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 91,500
Advance payments to creditors on purchase orders 10,000
Interest receivable on bonds 10,000
Subscriptions receivable due in 30 days 55,000
Trade and other receivables 166,500

Composition of trade accounts receivable:

Other trade accounts receivable unassigned 50,000
Trade accounts receivable - assigned 15,000
Trade installment receivable due 1 18 months,
net of unearned finance charges of P2,000 20,000
Trade receivables from officers due currently 1,500
Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks) 5,000
Trade accounts receivable 91,500

Items not included:

Accounts known to be worthless 2,500 Write off
Advances to affiliated companies 25,000 Noncurrent investment
Customers' account with credit balance (15,000) Trade and other payables
PROBLEM NO. 2 - Beatles Company

Requirement No. 1
1) Love M. Do
Sales returns 92,000
Accounts receivable 92,000

2) Strawberry Fields
None

3) This Boy Company

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

4) Girl Corporation
Sales 40,000
Accounts receivable 40,000

5) Ticket To Ride Corp.

Accounts receivable-Nontrade 160,000
Accounts receivable 160,000

6) Let It Be Corp
Cash 124,000
Accounts receivable 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 2,020,000
Add (Deduct) adjustments:
No. 1 (92,000)
No. 4 (40,000)
No. 5 (160,000)
No. 6 (124,000)
Adjusted balance 1,604,000
PROBLEM NO. 3 - Praktis Company
Per Books Adjustments Per Audit
Accounts receivable 442,500 1 (16,400) 387,400
2 15,000
3 (21,000)
4 (12,000)
5 (1,200)
6 (18,000)
7 (1,500)

60 days old and below 238,500 4 (12,000) 205,800

5 (1,200)
6 (18,000)
7 (1,500)
61 to 90 days 117,200 117,200
Over 90 days 85,400 3 (21,000) 64,400

Allowance for doubtful accounts 15,000 2 15,000 7,622

3 (21,000)
8 (1,378)
Adjusting Journal Entries
1 Advances to officers and employees 16,400
Accounts receivable 16,400

2 Accounts receivable 15,000

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

3 Allowance for doubtful accounts 21,000

Accounts receivable (>90 days) 21,000
Accounts that should be written off

4 Net sales 12,000

Accounts receivable (<60 days) 12,000
Unrecorded credit memo

5 Net sales 1,200

Accounts receivable (<60 days) 1,200
Unrecorded employee discount

6 Net sales 18,000

Accounts receivable (<60 days) 18,000
Inventory 13,000
Cost of sales 13,000
Goods out on consignment erroneously billed

7 Freight out 1,500

Accounts receivable (<60 days) 1,500
Unrecorded freight-out

8 Allowance for doubtful accounts 1,378

Doubtful accounts expense 1,378

60 days old and below 205,800 1% 2,058

61 to 90 days 117,200 2% 2,344
Over 90 days 64,400 5% 3,220
Required allowance 7,622
Balance per books before this adjustment (15,000+15,000-21,000) 9,000
Adjustment 1,378
PROBLEM NO. 4 - Professional Company

Requirement No. 1
Category Aging ratio AR Balance Rate Allowance
1 10 days 64% 960,000 1.00% 9,600
11 30 days 18% 270,000 2.50% 6,750
31 60 days 8% 120,000 5.00% 6,000
61 120 days 5% 75,000 20.00% 15,000
121 180 days 3% 45,000 35.00% 15,750
over 180 days 2% 30,000 80.00% 24,000
100% 1,500,000 77,100

Requirement No. 2
Doubtful accounts expense 22,300 *
Allowance for doubtful accounts 22,300

Allowance for doubtful accounts, 1/1 27,300

Add provisions (P8,000,000 x 4%) 320,000
Total 347,300
Less accounts written-off 292,500
Balance before adjustment 54,800
Required allowance (see no. 1) 77,100
Additional required allowance for doubtful accounts 22,300
PROBLEM NO. 5 - Poster Corporation

Requirement No. 1
Accounts receivable, 1/1/12 209,000
Credit sales for 2012 1,500,000
Collections during 2012 (1,380,200)
Accounts written off - 2012 (31,000)
Accounts receivable, 12/31/12 297,800

Requirement No. 2
Allowance for doubtful accounts, 1/1/12 7,600
Doubtful accounts expense - 2012 (see computation below) 30,000
Accounts written off - 2012 (31,000)
Recovery of accounts written off - 2012 4,200
Allowance for doubtful accounts, 12/31/12 10,800

Computation of doubtful accounts expense - 2012:

Doubtful accounts expense for 2012 (P1,500,000 x 2%) 30,000

Computation of bad debt rate:

Year Credit sales AR writen-off Recoveries Net
2009 1,110,000 26,000 2,150 23,850
2010 1,225,000 29,500 3,750 25,750
2011 1,465,000 30,000 3,600 26,400
3,800,000 85,500 9,500 76,000

Net accounts written off (2009 to 2011) 76,000

Divide by credit sales (2009 to 2011) 3,800,000
Percentage of uncollectible accounts to charge sales 2.00%
PROBLEM NO. 6 - Ringo, Inc.

Requirement No. 1.a

GL/SL 60 61 to 90 91 to 120 over 120
Unadjusted balances 837,900 387,800 307,100 89,800 53,200
Add (deduct) adjustments:
AJE No. 1 (9,000) (9,000)
AJE No. 2 (6,100) (6,100)
AJE No. 3 11,000 11,000
Adjusted balances 833,800 387,800 318,100 83,700 44,200

Requirement No. 1.b

Age of accounts balance Rate Allowance

60 387,800 1% 3,878
61 to 90 318,100 2% 6,362
91 to 120 83,700 5% 4,185
over 120 44,200 25% 11,050
833,800 25,475

Requirement No. 1.c

Unadjusted allowance for doubtful accounts 55,495
Add (deduct) adjustments:
AJE no. 1 (9,000)
AJE no. 4 (squeeze) (21,020) (30,020)
Required allowance (see no. 1.b) 25,475

Balance per books (P41,895 - P6,100) 35,795

Add (deduct) adjustments:
AJE no. 2 6,100
AJE no. 4 (21,020) (14,920)
Doubtful accounts expense per audit 20,875

Requirement No. 2
Adjusting journal entries:
1) Allowance for doubtful accounts 9,000
Accounts receivable - over 120 days 9,000
To write off definitely uncollectible accounts

2) Doubtful account expense 6,100

Accounts receivable - 91 to 120 days 6,100
To correct entry made in recording accounts written off

3) Accounts receivable - 61 to 90 days 11,000

Advances from customers 11,000
To reclassify advances from customers

4) Allowance for doubtful accounts 21,020

Doubtful account expense 21,020
To adjust allowance to required balance
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 902,500
Less interest (P2,800,000 x 11%) 308,000
Total noncurrent receivables, 12/31/12

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 2,000,000
1,600,000

637,600
57,384 694,984

2,800,000

594,500 2,205,500
6,500,484

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

360,000
154,000
514,000

540,000
160,000
57,384
154,000
911,384
PROBLEM NO. 8 - Pedro Company

Requirement No. 1.a

PV of consideration receivable (see computation b 503,105
Carrying amount of land (400,000)
Correct gain on sale of land 103,105

Present value of cash flows to determine initial CA:

Date Principal Interest (4%) Total PVF (14%) PV, 1/1/12 PV, 12/31/12
12/31/12 200,000 24,000 224,000 0.8772 196,493
12/31/13 200,000 16,000 216,000 0.7695 166,212 189,475
12/31/14 200,000 8,000 208,000 0.6750 140,400 160,056
600,000 503,105 349,531

Requirement No. 1.b

Amortization schedule using effective interest method:
Date EI (14%) NI (4%) Disc. Amort. Repayment AC
1/1/12 503,105
12/31/12 70,435 24,000 46,435 200,000 349,540
12/31/13 48,936 16,000 32,936 200,000 182,476
12/31/14 25,524 8,000 17,524 200,000 -
23
Interest income - 2012 (P503,105 x .1 70,435

Requirement No. 1.c

Gain on sale of land - overstated (P200,000 - P10 96,895
Interest income for 2012 - understated (P70,435 - (46,435)
Net overstatement of 2012 profit 50,460

Requirement No. 1.d

Carrying amount, 12/31/12 (see schedule) 349,540

Requirement No. 1.e

Amount reported as notes receivable 400,000
Correct current portion of NR (P349,540 - P182,47 167,064
Overstatement of CA/working capital 232,936

Requirement No. 2
PROBLEM NO. 9 - My Love Corporation

Requirement No. 1
PVF used to calculate the annual payment (P1.2M/P341,180) 3.5172
Ordinary annuity factor at 13% for 5 periods 3.5172

Requirement No. 2 Profit

over (under)
Sales - over
Reported 2,005,900
Should be 1,500,000 505,900
Interest income - under
Reported 0
Should be (refer to amortization schedule) 156,000 (156,000)
Net misstatement 349,900

Requirement No. 3 RE, 12/31/12

over (under)
2011 profit overstated (see no. 2) 349,900
2012 profit understated (interest income under)
Reported 0
Should be (refer to amortization schedule) 131,927 (131,927)
Net misstatement 217,973

Requirement No. 4
Amount reported under current assets
[P1,705,900 - (P341,180 x 2)] 1,023,540
Should be (refer to amortization schedule) 236,456
Net misstatement of WC, 12/31/12 - over (under) 787,084

Amortization schedule:
Date Payment Interest (13%) Principal CA
1,200,000
12/31/11 341,180 156,000 185,180 1,014,820
12/31/12 341,180 131,927 209,253 805,567
12/31/13 341,180 104,724 236,456 569,111
12/31/14 341,180 73,984 267,196 301,915
12/31/15 341,180 39,265 301,915 -
1,705,900
PROBLEM NO. 10 - Merlyn, Inc.
Requirement No. 2
1/1 Notes receivable 25,000
Accounts receivable 25,000

2/28 Notes receivable 24,960

Loss on discounting (P25,250 - P24,960) 290
Notes receivable - discounted 25,000
Interest income (P25,000 x .06 x 2/12) 250

3/29 Notes receivable - Officers 6,200

Notes receivable 6,200

8/30 Notes receivable 4,200

Interest receivable 1,400
Interest income 2,800

9/4 Notes receivable dishonored 500

Notes receivable 500

Notes receivable dishonored 40,000

Notes receivable 40,000

11/1 Notes receivable 8,120

Cash 8,120

11/4 Notes receivable dishonored 26,031

Notes receivable 26,031

Notes receivable discounted 25,000

Notes receivable 25,000

12/27 Notes receivable 24,000

Loss on settlement of NR 2,031
Notes receivable dishonored 26,031

12/31 Notes receivable 6,200

Petty cash fund 6,200

12/31 Notes receivable 42,437

Notes receivable dishonored 40,500
Interest income 1,937

12/31 Interest receivable (P40,000 x 6% x 4/12) 800

Interest income 400
Notes receivable 1,200

12/31 Interest receivable (P8,000 x 6% x 2/12) 80

Interest income 80

12/31 Unearned interest income 400

Interest income 400
Requirement No. 1.a
Unadjusted trade NR 12,014
Add (Deduct) adjustments:
1/1 25,000
2/28 24,960
3/29 (6,200)
8/30 4,200
9/4 (40,500)
11/1 8,120
11/4 (26,031)
(25,000)
12/27 24,000
12/31 6,200
12/31 42,437
12/31 (1,200)
Adjusted trade NR, 12/31/12 48,000

Composition:
Robinson (P70,000 - P30,000) 40,000
Tripper (received PDC on 11/1) 8,000
Adjusted notes receivable-trade, 12/31/12 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) 2,800
Sept. to Dec. (P40,000 x .06 x 4/12) 800 3,600
Tripper (P8,000 x .06 x 12/12) 480
Pepper (P42,437 - P40,500) 1,937
Anna (P25,000 x .06 x 2/12) 250
Julia (non-interest bearing) -
Total interest income - 2012 6,267
PROBLEM NO. 11 - Bahrain Bank

Requirement No.s 1 & 2

Principal 10,000,000
Direct origination cost 130,900
Origination fee received from borrower (P10M x .05) (500,000)
Carrying amount, 1/1/12 9,630,900

Amortization schedule
Date EI (11%) NI (10%) Disc. Amort. C.A.
1/1/11 9,630,900
12/31/11 1,059,399 1,000,000 59,399 9,690,299
12/31/12 1,065,933 1,000,000 65,933 9,756,232
12/31/13 1,073,186 1,000,000 73,186 9,829,418
12/31/14 1,081,236 1,000,000 81,236 9,910,654
12/31/15 1,089,346 1,000,000 89,346 10,000,000
826
Requirement No. 3
Carrying amount, 12/31/12 (see schedule) 9,756,232
Less PV of expected cash flows:
12/31/14 (P4M x 0.8116) 3,246,400
12/31/16 (P4M x 0.6587) 2,634,800 5,881,200
Loan impairment (bad debt expense) 3,875,032
PROBLEM NO. 12 - Theory

1 D
2 B
3 A
4 D
5 D
6 D
7 C
8 B
9 B
10 A
11 D
12 B
 A B C D
1 Cash on hand and in bank 38,700 35,002 34,402 35,502
2 Notes receivable 4,000 4,500 5,000 5,500
3 Accounts receivable 36,000 40,000 42,000 38,000
4 Allow. for doubtful accounts 1,800 2,000 2,100 1,900
5 Accounts receivable-net 40,100 38,000 40,000 39,900
6 Accounts receivable-others 2,750 - 500 1,000
7 Advances to officers and employees 3,840 1,000 2,840 3,740
8 Marketable securities 13,000 10,750 8,500 4,250
9 Allow. for decline in MV of marketable sec. 1,375 250 1,125 -
10 Inventories 15,400 20,000 24,600 16,000
11 Prepayments 100 500 - 900
12 Total curent assets 111,904 113,302 113,950 112,802
13 Property, plant and equipment 990,000 1,910,000 910,000 940,000
14 Accumulated depreciation 346,000 344,000 350,000 356,000
15 PPE-net 566,000 1,566,000 606,000 584,000
16 Total assets 677,904 713,950 679,302 678,802
17 Accounts payable 600 4,000 5,200 2,800
18 Accrued expenses 2,800 4,000 5,200 1,200
19 Total current liabilities 2,800 5,200 4,000 1,200
20 Bonds payable 397,000 400,000 363,000 360,000
21 Bond discount 37,000 3,000 43,000 40,000
22 Total liabilities 400,000 405,200 363,000 368,200
23 Common stock 311,102 200,000 108,750 308,750
24 Retained earnings, end. 125,104 108,750 111,102 94,750
25 Net sales 944,000 948,000 950,000 952,000
26 Cost of sales 669,600 665,000 661,000 664,400
27 Gross Profit 280,400 282,400 285,000 287,000
28 Operating expenses 270,798 264,798 270,000 264,000
29 Operating income 23,602 15,000 17,602 18,400
30 Other income 5,000 7,250 5,500 7,750
31 Other charges 6,500 9,000 6,000 3,000
32 Net income 16,352 11,000 17,000 14,000
33 Gain on sale of Maretable securities-SMC 1,000 2,250 1,750 -
34 Bond discount amortization 1,000 4,000 3,000 -
35 Dividend income-SMC Co. common 1,000 500 2,000 1,500