Problem 21- II (IAA)

During the second year of operations. Shark Company found itself in financial difficulties. The entity decided to
use the accounts receivable as a means of obtaining cash to continue operations. On July 1, 2016, the entity sold
P 1,500,000 of accounts receivable for cash proceeds od P1,390,000. No bad debt allowance was associated
with these accounts. On December 15, 2016, the entity assigned the remainder of its accounts receivable,
P5,000,000 as of that date, as collateral on a P2,500,000, 12% annual interest rate loan from Finance Company.
The entity received P2,500,000 less a 2% finance charge. None of the assigned accounts had been collected by
the end of the year. It is estimated that 10 % of accounts receivable would be uncollectible.

The entity revealed the following data on December 31, 2016:

Accounts receivable, excluding factored and assigned accounts 1,000,000

Accounts receivable—assigned 5,000,000

Accounts receivable—factored 1,500,000

Allowance for bad debts before adjustment 100,000

1. What total amount should be reported as accounts receivable on December 31, 2016?

a. 7,500,000

b. 6,000,000

c. 5,000,000

d. 1,000,000

Computation:

Assigned account receivable P5,000,000

Add: Unassigned account receivable -0-

12/31/2016/ Account receivable P5,000,000

2. What amount should be recognized as bad debts expense for 2016?

a. 600,000

b. 500,000

c. 650,000

d. 0
Computation:

Allowance for bad debts expense prior adjustment P100,000

Add: Required allowance for the year (5,000,000 ×10%) 500,000

Bad debts expenses P600,000