Pamantasan ng Cabuyao

Katapatan Subd., Banay Banay, City of Cabuyao

Accounting Review VI - Auditing Problem (ACCTG100G) AP - 08

AUDIT OF RECEIVABLES
Problem I

In the audit of Alphabet Corporation, the auditor had an appreciation of the following schedule and noted some comments for
possible adjustments:
Alphabet Corporation
Accounts Receivable Schedule
December 31, 2018
Customer Balance Current Past Due

Triple A P 92,000 P -- P 92,000

BBB Company 420,000 248,000 172,000
CCC Company 350,000 92,000 258,000
DDD Corporation 374,000 212,000 162,000
EEE, Inc. 160,000 -- 160,000
FFF Company 124,000 60,000 64,000
GGG Incorporated 4,000 4,000 --
Triple H Merchandisers 256,000 80,000 176,000
III Corp. 240,000 240,000 --

The Accounts Receivable control account balance was determined to be P2,020,000.

The external auditor submitted the following audit comments for possible adjustments:
Triple A Merchandise found defective; returned by customer on October 31, 2018 for credit, but the
credit memo was issued by Alphabet only on January 15, 2019.
BBB Company Account is good but usually pays late.
CCC Company Merchandise worth P160,000 was destroyed while in transit on May 31, 2018, terms FOB
Destination. The carrier was billed on June 15, 2018. (See EEE, Inc. and III Corp.)
DDD Corporation Customer billed twice in error for P40,000. Balance is collectible.
EEE, Inc. Collected in full on January 31, 2019.
FFF Company Paid in full on December 30, 2018 but not recorded. Collections were deposited on January
2, 2019.
GGG Incorporated Received account confirmation from customer for P44,000. Investigation revealed an
erroneous credit for P40,000. (See Triple H Merchandisers)
Triple H Merchandisers Neglected to post P40,000 credit to customer’s account.
III Corp. Customer wants to know the reason for receipt of P160,000 credit memo as their accounts
payable balance was P400,000.
REQUIRED:

A. Adjusting entries as of December 31, 2018.

B. Adjusted balance of Accounts Receivable – Trade as of December 31, 2018.

Problem II

Hi-Low Corp. had the following long-term receivable account balances at December 31, 2017:
Note receivable from sale of division P4,500,000
Note receivable from officer 1,200,000
Transactions during 2018 and other information relating to Hi-Low’s long-term receivable were as follows:

1. The P4,500,000 note receivable is dated May 1, 2017, bears interest at 9%, and represents the balance of consideration
received from the sale of Hi-Lows beer division to Beer-Hug Co. Principal payments of P1,500,000 plus appropriate
interest are due on May 1, 2018, 2019, and 2020. The first principal and interest payment was made on May 1, 2018.
Collection of the note installments is reasonably assured.

2. The P1,200,000 note receivable is dated December 31, 2017, bears interest at 8%, and is due on December 31, 2020.
The note is due from Pacifica Palaspas, president of Hi-Low Co. Interest is payable annually on December 31 and
interest payments were made on due dates through December 31, 2018.
 3. On April 1, 2018, Hi-Low sold a patent to Tigbak, Inc. in exchange for a P400,000 non-interest bearing note due on April
1, 2020. There was no established exchange price for the patent, and the note has no ready market. The prevailing rate
of interest for a note of this type at April 1, 2018, was 12%. The present value of 1 for two periods at 12% is 0.797. The
patent had a carrying value of P80,000 at January 1, 2018, and the amortization for the year ended December 31, 2018
would had been P16,000. The collection of the note is reasonably assured.

4. On July 1, 2018, Hi-Low sold a parcel of land to Bay-High Company for P400,000 under an installment sales contract.
Bay-High made a P120,000 cash down payment on July 1, 2018, and signed a 4-year 11% note for the P280,000
balance. The equal annual payments of the principal and interest on the note will be P90,950 payable on July 1, 2019
through July 1, 2022. The land could had been sold at an established cash price of P400,000. The cost of the land to Hi-
Low was P300,000. It reasonably assured that the note will be collected.

Based on the preceding information, answer the following:

1. The long-term receivables at December 31, 2018
A. P4,768,042 B. P3,268,042 C. P3,237,242 D. P3,239,350

2. Total current portion of the long-term receivables at December 31, 2018

A. P1,570,000 B. P1,500,000 C. P1,590,250 D. P1,559,450

3. Accrued interest receivable at December 31, 2018

A. P195,400 B. P105,400 C. P210,800 D. P224,092

4. Total interest income for the year ended December 31, 2018
A. P455,092 B. P320,092 C. P426,400 D. P470,092

5. Unamortized discount at December 31, 2018 on note receivable from sale of patent
A. P81,200 B. P28,692 C. P10,809 D. P52,508

Problem III
In your audit of the books of the Georgia Company for the year 2018, you concluded that the allowance for doubtful accounts
should be adjusted to equal the estimated amount required based on the aging of the accounts as of December 31. During your
audit, you were able to gather the following data:

Allowance for doubtful accounts, January 1, 2018 P300,000

Provision for doubtful accounts during 2018 (3% of P5,000,000 sales) 150,000
Bad debts written off in 2018 187,500
Recovery of bad debts written off in during 2018 50,000
Estimated doubtful accounts per aging of accounts on December 31, 2018 200,000
Accounts receivable, December 31, 2018 2,375,000

REQUIRED:
1. Based on the result of your audit, determine the following:
A. Doubtful accounts expense for 2018.
B. Net realizable value of Accounts Receivable as of December 31, 2018
C. The increase (decrease) in the recorded allowance for doubtful accounts.
D. Adjusting journal entries.

2. Assuming there was no aging of accounts, determine the following:

A. Doubtful accounts expense for 2018.
B. Allowance for doubtful accounts as of December 31, 2018.

3. Assuming there was no aging of accounts and the company used 8% of accounts receivable method, determine the
following:
A. Doubtful accounts expense for 2018.
B. Allowance for doubtful accounts as of December 31, 2018.

Problem IV

In connection with your examination of the financial statements of ABC Company for the year ended December 31, 2018, you
were able to obtain certain information during your audit of the accounts receivable and related accounts:
1. The December 31, 2018 balance in the Accounts Receivable control account is P558,600.
2. The aging schedule of the account receivable as of December 31, 2018 is presented below:
Net Debit Percentage To Be Applied
Age Balance Corrections Have Been Made
60 days and under P258,513 1 percent
61 to 90 days 204,735 3 percent
91 to 120 days 59,886 6 percent
Over 120 days 35,466 Definitely uncollectible, P6,300;
The remainder is estimated to be
25% uncollectible.
 3. The only entries made in the Doubtful Expense account were:
a. A debit on December 31, for the amount of the credit to the Allowance for Doubtful Accounts.
b. A credit for P4,110 on November 30, 2018, and a debit to Allowance for Doubtful Accounts because of
bankruptcy. The related sales took place on October 1, 2018.

4. The Allowance for Doubtful Accounts schedule is presented below:

Debit Credit Balance
January 1, 2018 P13,125
November 30, 2018 P4,110 9,015
December 31, 2018 (P558,600 x 5%) P27,930 36,945

5. There is a credit balance in one account receivable (61 to 90 days) of P7,260; it represents on an advance on sales
contract.

Based on the above and the result of your audit, answer the following:
1. How much is the adjusted balance of Accounts Receivable as of December 31, 2018?
A. P555,450 B. P559,560 C. P540,930 D. P548,190
2. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31, 2018?
A. P19,706 B. P19,583 C. P19,830 D. P19,147
3. How much is the doubtful accounts expense for the year 2018?
A. P16,991 B. P16,868 C. P17,115 D. P27,930
4. How much is the net adjustment to the Doubtful Accounts Expense account?
A. P6,952 credit B. P6,705 credit C. P6,829 credit D. P4,110 debit

Problem V

The accounts receivable subsidiary ledger of Bingo Corporation shows the following information:

December 31, 2018 INVOICE

Customer Account Balance Date Amount
AAA, Inc. P140,720 12/06/18 P 56,000
11/29/18 84,720
BBB Co. 83,680 09/27/18 48,000
08/20/18 35,680
CCC Corp. 122,400 12/08/18 80,000
10/25/18 42,400
DDD Co. 180,560 11/17/18 92,560
10/09/18 88,000
EEE Co. 126,400 12/12/18 76,800
12/02/18 49,600
FFF, Inc. 69,600 09/12/18 69,600
TOTAL P723,360 P723,360

The estimated bad debt rates below are based on the Corporation’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 doubtful accounts had a credit balance of P14,000 on December 31, 2017, before any adjustments.

REQUIRED:
1. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31, 2018?
A. P52,795 B. P24,795 C. P38,795 D. P14,000
2. The necessary adjusting journal entry to adjust the Allowance for Doubtful Accounts as of December 31, 2018, would
include
A. No adjusting journal entry is necessary.
B. A debit to Retained Earnings of P24,795.
C. A debit to Doubtful Accounts Expense of P38,795.
D. A credit to Allowance for Doubtful Accounts of P24,795.

Problem VI
Company AB loaned Company YZ P750,000 on January 1, 2014. The terms of the loan were payment in full on January 1, 2019,
plus annual interest payments at 11%. The interest payment was made as scheduled on January 1, 2015; however, due to
financial setbacks, YZ was unable to make its 2016 interest payment. AB considers the loan impaired and projects the following
cash flows from the loan as of December 31, 2016 and 2017. Assume that AB accrued interest at December 31, 2015, but did not
continue to accrue interest due to impairment of the loan. The prevailing interest rate for similar type of the note as of December
31, 2016 and 2017 is 10%.
Projected Cash Flows
Amount Projected As Of
Date of Cash Flow December 31, 2016 December 31, 2017
December 31, 2017 P 50,000 P 50,000
December 31, 2018 100,000 150,000
December 31, 2019 200,000 300,000
December 31, 2020 300,000 250,000
December 31, 2021 100,000
REQUIRED:
1. Prepare the valuation entry at December 31, 2016.
2. Prepare the journal entry to record the receipt of P50,000 on December 31, 2017.
3. Prepare the valuation adjusting entry at December 31, 2015
4. Prepare the 2018 journal entries, assuming the receipt of P150,000 as scheduled; also assume that estimates for future
cash flows remain the same as they were at the end of 2017.

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wep/ACCTG100G/receivables