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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 debts 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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2. DOMINGO COMPANY’s credit sales at December 31, 2006 is:
a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80

3. How much is the DOMINGO COMPANY’s net credit sales?


a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80

4. The Bad Debts Expense of DOMINGO COMPANY at December 31, 2006 is:
a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14

5. The Accounts Receivable of DOMINGO COMPANY at December31, 2006 is:


a. P 408.042.00 b. P 407,536.80 c. P 401,536.80 d. P 391,456.80

6. The Allowance for Bad Debts of DOMINGO COMPANY at December 31, 2006 is:
a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14

Solution
Accounts Receivable
Credit Sales 720,736.80 Collection 294,000.00
Recoveries 6,505.20 Sales discount
from credit cust. 6,000.00
Write-off 19,200.00
Sales returns from
credit customer 10,080.00
__________ Recoveries 6,505.20
727,242.00 335,785.20
Ending bal. 391,456.80

Net credit sales:


Credit sales 720,736.80
- Sales discounts from credit sales ( 6,000.00)
- Sales returns from credit sales (10,080.00)
Net credit sales 704,656.80

Bad debts:
Net credit sales 704,656.80
x % of uncollectible 2%
Bad debts 14,093.136

Allowance for bad debts:


Beg. balance 19,327.20
Provision for bad debts 14,093.14
Recoveries 6,505.20
Less: Write-off ( 19,200.00)
Allowance ending balance 20,725.54
Answer:
1. A 2. B 3. C 4. B 5. D 6. A

Problem 4
Presented below are unaudited balances of selected accounts of MARJORIE COMPANY as of
December 31, 2006:
Unaudited Balances, 12/31/06
Selected Accounts Debit Credit
Cash P 500,000
Accounts receivable 1,300,000
Allowance for doubtful accounts 8,000
Net sales P 6,750,000

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Additional information are as follows:

a. Goods amounting to P50,000 were invoiced for the accounts of Joy Store & Co.,
recorded on January 2, 2007 with terms of net, 60 days, FOB shipping point. The goods
were shipped to Variety Store on December 30, 2006.

b. The bank returned on December 29, 2006, a customer’s check for P5,000 marked
“DAIF”, but no entry was made.

c. MARJORIE COMPANY estimates that allowance for uncollectible accounts should be one
and one-half percent (1½%) of the accounts receivable balance as of year-end. No
provision has yet been made for 2006.

Questions

1. What is the adjusted balance of Accounts Receivable on December 31, 2006?


a. P 1,355,000 b. P 1,350,000 c. P 1,305,000 d. P 1,300,000

2. What is the adjusted balance of Allowance for doubtful accounts on December 31, 2006?
a. P 36,325 b. P 28,325 c. P 20,325 d. P 8,000

3. What is the adjusted amount of 2006 Bad Debts Expense?


a. P 12,325 b. P 20,325 c. P 28,325 d. P 36,325

Solution
(1) A 1,300,000 + 50,000 + 5,000 P1,355,000

(2) C P1,355,000 x 1 ½% P20,325

(3) C P20,325 + P8,000 debit balance P28,325

Problem 5
During December, 2006, the Accounts Receivable controlling account on the books of
FERNANDEZ COMPANY showed one debit posting and two credit postings. The debit
represents receivables from December sales, P780,000. One credit was for P470,400, made
a result of cash collections on November and December receivables; the second credit was
an adjustment for estimated uncollectibles, P90,000. The December 31 balance was
P270,000.

When receivables were collected, the bookkeeper credited Accounts Receivables for the cash
collected. All customers who paid their accounts during December took advantage of the
2% cash discount.

As of December 1, debit balance in customers’ subsidiary accounts totaled P177,000. An


adjustment for estimated doubtful accounts of P18,000 had been posted to the Accounts
Receivable controlling account at the end of 2002, and no write-offs were recorded during
2006. In addition, a number of customers had overpaid their accounts, and as a result,
some of the customers’ subsidiary accounts had credit balances on December 1. No
overpayments were made during December nor were any credit balances in customers’
accounts reduced during December.

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Questions

1. The Accounts Receivable beginning balance (unadjusted) of FERNANDEZ COMPANY at


December 31, 2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

2. The Accounts Receivable beginning balance (adjusted) of FERNANDEZ COMPANY at


December 31, 2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

3. The Credit Balance of Accounts Receivable at the beginning of the year of FERNANDEZ
COMPANY is:
a. P 48,600 b. P 66,600 c. P 108,600 d. P 126,600

4. The Accounts Receivable balance of FERNANDEZ COMPANY at December 31, 2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

Solution

Computation for unadjusted AR beginning balance:

Accounts Receivable
* Beg. bal. 50,400 Collections 470,400
Sales 780,000 Allow. for BD 90,000
830,400 560,400
End bal. 270,000
* squeezed figure

Ending balance of AR control account 270,000


Add: Credits during December 560,400
Less: Debits during December ( 780,000)
Balance of AR control account – Dec. 1 50,400
Add: 2006 Est. allowance for BD 18,000
Adjusted AR control account – Dec. 1 68,400
Less: AR subsidiary account – Dec. 1 177,000
Credit balance of AR account – Dec. 1 108,600

Answer:
1. A 2. B 3. C 4. D

Problem 6
You are examining the financial statements of MATIAS CORPORATION for the year ended
December 31, 2006. During the audit of the accounts receivable and other related
accounts, certain information was obtained.

The December 31, 2006 debit balance in the Accounts Receivable control account is
P197,000.

The only entries in the Bad Debts Expense account were: a credit for P324 on December
31, 2006, because Marlisa Company remitted in full for the accounts charged off October
31, 2006, and a debit on December 31 for the amount of the credit to the Allowance for
Doubtful Accounts.

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The Allowance for Doubtful Accounts schedule is presented below:
Debit Credit Balance
January 1, 2006 P 3,658
October 21, 2006, Uncollectible;
Marlisa Co., - P324; Abonales Co.,
- P 820; Cherryl Co., - P564 P 1,508 2,150
December 31, 2006, 5% of P197,000 P 9,850 12,000

An aging schedule of the accounts receivable as of December 31, 2006 and the decision are
shown in the table below:

Age Net Debit Balance Amount to which the Allow.


is to be adjusted after adjust.
____________ _________________ and corrections have been made

0 – 1 month P 93,240 1 percent


1 – 3 months 76,820 2 percent
3 – 6 months 22,180 3 percent
over 6 months 6,000 Definitely uncollectible, P1,000;
P2,000 is considered 50% uncollec-
tible; the remainder is estima-
ted to be 80% collectible.

There is a credit balance in one account receivable (0-1 month) of P2,000; it represents an
advance on a sales contract. Also, there is a credit balance in one of the 1-3 months
accounts receivable of P500 for which merchandise will be accepted by the customer.

The ledger accounts have not been closed as of December 31, 2006. The Accounts
Receivable control account is not in agreement with the subsidiary ledger. The difference
cannot be located, and the auditor decides to adjust the control to the sum of the
subsidiaries after corrections are made.

Questions

1. The adjusted balance of accounts receivable of MATIAS CORPORATION at December 31,


2006 is:
a. P 199,740 b. P 199,540 c. P 198,300 d. P 198,100

2. The adjusted write-off of accounts receivable balance of MATIAS CORPORATION at


December 31, 2006 is:
a. P 2,708.00 b. P 2,508.00 c. P 2,384.00 d. P 1,708.00

3. The adjusted allowance of bad debts account of MATIAS CORPORATION at December 31,
2006 is:
a. P 4,980.60 b. P 4,964.20 c. P 4,780.60 d. P 4,764.20

4. The bad debts expense per book of MATIAS CORPORATION at December 31, 2006 is:
a. P 9,850.00 c. P 4,764.20
b. P 6,359.80 d. Cannot be determined

5. The adjusted bad debts expense of MATIAS CORPORATION at December 31, 2006 is:
a. P 3,814.20 b. P 3,614.20 c. P 3,490.20 d. P 2,814.20

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6. The entry to adjust the account of Marlisa Company is:
a. Bad debts 324 c. Allow. for BD 324
Allow. for BD 324 Bad debts 324
b. Bad debts 324 d. Accounts receiv. 324
Accounts receivable 324 Bad debts 324

7. The entry to reconcile the accounts receivable control ledger to subsidiary ledger is:
a. Accounts receivable 1,440 c. Accounts receiv. 1,440
Allow. for BD 1,440 Misc. income 1,440
b. Allow. for BD 1,440 d. No adjustment
Accounts receivable 1,440

8. The net realizable value of accounts receivable of MATIAS CORPORATION at December


31, 2006 is:
a. P 194,975.80 b. P 194,775.80 c. P 193,335.80 d.P193,319.40

Solution

Per PER SUBSIDIARY LEDGERS


Control Over
Acct. 0-1 mo. 1-3 mos 3-6 mos. 6 mos. Total
Bal. before adjustments P 197,000 P 93,240 P 76,820 P 22,180 P 6,000 P 198,240
Adjustments:
Add(Deduct)
(2) Correction to 10.31.02
entry to write-off
uncollectible accts. (200)
(3) Write-off of acct.
considered definitely
uncollectible ( 1,000) (1,000) (1,000)
(4) Reclassification of
credit balances 2,500 2,000 500 2,500
P 198,300 P 95,240 P 77,320 P 22,180 P 5,000 P 199,740
(5) To adjust the control
acct. to agree with SL 1,440
Adjusted balance P 199,740

Audit adjustments as of 12.31.06

(1) Bad Debts expense 324


Allowance for doubtful accounts 324

(2) Allowance for doubtful accounts 200


Accounts Receivable 200

(3) Allowance for doubtful accounts 1,000


Accounts Receivable 1,000

(4) Accounts Receivable 2,500


Customer’s Accounts with Credit Balances 2,500

(5) Accounts Receivable 1,440


Miscellaneous Revenue 1,440

(6) Allowance for Doubtful Accounts 6,359.80


Bad Debts Expense 6,359.80

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Required allowance on 12.31.06
0-1 mo. P 95,240 x 1% P 952.40
1-3 mos. 77,320 x 2 % 1,546.40
3-6 mos. 22,180 x 3% 665.40
Over 6 mos. 3,000 x 20% 600.00
2,000 x 50% 1,000.00
P 4,764.20
Beg. balance 3,658.00
+ Provision per audit 3,490.20
(squeezed figure)
- Write-off 2,384.00
Ending balance 4,764.20

Provision per book 9,850.00


Provision per audit 3,490.20
Adjustment 6,359.80

Answer:
1. A 2. C 3. D 4. A 5. C
6. A 7. C 8. A

Problem 7
You are auditing the Accounts Receivable and the related Allowance for Bad Debts account
of ROY COMPANY. The following data are available:

Accounts Receivable, general ledger balance P 848,000

Allowance for bad debts:


Beginning balance P 20,000
Provision per general ledger 48,000
Write-offs ( 16,000)
Balance, end P 52,000

Summary of Aging Schedule

The summary of the subsidiary ledger as of December 31, 2006, was totaled as follows:

Debit balances:
Under on month P 360,000
One to six months 368,000
Over six months 152,000
P 880,000

Credit balances:
Almario P 8,000 - OK; additional billing in
January 2004
Peter 14,000 – Should have been credited
To Manuel Co. - 1-6 mos.
classification.
Bituin 18,000 - Advance on a sales contract
P 40,000

The customers’ ledger is not in agreement with the accounts receivable control. The client
instructs the auditor to adjust the control to the subsidiary ledger after corrections are
made.

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ALLOWANCE FOR DOUBTFUL ACCOUNTS

It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six
months are expected to require a reserve of 2 percent. Accounts over six months are
analyzed as follows:

Definitely bad P 48,000


Doubtful (estimated to be 50% collectible) 24,000
Apparently good, but slow (90% collectible) 80,000
Total P152,000
Questions

1. The entry to adjust the account of Almario is:


a. Accounts receivable 8,000 c. Accounts receivable 8,000
Sales 8,000 Cust. with Cr. bal. 8,000
b. Sales 8,000 d. No adjustment
Accounts receivable 8,000

2. The entry to adjust the account of Peter is:


a. Accounts receivable 14,000 c. Accounts receivable 14,000
Sales 14,000 Cust. with Cr. bal. 14,000
b. Sales 14,000 d. No adjustment
Accounts receivable 14,000

3. The entry to adjust the account of Bituin is:


a. Accounts receivable 18,000 c. Accounts receivable 18,000
Sales 18,000 Cust. with Cr. bal. 18,000
b. Sales 18,000 d. No adjustment
Accounts receivable 18,000

4. The entry to reconcile the control ledger to the subsidiary ledger is:
a. Miscellaneous loss 8,000 c. Accounts receivable 8,000
Accounts receivable 8,000 Sales 8,000
b. Accounts receivable 8,000 d. Sales 8,000
Miscellaneous gain 8,000 Accounts receivable 8,000

5. The entry to adjust the Bad Debts Expense is:


a. Bad Debts Expense 74,680 c. Bad Debts Expense 30,680
Allow. for BD 74,680 Allow. for BD 30,680
b. Bad Debts Expense 26,680 d. No adjustment
Allow. for BD 26,680

6. The Accounts Receivable balance at December 31, 2006 is:


a. P 840,000 b. P 826,000 c. P 818,000 d. P 786,000

7. The Allowance for Bad Debts at December 31, 2006 is:


a. P 74,680 b. P 48,000 c. P 30,680 d. P 26,680

8. The Bad Debts Expense at December 31, 2006 is:


a. P 74,680 b. P 48,000 c. P 30,680 d. P 26,680

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Solution

* (1) Accounts receivable 8,000


Sales 8,000

(2) Accounts receivable 14,000


Accounts receivable 14,000

* (3) Accounts receivable 18,000


Customers’ deposit 18,000

(4) Allowance for bad debts 48,000


Accounts receivable 48,000

* (5) Miscellaneous losses 8,000


Accounts receivable 8,000
To reconcile control account with subsidiary ledger.

(6) Bad debts 26,680


Allowance for bad debts 26,680

* ignored in the aging of AR


Aging of AR
Control Under 1 to 6 Over 6
Account 1 mo. mos. mos.
Unadjusted balance 848,000 360,000 368,000 152,000
(1) 8,000
(2) - (14,000)
(3) 18,000
(4) (48,000) (48,000)
(5) ( 8,000) ______ _______ _______
Adjusted balance 818,000 360,000 354,000 104,000

Under 1 mo. 360,000 x 1% = 3,600


1 to 6 mos. 354,000 x 2% = 7,080
Over 6 mos.
24,000 x 50% = 12,000
80,000 x 10% = 8,000
Required allowance for bad debts 30,680

Provision for bad debts per audit:


Beginning balance 20,000
+ Provision – squeezed figure 74,680
- Write-off per book 16,000
- Additional Write-off 48,000
Ending balance 30,680

Provision per book 48,000


Provision per audit 74,680
Adjustment 26,680

Answer:
1. A 2. D 3. C 4. A 5. B
6. C 7. C 8. A

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Problem 8
KAREN COMPANY’s accounts receivable subsidiary ledger shows the following information:
Invoice
Customer Account Balance – 12/31/06 Date Amount
Penas P 70,360 12/06/06 P 28,000
11/29/06 42,360

Jefferson 41,840 09/27/06 24,000


08/20/06 17,840

Junsay 61,200 12/08/06 40,000


10/25/06 21,200

Cherryl 90,280 11/17/06 46,280


10/09/06 44,000

Baron 63,200 12/12/06 38,400


12/02/06 24,800

Riza 34,800 09/12/06 34,800

The estimated bad debt rates below are based on Karen Company’s receivable collection
experience.
Age of Accounts Rate
0 – 30 days 1%
31 – 60 days 1.5%
61 – 90 days 3%
91 – 120 days 10%
Over 120 days 50%

The allowance for bad debts account had a credit balance of P7,000 on December 31, 2006,
before adjustment.

Questions

1. The adjusted Accounts Receivable balance of KAREN COMPANY at December 31, 2006
is:
a. P 317,680 b. P 319,320 c. P 326,880 d. P 361,680

2. The adjusted balance of Allowance for Bad Debts of KAREN COMPANY at December 31,
2006 is:
a. P 9,698.80 b. P 10,188.80 c. P 12,397.60 d. P 19,397.60

3. The adjusted balance of Bad Debts Expense of KAREN COMPANY at December 31, 2006
is:
a. P 9,698.80 b. P 10,188.80 c. P 12,397.60 d. P 19,397.60

4. The net realizable value of Accounts Receivable of KAREN COMPANY at December 31,
2006 is:
a. P 342,282.40 b. P 349,282.40 c. P 307,482.40 d. P 314,482.40

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Solution

Aging of AR
Balance 0-30 31-60 61-90 91-120 Over 120
12/31/06 Days Days Days Days Days

Penas P 70,360 28,000 42,360


Jefferson 41,840 24,000 17,840
Junsay 61,200 40,000 21,200
Cherryl 90,280 46,280 44,000
Baron 63,200 63,200
Riza 34,800 ______ ______ ______ 34,800 _____
Total P361,680 131,200 88,640 65,200 58,800 17,840
x % of uncollectibility 1% 1.5% 3% 10% 50%
Required Allowance 1,312 1,329.60 1,956 5,880 8,920 = P 19,397.60

Bad debts expense 12,397.60


Allowance for bad debts 12,397.60
(P19,397.60 – P7,000)
Answer:
1. D 2. D 3. C 4. A

Problem 9
You are assigned to audit KENT COMPANY for the year ending December 31, 2006. The
accounts receivable were circularized as at December 31, 2006 and the following
exceptions/replies have not been disposed of at the date of your examination.

Customer Balance Comments Audit Findings

Duque P 30,000 Balance was paid Dec. Kent received mailed


29, 2006. January 2, 2007.

Odessa 74,000 Balance was offset by our Kent credited accounts


Dec. 10 shipment of goods. payable for P74,000 to
record purchase of goods

Solejon 16,200 The above balance has The payment was


been paid. Credited to Dairen – cust.

Rubin 23,700 We do not owe Kent any- The shipment costing


thing as the goods were P16,300 was made on
received January, 2007, Dec. 29, 2006 and the
FOB Destination goods were not included
in recording the year-end
inventory.

Jamea 150,000 Our deposit of P200,000 Kent had previously


should cover this balance credited the deposit to
sales.

Ocsio 54,000 We never received these The shipment was erro-


goods. neously made to another
customer and the goods
worth P51,000 are now
on its way to Ocsio. The
shipment, FOB Shipping

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Point, was made on Dec.
30, 2006.

Dela Cruz 100,000 We are rejecting the price, Kent’s clerk erroneously
which is too much computed the unit price
at P2,000. The correct
pricing should have been
at P1,200 per unit.

Ronel 18,000 Amount is okay. Since Goods cost P12,000 and


this is on consignment, we were appropriately inclu-
will remit payment upon ded in Kent’s inventory
selling the goods.

KENT COMPANY has not recorded yet its 2006 inventory. The balance of inventory and
Accounts Receivable at December 31, 2006 (per trial balance) is P 456,000 and P345,900,
respectively.

Questions

1. The entry to adjust the finding made in the account of Duque is:
a. Cash 30,000 c. Accounts receivable 30,000
Accounts receivable 30,000 Cash 30,000
b. Cash 30,000 d. No adjustment
Sales 30,000

2. The entry to adjust the finding made in the account of Odessa is:
a. Purchases 74,000 c. Accounts payable 74,000
Accounts receivable 74,000 Accounts receivable 74,000
b. Sales 74,000 d. No adjustment
Purchases 74,000

3. The entry to adjust the finding made in the account of Solejon is:
a. Accounts receivable 16,200 c. Accounts receivable 16,200
Accounts receivable 16,200 Accounts payable 16,200
b. Accounts payable 16,200 d. No adjustment
Accounts receivable 16,200

4. The entry to adjust the finding made in the account of Rubin is (for sales):
a. Sales 23,700 c. Accounts receivable 23,700
Accounts receivable 23,700 Sales 23,700
b. Accounts payable 23,700 d. No adjustment
Purchases 23,700

5. Entry to adjust the finding made in the account of Rubin is (for cost of sales):
a. Cost of sales 16,300 c. Retained earnings 16,300
Inventory 16,300 Inventory 16,300
b. Inventory 16,300 d. No adjustment
Cost of sales 16,300

14
6. The entry to adjust the finding made in the account of Jamea is:
a. Customers’ advances 150,000 c. Sales 200,000
Sales 150,000 Customers’ advances 50,000
Accounts receivable 150,000
b. Customers’ advances150,000 d. Sales 150,000
Accounts receivable 150,000 Customers’ advances 150,000

7. The entry to adjust the finding made in the account of Ocsio is:
a. No adjustment c. Sales 54,000
Accounts receivable 54,000
b. Accounts receivable 51,000 d. Sales 3,000
Sales 51,000 Accounts receivable 3,000
8. The entry to adjust the finding made in the account of Dela Cruz is:
a. Accounts receivable 40,000 c. Sales 60,000
Sales 40,000 Accounts receivable 60,000
b. Sales 40,000 d. No adjustment
Accounts receivable 40,000

9. The adjusted balance of Kent Company’s inventory at December 31, 2006 is:
a. 451,700 b. P 460,300 c. P 472,300 d. P 484,300

10. The adjusted balance of Kent Company’s accounts receivable at December 31, 2006 is:
a. P 37,200 b. P 55,200 c. P 187,200 d. P 205,200

Solution
For Doque No adjustment
For Odessa Accounts payable 74,000
Accounts receivable 74,000
For Solejon Accounts receivable 16,200
Accounts receivable 16,200
For Rubin Sales 23,700
Accounts receivable 23,700
Inventory 16,300
Cost of sales 16,300
For Jamea Sales 200,000
Customers’ advances 50,000
Accounts receivable 150,000
For Ocsio. Sales 3,000
Accounts receivable 3,000
For dela Cruz Sales 40,000
Accounts receivable 40,000
For Ronel Sales 18,000
Accounts receivable 18,000

Unadjusted Inventory 456,000 Unadjusted AR 345,900


Adjustment - Rubin 16,300 Adjustment - Odessa ( 74,000)
- Solejon -
- Rubin ( 23,700)
- Jamea (150,000)
- Ocsio ( 3,000)
- dela Cruz ( 40,000)
_________ - Ronel ( 18,000)
Adjusted balance 472,300 Adjusted balance 37,200

Answer:
1. D 2. C 3. A 4. A 5. B
6. C 7. D 8. B 9. C 10. A

15
Problem 10
You have been assigned to audit the financial statement MALAQUI INCORPORATED. The
company is a distributor of a variety of electronic appliances and parts. The company uses
the calendar year for reporting purposes. Information regarding balances of MALAQUI
INCORPORATED’S Accounts Receivable and the related Allowance for Doubtful Accounts as
of December 31, 2006 and the related audit finding, is given below.

The schedule of accounts receivable furnished you by the accountant reflects some errors.
The total figure in the schedule does not tally with the balance per subsidiary ledger of
P919,000. Based on your review of sales invoices, purchase orders and other related
documents, you noted the following information:

1. Sales on account of various electronics totaling P36,480 were returned by the customer
on December 28, 2006, but no entry was made in the books. The goods were included
in the year-end physical count.

2. Based on the findings per confirmation reply from a customer, he indicated that he has
already paid his account of P23,980 in October, 2006. Your verification disclosed that
said collection was credited to net sales account.

3. Collection of P12,950 on November 5, 2006 from Diana Corporation was credited to the
account of DNA Corporation.

The allowance for doubtful accounts is set at 3% of the outstanding accounts receivable at
the end of the period. As of December 31, 2006, the Allowance for Doubtful Accounts has a
balance of P32,400 before adjustment.

Questions

1. What is the adjusted balance of Accounts Receivable as of December 31, 2006?


a. P 919,000 b. P 895,020 c. P 882,520 d. P 858,540

2. What is the adjusted balance of Allowance for Doubtful Accounts as of December 31,
2006?
a. P 27,570.00 b. P 26,850.60 c. P 26,475.60 d. P 25,756.20

Solution
Sales 36,480
Accounts receivable 36,480
Sales 23,980
Accounts receivable 23,980
Answer:
1. D 2. D

Problem 11
You audit of APAS COMPANY for the year 2006 disclosed the following:

1. The December 31 inventory was determined by a physical count on December 28 and


based on such count, the inventory was recorded by:
Inventory 1,400,000
Cost of sales 1,400,000
2. The 2006 ledger shows a sales balance of P20,000,000.
3. The company sells a mark-up of 20% based on sales.

16
4. The company recognizes sales upon passage of title to the customers.
5. All customers are within a four-day delivery area.

The sales register for December, 2006 and January, 2007, showed the following details:

December Register

Invoice No. FOB Terms Date Shipped Amount


300 Destination 12/30 P 50,000
301 Shipping point 12/30 62,500
302 Destination 12/23 47,500
303 Destination 12/24 82,500
304 Shipping point 01/02 56,000
305 Shipping point 12/29 90,000

January Register

Invoice No. FOB Terms Date Shipped Amount


306 Destination 12/29 67,500
307 Shipping point 12/29 74,500
308 Destination 01/02 140,000
309 Shipping point 01/04 73,000
310 Shipping point 12/27 67,500

Questions

1. The Sales for December is over/(under) by:


a. P 36,000 under c. P 106,000 under
b. P 36,000 over d. P 106,000 over

2. The Inventory for December is over/(under) by:


a. P 235,600 under c. P 181,600 under
b. P 235,600 over d. P 181,600 over

3. The adjusted inventory at December 31, 2006 is:


a. P 1,645,412 b. P 1,635,600 c. P 1,218,400 d. P 1,164,400

4. The adjusted sales at December 31, 2006 is:


a. P 20,106,000 b. P 20,036,000 c. P 19,964,000 d. P 19,894,000

5. How much sales for the month of December 2006 were erroneously recorded in January
2007?
a. P 282,000 b. P 272,500 c. P 198,000 d. P 142,000

6. How much sales for the month of January 2007 were erroneously recorded in December
2006?
a. P 228,500 b. P 188,500 c. P 180,500 d. P 106,000

Solution
(1) Sales 50,000
Accounts receivable 50,000
Invoice # 300

17
(2) Cost of sales 50,000
Inventory 50,000
(62,500 x 80%)
Invoice # 301
(3) Sales 56,000
Accounts receivable 56,000
Invoice # 304
(4) Cost of sales 72,000
Inventory 72,000
(90,000 x 80%)
Invoice # 305
(5) Accounts receiv. 74,500
Sales 74,500
Invoice # 307
(6) Cost of sales 59,600
Inventory 59,600
(74,500 x 80%)
(7) Accounts receiv. 67,500
Sales 67,500
Invoice # 310

Unadjusted Sales 20,000,000 Unadjusted inventory 1,400,000


(1) ( 50,000) (2) ( 50,000)
(3) ( 56,000) (4) ( 72,000)
(5) 74,500 (6) ( 59,600)
(7) 67,500 _________
Adjusted Sales 20,036,000 Adjusted inventory 1,218,400

Sales for the month of December that 2003


were erroneously recorded in January 2004:
Invoice # 307 74,500
Invoice # 310 67,500
Total 142,000

Sales for the month of January 2004


were erroneously recorded in December 2003:
Invoice # 300 50,000
Invoice # 304 56,000
Total 106,000
Answer:
1. A 2. D 3. C 4. B 5. D 6. D

Problem 12
You are engaged to perform an audit of the accounts of the JELLER CORPORATION for the
year ended December 31, 2006, and have observed the taking of the physical inventory of
the company on December 27, 2006. Only merchandise shipped by the Durian Corporation
to customers up to and including December 27, 2006 have been removed or excluded 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.

The following lists of sales invoices are entered in the sales books for the months of
December 2006 and January 2007, respectively.

Sales Invoices
Date Amount Date Shipped

December 2006 (a) 12/23/06 P 25,000 12/31/06


(b) 12/27/06 18,000 12/27/06
(c) 12/30/06 30,000 01/05/07

18
(d) 12/22/06 12,000 01/08/07
(e) 12/28/06 16,000 12/29/06
(f) 12/03/06 8,000 12/05/06
(g) 12/31/06 20,000 01/07/07
(h) 12/31/06 14,000 12/31/06

January 2007 (i) 12/31/06 7,500 12/29/06


(j) 12/27/06 11,000 01/04/07
(k) 01/08/07 9,000 01/09/07
(l) 01/10/07 5,000 12/31/06
Questions

1. How much sales for month of December 2006 were erroneously recorded in January
2007?
a. P 7,500 b. P 12,500 c. P 18,500 d. P 20,000

2. How much sales for the month of January 2007 were erroneously recorded in December
2006?
a. Zero b. P 12,500 c. P 20,000 d. P 62,000

3. How much is the correct amount of sales for the month ended December 31, 2006?
a. P 143,000 b. P 155,500 c. P 93,500 d. P 81,000

Solution
(1) B Item (I)P7,500 and Item (l), P5,000 P12,500

(2) D Items c, d, g P62,000

(3) C Recorded sales for December P143,000


December sales recorded in January 12,500
January sales recorded in December (62,000)
Adjusted sales for December P 93,500

Problem 13
On September 1, DY COMPANY assigns specific receivables totaling P750,000 to Davao Bank
as collateral on a P625,000, 12% note. DY COMPANY will continue to collect the assigned
accounts receivable. Davao Bank also assesses a 2% service charge on the total accounts
receivable assigned. DY COMPANY is to make monthly payments to Davao Bank with cash
collected on assigned accounts receivable. Collections of assigned accounts during
September totaled P260,000 less cash discounts of P3,500.

Questions

1. What were the proceeds from the assignment of DY COMPANYs’ accounts receivable on
September 1?
a. P 610,000 b. P 612,500 c. P 625,000 d. P 735,000

2. What amount is owed to Davao Bank by DY COMPANY for September collections plus
accrued interest on the note to September 30?
a. P 260,000 b. P 262,750 c. P 264,000 d. P 266,250

Solution
(1) A P625,000 – (2% x P750,000) P610,000

(2) B P260,000 – P3,500 + (P625,000 x 12% x 1/12) P262,750

19
Problem 14
On April 1, 2006, VAILOCES CORPORATION assigned accounts receivable totaling P400,000
as collateral on a P300,000, 16% note from Racel Bank. The assignment was done on a
nonnotification basis. In addition to the interest on the note, the bank also receives a 2%
service fee, deducted in advance on the P300,000 value of the note.

Additional information is as follows:

1. Collections of assigned accounts in April totaled P191,100, net of a 2% sales discount.

2. On May 1, VAILOCES CORPORATION paid the bank the amount owed for April collections
plus accrued interest on note to May 1.

3. The remaining accounts were collected by VAILOCES CORPORATION during May except
for P2,000 accounts written-off as worthless.

4. On June 1, VAILOCES CORPORATION paid the bank the remaining balance of the note
plus accrued interest.

Questions

1. The journal entry of VAILOCES CORPORATION in the assignment of accounts receivable


on April 1, 2006 is:
a. Cash 294,000 c. Cash 294,000
Finance charges 6,000 Finance charges 6,000
Accounts receivable 300,000 Notes payable 300,000
b. Cash 294,000 d. Cash 294,000
Finance charges 6,000 Commission exp. 6,000
AR – assigned 300,000 AR – assigned 300,000

2. The journal entry of VAILOCES CORPORATION in the assignment of accounts receivable


on April 1, 2006 assuming the assignment is on notification basis:
a. Cash 294,000 c. Cash 294,000
Finance charges 6,000 Finance charges 6,000
Accounts receivable 300,000 Notes payable 300,000
b. Cash 294,000 d. Cash 294,000
Finance charges 6,000 Commission exp. 6,000
AR – assigned 300,000 AR – assigned 300,000

3. The entry of VAILOCES CORPORATION on April collection of the assigned account is:
a. Cash 191,100 c. Cash 191,100
Sales discounts 3,900 Sales discounts 3,900
AR – assigned 195,000 Accounts receivable 195,000
b. Cash 191,100 d No journal entry
Accounts receivable 191,100

4. If the assignment is on notification basis, who should collect the assigned accounts
receivable?
a. Vailoces Corporation c. A third party
b. Racel Bank d. It is the option of the customer to
whom he/she will pay the account

20
5. Using the assumption in number 4 above, what will be the entry of VAILOCES
CORPORATION on the April collection of the assigned accounts receivable?
a. Cash 191,100 c. Cash 191,100
Sales discounts 3,900 Sales discounts 3,900
AR – assigned 195,000 Accounts receivable 195,000
b. Cash 191,100 d No journal entry
Accounts receivable 191,100

6. The journal entry of VAILOCES CORPORATION on the on May 1, 2006 is:


a. Notes payable 187,100 c. Notes payable 188,500
Interest expense 4,000 Interest expense 2,600
Cash 191,100 Cash 191,100
b. Notes payable 195,000 d. Notes payable 195,000
Interest expense 5,333 Interest expense 4,000
Cash 200,333 Cash 199,000

7. Using the same information in number 6 (May 1 transaction) except that the assignment
is done on a notification basis, the entry should be:
a. Notes payable 187,100 c. Notes payable 188,500
Interest expense 4,000 Interest expense 2,600
Accounts receivable 191,100 AR –assigned 191,100
b. Notes payable 195,000 d. No journal entry
Interest expense 4,000
AR - assigned 199,000

8. The total interest expense of VAILOCES CORPORATION on the assigned accounts


receivable is:
a. P 5,400 b. P 8,066 d. P 10,000 c. P 11,400

Solution
April 1 Accounts receivable – assigned 400,000
Accounts receivable 400,000
1 Cash 294,000
Finance charges (300,000 x 2%) 6,000
Notes payable 300,000
(1) Cash 191,100
Sales discounts 3,900
AR – assigned (191,100/98%) 195,000
(2) Notes payable 195,000
Interest expense 4,000
(300,000 x 16% x 1/12)
Cash 199,000
(3) Cash 203,000
Allowance for bad debts 2,000
AR – assigned 205,000
(400,000 – 195,000)
(4) Notes payable (300,000 – 195,000)105,000
Interest expense 1,400
(105,000 x 16% x 1/12)
Cash 106,400
Answer:
1. C 2. C 3. A 4. B 5. D
6. D 7. B 8. A

21
Problem 15
UY FINANCE CORPORATION purchases the accounts receivable of other companies on a
without recourse, notification basis. At the time the receivables are factored, 15% of the
amount factored is charged to the client as commission and recognized as revenue in UY’S
books. Also, 10% of the receivables factored is withheld by Uy as protection against sales
returns or other adjustments. This amount credited by Uy to the client Retainer account.
At the end of each month, payments are made by Uy to its clients so that the balance in the
Client Retainer account is equal to 10% of unpaid factored receivables. Based on Uy’s bad
debt loss experience, an allowance for bad debts of 5% of all factored receivables is to be
established, Uy makes adjusting entries at the end of each month.

On January 3, 2003, Jannette Company factored its accounts receivable totaling


P1,000,000. By January 31, P800,000 on these receivables had been collected by Uy.

Questions

1. The commission earned of Uy Finance Corporation from Jannette Company’s accounts


receivable factored is:
a. P 150,000 b. P 120,000 c. P 135,000 d. P 90,000

2. The proceeds received by Jannette Company on the accounts factored is:


a. P 810,000 b. P 780,000 c. P 765,000 d. P 750,000

3. How much is the Client Retainer account of Uy Finance Corporation at January 31, 2003
is:
a. P 0 b. P 20,000 c. P 60,000 d. P 80,000

4. How much is the bad debts expense of Uy Finance Corporation at January 31, 2003 is:
a. P 50,000 b. P 40,000 c. P 20,000 d. P 0

Solution

UY FINANCE CORPORATION’S BOOKS

Jan. 3 Accounts receivable factored 1,000,000


Commission income (P1 M x 15%) 150,000
Client Retainer (P1 M x 10%) 100,000
Cash 750,000
31 Cash 800,000
Accounts receivable factored 800,000
31 Client Retainer 80,000
Cash (100,000 – [10% x 200,000]) 80,000
31 Bad debts expense 50,000
Allowance for bad debts (P1 M x 5%) 50,000

JANETTEE COMPANY’S BOOKS

Jan. 3 Cash 750,000


Receivable from factor 100,000
Commission 150,000
Accounts receivable 1,000,000
31 Cash 80,000
Receivable from factor 80,000

Answer:
1. A 2. D 3. B 4. A

22
Problem 16
During your audit of the LEILANI COMPANY for the calendar year 2006, you find the
following accounts:
NOTES RECEIVABLE
Sept. 1 Samson, 12%, due in 3 mos. 36,000 36,000
Nov. 1 Hazel, 15%, due in 6 mos. 90,000 126,000
Nov. 1 Salazar, no interest, due in one
year 75,000 201,000
Nov. 30 Rosa, Co. 12%, due in 13 mos. 15,000 216,000
Dec. 1 Rona, 15%, due in 15 mos. 36,000 252,000
Dec. 2 Anito, President, 18%, due in 3
mos. 18,000 270,000

NOTES RECEIVABLE DISCOUNTED


Sept. 1 Samson note, discounted at 36,000 36,000
15%
Nov. 1 Salazar note, discounted at 75,000 111,000
15%

INTEREST EXPENSE
Sept. 1 Samson note 310.50 310.50
Nov. 1 Salazar note 11,250.00 11,560.50

All notes are trade notes receivable unless otherwise specified. The Samson note was paid
December31, 2006. Interest income is credited only upon receipt of cash.

Questions

1. The accrued interest income at December 31, 2006 is:


a. P 2,748 b. P 3,018 c. P 3,120 d. P 4,200

2. The interest expense at December 31, 2006 is:


a. P 1,875.00 b. P 2,185.50c. P 4,060.50 d. P 11,560.50

3. The Notes Receivable at December 31, 2006 is:


a. P 141,000 b. P 159,000 c. P 216,000 d. P 252,000

4. The Notes Receivable – discounted at December 31, 2006 is:


a. P 63,750 b. P 73,125 c. P 75,000 d. P 111,000

5. How much is the proceeds in the discounting of notes receivable for the year?
a. P 99,439.50 b. P 100,060.50 c. P 111,000.00 d. P 111,310.50

Solution
1. C
Hazel 90,000 x 15% x 2/12 = P 2,250
Rosa 15,000 x 12% x 1/12 = 150
Rona 36,000 x 15% x 1/12 = 450
Anito 18,000 x 18% x 1/12 = 270
Total accrued interest P 3,120
2. B
Samson = P 310.50
Salazar 11,250 x 2/12 = 1,875.00
Total interest expense = P2,185.50

23
3. A
Hazel 90,000
Rosa 15,000
Rona 36,000
Total 141,000
4. C
Salazar 75,000
5. A
Samson P 36,000 – P 310.50 = P 35,689.50
Salazar P 75,000 – P11,250 = 63,750.00
Total proceeds = P 99,439.50

Problem 17
On January 1, 2006, TUQUIB COMPANY sells its equipment with a carrying value of
P160,000. The company receives a non-interest-bearing note due in 3 years with a face
amount of P200,000. There is no established market value for the equipment. The
prevailing interest rate for a note of this type is 12%. The following are the present value
factors of 1 at 12%:

Present value of 1 for 3 periods 0.71178


Present value of an ordinary annuity of 1 for 3 periods 2.40183

Questions

1. The gain or loss on the sale of equipment is:


a. P 40,000 b. P 122 c. P 0 d. (P 17,644)

2. The discount on notes receivable is:


a. P 57,644 b. P 40,000 c. P 39,878 d. P 0

3. The entry to record the sale of equipment is:


a. Notes receivable 200,000 c. Notes receivable 200,000
Equipment 200,000 Loss on sale 17,644
Equipment 160,000
Discount on NR 57,644
b. Notes receivable 200,000 d. Notes receivable 200,000
Equipment 160,000 Equipment 160,000
Gain on sale 40,000 Gain on sale 122
Discount on NR 39,878

4. The discount amortization at the end of the second year using the effective-interest
amortization is:
a. P 17,083 b. P 19,133 c. P 21,428 d. P 36,216

5. The entry to record the discount amortization is:


a. Discount on NR c. Interest income
Interest income Discount on NR
b. Discount on NR d. Interest expense
Interest expense Discount on NR

Solution
1. D
Sales price – present value of note (P200,000 x 0.71178) 142,356
Book value of equipment 160,000
Loss on sale of equipment (17,644)

24
2. A
Face value of note 200,000
Present value of note 142,356
Discount on notes receivable 57,644
3. C
Notes receivable 200,000
Loss on sale of equipment 17,644
Equipment 160,000
Discount on notes receivable 57,644
4. B
Present value of note, 1/1/03 142,356
Add: Interest earned in 2003
(142,356 x 12%) 17,083
Present value of note, 1/1/04 159,439
Add: interest earned in 2004
(159,439 x 12%) 19,133
Present value of note, 1/1/05 178,572
5. A

Problem 18
On January 2, 2006, a tract of land that originally cost P800,000 was sold by MAYLENE
CORPORATION. The company received a P1,200,000 note as payment. It bears interest
rate of 4% and is payable in 3 annual installments of P400,000 plus interest on the
outstanding balance. The prevailing rate of interest for a note of this type is 10%. The
present value table shows the following present value factors of 1 at 10%:

Present value factor of 1 for 3 periods 0.75132


Present value factor of 1 for 2 periods 0.82645
Present value factor of 1 for 1 period 0.90909
Present value of an ordinary annuity of 1 for 3 periods 2.48685

Questions

1. The gain on sale of land on January 2, 2006 is:


a. P 194,740 b. P 276,847 c. P 290,740 d. P 400,000

2. The interest income on the note receivable for the year ended December 31, 2006 using
effective interest method is:
a. P 120,000 b. P 109,074 c. P 107,685 d. P 99,474

3. How much cash will MYLENE CORPORATION received from notes receivable?
a. P 1,076,847 b. P 1,200,000 c. P 1,296,000 d. P 1,476,847

Solution
Amount of cash to be received:

Interest Principal Total


2003 48,000 * 400,000 448,000
2004 32,000 ** 400,000 432,000
2005 16,000 *** 400,000 416,000
Total 1,296,000
* 1,200,000 x 4%
** 800,000 x 4%
*** 400,000 x 4%

Cash received PV Factor Present Value


2003 448,000 0.90909 407,272
2004 432,000 0.82645 357,026
2005 416,000 0.75132 312,549
Total 1,076,847

25
Present value of note 1,076,847
Cost of land 800,000
Gain on sale 276,847

Interest income for 2006 – P1,076,847 x 10% = P107,685

Answer:
1. B 2. C 3. C

Problem 19
The balance sheet of PERSEVERANCE CORPORATION on December 31, 2005, includes the
following cash and receivable balances:

Cash – Davao Bank P 45,000


Currency and coins 16,000
Petty cash fund 1,000
Cash in bond sinking fund 15,000
Notes receivable (including discounted with
recourse, P15,500) 36,500
Accounts receivable P 85,600
Less: Allow. for bad debts (4,150) 81,450
Interest receivable 525

Current liability reported in the December 31, 2005, balance sheet included:

Obligation on discounted notes receivable 15,500

Transactions during 2006 included the following:

1. Sales on account were P767,000.

2. Cash collected on accounts totaled P576,500, including accounts of P93,000 with cash
discounts of 2%.

3. Notes received in settlement of accounts totaled P82,500.

4. Notes receivable discounted as of December 31, 2005, were paid at maturity with the
exception of one P3,000 note on which the company had to pay the bank P3,090, that
included interest and protest fees. It is expected that recovery will be made on this note
early in 2004.

5. Customer notes of P60,000 were discounted with recourse during the year, proceeds
from their transfer being P58,500. Of this total, P48,000 matured during the year
without notice of protest.

6. Customer accounts of P8,720 were written-off in prior year as worthless.

7. Recoveries of doubtful accounts written-off in prior years were P2,020. (not included in
the collection in number 2)

8. Notes receivable collected during the year totaled P27,000 and interest collected was
P2,450.

26
9. On December 31, accrued interest on notes receivable was P630.

10. Uncollectible accounts are estimated to be 5% of the December 31, 2006, accounts
receivable balance.

11. Cash of P35,000 was borrowed from Davao Bank, accounts receivable of P50,000 being
pledged on the loan. Collections of P19,500 had been made on these receivables
included in the total given in transaction (2) and this amount was applied on December
31, 2006, to payment of accrued interest on the loan of P600, and the balance to partial
payment of the loan.

12. Petty cash fund was reimbursed based on the following analysis of expenditure
vouchers:
Travel expenses P 112
Entertainment expenses 78
Postage 93
Office supplies 173
Cash over 6

13. P3,000 cash was added to the bond sinking fund.

14. Currency on hand at December 31, 2006 was P12,000.

15. Total cash payment for all expenses during the year were P468,000. Charge to General
Expense

Based on the information above and some other analysis, answer the following questions:

Questions

1. PERSEVERANCE CORPORATION’s Cash balance at December 31, 2006 is:


a. P 269,430 b. P 265,430 c. P 252,430 d. P 219,930

2. PERSEVERANCE CORPORATION’s Accounts Receivable balance at December 31, 2006 is:


a. P178,8787.00 b. P 178,824.50 c. P176,804.50 d. P174,254.50

3. PERSEVERANCE CORPORATION’s Other Cash Item (Currency and coins & Petty Cash
Fund) at December 31, 2006 is:
a. P 16,000 b. P 13,000 c. P 12,550 d. P 12,000

4. PERSEVERANCE CORPORATION’s Notes Receivable at December 31, 2006 is:


a. P 46,500 b. P 31,000 c. P 30,910 d. P 28,500

5. PERSEVERANCE CORPORATION’s Obligation of Discounted of Note Receivable at


December 31, 2006 is:
a. P 15,500 b. P 12,000 c. P 11,910 d. P 3,500

6. PERSEVERANCE CORPORATION’s Interest Receivable at December 31, 2006 is:


a. P 2,555 b. P 1,155 c. P 630 d. P 525

7. PERSEVERANCE CORPORATION’s Bad debts at December 31, 2006 is:


a. P 16,005.20 b. P 13,875.50 c. P 11,855.50 d. P 11,825.50

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8. PERSEVERANCE CORPORATION’s Allowance for bad debts at December 31, 2006 is:
a. P 9,406.50 b. P 9,305.50 c. P 9,252.00 d. P 4,150.00

9. PERSEVERANCE CORPORATION’s Sales balance at December 31, 2006 is:


a. P 767,000 b. P 765,140 c. P 765,102 d. P 757,330

10. PERSEVERANCE CORPORATION’s Interest income balance at December 31, 2006 is:
a. P 3,086 b. P 3,080 c. P 2,561 d. P 2,555

Solution
(1) Accounts receivable 767,000
Sales 767,000
(2) Cash 576,500
Sales discounts 1,860
Accounts receivable 576,360
(3) Notes receivable 82,500
Accounts receivable 82,500
(4) Obligation on discounted note 12,500
Notes receivable 12,500
Accounts receivable 3,090
Cash 3,090
Obligation on discounted note 3,000
Notes receivable 3,000
(5) Cash 58,500
Interest expense 1,500
Obligation on discounted note 60,000
Obligation on discounted note 48,000
Notes receivable 48,000
(6) Allowance for bad debts 8,720
Accounts receivable 8,720
(7) Accounts receivable 2,020
Allowance for bad debts 2,020
Cash 2,020
Accounts receivable 2,020
(8) Cash 27,000
Notes receivable 27,000
Cash 2,450
Interest receivable 525
Interest income 1,925
(9) Interest receivable 630
Interest income 630
(10) Bad debts 11,855.50
Allowance for bad debts 11,855.50
(11) Cash 35,000
Notes payable 35,000
Interest expense 600
Notes payable 18,900
Cash 19,500
(12) Operating expenses 456
Cash 456
Cash 6
Other income 6
(13) Sinking fund 3,000
Cash 3,000
(14) No entry
(15) General expenses 468,000
Cash 468,000

Answer:
1. A 2. C 3. B 4. D 5. B
6. C 7. C 8. B 9. B 10. D

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Problem 20
You are engaged in your fifth annual examination of the financial statements of NAVAL
CORPORATION. Your examination is for the year ended December 31, 2006. The client
prepared the following schedule of Trade Notes Receivable and Interest Receivable for you
at December 31, 2006. You have agreed the opening balances to your prior year’s audit
workpapers.

NAVAL CORPORATION
TRADE NOTES RECEIVABLE AND RELATED INTEREST RECEIVABLE
Trade-Notes Receivable
Maker Date Terms Int. Bal. 2006 2006 Bal.
Rate 12/31/05 debits credit 12/31/06
Rubin 04/01/05 1-year 12% P 60,000 P 60,000
Co.
Cardoza 05/01/06 90 days - P 30,000 29,375 P 625
after date
Pancho 07/01/06 60 days 12% 6,000 6,000
after date
Betque 08/03/06 Demand 12% 15,000 15,000
Gabuter 10/02/06 60 days 12% 50,000 50,000 -
o after date
Noval 11/01/06 90 days 8% 42,000 35,000 7,000
after date
Gan 11/01/06 90 days 12% 32,000 32,000
after date

INTEREST RECEIVABLE
Due from Balance 2006 debit 2006 credit Balance
12/31/06
Rubin Co. P 5,400 P 1,800 P 7,200
Pancho 120 P 120
Betque 400 400
Gabutero 1,000 660 340
Noval 560 560
Gan ___________ 640 ___________ 640
Totals P 5,400 P 4,520 P 7,860 P 2,060

Your examination reveals this information:

1. Interest is computed on a 360-day basis. In computing interest, it is the corporation’s


practice to exclude the first day of the note’s term and to include the due date.

2. The Cardoza’s 90-day non-interest bearing note was discounted on May 15 at 10%, and
the proceeds were credited to the Trade Notes Receivable account. The note was paid
at maturity.

3. Pancho became bankrupt on August 31, and the corporation will recover 75 cents on the
peso. All of Naval Corporation’s notes receivable provide for interest at a rate of 12% on
the maturity value of a dishonored note.

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4. Betque, president of Naval Corporation, confirmed that she owed Naval Corporation
P15,000 and that she expected to pay the note within six months. You are satisfied that
the note is collectible.

5. Gabutero’s 60-day note was discounted on November 1 at 8%, and the proceeds were
credited to the Trade Notes Receivable and Interest Receivable accounts. On December
2, Naval Corporation received notice from the bank that GAbutero’s note was not paid at
maturity and that it had been charged against Naval’s checking account by the bank.
Upon receiving the notice from the bank, the bookkeeper recorded the note and the
accrued interest in the Trade Notes Receivable and Interest Receivable account.
Gabutero paid Naval Corporation the full amount due in January 2003.

6. Noval, 90-day note was pledged as collateral for P35,000, 60-day 10% loan from the
Davao National Bank on December 1.

7. On November 1, the corporation received four, P8,000, 90-day notes from Gan. On
December 1, the corporation received payment from Gan for one of the P8,000 notes
with accrued interest. Prepayment of the notes is allowed without penalty. The
bookkeeper credited the Gan’s Accounts Receivable account for the cash received.

Questions

1. At December 31, 2006, the note receivable from Cardoza has a balance of:
a. P 30,000 b. P 29,375 c. P 625 d. P 0

2. The interest income from Cardoza’s note at December 31, 2006 is:
a. P 750 b. P 625 c. P 500 d. P 0

3. At December 31, 2006, the note receivable from Pancho has a balance of:
a. P 6,370.92 b. P 6,366.00 c. P 6,120 d. P 0

4. The interest income from Pancho’s note at December 31, 2006 is:
a. P 370.92 b. P 250.92 c. P 246 d. P 0

5. At December 31, 2006, the note receivable from Betque has a balance of:
a. P 15,350 b. P 15,000 c. P 14,650 d. P 0

6. At December 31, 2006 the note receivable from Gabutero has a balance of:
a. P 150,000 b. P 100,000 c. P 50,000 d. P 0

7. At December 31, 2006 the note receivable from Noval has a balance of:
a. P 42,000 b. P 35,000 c. P 7,000 d. P 0

8. At December 31, 2006 the note receivable from Gan has a balance of:
a. P 32,480 b. P 32,000 c. P 24,000 d. P 23,950

9. The total Note Receivable – Trade at December 31, 2006 is:


a. P 89,000 b. P 81,000 c. P 72,366 d. P 66,000

10. The total Interest Receivable at December 31, 2006 is:


a. P 2,300 b. P 2,060 c. P 1,950 d. P 1,790

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Solution

Adjusting Entries as of Dec. 31, 2006


(2) Cardoza (a) Interest Expense 625.00
Trade Notes receivable 625.00
Maturity Value = Face Value P30,000
Discount (30,000 x 10% x 75/360) 625
Proceeds P29,375

(3) Pancho (b) Accounts Receivable 6,370.92


Trade Notes Receivable 6,000.00
Interest Receivable 120.00
Interest Revenue 250.92
Face Value P6,000.00
Interest (6000 x 12% x60/360) 120.00
Maturity value P6,120.00
Add.’l interest from due date , 8.30.06 to
12.31.06 (6,120 x 12% x 123/360) 250.92
Total amount due, 12.31.06 P6,370.92

(4) Betque © Notes receivable- Officers 15,000


Interest Receivable 350
Interest Revenue 350
Trade Notes Receivable 15,000
Accrued Interest as of 12.31.06
(15,000 x 12% x 150/360) = P750

(5) Gabutero OE: Cash 50,660


Notes Receivable 50,000
Interest Receivable 660

CE: Cash 50,660


NR – Discounted 50,000
Interest income 660
(d)
Adj: Notes Receivable 50,000
Interest Receivable 660
Interest income 660
NR – discounted 50,000
----------------------------------------- ----------- ----------

OE: Notes Receivable 50,000


Interest Receivable 1,000
Cash 51,000

CE: Accounts Receivable 51,000


Cash 51,000

NR – discounted 50,000
Notes Receivable 50,000

(e) Accounts Receivable 51,000


NR – discounted 50,000
Trade Notes Receivable 100,000
Interest Receivable 1,000
Face Value P50,000
Interest (50,000 x 12% x 60/360) 1,000
Maturity Value P51,000
Discount (50,000 x 8% x 30/360) 340
Proceeds P50,660

(f) Accounts Receivable 510


Interest Revenue 510
(51,000 x 12% x 30/360)

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(6) Noval (g) Trade Notes Receivable 35,000
Notes Payable- bank 35,000

(7) Gan (h) Accounts Receivable 8,080


Trade Notes Receivable 8,000
Interest Revenue 80
(8,000 x 12% x 30/360) = P80
(I) Interest revenue 160
Interest Receivable 160
(Accrued Interest as of 12.31.06
24,000 x 12% x 60/360) = P480
ANSWER:
1. D 2. D 3. D 4. A 5. B
6. D 7. A 8. C 9. D 10. D

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