FAR EASTERN UNIVERSITY
College of Accountancy
ASSURANCE CONCEPTS & APPLICATIONS 1
AUDIT OF RECEIVABLES
SITUATIONAL – 4
Audit of Receivables
The adjusted trial balance of JAMES Corporation on December 31, 2023,
includes the following cash and receivables balances.
Cash-Allied Bank
P 450,000
Currency on Hand
160,000
Petty Cash Fund
10,000
Cash in bond sinking fund
150,000
Notes receivable (including notes
discounted with recourse, P155,000)
365,000
Accounts receivable
856,000
Allow. for Doubtful Accounts (41,500)
814,500
Interest receivable
5,250
Current liabilities reported in the December 31, 2023 statement of
financial position included:
Obligation on discounted notes receivables
P155,000
Transactions during 2024 included the following:
a. Sales on account were P7, 670,000.
b. Cash collected on accounts totaled P5,765,000, including
accounts of P930,000 with cash discounts of 2%.
c. Notes received in settlement of accounts totaled P825,000.
d. Notes receivable discounted as of December 31, 2023, were paid
at maturity with the exception of one P30,000 note on which the
company had to pay the bank P30,900, which include interest and
protest fees. It is expected that recovery will be made on this
note early in 2025.
e. Customer notes of P585,000 were discounted with recourse during
the year, proceeds from their transfer being P585,000. (All
discounting transactions were recorded as loans.) Of this
total, P480,000 matured during the year without notice of
protest.
f. Customer accounts of P87, 200 were written off during the year
as worthless.
g. Recoveries of bad debts written off in prior years were
P20,200.
h. Notes receivable collected during the year totaled P270,000 and
interest collected was P24,500.
i. On December 31, accrued interest on notes receivable was
P6,300.
j. Cash of P350,000 was borrowed from Allied Bank with accounts
receivable of P400,000 being pledged on the loan. Collections
of P195,000 had been made on these receivables (included in the
total given in transaction (b) ), and this amount was applied
on December 31, 2014, to payment of accrued interest on the
loan of P6,000, and the balance to the partial payment of the
loan.
k. The petty cash fund was reimbursed (meaning that cash was
removed from the bank account and placed in the petty cash
fund) based following analysis of expenditure vouchers:
Travel expense
P 1,120
Entertainment expense
780
Postage expense
930
Office supplies expense
Cash short and over (an income account)
1,730
60
l. Cash of P30,000 was added to bond retirement fund.
m. Currency on hand at December 31, 2024, was 120,000.
n. Total cash payments for all expenses during the year were
P6,800,000. Charge to general expenses.
o. Uncollectible accounts are estimated to be 5% of the December
31, 2024, Accounts Receivable balance.
Based on the above and the result of your audit, answer the
following:
1. The total cash to be reported in the company’s December 31,
2024 statement of financial position is
A. P555,700
C. 574,180
B. 574,300
D. 569,800
2. The doubtful accounts expense to be recognized for the year
ended December 31,2024 is
A. P117,010
C. 117,940
B. 91,510
D. 92,440
3. The net account receivable as of Dec. 31, 2024 is
A. P1,713,190
C. 1,738,690
B. 1,730,860
D. 1,756,360
4. The net trade and other receivables to be reported in the
company’s December 31, 2024 statement of financial position is
A. P2,023,690
C. 2,072,260
B. 2,078,560
D. 2,060,890
5. In determining validity of accounts receivable, which of the
following would you consider as most reliable?
A. Direct telephone communication between auditor and debtor.
B. Credits to accounts receivable from the cash receipts book
after the close of business at year end.
C. Documentary evidence that supports the accounts receivable
balance.
D. Confirmation replies received directly from customers.
SITUATIONAL – 5 Estimating Bad Debts
From inception of operations to December 31, 2024, REID 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 a count were made.
Reid’s usual credit terms are net 30 days.
The balance in the Allowance for Bad debts account was P143, 000 at
January 1, 2024. During 2024, credit sales totaled 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. Reid installed
a computer facility in November 2014 and an aging of accounts
receivable was prepared for the first time as of December 31, 2024. A
summary of the aging is as follows:
Classification by
Month of Sale
Uncollectible
November-December 2024
July-October 2024
January – June 2024
Prior to January 1, 2024
Balance in
Each category
Estimated %
P 2,160,000
1,300,000
840,000
300,000
2%
10%
25%
70%
Based on the review of collectability of the account balances in the
“prior to January 1, 2024” aging category, additional receivables
totaling P120, 000 were written off as December 31, 2024. The 70%
uncollectible estimate applies to the remaining P180, 000 in the
category. Effective with the year ended December 31, 2024, Reid
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 account on
December 31, 2024 (before year-end adjustment)?
A. P300, 000
C. 226,000
B. 143,000
D. 346,000
2. What is the journal entry for the year-end adjustment to the
Allowance for Bad Debts account balance as of December 31,
2024?
A. Bad Debts Expense
283,200
Allowance for Bad Debts
283,200
B. Bad Debts Expense
163, 200
Allowance for Bad Debts
163, 200
C. Allowance for Bad Debts
143, 000
Bad Debts Expense
143,000
D. Bad Debts Expense
509, 200
Allowance for Bad Debts
509, 200
3. For the year ended December 31, 2024, Reid’s bad debts expense
would be
A. P626, 200
C. 300,000
B. 283, 200
D. 583, 200
4. The net realizable value of Reid’s accounts receivable at
December 31, 2024, should be
A. P4, 374, 000
C. 3, 970, 800
B. 3, 896,800
D. 4,090,800
5. An auditor’s purpose in reviewing credit ratings of customers
with delinquent accounts receivable most likely is to obtain
evidence concerning management’s assertion about
A. Completeness
B. Existence
C. Rights and obligations
D. Valuation and allocation
-0-