142,356
57,644
Answer: A
3.
Present value of note, Jan. 1, 2010
P 142,356
Add: Interest income in 2010 (P 142,356 x
17,083
12%)
Present value of note, Jan. 1, 2011
159,439
Add: Interest income in 2011 (P 159,439 x
19,133
12%)
Present value of note, Jan. 1, 2012
178,572
Face value of note
200,000
Discount amortization at the end of the third
21,428
year
Answer: C
Problem 2-29
Note Receivable with an Unreasonable Low Interest Rate
On January 2, 2010, a tract of land that originally cost P 800,000 was sold by VIETMAN
ROSE COMPANY. The company received a P 1,200,000 note as payment. It bears
interest rate of 4% and is payable in 3 annual instalments of P 400,000 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 value factor of 1 for 3 periods
0.75132
Present value factor of 1 for 2 periods
0.82645
Present value factor for 1 period
0.90909
Present value of an ordinary annuity of 1 for 3 periods
2.48685
1. The gain to be recognized on the sale of the land is
A. P 400,00
C. P 194,740
B. P 276,847
D. P 0
2. The interest income to be reported for 2010 should be
A. P 59,685
C. P 48,000
B. P 120,000
D. P 107,685
Solution 2-29
1. AMOUNT OF CASH TO BE RECEIVED EACH YEAR
Year
2010
2011
2012
(P 1,200,000 x 4%)
(P 800,000 x 4%)
(P 400,000 x 4%)
Interest
P 48,000
32,000
16,000
Principal
P 400,000
400,000
400,000
Total
448,000
432,000
416,000
P 96,000
1,200,000
P 1,296,000
PRESENT VALUE OF THE NOTE AT 10% INTERST RATE
Year
2010
2011
2012
Cash to
Received
P 448,000
432,000
416,000
P 1,296,000
Net present value of note
Less: Cost of land
Gain on sale of land
Present Value
Factor
0.90909
0.82645
0.75132
Present
Value
P 407,272
357,026
312,459
P 1,076,847
P 1,076,847
800,000
P 276,847
Answer: B
2. Interest income for 2010 (P 1,076,847 x 10%)
P 107,685
Answer: D
Problem 2-30
Discounting of Notes Receivable
During your audit of FOREVER COMPANY for the year ended December 31, 2010, you
find the following account.
Notes Receivable
Date
Sep.
1
Oct.
1
1
Nov.
1
30
Dec.
30
1
1
Cornea, 20%, due in 3 months
Hunk Co., 24%, due in 2 months
Discounted Cornea note at 25%
Valerie, 24%, due in 13 months
Cellular Co., no interest, due in
one year
Discounted Cellular note at 18%
Tictic, 18%, due in 5 months
O. Reyes, President, 12% due i3
months (for cash loan given to O.
Reyes)
Debit
P 80,000
300,000
Credit
P 80,000
600,000
500,000
500,000
900,000
1,200,000
All notes are trade notes unless otherwise specified. The Cornea note was paid on
December 1 as per notification from the bank. The Hunk Co. note was dishonoured on
the due date but the legal department has assured management of its full collectability.
The company, with your concurrence, will treat the discounting as a conditional sale of
note receivable.
1. At what amount on the current asset section of the December 31, 2010 statement
of financial position will the Notes receivable-trade be carried?
A. P 1,500,000
C. P 2,400,000
B. P 1,800,000
D. P 2,080,000
2. What amount of loss on notes receivable discounting should be reported in the
2010 income statement of the company?
A. P 90,500
C. P 90,000
B. P 90,833
D. P 0
3. Based on the ledger account presented, what amount of interest income should be
accrued at December 31, 2010?
A.P 59,685
C. P 48,000
B. P 120,000
D. P 107,685
Solution 2-30
1.
Valerie
Tictic
Total notes receivable-trade, Dec. 31, 2010
P 600,000
900,000
P 1,500,000
Answer: A
2. Net proceeds:
Principal
Interest ( P 80,000 x 20% x 3/12)
Maturity value
P 80,000
4,000
84,000
Discount (P84,000 x 25% x 2/12)
Book value
Principal
Accrued interest receivable (P80,000 x 20% x 1/12)
3,500
P 80,000
1,333
Loss on discounting of Cornea note
Principal/Maturity Value
Discount (P 500,000 x 18%x 1 year)
Net proceeds
Book value
Loss on discounting of Cellular note
Total loss on discounting (P833 + 90,000)
P 80,500
81,333
P 8,333
P 500,000
(90,000)
410,000
500,000
P 90,000
P 90,833
Answer: B
3.
Hunk
(P 300,000 x 24% x 3/12)
Valerie
(P 600,000 x 24% x 2/12)
Tictic
(P 900,000 x 18% x 1/12)
O. Reyes
(P 1,200,000 x 12% x 1/12)
Total accrued interest receivable, Dec. 31, 2010
P 18,000
24,000
13,500
12,000
67,500
Problem 2-31
Various Receivable Transactions
The AUTOMATIC COMPANY sells plastic products to wholesalers. The end of the
company’s reporting period is December 31. During 2010, the following transactions
related to receivables occurred:
March
31
Sold merchandise to Mismo Co. and accepted a 10% note.
Payment of P 120,000 principal plus interest is due on March 31,
2011
April
12
Sold merchandise to Abe Co. for P 20,000 with terms 2/10,n/30.
Automatic uses the gross method to account for cash discounts.
21
Collected the entire amount due from Abe co.
27
A customer returned merchandise costing Automatic P 60,000.
Automatic reduced the customer’s receivable balance by P 80,000,
the sales price of the merchandise. The company records sales
return as they occur.
May
30
Transferred receivables of P 1,000,000 to factor without recourse.
The factor charged Automatic a 2% fiancé charge on the
receivables transferred. The criteria to derecognized the asset are
met.
July
31
Sold merchandise to Fabon Company for P 150,000 and accepted
an 8%, 6-month note. 8% is an appropriate rate for this type of
note.
Sep.
30
Discounted the Fabon Company at the bank. The bank’s discount
rate is 12%. The note was discounted without recourse.
Required:
1. Prepare the necessary journal entries to account for the above transactions. For
transactions involving the sale of merchandise, ignore the entry for the cost of
goods sold.
2. Prepare any necessary adjusting entries at December 31, 2010. Adjusting entires
are only recorded at year-end.
Solution 2-31
Mar
April
31
12
21
27
Notes receivable
Sales
120,000
120,000
Accounts receivable
Sales
20,000
Cash (P 20,000 x 98%)
Sales discounts (P 20,000 x 2%)
Accounts receivable
19,600
400
Sales returns
80,000
20,0000
20,000
Accounts receivable
Inventory
Cost of goods sold
May
July
Sep.
30
31
30
31
60,000
60,000
Cash (P 1, 000,000 x 98%)
Loss on factoring (P1,000,000 x 2%)
Accounts receivable
980,000
20,000
Notes receivable
Sales
150,000
Cash
Loss on note receivable discounting
Notes receivable
Interest income
149,760
2,240
Net proceeds:
Principal
Interest (P150,000 x 8% x 6/12)
Maturity value
Discount (P 156,000 x 12% x 4/12)
Book value:
Principal
Accrued interest (P 150,000 x 8% x 2/12)
Loss on discounting
Dec.
80.000
Accrued interest receivable
Interest income
(P 120,000 x 10% x 9/12)
1,000,000
150,000
150,000
2,000
P 150,000
6,000
156,000
(6,240)
P 150,000
2,000
P 149,760
152,000
2,240
9,000
9,000
Problem 2-32
Discounting of Notes Receivable
The notes receivable account of CAIMITO, INC. consisted of the following:
1. 60-day note of P 10,000 dated May 15 with a 9% interest rate, discounted at the
bank on June 8 at 12%.
2. 120-day note of P 100,000 (face amount) dated October 1 with no stated interest
and a market rate of 9% interest, discounted at the bank on November 30 at 12%.
This note was received from the sale of equipment.
1. The proceeds from discounting of the 60-day note amount to
A. P 10,000
C. P 10,028
B. P 10,059
D. P 10,150
2. How much was received by the company from the discounting of the 120-day note?
A. P 101,920
C. P 98,000
B. P 99,960
D. P 100,000
Solution 2-32
1. 60-DAY NOTE
Face amount
Add: Interest ( P 10,000x 9% x 60/360)
Maturity value
Less: Bank discount ( P10,150 x 12% x 36/360)
Net proceeds
P 10,000
150
10,150
122
P 10,028
Answer: C
2. 120-DAY NOTE
Maturity value (same as amount)
Less: Bank discount (P 100,000 x 12% x 60/360)
Net proceeds
Answer: C
Problem 2-33
P 100,000
2,000
P 98,000
Notes Receivable: Classification and Interest Computation
The following long-term receivables were reported in the December 31, 2009, statement
of financial position of MANGO CORPORATION:
Note receivable from sale of plant
Note receivable from officer
P 3,000,000
800,000
The following transactions during 2010 and other information relate to the company’s
long-term receivables:
1. The note receivable from sale of plant bears interest at 12% per annum. The note is
payable in 3 annual instalments of P 1,000,000 plus interest on the unpaid balance
every April 1. The initial principal and interest payment was made on April 1, 2010.
2. The note receivable from officer is dated December 31, 2009, earns interest at 10%
per annum, and is due on December 31, 2012. The 2010 interest was received on
December 31, 2010.
3. Mango sold a piece of equipment to Banana, Inc. on April 1, 2010, in exchange for
a P 400,000, non-interest bearing note due on April 1, 2012. 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, 2010, was 12%. The present
value factor of 1 for two periods at 12% is 0.797.
4. A tract of land was sold by Mango to Orange Inc. on July 1, 2010, for P 2,000,000
under an instalment sale contract. Orange signed a 4-year 11% note for P
1,400,000 on July 1, 2010, in addition to the down payment of P 600,000. The
equal annual payments of principal and interest on the note will be P 451,250
payable on July 1, 2011, 2012, 2013 and 2014. The land had an established cash
price of P 2,000,000, and its cost to Mango was P 1,500,000. The collection of the
instalments on this note is reasonable assured.
1. The amount to be reported as noncurrent receivables on the statement of financial
position at December 31, 2010, is
A. P 3,096,242
C. P 3,221,550
B. P 3,067,550
D. P 3,250,242
2. The current portion of notes receivable on December 31, 2010 should be
A. P 1,451,250
C. P 2,097,250
B. P 1,297,250
D. P 2,297,250
3. The accrued interest receivable on December 21, 2010 should be
A. P 257,000
C. P 285,692
B. P 180,000
D. P 334,000
4. On December 31, 2010, the unamortized discount on note receivable from sale of
equipment should be
A. P 42,944
C. P 0
B. P 109,892
D. P 52,508
5. The total interest income for the year ended December 31, 2010
A. P 427,000
C. P 375,692
B. P 455,692
D. P 532,692
Solution 2-33
1. NONCURRENT RECEIVABLES ( NET OF CURRENT PORTION)
Notes receivable from sale of plant:
Balance, 12/31/10 (P 3,000,000-1,000,000)
Less: Installment due April 1, 2011
Note receivable from officer due Dec. 31, 2012
Note receivable from sale of equipment:
Present value of note on April 1, 2010
(P 400,000 x 0.797)
Add: Interest income,
April 1 – Dec. 31, 2010
(P 318,800 x 12% x 9/12)
Note receivable from sale of land:
Balance, Dec. 31, 2010
Less: Installment due July 1,
2010
P 2,000,000
1,000,000
P 1,000,000
800,000
P 318,800
28,692
P 1,400,000
347,492
Total amount to be
received
Less: Interest
(1,400,000 x 11%)
P451,25
0
154,000
297,250
Total
Answer: D
2. CURRENT PORTIONN OF NONCURRENT RECEIVABLES
Note receivable from sale of plant
Note receivable from sale of land (see no.1)
Total
P 1,000,000
297,250
1,297,250
Answer: B
3. ACCURED INTEREST RECEIVALBE, DEC. 31, 2010
Note receivable from sale of plant, April 1
– Dec.31
(P 2,000,000 x 12% x 9/12)
Note receivable from sale of land, July 1 –
Dec.31
(P1,400,000 x 11% x 6/12)
Total
Answer: B
P 180,000
77,000
P257,000
4. UNAMORTIZED DISCOUNT, DEC. 31, 2010
Unamortized discount, April 1, 2010
(P400,000 – 318,800)
Less: amortization, April 1 – Dec.31 (see no. 1)
Total
P 81,200
28,692
P52,508
Answer: D
5. INTERST INCOME FOR THE YEAR ENDED DEC. 31,2010
Note receivable from sale of plant:
Interest income, Jan.1 – Mar. 31
(P 3,000,000 x 12% x 3/12)
P 90,000
1,102,750
P3,250,242
Interest income, April 1 – Dec.31
(P 2, 000,000 x 12% x 9/12)
Note receivable from officer (P 800,000 x
10%)
Note receivable from sale of equipment
(see no.1)
Note receivable from sale of land (see no.3)
Total
180,000 P270,000
80,000
28,692
77,000
P455,692
Answer: B
Problem 2-34
Various Notes Receivable Transactions
The Notes Receivable account of Bunsoy Co. has a debit balance of P 239,200 on
December 31, 2010. There was no balance at the beginning of the year. Your analysis
of the account reveals the following:
1. Notes amounting to P 845,000 were received from customers during the year.
2. Notes of P 416,000 were collected on due dates and notes amounting to
P
221,000 were discounted at the Aggressive Bank. The Notes Receivable account
was credited for the notes discounted.
3. Of the P 221,000 notes discounted, P 104,000 was paid on maturity dates while a
note for P 31,200 was dishonoured and was charged back to Notes Receivable
account.
4. Cash of P 33,000 was received as partial payment on notes not yet due. The
amount received was credited to Liability on Partial Payment account.
5. A note of P 50,000 was pledged as collateral for a bank.
6. Included in the company’s cash account balance is a three-month note from an
officer amounting to P 8,000 which is over a month past.
Assuming that Busoy Co. will use a Notes Receivable Discounted account, the adjusted
balance of the Notes Receivable account on December 31, 2010 is
A. P 260,800
C. P 364,800
B. P 232,200
D. P 175,000
Solution 2-34
Unadjusted balance
(P 845,000 – P 416,000 – P221,000 + P 31,200)
Partial collection recorded as a liability
Notes receivable discounted still outstanding
(P 221,000 – P 104,000 – P31,000)
Dishonoured notes
Adjusted balance
P 239,200
(33,000)
85,800
(31,200)
P 260,800
Problem 2-35
Loan Impairment Loss
YOKOHANA BANK loaned P 5,000,000 to Bargain Company on January 1, 2010. The
initial loan repayment terms include a 10% interest rate plus annual principal payments
of P 1,100,000 on January 1 each year. Bargain made the required interest payment in
2010 but did not make the P 1,100,000 principal payment nor the P 550,000 interest
payment for 2011. Yokohana is preparing its annual financial statements on December
31, 2011. Bargain is having financial difficulty, and Yokohana has conducted that the
loan is impaired.
Analysis of Bargain’s financial condition on December 31, 2011, indicated the principal
payments will be collected, but the collection of interest is unlikely. Yokohana did not
accrue the interest on December 31. 2011.
The projected cash flows are:
December 31, 2012
December 31, 2013
December 31, 2014
P 1, 750,000
2, 000,000
1, 750,000
5, 500,000
1. What is the loan impairment loss on December 31, 2011?
A. P 941,500
C. P 0
B. P 550,000
D. P 5,500,000
2. What is the interest income to be reported by Yokohana Bank in 2012?
A. P 501,435
C. P 455,850
B. P 0
D. P 550,000
3. What is the carrying value of the loan receivable on December 31, 2013?
A. P 1,590,785
C. P 3,264,350
B. P 1,750,000
D. P 4,558,500
4. What is the interest income in 2013?
A. P 159,079
C. P 455,850
B. P 550,000
D. P 326,435
5. What is the interest income for 2014?
A. P 159,079
C. P 326,435
B. P 550,000
D. P 455,850
Solution 2-35
1.
Book value of loan receivable
Present value of projected cash flows:
Dec. 31, 2012 (P1,750,000 x 0.9091)
Dec. 31, 2013 (P2,000,000 x 0.8264)
Dec. 31, 2014 (P1,750,000 x 0.7513)
Loan impairment loss
P5,500,000
P 1,590,925
1,652,800
1,314,775
4,558,500
P941,500
Answer: A
Date
Dec. 31, 2012
Loan Receivable
Before Current
Payment
P 5,500,000
Dec. 31, 2013
Dec. 31, 2014
3,750,000
1,750,000
2. Interest income in 2012
Answer: C
Allowance
for Loan
Net Loan
Impairment Receivable
P941,500 P4,558,50
0
485,650
3,264,350
159,215
1,590,785
Interest
Payment
Income
Received
P455,850 P1,750,000
326,435
159,079
P 455,850
2,000,000
1,750,000
3.
Loan receivable(P 5,500,000 – 1,750,000 – 2,000,000)
Allowance for loan impairment
Carrying value, Dec. 31, 2013
P 1,750,000
(159,215)
P1,590,785
Answer: A
4. Interest income in 2013
P 326,435
Answer: D
5. Interest income in 2014
Answer: A
P 159,079