Chapter 2 Receivables

Audit of receivables
AUDIT PROGRAM FOR RECEIVABLES
Audit objectives:
To determine that:
1. Receivables represent valid claims against customers and other parties and have been
properly recorded.
2. The related allowance for doubtful accounts, returns and allowances, and discounts are
reasonably adequate.
3. Receivables are properly describe
4. Disclosures with respect to the accounts are adequate.
Audit Procedures:
1. Obtain a list of aged accounts receivable balances from the subsidiary ledger, and:
 Foot and cross-foot the list.
 Check if the list reconciles with the general ledger control account.
 Trace individual balances to the subsidiary ledger.
 Test the accuracy of the aging
 Adjust non-trade accounts erroneously include in customers’ accounts.
 Investigate and reclassify significant credit balances.
2. Test accuracy of balances appearing in the subsidiary ledger.
3. Confirm accuracy of individual balances by direct communication with customers.

 Investigate exceptions reported by customers and discuss with appropriate officer for
proper disposal.
 Send a second request for positive confirmation requests without any replies from
customers.
 If the second request does not produce a reply from the customer, perform extended
procedures, like:
 Reviewing collections after year-end
 Checking, supporting documents.
 Discussing the account with appropriate officer.
 Discuss with appropriate officer, confirmation request returned by the post office and
perform extended procedures.
 Prepare a summary of confirmation results.
4. Review correspondence with customers for possible adjustments.
5. Test propriety of cutoff:

 Examine sales recorded and shipments made a week before and after the end of the
reporting period and ascertain whether the sales were recorded in the proper period.
 Investigate large amounts of sales returned shortly after the end of the reporting period.
6. Perform analytical procedures, like:

 Gross profile ratio
 Accounts receivable turnover
 Ratio of accounts written off to sales or balance of accounts receivable.
 Compare with prior year and industry averages.
7. Review individual balances and age of accounts with appropriate officer, and:
 Determine accounts that should be written off.
 Determine adequacy of allowance for doubtful accounts.
8. Obtain analyses of significant other receivables.
9. Ascertain whether some receivables are pledged, factored, discounted, or assigned.
10. Determine financial statement presentation and adequacy of disclosures.
11. Obtain receivable representation letter from client.
Problem 2-1
Computaton of Accounts Receivable Balance
Shown below is Gorospe COMPANY’ S aging schedule of its accounts receivable on December 31, 2010.
Balance Days Past Due

Customers Due Current 1-30 31-60 Over 60
AA Co. P 23,000 P 0 P 0 P 23,000 0
BB, Inc. 105,000 62,000 20,000 13,000 10,000
CC Corp. 87,500 23,000 14,500 10,000 40,000
DD, Inc. 93,500 53,000 20,500 10,000 10,000
EE Transport 40,000 0 0 0 40,000
FF, Inc. 31,000 15,000 16,000 0 0
GG Co. 1,000 1,000 0 0 0
HH Corp. 64,000 20,000 18,000 16,000 10,000
II Company 60,000 60,000 0 0
0
Totals P 505,000 P 234,000 P89,000 P 72,000 P110,000
The accounts receivable balance per general ledger is P505,000 on December 31, 2010.
The following are audit comments for possible adjustments:
AA Company
Merchandise found defective; returned by the customer on November 10 for credit, but the credit
memo was issued by Gorospe only on January 2, 2011
BB, Inc
Account is good but usually pays late.
CC Corp.
Merchandise worth P40,000 destroyed in transit on June 4, 2010. The carrier was billed on July 1.( See
EE Transport and II Company)
DD Inc.
Customer billed twice in error for P10,000. Balance is collectible.
EE Transport
Collected in full in January 15, 2011.
FF, Inc.
Paid in full o December 29, 2010 but not recorded. Collections were deposited January3, 2011.
GG Co.
Received account confirmation from customer for P11,000. Investigation revealed an erroneous credit
for P10,000 ( see HHCorp.)
HH Corp.
Neglected to post P10,000 credit to customer’s account.
II Company
Customers wants to know the reason for receipt of P40,000 credit memo as its accounts payable is
P100,000.
Based on the foregoing information, what should be the adjusted balance of the Accounts Receivable-
trade at December 31, 2010?
Solution 2-1
Accounts Receivable per general ledger P 505,000
AA Co. – delayed issuance of credit memo ( 23,000)
CC Corp. – Damaged merchandise credited to II Company ( 40,000)
DD, Inc. -Double billing ( 10,000)
FF Inc. - Collection not recorded (31,000)
GG Co. –Erroneous posting of credit for HH Corp. 10,000
HH Corp. – Payment credited in error to GG Co. ( 10,000)
II Company- credit for CC corp. erroneously posted to II Co . 40,000
Adjusted balance of accounts receivable- trade P441,000
Problem 2-2
DAFFODIL AUTO PARTS sells new parts to auto dealers. Company policy requires that a prenumbered
shipping document be issued for each sale. At the time of pick-up or shipment, the shipping clerk writes
the date on the shipping document. The last shipment made in the year ended December 31, 2010, was
recorded on document 3167. Shipments are billed in the order that the billing clerk receives the
shipping documents.
For late December 31, 2010 and early January 2011, Shipping Documents are billed on sales invoices as
follows:
Shipping Sales
Document No. Invoice No.
3163 5332
3164 5326
3165 5327
3166 5330
3167 5331
3168 5328
3169 5329
3170 5333
3171 5335
3172 5334
The December 2010 and January 2011 sales journal have the following information included:
SALES JOURNAL-DECEMBER 2010
Day of Sales Amount

Month Invoice No. of Sale
30 5326 P 72,611
30 5329 191,430
31 5327 41,983
31 5328 62,022
31 5330 4,774
SALES JOURNAL- 2011
Day of Sales Amount

Month Invoice No. of Sale
1 5332 P 264,131
1 5331 10,639
1 5333 85, 206
2 5335 125,050
2 5334 64,658
1. What is the net overstatement (understatement) of Daffodil’s sale for the year ended December
31, 2010?
A. P21,318
B. P253,452
C. (P253,452)
D. (P 21,318 )
2. What adjusting entry is necessary to correct Daffodil’s financial statements for the year ended
December 31, 2010?
A. Accounts Receivable 21,318

Sales 21,318
B. Accounts Receivable 253,452
Sales 253,452
C. Sales 21,318
Accounts Receivable 21,318
D. Sales 253,452
3. Cutoff test designed to detect credit sales made before the end of the year that have been
recorded in the subsequent year provide assurance about management’s assertion of
A. Rights and Obligation

B. Completeness
C. Existence
D. Valuation and Allocation
4. Tracing shipping documents to prenumbered sales invoices provides evidence that
A. No duplicate shipments or billings occurred

B. Shipments to customers were properly invoiced
C. All goods ordered by customers were shipped.
D. All prenumbered sales invoices were accounted for
5. An author most likely would review an entity’s periodic accounting for the numerical sequence of
shipping documents and invoices to support management’s financial statement assertion of
A. Existence
B. Rights and Obligations
C. Valuation and allocation
D. Completeness
Solution 2-2
1.
December Shipping Misstatemen Overstatement or

2010 Sales t
Documen
t In Sales Understatement of
Invoice No. No. Cutoff December 31 Sales
5326 3164
5329 3169 P191,430 Overstatement
5327 3165
5328 3168 62,022 overstatement
5330 3166
253,452
January
2011 Sales
5332 3163 264,131 Understatement
5331 3167 10,639 Understatement
5333 3170
5335 3171
5334 3172
21,318
Answer: D
2. Accounts receivable 21,318
Sales 21,318
Answer: A
3. Completeness
Answer: B
4. Shipments to customers were properly invoiced.
Answer: B
5. Completeness
Answer: D
Problem 2-3
Recording Sales, Sales Returns and Collections
HOOLAND TULIPS, INC. sold goods costing P12, 000 on account for P18, 000 on March 21. It collected
P12, 000 off this account on April 3. Also on this date, the customer reported that the goods did not
meet the required specifications and returned goods costing P4, 000(with a sales price of P16, 000).
Holland Tulips, Inc. uses a perpetual inventory system.
Prepare the journal entries necessary on March 21 and April 3.
Solution 2-3
JOURNAL ENTRIES
March 21 Accounts Receivable 18,000
Sales 18,000
21 Cost of goods sold 12,000
Inventory 12,000
April 3 Cash 12,000
3 Sales returns and allowance 6,000
3 Inventory 4,000
Cost of goods sold 4,000
Problem 2-4
Computation of Accounts Receivable Balance
The following information is from GUMAMELA CORP.’ first year of operation:
1. Merchandise purchased P450,000

2. Ending merchandise inventory 123,000
3. Collections from customers 150,000
4. All sales are on account and goods sell at
30% above cost.
What is the accounts receivable balance at the end of the company’s first year of operations?
A. P275,100 C. P595,000
B. P78,900 D. P435,000
Solution 2-4
Purchases P450, 000

Less: Merchandise inventory, ending (123,000)
Multiply by sales ratio X 130%
Sales 425,100
Less : Collections from customers (150,000)
Accounts receivable, ending P275,100
Answer: A
Problem 2-5
Computation of Accounts Receivable Balance
BANABA CO. reported the following information at the end of its first year operations, December 31,
2010:
Bad debt expense for 2010 P271,000

Uncollectible accounts written off during 2010 35,400
Net realizable value of accounts receivable 895,000
What is the accounts receivable balance at December 31, 2010?
A. P 1,166,000
B. P930,400
C. P1,201,400
D. P1,130,600
SOLUTION 2-5
Bad debt expense for 2010 P271, 000
Less: Accounts Written Off during 2010 (35,400)
Allowance for bad debts, December 31, 2010 235,600
Add: Net Realizable value of the accounts
Receivables, Dec. 31, 2010 895,000
Accounts Receivable, Dec. 31, 2010 P1,130,600
Answer : D
Problem 2-6
Computation of Accounts Receivable and Allowance for bad debts
SUNFLOWER COMPANY sells a variety of imports goods. By selling on credit, Sunflower cannot expect to
collect 100% of its accounts receivable. At December 31, 2009, Sunflower reported the following on its
statement of financial position:
Accounts Receivable P 2197,500

LESS: Allowance for bad debts (133,500)
Accounts receivable, net P 2,064,000
During the year ended December 31, 2010, Sunflower earned sales revenue of P537,702,500 and
collected cash of 528,070,500 from customers. Assume bad debts expense for the year was 1% of sales
revenue and that sunflower wrote off uncollectible accounts receivable totaling P5,439,500.
1. What is the accounts receivable balance at December 31, 2010?

A. P 6390,000 C. P 11,829,500
B. P 2197,500 D. P 6,318,975
2. What is the December 31, 2010, balance of the Allowance for bad debts account?
A. P 133,500 B. P 71,025
C. P 61,975 D. P71,525
Solution 2-6
1. Accounts Receivable, Jan. 1, 2010 P 2,197,500

Sales 537,702,500
Collections 528,070,500
Accounts written off (5,439,500)
Accounts receivables, Dec. 31, 2010 6,390,000
Answer: A
Allowance for bad debts, Jan.1 2010 P 133,500
Bad debt expense (537,702,500 x 1 %) 5,377,025
Accounts written off 5,439,500
Allowance for bad debts, December 31, 2010 P 71,025
Answer: B
Problem 2-7
Determining the allowances for bad debts
The following information pertains to ACACIA, INC. for the year ended December 31, 2010:
Credit sales during 2010 P4, 450,000

Collection of accounts written off in prior periods 170,000
Worthless accounts written off in 2010 191,000
Allowance for doubtful accounts, Jan. 1, 2010 155,000
Acacia, Inc provides for doubtful accounts based on 1 ½ % of credit sales.

What is the balance of the allowance for doubtful accounts at December 31, 2010?
A. P345,750 C. P200,750
B. P66,750 D. P242,750
Solution 2-7
Allowance for Doubtful Accounts

Accounts written off P 155,000 Balance, Jan 1, 2010
In 2010 P191,000 66,750 Bad debt expense
For 2010
(4,450,000 x 1 ½ %)
170,000 Recovery of accounts
Written off
P 200,750 Balance, 12/31/2010
Answer: C
Problem 2-8
Computing the net realizable value of accounts receivable
MAHOGANY COMPAY’S analysis and aging of its account receivable at December 31, 2010 disclosed the
following:
Accounts receivable P 460,000

Accounts estimated to be uncollectible (per aging) 95,000
Allowance for bad debts (per books) 103,000
What is the net realizable value of mahogany’s receivable at December 31, 2010?
A. P357,000 C. P460,000
B. P262,000 D. P365,000
Solution 2-8
Accounts receivable P 460,000

Less: accounts estimated to be uncollectible 95,000
Net realizable value 365,000
Answer: D
Problem 2-9
Computation of Net Sales
The allowance for doubtful accounts has a credit balance of P150,000 at December 31,2009. During
2010, uncollectible accounts of P35,000 had been written off. The company estimates its bad debt
expense to be2% of net sales. The balance of the allowance account at the end of 2010 was P437,000.
The company’s Net Sales for 2010 amounted to

A. P 12,600,000 C. P21,850,000
B. P16,000,000 D. P14,350,000
Solution 2-9
Allowance for bad debts, Jan. 1, 2010 P150,000
Uncollectible Accounts written off (35,000)
Bad debts expense( SQUEEZE) 322,000
Allowance for bad debts, December 31, 2010 P437,000
Bad Debt expense= 2 % of net Sales

Net sales(P322,000\2%) P16,100,000
Answer: B
Problem 2-10
Computation Accounts Receivable Balance
The following amounts are shown on the 2010 and 2009 financial statements of SAN FRANCISCO CO.:
2010 2009
Accounts Receivable ? P 470,000
Allowance for Bad debts 20,000 10,000
Net Sales 2,600,000 2,400,000
Cost of goods sold 1,900,000 1,752,000
San Francisco Co.’s accounts receivable turnover for 2010 is 6.5 times.
What is the accounts receivable balance at December 31, 2010?

A. P820,000 C. P360,000
B. P340,000 D. P470,000
Solution 2-10
(X=Net receivable, December 31, 2010)
A\R turnover =net sales \ Ave. net receivables

6.5 =P2,600,000\P460,000+ X
2
P2,990,000+6.5X= P2,600,000
2
P2,990,000+6.5X=P 5,200,000
6.5X=P 2,210,000
X = P 340,000
Net receivables, December 31, 2010 P340,000
Add: Allowance for bad debts Dec. 31, 2010 20,000
Accounts receivable, Dec. 31, 2010 P360,000
Answer: C
Problem 2-11
Computation of accounts receivable written off
The policy of ILANG-ILANG, INC. is to debit bad debt expense for 3% of all new sales. The following are
the company’s sales and allowance for bad debts for the past four years.
Year Sales Allowance for Bad Debts

Year-end Balance
2007 P3,000,000 P45,000
2008 2,950,000 56,000
2009 3,120,000 60,000
2010 2,420,000 75,000
The accounts written off in 2008, 2009, and 2010 amounted to
2008 2009 2010

A. P99,500 P97,600 P 87,600
B. 77,500 89,600 57,600
C. 11,000 4,000 15,000
D. 12,500 22,400 62,400
Solution 2-11
2008 2009 2010

Allowance balance, beginning P45,000 P56,000 P60,000
Add: Estimated uncollectible* 88,500 93,600 72,600
Total allowance before write-off 133,500 149,600 132,600
Less: Allowances balance, ending (56,000) (60,000) (75,000)
Accounts written off 77,500 89,600 57,600
*3% of sales
Answer: B
Problem 2-12
ROSES, INC. offers sales discount to customers who will pay their accounts in full within 10 days from
date of sale. On October 1, it sold goods on account for P420, 000. Payment of P411, 600 in satisfaction
of this account was received on October 9.
What is the sales discount rate?
A. 2%
B. 0%
C. 2.04%
D. 0.04%
Solution 2-12
Gross Receivables P 420,000

Less: Amount Received 411,600
Sales Discount P 8,400
Divide by gross receivable P420,000
Sales Discount Rate 2%
Answer: A
Problem 2-13
Accounts Receivable Aging Schedule
CALACHUCHI CORP.’S accounts receivable subsidiary ledger shows the following information:
ACCOUNT INVOICE
BALANCE
CUSTOMER DEC. 31, 2010 DATE AMOUNT
Aruy, Inc. P 35,180 12/06/10 P14,000
11/29/10 21,180
Naku Co. 20,920 09/27/10 12,000
08/20/10 8,920
Syak Corp. 30,600 12/08/10 20,000
10/25/10 10,600
Trip Co. 45,140 11/17/10 23,140
10/09/10 22,000
Uy Co. 31,600 12/12/10 19,200
12/02/10 12,400
Xak Corp. 17,400 09/12/10 17,400
The estimated bad debt rates below are based on Calachuchi Corp.’s receivable collection
experience.
Age of Accounts Rate

0-30 days 1%
31-60 days 1.5%
61-90days 3%
91- 120 days 10%
Over 120 days 50%
The allowance for bad of debts account had a debit balance of P5, 500 on December 31, 2010, before
adjustment.
1. The company’s accounts receivable under “61-90 days” category should be
A. P32,600 C. P44,600
B. P44,230 D. P42,000
2. The company’s accounts receivable under “ 91-120 days” category should be

A. P38,320 C. P29,400
B. P 40,000 D. P12,000
3. The allowance for bad debts to be reported on the state of financial position at December 31,
2010 is
A. P 9,699 C. 4,199
B. P15,199 D. 5,500
4. What entry should be made on December 31, 2010 to adjust the allowance for bad debts
account?
A. Bad debt expense 15,199
Allowance for bad debts 15,199
B. Bad debt expense 4,199
C. Allowance for Bad debts 5,500
Bad Debt Expense 5,500
D. Bad Debt Expense 9,699
Allowance for Bad Debts 9,699
5. What is the net realizable value of accounts at December 31, 2010?

A. P165, 641
B. P171, 141
C. P196,039
D. P186, 340
Solution 2-13
Calachuchi Corp
ACCOUTS RECEIVABLE AGING SCHEDULE
December 31,2010
Balance 0-30 31-60 61-90 91-120 Over 120
Customer 12-31-10 Days Days Days Days Days
Aruy, Inc. P 35, 180 P14,000 P21,180
Naku Co. 20,920 12,000 8,920
Syak Corp. 30,600 20,000 10,600
Trip Co. 45,140 23,140 22,000
Uy Co. 31,600 31,600
Xak Corp. 17,400
180,140 P65,600 P44,320 P32,600 P29,400 P8,920
1. Answer: A 2. Answer : C
3. COMPUTATION OF REQUIRED ALLOWANCE
DECEMBER 31, 2010
0-30 Days P65,600 X 1% = P 656

31-60 Days 44,320 X 1.50% = 665
61-90 Days 32,600 X 3% = 978
91-120 Days 29,400 X 10% = 2,940
Over 120 Days 8,920 X 50% = 4,460
9,699
Answer: A
4. Bad debt expense 15,199
Allowance for Bad debts 15,199
Required allowance (see no. 2) P9,699

Add: Allowance balance-debit 5,500
Increase in allowance P15,199
Answer: A
5.
Accounts receivable P180, 840

Less: Allowance for bad debts (see no. 2) ( 9,699)
Net realizable value, Dec. 31, 2010 P171,141
Answer: B
Problem 2-14
Adjusting Entry for Estimated Bad Debts
ORCHID COMPANYS accounts receivable at December 31, 2010 had a balance of P 1,200,000. The
allowance for bad debts account had a credit balance of P40, 000. Net sales in 2010 were P
6,704,000(net of sales discount of P56, 000). An aging schedule shows that P150, 000 of the outstanding
accounts receivable are doubtful.
What is the adjusting entry for estimated bad debt expense?

C. Bad debt expense 190,000
D. Allowance for bad debts 110,000
Bad debt expense 110,000
Solution 2-15
Required allowance P150,000

Less: Allowance balance 40,000
Increase in Allowance P110,000
Answer: B
Problem 2-15
Estimating Bad Debt Expense by Aging Accounts Receivable
YELLOW BELL’S, INC. estimates its bad debt losses by aging its accounts receivable. The aging schedule of
accounts receivable at December 31, 2010, is presented below:
Age of Accounts Amount

0-30 days P 843,200
31-60 days 461,000
61-90 days 192,400
91-120 days 76,650
over 120 days 39,400
P 1,612,650
Yellow Bells Inc.’s uncollectible accounts experiences for the past years are summarized in the following
schedule:
over
A/R Balance 0-30 31-60 61-90 91-120 120
Year Dec. 31 Days Days Days Days Days
2009 1,312,500 0.3% 1.8% 12% 38% 65%
2008 999,999 0.5% 1.6% 11% 41% 70%
2007 465,000 0.2% 1.5% 9% 50% 69%
2006 816,000 0.4% 1.7% 10.2% 47% 81%
2005 1,243,667 0.9% 2.0% 9.7% 33% 95%
The balance of the allowance for bad debts account at December 31, 2010, (before adjustment) is P84,
500.
1. What is the average bad debt expense rate rate for “91-120” days accounts?
A. 76% C. 10.38%
B. 8.6 % D. 41.80 %
2. What is the average bad debt expense rate for “ 31-60 days
A. 10.38 % C. .46%
B. 41,80% D. 1.72%
3. The net realizable value of the Company’s account receivable on December 31, 2010, should be
A. P1,518,887 C. P1,528,150
B. P1,612, 650 D. P1, 603, 358
4. What entry should be made to adjust the allowance for bad debts on Dec. 31, 2010?
5. In evaluating the adequacy of the allowance for bad debts, an auditor most likely reviews the
entity’s aging of receivables to support management’s financial statement of
A. Existence
B. Valuation and Allocation
C. Completeness
D. Rights and obligation
Solution 2-15
1. COMPUTATION OF AVERAGE BAD DEBT EXPENSE

RATE
0-30 31-60 61-90 91-120 Over 120
Year Days Days Days Days Days
2009 0.3% 1.8% 12% 38% 65%
2008 0.5 1.6 11 41 70
2007 0.2 1.5 9 50 69
2006 0.4 1.7 10.2 47 81
2005 0.9 0.9 9.7 33 95
Total 2.3% 8.6% 51.9% 209% 380%
0.46 10.38
Average % 1.7% % 41.38% 76%
1.ANSWER : D 2. Answer: D
3.
COMPUTATION OF REQUIRED ALLOWANCE BALANCE

AR Balance
Age of Accounts 12/31/10 Rate Estimated Uncollectible
0-30 days P 843, 200 0.46% P 3,878.72
31-60 days 461,000 1.72 7,929.20
61-90 days 192,400 10.38 19,971.12
91-120 days 76,650 41.8 32,039.70
over 120 days 39,400 76 29,944.00
P1612, 650 P93,762.74
Accounts receivable P1,612, 650

Less: Required allowance balance per aging ( 93,763)
Net Realizable value, December, 2010 P1,518,887
Answer: A
Required allowance per aging P 93,763

Less: Allowance balance before adjustment (84,500)
Increase in allowance 9,263
Answer: C
5.Assertions about valuation and allocation concern whether assets, liabilities and equity interest are
included in the financial statements at appropriate amounts and any resulting valuation or allocation
adjustment are properly recorded, Management for example, asserts that account receivable are stated
at net realizable value, e.i, the amount that is expected to be received from its customers(gross
receivable minus allowance for bad debts ) Aging the receivable is a procedure for assessing the
reasonableness of the allowance for bad debts.
Answer: B
PROBLEM 2-16: Estimating Bad Debts Using the Percentage of Sales Method
The following selected transactions occurred during the year ended December 31, 2010:
Gross sales (cash and credit) P750,000

Collections from credit customers, net of 2% cash discount 245,000
Cash sales 150,000
Uncollectible accounts written off 16,000
Credit memos issued to credit customers for sales returns and allowances 8,400
Cash refunds given to cash customers for sales returns and allowances 12,640
Recoveries on accounts receivable written off in prior years (not included
in cash received stated above) 5,421
At year-end, the company provides for estimated bad debt losses by crediting the Allowance for
Bad Debts account for 2% of its net credit sales for the year.
1. What is the company’s net credit sales in 2010?

A. P600,000 C. P591,600
B. P586,600 D. P595,000
2. The bad debts expense for 2010 is

A. P11,832 C. P11,732
B. P11,900 D. P12,000
Solution 2-16
1. Gross credit sales (P750,000 – P150,000) P600,000

Less: Sales discount
(P245,000 ÷ 98% = P250,000 x 2%) P5,000
Sales returns and allowances 8,400 13,400
Net credit sales P586,600
Answer: B
2. Bad debt expense (P586,600 x 2%) P11,732
Answer: C
PROBLEM 2-17: Estimating Bad Debts Expense
COCONUT CO. estimates its bad debts expense to be 3% of net sales. The company’s
unadjusted trial balance at December 31, 2010, includes the following accounts:
Debit Credit
Allowance for bad debts P8,000
Sales 2,600,000
Sales return and allowances P45,000
What is the company’s bad debt expense for 2010?

A. P76,650 C. P68,650
B. P78,000 D. P70,000
Solution 2-17
Net sales (P2,600,000 – P45,000) P2,555,000

Multiply by bad debt rate x 3%
Bad debt expense P 76,650
Answer: A
PROBLEM 2-18: Estimating Bad Debts Expense
BANAWE, INC. estimates its uncollectible accounts to be 3% of the accounts receivable

balance. The following information was taken from the company’s statement of financial
position at December 31, 2010:
Debit Credit
Net sales (including cash sales of P825,000) P3,460,000
Allowance for bad debts P 69,000
Accounts receivable 2,460,000
What is the bad debt expense to be reported for 2010?

A. P79,050 C. P73,800
B. P69,000 D. P142,800
Solution 2-18
Required allowance, Dec. 31, 2010 (P2,460,000 x 3%) P 3,800

Add: Allowance balance before adjustment-debit 69,000
Bad debts expense for 2010 P142,800
Answer:D
PROBLEM 2-19: Accounts Receivable Factoring
On December 5, 2010, BANDERA ESPAÑOLA, INC. sold its accounts receivable (net
realizable value, P260,000) for cash of P230,000. Ten percent of the proceeds was withheld by
the factor to allow for possible customer returns and other account adjustments. The related
allowance for bad debts is P40,000.
1. The loss on factoring of accounts receivable is

A. P10,000 C. P20,000
B. P30,000 D. P0
2. What is the entry to record the factoring of accounts receivable?

A. Cash 230,000
Loss on factoring 30,000
Accounts receivable 300,000
B. Cash 207,000
Receivable from factor 23,000
C. Cash 230,000
D. Cash 207,000
Solution 2-19
1. Net realizable value of accounts receivable P260,000

Less: Cash proceeds 230,000
Loss on factoring P 30,000
Answer: B
2. Cash (P230,000 x 90%) 207,000

Receivable from factor (P230,000 x 10%) 23,000
Answer: D
PROBLEM 2-20: Assignment of Accounts Receivable
On April 1, 2010, SAMPAGUITA CORPORATION assigned accounts receivable totalling

P400,000 as collateral on a P300,000, 16% note from Iwahig 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 totalled P191,100, net of a 2% discount.
2. On May 1, Sampaguita 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 Sampaguita Corporation during May except for
P2,000 accounts written off as worthless.
4. On June 1, Sampaguita Corporation paid the bank the remaining balance of the note plus
accrued interest.
Prepare the journal entries to record the above transactions on the books of Sampaguita
Corporation.
Solution 2-20
April 1 Accounts receivable - assigned 400,000

1 Cash 294,000
Finance charge (P300,000 x 2%) 6,000
Notes payable 300,000
(1) Cash 191,100

Sales discounts 3,900
Accounts receivable - assigned (P191,100 ÷ 98% ) 195,000
(2) Notes Payable 195,000

Interest Expense (P300,000 x 16% x 1/12) 4,000
Cash 199,000
(3) Cash 203,000

Accounts receivable - assigned (P400,000 - P195,000 ) 205,000
(4) Notes Payable (P300,000 - P195,000) 105,000

Interest Expense (P105,000 x 16% x 1/12) 1,400
Cash 106,400
PROBLEM 2-21: Estimating Bad Debts
LAGUNDI COMPANY applies the allowance method to value its accounts receivable. The
company estimates its bad debts based on past experiences, which indicates that 1.5% of net
credit sales will be uncollectible. Its total sales for the year ended December 31, 2010, amounted
to P4,000,000 including cash sales of P400,000. After a thorough evaluation of the accounts
receivable from Nolog company amounting to P20,000, Lagundi has decided to write off this
account before year-ended adjustments are made.
Shown below are Lagundi’s account balances at December 31, 2010, before any adjustments and
the P20,000 write off,
Sales P4,000,000
Sales discounts 250,000
Sales return and allowances 350,000
Bad debt expense 0
Lagundi has decided to value its accounts receivable using the statement of financial position
approach as suggested by its external auditors. Presented below is the aging of the accounts
receivable subsidiary ledger accounts at December 31, 2010.
Less than 61-90 91-120 Over

Account Balance 60 days days days 120 days
Antiporda P 100,000 P100,000
Balbakwa 256,000 180,000 P76,000
Curdapia 654,000 500,000 154,000
Dagul 50,000 50,000
Empoy 420,000 P420,000
Total P1,480,000 P780,000 P230,000 P420,000 P50,000
% collectible 99% 95% 85% 60%
1. The entry to write off Lagundi’s accounts receivable from Nolog of P20,000 will
A. Decrease total assets and net income for 2010
B. Increase total assets and decrease net income for 2010
C. Have no effect on total assets and net income for 2010
D. Have no effect on total assets and increase net income for 2010
2. Lagundi’s estimated bad debt expense for 2010 based on net credit sales is
A. P60,000 C. P45,000
B. P12,000 D. P56,250
3. The final entry to adjust the allowance for bad debts account is
4. What is the net realizable value of Lagundi’s account receivable on December 31, 2010?
A. P1,435,700 C. P1,397,700
B. P1,435,000 D. P1,377,700
5. Which of the following most likely would give the most assurance concerning the valuation
and allocation assertions of accounts receivable?
A. Vouching amounts in the subsidiary ledger to details on shipping documents.
B. Comparing receivable turnover ratios with industry statistics for reasonableness.
C. Inquiring about receivables pledged under loan agreements.
D. Assessing the allowance for uncollectible amounts for reasonableness.
Solution 2-21
1. No effect on total assets and net income for 2010. The entry to record the write off is:

Answer: C
2. Credit sales (P4,000,000 - P400,000) P3,600,000

Less: Sales discounts P250,000
Sales return and allowances 350,000 600,000
Net Sales 3,000,000
Multiply by bad debt rate x 1.5%
Bad debt expense P 45,000
Answer: C

Sales return and allowances 44,300
A/R
Age Balance Rate Amount
Less than 60 days P780,000 1% P 7,800
61 - 90 days 230,000 5% 11,500
91 - 120 days 420,000 15% 63,000
Over 120 days 50,000 40% 20,000
Required allowance 102,300
Allowance balance (P33,000 + P45,000 – P20,000) 58,000
Adjustment – increase in allowance P 44,300
Answer: A
4. Accounts receivable P1,480,000

Less: Allowance for bad debts (see no. 3) 102,300
Net realizable value, Dec. 31, 2010 P1,377,700
Answer: C
5. Assessing the allowance for uncollectible accounts for reasonableness.
Answer: C
PROBLEM 2-22: Estimating Bad Debts
From inception of operations to December 31, 2010, MAKAHIYA CORP. provided for
uncollectible accounts receivable under the allowance method: provisions were made monthly at
2% of credit sales; bad debts written off were charged to the Allowance account; recoveries of
bad debts previously written off were credited to the Allowance account; and no year-end
adjustments to the Allowance account were made. Makahiya’s usual credit terms are net 30 days.
The balance in the Allowance for Bad Debts account was P143,000 at January 1, 2010. During
2010, credit sales totalled P15,000,000, interim provisions for doubtful accounts were made at
2% of credit sales, P140,000 of bad debts were written off, and recoveries of accounts previously
written off amounted to P43,000. Makahiya installed a computer facility in November 2010 and
an aging of accounts receivable was prepared for the first time as of December 31, 2010. A
summary of the aging is as follows:
Classification by Balance in Estimated %

Month of Sale Each Category Uncollectible
November – December 2010 P2,160,000 2%
July – October 2010 1,300,000 10%
January to June 840,000 25%
Prior to January 1, 2010 300,000 70%
P4,600,000
Based on the review of collectibility of the account balances in the “prior to January 1, 2010”
aging category, additional receivables totalling P120,000 were written off as of December 31,
2010. The 70% uncollectible estimate applies to the remaining P180,000 in the category.
Effective with the year ended December 31, 2010, Makahiya adopted a new accounting method
for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging
analysis of accounts receivable.
1. What is the balance of the allowance for Bad Debts accounts before the change in accounting
estimate?
A. P300,000 C. P226,000
B. P143,000 D. P346,000
2. What is the journal entry for the year-end adjustment to the Allowance for Bad Debt account
balance as of December 31, 2010?
A. Bad Debts Expense 283,200
B. Bad Debts Expense 163,200
C. Allowance for Bad Debts 143,000
Bad Debts Expense 143,000
D. Bad Debts Expense 509,200
3. For the year ended December 31, 2010, Makahiya’s bad debt expense would be
A. P626,200 C. P300,000
B. P283,200 D. P583,200
4. The net realizable value of Makahiya’s accounts receivable at December 31, 2010 should be
A. P4,374,000 C. P3,970,800
B. P3,896,800 D. P4,090,800
5. An auditor’s purpose in reviewing credit ratings of customers with delinquent accounts

receivable most likely is to obtain evidence concerning management’s ascertain about
A. Completeness
B. Existence
C. Rights and obligations
D. Valuation and allocation
Solution 2-22
1. Allowance for bad debts, Jan. 1 P143,000

Add: Bad debt expense for 2010 (P15,000,000 x 2%) P300,000
Recoveries of accounts previously written off 43,000 343,000
Total 486,000
Less: Accounts written off (P140,000 + P120,000) 260,000
Allowance for bad debts, Dec. 31 P226,000
Answer: C
2. Bad debts expense 283,200

Classification Balance Rate Amount

November – December 2010 P2,160,000 2% P 43,200
July – October 2010 1,300,000 10% 130,000
January – June 2010 840,000 25% 210,000
Prior to January 1, 2010
(P300,000 – P120,000 write off) 180,000 70% 126,000
Required Allowance balance, Dec. 31, 2010 P509,200
Less: Allowance balance before adjustment (see no. 1) 226,000
Increase in allowance P283,200
Answer:A
3. Bad debt expense recorded P300,000
Additional bad debt expense to arrive at the required allowance based on aging 283,200
Correct bad debt expense for 2010 P343,000
Answer: D
4. Accounts receivable (P4,600,000 – P120,000) P4,480,000

Less: Required allowance per aging 509,200
Net realizable value, Dec. 31, 2010 P3,970,800
Answer: C
5. Valuation and allocation
Answer: D
PROBLEM 2-23: Various Adjustments to Correct Accounts Receivable and Related Accounts
You are examining the financial statements of SALUYOT COMPANY for the year ended
December 31, 2010. Your audit of the accounts receivable and other related accounts disclosed
the following information:
1. The December 31, 2010 balance in the Accounts Receivable control account is P788,000.
2. The only entries in the Bad Debts Expense account were:
a. A credit of P1,296 on December 1, 2010, because customer A remitted in full for the
account charged off October 31, 2010.
b. A debit on December 31 for the amount of the credit to Allowance for Bad Debts.
3. The Allowance for Bad Debts account is presented below:
Date Particulars Debit Credit Balance

Jan. 1 Balance P15,250
Oct. 31 Uncollectible:
Customer A P1,296
B 3,280
C 2,256 P6,032 9,218
Dec. 31 3% of P788,000 P23,640 32,858
4. An aging schedule of the accounts receivable as of December 31, 2010, and the decisions are
shown in the table below:
AGE Net Debit Amount to which the allowance is to be adjusted after

Balance adjustments and corrections have been made
0-1 month P372 1%
1-3 months ,960 2%
3-6 months 307, 3%
Over 6 months 280 Definitely uncollectible, P4,000; P8,000 is considered to be
88,7 50% uncollectible; the remainder is estimated to be 80%
20 collectible
24,0
00
.
P792
,960
5. There is a credit balance in one account receivable (0-1 month) of P8,000; it represents an
advance on a sales contract; also there is a credit balance in one of the 1-3 months accounts
receivable of P2,000 for which merchandise will be accepted by the customer.
6. The Accounts Receivable control account is not in agreement with the subsidiary ledger. The
differences cannot be located, and the company’s accountant decides to adjust the control to
the sum of the subsidiaries after corrections are made.
1. The adjustment to correct the entry made on December 31, 2010, is

C. Accounts receivable 1,296
D. No adjusting entry is necessary.
2. The required allowance balance (per aging) on December 31, 2010, is

A. P29,354 C. P19,858
B. P19,058 D. P32,858
3. The net realizable value of Saluyot’s accounts receivable on (per aging) on December 31,
2010, is
A. P779,902 C. P793,200
B. P774,142 D. P788,664
4. Saluyot should report bad debt expense for 2010 of

A. P13,344 C. P10,296
B. P22,344 D. P33,936
5. What entry is necessary to adjust the allowance account at December 31, 2010?
C. Allowance for Bad Debts 10,296
D. Allowance for Bad Debts 13,800
Solution 2-23
1. ADJUSTING ENTRY
Bad debts expense 1,296

ENTRY MADE
Cash 1,296
CORRECT ENTRIES

#
Cash 1,296
Answer: B
2. Net Debit Adjusted Required

Age Balance Adjustment Balance Rate Allowance
0-1 month P372,960 P8,000 P380,960 1% P3,810
1-3 months 307,280 2,000 309,280 2% 6,186
3-6 months 88,720 - 88,720 3% 2,662
Over 6 months 24,000 (4,000) 8,000 50% 4,000
12,000 20% 2,400
Total P792,960 P6,000 P798,960 P19,058
Answer: B
3. Control Subsidiary
Account Ledgers
Unadjusted balances P788,000 P792,960
Understatement of accounts written off
on October 31 (P6,832 – P6,032) (800)
Write off of uncollectible accounts in the
“over 6 months” category (4,000) (4,000)
Customers’ credit balances (P8,000 + P2,000) 10,000 10,000
Corrected balance 793,200 798,960
Unlocated difference (P798,960 – P793,200) 5,760 -
Adjusted balances P798,960 P798,960
Accounts receivable, Dec. 31, 2010 P798,960

Less: Required allowance per aging 19,058
Net realizable value, Dec. 31, 2010 P779,902
Answer:A
4. Bad debt expense recorded P23,640

Adjustment to arrive at the required allowance (10,296)
Correct bad debt expense for 2010 P13,344
Answer: A
5. Allowance for bad debt P10,296

Bad debt expense P10,296
Required allowance balance (see no. 2) P19,058

Allowance balance, December 31:
Per books P32,858
Recovery of account written off 1,296
Understatement of write off on Oct 1 (P6,832 – P6,032) (800)
Unrecorded write off (4,000) 29,354
Adjustment – decrease in allowance P10,296
Answer:C
PROBLEM 2-24: Analysis of Accounts Receivable and Related Accounts
The following information is based on a first audit of SABILA COMPANY. The client has not
prepared financial statements for 2008, 2009 nor 2010. During these years, no accounts have
been written off as uncollectible, and the rate of gross income on sales has remained constant for
each of the three years.
Prior to January 1, 2008, the client used the accrual method of accounting. From January 1, 2008
to December 31, 2010, only cash receipts and disbursements records were maintained. When
sales on account were made, they were entered in the subsidiary accounts receivable ledger. No
general ledger postings have been made since December 31, 2007.
As a result of your examination, the correct data shown in the table below are available:
12/31/07 12/31/10
Account receivable balances:
Less than one year old P15,400 P28,200
One to two years old 1,200 1,800
Two to three years old 800
Over three years old 2,200
Total accounts receivable P16,600 P33,000
Inventories P11,600 P18,800
Accounts payable for inventory purchased P5,000 P11,000
Cash received on accounts receivable in:
2008 2009 2010

Applied to:
Current year collections P148,800 P161,800 P208,800
Accounts of the prior year 13,400 15,000 16,800
Accounts of two years prior 600 400 2,000
Total P162,800 P177,200 P227,600
Cash sales P17,000 P26,000 P31,200
Cash disbursements for inventory purchased P125,000 P141,200 P173,800
1. The company’s sales revenue for the three-year period amounted to

A. P658,200 C. P625,400
B. P74,200 D. P415,300
2. What is the company’s total sales revenue for 2009?

A. P206,400 C. P268,200
B. P183,600 D. P180,400
3. The aggregate amount of purchases for the three-year period is

A. P131,000 C. P434,000
B. P440,000 D. P446,000
4. What is the company’s gross income ratio in each of the three-year period?
A. 33.33% C. 35.16%
B. 28.35% D. 31.15%
5. What is the company’s gross income for each of the three-year period?
2008 2009 2010

A. P60,933 P68,200 P80,000
B. 55,533 60,133 79,000
C. 122,400 137,600 178,800
D. 61,200 68,800 89,400
Solution 2-24
1. Accounts receivable, Dec. 31, 2010 P 33,000

Add: Collections, 2008 – 2010 567,600
Total 600,600
Less: Accounts receivable, Jan. 1, 2008 16,600
Total credit sales 584,000
Add: Cash sales, 2008 – 2010 74,200
Total sales, 2008 – 2010 P658,200
Answer:A
2. Sales revenue for 2009 (see no. 5) P206,400
Answer: A
3. Accounts payable, Dec. 31, 2010 P 11,000

Add: payments to suppliers 440,000
Total 451,000
Less: Accounts payable, Jan. 1, 2010 5,000
Total purchases, 2008 – 2010 P446,000
Answer:D
4. Sales (see no. 1) P658,200

Less: Cost of sales
Inventory, Jan. 1, 2008 P 11,600
Add: Purchases (see no. 3) 446,000
Goods available for sale 457,600
Less: Inventory, Dec. 31, 2010 18,800 438,800
Gross Income P219,400
Gross income ratio (P219,400 ÷ P658,200) 33 1/3%
Answer:A
5. 2008 2009 2010 Total

Cash sales P 17,000 P26,000 P31,200 P74,200
Collections in:
2008 148,800 - - 148,800
2009 15,000 161,800 - 176,800
2010 2,000 16,800 208,800 227,600
A/R, Dec. 31 800 1,800 28,200 30,800
Total sales 183,600 206,400 268,200 658,200
Multiply by gross income ratio 33 1/3% 33 1/3% 33 1/3% 33 1/3%
Gross income P61,200 P68,800 P89,400 P219,400
Answer:D
PROBLEM 2-25 Analysis of Account Receivable and Allowance for Bad Debts
You are auditing the accounts receivable and the related allowance for bad debts account of
IKEBANA COMPANY.
The following data are available:
General Ledger
Accounts Receivable
2010
Dec. 31 424,000
Allowance for Bad Debts

2010 2010
July 31 GJ – Write off 8,000 Jan. 1 Balance 10,000
Dec. 31 GJ – Provision 24,000
Summary of Aging Schedule
The summary of the subsidiary ledger balances as of December 31, 2010 is shown below:
Debit balances:
Under one month P180,000
One to six months 184,000
Over six months 76,000
P440,000
Credit balances:
AA Co. P 4,000 - OK; additional billing in Jan. 2011
BB Co. 7,000 - Should have been credited to DD Co.*
CC Co. 9,000 - Advance on a sale contract
P20,000
* Account is in “one to six months” classification.
The customer’s 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.
Allowance for Bad Debts Requirements
It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six months
are expected to require an allowance of 2 percent. Accounts over six months are analysed as
follows:
Definitely bad P24,000

Doubtful (estimated to be 50% collectible) 12,000
Apparently good, but slow (estimated to be 90% collectible) 40,000
Total P76,000
1. The adjusted balance of Ikebana’s “1 to 6 months” accounts receivable is

A. P164,000 C. P177,000
B. P171,000 D. P184,000
2. The adjusted balance of Ikebana’s “over 6 months” accounts receivable is

A. P74,000 C. P69,000
B. P52,000 D. P45,000
3. The adjusted accounts receivable balance on December 31, 2010 should be

A. P404,000 C. P409,000
B. P420,000 D. P413,000
4. The required balance of the allowance for bad debts account on December 31, 2010 is
A. P47,340 C. P15,480
B. P15,340 D. P21,340
5. The entry to adjust the allowance for bad debts account is

A. Bad debts expense 13,340
B. Allowance for bad debts 2,000
C. Bad debts expense 17,340
D. Bad debts expense 15,340
Solution 2-25
A G I N G
Control Subsidiary Ledger Under 1 1 to 6 Over 6
Account CR DR Month Months Months
Unadjusted balances P424,000 P20,000 P440,000 P180,000 P184,000 P76,000
Accounts with credit balances 13,000 (20,000) (7,000) (7,000)
Write off (24,000) (24,000) (24,000)
Unlocated difference (4,000
P409,000 -- P409,000 P180,000 P177,000 P52,000
1. Answer: C 2. Answer: B 3. Answer: C
4. Adjusted Balance Rate Amount

Under 1 month P180,000 1% P 1,800
1 to 6 months 177,000 2% 3,540
Over 6 months:
Doubtful 12,000 50% 6,000
Good but slow 40,000 10% 4,000
Required allowance P15,340
Answer: B
5. Bad debts expense 13,340

Required allowance (see no. 4) P15,340

Allowance balance (P10,000 + P24,000 – P24,000 – P8,000) 2,000
Adjustment – increase in allowance P13,340
Answer: A
Problem 2-26
Estimating Bad Debts
PITO-PITO COMPANY produces herbal tea and other slimming products that are sold
throughout the Philippines. While the company is experiencing a steady growth in sales,
it has become noticeable that collections of accounts receivable from customers are no
longer as fast as they used to be.
Pito-Pito Company’s products are sold on payment terms of 2/10, n/30. In the past,
more than 75% of the credit customers have availed of the discount by paying within the
discount period. During the year ended December 31, 2010, there has been an increase
in the number of customers taking the full 30 days to pay. The company estimates that
less than 60% of the customers are taking advantage of the discount. Bad debt losses
as a percentage of gross credit sales have increased from the 1.5% provided in prior
years to about 4% in the current year.
The determination of accounts receivable collections has prompted the company’s
controller to prepare the following report.
ACCOUNTS RECEIVALBE COLLECTIONS
December 31, 2010
A. It is normal that some receivables will prove uncollectible. In fact, annual bad
debt write-offs has been 1.5% of total credit sales for many years. However, this
rate has increased to 4% during the current year.
B. The accounts receivable balance at December 31, 2010, is P3,000,000. The

condition of this balance in terms of age and probability of collection is presented
below.
Proportion of Total Age Categories Probability of Collection
64% 1 to 10 days 99%

18% 11 to 30 days 97.5%
8% Past due 31 to 60 days 95%
2% Past due to over 180 days 20%
C. The allowance for bad debts has a credit balance of P54,600 on January 1,
2010.
D. The P 640,000 bad debts expense provided during the year is based on the
assumption that 4% of total credit sales will be uncollectible.
E. Accounts written-off during the year totalled P 585,000.
1. What is the required allowance balance on December 31, 2010?
A. P 154,200 C. P 109,600
B. P 209,200 D. P 55,000
2. What year-end adjustment is necessary to bring Pito-Pito Company’s allowance for

doubtful accounts to the balance indicated by the aging analysis?
A. Bad debts expense 10,400
Allowance for doubtful accounts 10,400

B. Allowance for doubtful accounts 10,400
C. Bad debts expense 44,600
D. Bad debts expense 154,200
3. What is the net realizable value of Pito-Pito Company’s accounts receivable at

December 31, 2010?
A. P 2,955,400 C. P 2,736,200
B. P 2,845,800 D. P 1,675,800
4. Pito-Pito should report bad debts expense for 2010 of.
A. P 9,600 C. P 640,000
B. P 595,400 D. P 686,600
5. Pito-Pito’s total credit sales for 2010 is
A. P 16,000,000 C. P 25,600,000
B. P 42,666,667 D. P 14,625,000
SOLUTION 2-26
1. AGING SCHEDULE
Uncollectible
Category Aging Account Rate Amount
Ratio Receivable
Balances
1 to 10 days 64% P 1, 920,000 1% P 19,200
11 to 30 days 18% 540,000 2.5% 13,500
Past due 31 to 60 days 8% 240,000 5% 12,000
Past due 61 to 120 days 5% 150,000 20% 30,000
Past due 121 to 180 days 3% 90,000 35% 31,500
Past due over 180 days 2% 60,000 80% 48,000
Total P 3,000,000 P 154,200
Answer: A
2.

Allowance for bad debts, January 1, 2010 P 54,600

Add: 2010 bad debts expense 640,000
Total 694,600
Less: Accounts written off 585,000
Allowance balance before adjustment, December 31, 109,600
2010
Required allowance per aging 154,200
Adjustment – increase in allowance P 44,600
Answer: C
3.
Accounts receivable P 3,000,000

Less: Allowance for bad debts 154,200
Net realizable value, December 31, 2010 P 2, 845, 800
Answer: B
4.
Bad debts expense recorded P 640,000

Add: Adjustment to bring the allowance
balance to the amount indicated by the
aging analysis (see no.2) 44,6000
Correct bad debts expense for 2010 P 684,000
Answer: D
Alternative computation
Allowance for bad debts, January 1, 2010 P 54,600
Accounts written off (585,000)
Bad debts expense (SQUEEZE) 684,000
Allowance for bad debts, December 31, 2010 154,200
5. Total credit sales for 2010 (P 640,000/4%) P 16,000,000
Answer: A
Problem 2-27
Factoring of Accounts Receivable
ROSAL FINANCE CORP. purchase 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
Rosal’s books. Also, 10% of the receivables factored is withheld by Rosal as protection
against sales return and other adjustments. This amount is credited by Rosal to the
Client Retainer account. At the end of each month, payments are made by Rosal to its
client so that the balance in the Client Retainer account is equal to 10% of unpaid
factored receivables. Based on Rosal’s bad debts of 5% of all factored receivables is to
be established. Rosal makes adjusting entries at the end of each month.
On January 3, 2010, Poor, Inc. factored its account receivable totalling P 1,000,000. By
January 31, P 800,000 on these receivables had been collected by Rosal.
Prepare the entries on Rosal’s and Poor’s books to record the above information.
Solution 2-27
ROSAL’S BOOKS
2010
January 3 Accounts receivable factored 1,000,000
Commission Income
(P 1,000,000 x 15%) 150,000
Client Retainer 100,000
(P 1,000,000 x 10%)
Cash 750,000
31 Cash 800,000
Accounts receivable factored 800,000
31 Client Retainer 80,000

Cash 80,000
31 Bad debts expense 50,000

(P 1,000,000 x 5%)
POOR, INC.’s BOOKS
2010
January 3 Cash 750,000
Commission 150,000
31 Cash 80,000
Problem 2-28
Noninterest-bearing Note
On January 1, 2010, WALING-WALING CO. sells its equipment with a carrying value of
P 160,000. The company receives a non-interest bearing note due in 3 years with a
face amount of P 200,000. There is no established market value for the equipment. The
prevailing interest rate for a note of this type is 21%. The following are the present value
factors of 1 at 12%
Present value of 1 for 3 periods .071178
Present value of an ordinary annuity of 1 at 3 periods 2.40183
1. What is the gain or loss to be recognized on the sale of the equipment?
A. P 17,644 loss C. P 17,644 gain

B. P 122 gain D. P 40,000 gain
2. The discount on note receivable on January 1, 2010, is
A. P 57,644 C. P 40,000
B. P 0 D. P 17,644
3. The discount amortization at the end of the third year using the effective interest
method is
A. P 13,333 C. P 21,428
B. P 19,215 D. P 0
Solution 2-28
1.
Sales price/Present value of note P 142,356

(P 200,000 x 0.71178)
Less: Book value of equipment 160,000
Loss on sale of equipment P 17, 644
Answer: A
2.
Face value of note P 200,000

Less: Present value of note (see no. 1) 142,356
Discount of note receivable 57,644
Answer: A
3.
Present value of note, Jan. 1, 2010 P 142,356

Add: Interest income in 2010 (P 142,356 x 17,083
12%)
Present value of note, Jan. 1, 2011 159,439
Add: Interest income in 2011 (P 159,439 x 19,133
12%)
Present value of note, Jan. 1, 2012 178,572
Face value of note 200,000
Discount amortization at the end of the third 21,428
year
Answer: C
Problem 2-29
Note Receivable with an Unreasonable Low Interest Rate
On January 2, 2010, a tract of land that originally cost P 800,000 was sold by VIETMAN
ROSE COMPANY. The company received a P 1,200,000 note as payment. It bears
interest rate of 4% and is payable in 3 annual instalments of P 400,000 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 for 1 period 0.90909
Present value of an ordinary annuity of 1 for 3 periods 2.48685
1. The gain to be recognized on the sale of the land is
A. P 400,00 C. P 194,740
B. P 276,847 D. P 0
2. The interest income to be reported for 2010 should be
A. P 59,685 C. P 48,000
B. P 120,000 D. P 107,685
Solution 2-29
1. AMOUNT OF CASH TO BE RECEIVED EACH YEAR
Year Interest Principal Total

2010 (P 1,200,000 x 4%) P 48,000 P 400,000 448,000
2011 (P 800,000 x 4%) 32,000 400,000 432,000
2012 (P 400,000 x 4%) 16,000 400,000 416,000
P 96,000 1,200,000 P 1,296,000
PRESENT VALUE OF THE NOTE AT 10% INTERST RATE
Year Cash to Present Value Present

Received Factor Value
2010 P 448,000 0.90909 P 407,272
2011 432,000 0.82645 357,026
2012 416,000 0.75132 312,459
P 1,296,000 P 1,076,847
Net present value of note P 1,076,847

Less: Cost of land 800,000
Gain on sale of land P 276,847
Answer: B
2. Interest income for 2010 (P 1,076,847 x 10%) P 107,685
Answer: D
Problem 2-30
Discounting of Notes Receivable
During your audit of FOREVER COMPANY for the year ended December 31, 2010, you
find the following account.
Notes Receivable
Date Debit Credit
Sep. 1 Cornea, 20%, due in 3 months P 80,000
Oct. 1 Hunk Co., 24%, due in 2 months 300,000
1 Discounted Cornea note at 25% P 80,000
Nov. 1 Valerie, 24%, due in 13 months 600,000
30 Cellular Co., no interest, due in 500,000
one year
30 Discounted Cellular note at 18% 500,000
Dec. 1 Tictic, 18%, due in 5 months 900,000
1 O. Reyes, President, 12% due i3 1,200,000
months (for cash loan given to O.
Reyes)
All notes are trade notes unless otherwise specified. The Cornea note was paid on
December 1 as per notification from the bank. The Hunk Co. note was dishonoured on
the due date but the legal department has assured management of its full collectability.
The company, with your concurrence, will treat the discounting as a conditional sale of
note receivable.
1. At what amount on the current asset section of the December 31, 2010 statement
of financial position will the Notes receivable-trade be carried?
A. P 1,500,000 C. P 2,400,000
B. P 1,800,000 D. P 2,080,000
2. What amount of loss on notes receivable discounting should be reported in the
2010 income statement of the company?
A. P 90,500 C. P 90,000
B. P 90,833 D. P 0
3. Based on the ledger account presented, what amount of interest income should be
accrued at December 31, 2010?
A.P 59,685 C. P 48,000

B. P 120,000 D. P 107,685
Solution 2-30
1.
Valerie P 600,000
Tictic 900,000
Total notes receivable-trade, Dec. 31, 2010 P 1,500,000
Answer: A
2. Net proceeds:
Principal P 80,000
Interest ( P 80,000 x 20% x 3/12) 4,000
Maturity value 84,000
Discount (P84,000 x 25% x 2/12) 3,500 P 80,500
Book value
Principal P 80,000
Accrued interest receivable (P80,000 x 20% x 1/12)
1,333 81,333
Loss on discounting of Cornea note P 8,333
Principal/Maturity Value P 500,000

Discount (P 500,000 x 18%x 1 year) (90,000)
Net proceeds 410,000
Book value 500,000
Loss on discounting of Cellular note P 90,000
Total loss on discounting (P833 + 90,000) P 90,833
Answer: B
3.
Hunk (P 300,000 x 24% x 3/12) P 18,000
Valerie (P 600,000 x 24% x 2/12) 24,000
Tictic (P 900,000 x 18% x 1/12) 13,500
O. Reyes (P 1,200,000 x 12% x 1/12) 12,000
Total accrued interest receivable, Dec. 31, 2010 67,500
Problem 2-31
Various Receivable Transactions
The AUTOMATIC COMPANY sells plastic products to wholesalers. The end of the
company’s reporting period is December 31. During 2010, the following transactions
related to receivables occurred:
March 31 Sold merchandise to Mismo Co. and accepted a 10% note.

Payment of P 120,000 principal plus interest is due on March 31,
2011
April 12 Sold merchandise to Abe Co. for P 20,000 with terms 2/10,n/30.
Automatic uses the gross method to account for cash discounts.
21 Collected the entire amount due from Abe co.
27 A customer returned merchandise costing Automatic P 60,000.

Automatic reduced the customer’s receivable balance by P 80,000,
the sales price of the merchandise. The company records sales
return as they occur.
May 30 Transferred receivables of P 1,000,000 to factor without recourse.

The factor charged Automatic a 2% fiancé charge on the
receivables transferred. The criteria to derecognized the asset are
met.
July 31 Sold merchandise to Fabon Company for P 150,000 and accepted

an 8%, 6-month note. 8% is an appropriate rate for this type of
note.
Sep. 30 Discounted the Fabon Company at the bank. The bank’s discount
rate is 12%. The note was discounted without recourse.
Required:
1. Prepare the necessary journal entries to account for the above transactions. For
transactions involving the sale of merchandise, ignore the entry for the cost of
goods sold.
2. Prepare any necessary adjusting entries at December 31, 2010. Adjusting entires
are only recorded at year-end.
Solution 2-31
Mar 31 Notes receivable 120,000
Sales 120,000
April 12 Accounts receivable 20,000

Sales 20,0000
21 Cash (P 20,000 x 98%) 19,600

Sales discounts (P 20,000 x 2%) 400
27 Sales returns 80,000

Accounts receivable 80.000
Inventory 60,000
May 30 Cash (P 1, 000,000 x 98%) 980,000

Loss on factoring (P1,000,000 x 2%) 20,000
July 31 Notes receivable 150,000

Sales 150,000
Sep. 30 Cash 149,760

Loss on note receivable discounting 2,240
Notes receivable 150,000
Interest income 2,000
Net proceeds:
Principal P 150,000
Interest (P150,000 x 8% x 6/12) 6,000
Discount (P 156,000 x 12% x 4/12) (6,240) P 149,760
Book value:
Principal P 150,000
Accrued interest (P 150,000 x 8% x 2/12) 2,000 152,000
Loss on discounting 2,240
Dec. 31 Accrued interest receivable 9,000

Interest income 9,000
(P 120,000 x 10% x 9/12)
Problem 2-32
Discounting of Notes Receivable
The notes receivable account of CAIMITO, INC. consisted of the following:
1. 60-day note of P 10,000 dated May 15 with a 9% interest rate, discounted at the
bank on June 8 at 12%.
2. 120-day note of P 100,000 (face amount) dated October 1 with no stated interest
and a market rate of 9% interest, discounted at the bank on November 30 at 12%.
This note was received from the sale of equipment.
1. The proceeds from discounting of the 60-day note amount to
A. P 10,000 C. P 10,028
B. P 10,059 D. P 10,150
2. How much was received by the company from the discounting of the 120-day note?
A. P 101,920 C. P 98,000
B. P 99,960 D. P 100,000
Solution 2-32
1. 60-DAY NOTE
Face amount P 10,000

Add: Interest ( P 10,000x 9% x 60/360) 150
Less: Bank discount ( P10,150 x 12% x 36/360) 122
Net proceeds P 10,028
Answer: C
2. 120-DAY NOTE
Maturity value (same as amount) P 100,000

Less: Bank discount (P 100,000 x 12% x 60/360) 2,000
Net proceeds P 98,000
Answer: C
Problem 2-33
Notes Receivable: Classification and Interest Computation
The following long-term receivables were reported in the December 31, 2009, statement
of financial position of MANGO CORPORATION:
Note receivable from sale of plant P 3,000,000
Note receivable from officer 800,000
The following transactions during 2010 and other information relate to the company’s
long-term receivables:
1. The note receivable from sale of plant bears interest at 12% per annum. The note is
payable in 3 annual instalments of P 1,000,000 plus interest on the unpaid balance
every April 1. The initial principal and interest payment was made on April 1, 2010.
2. 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.
3. Mango sold a piece of equipment to Banana, Inc. on April 1, 2010, in exchange for
a P 400,000, 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%. The present
value factor of 1 for two periods at 12% is 0.797.
4. A tract of land was sold by Mango to Orange Inc. on July 1, 2010, for P 2,000,000
under an instalment sale contract. Orange signed a 4-year 11% note for P
1,400,000 on July 1, 2010, in addition to the down payment of P 600,000. The
equal annual payments of principal and interest on the note will be P 451,250
payable on July 1, 2011, 2012, 2013 and 2014. The land had an established cash
price of P 2,000,000, and its cost to Mango was P 1,500,000. The collection of the
instalments on this note is reasonable assured.
1. The amount to be reported as noncurrent receivables on the statement of financial

position at December 31, 2010, is
A. P 3,096,242 C. P 3,221,550
B. P 3,067,550 D. P 3,250,242
2. The current portion of notes receivable on December 31, 2010 should be
A. P 1,451,250 C. P 2,097,250
B. P 1,297,250 D. P 2,297,250
3. The accrued interest receivable on December 21, 2010 should be
A. P 257,000 C. P 285,692
B. P 180,000 D. P 334,000
4. On December 31, 2010, the unamortized discount on note receivable from sale of
equipment should be
A. P 42,944 C. P 0
B. P 109,892 D. P 52,508
5. The total interest income for the year ended December 31, 2010
A. P 427,000 C. P 375,692
B. P 455,692 D. P 532,692
Solution 2-33
1. NONCURRENT RECEIVABLES ( NET OF CURRENT PORTION)
Notes receivable from sale of plant:

Balance, 12/31/10 (P 3,000,000-1,000,000) P 2,000,000
Less: Installment due April 1, 2011 1,000,000 P 1,000,000
Note receivable from officer due Dec. 31, 2012 800,000
Note receivable from sale of equipment:
Present value of note on April 1, 2010
(P 400,000 x 0.797) P 318,800
Add: Interest income,
April 1 – Dec. 31, 2010
(P 318,800 x 12% x 9/12) 28,692 347,492
Note receivable from sale of land:
Balance, Dec. 31, 2010 P 1,400,000
Less: Installment due July 1,
2010
Total amount to be P451,25
received 0
Less: Interest
(1,400,000 x 11%) 154,000 297,250 1,102,750
Total P3,250,242
Answer: D
2. CURRENT PORTIONN OF NONCURRENT RECEIVABLES
Note receivable from sale of plant P 1,000,000

Note receivable from sale of land (see no.1) 297,250
Total 1,297,250
Answer: B
3. ACCURED INTEREST RECEIVALBE, DEC. 31, 2010
Note receivable from sale of plant, April 1

– Dec.31 P 180,000
(P 2,000,000 x 12% x 9/12)
Note receivable from sale of land, July 1 –
Dec.31 77,000
(P1,400,000 x 11% x 6/12)
Total P257,000
Answer: B
4. UNAMORTIZED DISCOUNT, DEC. 31, 2010
Unamortized discount, April 1, 2010

(P400,000 – 318,800) P 81,200
Less: amortization, April 1 – Dec.31 (see no. 1) 28,692
Total P52,508
Answer: D
5. INTERST INCOME FOR THE YEAR ENDED DEC. 31,2010
Note receivable from sale of plant:

Interest income, Jan.1 – Mar. 31
(P 3,000,000 x 12% x 3/12) P 90,000
Interest income, April 1 – Dec.31
(P 2, 000,000 x 12% x 9/12) 180,000 P270,000
Note receivable from officer (P 800,000 x 80,000
10%)
Note receivable from sale of equipment 28,692
(see no.1)
Note receivable from sale of land (see no.3) 77,000
Total P455,692
Answer: B
Problem 2-34
Various Notes Receivable Transactions
The Notes Receivable account of Bunsoy Co. has a debit balance of P 239,200 on
December 31, 2010. There was no balance at the beginning of the year. Your analysis
of the account reveals the following:
1. Notes amounting to P 845,000 were received from customers during the year.
2. Notes of P 416,000 were collected on due dates and notes amounting to P

221,000 were discounted at the Aggressive Bank. The Notes Receivable account
was credited for the notes discounted.
3. Of the P 221,000 notes discounted, P 104,000 was paid on maturity dates while a
note for P 31,200 was dishonoured and was charged back to Notes Receivable
account.
4. Cash of P 33,000 was received as partial payment on notes not yet due. The
amount received was credited to Liability on Partial Payment account.
5. A note of P 50,000 was pledged as collateral for a bank.
6. Included in the company’s cash account balance is a three-month note from an

officer amounting to P 8,000 which is over a month past.
Assuming that Busoy Co. will use a Notes Receivable Discounted account, the adjusted
balance of the Notes Receivable account on December 31, 2010 is
A. P 260,800 C. P 364,800
B. P 232,200 D. P 175,000
Solution 2-34
Unadjusted balance
(P 845,000 – P 416,000 – P221,000 + P 31,200) P 239,200
Partial collection recorded as a liability (33,000)
Notes receivable discounted still outstanding
(P 221,000 – P 104,000 – P31,000) 85,800
Dishonoured notes (31,200)
Adjusted balance P 260,800
Problem 2-35
Loan Impairment Loss
YOKOHANA BANK loaned P 5,000,000 to Bargain Company on January 1, 2010. The

initial loan repayment terms include a 10% interest rate plus annual principal payments
of P 1,100,000 on January 1 each year. Bargain made the required interest payment in
2010 but did not make the P 1,100,000 principal payment nor the P 550,000 interest
payment for 2011. Yokohana is preparing its annual financial statements on December
31, 2011. Bargain is having financial difficulty, and Yokohana has conducted that the
loan is impaired.
Analysis of Bargain’s financial condition on December 31, 2011, indicated the principal
payments will be collected, but the collection of interest is unlikely. Yokohana did not
accrue the interest on December 31. 2011.
The projected cash flows are:
December 31, 2012 P 1, 750,000

December 31, 2013 2, 000,000
December 31, 2014 1, 750,000
5, 500,000
1. What is the loan impairment loss on December 31, 2011?
A. P 941,500 C. P 0
B. P 550,000 D. P 5,500,000
2. What is the interest income to be reported by Yokohana Bank in 2012?
A. P 501,435 C. P 455,850
B. P 0 D. P 550,000
3. What is the carrying value of the loan receivable on December 31, 2013?
A. P 1,590,785 C. P 3,264,350
B. P 1,750,000 D. P 4,558,500
4. What is the interest income in 2013?
A. P 159,079 C. P 455,850
B. P 550,000 D. P 326,435
5. What is the interest income for 2014?
A. P 159,079 C. P 326,435
B. P 550,000 D. P 455,850
Solution 2-35
1.
Book value of loan receivable P5,500,000

Present value of projected cash flows:
Dec. 31, 2012 (P1,750,000 x 0.9091) P 1,590,925
Dec. 31, 2013 (P2,000,000 x 0.8264) 1,652,800
Dec. 31, 2014 (P1,750,000 x 0.7513) 1,314,775 4,558,500
Loan impairment loss P941,500
Answer: A
Loan Receivable Allowance

Before Current for Loan Net Loan Interest Payment
Date Payment Impairment Receivable Income Received
Dec. 31, 2012 P 5,500,000 P941,500 P4,558,50 P455,850 P1,750,000
0
Dec. 31, 2013 3,750,000 485,650 3,264,350 326,435 2,000,000
Dec. 31, 2014 1,750,000 159,215 1,590,785 159,079 1,750,000
2. Interest income in 2012 P 455,850
Answer: C
3.
Loan receivable(P 5,500,000 – 1,750,000 – 2,000,000) P 1,750,000

Allowance for loan impairment (159,215)
Carrying value, Dec. 31, 2013 P1,590,785
Answer: A
Answer: D
Answer: A

Chapter 2 Receivables

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Chapter 2 Receivables

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Audit of receivables

AUDIT PROGRAM FOR RECEIVABLES

3. Receivables are properly describe

4. Disclosures with respect to the accounts are adequate.

2. Test accuracy of balances appearing in the subsidiary ledger.

3. Confirm accuracy of individual balances by direct communication with customers.

4. Review correspondence with customers for possible adjustments.

5. Test propriety of cutoff:

6. Perform analytical procedures, like:

8. Obtain analyses of significant other receivables.

9. Ascertain whether some receivables are pledged, factored, discounted, or assigned.

10. Determine financial statement presentation and adequacy of disclosures.

11. Obtain receivable representation letter from client.

Computaton of Accounts Receivable Balance

Balance Days Past Due

The following are audit comments for possible adjustments:

SALES JOURNAL-DECEMBER 2010

Day of Sales Amount

SALES JOURNAL- 2011

Day of Sales Amount

A. Accounts Receivable 21,318

A. Rights and Obligation

4. Tracing shipping documents to prenumbered sales invoices provides evidence that

A. No duplicate shipments or billings occurred

December Shipping Misstatemen Overstatement or

Recording Sales, Sales Returns and Collections

Prepare the journal entries necessary on March 21 and April 3.

Computation of Accounts Receivable Balance

The following information is from GUMAMELA CORP.’ first year of operation:

1. Merchandise purchased P450,000

Purchases P450, 000

Computation of Accounts Receivable Balance

Bad debt expense for 2010 P271,000

What is the accounts receivable balance at December 31, 2010?

Computation of Accounts Receivable and Allowance for bad debts

Accounts Receivable P 2197,500

1. What is the accounts receivable balance at December 31, 2010?

1. Accounts Receivable, Jan. 1, 2010 P 2,197,500

Determining the allowances for bad debts

Credit sales during 2010 P4, 450,000

Acacia, Inc provides for doubtful accounts based on 1 ½ % of credit sales.

Allowance for Doubtful Accounts

Computing the net realizable value of accounts receivable

Accounts receivable P 460,000

Accounts receivable P 460,000

The company’s Net Sales for 2010 amounted to

Bad Debt expense= 2 % of net Sales

Computation Accounts Receivable Balance

What is the accounts receivable balance at December 31, 2010?

A\R turnover =net sales \ Ave. net receivables

Year Sales Allowance for Bad Debts

The accounts written off in 2008, 2009, and 2010 amounted to

2008 2009 2010

2008 2009 2010

What is the sales discount rate?

Gross Receivables P 420,000

Age of Accounts Rate

1. The company’s accounts receivable under “61-90 days” category should be

2. The company’s accounts receivable under “ 91-120 days” category should be

5. What is the net realizable value of accounts at December 31, 2010?

0-30 Days P65,600 X 1% = P 656

Required allowance (see no. 2) P9,699

Accounts receivable P180, 840