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

1
Problem 2
Presented below are unaudited balances of selected accounts of MARJORIE COMPANY as of
December 31, 2019:
Unaudited Balances, 12/31/19
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

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, 2019.

b. The bank returned on December 29, 2019, 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 2019.

Questions

1. What is the adjusted balance of Accounts Receivable on December 31, 2019?

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, 2019?
a. P 36,325 b. P 28,325 c. P 20,325 d. P 8,000

3. What is the adjusted amount of 2019 Bad Debts Expense?

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

Problem 3
You are examining the financial statements of MATIAS CORPORATION for the year ended
December 31, 2019. During the audit of the accounts receivable and other related
accounts, certain information was obtained.

The December 31, 2019 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, 2019, because Marlisa Company remitted in full for the accounts charged off October
31, 2019, and a debit on December 31 for the amount of the credit to the Allowance for
Doubtful Accounts.
The Allowance for Doubtful Accounts schedule is presented below:
Debit Credit Balance
January 1, 2019 P 3,658
October 21, 2019, Uncollectible;
Marlisa Co., - P324; Abonales Co.,
- P 820; Cherryl Co., - P564 P 1,508 2,150
December 31, 2019, 5% of P197,000 P 9,850 12,000
An aging schedule of the accounts receivable as of December 31, 2019 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, 2019. 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,

2019 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, 2019 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,
2019 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, 2019 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, 2019 is:
a. P 3,814.20 b. P 3,614.20 c. P 3,490.20 d. P 2,814.20
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, 2019 is:
a. P 194,975.80 b. P 194,775.80 c. P 193,335.80 d.P193,319.40

Problem 4
You audit of APAS COMPANY for the year 2019 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 2019 ledger shows a sales balance of P20,000,000.
3. The company sells a mark-up of 20% based on sales.
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, 2019 and January, 2020, 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, 2019 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, 2019 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 2019 were erroneously recorded in January
2020?
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 2020 were erroneously recorded in December
2019?
a. P 228,500 b. P 188,500 c. P 180,500 d. P 106,000

Problem 5
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

Problem 6
On April 1, 2019, 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, 2019 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, 2019 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
a. 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

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, 2019 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

Problem 7
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, 2019, 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, 2019
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, 2019
is: a. P 50,000 b. P 40,000 c. P 20,000 d. P 0

Problem 8
During your audit of the LEILANI COMPANY for the calendar year 2019, 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, 2019. Interest income is credited only upon receipt of cash.

Questions

1. The accrued interest income at December 31, 2019 is:

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

2. The interest expense at December 31, 2019 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, 2019 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, 2019 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

Problem 9
On January 1, 2019, 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

Problem 10
On January 2, 2019, 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, 2019 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, 2019 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