ASSIGNMENT: AUDIT OF SALES AND RECEIVABLES

THEORIES
1. What companies have high receivables? (Note: Businesses whose
transactions are mostly in the form of credit)
2. What accounts should be taken into consideration when analyzing sales
and accounts receivable?
3. Is higher days sales outstanding better? What affects the DSO number?
Days sales outstanding may also be referred to as?
4. What does the accounts receivable turnover ratio tell us? What affects
the AR turnover ratio?
5. How is the doubtful account expense estimated using the aging of
accounts receivable?
PROBLEM SOLVING
1. Crooklands Inc. sells new parts to auto dealers. Company policy
requires that a prenumbered shipping documents be issued for each
sale. At the time of pickup or shipment, the shipping clerk writes
the date on the shipping document. The last shipment made in the year
ended December 31, 2018, was recorded on document 3167. Shipments are
billed in the order that the billing clerk receives the shipping
documents.
For late December 2018 and early January 2019, shipping documents are
billed on sales invoices as follows:
Shipping Document No. Sales Invoice No.
3163 5332
3164 5326
3165 5327
3166 5330
3167 5331
3168 5328
3169 5329
3170 5333
3171 5335
3172 5334

The December 2018 and January 2019 sales journals have the following
information included:
Sales Journal – December 2018
Day of Month Sales Invoice No. Amount of Sale
30 5326 P72,611
30 5329 191,430
31 5327 41,983
31 5328 62,022
31 5330 4,774

Sales Journal – January 2019

Day of Month Sales Invoice No. Amount of Sale
1 5332 P264,131
1 5331 10,639
1 5333 85,206
 2 5335 125,020
2 5334 64,658

a. What is the net overstatement (understatemnt) of Crookland’s sales

for the year ended December 31, 2018? Prepare the adjusting entry
necessary to correct the Crookland’s financial statements for the
year ended December 31, 2018.

2. Effective with the current year, Ostrave Company adopted a new

accounting method for estimating the allowance for doubtful accounts
at the amount indicated by the year-end aging of accounts receivable.
Allowance for doubtful accounts, January 1 250,000
Provision for doubtful accounts during the current 200,000
year at 2% of credit sales of P10,000,000
Accounts written off 205,000
Estimated uncollectible accounts per aging on 220,000
December 31

a. What amount should be reported as doubtful accounts expense for

the current year?

3. Burneside Corp.’s accounts receivable subsidiary ledger shows the

following information:

Account Balance Invoice

Customer
Dec 31, 2018 Date Amount
Arden, Inc. P35,180 12/06/18 P14,000
11/29/18 21,180
Lakeside Co. 20,920 09/27/18 12,000
08/20/18 8,920
Moraine Corp. 30,600 12/08/18 20,000
10/25/18 10,600
Budapest Co. 45,140 11/17/18 23,140
10/09/18 22,000
Brno Co. 31,600 12/12/18 19,200
12/02/18 12,400
Napa Corp. 17,400 09/12/18 17,400

The lifetime expected credit loss rates below are based on Burneside
Corp’s receivable collection experience, adjusted for forward-looking
estimates.

Age of Accounts Rate

0-30 days 1%
31-60 days 1.5%
61-90 days 3%
91-120 days 10%
Over 120 days 50%

The allowance for credit loss account had a debit balance of P5,500
on December 31, 2018, before adjustment.

a. Prepare the aging schedule of report of Burneside Corp.

 b. The allowance for credit loss to be reported in the statement of
financial position at December 31, 2018 is
c. What entry should be made on December 31, 2018 to adjust the
allowance for credit loss account?
d. What is the net realizable value of accounts receivable at December
31, 2018?

4. Vienna 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.
Vienna 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, 2018, 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.
Expected credit losses as a percentage of gross credit sales have
increased from the 1.5% provided in the prior years to about 4% in
the current year.
The deterioration of accounts receivable collections has prompted the
company’s controller to prepare the following report.
Accounts Receivable Collections
December 31, 2018

I. It is normal that some receivables will prove uncollectible. In

fact, annual bad debt write-offs had been 1.5% of total credit
sales for many years. However, this rate has increased to 4%
during the current year.

II. The accounts receivable balance at December 31, 2018, is

P3,000,000. The condition of this balance in terms of age and
probability of collection is presented below.

Proportion Probability
Age Categories
of Total of Collection
64% 1 to 10 days 99%
18% 11 to 30 days 97.5%
8% Past due 31 to 60 days 95%
5% Past due 61 to 120 days 80%
3% Past due 121 to 180 days 65%
2% Past due over 180 days 20%

III. The allowance for credit loss had a credit balance of P54,600
on January 1, 2018.
IV. The P640,000 expected credit loss provided during the year is
based on the assumption that 4% of the total credit sales will
be uncollectible.
V. Accounts written-off during the year totaled P585,000
 a. What is the required allowance balance on December 31, 2018?
b. Prepare the journal entry necessary to bring the Vienna Company’s
allowance for credit loss to the balance indicated in the aging
analysis.
c. What is the net realizable value of Vienna Company’s accounts
receivable at December 31, 2018?
d. Vienna should report expected credit loss for 2018 of
e. Vienna’s total credit sales for 2018 is

5. Guernsey Company began operations on January 1, 2021. On December 31,

2021, the entity provided doubtful accounts based on 1% of annual
credit sales.
On January 1, 2022, the entity changed the method of determining the
allowance for doubtful accounts by aging of accounts receivable.
Days past invoice date Percent uncollectible
0 – 30 1
31 – 90 5
91 – 180 20
Over 180 80

In addition, the entity wrote off all accounts receivable that were
over 1 year old.
The entity provided the following additional information:
2022 2021
Credit sales 3,000,000 2,800,000
Collections, including recovery 2,915,000 2,400,000
Accounts written off 27,000 None
Recovery of accounts previously written off 7,000 None

Days past invoice date at December 31

0 – 30 300,000 250,000
31 – 90 80,000 90,000
91 – 180 60,000 45,000
Over 180 25,000 15,000

a. What is the allowance for doubtful accounts on December 31, 2021?

b. What is the allowance for doubtful accounts on December 31, 2022?
c. What amount should be reported as doubtful accounts expense for
2022?