Audit of Receivables

CHAPTER 4 – Audit of Receivables Problem 1 The accounts receivable of FRANCO COMPANY were stated at P1,467,000 in a balance sheet submitted to a banker for credit. You are called upon to audit the report and, upon analysis, the asset was found to consist of the following items: Due from customers on open account Acknowledged claim for damages Due from consignee at billed price – cost price being P22,500 Investment in and advances to affiliated company Loans to officers and employees Deposits with municipalities – bids for contracts Unpaid capital stock subscriptions Advances to creditors for merchandise purchased but not received Cash advanced to salesmen for traveling expenses Allowance for doubtful accounts

P 1,125,000 22,500 30,000 150,000 13,500 67,500 60,000 24,000 4,500 ( 30,000) P1,467,000

The amount of P1,125,000 due from customers was the remaining balance after deducting accounts with credit balances of P6,000. During your examination, you noted that on December 31, the company assigned P300,000 of customers’ accounts to secure a 17%, P240,000 note payable. A 1% commission based on the accounts assigned was charged and deducted from the cash received. The client recorded this transaction by a debit to cash and a credit to notes payable. Questions 1. How much is the Accounts Receivable (gross) balance at December 31? a. P 759,000 b. P 789,000 c. P 1,101,000 d. P 1,131,000 2. The total current non-trade receivable balance at December 31 is: a. P 64,500 b. P 96,000 c. P 120,000 d. P 192,000 3. The liability for the accounts receivable – assigned is: a. P 237,000 b. P 240,000 c. P 243,000

d. P 300,000

4. The total non-trade receivable balance at December 31 is: a. P 342,000 b. P 318,000 c. P 313,500

d. P 245,000

Solution (1) Claims Receivable Accounts receivable (2) Sales Accounts receivable (3) Advances to affiliates Accounts receivable (4) Receivables - officers/employee Accounts receivable (5) Deposits for contracts bidding Accounts receivable

22,500 30,000 150,000

22,500 30,000

150,000 13,500 13,500 67,500 67,500

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(6) Subscription receivable Accounts receivable (7) Advances to suppliers Accounts receivable (8) Advances to officers/employee Accounts receivable (9) Accounts receivable Allowance for bad debts (10) Accounts receivable Customers with credit balance (11) OE: Cash Notes payable CE: Cash Commission expense Notes payable Adj: Commission expense Notes payable Unadjusted AR (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Adjusted balance

60,000 24,000 4,500 30,000 6,000

60,000 24,000 4,500 30,000 6,000

237,000

237,000 237,000 3,000 300,000 3,000 3,000 1,467,000 ( 22,500) ( 30,000) ( 150,000) ( 13,500) ( 67,500) ( 60,000) ( 24,000) ( 4,500) 30,000 6,000 1,131,000

Current non-trade AR Claims receivable Advances to off/empl ( 13,500 + 4,500) Advances to suppliers Total Answer: 1. D 2. A

Non-trade AR Claims receivable Advances to affiliates Advances to off/empl ( 13,500 + 4,500) Deposit for contracts Subscription receivable Advances to suppliers

Total

22,500 150,000 18,000 67,500 60,000 24,000 __________ 342,000

22,500 18,000 24,000 64,500 3. B

4. A

Problem 2 In your audit of MENDOZA COMPANY for the past calendar year, you find the following accounts: ACCOUNTS RECEIVABLES Jan. 1, 2002 P 800,000 Jan. – Dec. 1992 collections P 5,900,000 Jan. – Dec. Sales 6,300,000 Jan. – Dec. write-off 100,000

Jan. – Dec. Write-off of last year’s receivables Write-off of this year’s Receivables

P

ALLOWANCE FOR BAD DEBTS Jan. 1, 2002 85,000 Dec. 31 provisions

P

95,000 315,000

15,000

In your examination, you find that the balance of Accounts Receivable represents sales of the current audit year only; that credit balances in the subsidiary ledger for accounts receivable totaled P80,000; and that the current year’s provision for bad debts expense was 5% of sales (as compared with 4½% last year, 4% of the year before, and 3½% the next previous year). Sequential to aging the accounts receivable, you and the company’s

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treasurer agree on an additional write-off of P50,000, and P300,000 as the probable loss to be sustained on collection of the accounts receivable balance. Questions 1. The adjusted Accounts Receivable balance is: a. P 830,000 b. P 1,100,000 c. P 1,130,000

d. P 1,180,000

2. The adjusted Allowance for Bad Debts is: a. P 260,000 b. P 300,000

c. P 315,000

d. P 355,000

3. The adjusted Bad Debts account is: a. P 260,000 b. P 300,000

c. P 315,000

d. P 355,000

4. The provision per record at December 31 is: a. P 260,000 b. P 300,000

c. P 315,000

d. P 355,000

Solution Accounts Receivable 80,000 Customers’ credit balance 80,000 Allowance for bad debts 50,000 Accounts receivable 50,000 Bad debts expense 40,000 Allowance for bad debts 40,000 Computation: Provision per records 315,000 * Provision per audit 355,000 Adjustment 40,000

Answer: 1. C

* Beg. balance + Provisions - Write-off per book - Additional write-off Ending balance 2. B

95,000 355,000 squeezed figure 100,000 50,000 300,000 3. D

4. C

Problem 3 The following selected transactions occurred during the year ended December 31, 2006 of DOMINGO COMPANY: Gross sales (cash and credit) Collections from credit customers, net of 2% cash discount Cash sales Uncollectible accounts written off Credit memos issued to credit customers for sales ret./allow. Cash refunds given to cash customers for sales ret./allow. Recoveries on accounts receivable written-off in prior years (not included in cash received stated above)

P 900,736.80 294,000.00 180,000.00 19,200.00 10,080.00 15,168.00 6,505.20

At year-end, the company provides for estimated bad debts losses by crediting the Allowance for Bad Debts account for 2% of its net credit sales for the year. The allowance for bad debts at the beginning of the year is P19,327.20. Questions 1. How much is the DOMINGO COMPANY’s gross sales? a. P 900,736.80 b. P 720,736.80 c. P 704,656.80

d. P 689,488.80

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2. DOMINGO COMPANY’s credit sales at December 31, 2006 is: a. P 900,736.80 b. P 720,736.80 c. P 704,656.80

d. P 689,488.80

3. How much is the DOMINGO COMPANY’s net credit sales? a. P 900,736.80 b. P 720,736.80 c. P 704,656.80

d. P 689,488.80

4. The Bad Debts Expense of DOMINGO COMPANY at December 31, 2006 is: a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14 5. The Accounts Receivable of DOMINGO COMPANY at December31, 2006 is: a. P 408.042.00 b. P 407,536.80 c. P 401,536.80 d. P 391,456.80 6. The Allowance for Bad Debts of DOMINGO COMPANY at December 31, 2006 is: a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14 Solution Credit Sales Recoveries

Ending bal.

Accounts Receivable 720,736.80 Collection 294,000.00 6,505.20 Sales discount from credit cust. 6,000.00 Write-off 19,200.00 Sales returns from credit customer 10,080.00 __________ Recoveries 6,505.20 727,242.00 335,785.20 391,456.80

Net credit sales: Credit sales - Sales discounts from credit sales - Sales returns from credit sales Net credit sales

720,736.80 ( 6,000.00) (10,080.00) 704,656.80

Bad debts: Net credit sales x % of uncollectible Bad debts

704,656.80 2% 14,093.136

Allowance for bad debts: Beg. balance 19,327.20 Provision for bad debts 14,093.14 Recoveries 6,505.20 Less: Write-off ( 19,200.00) Allowance ending balance 20,725.54 Answer: 1. A 2. B 3. C 4. B

5. D

6. A

Problem 4 Presented below are unaudited balances of selected accounts of MARJORIE COMPANY as of December 31, 2006: Unaudited Balances, 12/31/06 Selected Accounts Debit Credit Cash P 500,000 Accounts receivable 1,300,000 Allowance for doubtful accounts 8,000 Net sales P 6,750,000

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Additional information are as follows: a. Goods amounting to P50,000 were invoiced for the accounts of Joy Store & Co., recorded on January 2, 2007 with terms of net, 60 days, FOB shipping point. The goods were shipped to Variety Store on December 30, 2006. b. The bank returned on December 29, 2006, a customer’s check for P5,000 marked “DAIF”, but no entry was made. c. MARJORIE COMPANY estimates that allowance for uncollectible accounts should be one and one-half percent (1½%) of the accounts receivable balance as of year-end. No provision has yet been made for 2006. Questions 1. What is the adjusted balance of Accounts Receivable on December 31, 2006? a. P 1,355,000 b. P 1,350,000 c. P 1,305,000 d. P 1,300,000 2. What is the adjusted balance of Allowance for doubtful accounts on December 31, 2006? a. P 36,325 b. P 28,325 c. P 20,325 d. P 8,000 3. What is the adjusted amount of 2006 Bad Debts Expense? a. P 12,325 b. P 20,325 c. P 28,325

d. P 36,325

Solution (1) A

1,300,000 + 50,000 + 5,000

P1,355,000

(2)

C

P1,355,000 x 1 ½%

P20,325

(3)

C

P20,325 + P8,000 debit balance

P28,325

Problem 5 During December, 2006, the Accounts Receivable controlling account on the books of FERNANDEZ COMPANY showed one debit posting and two credit postings. The debit represents receivables from December sales, P780,000. One credit was for P470,400, made a result of cash collections on November and December receivables; the second credit was an adjustment for estimated uncollectibles, P90,000. The December 31 balance was P270,000. When receivables were collected, the bookkeeper credited Accounts Receivables for the cash collected. All customers who paid their accounts during December took advantage of the 2% cash discount. As of December 1, debit balance in customers’ subsidiary accounts totaled P177,000. An adjustment for estimated doubtful accounts of P18,000 had been posted to the Accounts Receivable controlling account at the end of 2002, and no write-offs were recorded during 2006. In addition, a number of customers had overpaid their accounts, and as a result, some of the customers’ subsidiary accounts had credit balances on December 1. No overpayments were made during December nor were any credit balances in customers’ accounts reduced during December.

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Questions 1. The Accounts Receivable beginning balance (unadjusted) of FERNANDEZ COMPANY at December 31, 2006 is: a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000 2. The Accounts Receivable beginning balance (adjusted) of FERNANDEZ COMPANY at December 31, 2006 is: a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000 3. The Credit Balance of Accounts Receivable at the beginning of the year of FERNANDEZ COMPANY is: a. P 48,600 b. P 66,600 c. P 108,600 d. P 126,600 4. The Accounts Receivable balance of FERNANDEZ COMPANY at December 31, 2006 is: a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000 Solution Computation for unadjusted AR beginning balance: Accounts Receivable 50,400 Collections 780,000 Allow. for BD 830,400 End bal. 270,000 * squeezed figure * Beg. bal. Sales

Ending balance of AR control account Add: Credits during December Less: Debits during December Balance of AR control account – Dec. 1 Add: 2006 Est. allowance for BD Adjusted AR control account – Dec. 1 Less: AR subsidiary account – Dec. 1 Credit balance of AR account – Dec. 1 Answer: 1. A

2. B

3. C

470,400 90,000 560,400

270,000 560,400 ( 780,000) 50,400 18,000 68,400 177,000 108,600 4. D

Problem 6 You are examining the financial statements of MATIAS CORPORATION for the year ended December 31, 2006. During the audit of the accounts receivable and other related accounts, certain information was obtained. The December 31, 2006 debit balance in the Accounts Receivable control account is P197,000. The only entries in the Bad Debts Expense account were: a credit for P324 on December 31, 2006, because Marlisa Company remitted in full for the accounts charged off October 31, 2006, and a debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts.

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The Allowance for Doubtful Accounts schedule is presented below: Debit Credit January 1, 2006 October 21, 2006, Uncollectible; Marlisa Co., - P324; Abonales Co., - P 820; Cherryl Co., - P564 P 1,508 December 31, 2006, 5% of P197,000 P 9,850

Balance P 3,658 2,150 12,000

An aging schedule of the accounts receivable as of December 31, 2006 and the decision are shown in the table below: Age ____________ 0 – 1 month 1 – 3 months 3 – 6 months over 6 months

Net Debit Balance _________________ P

93,240 76,820 22,180 6,000

Amount to which the Allow. is to be adjusted after adjust. and corrections have been made 1 percent 2 percent 3 percent Definitely uncollectible, P1,000; P2,000 is considered 50% uncollectible; the remainder is estimated to be 80% collectible.

There is a credit balance in one account receivable (0-1 month) of P2,000; it represents an advance on a sales contract. Also, there is a credit balance in one of the 1-3 months accounts receivable of P500 for which merchandise will be accepted by the customer. The ledger accounts have not been closed as of December 31, 2006. The Accounts Receivable control account is not in agreement with the subsidiary ledger. The difference cannot be located, and the auditor decides to adjust the control to the sum of the subsidiaries after corrections are made. Questions 1. The adjusted balance of accounts receivable of MATIAS CORPORATION at December 31, 2006 is: a. P 199,740 b. P 199,540 c. P 198,300 d. P 198,100 2. The adjusted write-off of accounts receivable balance of MATIAS CORPORATION at December 31, 2006 is: a. P 2,708.00 b. P 2,508.00 c. P 2,384.00 d. P 1,708.00 3. The adjusted allowance of bad debts account of MATIAS CORPORATION at December 31, 2006 is: a. P 4,980.60 b. P 4,964.20 c. P 4,780.60 d. P 4,764.20 4. The bad debts expense per book of MATIAS CORPORATION at December 31, 2006 is: a. P 9,850.00 c. P 4,764.20 b. P 6,359.80 d. Cannot be determined 5. The adjusted bad debts expense of MATIAS CORPORATION at December 31, 2006 is: a. P 3,814.20 b. P 3,614.20 c. P 3,490.20 d. P 2,814.20

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6. The entry to adjust the account of Marlisa Company is: a. Bad debts 324 c. Allow. for BD 324 Allow. for BD 324 Bad debts b. Bad debts 324 d. Accounts receiv. 324 Accounts receivable 324 Bad debts

324 324

7. The entry to reconcile the accounts receivable control ledger to subsidiary ledger is: a. Accounts receivable 1,440 c. Accounts receiv. 1,440 Allow. for BD 1,440 Misc. income 1,440 b. Allow. for BD 1,440 d. No adjustment Accounts receivable 1,440 8. The net realizable value of accounts receivable of MATIAS CORPORATION at December 31, 2006 is: a. P 194,975.80 b. P 194,775.80 c. P 193,335.80 d.P193,319.40 Solution

Bal. before adjustments Adjustments: Add(Deduct) (2) Correction to 10.31.02 entry to write-off uncollectible accts. (3) Write-off of acct. considered definitely uncollectible (4) Reclassification of credit balances (5) To adjust the control acct. to agree with SL Adjusted balance

Per Control Acct. P 197,000

0-1 mo. P 93,240

PER SUBSIDIARY LEDGERS Over 1-3 mos 3-6 mos. 6 mos. P 76,820 P 22,180 P 6,000

Total P 198,240

(200) ( 1,000) P

2,500 198,300

2,000 P 95,240

500 P 77,320

P 22,180

(1,000)

(1,000)

P 5,000

2,500 P 199,740

1,440 P 199,740

Audit adjustments as of 12.31.06 (1)

Bad Debts expense Allowance for doubtful accounts

324

(2)

Allowance for doubtful accounts Accounts Receivable

200

(3)

Allowance for doubtful accounts Accounts Receivable

1,000

(4)

Accounts Receivable Customer’s Accounts with Credit Balances

2,500

(5)

Accounts Receivable Miscellaneous Revenue

1,440

(6)

Allowance for Doubtful Accounts Bad Debts Expense

6,359.80

8

324 200 1,000

2,500 1,440 6,359.80

Required allowance on 12.31.06 0-1 mo. 1-3 mos. 3-6 mos. Over 6 mos.

P 95,240 x 1% 77,320 x 2 % 22,180 x 3% 3,000 x 20% 2,000 x 50%

Beg. balance + Provision per audit (squeezed figure) - Write-off Ending balance Provision per book Provision per audit Adjustment Answer: 1. A 6. A

2. C 7. C

P

952.40 1,546.40 665.40 600.00 1,000.00 P 4,764.20

3,658.00 3,490.20 2,384.00 4,764.20 9,850.00 3,490.20 6,359.80

3. D 8. A

4. A

5. C

Problem 7 You are auditing the Accounts Receivable and the related Allowance for Bad Debts account of ROY COMPANY. The following data are available: Accounts Receivable, general ledger balance Allowance for bad debts: Beginning balance Provision per general ledger Write-offs Balance, end

P 848,000 P

20,000 48,000 ( 16,000) P 52,000

Summary of Aging Schedule The summary of the subsidiary ledger as of December 31, 2006, was totaled as follows: Debit balances: Under on month One to six months Over six months Credit balances: Almario Peter Bituin

P 360,000 368,000 152,000 P 880,000 P

8,000 - OK; additional billing in January 2004 14,000 – Should have been credited To Manuel Co. - 1-6 mos. classification. 18,000 - Advance on a sales contract P 40,000

The customers’ ledger is not in agreement with the accounts receivable control. The client instructs the auditor to adjust the control to the subsidiary ledger after corrections are made.

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ALLOWANCE FOR DOUBTFUL ACCOUNTS It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six months are expected to require a reserve of 2 percent. Accounts over six months are analyzed as follows: Definitely bad Doubtful (estimated to be 50% collectible) Apparently good, but slow (90% collectible) Total

P 48,000 24,000 80,000 P152,000

Questions 1. The entry to adjust the account of Almario is: a. Accounts receivable 8,000 c. Accounts receivable 8,000 Sales 8,000 Cust. with Cr. bal. 8,000 b. Sales 8,000 d. No adjustment Accounts receivable 8,000 2. The entry to adjust the account of Peter is: a. Accounts receivable 14,000 Sales 14,000 b. Sales 14,000 Accounts receivable 14,000

c. Accounts receivable 14,000 Cust. with Cr. bal. 14,000 d. No adjustment

3. The entry to adjust the account of Bituin is: a. Accounts receivable 18,000 Sales 18,000 b. Sales 18,000 Accounts receivable 18,000

c. Accounts receivable 18,000 Cust. with Cr. bal. 18,000 d. No adjustment

4. The entry to reconcile the control ledger to the subsidiary ledger is: a. Miscellaneous loss 8,000 c. Accounts receivable 8,000 Accounts receivable 8,000 Sales 8,000 b. Accounts receivable 8,000 d. Sales 8,000 Miscellaneous gain 8,000 Accounts receivable 8,000 5. The entry to adjust the Bad Debts Expense is: a. Bad Debts Expense 74,680 c. Bad Debts Expense 30,680 Allow. for BD 74,680 Allow. for BD b. Bad Debts Expense 26,680 d. No adjustment Allow. for BD 26,680

30,680

6. The Accounts Receivable balance at December 31, 2006 is: a. P 840,000 b. P 826,000 c. P 818,000

d. P 786,000

7. The Allowance for Bad Debts at December 31, 2006 is: a. P 74,680 b. P 48,000 c. P 30,680

d. P 26,680

8. The Bad Debts Expense at December 31, 2006 is: a. P 74,680 b. P 48,000 c. P 30,680

d. P 26,680

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Solution * (1) Accounts receivable Sales

8,000

8,000

(2) Accounts receivable 14,000 Accounts receivable

14,000

* (3) Accounts receivable 18,000 Customers’ deposit

18,000

(4) Allowance for bad debts Accounts receivable

48,000

48,000

* (5) Miscellaneous losses 8,000 Accounts receivable 8,000 To reconcile control account with subsidiary ledger. (6) Bad debts Allowance for bad debts

26,680 26,680

* ignored in the aging of AR

Unadjusted balance (1) (2) (3) (4) (5) Adjusted balance 818,000

Control Account 848,000 8,000 18,000 (48,000) ( 8,000)

Under 1 mo. 1 to 6 mos. Over 6 mos.

Aging of AR Under 1 to 6 Over 6 1 mo. mos. mos. 360,000 368,000 152,000 (14,000) (48,000) ______ _______ _______ 360,000 354,000 104,000

360,000 x 1% 354,000 x 2%

24,000 x 50% 80,000 x 10% Required allowance for bad debts

Answer: 1. A 6. C

= =

3,600 7,080

= 12,000 = 8,000 30,680

Provision for bad debts per audit: Beginning balance + Provision – squeezed figure - Write-off per book - Additional Write-off Ending balance

20,000 74,680 16,000 48,000 30,680

Provision per book Provision per audit Adjustment

48,000 74,680 26,680

2. D 7. C

3. C 8. A

4. A

5. B

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Problem 8 KAREN COMPANY’s accounts receivable subsidiary ledger shows the following information: Invoice Customer Account Balance – 12/31/06 Date Amount Penas P 70,360 12/06/06 P 28,000 11/29/06 42,360 Jefferson

41,840

09/27/06 08/20/06

24,000 17,840

Junsay

61,200

12/08/06 10/25/06

40,000 21,200

Cherryl

90,280

11/17/06 10/09/06

46,280 44,000

Baron

63,200

12/12/06 12/02/06

38,400 24,800

Riza

34,800

09/12/06

34,800

The estimated bad debt rates below are based on Karen Company’s receivable collection experience. Age of Accounts Rate 0 – 30 days 1% 31 – 60 days 1.5% 61 – 90 days 3% 91 – 120 days 10% Over 120 days 50% The allowance for bad debts account had a credit balance of P7,000 on December 31, 2006, before adjustment. Questions 1. The adjusted Accounts Receivable balance of KAREN COMPANY at December 31, 2006 is: a. P 317,680 b. P 319,320 c. P 326,880 d. P 361,680 2. The adjusted balance of Allowance for Bad Debts of KAREN COMPANY at December 31, 2006 is: a. P 9,698.80 b. P 10,188.80 c. P 12,397.60 d. P 19,397.60 3. The adjusted balance of Bad Debts Expense of KAREN COMPANY at December 31, 2006 is: a. P 9,698.80 b. P 10,188.80 c. P 12,397.60 d. P 19,397.60 4. The net realizable value of Accounts Receivable of KAREN COMPANY at December 31, 2006 is: a. P 342,282.40 b. P 349,282.40 c. P 307,482.40 d. P 314,482.40

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Solution Aging of AR

Balance 0-30 12/31/06

31-60 Days

61-90 Days

91-120 Days

Penas P 70,360 Jefferson 41,840 Junsay 61,200 Cherryl 90,280 Baron 63,200 Riza 34,800 Total P361,680 x % of uncollectibility Required Allowance

28,000

42,360

Bad debts expense Allowance for bad debts (P19,397.60 – P7,000) Answer: 1. D 2. D

12,397.60 12,397.60

40,000

46,280 63,200 ______ ______ 131,200 88,640 1% 1.5% 1,312 1,329.60

3. C

Over 120 Days

21,200 44,000 ______ 65,200 3% 1,956

24,000

34,800 58,800 10% 5,880

Days 17,840

_____ 17,840 50% 8,920 = P 19,397.60

4. A

Problem 9 You are assigned to audit KENT COMPANY for the year ending December 31, 2006. The accounts receivable were circularized as at December 31, 2006 and the following exceptions/replies have not been disposed of at the date of your examination. Customer

Balance

Duque

P 30,000

Comments

Audit Findings

Balance was paid Dec. 29, 2006.

Kent received mailed January 2, 2007.

Odessa

74,000

Balance was offset by our Dec. 10 shipment of goods.

Kent credited accounts payable for P74,000 to record purchase of goods

Solejon

16,200

The above balance has been paid.

The payment was Credited to Dairen – cust.

Rubin

23,700

We do not owe Kent anything as the goods were received January, 2007, FOB Destination

The shipment costing P16,300 was made on Dec. 29, 2006 and the goods were not included in recording the year-end inventory.

150,000

Our deposit of P200,000 should cover this balance

Kent had previously credited the deposit to sales.

We never received these goods.

The shipment was erroneously made to another customer and the goods worth P51,000 are now on its way to Ocsio. The shipment, FOB Shipping

Jamea

Ocsio

54,000

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Point, was made on Dec. 30, 2006. Dela Cruz

Ronel

100,000

We are rejecting the price, which is too much

Kent’s clerk erroneously computed the unit price at P2,000. The correct pricing should have been at P1,200 per unit.

18,000

Amount is okay. Since this is on consignment, we will remit payment upon selling the goods.

Goods cost P12,000 and were appropriately included in Kent’s inventory

KENT COMPANY has not recorded yet its 2006 inventory. The balance of inventory and Accounts Receivable at December 31, 2006 (per trial balance) is P 456,000 and P345,900, respectively. Questions 1. The entry to adjust the finding made in the account of Duque is: a. Cash 30,000 c. Accounts receivable 30,000 Accounts receivable 30,000 Cash 30,000 b. Cash 30,000 d. No adjustment Sales 30,000 2. The entry to adjust the finding made in the account of Odessa is: a. Purchases 74,000 c. Accounts payable 74,000 Accounts receivable 74,000 Accounts receivable 74,000 b. Sales 74,000 d. No adjustment Purchases 74,000 3. The entry to adjust the finding made in the account of Solejon is: a. Accounts receivable 16,200 c. Accounts receivable 16,200 Accounts receivable 16,200 Accounts payable 16,200 b. Accounts payable 16,200 d. No adjustment Accounts receivable 16,200 4. The entry to adjust the finding made in the account of Rubin is (for sales): a. Sales 23,700 c. Accounts receivable 23,700 Accounts receivable 23,700 Sales 23,700 b. Accounts payable 23,700 d. No adjustment Purchases 23,700 5. Entry to adjust the finding made in the account of Rubin is (for cost of sales): a. Cost of sales 16,300 c. Retained earnings 16,300 Inventory 16,300 Inventory 16,300 b. Inventory 16,300 d. No adjustment Cost of sales 16,300

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6. The entry to adjust the finding made in the account of Jamea is: a. Customers’ advances 150,000 c. Sales 200,000 Sales 150,000 Customers’ advances 50,000 Accounts receivable 150,000 b. Customers’ advances150,000 d. Sales 150,000 Accounts receivable 150,000 Customers’ advances 150,000 7. The entry to adjust the finding made in the account of Ocsio is: a. No adjustment c. Sales 54,000 Accounts receivable 54,000 b. Accounts receivable 51,000 d. Sales 3,000 Sales 51,000 Accounts receivable 3,000 8. The entry to adjust the finding made in the account of Dela Cruz is: a. Accounts receivable 40,000 c. Sales 60,000 Sales 40,000 Accounts receivable 60,000 b. Sales 40,000 d. No adjustment Accounts receivable 40,000 9. The adjusted balance of Kent Company’s inventory at December 31, 2006 is: a. 451,700 b. P 460,300 c. P 472,300 d. P 484,300 10. The adjusted balance of Kent Company’s accounts receivable at December 31, 2006 is: a. P 37,200 b. P 55,200 c. P 187,200 d. P 205,200 Solution For Doque For Odessa For Solejon For Rubin

For Jamea For Ocsio. For dela Cruz For Ronel

No adjustment Accounts payable Accounts receivable Accounts receivable Accounts receivable Sales Accounts receivable Inventory Cost of sales Sales Customers’ advances Accounts receivable Sales Accounts receivable Sales Accounts receivable Sales Accounts receivable

Unadjusted Inventory Adjustment - Rubin

Adjusted balance Answer: 1. D 6. C

2. C 7. D

456,000 16,300

_________ 472,300 3. A 8. B

74,000 16,200 23,700 16,300 200,000 3,000 40,000 18,000

74,000 16,200 23,700 16,300 50,000 150,000 3,000 40,000 18,000

Unadjusted AR Adjustment - Odessa - Solejon - Rubin - Jamea - Ocsio - dela Cruz - Ronel Adjusted balance 4. A 9. C

345,900 ( 74,000) ( 23,700) (150,000) ( 3,000) ( 40,000) ( 18,000) 37,200

5. B 10. A

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Problem 10 You have been assigned to audit the financial statement MALAQUI INCORPORATED. The company is a distributor of a variety of electronic appliances and parts. The company uses the calendar year for reporting purposes. Information regarding balances of MALAQUI INCORPORATED’S Accounts Receivable and the related Allowance for Doubtful Accounts as of December 31, 2006 and the related audit finding, is given below. The schedule of accounts receivable furnished you by the accountant reflects some errors. The total figure in the schedule does not tally with the balance per subsidiary ledger of P919,000. Based on your review of sales invoices, purchase orders and other related documents, you noted the following information: 1. Sales on account of various electronics totaling P36,480 were returned by the customer on December 28, 2006, but no entry was made in the books. The goods were included in the year-end physical count. 2. Based on the findings per confirmation reply from a customer, he indicated that he has already paid his account of P23,980 in October, 2006. Your verification disclosed that said collection was credited to net sales account. 3. Collection of P12,950 on November 5, 2006 from Diana Corporation was credited to the account of DNA Corporation. The allowance for doubtful accounts is set at 3% of the outstanding accounts receivable at the end of the period. As of December 31, 2006, the Allowance for Doubtful Accounts has a balance of P32,400 before adjustment. Questions 1. What is the adjusted balance of Accounts Receivable as of December 31, 2006? a. P 919,000 b. P 895,020 c. P 882,520 d. P 858,540 2. What is the adjusted balance of Allowance for Doubtful Accounts as of December 31, 2006? a. P 27,570.00 b. P 26,850.60 c. P 26,475.60 d. P 25,756.20 Solution Sales Accounts receivable Sales Accounts receivable Answer: 1. D 2. D

36,480 23,980

36,480 23,980

Problem 11 You audit of APAS COMPANY for the year 2006 disclosed the following: 1. The December 31 inventory was determined by a physical count on December 28 and based on such count, the inventory was recorded by: Inventory 1,400,000 Cost of sales 1,400,000 2. The 2006 ledger shows a sales balance of P20,000,000. 3. The company sells a mark-up of 20% based on sales.

16

4. The company recognizes sales upon passage of title to the customers. 5. All customers are within a four-day delivery area. The sales register for December, 2006 and January, 2007, showed the following details: December Register Invoice No. 300 301 302 303 304 305

FOB Terms Destination Shipping point Destination Destination Shipping point Shipping point

Date Shipped 12/30 12/30 12/23 12/24 01/02 12/29

Amount P 50,000 62,500 47,500 82,500 56,000 90,000

FOB Terms Destination Shipping point Destination Shipping point Shipping point

Date Shipped 12/29 12/29 01/02 01/04 12/27

Amount 67,500 74,500 140,000 73,000 67,500

January Register Invoice No. 306 307 308 309 310 Questions 1. The Sales for December is over/(under) by: a. P 36,000 under b. P 36,000 over

c. P 106,000 under d. P 106,000 over

2. The Inventory for December is over/(under) by: a. P 235,600 under c. P 181,600 under b. P 235,600 over d. P 181,600 over 3. The adjusted inventory at December 31, 2006 is: a. P 1,645,412 b. P 1,635,600 c. P 1,218,400

d. P 1,164,400

4. The adjusted sales at December 31, 2006 is: a. P 20,106,000 b. P 20,036,000 c. P 19,964,000

d. P 19,894,000

5. How much sales for the month of December 2006 were erroneously recorded in January 2007? a. P 282,000 b. P 272,500 c. P 198,000 d. P 142,000 6. How much sales for the month of January 2007 were erroneously recorded in December 2006? a. P 228,500 b. P 188,500 c. P 180,500 d. P 106,000 Solution (1) Sales 50,000 Accounts receivable 50,000 Invoice # 300

17

(2) Cost of sales 50,000 Inventory (62,500 x 80%) Invoice # 301 (3) Sales 56,000 Accounts receivable Invoice # 304 (4) Cost of sales 72,000 Inventory (90,000 x 80%) Invoice # 305 (5) Accounts receiv. 74,500 Sales Invoice # 307 (6) Cost of sales 59,600 Inventory (74,500 x 80%) (7) Accounts receiv. 67,500 Sales Invoice # 310 Unadjusted Sales (1) (3) (5) (7) Adjusted Sales

50,000

56,000 72,000

74,500 59,600 67,500 20,000,000 ( 50,000) ( 56,000) 74,500 67,500 20,036,000

Unadjusted inventory (2) (4) (6) Adjusted inventory

1,400,000 ( 50,000) ( 72,000) ( 59,600) _________ 1,218,400

Sales for the month of December that 2003 were erroneously recorded in January 2004: Invoice # 307 74,500 Invoice # 310 67,500 Total 142,000 Sales for the month of January 2004 were erroneously recorded in December 2003: Invoice # 300 50,000 Invoice # 304 56,000 Total 106,000 Answer: 1. A 2. D 3. C

4. B

5. D

6. D

Problem 12 You are engaged to perform an audit of the accounts of the JELLER CORPORATION for the year ended December 31, 2006, and have observed the taking of the physical inventory of the company on December 27, 2006. Only merchandise shipped by the Durian Corporation to customers up to and including December 27, 2006 have been removed or excluded from inventory. The inventory as determined by physical inventory count has been recorded on the books by the company’s controller. No perpetual inventory records are maintained. All sales are made on an FOB shipping point basis. The following lists of sales invoices are entered in the sales books for the months of December 2006 and January 2007, respectively.

December 2006

18

(a) (b) (c)

Sales Invoices Date Amount

Date Shipped

12/23/06 12/27/06 12/30/06

12/31/06 12/27/06 01/05/07

P 25,000 18,000 30,000

January 2007

(d) (e) (f) (g) (h)

12/22/06 12/28/06 12/03/06 12/31/06 12/31/06

(i) (j) (k) (l)

12/31/06 12/27/06 01/08/07 01/10/07

12,000 16,000 8,000 20,000 14,000 7,500 11,000 9,000 5,000

01/08/07 12/29/06 12/05/06 01/07/07 12/31/06 12/29/06 01/04/07 01/09/07 12/31/06

Questions 1. How much sales for month of December 2006 were erroneously recorded in January 2007? a. P 7,500 b. P 12,500 c. P 18,500 d. P 20,000 2. How much sales for the month of January 2007 were erroneously recorded in December 2006? a. Zero b. P 12,500 c. P 20,000 d. P 62,000 3. How much is the correct amount of sales for the month ended December 31, 2006? a. P 143,000 b. P 155,500 c. P 93,500 d. P 81,000 Solution (1) B

Item (I)P7,500 and Item (l), P5,000

P12,500

(2)

D

Items c, d, g

P62,000

(3)

C

Recorded sales for December December sales recorded in January January sales recorded in December Adjusted sales for December

P143,000 12,500 (62,000) P 93,500

Problem 13 On September 1, DY COMPANY assigns specific receivables totaling P750,000 to Davao Bank as collateral on a P625,000, 12% note. DY COMPANY will continue to collect the assigned accounts receivable. Davao Bank also assesses a 2% service charge on the total accounts receivable assigned. DY COMPANY is to make monthly payments to Davao Bank with cash collected on assigned accounts receivable. Collections of assigned accounts during September totaled P260,000 less cash discounts of P3,500. Questions 1. What were the proceeds from the assignment of DY COMPANYs’ accounts receivable on September 1? a. P 610,000 b. P 612,500 c. P 625,000 d. P 735,000 2. What amount is owed to Davao Bank by DY COMPANY for September collections plus accrued interest on the note to September 30? a. P 260,000 b. P 262,750 c. P 264,000 d. P 266,250 Solution (1) A

P625,000 – (2% x P750,000)

P610,000

(2)

P260,000 – P3,500 + (P625,000 x 12% x 1/12)

P262,750

B

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Problem 14 On April 1, 2006, VAILOCES CORPORATION assigned accounts receivable totaling P400,000 as collateral on a P300,000, 16% note from Racel Bank. The assignment was done on a nonnotification basis. In addition to the interest on the note, the bank also receives a 2% service fee, deducted in advance on the P300,000 value of the note. Additional information is as follows: 1. Collections of assigned accounts in April totaled P191,100, net of a 2% sales discount. 2. On May 1, VAILOCES CORPORATION paid the bank the amount owed for April collections plus accrued interest on note to May 1. 3. The remaining accounts were collected by VAILOCES CORPORATION during May except for P2,000 accounts written-off as worthless. 4. On June 1, VAILOCES CORPORATION paid the bank the remaining balance of the note plus accrued interest. Questions 1. The journal entry of VAILOCES CORPORATION in the assignment of accounts receivable on April 1, 2006 is: a. Cash 294,000 c. Cash 294,000 Finance charges 6,000 Finance charges 6,000 Accounts receivable 300,000 Notes payable 300,000 b. Cash 294,000 d. Cash 294,000 Finance charges 6,000 Commission exp. 6,000 AR – assigned 300,000 AR – assigned 300,000 2. The journal entry of VAILOCES CORPORATION in the assignment of accounts receivable on April 1, 2006 assuming the assignment is on notification basis: a. Cash 294,000 c. Cash 294,000 Finance charges 6,000 Finance charges 6,000 Accounts receivable 300,000 Notes payable 300,000 b. Cash 294,000 d. Cash 294,000 Finance charges 6,000 Commission exp. 6,000 AR – assigned 300,000 AR – assigned 300,000 3. The entry of VAILOCES CORPORATION on April collection of the assigned account is: a. Cash 191,100 c. Cash 191,100 Sales discounts 3,900 Sales discounts 3,900 AR – assigned 195,000 Accounts receivable 195,000 b. Cash 191,100 d No journal entry Accounts receivable 191,100 4. If the assignment is on notification basis, who should collect the assigned accounts receivable? a. Vailoces Corporation c. A third party b. Racel Bank d. It is the option of the customer to whom he/she will pay the account

20

5. Using the assumption in number 4 above, what will be the entry of VAILOCES CORPORATION on the April collection of the assigned accounts receivable? a. Cash 191,100 c. Cash 191,100 Sales discounts 3,900 Sales discounts 3,900 AR – assigned 195,000 Accounts receivable 195,000 b. Cash 191,100 d No journal entry Accounts receivable 191,100 6. The journal entry of VAILOCES CORPORATION on the on May 1, 2006 is: a. Notes payable 187,100 c. Notes payable 188,500 Interest expense 4,000 Interest expense 2,600 Cash 191,100 Cash 191,100 b. Notes payable 195,000 d. Notes payable 195,000 Interest expense 5,333 Interest expense 4,000 Cash 200,333 Cash 199,000 7. Using the same information in number 6 (May 1 transaction) except that the assignment is done on a notification basis, the entry should be: a. Notes payable 187,100 c. Notes payable 188,500 Interest expense 4,000 Interest expense 2,600 Accounts receivable 191,100 AR –assigned 191,100 b. Notes payable 195,000 d. No journal entry Interest expense 4,000 AR - assigned 199,000 8. The total interest expense of VAILOCES CORPORATION on the assigned accounts receivable is: a. P 5,400 b. P 8,066 d. P 10,000 c. P 11,400 Solution April 1 1 (1) (2)

(3)

(4)

Answer: 1. C 6. D

Accounts receivable – assigned 400,000 Accounts receivable Cash 294,000 Finance charges (300,000 x 2%) 6,000 Notes payable Cash 191,100 Sales discounts 3,900 AR – assigned (191,100/98%) Notes payable 195,000 Interest expense 4,000 (300,000 x 16% x 1/12) Cash Cash 203,000 Allowance for bad debts 2,000 AR – assigned (400,000 – 195,000) Notes payable (300,000 – 195,000)105,000 Interest expense 1,400 (105,000 x 16% x 1/12) Cash 2. C 7. B

3. A 8. A

4. B

400,000 300,000 195,000

199,000 205,000

106,400 5. D

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Problem 15 UY FINANCE CORPORATION purchases the accounts receivable of other companies on a without recourse, notification basis. At the time the receivables are factored, 15% of the amount factored is charged to the client as commission and recognized as revenue in UY’S books. Also, 10% of the receivables factored is withheld by Uy as protection against sales returns or other adjustments. This amount credited by Uy to the client Retainer account. At the end of each month, payments are made by Uy to its clients so that the balance in the Client Retainer account is equal to 10% of unpaid factored receivables. Based on Uy’s bad debt loss experience, an allowance for bad debts of 5% of all factored receivables is to be established, Uy makes adjusting entries at the end of each month. On January 3, 2003, Jannette Company factored its accounts receivable totaling P1,000,000. By January 31, P800,000 on these receivables had been collected by Uy. Questions 1. The commission earned of Uy Finance Corporation from Jannette Company’s accounts receivable factored is: a. P 150,000 b. P 120,000 c. P 135,000 d. P 90,000 2. The proceeds received by Jannette Company on the accounts factored is: a. P 810,000 b. P 780,000 c. P 765,000 d. P 750,000 3. How much is the Client Retainer account of Uy Finance Corporation at January 31, 2003 is: a. P 0 b. P 20,000 c. P 60,000 d. P 80,000 4. How much is the bad debts expense of Uy Finance Corporation at January 31, 2003 is: a. P 50,000 b. P 40,000 c. P 20,000 d. P 0 Solution UY FINANCE CORPORATION’S BOOKS Jan.

3

31 31 31

Accounts receivable factored 1,000,000 Commission income (P1 M x 15%) Client Retainer (P1 M x 10%) Cash Cash 800,000 Accounts receivable factored Client Retainer 80,000 Cash (100,000 – [10% x 200,000]) Bad debts expense 50,000 Allowance for bad debts (P1 M x 5%)

150,000 100,000 750,000 800,000 80,000 50,000

JANETTEE COMPANY’S BOOKS Jan. 3

Cash

31 Answer: 1. A

22

Receivable from factor Commission Accounts receivable Cash Receivable from factor 2. D

3. B

750,000 100,000 150,000 80,000

4. A

1,000,000 80,000

Problem 16 During your audit of the LEILANI COMPANY for the calendar year 2006, you find the following accounts: NOTES RECEIVABLE Sept. 1 Samson, 12%, due in 3 mos. 36,000 36,000 Nov. 1 Hazel, 15%, due in 6 mos. 90,000 126,000 Nov. 1 Salazar, no interest, due in one year 75,000 201,000 Nov. 30 Rosa, Co. 12%, due in 13 mos. 15,000 216,000 Dec. 1 Rona, 15%, due in 15 mos. 36,000 252,000 Dec. 2 Anito, President, 18%, due in 3 mos. 18,000 270,000

Sept. 1 Nov. 1

Sept. 1 Nov. 1

NOTES RECEIVABLE DISCOUNTED Samson note, discounted at 15% Salazar note, discounted at 15% INTEREST EXPENSE 310.50 11,250.00

Samson note Salazar note

36,000

36,000

75,000

111,000

310.50 11,560.50

All notes are trade notes receivable unless otherwise specified. The Samson note was paid December31, 2006. Interest income is credited only upon receipt of cash. Questions 1. The accrued interest income at December 31, 2006 is: a. P 2,748 b. P 3,018 c. P 3,120

d. P 4,200

2. The interest expense at December 31, 2006 is: a. P 1,875.00 b. P 2,185.50c. P 4,060.50

d. P 11,560.50

3. The Notes Receivable at December 31, 2006 is: a. P 141,000 b. P 159,000 c. P 216,000

d. P 252,000

4. The Notes Receivable – discounted at December 31, 2006 is: a. P 63,750 b. P 73,125 c. P 75,000

d. P 111,000

5. How much is the proceeds in the discounting of notes receivable for the year? a. P 99,439.50 b. P 100,060.50 c. P 111,000.00 d. P 111,310.50 Solution 1. C Hazel 90,000 x Rosa 15,000 x Rona 36,000 x Anito 18,000 x Total accrued interest 2. B Samson Salazar 11,250 x Total interest expense

15% 12% 15% 18%

2/12

x x x x

2/12 1/12 1/12 1/12

= P 2,250 = 150 = 450 = 270 P 3,120

= P 310.50 = 1,875.00 = P2,185.50

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3.

4. 5.

A Hazel 90,000 Rosa 15,000 Rona 36,000 Total 141,000 C Salazar 75,000 A Samson P 36,000 – P 310.50 Salazar P 75,000 – P11,250 Total proceeds

= P 35,689.50 = 63,750.00 = P 99,439.50

Problem 17 On January 1, 2006, TUQUIB COMPANY sells its equipment with a carrying value of P160,000. The company receives a non-interest-bearing note due in 3 years with a face amount of P200,000. There is no established market value for the equipment. The prevailing interest rate for a note of this type is 12%. The following are the present value factors of 1 at 12%: Present value of 1 for 3 periods Present value of an ordinary annuity of 1 for 3 periods

0.71178 2.40183

Questions 1. The gain or loss on the sale of equipment is: a. P 40,000 b. P 122 c. P 0

d. (P 17,644)

2. The discount on notes receivable is: a. P 57,644 b. P 40,000

d. P 0

c. P 39,878

3. The entry to record the sale of equipment is: a. Notes receivable 200,000 c. Notes receivable 200,000 Equipment 200,000 Loss on sale 17,644 Equipment 160,000 Discount on NR 57,644 b. Notes receivable 200,000 d. Notes receivable 200,000 Equipment 160,000 Equipment 160,000 Gain on sale 40,000 Gain on sale 122 Discount on NR 39,878 4. The discount amortization at the end of the second year using the effective-interest amortization is: a. P 17,083 b. P 19,133 c. P 21,428 d. P 36,216 5. The entry to record the discount amortization is: a. Discount on NR c. Interest income Interest income Discount on NR b. Discount on NR d. Interest expense Interest expense Discount on NR Solution 1. D Sales price – present value of note (P200,000 x 0.71178) 142,356 Book value of equipment 160,000 Loss on sale of equipment (17,644)

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2.

3.

4.

5.

A Face value of note Present value of note Discount on notes receivable C Notes receivable Loss on sale of equipment Equipment Discount on notes receivable B Present value of note, 1/1/03 Add: Interest earned in 2003 (142,356 x 12%) Present value of note, 1/1/04 Add: interest earned in 2004 (159,439 x 12%) Present value of note, 1/1/05 A

200,000 142,356 57,644 200,000 17,644

160,000 57,644 142,356 17,083 159,439 19,133 178,572

Problem 18 On January 2, 2006, a tract of land that originally cost P800,000 was sold by MAYLENE CORPORATION. The company received a P1,200,000 note as payment. It bears interest rate of 4% and is payable in 3 annual installments of P400,000 plus interest on the outstanding balance. The prevailing rate of interest for a note of this type is 10%. The present value table shows the following present value factors of 1 at 10%: Present Present Present Present

value value value value

factor of 1 for 3 periods factor of 1 for 2 periods factor of 1 for 1 period of an ordinary annuity of 1 for 3 periods

0.75132 0.82645 0.90909 2.48685

Questions 1. The gain on sale of land on January 2, 2006 is: a. P 194,740 b. P 276,847 c. P 290,740

d. P 400,000

2. The interest income on the note receivable for the year ended December 31, 2006 using effective interest method is: a. P 120,000 b. P 109,074 c. P 107,685 d. P 99,474 3. How much cash will MYLENE CORPORATION received from notes receivable? a. P 1,076,847 b. P 1,200,000 c. P 1,296,000 d. P 1,476,847 Solution Amount of cash to be received: Interest Principal Total 2003 48,000 * 400,000 448,000 2004 32,000 ** 400,000 432,000 2005 16,000 *** 400,000 416,000 Total 1,296,000 * 1,200,000 x 4% ** 800,000 x 4% *** 400,000 x 4% 2003 2004 2005 Total

Cash received 448,000 432,000 416,000

PV Factor 0.90909 0.82645 0.75132

Present Value 407,272 357,026 312,549 1,076,847

25

Present value of note Cost of land Gain on sale

1,076,847 800,000 276,847

Interest income for 2006 – P1,076,847 x 10% = P107,685 Answer: 1. B

2. C

3. C

Problem 19 The balance sheet of PERSEVERANCE CORPORATION on December 31, 2005, includes the following cash and receivable balances: Cash – Davao Bank Currency and coins Petty cash fund Cash in bond sinking fund Notes receivable (including discounted with recourse, P15,500) Accounts receivable P 85,600 Less: Allow. for bad debts (4,150) Interest receivable

P 45,000 16,000 1,000 15,000 36,500 81,450 525

Current liability reported in the December 31, 2005, balance sheet included: Obligation on discounted notes receivable

15,500

Transactions during 2006 included the following: 1. Sales on account were P767,000. 2. Cash collected on accounts totaled P576,500, including accounts of P93,000 with cash discounts of 2%. 3. Notes received in settlement of accounts totaled P82,500. 4. Notes receivable discounted as of December 31, 2005, were paid at maturity with the exception of one P3,000 note on which the company had to pay the bank P3,090, that included interest and protest fees. It is expected that recovery will be made on this note early in 2004. 5. Customer notes of P60,000 were discounted with recourse during the year, proceeds from their transfer being P58,500. Of this total, P48,000 matured during the year without notice of protest. 6. Customer accounts of P8,720 were written-off in prior year as worthless. 7. Recoveries of doubtful accounts written-off in prior years were P2,020. (not included in the collection in number 2) 8. Notes receivable collected during the year totaled P27,000 and interest collected was P2,450.

26

9. On December 31, accrued interest on notes receivable was P630. 10. Uncollectible accounts are estimated to be 5% of the December 31, 2006, accounts receivable balance. 11. Cash of P35,000 was borrowed from Davao Bank, accounts receivable of P50,000 being pledged on the loan. Collections of P19,500 had been made on these receivables included in the total given in transaction (2) and this amount was applied on December 31, 2006, to payment of accrued interest on the loan of P600, and the balance to partial payment of the loan. 12. Petty cash fund was reimbursed based on the following analysis of expenditure vouchers: Travel expenses P 112 Entertainment expenses 78 Postage 93 Office supplies 173 Cash over 6 13. P3,000 cash was added to the bond sinking fund. 14. Currency on hand at December 31, 2006 was P12,000. 15. Total cash payment for all expenses during the year were P468,000. Charge to General Expense Based on the information above and some other analysis, answer the following questions: Questions 1. PERSEVERANCE CORPORATION’s Cash balance at December 31, 2006 is: a. P 269,430 b. P 265,430 c. P 252,430 d. P 219,930 2. PERSEVERANCE CORPORATION’s Accounts Receivable balance at December 31, 2006 is: a. P178,8787.00 b. P 178,824.50 c. P176,804.50 d. P174,254.50 3. PERSEVERANCE CORPORATION’s Other Cash Item (Currency and coins & Petty Cash Fund) at December 31, 2006 is: a. P 16,000 b. P 13,000 c. P 12,550 d. P 12,000 4. PERSEVERANCE CORPORATION’s Notes Receivable at December 31, 2006 is: a. P 46,500 b. P 31,000 c. P 30,910 d. P 28,500 5. PERSEVERANCE CORPORATION’s Obligation of Discounted of Note Receivable at December 31, 2006 is: a. P 15,500 b. P 12,000 c. P 11,910 d. P 3,500 6. PERSEVERANCE CORPORATION’s Interest Receivable at December 31, 2006 is: a. P 2,555 b. P 1,155 c. P 630 d. P 525 7. PERSEVERANCE CORPORATION’s Bad debts at December 31, 2006 is: a. P 16,005.20 b. P 13,875.50 c. P 11,855.50 d. P 11,825.50

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8. PERSEVERANCE CORPORATION’s Allowance for bad debts at December 31, 2006 is: a. P 9,406.50 b. P 9,305.50 c. P 9,252.00 d. P 4,150.00 9. PERSEVERANCE CORPORATION’s Sales balance at December 31, 2006 is: a. P 767,000 b. P 765,140 c. P 765,102 d. P 757,330 10. PERSEVERANCE CORPORATION’s Interest income balance at December 31, 2006 is: a. P 3,086 b. P 3,080 c. P 2,561 d. P 2,555 Solution (1) Accounts receivable 767,000 Sales (2) Cash 576,500 Sales discounts 1,860 Accounts receivable (3) Notes receivable 82,500 Accounts receivable (4) Obligation on discounted note 12,500 Notes receivable Accounts receivable 3,090 Cash Obligation on discounted note 3,000 Notes receivable (5) Cash 58,500 Interest expense 1,500 Obligation on discounted note Obligation on discounted note 48,000 Notes receivable (6) Allowance for bad debts 8,720 Accounts receivable (7) Accounts receivable 2,020 Allowance for bad debts Cash 2,020 Accounts receivable (8) Cash 27,000 Notes receivable Cash 2,450 Interest receivable Interest income (9) Interest receivable 630 Interest income (10) Bad debts 11,855.50 Allowance for bad debts (11) Cash 35,000 Notes payable Interest expense 600 Notes payable 18,900 Cash (12) Operating expenses 456 Cash Cash 6 Other income (13) Sinking fund 3,000 Cash (14) No entry (15) General expenses 468,000 Cash Answer: 1. A 6. C

28

2. C 7. C

3. B 8. B

4. D 9. B

767,000 576,360 82,500 12,500 3,090 3,000 60,000 48,000 8,720 2,020 2,020 27,000 525 1,925 630 11,855.50 35,000 19,500 456 6 3,000 468,000 5. B 10. D

Problem 20 You are engaged in your fifth annual examination of the financial statements of NAVAL CORPORATION. Your examination is for the year ended December 31, 2006. The client prepared the following schedule of Trade Notes Receivable and Interest Receivable for you at December 31, 2006. You have agreed the opening balances to your prior year’s audit workpapers.

Maker Rubin Co. Cardoza

NAVAL CORPORATION TRADE NOTES RECEIVABLE AND RELATED INTEREST RECEIVABLE Trade-Notes Receivable Date Terms Int. Bal. 2006 2006 Bal. Rate 12/31/05 debits credit 12/31/06 04/01/05 1-year 12% P 60,000 P 60,000 05/01/06

Pancho

07/01/06

Betque Gabuter o Noval

08/03/06 10/02/06

Gan

11/01/06

Due from Rubin Co. Pancho Betque Gabutero Noval Gan Totals

11/01/06

90 days after date 60 days after date Demand 60 days after date 90 days after date 90 days after date

Balance P 5,400

___________ P 5,400

-

P 30,000

12%

6,000

12% 12%

15,000 50,000

50,000

15,000 -

8%

42,000

35,000

7,000

12%

32,000

INTEREST RECEIVABLE 2006 debit 2006 credit P 1,800 120 400 1,000 560 640 P 4,520

29,375

P

625 6,000

32,000

Balance 12/31/06

P 7,200 660 ___________ P 7,860

P 120 400 340 560 640 P 2,060

Your examination reveals this information: 1. Interest is computed on a 360-day basis. In computing interest, it is the corporation’s practice to exclude the first day of the note’s term and to include the due date. 2. The Cardoza’s 90-day non-interest bearing note was discounted on May 15 at 10%, and the proceeds were credited to the Trade Notes Receivable account. The note was paid at maturity. 3. Pancho became bankrupt on August 31, and the corporation will recover 75 cents on the peso. All of Naval Corporation’s notes receivable provide for interest at a rate of 12% on the maturity value of a dishonored note.

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4. Betque, president of Naval Corporation, confirmed that she owed Naval Corporation P15,000 and that she expected to pay the note within six months. You are satisfied that the note is collectible. 5. Gabutero’s 60-day note was discounted on November 1 at 8%, and the proceeds were credited to the Trade Notes Receivable and Interest Receivable accounts. On December 2, Naval Corporation received notice from the bank that GAbutero’s note was not paid at maturity and that it had been charged against Naval’s checking account by the bank. Upon receiving the notice from the bank, the bookkeeper recorded the note and the accrued interest in the Trade Notes Receivable and Interest Receivable account. Gabutero paid Naval Corporation the full amount due in January 2003. 6. Noval, 90-day note was pledged as collateral for P35,000, 60-day 10% loan from the Davao National Bank on December 1. 7. On November 1, the corporation received four, P8,000, 90-day notes from Gan. On December 1, the corporation received payment from Gan for one of the P8,000 notes with accrued interest. Prepayment of the notes is allowed without penalty. The bookkeeper credited the Gan’s Accounts Receivable account for the cash received. Questions 1. At December 31, 2006, the note receivable from Cardoza has a balance of: a. P 30,000 b. P 29,375 c. P 625 d. P 0 2. The interest income from Cardoza’s note at December 31, 2006 is: a. P 750 b. P 625 c. P 500 d. P 0 3. At December 31, 2006, the note receivable from Pancho has a balance of: a. P 6,370.92 b. P 6,366.00 c. P 6,120 d. P 0 4. The interest income from Pancho’s note at December 31, 2006 is: a. P 370.92 b. P 250.92 c. P 246 d. P 0 5. At December 31, 2006, the note receivable from Betque has a balance of: a. P 15,350 b. P 15,000 c. P 14,650 d. P 0 6. At December 31, 2006 the note receivable from Gabutero has a balance of: a. P 150,000 b. P 100,000 c. P 50,000 d. P 0 7. At December 31, 2006 the note receivable from Noval has a balance of: a. P 42,000 b. P 35,000 c. P 7,000 d. P 0 8. At December 31, 2006 the note receivable from Gan has a balance of: a. P 32,480 b. P 32,000 c. P 24,000 d. P 23,950 9. The total Note Receivable – Trade at December 31, 2006 is: a. P 89,000 b. P 81,000 c. P 72,366

d. P 66,000

10. The total Interest Receivable at December 31, 2006 is: a. P 2,300 b. P 2,060 c. P 1,950

d. P 1,790

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Solution (2)

(3)

(4)

(5)

Cardoza

Pancho

Betque

Gabutero

Adjusting Entries as of Dec. 31, 2006 (a) Interest Expense Trade Notes receivable Maturity Value = Face Value Discount (30,000 x 10% x 75/360) Proceeds (b) Accounts Receivable Trade Notes Receivable Interest Receivable Interest Revenue Face Value Interest (6000 x 12% x60/360) Maturity value Add.’l interest from due date , 8.30.06 to 12.31.06 (6,120 x 12% x 123/360) Total amount due, 12.31.06

625.00 P30,000 625 P29,375 6,370.92

P6,000.00 120.00 P6,120.00

15,000 350

OE: Cash

50,660

CE: Cash

NR – Discounted Interest income

(d) Adj: Notes Receivable Interest Receivable Interest income NR – discounted -----------------------------------------

50,660

50,000 660 -----------

OE: Notes Receivable Interest Receivable Cash

50,000 1,000

CE: Accounts Receivable Cash

51,000

NR – discounted Notes Receivable (e)

Accounts Receivable NR – discounted Trade Notes Receivable Interest Receivable Face Value Interest (50,000 x 12% x 60/360) Maturity Value Discount (50,000 x 8% x 30/360) Proceeds (f)

Accounts Receivable Interest Revenue (51,000 x 12% x 30/360)

6,000.00 120.00 250.92

250.92 P6,370.92

© Notes receivable- Officers Interest Receivable Interest Revenue Trade Notes Receivable Accrued Interest as of 12.31.06 (15,000 x 12% x 150/360) = P750 Notes Receivable Interest Receivable

625.00

50,000 51,000 50,000 P50,000 1,000 P51,000 340 P50,660 510

350 15,000

50,000 660 50,000 660

660 50,000 ----------

51,000 51,000 50,000

100,000 1,000

510

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(6)

Noval

(g) Trade Notes Receivable Notes Payable- bank

35,000

(7)

Gan

(h) Accounts Receivable Trade Notes Receivable Interest Revenue (8,000 x 12% x 30/360) = P80 (I) Interest revenue Interest Receivable (Accrued Interest as of 12.31.06 24,000 x 12% x 60/360) = P480

8,080

ANSWER: 1. D 6. D

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2. D 7. A

3. D 8. C

4. A 9. D

160

5. B 10. D

35,000 8,000 80 160