Edited:
In connection with your examination of the financial statements of TharnType, 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.
• The December 31, 2020 balance in the Accounts Receivable control account is P1,042,100.
• An aging schedule of the accounts receivable as of December 31, 2020 is presented below:
Age
Net debit
balance
60 days & under
61 to 90 days
91 to 120 days
P473,400
402,900
98,200
Over 120 days
46,900
Percentage to be applied
after corrections have
been made
1/2 percent
2 1/2 percent
6 1/2 percent
Definitely uncollectible,
P14,600; the remainder is
estimated to be 30%
uncollectible.
P1,042,100
• The Allowance for Doubtful Accounts schedule is presented below:
Debit
Credit
January 1, 2020
November 30, 2020
P7,800
December 31, 2020 (P1,042,100 x 5%)
P52,105
Balance
P12,500
7,400
P59,505
• Entries made in the Doubtful Accounts Expense account were:
1. A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts.
2. A credit for P8,700 on November 30, 2020, and a debit to Allowance for Doubtful Accounts
because of a bankruptcy. The related sales took place on October 2, 2020. (Note that as per
investigation, the amount reflected in the Doubtful Accounts Expense account is the correct
one).
• There is a credit balance in one account receivable (60 days & under) of P21,000; it represents an
advance on a sales contract.
Questions:
1. How much is the adjusted balance of Accounts Receivable as of December 31, 2020?
2. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31, 2020?
3. How much is the Doubtful Accounts expense for the year 2020?
4. How much is the net adjustment to the Doubtful Accounts expense account? Indicate if debit or credit
(amount, debit or credit)
5. How much is the overstatement (understatement) in your total assets as of December 31, 2020?
Indicate if overstated or understated (amount, overstated or understated)
Solution:
1-2
Before we proceed, note that the total in the aging table should have been P1,021,400. Now to proceed,
see the table below:
Percentage to be
Net debit
Adjusted
applied after
Related
Age
Adjustment
balance
Balance
corrections have Allowance
been made
P21,000
P494,400 1/2 percent
P2,472
60 days & under
P473,400
(8,700)*
394,200
9,855
61 to 90 days
402,900
2 1/2 percent
98,200 6 1/2 percent
6,383
91 to 120 days
98,200
9,690
Over 120 days
46,900
(14,600)**
32,300 30%
P1,019,100
P28,400
P1,021,400
*From entries made in the DAE account, item 2.
**This was indicated in the schedule as uncollectible.
#1 P1,019,100
#2 P28,400
3. For this item, see the calculation below:
Beg. Bal. of ADA
Less: Write off on November 30
Less: Write off on December 31
Adjusted Balance before Expense
Doubtful Accounts Expense (squeezed)
ADA, end. Bal.
P12,500
(8,700)
(14,600)
(P10,800)
39,200
P28,400
#3 P39,200
4. For this item, see the calculation below:
Beg. Bal. of DAE
Add: credit on ADA
Less: Write off on November 30
DAE, Unadjusted
DAE, Adjusted
Adjustment
#4 P4,205, credit
P
0
52,105
(8,700)
P43,405
39,200
P 4,205
5. To know this, we have to determine the adjusted and unadjusted net AR balance as follows:
Net AR, unadjusted
AR, gross
P1,042,100
ADA, gross
(59,505)
P982,595
Net AR, adjusted
AR, gross
P1,019,100
ADA, gross
(28,400)
990,700
Understatement
(P8,105)
#5 P8,105, understated
Edited:
The balance sheet of BL Corporation reported the following long-term receivables as of December 31,
2019:
Note receivable from sale of plant
P12,000,000
Note receivable from officer
3,200,000
In connection with your audit, you were able to gather the following transactions during 2020 and other
information pertaining to the company’s long-term receivables:
a. The note receivable from sale of plant is a non-interest-bearing note. The note is payable in 6 semiannual installments of P2,000,000 every April 1 and October 1. The initial payment was made on April 1,
2020. The note had no ready market, and there was no established exchange price for the plant. At the
time of sale, the prevailing interest rate for a note of this type was 12%. The present value factor of an
annuity for 6 semi-annual periods at 12% is 4.9173
b. The note receivable from officer is dated December 31, 2019, earns interest at 16% per annum, and is
due on December 31, 2022. The 2020 interest was received on December 31, 2020. The present value
factor of an annuity for 3 periods at 16% is 2.2459, and the present value factor of 1 for 3 periods at 16%
is 0.6407
c. The corporation sold a piece of equipment to LoveHasNoGender, Inc. on June 1, 2020, in exchange for
an P1,600,000 12% interest bearing note due on June 1, 2022. At the time of sale, the prevailing interest
rate for a note of this type at June 1, 2020, was 14%. The present value factor of an annuity for 2 periods
at 14% is 1.6467, and the present value factor of 1 for 2 periods at 14% is 0.7695
d. A tract of land was sold by the corporation to Flag Co. on July 1, 2020, for P8,000,000 under an
installment sale contract. Flag Co. signed a 4-year 11% note for P5,600,000 on July 1, 2020, in addition to
the down payment of P2,400,000. The equal annual payments of principal and interest on the note will
be P1,805,000 payable on July 1, 2021, 2022, 2023, and 2024. The land had an established cash price of
P8,000,000, and its cost to the corporation was P6,000,000. The collection of the installments on this
note is reasonably assured.
QUESTIONS:
Based on the above and the result of your audit, determine
the following:
1. How much is the carrying amount of Note A as of December 31, 2020?
2. How much is the carrying amount of Note B as of December 31, 2020?
3. How much is the carrying amount of Note C as of December 31, 2020?
4. How much is the carrying amount of Note D as of December 31, 2020?
5. How much is the total notes receivables as of December 31, 2020?
6. Interest income for the year 2020
7. Accrued interest receivable as of December 31, 2020
8. Assuming that the company mistakenly ignored the prevailing market rate of Note C, how much is
overstatement (understatement) in interest income for 2020 ignoring income taxes? Indicate if
overstated or understated (amount, overstated or understated)
9. Assuming that the company mistakenly ignored the prevailing market rate of Note C, how much is
overstatement (understatement) in notes receivable as of 2020? Indicate if overstated or understated
(amount, overstated or understated)
Solution:
1-8
To solve these, we have to individually assess each notes receivable as follows:
Note A
Amortization Table
Period
Oct. 1, 2019
Apr. 1, 2020
Oct. 1, 2020
Apr. 1, 2021
Oct. 1, 2021
Apr. 1, 2022
Oct. 1, 2022
Beg. Bal.
Periodic pmt.
Int. earned
Principal Pmt.
9,834,600
8,424,676
6,930,157
5,345,966
3,666,724
1,886,727
2,000,000
2,000,000
2,000,000
2,000,000
2,000,000
2,000,000
590,076
505,481
415,809
320,758
220,003
113,204
1,409,924
1,494,519
1,584,191
1,679,242
1,779,997
1,886,796
End. Bal.
9,834,600*
8,424,676
6,930,157
5,345,966
3,666,724
1,886,727
-69**
*2,000,000 x 4.9173
**due to rounding off of PV factor
So, the relevant information here would be:
The carrying amount as of December 31, 2020 is:
Carrying amount at Oct. 1, 2020
Amortization of Discount (6,930,157 x 12% x 3/12)
Carrying amount, Dec. 31, 2020
6,930,157
207,905
7,138,062
Int. Income for 2020
Interest for Jan-March 2020 (590,076 x 3/6)
Interest for Apr-Sept 2020 (505,481 x 6/6)
Interest for Oct-Dec 2020 (415,809 x 3/6)
Total interest income, 2020
295,038
505,481
207,905
1,008,424
Journal entry at year-end is:
Notes Receivable
Interest Income
207,905
207,905
Note B
Since the note is interest-bearing and there is no indication the interest rate is unreasonable, carrying
amount is at Face Value. Thus, carrying amount for this note is 3,200,000
Further, interest income on this note is simply 3,200,000 x 16% = 512,000
Note C
Amortization Table
Period
Beg. Bal.
June 1, 2020
June 1, 2021
1,547,366
June 1, 2022
1,571,997
Periodic pmt.*
Int. earned
Principal Pmt (Inc.)
192,000
1,792,000**
216,631
220,080
-24,631
1,571,920
End. Bal.
1,547,366^
1,571,997
77^^
*Note that the periodic interest payment is 1,600,000 x 12% = 192,000
**Payment at year 2 is the sum of the interest payment and the principal, that is, 192,000 + 1,600,000 =
1,792,000
^This is obtained as 1,600,000 x 0.7695 + 192,000 x 1.6467 = 1,547,366
^^This difference is due to the rounding off of PV factors.
The relevant information are as follows:
Carrying amount, June 1, 2020
Amortization of Note Discount
(1,547,366 x .14 x 7/12) – (1,600,000 x .12 x 7/12)
Carrying amount, Dec 31, 2020
1,547,366
14,368
1,561,734
Interest income is 1,547,366 x .14 x 7/12 = 126,368
Journal entry at year-end:
Notes Receivable
Accrued interest receivable
(192,000 x 7/12)
Interest Income
Note D
Amortization Table
Period
July 1, 2020
July 1, 2021
July 1, 2022
July 1, 2023
July 1, 2024
Beg. Bal.
5,600,000
4,411,000
3,091,210
1,626,243
14,368
112,000
126,368
Periodic pmt.
Int. earned
Principal Pmt.
1,805,000
1,805,000
1,805,000
1,805,000
616,000
485,210
340,033
178,887
1,189,000
1,319,790
1,464,967
1,626,113
End. Bal.
5,600,000
4,411,000
3,091,210
1,626,243
130*
*This difference is due to the rounding off of PV factors.
Relevant information are as follows:
Since there is no premium or discount, carrying amount is equal to the balance of 5,600,000
Interest income is simply 5,600,000 x .11 x 6/12 = P308,000
Journal entry at year-end is as follows:
Accrued interest receivable
Interest Income
308,000
308,000
Now to the questions:
1. Note A = 7,138,062
2. Note B = 3,200,000
3. Note C = 1,561,734
4. Note D = 5,600,000
5. Total = 17,499,796
6.
Note A = 1,008,424
Note B = 512,000
Note C = 126,368
Note D = 308,000
Total = 1,954,792
7.
Note A = 0
Note B = 0
Note C = 112,000
Note D = 308,000
Total = 420,000
8. If the company mistakenly ignored the prevailing market rate, no discount on notes is recognized.
Thus, the understatement of int. income will be equal to the amortization of such discount. The answer
is 14,368, understated
9. If ignored, the carrying amount of the note will be equal to face value. Thus, assets will be overstated.
The answer is 1,600,000 - 1,561,734 = 38,266, overstated