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STUDENT HANDOUTS
AUDITING — PROBLEMS J. CAYETANO
AP 02 — Audit of Receivables May 2021 CPALE REVIEW

DISCUSSION QUESTIONS

PROBLEM 1 PROBLEM 2
Presented below are unaudited balances of selected The December 31, 2020 statement of financial position of
accounts of Angelica Company as of December 31, 2021 Leon Company showed Accounts receivable balance of
P500,000 and Allowance for Bad Debts of P48,000.
Unadjusted balances,
Following is a summary of accounts receivable transactions
December 31, 2021
recorded by the company in 2021:
Selected accounts Debit Credit
Cash 500,000
Credit sales during the year P 3,120,000
Accounts receivable 1,300,000
Total accounts collected during the year 3,020,160
Allowance for bad debts 8,000
Accounts written off as uncollectible 42,000
Net sales 6,750,000
Recoveries of accounts written off in the 2,160
Additional information are as follows: previous year
• Goods amounting to P50,000 were invoiced for the
accounts of Mang Kanour Store & Company recorded on On December 31, 2021, an aging of accounts receivable
January 2, 2022 with terms of net, 60 days, FOB shipping indicated the following:
point. The goods were shipped to Mang Kanour on
December 30, 2021. % of total Probability of
Age group receivable amount collection
• The bank returned on December 29, 2021, a customer’s
Less than 60 days 60% 99%
check for P15,000 marked “No Sufficient Funds”, but no
Between 61 and 22% 88%
entry was made.
120 days
• Angelica estimates that allowance for uncollectible Between 121 and 15% 45%
accounts should be one and one-half percent on the 180 days
accounts receivable balance as of year-end. No Over 180 days 3% 20%
uncollectible accounts expense has yet been provided
for 2021. Questions: Based on the above and the result of your
audit, answer the following:
Questions: Based on the above and the result of your audit,
answer the following: 1. The adjusted gross balance of accounts receivable is?
a. 560,000 c. 570,000
1. What is the adjusted balance of Accounts Receivable on b. 562,160 d. 604,160
December 31, 2021?
a. 1,365,000 c. 1,335,000 2. The allowance for doubtful accounts as of December
b. 1,350,000 d. 1,315,000 31, 2021 is:
a. 77,484 c. 77,784
2. What is the adjusted balance of Allowance for b. 77,324 d. 77,544
Uncollectible accounts on December 31, 2021?
a. 20,475 c. 20,025 3. The doubtful account expense for the year 2021 is:
b. 20,250 d. 19,725 a. 69,324 c. 69,664
b. 69,624 d. 69,124
3. What is the adjusted amount of 2021 uncollectible
accounts expense? 4. The net realizable value of accounts receivable as of
a. 12,475 c. 28,250 December 31, 2021 is:
b. 28,025 d. 28,475 a. 480,356 c. 482,456
b. 480,516 d. 482,216
4. What is the carrying amount of the Accounts Receivable
to be presented in the statement of financial position as 5. Assuming that the over 180 days account is 100%
of December 31, 2021? uncollectible, how much is the balance of allowance for
a. 1,344,525 c. 1,365,000 uncollectible accounts at year end?
b. 1,357,000 d. 1,329,750 a. 43,244 c. 44,684
b. 64,344 d. 58,924
5. The adjusting journal entry for the check marked “No
sufficient fund” involves:
a. Debit to cash in bank P15,000
b. Debit to accounts receivable P15,000
c. Debit to sales P15,000
d. Debit to bad debt expense P15,000

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AUDITING — PROBLEM | AP.102 —Receivables ARC – ACCOUNTANCY REVIEW CENTER

PROBLEM 3 Customer Dog The invoice for the deliveries

You are auditing the receivable of TZUYU Inc., a supplier of made on December 3, was
office and school supplies in the Northern Luzon region. Your Balance per record: erroneously posted in the
investigation revealed the following general ledger balances P255,000 subsidiary ledger at P55,000.
as of December 31, 2021 before any audit adjustments: The correct invoice amount is
Reply: “Our records P50,000.
Account receivable 1,250,000 indicate that the balance
Allowance for bad debt 38,500 is at P250,000”

The company proves for bad debt expense for interim

reporting purposes using the income statement approach. Customer Elephant Payment of Kat for an
Bad debt expense is provided as 2% of Sales for the first October 20 invoice was
three quarters. Total sales for the first three quarters, from Balance per record: posted against the subsidiary
which the interim provisions were made was at P4,500,000. P160,000 ledger of Elephant.

During the year, P56,000 of the receivables were written off, Reply: “Our records show All outstanding transaction
while P20,000 of previously written off accounts were a bigger balance” with Elephant were made in
recovered. The following aging of accounts receivable November.
schedule was provided by the company accountant:

Accounts receivable age Amount The term of sale is 5/15, n/30. Per the past experience of the
1 – 15 days current 420,000 company, 25% of current customers normally take
16 – 30 days current 240,000 advantage of cash discounts.
1 – 30 days past due 210,000
31 – 60 days past due 250,000 The following are deemed appropriate regarding accounts
More than 60 days 120,000 that are doubtful of collection:
past due
Accounts receivable age Percentage uncollectible
Of the more than 60 days past due account, P30,000 is 1 – 15 days current --
deemed uncollectible thus has to be further written off. You 16 – 30 days current 2%
sent confirmation letters to customers with significant 1 – 30 days past due 10%
balances. 31 – 60 days past due 25%
More than 60 days past 50%
The following is a summary of the confirmation replies: due

Customer’s information
Customer Apol
Balance per record:
P150,000
Reply: “Our records show
a balance of P135,000”
Customer Boi
Balance per record:
P300,000
Audit Findings Questions: Based on above data and result of your audit,
The difference was due to answer the following:
merchandise return made by
the customer on December 1. What is the correct balance of accounts receivables
28. The goods were received before any valuation balance?
on January 2. a. 1,200,000 c. 1,185,000
b. 1,195,000 d. 1,180,000
The related credit memo was
issued and recorded by then, 2. What is the correct allowance for bad debts expense as
the return was for goods of December 31, 2021?
originally delivered and
a. 122,450 c. 127,050
invoiced by the company on
b. 122,550 d. 126,050
October 12.
3. What is the correct carrying amount of accounts
The difference was due to an
error made by the company receivables as of December 31, 2021?
preparing an invoice dated a. 1,082,300 c. 1,057,550
November 20. b. 1,087,550 d. 1,052,300

Reply: “Our records show The invoice price used was at 4. What is the correct allowance for sales discount as of
a balance at P290,000” P200/unit whereas the agreed December 31, 2021?
price should have been at a. 5,250 c. 21,000
P190/unit. b. 6,000 d. 16,750

Customer Cat
Balance per record:
P190,000
Reply: “Our records show
a balance at P150,000”
The payment made by Kat for 5. What is the correct bad debts expense for 2021?
an invoice dated October 20 a. 173,950 c. 204,050
was posted erroneously to b. 203,950 d. 174,050
the subsidiary ledger of
Elephant.

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AUDITING — PROBLEM | AP.102 —Receivables ARC – ACCOUNTANCY REVIEW CENTER

PROBLEM 4 PROBLEM 5
Remix Company included the following in its notes receivable On January 1, 2021, SNSD Company sold land that originally
as of December 31, 2022: cost P400,000 to GG Company. As payment, GG gave SNSD
Company a P600,000 note. The note bears an interest rate of
Notes receivable from sale of land 880,000 4% and is to be repaid in three annual installments of
Notes receivable from consultation 1,200,000 P200,000 (plus interest on the outstanding balance). The first
Notes receivable from sale of equipment 1,600,000 payment is due on December 31, 2021.

The following transaction during 2022 and other information The market price of the land is not reliably determinable. The
relate to the company’s note receivable: prevailing rate of interest for notes of this type is 14% on
January 1, 2021 and 15% on December 31, 2021.
a. On January 1, 2022, Remix Company sold a tract of
land to Future Company. The land, purchased 10 years SNSD made the following entries in relation to the sale of land
ago, was carried on Remix’s books at P500,000. Remix and the related note receivable:
received a noninterest-bearing note for P880,000 from
Future. The note is due on December 31, 2023. There January 1, 2021
was no established exchange price for the land. The Notes receivable 600,000
Land 400,000
prevailing interest rate for this note on January 1, 2022
Gain on sale of land 200,000
was 10%.
December 31, 2021
b. On January 1, 2022, Remix Company received a 5%, Cash 224,000
P1,200,000 promissory note in exchange for the Notes receivable 200,000
consultation services rendered. The note will mature on Interest income 24,000
December 31, 2025, with interest receivable every
December 31. The fair value of the services rendered is SNSD reported the notes receivable in its statement of
financial position at December 31, 2021 as part of trade and
not readily determinable. The prevailing rate of interest
other receivables. The following are the present value factor
for a note of this type was 10% on January 1, 2022. of 14%:

c. On January 1, 2022, Remix sold an old equipment with Periods Present value of 1 Present value of annuity
a carrying amount of P1,600,000, receiving P2,400,000 1 0.8772 0.8772
note. The note bears an interest rate of 4% and is to be 2 0.7695 1.6467
repaid in three annual installments of P800,000 (plus 3 0.6750 2.3216
interest on the outstanding balance). Remix received
Questions:
the first payment on December 31, 2022. There is no
established market value for the equipment. The market 1. The correct gain on sale of land is
interest rate for similar note was 14% on January 1, a. 103,085 c. 120,061
2022. b. 94,868 d. 200,000

Questions: Round off present value factors to four decimal 2. The correct interest income for 2021 is
places and final answers to the nearest hundred: a. 74,230 c. 70,432
b. 72,809 d. 24,000
1. What is the consultation free revenue should be
recognized in 2022? 3. Profit for 2021 is overstated by
a. 1,050,800 c. 901,600 a. 50,483 c. 54,902
b. 1,095,800 d. 1,200,000 b. 31,130 d. 0

2. What should be reported as gain on sale of equipment? 4. The correct carrying amount of the notes receivable at
a. 331,600 c. 412,400 December 31, 2021 is
b. 257,280 d. 800,000 a. 400,000 c. 368,870
b. 345,098 d. 349,517
3. The amount to be reported as noncurrent notes
receivable on December 31 2022 is 5. SNSD’s working capital at December 31, 2021 is
a. 2,605,706 c. 2,494,000 overstated by
b. 1,825,800 d. 2,625,700 a. 235,750 c. 182,476
b. 232,932 d. 0
4. The amount to be reported as current notes receivable
on December 31 2022 is
a. 1,600,000 c. 1,467,200
b. 1,680,000 d. 800,000

5. How much interest income should be recognized in

2022?
a. 464,000 c. 459,500
b. 435,800 d. 156,000

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AUDITING — PROBLEM | AP.102 —Receivables ARC – ACCOUNTANCY REVIEW CENTER

PROBLEM 6 1. What amount of loss on factoring should Soksoksok

Soksoksok Company engaged in the following transactions report for 2019?
with regards to financing of receivables during 2021: a. 400,000 c. 750,000
b. 550,000 d. 600,000
Factoring:
During 2021, Soksoksok Company sold accounts receivable 2. Assuming none of the accounts factored were collected,
with recourse with a face amount of P4,000,000. The factor the loss on factoring of Soksoksok is
charged a service fee of 10% of the accounts factored and a. 400,000 c. 750,000
withheld 5% of the accounts factored as protection against b. 550,000 d. 600,000
customer returns and other adjustments.
3. What is the net proceeds from factoring of accounts
The fair value of the recourse obligation is determined to be receivable?
P150,000. All of the accounts were fully collected by the a. 3,800,000 c. 3,850,000
factor. b. 3,650,000 d. 3,400,000

Discounting: 4. What is the amount of proceeds from discounting the

On June 30, 2021, Soksoksok also discounted a customer’s
note on June 30, 2019?
note with recourse at a bank at a 10% discount rate. The note
is dated May 1, 2021, has a term of 90 days, a face value of a. 6,083,875 c. 6,000,000
P6,000,000 and an interest rate of 9%. Soksoksok Company b. 6,135,000 d. 6,103,875
accounted this transaction as a secured borrowing. The
customer paid the note to the bank on maturity date. 5. What amount should be recognized as interest expense
related to the note discounting?
Questions: a. 51,125 c. 6,125
b. 13,875 d. 0

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