4 Questions Receivables

PROBLEM NO. 1 – Composition of trade and other receivables On December 31, 2015 the accounts receivable control account of Ipil-ipil Co. had a balance of P181,000. An analysis of the accounts receivable account showed the following: Accounts known to be worthless Advance payments to creditors on purchase orders Advances to affiliated companies Customers’ accounts reporting credit balance arising from sales return Interest receivable on bonds Other trade accounts receivable – unassigned Subscriptions receivable for ordinary share capital due in 30 days Trade accounts receivable – assigned Trade installment receivable due 1 – 18 months, (including unearned finance charges, P2,000) Trade receivables from officers, due currently Trade accounts on which post-dated checks are held (no entries were made on receipts of checks) Total

P

2,500 10,000 25,000 (15,000) 10,000 50,000 55,000 15,000 22,000 1,500

P

5,000 181,000

REQUIRED: Determine the trade and other receivables to be reported on the entity’s December 31, 2015 statement of financial position.

PROBLEM NO. 2 – Computation of adjusted accounts receivable In the audit of Beatles Company, the auditor had an appreciation of the following schedule and noted some comments for possible adjustments: Beatles Company Accounts Receivable Schedule December 31, 2015 Customer Love M. Do Strawberry Fields This Boy Company

Balance P92,000 420,000 350,000

Current P 248,000 92,000

Past Due P92,000 172,000 258,000

Girl Corporation 374,000 Ticket To Ride Transport Corp. 160,000 Let It Be Corp. 124,000 Hey Jude 4,000 Get Back Company 256,000 Yesterday Corp. 240,000 Totals P2,020,000

212,000 60,000 4,000 80,000 240,000 P936,000

162,000 160,000 64,000 176,000 P1,084,000

The Accounts Receivable control account balance was determined to be P2,020,000. The external auditor submitted the following audit comments for possible adjustments: Love M. Do

Merchandise found defective; returned by customer on October 31, 2015 for credit, but the credit memo was issued by Beatles only on January 15, 2016.

Strawberry Fields

Account is good but usually pays late.

This Boy Company

Merchandise worth P160,000 was destroyed while in transit on May 31, 201, terms FOB Destination. The carrier was billed on June 15, 2015. (See Ticket To Ride Corp. and Yesterday Corp.)

Girl Corporation

Customer billed twice in error for P40,000. Balance is collectible.

Ticket To Ride Corp.

Collected in full on January 31, 2016

Let It Be Corp.

Paid in full on December 30, 2015 but not recorded. Collections were deposited on January 2, 2016.

Hey Jude

Received account confirmation from customer for P44,000. Investigation revealed an erroneous credit for P40,000. (See Get Back Company)

Get Back Company

Neglected to post P40,000 credit to customer’s account.

Yesterday Corp.

Customer wants to know reason for receipt of P160,000 credit memo as their accounts payable balance was P400,000.

REQUIRED:

1. Adjusting entries as of December 31, 2015. 2. Adjusted balance of Accounts Receivable – Trade as of December 31, 2015.

PROBLEM NO. 3 – Audit of accounts receivable and related accounts In connection with the audit of the financial statements of Praktis Corporation, your audit senior instructed you to examine the company’s accounts receivable. Prior to any adjustments you were able to extract the following balances from Praktis’ trial balance as of December 31, 2015: Accounts receivable Allowance for doubtful accounts

P442,500 15,000

From the schedule of accounts receivable as of December 31, 2015, you determined that this account includes the following: Accounts with debit balance: 60 days old and above 61 to 90 days Over 90 days Advances to officers Accounts with credit balance Accounts receivable per GL

P 238,500 117,200 85,400

P 441,100 16,400 ( 15,000) P 442,500

The credit balance in customer’s account represents collection from a customer whose account had been written-off as uncollectible in 2014. Accounts receivable for more than a year totaling, P21,000 should be written off. Confirmation replies received directly from customers disclosed the following exceptions: Customer Jessie

Customer’s Comments The goods sold on December 1 were returned on December 16, 2015

Audit Findings The client failed to record credit memo no. 23 for P12,000. The merchandise was included in the ending inventory at cost.

Robert

We do not owe this amount *%#@ (bad word). We did not receive any merchandise

Investigation revealed that goods sold for P16,000

from your company.

were shipped to Robert on December 29, 2015, terms FOB shipping point. The goods were lost in transit and the shipping company has acknowledged its responsibility for the lost of the merchandise.

Anne

I am entitled to a 10% employee discount. Your bill should be reduced by P1,200.

Annie is an employer of Praktis. Starting November 2015, all company employees were entitled to a special discount.

Jay-ar

We have not yet sold the goods. We will remit the proceeds as soon as the goods are sold.

Merchandise billed for P18,000 were consigned to Jay-ar on December 30, 2015. The goods cost P13,000.

Roy

We do not owe you P20,000. We already paid our accounts as evidenced by OR # 1234.

The sale of merchandise on December 18, 2015 was paid by Roy on January 6, 2016.

Carla

Reduce your bill by P1,500.

This amount represents freight paid by the customers for the merchandise shipped on December 17, 2015, terms FOB destination-collect.

Based on your discussion with Praktis’ Credit Manager, you both agreed that an allowance for doubtful accounts should be maintained using the following rates: 60 days old and below 61 to 90 days Over 90 days REQUIRED: 1. Compute for the adjusted balances of following: a. Accounts receivable

1% 2% 5%

b. Allowance for doubtful accounts 2. Adjusting entries as of December 31, 2015

PROBLEM NO. 4 – Audit of allowance for doubtful accounts Professional 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, 2015, 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 account as a percentage of total credit sales have risen from the 1.5% provided the past years to 4% in the current year. In response to your request for more information on the deterioration accounts receivable collections, the company’s controller has prepare the following report: Professional Company Accounts Receivable Collections December 31, 2015 The fact that some credit accounts will provide uncollectible is normal, and annual bad debt written-offs had been 1.5% of total credit sales for many years. However, during the year 2015, 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 collections is shown below: Proportion of total 64% 18% 8% 5% 3% 2%

Age of accounts 1 – 10 days 11 – 30 days Past due 31 – 60 days Past due 61 – 120 days Past due 121 – 180 days Past due over 180 days

Probability of collection 99.0% 97.5% 95.0% 80.0% 65.0% 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 debts expense accrual during the year based on the assumption that 4% of total credit sales will be uncollectible. Total credit sales for the year 2015 amounted to P8,000,000, and written-offs of uncollectible accounts during the year totaled P292,500. REQUIRED: 1. Adjusted balance of the allowance for doubtful accounts as of December 31, 2015. 2. The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of December 31, 2015.

PROBLEM NO. 5 – Analysis of account receivable and related accounts The Poster Co. sells direct to retail customers and also to wholesalers. Accounts receivable and an allowance for bad debts are maintained separately for each division. On January 1, 2015 the balance of the retail accounts receivable was P209,000 while the bad debts with respect to retail customers was a credit of P7,600. The following summary pertains only to retail sales since 2012: Credit Sales 2012 2013 2014 2015

P1,110,000 1,225,000 1,465,000 1,500,000

Bad Debts Written Off P26,000 29,500 30,000 31,000

Bad Debts Recoveries P2,150 3,750 3,600 4,200

Bad debts are provided for as a percentage of credit sales. The accountant calculates the percentage annually by using the experience of the three years prior to the current year. The formula is bad debts written off less recoveries expressed as a percentage of the credit sales for the same period. cash receipts in 2015 from credit sales to retail customers was P1,380,200. REQUIRED: Determine the following: 1. Adjusted accounts receivable as of December 31, 2015 2. Adjusted allowance for doubtful accounts as of December 31, 2015

PROBLEM NO. 6 – Audit of accounts receivable and related accounts In connection with your examination of the financial statements of Ringo Inc. for the year ended December 31, 2015, you were able to obtain certain information during your audit of the accounts receivable and related accounts. 

The December 31, 2015 balance in the Accounts Receivable control accounts is P837,900.



An aging schedule of the accounts receivable as of December 31, 2015 is presented below: Net debit Percentage to be applied after Age balance corrections have been made 60 days & under P387,800 1 percent 61 to 90 days 307,100 2 percent 91 to 120 days 89,800 5 percent Over 120 days 53,200 Definitely uncollectible, P9,000; the remainder is estimated to be P837,900 25% uncollectible. 

The Allowance for Doubtful Accounts schedule is presented below: Debit

January 1, 2015 November 30, 2015 December 31, 2015 (P837,900 x 5%)

Credit

P6,100 P41,895

Balance P19,700 13,600 P55,495



Entries made to Doubtful Accounts Expense account were: 1. A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts. 2. A credit for P6,100 on November 30, 2015, and a debit to Allowance for Doubtful Accounts because of a bankruptcy. The related sales took place on October 1, 2015.



There is a credit balance in one account receivable (61 to 90 days) of P11,000; it represents an advance on a sales contract.

REQUIRED: 1. Determine the following as of and for the year ended December 31, 2015: a. Accounts receivable b. Allowance for doubtful accounts c. Doubtful accounts expense

2. Adjusting entries as of December 31, 2015

PROBLEM NO. 7 – Analysis of notes receivable and related accounts The balance sheet of Yoko Corporation reported the following long-term receivables as of December 31, 2014: Note receivable from sale of plant Note receivable from officer

P6,000,000 1,600,000

In connection with your audit, you were able to gather the following transactions during 2015 and other information pertaining to the company’s long-term receivables: a.

The note receivable from sale of plant bears interest at 12% per annum. The note is payable in 3 annual installments of P2,000,000 plus interest on the unpaid balance every April 1. The initial principal and interest payment was made on April 1, 2015.

b.

The note receivable from officer is dated December 31, 2014, earns interest at 10% per annum, and is due on December 31, 2017. The 2015 interest was received on December 31, 2015.

c.

The corporation sold a piece of equipment to Yes, Inc. on April 1, 2015, in exchange for an P800,000 non-interest bearing note due on April 1, 2017. The note had no ready market, and there was no established exchange price for the equipment. The prevailing interest rate for a note of this type at April 1, 2015, was 12%. The present value factor of 1 for two periods at 12% is 0.797.

d.

A tract of land was sold by the corporation to No Co. on July 1, 2015, for P4,000,000 under an installment sale contract. No Co. signed a 4-year 11% note for P2,800,000 on July 1, 2015, in addition to the down payment of P1,200,000. The equal annual payments of principal and interest on the note will be P902,500 payable on July 1, 2016, 2017, 2018, and 2019. The land had an established cash price of P4,000,000, and its cost to the corporation was P3,000,000. The collection of the installments on this note is reasonably assured.

REQUIRED: Determine the following as of and for the year ended December 31, 2015: 1. 2.

Noncurrent receivables Current portion of long-term receivables

3. 4.

Accrued interest receivable Interest income

PROBLEM NO. 8 – Audit of notes receivable and related accounts On January 1, 2015, Pedro Company sold land that originally cost P400,000 to Buyer Company. As payment, Buyer gave Pedro Company a P600,000 note. The note bears of 4% and is to be repaid in three annual installments of P200,000 (plus interest on the outstanding balance). The first payment is due on December 31, 2015. The market price of the land is not reliably determinable. The prevailing rate of interest for notes of this type is 14% on January 1, 2015 and is 15% on December 31, 2015. Pedro made the following journal entries in relation of the sale of land and the related note receivable: January 1, 2015 Notes receivable Land Gain on sale of land

P600,000 P400,000 200,000

December 31, 2015 Cash Notes receivable Interest income

P224,000 P200,000 24,000

Pedro reported the notes receivable in its statement of financial position at December 31, 2015 as part of trade and other receivables. REQUIRED: 1.

Determine the following as of and for the year ended December 31, 2015: a. Correct gain on sale of land b. Correct interest income c. Overstatement of profit d. Correct carrying amount of note receivable e. Overstatement of working capital

2.

Adjusting entries as of December 31, 2015

PROBLEM NO. 9 – Audit of notes receivable and related accounts My Love Corporation is a local company engaged in buying and selling manufacturing equipment. On 1 January 2014, My Love Corporation sold equipment, with a cash price of P1,500,000, to Silly Love Company. The cost of the equipment is P750,000. Silly Love signed a deferred payment contract that provides for a down payment of P300,000 and a 5-year note for P1,705,900. The note is to be paid in 5 equal annual payments of P341,180. The payments include interest and are made on December 31 of each year, beginning on December 31, 2014. My Love Corporation made the following entries in relation to the sale of the equipment and the related note receivable: January 1, 2014 Cash Notes receivable Cost of goods sold Sales Inventory

P 300,000 1,705,900 750,000 P2,005,900 750,000

December 31, 2014 Cash Notes receivable

P 341,180 P 341,180

December 31, 2015 Cash Notes receivable

P 341,180 P 341,180

My Love Corporation reported the notes receivable in its statement of financial position at December 31, 2014 and 2015 as part of trade and other receivables. REQUIRED: Determine the following: 1. 2. 3. 4.

The effective interest rate Overstatement of profit for 2014 Overstatement of retained earnings as of December 31, 2015 Overstatement of working capital as of December 31, 2015

PROBLEM NO. 10 – Analysis of notes receivable and related accounts You are examining the financial statements of Merlyn, Inc. for the year ended December 31, 2015. Your analysis of the 2015 entries in the Notes Receivable account follows: Merlyn, Inc. Analysis of Notes Receivable For the Year Ended December 31, 2015 Date 2015 Jan. 1

Balance Forwarded Received P25,000 6% note due 10/29/15 from Anna whose trade Account was past due

Feb. 28

Discounted Anna note

Mar. 31

Received non-interest-bearing demand note from Julia, the corporation’s treasurer for a loan

Aug. 30

Sept. 4

Nov. 1

Debit P118,000

P24,960

6,200

Received principal and interest due from Robinson in accordance with agreement, two principal payments in advance Paid protest fee on note dishonored by Pepper

34,200

500

Received check dated 2/1/16 in settlement of Tripper note. The check was included in cash on hand 12/31/15

Nov. 4

Paid protest fee and maturity value of Anna note to bank. Note discounted 2/28/15 was 26,031 dishonored

Dec. 27

Accepted equipment with a fair market value of P24,000 in full settlement from Anna

Dec. 31

Received check dated 1/2/16 from Julia in

Credit

8,120

24,000

payment of 3/31/15 note. (The cash was included in petty cash fund 1/2/16 when it was returned to Julia in exchange for new demand note for the same amount.)

6,200

Dec. 31

Received principal and interest on Pepper note

Dec. 31

Accrued interest on Robinson note

1,200 P151,931

42,437

P139,917

The following information is available: (1)

Balances at January 1, 2015, were a debit of P1,400 in the Accrued Interest Receivable account and a credit of P400 in the Unearned Interest Income account. The P118,000 debit in the Note Receivable account consisted the following three notes: Robinson note of 8/31/08 payable in annual installments of P10,000 principal plus accrued interest at 6% each August 31 Tripper note discounted to Merlyn, Inc, at 6% 11/1/14 due 11/1/15 Pepper note for P40,000 plus 6% interest dated 12/31/14 due on 9/1/15

P70,000 8,000 40,000

(2)

No entries were made during 2015 to the Accrued Interest Receivable or the Unearned Interest Income account and only one entry for a credit of P1,200 on December 31, appeared in the Interest Income account.

(3)

All notes were from the trade customers unless otherwise indicated.

(4)

Debits and credits affecting Notes Receivable were correctly recorded unless facts indicated otherwise.

REQUIRED: 1.

2.

Determined the following as of and for the year ended December 31, 2015: a. Notes receivable-trade b. Interest income Adjusting entries as of December 31, 2015

PROBLEM NO. 11 – Loan impairment Bahrain Bank granted a loan to a borrower in the amount of P10,000,000 on January 1, 2014. The interest rate on the loan is 10% payable annually starting December 31, 2014. The loan matures in five years on December 31, 2018. Bahrain Bank incurs P130,900 of direct loan origination cost and P50,000 of indirect loan origination cost. In addition, Bahrain Bank charges the borrower a 5-point nonrefundable loan origination fee. The borrower paid the interest due on December 31, 2014. However, during 2015 the borrower began to experience financial difficulties, requiring the bank to reassess the collectability of the loan. As of December 31, 2015, the bank expects that only P8,000,000 of the principal will be recovered. The P8,000,000 principal amount is expected to be collected in two equal installments on December 31, 2017 and December 31, 2019. The prevailing interest rates for similar type of notes as of December 31, 2014 and 2015 are 15% and 16% respectively. REQUIRED: Determine the following: 1. Interest income to be recognized in 2014 2. Carrying amount of the loan as of December 31, 2014 3. Loan impairment loss to be recognized in 2015

PROBLEM N0. 12 – Theory

Select the best answer for each of the following:

1.

In the audit of which of the following general ledger accounts will tests of controls be particularly appropriate? a. Equipment b. Bank charges c. Bonds payable d. Sales

. 2.

The purpose of test of controls over shipping is to determine whether a. Billed goods have been shipped. b. Shipments are billed.

c. Shipping department personnel are competent. d. Credit is approved before goods are shipped.

3.

The purpose of tests of controls over billing is to determine whether a. Billed goods have been shipped. b. Shipments are billed. c. Billing department personnel are competent. d. Credit is approved before goods are billed.

4.

An auditor most likely would review an entity’s periodic accounting for the numerical sequence of shipping documents and invoices to support management’s financial statement assertion of a. Existence or occurrence b. Rights and obligations c. Valuation d. Completeness

5.

Which of the following might be detected by an auditor’s review of the client’s cut-off? a. Excessive goods returned for credit b. Unrecorded sales discounts c. Lapping of year-end accounts receivable d. Inflated sales for the year

6.

An auditor who has confirmed accounts receivable may discover that the sales journal was held open past year-end if a. Positive confirmations sent to debtors are not returned b. Negative confirmations sent to debtors are not retuned c. Most of the returned negative confirmations indicate that the debtors owes a ledger balance that the amount being confirmed. d. Most of the returned positive confirmations indicate that the debtor owes a smaller balance than the amount being confirmed.

7. The auditor finds situation in which one person has the ability to collect receivables, make deposits, issue credit memos and record receipt of payments. The auditor suspects the individual may be stealing from cash receipts. Which of the following audit procedures would be most effective in discovering fraud in this scenario? a. Send positive confirmations to a random selection of customers. b. Send negative confirmations to all outstanding accounts receivable customers. c. Perform a detailed review of debits to customer discounts, sales returns, or other debit accounts, excluding cash posted to the cash receipts journal.

d. Take a sample of bank deposits and trace the detail in each bank deposit back to the entry in the cash receipts journal.

8. All of the following are examples of substantive tests to verify valuation of net accounts receivable except the a. Re-computation of the allowance for bad debts. b. Inspection of accounts for current versus non-current 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.

9. Confirmation, which is a specific type of inquiry, is the process of obtaining a representation of information or of an existing condition directly from a third party. Two assertions for which confirmation of accounts receivable balances provides primary evidence are a. Completeness and valuation b. Rights and obligations and existence c. Valuation and rights and obligations d. Existence and completeness 10. The negative request form of accounts receivable confirmation may be used when the Combined Assessed Number of Consideration by Level Of Inherent and Small Balances the Recipient is Control Risk is is a. Low Many Likely b. Low Few Unlikely c. High Few Likely d. High Many Likely 11. Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? a. Review the cash receipts journal for the month prior to year-end. b. Intensify the study of internal control concerning the revenue cycle. c. Increase the assessed level of detection risk for the existence assertion. d. Inspect the shipping records documenting the merchandise sold to the debtors.

12. Which of the following is the greatest drawback of using subsequent collections evidenced only by a deposit slip as an alternative procedure when responses to positive accounts receivable confirmations are not received? a. Checking of subsequent collections can never be used as an alternative auditing procedure. b. By examining a deposit slip only, the auditor does not know whether the payment is for the receivable at the balance sheet date or a subsequent transaction. c. A deposit slip is not received directly by the auditor. d. A customer may not have made a payment on a timely basis. .