Accounting 43 Auditing and Assurance – Concepts and Applications
Audit of Receivables
PROBLEM 1
You were engaged to perform an audit of the accounts of the Montealegre Corporation for the year ended December 31,
2014, and have observed the taking of the physical inventory of the company on December 30, 2012. Only merchandise
shipped by the client to customers up to and including December 30, 2012 have been eliminated from inventory. The
inventory as determined by physical inventory count has been recorded on the books by the company’s controller. No
perpetual inventory records are maintained. All sales are made on an FOB shipping point basis. You are to assume that
all purchase invoices have been correctly recorded.
The following lists of sales invoice are entered in the sales books for the months of December 2014 and January 2015,
respectively.
Dec. 2014
A
Sales Invoice
Amount
Sales
Invoice
Date
Cost of
Goods Sold
Date shipped
P 30,000
Dec. 21
P20,000
Dec. 31, 2014
B
22,000
Dec. 31
18,000
Dec. 31,2014
C
10,000
Dec. 29
6,000
Dec. 30,2014
D
40,000
Dec. 31
24,000
Jan. 3, 2015
E
100,000
Dec. 30
56,000
Dec. 29, 2014*
F
20,000
Dec. 30
80,000
Jan.2, 2013
Jan. 2015
G
60.000
Dec. 31
40,000
Dec. 30,2012
H
40,000
Jan. 2
23,000
Jan.2, 2013
I
80,000
Jan. 3
55,000
Dec.31, 2012
J
90,000
Jan. 4
64,000
Dec.29,2012
*Shipped to consignee. Verification from the consignee indicates that 60% of the merchandise is still unsold at December
31, 2014.
1. Prepare the necessary adjusting journal entries at December 31, 2014 in connection with the foregoing date.
PROBLEM 2
You are assigned to audit the Montilla Merchandising, Inc for the year ending June 30, 2014. The accounts receivable
were circularized as at June 30, 2014 and the following exceptions have not been disposed of.
Customer
Alejandro
Balance
P 30,000
Comments from Customers
Balance was paid on June 29, 2014
Banta
74,000
Cada
16,200
Balance was offset by our June 10
shipment of tires.
The above balance has been paid.
Delfino
10,000
Espiritu
24,000
Follero
15,000
Garcia
85,000
Hababag
10,000
We are rejecting the price, which is
too much.
Igloso
180,000
Amount is okay. Since this is on
consignment, we will remit payment
upon selling the goods.
Our records show a bigger balance,
please check
We do not owe Montilla anything on
June 30 as goods were received in
July 2014, FOB destination.
Our deposit of P60,000 should cover
this balance.
We never received these goods.
Audit Findings
Montilla received mailed check on July
2, 2014.
Montilla credited accounts payable for
P74,000 to record purchase of tires.
The balance was credited to customer
Llamoso.
A new confirmation was mailed.
The shipment costing P16,500 was
made on June 29 2014 and the goods
were not included in recording the
June 30, 2014 inventory.
Montilla had previously credited the
deposit to sales.
The shipment was erroneously made
to another customer, and the goods
costing P59,000 are now on its way to
Grebialde. The shipment was made
FOB destination.
Montilla’s clerk erroneously computed
the unit price at P200. The correct
pricing should have been at P150 per
unit.
Goods cost P120,000, and were
excluded in Montilla’s inventory.
Rey Joseph M. Redoblado | 1
Accounting 43 Auditing and Assurance – Concepts and Applications
Audit of Receivables
Jaca
5,000
CM no. 3256 cancels this balance.
The CM dated May 31, 2014 was
recorded by Motillla in July 2014.
2. Provide the audit adjusting entries.
PROBLEM 3
The Accounts Receivable control account balance of J.A. Serrano Company was P214,100 as of December 31, 2014.
The subsidiary ledger accounts of the Company are summarized below. Credit terms are 60 days net.
Account Name
Siapno
Celeste
Date
May 31
July 1
July 7
Sept. 1
Sept. 25
Nov. 1
Dec. 10
Debit
5,000
Aug. 8
Oct. 4
Nov. 25
8,400
Credit
3,000
5,000
3,000
8,000
3,000
3,000
Balance
5,000
2,000
7,000
4,000
12,000
9,000
12,000
22,000
8,400
22,000
Jan. 1
Two-month, 12%
note
Mar. 1
Dec. 1
Two-month, 6% note
120,000
120,000
100,000
(2,400)
97,600
Manganiban
Feb. 3
Aug. 3
10,000
10,000
10,000
20,000
Toscano
Feb. 10
April 9
May 4
July 2
Sept. 6
Nov. 25
30,000
July 17
Aug. 16
Sept. 30 (open)
Oct. 15
Oct. 18
Dec. 20
5,000
4,440
7,500
Sabio
Sañosa
8,400
122,400
30,000
40,000
40,000
52,780
2,220
9,440
6,000
6,000
30,000
40,000
52,780
55,000
5,000
9,440
16,940
7,500
13,500
7,500
The allowance for uncollectible accounts, before audit, has a credit balance of P5,000. The Allowance for Uncollectible
Accounts is to be adjusted to balance determined as follows:
Accounts not due
Accounts 160 days past due
Accounts 6 1-120 days
Accounts over 120 days past due
1 percent
2 percent
5 percent
50 percent
The provision is to be based only on the trade accounts. Except where payments are earmarked, the oldest items are paid
first.
3. Prepare the audit working papers for the aging of accounts receivable.
4. Provide the necessary audit adjustments as at December 31, 2014.
Rey Joseph M. Redoblado | 2
Accounting 43 Auditing and Assurance – Concepts and Applications
Audit of Receivables
PROBLEM 4
You have substantially completed the audit of Alejandro Black, Inc. (ABI) for the year ended April 30, 2014. ABI sells
household appliances. In preparation for your conference with the officers of the company, you are now going over your
working paper, which contain analysis and schedules as well as findings, and information that may require adjustments to
come up with audited balances as of April 30, 2014.
The following are the audit working papers relating to receivables:
ACCOUNTS RECEIVABLE - TRADE
Reconciliation Between General Ledger and the Total Subsidiary Ledger
April 30, 2014
Total of subsidiary ledger balances
Undelivered sales, based on sales orders received up to April 30, 2014 per JV no.
4030
Goods consigned to LCC, SM Naga and others
Collections received from Catanduanes and Sorsogon branches on May 1 based on
official receipts dated April 30, 2014 for sales made on April 15, 2014
Balance per general ledger
5,635,700
*2,732,900
**3,260,700
***(1,092,800)
P10,536,500
*Goods are physically segregated during inventory count. Sales invoices for these were issued on May 1 and deliveries to
customers were made on May 2.
**These goods were physically verified in customers’ stores. Under the terms of consignment, goods are billed to
customers, based upon their sales report.
***Subsequently deposited on May 2, 2014.
Customers are billed at 20% above cost. Terms 30 days.
ALLOWANCE FOR UNCOLLECTIBLE TRADE RECEIVABLES
Analysis of Movement During the Year
April 30, 2014
Allowance, May 1, 2013
Movement during the period May 1, 2013 - April 30, 2014
Provisions
Write offs
Allowance, April 30, 2014
1,020,000
3,425,625
(4,164,370)
281,255
Aging of accounts receivable-trade, based on accounts receivable schedule as of April 30, 2014, before considering any
adjustments on the accounts:
Current
31-60 days
61-90 days
91 days and over
Total
Per Client
4,469,760
267,320
455,440
443,180
5,635,700
Per Audit
4,067,320
402,440
267,320
898,620
5,635,700
A review of collectibility of each account disclosed the following:
a. A customer with an account balance of P168,000 classified as 91 days and over in aging can no longer be located by
company lawyers. He has known assets and his liabilities to other creditors totaled to P5,000,000. The other creditors
have the same experience as the company. The lawyers suggested that this account be written off, to which the
company president agreed.
b. It is the company policy to provide monthly for accounts doubtful of collection, based on aging schedule, as follows:
2% for current; 5% for 31 to 60 days; 10% for 61 to 90 days; and 30% for 91 days and over. Monthly write-offs are
charged against the allowance. At the end of the year, the credit and collection manager, the lawyers, together with a
representative of its external auditor, undertake a review of collectibility of each account.
5. Provide the correct balance of Trade Accounts Receivable - Gross.
Rey Joseph M. Redoblado | 3
Accounting 43 Auditing and Assurance – Concepts and Applications
Audit of Receivables
6. Provide the correct balance of Allowance for Uncollectible Trade Receivables
7. Provide the correct balance of Uncollectible Accounts Expense
PROBLEM 5
During the course of the audit of the financial statements of Banta, Inc. for the year ended Dec. 31, 2014, you examined
the Trade Notes Receivable account represented by the following items.
1.
2.
3.
4.
5.
6.
A four-month note dated Nov. 30, 2014 from the Mary Co., P100,000; interest rate, 100 percent discounted without
recourse on Nov. 30, 2014 at 8%. Banta recorded the proceeds received as a credit to Liability on Discounted
Notes.
A 90-day note dated Nov. 1, 2014 from Grace, P250,000; interest rate at 8 percent; the note is for subscriptions to
2,500 shares of the preference share capital of Banta, Inc. at P100 per share.
A 60 day note dated May 3, 2014 from Kalbo Company P30,000; interest rate, 6 percent; dishonored at maturity;
judgment obtained on Oct. 10, 2014, collection doubtful.
A 90-day note dated Jan. 4, 2014 from the president of Banta, Inc. - Sony Ramosa, P800,000; no interest; note not
renewed; president confirmed.
A 120-day note dated Sept. 14, 2014, from the Mamo Company, P60,000; interest rate, 9 percent1 note is held by
bank as collateral.
A two year non-interest bearing note from Melody Company for P200,000 received and dated August 31, 2014. The
note was received in exchange for equipment sold. The equipment had an original cost of P400,000 and had an
accumulated depreciation on January 1, 2014 of P160,000. Such equipment is being depreciated at a rate of 10% a
year, rounded the nearest month. The prevailing interest rate for a note of this type is 12%. Banta recorded the sale
by debiting notes receivable and crediting equipment at the face value of the note. No depreciation has yet been
provided on this equipment for the year 2014.
8. Prepare a worksheet for the analysis of Trade Notes Receivable with the following columns:
Maker
Due Date
Balance per Client
Adjustment
Balance per Audit
No. of Days Interest is Accrued
Interest Receivable
Remarks
9. Prepare the audit adjusting entries at December 31, 2014.
PROBLEM 6
Antonis Inc. had the following long-term receivable accounts balances at December 31, 2014:
Note receivable from sale of division
Note receivable from officer
P1,500,000
4,000,000
Transactions during 2014 and other information relative to Antonis long-term receivables were as follows:
a)
b)
c)
The P1,500,000 note receivable is dated April 1, 2013, bears interest at 9% and represents the balance of the
consideration received from the sale of Antonis’ gift items division to M Company. Principal payments of P500,000
plus appropriate interest are due on April 1, 2014, 2015 and 2016. The first principal and interest payment was made
on April 1, 2014. Collection of the note installment is reasonably assured.
The P4,000,000 note receivable is dated December 31, 2013, bears interest at 9%, and is due on December 31,
2014. The note is due from M. Alegre, president of the Antonis, Inc. and is collaterized by 100,000 shares of Antonis’
ordinary share capital. Interest is payable annually on December 31 and all interest payments were paid on their due
dates through December 31, 2014. The quoted market price of Antonis ordinary share was P45 per share on
December 31, 2014.
On October 1, 2014, Antonis sold a patent to DDD Company in exchange of a two-year P1,000,000 non-interest
bearing note due on October 31, 2016. There was no established price for the patent, and the note had no ready
market. The prevailing rate of interest for a note of this type at Oct. 1, 2014 was 12%. The patent had a carrying value
of P800,000 at January 1, 2014, and the amortization for the year ended Dec. 31, 2014 would have been P160,000.
The collection of the note is reasonably assured.
Rey Joseph M. Redoblado | 4
Accounting 43 Auditing and Assurance – Concepts and Applications
Audit of Receivables
d)
On September 1, 2014, Antonis sold a parcel of land to CGC Company for P20,000,000 under installment sales
contract. CGC made a P6,000,000 cash down payment on Sept. 1, 2014 and signed a four-year note for the
P14,000,000 balance. The equal annual payments of principal and interest on the note will be P5,003,252 payable on
Sept. 1 2015 through Sept. 1, 2018. The land could have sold at an established cash price of P20,000,000, the cost
of the land to Antonis was P15,000,000. Circumstances are such that the collection of the installments on the notes is
reasonably assured.
10. Determine the non-current portion of the long-term receivables at December 31, 2014.
11. Prepare a schedule showing the current portion of the long-term receivables and accrued interest receivable that would
appear in Antonis’ Statement of Financial Position at December 31, 2014.
12. Determine the total amount of interest income during the year 2014.
13. Determine the amount of gains or losses on sale of assets during the year 2014.
PROBLEM 7
You are assigned to assess the collectibility of the receivables carried in the books of Bulilit Bataller Company (BBC), your
audit client. The working trial balance prepared at December 31, 2014 showed the following balances:
Note receivable
Account receivable
P6,000,000
4,000,000
In the course of your examination, you discovered the following:
Note receivable from F
Note receivable from G
Note receivable from T
P2,000,000
3,000,000
1,000,000
No interest has yet been recorded by BBC during 2014 on any of the notes above.
Company F is undergoing bankruptcy proceedings and has negotiated for a restructuring of its notes receivable. The note
was for a four-year period and interest of 10% is collectible annually. All interest accrued before 2014 has been collected.
The note matured on December 31, 2013. No further interest will be collected during the four-year term.
The note receivable from Company G is a three-year non-interest bearing note, with face value of P3,000,000. The note
was received in exchange for a piece of land sold by BBC on May 1, 2014. The land was carried in the books at the date
of sale at P2,000,000. The difference between the face amount of the note and the carrying value of the land was credited
to gain on sale of land. The market interest rate for a note of this type is 10%.
The notes receivable from Company T bears interest at 10%. The note was received from sale of goods in the normal
course of business. The note is dated October 1, 2014 and matures on March 31, 2015.
14. Prepare any audit adjustments as a result of the foregoing.
15. Determine the carrying value of the notes that would appear under the current assets section and non-current assets
section of the Statement of Financial Position at December 31, 2014.
16. Determine the amount of impairment loss on receivables and interest revenue that would appear in profit or loss for the
year 2014.
-End-
Rey Joseph M. Redoblado | 5