Accounting 21 Financial Accounting and Reporting Part 1

Receivables

PROBLEM No. 1 – Adjustments

During your preparation of financial statement of Banana Corporation for the year ended December 31, 2010 revealed that the
Accounts Receivable account consists of the following:

Trade accounts receivable (current) P3,440,000

Past due trade accounts 640,000
Uncollectable accounts 128,000
Credit balances in customers’ accounts (80,000)
Notes receivable dishonored 240,000
Consignment shipments – at cost 320,000
The consignee sold goods costing P96,000 for P160,000. A 10%
commission was charged by the consignee and remitted the balance to
Banana. The cash was received in January , 2011.
Total P4,688,000

The balance of the allowance for doubtful accounts before audit adjustment is a credit of P80,000. It is estimated that an allowance
should be maintained to equal 5% of trade receivables, net of amount due from the consignee who is bonded. The company has
not provided yet for the 2010 bad debt expense.

Based on the above, determine the adjusted balance of the following:

1. Trade accounts receivable
2. Allowance for doubtful accounts
3. Doubtful accounts expense

PROBLEM No. 2 – Allowance for Doubtful Accounts

4. The trial balance before adjustment of Risen Company reports the following balances:

Dr. Cr.
Accounts receivable P100,000
Allowance for doubtful accounts P 2,500
Sales (all on credit) 750,000
Sales returns and allowances 40,000

Instructions
(a) Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated to be (1) 6% of gross accounts
receivable and (2) 1% of net sales.
(b) Assume that all the information above is the same, except that the Allowance for Doubtful Accounts has a debit balance of
P2,500 instead of a credit balance. How will this difference affect the journal entries in part (a)?

PROBLEM No. 3 – Reconstruction of Accounts

The adjusted trial balance of WEYGANDT INDUSTRIES as of December 31, 2010 shows the following:

Debit Credit
Accounts receivable P1,000,000
Allowance for bad debts P40,000

Additional information:
· Cash sales of the company represent 10% of gross sales.
· 90% of the credit sales customers do not take advantage of the 2/10, n/30 terms.
· It is expected that the cash discount of P6,000 will be taken on accounts receivable outstanding at December 31, 2011.
· Sales returns in 2011 amounted to P400,000. All returns were from charge sales.
· During 2011, accounts totaling to P44,000 were written off as uncollectable; bad debt recoveries during the year
amounted to P3,000.
· The allowance for bad debts is adjusted so that it represents certain percentage of the outstanding accounts receivable
at year end. The required percentage at December 31, 2011 is 150% of the rate used on December 31, 2010.

Based of the above, answer the following:

5. The accounts receivable as of December 31, 2011 is
6. The allowance for doubtful accounts as of December 31, 2011 is
7. The net realizable value of accounts receivable as of December 31, 2011 is
8. The doubtful account expense for the year 2011 is

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 Accounting 21 Financial Accounting and Reporting Part 1
Receivables

PROBLEM No. 4 – Adjustments

You were able to obtain the following information from JOSE FRANCISCO, INCORPORATED’s Accounts Receivable and
Allowance for Doubtful Accounts:

· From the general ledger you noted that the Accounts Receivable has a balance of P848,000 as of December 31, 2010.
Below is a transcript of the Allowance for Doubtful Accounts:

Debit Credit Balance

January 1 - Balance 20,000
July 31 - Write-off 16,000 4,000
December 31 - Provision 48,000 52,000

· The summary of the subsidiary ledger as of December 31, 2010 was totaled as follows:
Debit balances:
Under 1 month P360,000
1 to 6 months 368,000
Over 6 months 152,000
P880,000

Credit balances:
Alien P 8,000 - OK; additional billing in Jan. 2011
T.Twister 14,000 - Should have been credited to Apol*
Dee Lah 18,000 - Advances on sales contract
P40,000
*Accounts is one to six months’ classification

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

· It is agreed that 1% is adequate for accounts less than one month. Accounts one t0 six months are expected to require
a reserve of 2%. 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 (estimated to be 90% collectible) 80,000
Total P152,000

Based on the above, answer the following:

9. How much is the adjusted balance of Accounts Receivable as of December 31, 2010?
10. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31, 2010?
11. How much is the Doubtful Accounts Expense for the year 2010?

PROBLEM No. 5 – Notes Receivable

The statement of financial position of FF (Francisco-Fe) Corporation reported the following long-term receivables as of December
31, 2009:

Note receivable from sale of plant P9,000,000

Note receivable from officer 2,400,000

You were able to gather the following transactions during 2010 and other information pertaining to the company’s long-term
receivable:

a. The note receivable from sale of plant bears interest at 12% per annum. The note is payable in 3 annual installments of
P3,000,000 plus interest on the unpaid balance every April 1. The initial principal and interest payment was made on
April 1, 2010.
b. The note receivable from officer is dated December 31, 2009, earns interest at 10% per annum, and is due on December
31, 2012. The 2010 interest was received on December 31, 2010.
c. The corporation sold a piece of equipment to Yes, Inc. on April a 2010, in exchange for an P1,200,000 non-interest
bearing note due on April 1, 2012. The note had no ready market, and there was no established exchange price for the
equipment. The prevailing interest rate for a note of this type at April 1, 2010, was 12%.

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 Accounting 21 Financial Accounting and Reporting Part 1
Receivables

d. A tract of land was sold by the corporation to No Co. on July 1 2010, for P6,000,000 under an installment sale contract.
No. Co. signed a 4-year 11% note for P4,200,000 on July 1, 2010, in addition to the down payment of P1,800,000. The
equal annual payments of principal and interest on the note will be P1,353,750 payable on July 1, 2011, 2012, 2013 and
2014. The land had an established cash price of P6,000,000, and its cost to the corporation was P4,500,000. The
collection of the installment on this note is reasonably assured.

Based on the above, answer the following:

12. Noncurrent notes receivable as of December 31, 2010
13. Current portion of long-term notes receivable as of December 31, 2010
14. Accrued interest receivable as of December 31, 2010
15. Interest income for the year 2010

PROBLEM No. 6 – Loan Impairment

Fritzjames Bank loaned P7,500,000 to a borrower on January 1, 2009. The terms of the loan were payment in full on January 1,
2013, plus annual interest payment at 12%. The interest payment was made as scheduled on January 1, 2010. However, due to
financial setbacks, the borrower was unable to make its 2011 interest payment. Fritzjames Bank considers the loan impaired and
projects the cash flows from the loan as of December 31, 2011. The bank has accrued the interest at December 31, 2010, but
did not continue to accrue interest at December 31, 2011 due to the impairment of the loan. The projected cash flows are:

Date of cash flow Amount projected

as of December 31, 2011
December 31, 2012 500,000
December 31, 2013 1,000,000
December 31, 2014 2,000,000
December 31, 2015 4,000,000

The present value of 1 at 12% is as follows:

For one period 0.89

For two period 0.80
For three period 0.71
For four period 0.64

16. How much is the loan impairment to be recognized on December 31, 2011?
17. What is the interest income to be reported by Fritzjames Bank in 2012?
18. What is the carrying amount of the loan receivable on December 31, 2012?

PROBLEM No. 7 – Assignment of Accounts Receivable

19. Prepare journal entries for Mars Co. for:
(a) Accounts receivable in the amount of P500,000 were assigned to Utley Finance Co. by Mars as security for a loan of
P425,000. Utley charged a 3% commission on the accounts; the interest rate on the note is 12%.
(b) During the first month, Mars collected P200,000 on assigned accounts after deducting P450 of discounts. Mars wrote off a
P530 assigned account.
(c) Mars paid to Utley the amount collected plus one month's interest on the note.

PROBLEM No. 8 – Factoring of Accounts Receivable

20. On May 1, Dexter, Inc. factored P800,000 of accounts receivable with Quick Finance on a without recourse basis. Under the
arrangement, Dexter was to handle disputes concerning service, and Quick Finance was to make the collections, handle the
sales discounts, and absorb the credit losses. Quick Finance assessed a finance charge of 6% of the total accounts receivable
factored and retained an amount equal to 2% of the total receivables to cover sales discounts.

Instructions
(a) Prepare the journal entry required on Dexter's books on May 1.
(b) Prepare the journal entry required on Quick Finance’s books on May 1.
(c) Assume Dexter factors the P800,000 of accounts receivable with Quick Finance on a with recourse basis instead. Prepare
the journal entry required on Dexter’s books on May 1.

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 Accounting 21 Financial Accounting and Reporting Part 1
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PROBLEM No. 9 – Assignment of Accounts Receivable on Non-notification basis

21. On December 1, 2011 Balyada Company assigned on a non-notification basis accounts receivable of P5,000,000 to a bank in
consideration for a loan of 80% of the accounts less a 5% service fee on the accounts assigned. Balyada signed a note for the
bank loan. On December 31, 2011, Balyada collected assigned accounts of P2,000,000 less discount of P200,000. Balyada
remitted the collections to the bank in partial payment for the loan. The bank applied first the collection to the interest and the
balance to the principal. The agreed interest is 1% per month on the loan balance. In its December 31, 2009 statement of financial
position, what amount of note payable should be reported as current liability?

PROBLEM No. 10 – Factoring of Accounts Receivable

22. Baliks factored P5,000,000 of accounts receivable to a finance company on July 1, 2011. Control was surrendered by Baliks. The
finance company assessed a fee of 5% and retains a holdback equal to 10% of the accounts receivable. In addition, the finance
company charged 12% interest computed on a weighted average time to maturity of the receivables for 30 days. What is the
initial cash received by Baliks Company?

PROBLEM No. 11 – Note Discounting without Recourse

23. On July 31, 2011, Ate-Ni-You Company discounted without recourse at the bank a customer’s P6,000,000, 180-day, 10% note
receivable dated June 1, 2011. The bank discounted the note at 12%. What is the loss on note discounting?

PROBLEM No. 12 – Note Discounting with Recourse

24. On January 1, 2011, Di-Bayn Company sold land with carrying amount of P1,500,000 in exchange for a 9 month, 10% note with
face value of P2,000,000. The 10% rate properly reflects the time value of money for this type of note. On April 1, 2011, Di-Bayn
Company discounted the note with recourse. The bank discount rate is 12%. The discounting transaction is accounted for as
conditional sale with recognition for a contingent liability. On October 1, 2011, the maker dishonored the note receivable. Di-Bayn
Company paid the bank the maturity value of the note plus protest fee of P10,000. On December 31, 2011, Di-Bayn Company
collected the dishonored note in full plus 12% annual interest on the total amount due. What is the amount collected by Di-Bayn
Company from the customer on December 31, 2011?

-End-

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