AUDIT OF RECEIVABLES

PROBLEM NO. 1

On December 31, AAA Co.’s Accounts Receivable balance per ledger of P2,530,000 includes:

1. MasterCard or VISA credit card sale of merchandise to customer P150,000 2. Overpayment to

supplier for inventory purchased on account 90,000 3. Insurance claim on automobile accident
10,000 4. Advance to sales manager due in one year 40,000 5. 5-year note receivable due from
company president
(This was issued by the president for the loan granted to him.) 500,000 6. Interest due on
the 5-year note from company president, interest payable annually 60,000 7. Acceptance of 6-
month note for past due account arising from sale of inventory 90,000 8. Accrued interest
receivable on the note above 10,000
9. Overpayment by customer of an account receivable (20,000) 10. Accounts receivable to
customers definitely uncollectible 40,000 11. Other trade accounts receivable – unassigned
100,000 12. Trade accounts receivable – assigned 50,000 13. Note receivable from a customer
(This is for a cash loan made to this customer collectible in 3 years.) 60,000 14. Claim for
tax refund from last year 20,000 15. Prepaid insurance – 4 months remaining in the policy period
40,000 16. Advances to subsidiaries 400,000 17. Inventory in-transit as of December 31
purchased FOB shipping pt. 150,000 18. Subscriptions receivable (currently collectible) 200,000
19. Special deposits on contract bids 80,000
20. Dividends receivable 50,000 21. Note receivable dishonored 20,000 22. Accrued rent
receivable 20,000 23. Claims against common carriers 30,000 24. Acceptance of 8-month note
from employees arising from sale of inventory 20,000 25. Trade installment receivable normally
collectible within 16 months,
net of unearned interest income of P20,000 320,000 TOTAL P2,530,000

Questions: Based on the above and the result of your audit, compute the following:
1. Trade receivables as of December 31
2. Current non-trade receivables as of December 31
3. Trade and other receivables to be presented as current assets as of December 31
4. Non-current receivables as of December 31
5. Amount that should be reclassified as a current liability as of December 31

PROBLEM NO. 2

To substantiate the existence of the accounts receivable balances as at December 31, 2021, of HELOW
COMPANY, you have decided to send confirmation requests to customers. Below is a summary of the
confirmation replies together with the exceptions and audit findings. Gross profit on sales is 20%. The
company is under the perpetual inventory method.
Name of Balance Comments From Customers Audit Findings
Customer Per
Books

Marimar P150,000 P90,000 was returned on Returned goods were

 December 30, 2021. Correct received December 31,
balance is P60,000. 2021.

Pulgoso P30,000 Your CM representing price The CM was taken up by

adjustment dated December Helow Company in 2022.
28, 2021, cancels this.

Doreymon P144,000 You have overpriced us by The complaint is valid.

P150. Correct price should be
P300.

Goku P112,500 We received the goods only Term is shipping point. Shipped
on January 6, 2022. in 2021.

Togepi P135,000 Balance was offset by our Helow Company credited

December shipment of your raw accounts payable for P135,000
materials. to record purchases. Togepi is a
supplier.

Questions: Based on the above and the result of your audit, answer the following: 1. The effect on 2021
net income of Helow Company of its failure to record the CM involving transaction with Pulgoso
2. The overstatement of receivable from Doreymon is
3. The accounts receivable from Goku is

PROBLEM NO. 3

From inception of operations, BBB Co. carried no allowance for doubtful accounts.

Uncollectible accounts were expensed as written off and recoveries were credited to income as
collected.

During 2021, management recognized that the accounting policy with respect to doubtful accounts was
not correct and determined that an allowance for doubtful accounts was necessary.

A policy was established to maintain an allowance for doubtful accounts based on historical bad debt
loss percentage applied to year-end accounts receivable.

The historical bad debt loss percentage is to be recomputed each year based on all available past years
up to a maximum of five years.

Year Credit sales Write-offs Recoveries

2017 P1,500,000 P15,000 P 0
2018 2,250,000 38,000 2,700
2019 2,950,000 52,000 2,500
2020 3,300,000 65,000 4,800
 2021 4,000,000 83,000 5,000
The entity reported accounts receivable of P1,250,000 on December 31, 2020 and P2,000,000 on
December 31, 2021.

Questions: Based on the above and the result of your audit, answer the following:
1. What is the bad debt rate in 2020?
2. What is the bad debt rate in 2021?
3. What is the net realizable value of accounts receivable on December 31, 2020?
4. What is the net realizable value of accounts receivable on December 31, 2021?
5. What is the doubtful accounts expense for 2021

PROBLEM NO. 4

Cobidra Company produces paints and related products for sale to the construction industry throughout
Metro Manila. While sales have remained relatively stable despite a decline in the amount of new
construction, there has been a noticeable change in the timeliness with which the company’s customers
are paying their bills.

The company sells its products on payment terms of 2/10, n/30. In the past, over 75 percent of the
credit customers have taken advantage of the discount by paying within 10 days of the invoice date.
During the year ended December 31, 2020, the number of customers taking the full 30 days to pay has
increased. Current indications are that less than 60% of the customers are now taking the discount.
Uncollectible accounts as a percentage of total credit sales have risen from the 1.5% provided in the
past years to 4% in the current year.

In response to your request for more information on the deterioration of accounts receivable
collections, the company’s controller has prepared the following report:

Codibra Company
Accounts Receivable Collections
December 31, 2021

The fact that some credit accounts will prove uncollectible is normal, and annual bad debt writeoffs had
been 1.5% of total credit sales for many years. However, during the year 2021, this percentage increased
to 4%. The accounts receivable balance is P1,500,000, and the condition of this balance in terms of age
and probability of collection is shown below:

Proportion to total Age of accounts Probability of collection

64% 1 – 10 days 99.0%
18% 11 – 30 days 97.5%
8% Past due 31 – 60 days 95.0%
5% Past due 61 – 120 days 80.0%
3% Past due 121 – 180 days 65.0%
2% Past due over 180 days 20.0%

At the beginning of the year, the Allowance for Doubtful Accounts had a credit balance of P27,300. The
company has provided for a monthly bad debt expense accrual during the year based on the assumption
that 4% of total credit sales will be uncollectible. Total credit sales for the year 2021 amounted to
P8,000,000, and write-offs of uncollectible accounts during the year totaled P292,500.
Questions: Based on the above and the result of your audit, answer the following: 1. How much is the
adjusted balance of the allowance for doubtful accounts as of December 31, 2021? 2. The necessary
adjusting journal entry to adjust the allowance for doubtful accounts as of December 31, 2021 would
include a credit to allowance for doubtful accounts of

PROBLEM NO. 5

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
2. Carrying amount of note receivable from sale of land at December 31, 2021
3. Consultation service revenue in 2021
4. Carrying amount of note receivable from consultation at December 31, 2021
5. Gain on sale of equipment in 2021
6. Carrying amount of note receivable from sale of equipment at December 31, 2021 7. Amount of
notes receivable that should be presented as current assets at December 31, 2021 8. Amount of
notes receivable that should be presented as non-current assets at December 31, 2021 9. Total
interest income in 2021
10. Total interest income in 2022

PROBLEM NO. 6
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
2. Interest income in 2022 assuming the P200,000 was collected on December 31, 2022
3. Allowance for loan impairment as of December 31, 2022
4. Gain on reversal of impairment loss in 2022
5. Interest income in 2023 assuming the P600,000 was collected on December 31, 2023
6. Carrying amount of loan receivable as of December 31, 2023

PROBLEM NO. 7

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

2. Amount of cash received on August 1 discounting
3. Amount paid on November 1 default on the P900,000 note 4. Amount of
cash received on December 31 assignment of accounts receivable 5. Amount
of cash received on December 31 collection of accounts of GHI 6. Balance of
allowance for doubtful accounts as of December 31, 2021 7. The net realizable
value of accounts receivable as of December 31, 2021