AUDITING PROBLEMS Review Class

AUDIT OF RECEIVABLES

PROBLEM NO. 1

DDD Corporation included the following in its notes receivable as of December 31, 2021:

Note receivable from sale of land P 1,760,000

Note receivable from consultation 2,400,000
Note receivable from sale of equipment 3,200,000

In connection with your audit, you were able to gather the following transactions during 2021
and other information pertaining to the company’s notes receivable:

I. On January 1, 2021, DDD sold a tract of land. The land, purchased 10 years ago, was carried
on DDD’s books at a value of P1,000,000. DDD received a noninterest-bearing note for
P1,760,000. The note is due on December 31, 2022. There is no readily available market
value for the land, but the current market rate of interest for comparable notes is 10%.

II. On January 1, 2021, DDD finished consultation services and accepted in exchange a
promissory note with a face value of P2,400,000, a due date of December 31, 2023, and a
stated rate of 5%, with interest receivable at the end of each year. The fair value of the
services is not readily determinable and the note is not readily marketable. Under the
circumstances, the note is considered to have an appropriate imputed rate of interest of
10%.

III. On January 1, 2021, DDD sold an equipment with a carrying amount of P3,200,000 to X
Corporation. As payment, X gave DDD a P4,800,000 note. The note bears an interest rate of
4% and is to be repaid in three annual installments of P1,600,000 plus interest on the
outstanding balance. The first payment was received on December 31, 2021. The market
price of the equipment is not reliably determinable. The prevailing interest rate for similar
notes is 8%.

Questions:

Based on the result of your audit, determine the following (round off present value factors to four
decimal places, e.g., 0.8264, 1.7355):

1. Gain on sale of land in 2021

A. P760,000 B. P599,910 C. P454,464 D. P0

2. Carrying amount of note receivable from sale of land at December 31, 2021
A. P1,309,018 B. P1,454,464 C. P1,599,910 D. P1,760,000

3. Consultation service revenue in 2021

A. P1,803,120 B. P2,101,548 C. P2,400,000 D. P2,520,000

4. Carrying amount of note receivable from consultation at December 31, 2021

A. P2,101,548 B. P2,191,703 C. P2,290,873 D. P2,400,000

5. Gain on sale of equipment in 2021

A. P1,261,510 B. P1,417,984 C. P1,600,000 D. P4,461,510

6. Carrying amount of note receivable from sale of equipment at December 31, 2021
A. P1,540,545 B. P2,696,590 C. P3,026,431 D. P4,461,510

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AUDIT PROBLEMS 02 – AUDIT OF RECEIVABLES

7. Amount of notes receivable that should be presented as current assets at December 31, 2021
A. P1,485,886 B. P1,599,910 C. P3,085,796 D. P5,277,499

8. Amount of notes receivable that should be presented as non-current assets at December 31,
2021
A. P1,540,545 B. P3,026,431 C. P3,732,248 D. P5,218,134

9. Total interest income in 2021

A. P145,446 B. P355,601 C. P567,076 D. P712,522

10. Total interest income in 2022

A. P160,090 B. P379,260 C. P461,284 D. P621,374

PROBLEM NO. 2

On January 1, 2019, DDD Co. loaned P3,000,000 to DEF Co. The terms of the loan were payment
in full on January 1, 2024 plus annual interest payments at 11%. The interest payment was made
as scheduled on January 1, 2020, however, due to financial setbacks DEF Co. was unable to make
its 2021 interest payment. DDD Co. considers the loan impaired and projects the following cash
flows from the loan as of December 31, 2021 and 2022. Assume that DDD Co. accrued the interest
at December 31, 2020, but did not continue to accrue interest due to the impairment of the loan.

Amount projected as of
Date of flow December 31, 2021 December 31, 2022
December 31, 2022 P200,000 200,000
December 31, 2023 400,000 600,000
December 31, 2024 800,000 1,200,000
December 31, 2025 1,200,000 1,000,000
December 31, 2026 400,000

Questions:

Your client requested you to determine the following: (Round off present value factors to four
decimal places, e.g., 0.8264, 1.7355.)

1. Loan impairment loss in 2021

A. P1,212,380 B. P1,084,340 C. P882,380 D. P754,340

2. Interest income in 2022 assuming the P200,000 was collected on December 31, 2022
A. P211,762 B. P224,566 C. P232,938 D. P247,023

3. Allowance for loan impairment as of December 31, 2022

A. P754,340 B. P682,380 C. P596,720 D. P554,340

4. Gain on reversal of impairment loss in 2022

A. P52,722 B. P95,102 C. P104,898 D. P127,458

5. Interest income in 2023 assuming the P600,000 was collected on December 31, 2023
A. P211,762 B. P224,566 C. P232,938 D. P247,023

6. Carrying amount of loan receivable as of December 31, 2023

A. P1,750,558 B. P1,892,683 C. P2,292,683 D. P2,492,683

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AUDIT PROBLEMS 02 – AUDIT OF RECEIVABLES

PROBLEM NO. 3

E Co. showed the following balances on December 31, 2020:

Accounts receivable P6,000,000

Allowance for doubtful accounts (180,000)

The following transactions transpired for E Co. during the year 2021:
a. On May 1, received a P900,000, six-month, 12% interest-bearing note from GHI, a customer,
in settlement of an account.
b. On June 30, factored P1,200,000 of its AR to a finance company. The finance company
charged a factoring fee of 5% of the accounts factored and withheld 20% of the amount
factored.
c. On August 1, E Co. discounted the GHI note at the bank at 15%.
d. On November 1, GHI defaulted on the P900,000 note. E Co. paid the bank the total amount
due plus a P36,000 protest fee and other bank charges.
e. On December 31, E Co. assigned P1,800,000 of its accounts receivable to a bank under a
non-notification basis. The bank advanced 80% less a service fee of 5% of the accounts
assigned. E Co. signed a promissory note for the loan.
f. On December 31, E Co. collected from GHI in full including interest on total amount due at
12% since default date.
g. On December 31, it is estimated that 5% of the accounts receivable may prove uncollectible.

Questions:

Based on the above data, compute the following:

1. Amount of cash received on June 30 factoring

A. P900,000 B. P960,000 C. P1,140,000 D. P1,200,000

2. Amount of cash received on August 1 discounting

A. P882,450 B. P918,225 C. P925,380 D. P954,000

3. Amount paid on November 1 default on the P900,000 note

A. P990,000 B. P954,000 C. P936,000 D. P900,000

4. Amount of cash received on December 31 assignment of accounts receivable

A. P1,440,000 B. P1,368,000 C. P1,350,000 D. P342,000

5. Amount of cash received on December 31 collection of accounts of GHI

A. P1,009,800 B. P1,029,600 C. P1,089,000 D. P1,108,800

6. Balance of allowance for doubtful accounts as of December 31, 2021

A. P195,000 B. P240,000 C. P244,500 D. P255,000

7. The net realizable value of accounts receivable as of December 31, 2021

A. P3,645,000 B. P3,655,500 C. P3,660,000 D. P3,705,000

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AUDIT PROBLEMS 02 – AUDIT OF RECEIVABLES

PROBLEM NO. 4

Select the best answer for each of the following:

1. Which of the following statements would an auditor most likely add to the negative form of
confirmations of accounts receivable to encourage timely consideration by the recipients?
A. “This is not a request for payment; remittances should not be sent to our auditors in
the enclosed envelope.”
B. “Report any differences on the enclosed statement directly to our auditors; no reply is
necessary if this amount agrees with your records.”
C. “If you do not report any differences within fifteen days, it will be assumed that this
statement is correct.”
D. “The following invoices have been selected for confirmation and represent amounts that
are overdue.”

2. Auditors may use positive or negative forms of confirmation requests for accounts
receivable. An auditor most likely will use
A. The positive form to confirm all balances regardless of size.
B. A combination of the two forms, with the positive form used for large balances and the
negative form for the small balances.
C. A combination of the two forms, with the positive form used for trade receivables and
the negative form for other receivables.
D. The positive form when the combined assessed level of inherent and control risk for
assertions related to receivables is acceptably low, and the negative form when it is
unacceptably high.

3. The negative request form of accounts receivable confirmation may be used when the
Combined Assessed Level Of Number of Small Consideration By
Inherent and Control Risk Is Balances Is The Recipient Is
A. Low Many Likely
B. Low Few Unlikely
C. High Few Likely
D. High Many Likely

4. Negative confirmation of accounts receivable is less effective than positive confirmation of

accounts receivable because
A. A majority of recipients usually lack the willingness to respond objectively.
B. Some recipients may report incorrect balances that require extensive follow-up.
C. The auditor cannot infer that all nonrespondents have verified their account information.
D. Negative confirmations do not produce evidence that is statistically quantifiable.

5. All of the following are examples of substantive tests to verify the valuation of net accounts
receivable except the
A. Recomputation of the allowance for bad debts.
B. Inspection of accounts for current versus noncurrent status in the statement of financial
position.
C. Inspection of the aging schedule and credit records of past due accounts.
D. Comparison of the allowance for bad debts with past records.

END

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