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II AUDIT OF RECEIVABLES

SUMMARY OF PROBLEMS
PROBLEM NO. 1 Composition of trade and other receivables
PROBLEM NO. 2 Computation of adjusted accounts receivable
(including preparation of adjusting entries)
PROBLEM NO. 3 Audit of accounts receivable and related accounts
(including preparation of adjusting entries)
PROBLEM NO. 4 Audit of allowance for doubtful accounts
(including preparation of adjusting entries)
PROBLEM NO. 5 Analysis of accounts receivable and related accounts
PROBLEM NO. 6 Audit of accounts receivable and related accounts
(including preparation of adjusting entries)
PROBLEM NO. 7 Analysis of notes receivable and related accounts
PROBLEM NO. 8 Audit of notes receivable and related accounts
(including preparation of adjusting entries)
PROBLEM NO. 9 Audit of notes receivable and related accounts
PROBLEM NO. 10 Analysis of notes receivable and related accounts
(including preparation of adjusting entries)
PROBLEM NO. 11 Loan impairment
PROBLEM NO. 12 Theory

PROBLEM NO. 1 - Ipil-Ipil Company


Items included:
Trade accounts receivable (see computation below)
Advance payments to creditors on purchase orders
Interest receivable on bonds
Subscriptions receivable due in 30 days
Trade and other receivables
Composition of trade accounts receivable:
Other trade accounts receivable unassigned
Trade accounts receivable - assigned
Trade installment receivable due 1 18 months,
net of unearned finance charges of P2,000
Trade receivables from officers due currently
Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks)
Trade accounts receivable
Items not included:
Accounts known to be worthless
Advances to affiliated companies
Customers' account with credit balance

91,500
10,000
10,000
55,000
166,500

50,000
15,000
20,000
1,500
5,000
91,500

2,500 Write off


25,000 Noncurrent investment
(15,000) Trade and other payables

PROBLEM NO. 2 - Beatles Company


Requirement No. 1
1)

2)

Love M. Do
Sales returns
Accounts receivable

92,000
92,000

Strawberry Fields
None

3) This Boy Company


None, this is misposting only in the SL. However, the customers' ledger should be adjusted.
4)

5)

6)

Girl Corporation
Sales
Accounts receivable

40,000
40,000

Ticket To Ride Corp.


Accounts receivable-Nontrade
Accounts receivable

160,000

Let It Be Corp
Cash
Accounts receivable

124,000

160,000

124,000

7)

Hey Jude
None, this is misposting only in the SL. However, the customers' ledger should be adjusted.

8)

Get Back Company


None, this is misposting only in the SL. However, the customers' ledger should be adjusted.

9)

Yesterday Corp
None, this is misposting only in the SL. However, the customers' ledger should be adjusted.

Requirement No. 2
Unadjusted balance
Add (Deduct) adjustments:
No. 1
No. 4
No. 5
No. 6
Adjusted balance

2,020,000
(92,000)
(40,000)
(160,000)
(124,000)
1,604,000

PROBLEM NO. 3 - Praktis Company


Accounts receivable

Per Books
442,500

60 days old and below

238,500

61 to 90 days
Over 90 days

117,200
85,400

Allowance for doubtful accounts

Adjusting Journal Entries


1 Advances to officers and employees
Accounts receivable

15,000

1
2
3
4
5
6
7

Adjustments
(16,400)
15,000
(21,000)
(12,000)
(1,200)
(18,000)
(1,500)

Per Audit
387,400

4
5
6
7

(12,000)
(1,200)
(18,000)
(1,500)

205,800

(21,000)

2
3
8

15,000
(21,000)
(1,378)

16,400
16,400

2 Accounts receivable
15,000
Allowance for doubtful accounts
Erroneous recording of recovery from written off account

15,000

3 Allowance for doubtful accounts


Accounts receivable (>90 days)
Accounts that should be written off

21,000
21,000

4 Net sales
Accounts receivable (<60 days)
Unrecorded credit memo

12,000

5 Net sales
Accounts receivable (<60 days)
Unrecorded employee discount

1,200

6 Net sales
Accounts receivable (<60 days)

18,000

Inventory
Cost of sales
Goods out on consignment erroneously billed

12,000

1,200

18,000
13,000
13,000

7 Freight out
Accounts receivable (<60 days)
Unrecorded freight-out

1,500

8 Allowance for doubtful accounts


Doubtful accounts expense

1,378

1,500

60 days old and below


205,800
1%
61 to 90 days
117,200
2%
Over 90 days
64,400
5%
Required allowance
Balance per books before this adjustment (15,000+15,000-21,000)

1,378
2,058
2,344
3,220
7,622
9,000

117,200
64,400
7,622

Adjustment

1,378

PROBLEM NO. 4 - Professional Company


Requirement No. 1
Category
1 10 days
11 30 days
31 60 days
61 120 days

Aging ratio
64%
18%
8%

AR Balance
960,000
270,000
120,000

Rate
Allowance
1.00%
9,600
2.50%
6,750
5.00%
6,000

5%

75,000

20.00%

15,000

121 180 days

3%

45,000

35.00%

15,750

over 180 days

2%
100%

30,000
1,500,000

80.00%

24,000
77,100

Requirement No. 2
Doubtful accounts expense
Allowance for doubtful accounts

22,300 *

Allowance for doubtful accounts, 1/1


Add provisions (P8,000,000 x 4%)
Total
Less accounts written-off
Balance before adjustment
Required allowance (see no. 1)
Additional required allowance for doubtful accounts

22,300
27,300
320,000
347,300
292,500
54,800
77,100
22,300

PROBLEM NO. 5 - Poster Corporation


Requirement No. 1
Accounts receivable, 1/1/12
Credit sales for 2012
Collections during 2012
Accounts written off - 2012
Accounts receivable, 12/31/12

209,000
1,500,000
(1,380,200)
(31,000)
297,800

Requirement No. 2
Allowance for doubtful accounts, 1/1/12
Doubtful accounts expense - 2012 (see computation below)
Accounts written off - 2012
Recovery of accounts written off - 2012
Allowance for doubtful accounts, 12/31/12

7,600
30,000
(31,000)
4,200
10,800

Computation of doubtful accounts expense - 2012:


Doubtful accounts expense for 2012 (P1,500,000 x 2%)
Computation of bad debt rate:
Year
Credit sales
2009
1,110,000
2010
1,225,000
2011
1,465,000
3,800,000

AR writen-off
26,000
29,500
30,000
85,500

Net accounts written off (2009 to 2011)


Divide by credit sales (2009 to 2011)
Percentage of uncollectible accounts to charge sales

Recoveries
2,150
3,750
3,600
9,500

30,000

Net
23,850
25,750
26,400
76,000
76,000
3,800,000
2.00%

PROBLEM NO. 6 - Ringo, Inc.


Requirement No. 1.a
Unadjusted balances
Add (deduct) adjustments:
AJE No. 1
AJE No. 2
AJE No. 3
Adjusted balances

GL/SL
837,900
(9,000)
(6,100)
11,000
833,800

60
387,800

61 to 90
307,100

(9,000)
(6,100)
387,800

11,000
318,100

Requirement No. 1.b


Age of accounts
60
61 to 90
91 to 120
over 120

balance
387,800
318,100
83,700
44,200
833,800

Rate
1%
2%
5%
25%

Allowance
3,878
6,362
4,185
11,050
25,475

Requirement No. 1.c


Unadjusted allowance for doubtful accounts
Add (deduct) adjustments:
AJE no. 1
(9,000)
AJE no. 4 (squeeze)
(21,020)
Required allowance (see no. 1.b)
Balance per books (P41,895 - P6,100)
Add (deduct) adjustments:
AJE no. 2
AJE no. 4
Doubtful accounts expense per audit

55,495

(30,020)
25,475
35,795

6,100
(21,020)

(14,920)
20,875

Requirement No. 2
Adjusting journal entries:
1) Allowance for doubtful accounts
Accounts receivable - over 120 days
To write off definitely uncollectible accounts

91 to 120
over 120
89,800
53,200

9,000
9,000

2) Doubtful account expense


6,100
Accounts receivable - 91 to 120 days
To correct entry made in recording accounts written off
3) Accounts receivable - 61 to 90 days
Advances from customers
To reclassify advances from customers

11,000

4) Allowance for doubtful accounts


Doubtful account expense
To adjust allowance to required balance

21,020

6,100

11,000

21,020

83,700

44,200

PROBLEM NO. 7 - Yoko Corporation


Requirement No. 1
Note receivable from sale of plant
Balance, 12/31/12 (P6,000,000 - P2,000,000)
Less installment due on April 1, 2013
Note receivable from officer, due 12/31/14
Note receivable from sale of equipment
Present value of note, 4/1/12 (P800,000 x 0.797)
Discount amortization-2012 (P637,600 x 12% x 9/12)
Note receivable from sale of land
Balance, 12/31/12
Less principal installment due on 7/1/13
Total amount to be received
Less interest (P2,800,000 x 11%)
Total noncurrent receivables, 12/31/12

902,500
308,000

Requirement No. 2
Note receivable from sale of plant due on 4/1/13
Note receivable from sale of land (see no. 1)
Current portion of long-term receivables
Requirement No. 3
Note receivable from sale of plant (P4,000,000 x 12% x 9/12)
Note receivable from sale of land (P2,800,000 x 11% x 6/12)
Accrued interest receivable, 12/31/12
Requirement No. 4
Note receivable from sale of plant:
P6,000,000 x 12% x 3/12
180,000
P4,000,000 x 12% x 9/12
360,000
Note receivable from officer (P1,600,000 x 10%)
Note receivable from sale of equipment (P637,600 x 12% x 9/12)
Note receivable from sale of land (P2,800,000 x 11% x 6/12)
Total interest income for 2012

4,000,000
2,000,000

637,600
57,384

2,000,000
1,600,000

694,984

2,800,000

594,500

2,000,000
594,500
2,594,500

360,000
154,000
514,000

540,000
160,000
57,384
154,000
911,384

2,205,500
6,500,484

PROBLEM NO. 8 - Pedro Company


Requirement No. 1.a
PV of consideration receivable (see computation below)
Carrying amount of land
Correct gain on sale of land

503,105
(400,000)
103,105

Present value of cash flows to determine initial CA:


Date
12/31/15
12/31/16
12/31/17

Principal
200,000
200,000
200,000
600,000

Interest (4%)
24,000
16,000
8,000

Total
PVF (14%) PV, 1/1/15 PV, 12/31/15
224,000
0.8772
196,493
216,000
0.7695
166,212
189,475
208,000
0.6750
140,400
160,056
503,105
349,531

Requirement No. 1.b


Amortization schedule using effective interest method:
Date
1/1/15
12/31/15
12/31/16
12/31/17

EI (14%)

NI (4%)

70,435
24,000
48,936
16,000
25,524
8,000
23
Interest income - 2015 (P503,105 x .14)

Disc. Amort. Repayment


46,435
32,936
17,524

200,000
200,000
200,000

70,435

Requirement No. 1.c


Gain on sale of land - overstated (P200,000 - P103,105)
Interest income for 2015 - understated (P70,435 - P24,0
Net overstatement of 2015 profit

96,895
(46,435)
50,460

Requirement No. 1.d


Carrying amount, 12/31/15 (see schedule)

349,540

Requirement No. 1.e


Amount reported as notes receivable
Correct current portion of NR (P349,540 - P182,476)
Overstatement of CA/working capital

400,000
182,476
217,524

Requirement No. 2

AC
503,105
349,540
182,476
-

PROBLEM NO. 9 - My Love Corporation


Requirement No. 1
PVF used to calculate the annual payment (P1.2M/P341,180)
Ordinary annuity factor at 13% for 5 periods
Requirement No. 2

Profit
over (under)

Sales - over
Reported
Should be
Interest income - under
Reported
Should be (refer to amortization schedule)
Net misstatement

2,005,900
1,500,000
0
156,000

Requirement No. 3
2014 profit overstated (see no. 2)
2015 profit understated (interest income under)
Reported
Should be (refer to amortization schedule)
Net misstatement

12/31/14
12/31/15
12/31/16
12/31/17
12/31/18

341,180
341,180
341,180
341,180
341,180
1,705,900

Interest (13%)
156,000
131,927
104,724
73,984
39,265

Principal
185,180
209,253
236,456
267,196
301,915

505,900

(156,000)
349,900
RE, 12/31/15
over (under)
349,900

0
131,927

Requirement No. 4
Amount reported under current assets
[P1,705,900 - (P341,180 x 2)]
Should be (refer to amortization schedule)
Net misstatement of WC, 12/31/15 - over (under)
Amortization schedule:
Date
Payment

3.5172
3.5172

(131,927)
217,973

1,023,540
236,456
787,084

CA
1,200,000
1,014,820
805,567
569,111
301,915
-

PROBLEM NO. 10 - Merlyn, Inc.


Requirement No. 2
1/1

2/28

3/29

8/30

9/4

11/1

11/4

Notes receivable
Accounts receivable

25,000

Notes receivable
Loss on discounting (P25,250 - P24,960)
Notes receivable - discounted
Interest income (P25,000 x .06 x 2/12)

24,960
290

25,000

25,000
250

Notes receivable - Officers


Notes receivable

6,200

Notes receivable
Interest receivable
Interest income

4,200

6,200

1,400
2,800

Notes receivable dishonored


Notes receivable

500

Notes receivable dishonored


Notes receivable

40,000

Notes receivable
Cash

500

40,000
8,120
8,120

Notes receivable dishonored


Notes receivable

26,031

Notes receivable discounted


Notes receivable

25,000

12/27 Notes receivable


Loss on settlement of NR
Notes receivable dishonored
12/31 Notes receivable
Petty cash fund
12/31 Notes receivable
Notes receivable dishonored
Interest income

26,031

25,000
24,000
2,031
26,031
6,200
6,200
42,437
40,500
1,937

12/31 Interest receivable (P40,000 x 6% x 4/12)


Interest income
Notes receivable

800
400

12/31 Interest receivable (P8,000 x 6% x 2/12)


Interest income

80

12/31 Unearned interest income


Interest income

1,200

80
400
400

Requirement No. 1.a


Unadjusted trade NR
Add (Deduct) adjustments:

12,014
1/1
2/28
3/29
8/30
9/4
11/1
11/4

12/27
12/31
12/31
12/31
Adjusted trade NR, 12/31/12

25,000
24,960
(6,200)
4,200
(40,500)
8,120
(26,031)
(25,000)
24,000
6,200
42,437
(1,200)
48,000

Composition:
Robinson (P70,000 - P30,000)
Tripper (received PDC on 11/1)
Adjusted notes receivable-trade, 12/31/12

40,000
8,000
48,000

Notes:
1) NR from Pepper - collected on 12/31/12
2) NR from Anna - accepted equipment in full settlement on 12/27/12
3) NR from Julia - non-trade

Requirement No. 1.b


Robinson:
Jan. to Aug. (P70,000 x .06 x 8/12)
Sept. to Dec. (P40,000 x .06 x 4/12)
Tripper (P8,000 x .06 x 12/12)
Pepper (P42,437 - P40,500)
Anna (P25,000 x .06 x 2/12)
Julia (non-interest bearing)
Total interest income - 2012

2,800
800

3,600
480
1,937
250
6,267

PROBLEM NO. 11 - Bahrain Bank


Requirement No.s 1 & 2
Principal
Direct origination cost
Origination fee received from borrower (P10M x .05)
Carrying amount, 1/1/12

10,000,000
130,900
(500,000)
9,630,900

Amortization schedule
Date
1/1/11
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15

EI (11%)
1,059,399
1,065,933
1,073,186
1,081,236
1,089,346
826

Requirement No. 3
Carrying amount, 12/31/12 (see schedule)
Less PV of expected cash flows:
12/31/14 (P4M x 0.8116)
12/31/16 (P4M x 0.6587)
Loan impairment (bad debt expense)

NI (10%)
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000

Disc. Amort.
59,399
65,933
73,186
81,236
89,346

9,756,232
3,246,400
2,634,800

5,881,200
3,875,032

C.A.
9,630,900
9,690,299
9,756,232
9,829,418
9,910,654
10,000,000

PROBLEM NO. 12 - Theory


1
2
3
4
5
6
7
8
9
10
11
12

D
B
A
D
D
D
C
B
B
A
D
B

A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35

Cash on hand and in bank


Notes receivable
Accounts receivable
Allow. for doubtful accounts
Accounts receivable-net
Accounts receivable-others
Advances to officers and employees
Marketable securities
Allow. for decline in MV of marketable sec.
Inventories
Prepayments
Total curent assets
Property, plant and equipment
Accumulated depreciation
PPE-net
Total assets
Accounts payable
Accrued expenses
Total current liabilities
Bonds payable
Bond discount
Total liabilities
Common stock
Retained earnings, end.
Net sales
Cost of sales
Gross Profit
Operating expenses
Operating income
Other income
Other charges
Net income
Gain on sale of Maretable securities-SMC
Bond discount amortization
Dividend income-SMC Co. common

38,700
4,000
36,000
1,800
40,100
2,750
3,840
13,000
1,375
15,400
100
111,904
990,000
346,000
566,000
677,904
600
2,800
2,800
397,000
37,000
400,000
311,102
125,104
944,000
669,600
280,400
270,798
23,602
5,000
6,500
16,352
1,000
1,000
1,000

B
35,002
4,500
40,000
2,000
38,000
1,000
10,750
250
20,000
500
113,302
1,910,000
344,000
1,566,000
713,950
4,000
4,000
5,200
400,000
3,000
405,200
200,000
108,750
948,000
665,000
282,400
264,798
15,000
7,250
9,000
11,000
2,250
4,000
500

C
34,402
5,000
42,000
2,100
40,000
500
2,840
8,500
1,125
24,600
113,950
910,000
350,000
606,000
679,302
5,200
5,200
4,000
363,000
43,000
363,000
108,750
111,102
950,000
661,000
285,000
270,000
17,602
5,500
6,000
17,000
1,750
3,000
2,000

D
35,502
5,500
38,000
1,900
39,900
1,000
3,740
4,250
16,000
900
112,802
940,000
356,000
584,000
678,802
2,800
1,200
1,200
360,000
40,000
368,200
308,750
94,750
952,000
664,400
287,000
264,000
18,400
7,750
3,000
14,000
1,500