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CHAPTER 4
 Audit of Receivables
Problem 1
The accounts receivable of FRANCO COMPANY were stated at P1,467,000 in a balance sheet submitted to a banker for credit. You are called upon to audit the report and, upon analysis, the asset was found to consist of the following items: Due from customers on open account P 1,125,000 Acknowledged claim for damages 22,500 Due from consignee at billed price
 cost price being P22,500 30,000 Investment in and advances to affiliated company 150,000 Loans to officers and employees 13,500 Deposits with municipalities
 bids for contracts 67,500 Unpaid capital stock subscriptions 60,000 Advances to creditors for merchandise purchased but not received 24,000 Cash advanced to salesmen for traveling expenses 4,500 Allowance for doubtful accounts ( 30,000) P1,467,000 The amount of P1,125,000 due from customers was the remaining balance after deducting accounts with credit balances of P6,000. During your examination, you noted that on December 31, the company assigned P300,000
of customers’ accounts to secure a 17%, P240,000 note payable. A 1% commission based
on the accounts assigned was charged and deducted from the cash received. The client recorded this transaction by a debit to cash and a credit to notes payable.
Questions
1. How much is the Accounts Receivable (gross) balance at December 31? a.
 
P 759,000 b. P 789,000 c. P 1,101,000 d. P 1,131,000 2. The total current non-trade receivable balance at December 31 is: a. P 64,500 b. P 96,000 c. P 120,000 d. P 192,000 3. The liability for the accounts receivable
 assigned is: a.
 
P 237,000 b. P 240,000 c. P 243,000 d. P 300,000 4. The total non-trade receivable balance at December 31 is: a. P 342,000 b. P 318,000 c. P 313,500 d. P 245,000
Solution
 
(1) Claims Receivable 22,500  Accounts receivable 22,500 (2) Sales 30,000  Accounts receivable 30,000 (3) Advances to affiliates 150,000  Accounts receivable 150,000 (4) Receivables - officers/employee 13,500  Accounts receivable 13,500 (5) Deposits for contracts bidding 67,500  Accounts receivable 67,500
 
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(6) Subscription receivable 60,000  Accounts receivable 60,000 (7) Advances to suppliers 24,000  Accounts receivable 24,000 (8) Advances to officers/employee 4,500  Accounts receivable 4,500 (9) Accounts receivable 30,000  Allowance for bad debts 30,000 (10) Accounts receivable 6,000 Customers with credit balance 6,000 (11) OE: Cash 237,000 Notes payable 237,000 CE: Cash 237,000 Commission expense 3,000 Notes payable 300,000  Adj: Commission expense 3,000 Notes payable 3,000 Unadjusted AR 1,467,000 Non-trade AR (1) ( 22,500) Claims receivable 22,500 (2) ( 30,000) Advances to affiliates 150,000 (3) ( 150,000) Advances to off/empl (4) ( 13,500) ( 13,500 + 4,500) 18,000 (5) ( 67,500) Deposit for contracts 67,500 (6) ( 60,000) Subscription receivable 60,000 (7) ( 24,000) Advances to suppliers 24,000 (8) ( 4,500) (9) 30,000 (10) 6,000 __________  Adjusted balance 1,131,000 Total 342,000 Current non-trade AR Claims receivable 22,500  Advances to off/empl ( 13,500 + 4,500) 18,000  Advances to suppliers 24,000 Total 64,500  Answer: 1. D 2. A 3. B 4. A
Problem 2
In your audit of MENDOZA COMPANY for the past calendar year, you find the following accounts: ACCOUNTS RECEIVABLES Jan. 1, 2002 P 800,000 Jan.
 Dec. 1992 collections P 5,900,000 Jan.
 Dec. Sales 6,300,000 Jan.
 Dec. write-off 100,000 ALLOWANCE FOR BAD DEBTS Jan.
 Dec. Write-off of Jan. 1, 2002 P 95,000
last year’s receivables
P 85,000 Dec. 31 provisions 315,000 Write-
off of this year’s
Receivables 15,000 In your examination, you find that the balance of Accounts Receivable represents sales of the current audit year only; that credit balances in the subsidiary ledger for accounts
receivable totaled P80,000; and that the current year’s provision for bad deb
ts expense was 5% of sales (as compared with 4½% last year, 4% of the year before, and 3½% the next
previous year). Sequential to aging the accounts receivable, you and the company’s
 
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treasurer agree on an additional write-off of P50,000, and P300,000 as the probable loss to be sustained on collection of the accounts receivable balance.
Questions
1. The adjusted Accounts Receivable balance is: a.
 
P 830,000 b. P 1,100,000 c. P 1,130,000 d. P 1,180,000 2. The adjusted Allowance for Bad Debts is: a.
 
P 260,000 b. P 300,000 c. P 315,000 d. P 355,000 3. The adjusted Bad Debts account is: a.
 
P 260,000 b. P 300,000 c. P 315,000 d. P 355,000 4. The provision per record at December 31 is: a.
 
P 260,000 b. P 300,000 c. P 315,000 d. P 355,000
Solution
 
 Accounts Receivable 80,000
Customers’ credit balance
 80,000  Allowance for bad debts 50,000  Accounts receivable 50,000 Bad debts expense 40,000  Allowance for bad debts 40,000 Computation: Provision per records 315,000 * Provision per audit 355,000  Adjustment 40,000 * Beg. balance 95,000 + Provisions 355,000 squeezed figure - Write-off per book 100,000 - Additional write-off 50,000 Ending balance 300,000  Answer: 1. C 2. B 3. D 4. C
Problem 3
The following selected transactions occurred during the year ended December 31, 2006 of DOMINGO COMPANY: Gross sales (cash and credit) P 900,736.80 Collections from credit customers, net of 2% cash discount 294,000.00 Cash sales 180,000.00 Uncollectible accounts written off 19,200.00 Credit memos issued to credit customers for sales ret./allow. 10,080.00 Cash refunds given to cash customers for sales ret./allow. 15,168.00 Recoveries on accounts receivable written-off in prior years (not included in cash received stated above) 6,505.20 At year-end, the company provides for estimated bad debts losses by crediting the Allowance for Bad Debts account for 2% of its net credit sales for the year. The allowance for bad debts at the beginning of the year is P19,327.20.
Questions
1.
 
How much is the DOMINGO COMPANY’s gross sales?
 a.
 
P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80
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