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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
Solution
(1) Claims Receivable 22,500
Accounts receivable 22,500
(2) Sales 30,000
Accounts receivable 30,000
(3) Advances to affiliates 150,000
Accounts receivable 150,000
(4) Receivables - officers/employee 13,500
Accounts receivable 13,500
(5) Deposits for contracts bidding 67,500
Accounts receivable 67,500

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(6) Subscription receivable 60,000
Accounts receivable 60,000
(7) Advances to suppliers 24,000
Accounts receivable 24,000
(8) Advances to officers/employee 4,500
Accounts receivable 4,500
(9) Accounts receivable 30,000
Allowance for bad debts 30,000
(10) Accounts receivable 6,000
Customers with credit balance 6,000
(11)
OE: Cash 237,000
Notes payable 237,000
CE: Cash 237,000
Commission expense 3,000
Notes payable 300,000
Adj: Commission expense 3,000
Notes payable 3,000

Unadjusted AR
1,467,000
Non-trade AR

(1)
( 22,500)
Claims receivable
22,500
(2)
( 30,000)
Advances to affiliates
150,000
(3)
( 150,000)
Advances to off/empl

(4)
( 13,500)
( 13,500 + 4,500)
18,000
(5)
( 67,500)
Deposit for contracts
67,500
(6)
( 60,000)
Subscription receivable
60,000
(7)
( 24,000)
Advances to suppliers
24,000
(8)
( 4,500)

(9)
30,000

(10)
6,000

__________
Adjusted balance
1,131,000
Total
342,000

Current non-trade AR

Claims receivable
22,500
Advances to off/empl

( 13,500 + 4,500)
18,000

Advances to suppliers
24,000

Total
64,500

Answer:
1. D 2. A 3. B 4. A

Problem 2
In your audit of MENDOZA COMPANY for the past calendar year, you find the
following
accounts:
ACCOUNTS RECEIVABLES
Jan. 1, 2002 P 800,000
Jan. – Dec. 1992 collections P 5,900,000
Jan. – Dec. Sales 6,300,000
Jan. – Dec. write-off 100,000

ALLOWANCE FOR BAD DEBTS

Jan. – Dec. Write-off of
Jan. 1, 2002 P 95,000
last year’s receivables P 85,000
Dec. 31 provisions 315,000

Write-off of this year’s

Receivables 15,000

In your examination, you find that the balance of Accounts Receivable represents sales of
the current audit year only; that credit balances in the subsidiary ledger for accounts
receivable totaled P80,000; and that the current year’s provision for bad debts expense was
5% of sales (as compared with 4½% last year, 4% of the year before, and 3½% the next
previous year). Sequential to aging the accounts receivable, you and the company’s

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treasurer agree on an additional write-off of P50,000, and P300,000 as the probable loss to
be sustained on collection of the accounts receivable balance.

Questions

1. The adjusted Accounts Receivable balance is:

a. P 830,000 b. P 1,100,000 c. P 1,130,000 d. P 1,180,000

2. The adjusted Allowance for Bad Debts is:

a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000

3. The adjusted Bad Debts account is:

a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000

4. The provision per record at December 31 is:

a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000

Solution
Accounts Receivable 80,000
Customers’ credit balance 80,000
Allowance for bad debts 50,000
 Accounts receivable 50,000
Bad debts expense 40,000
Allowance for bad debts 40,000
Computation:
Provision per records 315,000
* Provision per audit 355,000
Adjustment 40,000

* Beg. balance 95,000

+ Provisions 355,000 squeezed figure
- Write-off per book 100,000
- Additional write-off 50,000
Ending balance 300,000
Answer:
1. C 2. B 3. D 4. C

Problem 3
The following selected transactions occurred during the year ended December 31, 2006 of
DOMINGO COMPANY:

Gross sales (cash and credit) P 900,736.80

Collections from credit customers, net of 2% cash discount 294,000.00
Cash sales 180,000.00
Uncollectible accounts written off 19,200.00
Credit memos issued to credit customers for sales ret./allow. 10,080.00
Cash refunds given to cash customers for sales ret./allow. 15,168.00
Recoveries on accounts receivable written-off in prior years
 (not included in cash received stated above) 6,505.20

At year-end, the company provides for estimated bad debts losses by crediting the
Allowance for Bad Debts account for 2% of its net credit sales for the year. The allowance
for bad debts at the beginning of the year is P19,327.20.

Questions
1. How much is the DOMINGO COMPANY’s gross sales?
a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80

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2. DOMINGO COMPANY’s credit sales at December 31, 2006 is:
a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80

3. How much is the DOMINGO COMPANY’s net credit sales?

a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80

4. The Bad Debts Expense of DOMINGO COMPANY at December 31, 2006 is:
a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14

5. The Accounts Receivable of DOMINGO COMPANY at December31, 2006 is:

a. P 408.042.00 b. P 407,536.80 c. P 401,536.80 d. P 391,456.80

6. The Allowance for Bad Debts of DOMINGO COMPANY at December 31, 2006 is:
a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14

Solution
Accounts Receivable
Credit Sales 720,736.80
Collection 294,000.00
Recoveries 6,505.20
Sales discount

from credit cust. 6,000.00

Write-off 19,200.00

Sales returns from

credit customer 10,080.00

__________
Recoveries 6,505.20
727,242.00
335,785.20
Ending bal. 391,456.80

Net credit sales:

Credit sales 720,736.80
- Sales discounts from credit sales ( 6,000.00)
- Sales returns from credit sales (10,080.00)
Net credit sales 704,656.80

Bad debts:
Net credit sales 704,656.80
x % of uncollectible 2%
Bad debts 14,093.136

Allowance for bad debts:

Beg. balance 19,327.20
Provision for bad debts 14,093.14
Recoveries 6,505.20
Less: Write-off ( 19,200.00)
Allowance ending balance 20,725.54
Answer:
1. A 2. B 3. C 4. B 5. D 6. A

Problem 4
Presented below are unaudited balances of selected accounts of MARJORIE COMPANY as of
December 31, 2006:
Unaudited Balances, 12/31/06
 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, 2006.

b. The bank returned on December 29, 2006, 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 2006.

Questions

1. What is the adjusted balance of Accounts Receivable on December 31, 2006?

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, 2006?
a. P 36,325 b. P 28,325 c. P 20,325 d. P 8,000

3. What is the adjusted amount of 2006 Bad Debts Expense?

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

Solution
(1)
A
1,300,000 + 50,000 + 5,000
P1,355,000

(2)
C
P1,355,000 x 1 ½%
P20,325
(3)
C
P20,325 + P8,000 debit balance
P28,325

Problem 5
During December, 2006, the Accounts Receivable controlling account on the books of
FERNANDEZ COMPANY showed one debit posting and two credit postings. The debit
represents receivables from December sales, P780,000. One credit was for P470,400, made
a result of cash collections on November and December receivables; the second credit was
an adjustment for estimated uncollectibles, P90,000. The December 31 balance was
P270,000.

When receivables were collected, the bookkeeper credited Accounts Receivables for the cash
collected. All customers who paid their accounts during December took advantage of the
2% cash discount.

As of December 1, debit balance in customers’ subsidiary accounts totaled P177,000.

An
adjustment for estimated doubtful accounts of P18,000 had been posted to the Accounts
Receivable controlling account at the end of 2002, and no write-offs were recorded during
2006. In addition, a number of customers had overpaid their accounts, and as a result,
some of the customers’ subsidiary accounts had credit balances on December 1. No
overpayments were made during December nor were any credit balances in customers’
accounts reduced during December.
Questions

1. The Accounts Receivable beginning balance (unadjusted) of FERNANDEZ COMPANY

at
December 31, 2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

2. The Accounts Receivable beginning balance (adjusted) of FERNANDEZ COMPANY

at
December 31, 2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

3. The Credit Balance of Accounts Receivable at the beginning of the year of FERNANDEZ
COMPANY is:
a. P 48,600 b. P 66,600 c. P 108,600 d. P 126,600

4. The Accounts Receivable balance of FERNANDEZ COMPANY at December 31, 2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

Solution

Computation for unadjusted AR beginning balance:

Accounts Receivable
* Beg. bal. 50,400
Collections 470,400
Sales 780,000
Allow. for BD 90,000
830,400
560,400
End bal. 270,000

* squeezed figure

Ending balance of AR control account 270,000

Add: Credits during December 560,400
Less: Debits during December ( 780,000)
Balance of AR control account – Dec. 1 50,400
Add: 2006 Est. allowance for BD 18,000
Adjusted AR control account – Dec. 1 68,400
Less: AR subsidiary account – Dec. 1 177,000
Credit balance of AR account – Dec. 1 108,600

Answer:
1. A 2. B 3. C 4. D
Questions
1. The Accounts Receivable beginning balance (unadjusted) of FERNANDEZ COMPANY
at
December 31, 2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

2. The Accounts Receivable beginning balance (adjusted) of FERNANDEZ COMPANY

at
December 31, 2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

3. The Credit Balance of Accounts Receivable at the beginning of the year of FERNANDEZ
COMPANY is:
a. P 48,600 b. P 66,600 c. P 108,600 d. P 126,600

4. The Accounts Receivable balance of FERNANDEZ COMPANY at December 31, 2006 is:
a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

Solution

Computation for unadjusted AR beginning balance:

Accounts Receivable
* Beg. bal. 50,400
Collections 470,400
Sales 780,000
Allow. for BD 90,000
830,400
560,400
End bal. 270,000

* squeezed figure

Ending balance of AR control account 270,000

Add: Credits during December 560,400
Less: Debits during December ( 780,000)
Balance of AR control account – Dec. 1 50,400
Add: 2006 Est. allowance for BD 18,000
Adjusted AR control account – Dec. 1 68,400
Less: AR subsidiary account – Dec. 1 177,000
Credit balance of AR account – Dec. 1 108,600

Answer:
1. A 2. B 3. C 4. D
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