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FINANCIAL ACCOUNTING & REPORTING / AUDITING PRACTICE S. IRENEO G. MACARIOLA C. ESPENILLA J. BINALUYO
RECEIVABLES
Nature of receivables
Receivables are financial assets arising from contractual rights to receive cash or another financial asset from
another company.
Types of receivables
Trade receivables arise from the sale of merchandise or service in the ordinary course of business. This
may be evidenced by a promise to pay called Notes Receivable, or not evidenced by a promise to pay,
Accounts Receivable
Non-trade receivable are claims arising from sources other than from sale of goods and services in the
normal course of business.
Initial valuation
Accounts receivable is initially recognized when the entity becomes a party to the contractual provision of the
instrument and are initially valued at the transaction price, which is the amount an entity expects to be entitled
in exchange for the transfer of goods and services.
Non-trade receivables expected to be collected within 12 months from reporting date are classified as current;
while those expected to be collected beyond are classified as non-current.
Lifetime ECL is the ECL that results from all possible default events over the expected life of a financial instrument.
12-month ECL is a portion of the lifetime ECL and represents the lifetime ECL resulting from a default occurring
in the 12 months after the reporting date weighted by the probability of that default occurring.
Stage 3 -- Assess individually the receivables to determine whether they are credit-impaired.
Receivable Financing
Pledging/General Assignment of Account receivable
1. Accounting for receivable is not affected, disclosure is required for the receivables pledged or assigned.
2. Recognize the proceeds of the borrowing as a liability
3. Charge interest on the carrying value of the liability
4. Any transaction cost incurred is a finance cost
9. Ding Inc. received a three-year, non-interest-bearing note for P50,000 on January 1, 2020. The current
interest rate at that time was 15% for similar notes. The only entry made in 2020 was:
Notes Receivable 50,000
Sales 50,000
The effects of the above entry on Ding’s profits for the years 2020, 2021 and 2022 and its retained earnings
at the end of 2022, respectively shall be
a. overstated, overstated, understated, no effect
b. overstated, understated, understated, understated
c. overstated, understated, understated, no effect
d. no effect on any of these
10. Statement 1: When a note receivable is discounted on a with recourse basis, the transaction is treated as a
borrowing.
Statement 2: The amount of finance charge (interest expense) recognized on a discounting of notes receivable
is always equals to the amount of discount.
a. Only statement 1 is true
b. Only statement 2 is true
c. Both statements are true
d. Both statements are false
11. At initial recognition, which of the following is deducted from the face value of the receivable to arrive at its
amortized cost?
a. direct origination costs.
b. direct origination fees.
c. discount on loan receivable.
d. premium on loan receivable.
12. Statement 1: The loan will have a new effective interest after effecting direct origination costs and fees.
Statement 2: The loan receivable shall be amortized using the original nominal interest.
a. only statement 1 is true
b. only statement 2 is true
c. both statements are true
d. both statements are false
13. Which of the following indicators should be present to shift the expected credit loss from stage 1 to stage 2?
a. an increase in credit risk
b. a significant increase in credit risk
c. an objective evidence of impairment
d. financial difficulties of the borrower
14. Where there is an objective evidence of impairment, the amount of interest income should be?
a. computed based on the gross carrying value of the loan.
b. computed based on the net carrying value of the loan.
c. no interest shall be recognized.
d. no correct answer.
Trade installment receivable due in 18 months, including unearned interest of P15,000 P725,000
Receivables from the officers 200,000
Claims against shipping company, due in 15 months 120,000
Past due trade accounts receivables 600,000
Customer’s NSF check returned by bank 80,000
Advances to employees 25,000
Receivable from customers arising from the sale of goods 750,000
Interest receivable on bonds 150,000
Interest receivable on notes 45,000
Other trade accounts receivable – unassigned 240,000
Subscriptions receivable for ordinary shares due in 24 months 1,000,000
Trade accounts receivable - assigned 550,000
Trade accounts on which post-dated check is held 290,000
Deposit made by a customer for the rent of the warehouse for 2 years 140,000
Trade accounts known to be worthless 30,000
1. How much is the amount of the trade receivables to be reported on the December 31, 2021 financial
statements?
a. 2,200,000 b. 2,530,000 c. 3,220,000 d. 3,630,000
2. The beginning balance of Ganda Inc.’s allowance for bad debt is P56,500. If Ganda Inc. estimates that 5% of
the outstanding balance of its trade receivable is uncollectible, how much is Ganda’s bad debt expense in
2021?
a. 122,000 b. 125,000 c. 132,500 d. 134,500
Problem 2: On January 1, 2021, Boss Company’s accounts receivable has an outstanding balance of P500,000.
Below are the transactions during 2021:
Total Sales including cash sales of P500,000 P8,000,000
Account receivable written-off 60,000
Total Sales returns, of which P30,000 pertains to sales made on cash basis 80,000
Amount received from credit customers 5,100,000
Sales discount and allowances granted 70,000
Amounts received representing recovery, not included in the P5,100,000 above 120,000
What is the amortized cost of the accounts receivable on December 31, 2021, assuming that the company’s policy
is to provide 5% allowance based on outstanding balance?
a. 2,470,000 b. 2,584,000 c. 2,973,500 d. 3,087,500
Problem 3: Leon Company has an accounts receivable balance of P500,000 and Allowance for Bad Debts of
P48,000 as of December 31, 2020. Below are transactions recorded by the company in 2021:
Credit sales during the year P 3,120,000
Total accounts collected from customers during the year 3,020,160
Accounts written off as uncollectible 42,000
Recoveries of accounts written off in the previous year 2,160
An aging of accounts receivable on December 31, 2021 is shown below:
% to the Total Probability
Age group Account Receivable Balance of Collection
Less than 60 days 60% 99%
Between 61 and 120 days 22 88
Between 121 and 180 days 15 45
Over 180 days 3 20
1. The adjusted balance of gross accounts receivable is
a. 560,000 b. 562,160 c. 570,000 d. 604,160
2. The balance of allowance for bad debts as of December 31, 2021 is
a. 77,484 b. 77,324 c. 77,784 d. 77,544
3. The bad debt expense for the year 2021 is
a. 69,324 b. 69,624 c. 69,664 d. 69,124
Problem 4: You are given the following data for Heart Company:
Cash Credit Total
Cost of sales P 500,000 P 4,500,000 P 5,000,000
Cash received from customers 650,000 5,850,000 6,500,000
Inventories were marked to sell as follows: Cash sales, 30% above cost and credit sales at 40% above cost, all
of which are deemed collectible. The balance of accounts receivable at the end of the year was
a. 1,475,000 b. 1,350,000 c. 450,000 d. 125,000
Problem 5: On January 1, 2021, Ex Company sold its equipment with an original cost of P1,000,000 and an
accumulated depreciation of P400,000 and received a cash of P200,000 and a 4-year, 3%, P500,000 note to be
collected on December 31, 2024. Interest is to be collected at the end of each year. Effective interest on the note
on this date is 5%.
1. How much is the gain (loss) on sale of equipment?
a. (63,240) b. 52,460 c. 64,540 d. (135,460)
2. How much is the interest income for the period ended December 31, 2022?
a. 23,227 b. 23,638 c. 24,070 d. 24,524
Problem 6: Wise Inc. sold its building on March 31, 2020. The building has an estimated useful life of 5 years
with an original cost of P15,000,000 and carrying value of P9,500,000 at the date of sale. Wise received a
P12,000,000, 3-year non-interest bearing note to be collected in equal annual installment of P4,000,000 every
March 31 of each year starting 2021. There is no available fair value for the building but on March 31, 2020,
effective interest for similar note was at 6%. On December 31, 2021, effective interest increased to 7%.
1. How much is the interest income for the period ended December 31, 2021?
a. 641,522 b. 267,302 c. 440,014 d. 490,391
2. How much is the current portion of the note receivable as of December 31, 2021?
a. 3,559,986 b. 3,648,986 c. 3,889,996 d. 4,000,000
Problem 7: On January 1, 2021, Arc Company received a 10%, P14,000,000 note, collectible in installment plus
interest every December 31 of each year until December 31, 2025. The note is be collected as follows:
December 31, 2021 P 4,000,000
December 31, 2022 3,500,000
December 31, 2023 3,000,000
December 31, 2024 2,500,000
December 31, 2025 1,000,000
The effective interest rates on January 1, 2021 and December 31, 2021 were 14% and 15%, respectively.
1. How much is the present value of the note when received on January 1, 2021?
a. 12,921,826 b. 12,098,192 c. 11,326,352 d. 10,226,392
2. How much is the carrying value of the note on December 31, 2021?
a. 13,330,882 b. 11,512,041 c. 9,330,882 d. 8,391,939
3. How much of the carrying value of the note receivable is reported as non-current as of December 31, 2022?
a. 6,137,206 b. 3,346,414 c. 6,002,891 d. 3,129,324
Problem 8: On October 31, 2021, Ingrid Corp. had the following transactions:
• Obtained a P500,000, 6-month loan from Citibank, discounted at 12%. The company pledged P600,000 of its
accounts receivable as a security for the loan.
• Factored P1,000,000 of accounts receivable without recourse on a notification basis with Nice Finance
Company. Nice Finance charged a factoring fee of 5% of the amount of the receivable factored and withheld
10% of the receivable factored.
What is amount of the cash received from the financing of the receivables and the amount of loss recognized
respectively?
a. 1,320,000; 50,000 b. 1,320,000; 150,000 c. 1,420,000; 50,000 d. 1,420,000; 150,000
AUDITING PRACTICE
Significant Business Process: Order to Cash (Formerly Revenue and Receipt Cycle)
The client’s accountant also provided you the following aging of accounts receivable, along with the
company’s policy of providing allowance for doubtful accounts:
Age Amount % Uncollectible
Current (60 days) P1,550,000 -
1-60 days past due 1,100,000 5%
61-120 days past due 740,000 10%
More than 120 days past due 500,000 20%
All sales were made under the terms 10/30, n/60. The company estimates based on past experience that 30%
of the accounts that are still current (60 days) will probably be paid within the discount period over the next
year, and another 2% of the accounts that are still current (60 days) is a fair estimate for customer returns.
The company has not recorded any bad debt expense for the year. During the year, however, it had a P23,500
recovery of a previously written-off account and a P135,000 write-off of uncollectible accounts (see
reconciliation above).
Requirements:
1. What is the correct balance of the accounts receivable – trade?
2. What is the carrying value/amortized cost of the accounts receivable–trade?
3. What is the correct bad debt expense for the year assuming that the allowance for doubtful
accounts had a balance of P105,700 as of January 1, 2020?
Required:
1. What is the amount of the origination cost incurred by YZA on January 1, 2020 in relation to
the loans receivable?
2. What is the amortized cost of the loan as of December 31, 2021 and the corresponding interest income
for the year ended December 31, 2021?
Required:
1. What is the initial carrying value of the loans receivable and how much is the bad expense/credit loss
that should be immediately recognized?
2. What is the carrying value of the loans receivable as of December 31, 2021 and the amount of the
bad debt expense/credit loss that should be recognized in 2021?
3. What is the impairment loss in 2022?
6. While testing the effectiveness of internal control over the billing process, the auditor discovered that the
controls were not consistently observed as there were instances where sales entries based on sales
invoices were not supported by delivery receipts, what will be a possible implication of this TOC findings
to the auditor’s substantive test audit program?
a. Decrease substantive test procedure focusing on existence on receivables.
b. Increase extent of substantive test procedures focusing on valuation assertion on
receivables.
c. Increase the number of customer accounts to be confirmed.
d. Obtain more persuasive evidence that focus on the valuation assertion on receivables.
7. The auditor, upon examining controls over the billing process, observed that the pre-numbering of the
delivery receipts is not monitored as evident in the review by the auditor of the December sales journal
entries and its supporting documents (sales invoice, customer orders and delivery receipt). Which of the
following may be a valid conclusion as a result of this audit observation?
a. There may be possible unbilled deliveries which affect the completeness assertion of AR
and Sales.
b. There may be possible fictitious deliveries which affect the existence/occurrence
assertion of AR and Sales.
c. There may be possible unbilled deliveries which affect the valuation assertion of AR and
Sales.
d. There may be possible fictitious deliveries which affect the completeness assertion of AR
and Sales.
8. Which of the following audit procedures would an auditor most likely perform to test controls relating
to management’s assertion concerning the completeness of sales transactions?
a. Verify that extensions and footings on the entity’s sales invoices and monthly
customer statements have been recomputed.
b. Inspect the entity’s reports of prenumbered shipping documents that have been
recorded in the sales journal.
c. Compare the invoice prices on prenumbered sales invoices to the entity’s authorized
price list.
d. Inquire about the entity’s credit granting policies and the consistent application of
credit checks.
9. A client suspects that certain subsidiary ledger postings of collections from customers were posted to
wrong customer subsidiary account balances, which of the following internal controls most likely lead to
the detection of such posting error?
a. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
b. Each sales invoice is supported by a pre-numbered shipping document.
c. The accounts receivable ledger is reconciled daily to the control account in the general ledger.
d. Sending of monthly statement of accounts to customers.
10. The most likely result of ineffective internal controls in the sales cycle is that
a. Fictitious transactions could be recorded, causing an understatement of revenues and an
overstatement of receivables.
b. Irregularities in recording transactions in the subsidiary accounts could delay the
shipment of goods.
c. Omission of shipping documents could go undetected, causing an understatement of
inventory.
d. Final authorization of credit memos by personnel in the sales department could permit
an employee defalcation scheme.
11. An auditor noted that the accounts receivable department is separate from other accounting activities.
Credit is approved by a separate credit department. Control accounts and subsidiary ledgers are balanced
monthly. Similarly, accounts are aged monthly. The accounts receivable manager writes off delinquent
accounts after one year or sooner, if a bankruptcy or other unusual circumstance is involved. Credit
memoranda are pre-numbered and must correlate with receiving reports. Which of the following areas
could be viewed as an internal control weakness of the above organization?
a. Write-offs of delinquent accounts
b. Credit approvals
c. Monthly aging of receivables
d. Handling of credit memos
12. Which of the following procedures concerning accounts receivable would an auditor most likely perform
to obtain evidential matter in support of an assessed level of control risk below the maximum level?
a. Observing an entity’s employee prepare the schedule of past due accounts receivable.
b. Sending confirmation requests to an entity’s principal customers to verify the existence
of accounts receivable.
c. Inspecting an entity’s analysis of accounts receivable for unusual balances.
d. Comparing an entity’s uncollectible accounts payable to actual uncollectible accounts
receivable.
13. In designing the audit program for Accounts Receivables and Sales, the auditor acknowledges that there
is a higher risk of , thus should design audit procedures that shall focus on validating ______
assertion/s?
a. Overstatement; Completeness and Existence/Occurrence
b. Understatement; Existence/Occurrence and Valuation
c. Understatement; Completeness and Valuation
d. Overstatement; Existence/Occurrence and Valuation
14. Sending accounts receivable confirmation letters to the client’s customers is consistent with the
auditor’s objective of validating client’s receivable assertion on:
a. Existence and rights
b. Completeness and valuation
c. Completeness and rights
d. Existence and valuation
15. Which of the following is correct regarding the use of Accounts Receivable confirmation letter?
a. A positive confirmation request is necessary where audit risk assessment over receivables is
low and that the auditor expects little or no misstatement in receivables.
b. A negative confirmation request provides the more persuasive evidence regarding existence
and rights assertion over receivables.
c. A blank confirmation request is useful when an account balance is suspected to be
overstated.
d. When a confirmation reply is received from the customer through the client, such a reply
should be considered invalid.
16. Which of the following statements about receivables confirmation is correct?
a. Under positive confirmation, the customer is request to confirm the accuracy of the balance
stated or state in what respect he disagrees.
b. The receivables’ confirmation has to take place immediately after the year-end.
c. Confirmation letters are sent by the auditor on the audit firm’s headed notepaper.
d. The confirmation provides assurance as to the valuation of receivable balances.
17. What actions should the auditor take if a reply to a positive confirmation request letter for a material
amount is not received from the customer within two or three weeks of being sent out?
a. Qualify the audit opinion due to lack of sufficient and appropriate evidence.
b. Send out a second request to the customer
c. Inform the entity’s internal audit department.
d. Qualify the audit opinion due to material misstatement in the financial statement.
18. As part of auditing the company’s revenue/receipt cycle, the auditor decided to render a sales cut- off by
tracing entries several days before and after the balance sheet date from the company’s sales journal to
the source documents which include the sales order, the sales invoice and the delivery receipt. Which of
the following is correct regarding the sales cut-off procedures?
a. Vouching entries several days before the balance sheet date to the source documents is
necessary to gather evidence regarding completeness assertion of receivables.
b. Vouching entries several days before and after the balance sheet date to the source
documents is necessary to gather evidence regarding valuation assertion of receivables.
c. Vouching entries several days before the balance sheet date to the source documents is
necessary to gather evidence regarding existence assertion of receivables.
d. Vouching entries several days after the balance sheet date to the source documents is
necessary to gather evidence regarding the existence assertion of receivables.
19. Cut-off tests designed to detect credit sales made after the end of the year that have been
recorded in the current year provide assurance about management’s assertion of:
a. Existence
b. Rights and obligations
c. Valuation and allocation
d. Completeness
20. Tracing shipping documents to pre-numbered sales invoice provides evidence that , which
provides evidence about assertion over receivables.
a. No duplicate shipments or billings occurred; Existence.
b. Shipments to customers were properly invoiced; Completeness.
c. All goods ordered by customer were shipped.; Completeness.
d. All pre-numbered sales invoices were accounted for; Existence.
21. During an audit of the accounts receivable function, you found that the accounts receivable turnover rate
had fallen from 7 to 4 times over the last three years. What is the most likely cause of the decrease and
which financial statement assertion would this observation be relevant to in preparing the audit program
for substantive testing for receivables.
a. An increase in the discount offered for early payment; valuation.
b. A more liberal credit policy; valuation.
c. A change form net 30 to net 25; existence.
d. Greater cash sales; existence.
22. Which of the following most likely would give the most assurance concerning the valuation
assertion 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 accounts for reasonableness.
23. The auditors’ analysis of the clients aged accounts receivable schedule is consistent with the
auditor’s objective of validating client’s receivable assertion on:
a. Existence
b. Completeness
c. Rights and obligation
d. Valuation
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