Chapter08 - Answer PDF

 

CH PTER

  8-1.

SUBSTANTIVE TESTS OF RECEIVABLES AND SALES

  Tests of details details of financial financial ba balance lancess are des designed igned to de determine termine the reasona reasonablenes blenesss of the balances in sales, accounts receivable, and other account balances which are affecte affe cted d by the sal sales es and col collec lection tion cycle. cycle. Suc Such h tests tests includ includee con confirm firmatio ation n of  accounts receivable, and examining documents supporting the balance in these accounts. Tests of transactions for the sales and collection cycle are intended to determine the effecti effectiven veness ess of inte interna rnall con control trol structure structure and to test test the substa substance nce of the transac tran saction tionss which which are produced produced by this cycle. cycle. Suc Such h tests tests wou would ld consist consist of  examining examin ing sales invoices in support support of entries in the sales jjourna ournal, l, reconc reconciling iling cash receipts, or review receipts, reviewing ing the appro approval val of credi credit. t. The results results of the tests of transac transaction tionss will be use used d to affect affect the proced procedures ures,, sample size, timing and particular items selected selected for the tests of details of financial  balances (i.e., an effective internal control structure will result in reduced testing when compared to the tests of details required in the case of an inadequate interna internall control structure).

8-2.

  There There are two common common types of confirm confirmati ations ons used for confi confirmin rming g accoun accounts ts receivable: receiv able: “positi “positive” ve” confirma confirmations tions and “negative” “negative” confirm confirmations ations.. A pos positive itive confirma conf irmatio tion n is a com commun municat ication ion addres addressed sed to the deb debtor tor reques requesting ting him to confirm conf irm directl directly y whether whether the balance balance as sta stated ted on the confirm confirmati ation on reques requestt is correctt or incorrect. correc incorrect. A negative confirma confirmation tion is also a commun communication ication addre addressed ssed to the debtor, but it requests a response only when the debtor disagrees with the stated amount. A positiv positivee confirmation is more reliable evidence because because the auditor auditor can perform fol follow low-u -up p pr proc oced edur ures es if a re respo spons nsee is no nott receiv received ed from th thee de debt btor. or. Wi With th a negativee confirmation, failure to reply must be regarded as a correct respon negativ response se even though the debtor may have ignored the confirmation request. Offsetting the reliability disadvantage, negative confirmations are less expensive to send than positive confirmations, and thus more of them can be distributed for  the same total cost. The determination determination of which type type of confirmation to be sent is an audito auditor’s r’s dec decis isio ion, n, an and d it sh shou ould ld be ba base sed d on the fact factss in the aud audit it.. Th Thee followi foll owing ng are the most importa important nt circ circums umstanc tances es wher wheree pos positiv itivee con confirma firmation tionss should be used:

 

8-2   Solutions Manual to Accompany Applied Auditing, Auditing, 2006 Edition 1. 2.

3.

The There re are a small small number number of large large ac accou counts nts which which ac accou count nt for a signific significan antt  portion of total t otal accounts receivable. The There re are susp suspect ected ed condi condition tionss of disput dispute, e, inaccu inaccuracy racy,, or irreg irregular ularity ity.. This would be the case when internal controls are considered inadequate or if   prior year’s audit test results are unsatisfactory. The rrule uless of ce certa rtain in regul regulato atory ry agen agencie ciess require require them. them. Thi Thiss is th thee ca case se fo for  r   brokers and dealers in securities.

When the ab When abov ovee co cond nditi ition onss do no nott ex exis ist, t, it is acce accept ptab able le to us usee ne nega gativ tivee confirma conf irmatio tions, ns, but negativ negativee confirma confirmation tionss sho should uld not be use used d if the au audito ditor  r   believes the customer is likely to ignore the confirmation. Typically, when negativ neg ativee confirma confirmation tionss are used, the aud auditor itor is using using a red reduce uced d con contro troll risk  assessment asses sment in the audit of accounts rec receivab eivable. le. It is also common to use negative confirmations for audits of hospitals, retail stores, and other industries where the receivables receiv ables are due from the general public. public. In these cases, cases, far more assurance is obtained from tests of internal control than from confirmations. It is also common to use a combination of negative and positive confirmations by sending the positives to accounts with large balances and negatives to those with small balances. 8-3.

  It is acceptable acceptable to confirm aaccoun ccounts ts rece receivable ivable p prior rior to the b balance alance ssheet heet da date te if the internal control structure is adequate and can provide reasonable assurance that sales, cash receipts and other credits are properly recorded between the date of the confirma conf irmatio tion n and the end of the accoun accounting ting perio period. d. Other Other factors the audito auditorr is likely to cons consider ider in making the decision are the materiality materiality of accou accounts nts receivab receivable le and the auditor’s auditor’s experien experience ce in prior prior ye years ars.. If the decisio decision n is made to con confirm firm accoun acc ounts ts rec receiv eivabl ablee prior prior to year year end end,, it is nec necess essary ary to test test the transa transacti ctions ons occurring between the confirmation date and the balance sheet date by examining internal documents and performing analytical procedures at year end.

8-4.

 

South Technologies, Inc.

(a) When confirm confirmati ation on req reques uests ts are mailed mailed to deb debtors tors who whose se accoun accounts ts wer weree written writ ten off as uncolle uncollecti ctible, ble, the auditor auditors’ s’ pur purpos posee is to det determi ermine ne that the receivables receiv ables were genuine genuine when they were first recorded recorded in the accounts. accounts. In some fraud cases, fictitious accounts receivable receivable have been create created d to cover up a shortage. Eventu Eventually ally these fictitiou fictitiouss receivab receivables les must be disposed of; one method is to write off the fictitio fictitious us accounts as uncollec uncollectible. tible. (b) The South exec executive utive appears appears to believe the auditors are solely solely concerned concerned with the collectibility collectibility of accoun accounts ts and notes receivable. receivable. In fact, the confirmatio confirmation n  process is primarily intended to establish that the receivables are genuine and tha thatt the custome customers rs (or makers makers of not notes) es) exist. exist. Othe Otherr aud audit it pro proced cedure uress are followed to determine collectibility.

 

Substantive Tests of Receivables and Sales   8-3 8-5.

  The confirma confirmation tion req reques uests ts shou should ld go to the makers of the notes reg regardl ardles esss of  whether the notes have whether have been discounted. discounted. The act of discounting discounting a note receiv receivable able does not reduce reduce the impo importa rtance nce of the note being genuine genuine and collectib collectible. le. A company which discounts discounts its notes receivab receivable le remains in a position of susta sustaining ining a loss if the makers of the notes fail to make payment at the maturity dates.

8-6.

  (a) When ccustome ustomers rs fail to resp respond ond to positiv positivee conf confirmation irmation reques requests ts the CPAs may not assume with confidence that these customers reviewed the requests and found no disagreement disagreement and therefo therefore re did not reply. Some busy cus customers tomers will not take the time to review confirmation requests and will not respond; hence, obvious exceptions may exist without being reported to the CPAs. (b) If there is no response to a secon second d request, the CPAs may mail mail a third request and possibly make telephone calls in an effort to get a reply directly from the customer. custome r. When it becomes app apparent arent that the confirmation confirmation program will not  produce further evidence, the t he CPAs should consider each rremaining emaining customer  as to the size, nature, and age of the balance and the apparent reason for the lack of a reply before they decide what additional work is necessary in the circumstance circums tances. s. The CPAs should carry out the alternative alternative audit proced procedures ures of  examining customers’ purchase orders or contracts, shipping documents and saless invo sale invoice icess of the client, client, and rem remitta ittance ncess by non noncon confirm firming ing cus custome tomers rs received receiv ed by the client subsequent subsequent to the balance sheet date. The auditors may also verify the existence, location, and credit standings of the nonconfirming customers by reference to credit agencies or other sources independent of the client.

8-7.

 

North, Inc.

 No, the matter remains unresolved. First, oral evidence ffrom rom the client is never in itself sufficient; the auditors must follow up to determine the reliability of the oral eviden evidence. ce. Sec Second ond,, paymen paymentt of an accou account nt receiv receivabl ablee is not  not   confirmation; confirmation; the ac acco coun untt migh mightt be fictit fictitio ious us,, an and d the “p “pay ayme ment” nt” co could uld ha have ve be been en made made by a dishone dish onest st employ employee ee who had create created d the fictitio fictitious us acc accoun ountt to concea conceall a cas cash h shortage. shortag e. The auditors auditors must exam examine ine the custo customer mer purchase orde orderr or contract, contract, and copies of the sales invoice and shipping document, in support of the unconfirmed receiv receivable able.. They They sho should uld also determine determine the genuin genuinene eness ss of the custo customer mer by reference to the telephone directory or to credit agency reports. 8-8.

 

Monty’s Meat, Inc.

a.   The workpaper workpaper does no nott includ includee a des descrip criptio tion n of the auditi auditing ng proc procedu edures res  performed in confirming the accounts. The workpaper is also incomplete in the following respects: 1)

Th Thee wo workp rkpap aper er does does no nott state state whethe whetherr th thee au audi ditor tor traced traced th thee AB ABC C Grocery remittance of P3,000 to November cash receipts.

 

8-4   Solutions Manual to Accompany Applied Auditing, Auditing, 2006 Edition 2)

The The wo work rkpa pape perr does does no nott sta state wh whet ethe herr the the audi audito torr exam examin ined ed the the

 November 2 credit memo issued to Sari-Sari Store. The workpap workpaper er does not state whether whether the auditor auditor trace traced d the Luc Lucena ena’s ’s Meat Market remittance to November cash receipts. 4) Th Thee wo work rkpa pape perr do does es no nott stat statee wheth whether er an and d how the audi auditor tor ob obta tain ined ed satisfaction regarding confirmation requests not returned. 5) The work workpa pap per does does not not sta state whe whethe ther the the au aud ditor itor ex exam amin ineed documentation for the Diana’s Supper Club order returned and received on October 31. 6) Rather than than summariz summarizing ing the confirm confirmations ations returned returned witho without ut excep exception, tion, as was done at the bottom of Work Working ing Paper 1, thes thesee con confirma firmatio tions ns should have been listed separately.

3)

b.   1)

Sales Accounts receivable Inventory Cost of goods sold

P11,100 P11,100 8,600 8,600

To reverse 2007 sale recorded in 2006. 2)

Al Allowance for uncollectible accounts Accounts receivable

1,277 1,277

To write off uncollectible account. 3)

Sales returns and allowances Accounts receivable

3,634 3,634

To record return of spoiled meat and recognize loss in period in which incurred. Meat not restored to inventory, inasmuch as it was spoiled. 4)

Sales Accounts receivable

13,000 13,000

To correct error in recording customer  remittance as a sale. 5)

Sales Returns Accounts receivable

334

Inventory Cost of goods sold

250

To record return and restore meat to inven inventory tory  because meat returned in i n good condition.

33 4

2 50

 

Substantive Tests of Receivables and Sales   8-5 c.

(See (See comple completed ted Exhibi Exhibits ts 1.1 and 1.2 reproduc reproduced ed below below and on the foll followi owing ng  page.)

 Exhibit 1.1 Monty’s Meat, Inc. Accounts Receivable Receivable - Trade Aging Analysis October 31, 2006 Conf. No. 1060 1061 1064 1602 1603 1607 1608 1612 10/31 10/31

11/27

Customer

Balance

Culley’s Meats Jolly Roger Restaurant ABC Grocery (Other) Rudy’s Deli General Foods Grocers Kim’s Fresh Meats Dill’s Discount Grocery Diana’s Supper Club Balance per ledger  Audit Adjustments Adjustments

P 1,330 466 4,256 329,433 378 13,468 2,334 12,469 866 P365,000 P (29,345)

Audited balance

P335,655 #

Current P

& #

Past Due (Days) 31-60 O Ovver 60  

1,330 P 3,000 280,763

13,000 1,074 12,469 334 P 311,970 P (28,068)

466 1,256 33,467

P1 P12,324 P 2,879 378 468

1,260

P 36,449

532 P13,234 P 3,347 P(1,277)

P 283,902

P 36,449

P13,234 P 2,070

Cash receipts 11/1 – 11/27

P(210,113)

P (13,353)

P

Outstanding

P 73,789

P 23,096

P13,234 P 2,070

10%

25%

7,379

P 55,,774

Estimated percent uncollectible 10/31

1-30

Estimated uncollectible

P 24,487

P

0 P

70%

Initial

Date

Reviewed by: Initial

Date

100%

P 9,264 P 2,070

Traced Trace d subsequ subs equent ent collectio nsidiary toryNove November remittan remi ttance ce adv advices ices.. ral ledger Obta Obtained ined balance bala nces s from frcoll omections subs subsidia ledger ledgmber er after agre agreeing eing to general gene ledger cont control rol accoun account.t.

Prepared by:

0 &

 

8-6   Solutions Manual to Accompany Applied Auditing, Auditing, 2006 Edition  Exhibit 1.2 Monty’s Meat, Inc. Accounts Receivable Receivable - Trade Allowance for Doubtful Accounts October 31, 2006 11/1/05 11/1 - 10/31 11/1 - 10/31

Balance per general ledger Monthly provision Write-offs

P28,000 # 24,000 & (37,000) @

10/31/06

Balance per general ledger

P15,000

 AJE 2  AJE 6

(1,277) P13,723 P10,777

Audited balance

P24,500

10/31/06

 AJE 6 Bad debts expense  Allowancee for doubtful accounts  Allowanc

P10,777 P10,777

To adjust allowance for doubtful accounts to amount considered conside red reasonable in the circumstances.

# & @ ^

Traced to last yea year’s r’s WTB - audited balance Traced to standard journal en entries tries Examined docum documentation entation and discussed with credit manager and legal counsel In light of aging an analysis, alysis, the ab above ove balan balance, ce, as adjusted adjusted,, appears to be ad adequate. equate.

Prepared by: Initial

Date

Reviewed by: Initial

Date

^

 

Substantive Tests of Receivables and Sales   8-7 8-9.

 

Makati Company

For all of the exceptions, the auditor is concerned about four principal things. (a) Whe Whethe therr the there re is a cli clien entt er error ror.. Many Many tim times es the co conf nfir irmat mation ion resp respon onse se dif differ feren ence cess ar aree du duee to timin timing g diffe differen rence cess for depo deposi sits ts in th thee mail mail an and d inventory invento ry in transi transitt to t o the custom customer. er. Sometimes Sometimes customer customerss misundersta misunderstand nd the confirma con firmation tion or the information information requeste requested. d. The audit auditor or must must disting distinguish uish  between those and client errors. (b) The amou amount nt of the client client error error if any any.. (c) The cau cause se of the error. It would be intenti intentiona onal, l, a misund misunders erstand tanding ing of the  proper way to t o record r ecord a transaction, or a breakdown of internal control. (d) Potent Potential ial errors in th thee sample not tested. tested. The auditor auditor must estimate estimate the eerror  rror  in the untested untested populatio population, n, based on the results of the tests of the sample sample.. Suggested steps to clear each of the comments satisfactorily are: 1.

(a (a)) Ex Exam amine ine su supp ppor ortin ting g docum documen ents ts,, includ includin ing g the sale saless in invo voic ices es an and d applicable sales and shipping orders, for propriety and valuation of the sales. (b) Review the cash cash receipt receiptss books for the period after after December December 31, 2005, and note any collections collections from the PDQ Company. Company. The degree of interna internall co cont ntro roll ov over er ca cash sh re rece ceip ipts ts sh shou ould ld be an imp impor orta tant nt co cons nside idera ratio tion n in determining the reliance that can be placed on the cash receipts entries. In addition, as there is no assurance that collections after December 31 rep represe resent nt the pay payment ment of invoice invoicess sup suppor porting ting the Dec Decemb ember er 31 tria triall  balance, consideration should be given to requesting a confirmation from the PDQ Company Company of the invoices paid by their checks. checks.

2.

(a) The ccaus ausee sho should uld be investig investigate ated d thoroug thoroughly hly.. If the ccred redit it was p poste osted d to the wrong account, account, it may indicate merely merely a clerical error. On the other  hand, posting to the wrong account may indicate lapping. (b) Suc Such h a commen commentt may also indicate indicate a delay in pos posting ting and depositi depositing ng of  receipts. receip ts. If upon investigation investigation such such is the case case,, the company sho should uld be informed immediately so that it can take corrective steps.

3.

This is a co confir nfirmat mation ion of the b bala alance nce with with an add additio itional nal co comme mment. nt. Since Since the cu cust stome omerr ha hass gi give ven n us the data data,, it is pr prefe efera rable ble to ch chec eck k to see see that that th thee informat info rmation ion agre agrees es with the company company’s ’s records. records. Suc Such h a proc procedu edure re may disclose misposting or delay in recording receipts.

4.

This This inco incomp mplet letee co comm mmen entt sh shou ould ld ra rais isee an imme immedi diate ate qu ques estio tion: n: doe doess the cu cust stome omerr mean mean pa paid id be befo fore re or pa paid id afte afterr Dece Decemb mber er 31 31?? Be Beca caus usee the customer’s intent is unknown, this account should be reconfirmed and the cu cust stom omeer as aske ked d to stat statee the the ex exac actt da date te.. Up Upon on rece receip iptt of the the seco second nd confirmation, the information thereon should be traced to the cash receipts  book.

 

8-8   Solutions Manual to Accompany Applied Auditing, Auditing, 2006 Edition 5.

The The au audi ditor tor shoul should d first first evalua evaluate te ho how w long long it takes takes to ship goo goods ds to the custome cus tomerr in quest question. ion. If it ord ordinar inarily ily takes takes mor moree than five five day days, s, there is no indication of error. A comment of this type may indicate that the company may be recording sales before before an actual sale has taken place. The auditor shou should ld examine the invoice invo ice and rev review iew with the approp appropria riate te off officia icials ls the compan company’s y’s pol policie icies. s. Sales, Sale s, cos costt of sales, sales, invent inventorie oriess and accounts accounts receiv receivable able may hav havee to be adjusted if title has not passed to the buyer as of December 31, 2005.

6.

(a) Determin Determinee if such advanc advancee paymen paymentt has been receiv received ed and tha thatt it has  been properly recorded. A review should be made of other advance  payments to ascertain that charges against such advances have been  properly handled. handl ed. (b) If the adva advance nce payment payment was to cover these invoices invoices,, the audit auditor or should  propose a reclassification of the P1,350, debiting the advance payment account and crediting accounts receivable--trade.

7.

(a) Examine Examine the sh shipp ipping ing order order for indica indication tionss that the goods goods we were re ship shipped ped and, if available, carrier’s invoice and/or bill of lading for receipt of the goods. (b) If it appea appears rs that go goods ods were shipped shipped,, send send all ava availa ilable ble inform informatio ation n to the custome customerr and ask the custome customerr to recon reconfirm firm.. If the customer customer still insists that goods were never received, all data should be presented to an approp app ropria riate te company company officia officiall for a comple complete te exp explan lanatio ation. n. Thi Thiss may indicate indica te that acco accounting unting for shipments shipments is inadeq inadequate uate and conside consideration ration sh shou ould ld be give iven to re rev viewi iewing ng the the pr proc oced edu ures res to dete determ rmin inee if  improvements can be made. (c (c)) If the go good odss we were re no nott sh shipp ipped ed,, the au audi ditor tor shou should ld reco recomme mmend nd an adjustment adjus tment reducing sales, cost of sales, and accounts receiva receivable, ble, and increasing inventories.

8.

This shou should ld be discuss discussed ed with the appro appropria priate te officia officials ls and and corr corresp espond ondenc encee with the cus custome tomerr should should be rev reviewe iewed d to all allow ow dete determin rminatio ation n whe whether ther an adjustment should be made in the amount receivable or if an allowance for  doubtful accounts should be set up.

9.

As any goods shipped shipped onbe consign consignment mentinventory does not not pass un until til those goo goods ds are title sold,onthe sales entry should reversed, charged, and cost of  sales credited credited if it is actua actually lly a consignment sale. Other so-cal so-called led sales should  be reviewed and company officials queried to determine if other sales actual re repre prese sent nt co cons nsign ignme ment nt sh ship ipme ments nts;; if so, the ad adjus justme tment nt set set for forth th in the  preceding sentence should be made for all consignment shipments.

10. This is a noncur noncurren rentt ass asset et and should should be reclass reclassifie ified d to either depos deposit it or   prepaid rent. A review of other accounts, especially those with round numbers, may disclose other accounts that should be so reclassified. 11. This may indica indicate te a misposting of the credit credit or a delay in pos posting ting the credit. Commentss under 2 above Comment above would also apply to credits.

 

Substantive Tests of Receivables and Sales   8-9 8-10.   Ken Company

 Requirement (a) Ken Company Accounts Receivable Aging Schedule May 31, 2006

 Age Category  Not yet due Less than 30 days past due 30 to 60 days past due 61 to 120 days past due 121 to 180 days past due Over 180 days past due

 Proportion of   Total 

 Amount  in Category

 Probability of    Non-Collection

.680 .150 .080 .050 .025 .015 1.000

P 816,000 180,000 96,000 60,000 30,000 18,000 P1,200,000

.010 .035 .050 .090 .400 .900

 Estimated  Uncollectible  Amount  P 8,160 6,300 4,800 5,400 12,000 16,200 P52,860

 Requirement (b) Ken Company Analysis of Allowance for Doubtful Accounts May 31, 2006 June 1, 2005 balance Bad debt expense accrual (3,000,000 x .04) Balance before write-offs of bad accounts Write-offs of bad accounts Balance before year-end adjustment Estimated uncollectible amount Additional allowance needed

P 30,250 120,000 P150,250 108,750 P 41,500 52,860 P 11,360  Debit

Bad Debts Expense Allowance for Doubtful Accounts

Credit 

11,360 11,360

 Requirement (c) 1.

Steps to Improve the  Accounts Receivable Situation Establish Esta blish more selec selective tive credi credit-gra t-granting nting  policies, such as more restrictive credit requi require reme ment ntss or mo more re thoro thoroug ugh h credi creditt rating investigation.

2.

 

Risks and Costs  Involved  This This policy policy could resul resultt in lost lost sales sales and increased incre ased costs of credi creditt evalu evaluation ation.. Ken ma may y be al alll but forc forced ed to adhe adhere re to the  prevailing credit-granting policies of the office equipment and supplies industry.

Establish a more rigorous collection policy either through external collection agencies or by Ken’s own personal.

This policy may offend current customers and and thus thus ri risk sk futu future re sa sale les. s. Incre ncreas aseed co coll llec ecti tion on co cost stss co coul uld d re resu sult lt fr from om this this  policy.

 

8-10   Solutions Manua Manuall to Accompany Applied Auditing, Auditing, 2006 Edition Charge Cha rge inte interes restt on ove overdue rdue account accounts. s.

This This pol policy icy may off offend end curren currentt custom customer erss

Insist on cash on delivery (COD) or cash on orde orderr (CO (COO) O) for for new new cu custo stome mers rs or   poorer credit risks.

and thus risk future sales. This This policy policy could resul resultt in lost lost sales sales and increased administrative costs.

8-11.   Demo Inc.

 Requirement (a) ( a)

DEMO INC. Accounts Receivable 12-31-05 Balance Per General Per Ledger Subsidiary Unadjusted Balances  Add (Deduct) Adjustments: Adjustments:  AJE (2) o correct understatement understatem ent of  accounts written off on October 31.

P197,000

P1 P198,240

AGING DISTRIBUTION Months Outstanding 0-1 1-3 3-6 over 6 P93,240

P76,820

P22,180

P6,000

(200)

(3) to write off definitely uncollectible accounts

(1,000)

(1,000)

(4) to reclas reclassify sify adv advances ances rom customers

2,000

2,000

(5) to recla reclassify ssify aaccounts ccounts with credit balances

500

500

1,440

_______

__ _______

_______

_______

______

P199,740

P199,740

P95,240

P77,320

P22,180

P5,000

(6) to adjus adjustt general ledger  balance to agree with subs idia iarry balance Balances as adjusted

(1,000) 2,000 500

DEMO INC. Allowance for Doubtful Accounts 12-31-05

Balance per Ledger  Add (Deduct) Adjustments:  AJE (1) to correct error in recording bad debts recovery (2) to correct understatement of accounts written off (3) to write off definitely uncollectible accounts (4) to adjust allowance to required balance (Sc (Schedule 1)

P12,000.00

Balance as adjusted

P 4,764.20

324.00 ( 200.00) ( 1,000.00) ( 6,3 6,359.80)

 

Substantive Tests of Receivables and Sales   8-11 Schedule 1: Computation of Required Allowance

 Account Classification 0-1 month outstanding 1-3 months outstanding 3-6 months outstanding over 6 months outstanding Totals

 Adjusted Total P 95,240 77,320 22,180 5,000  _______ P199,740

Required %

Allowance Amount 

1 2 3 P2,000-50% P3,000-20%

P 952.40 1,546.40 665.40 1,000.00 600.00 P4,764.20

 Requirement (b)   Adjusting Journal Entries 12-31-05 (1) (2) (3) (4) (5) (6) (7)

Bad Debts Allowance for Doubtful Accounts

324.00

Allowance for Doubtful Accounts Accounts Receivable

200.00

Allowance for Doubtful Accounts Accounts Receivable

1,000.00

Accounts Receivable Advances from Customers

2,000.00

Accounts Receivable Customers’ accounts with credit balances

324.00 200.00 1,000.00 2,000.00 500.00 500.00

Accounts Receivable Sales

1,440.00

Allowance for Doubtful Accounts Bad Debts Expense

6,359.80

1,440.00 6,359.80

8-12.   Tripoli Company

 Requirement (1) Accounts receivable, Accounts receivable, trade ........... .......................... ............................. ................... ..... Advanc Adv ances es to supplie suppliers.. rs....... ......... ......... ......... ......... .......... ......... ......... .......... ......... ......... ..... Due from officer officerss .... ......... .......... ......... ......... ......... ........ ......... ......... ......... .......... ......... ......... ..... Subscr Sub script iptions ions rec receiv eivable able – share share capital.... capital......... ......... ......... ......... ....... ... Expens Exp ensee advanc advances es to salesp salespeo eople ple ......... .............. .......... ......... ......... ......... ....... ... Ac Acccoun ounts pay payabl ble, e, trad tradee (P19, P19,25 250 0 – P450 450)* .. .... .... .... .... .... Advances fro rom m customers on sale less contra tracts.. ts....... ...... .... Sala Salari ries es pay payab able. le... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Allo llowanc ncee for doubtfu full account ntss .... .......... ...... ........ ...... .... ........ ...... .... Rece Receiv ivab able less (to (to cl clos osee perm perman anen entl tly y).... )...... .... .... .... .... .... .... .... .... .... .... Cust Custom omer ers’ s’ cr cred edit it ba bala lanc nces es.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..

40,000 450 2,50 2,500 0 4,600 4,600 1,000 1,000 19,2 19,25 50 450 3, 3,30 300 0 500 23,0 23,050 50 2, 2,00 000 0

 

8-12   Solutions Manua Manuall to Accompany Applied Auditing, Auditing, 2006 Edition  Requirement (2) Current assets: Accoun Acc ounts ts rec receiv eivable able,, trade trade .... ........ ........ ......... .......... ......... ......... .......... ....... .. Less Less al allow lowan ance ce fo forr do doub ubtfu tfull ac acco coun unts ts ... ...... ...... ...... ...... ...... ...... ... Cre redi dito torrs’ debi debitt ba bala lan nce ces.. s.... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Du Duee from from of offi fice cers rs* ** .. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Su Subs bscr crip ipti tio ons re rece ceiv ivab able le – or ord dinar inary y sh shaares* res** * .. .... .... .... .... Expe Expens nsee ad adv van ance cess to sa sale lesp speeop ople.. le.... .... .... .... .... .... .... .... .... .... .... .... .... ..

40,0 40,000 00 50 500 0

P39,5 P39,500 00 45 450 0 2, 2,50 500 0 4, 4,60 600 0 1, 1,00 000 0

Current liabilities: Ac Acco coun unts ts pa pay yab able le,, trad tradee .. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Cust Custom omer ers’ s’ cr cred edit it ba bala lanc nces es.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Cash advances from customers on sales (n (not ot yet sh ship ippe ped) d).. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Sala Salari ries es pay payab able. le... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. *

19,2 19,250 50 2, 2,00 000 0 450 450 3, 3,30 300 0

These aamount mountss are ne netted tted ag against ainst no normal rmal ba balances lances tto o reflec reflectt contro controll balances; balances;  but if material in amount, they should they  should be reported separately on separately  on the balance sheet as indicated in Requirement 2.

** Co Consi nside dere red d as curren currentt as asse sets ts only only if cu curre rrent ntly ly collect collectib ible. le. assumed assume d to be material in amoun amount. t.

All item itemss are are

8-13.   Pearl Corporation

1.   Estimated bad debt debt percentage based based on year-end year-end accounts receivable: receivable: # 28.5% Actual bad debts Credit Sales Outstanding receivables (year-end) Percentage of 

200 3 P 3,300a P90,000

2004 P 5,70 700 0c P158,000

2005 P 7, 7,8 800e P210,000

200 6   P 16,8 16,800 00 P459,000

P 9,500 b

P 19,900d

P 29, 29,500 500f 

P 58,9 58,900 00

outstanding receivables

0.347

a

P2,500 P2,50 0 + P500 + P300 = P3,300

 b

0 + P90,000 - P78,000 - P2,500 = P9,500 P4,600 + P700 + P400 = P5,700

c

0. 286

0.264

0.285#

d

P9,500 + P158,000 - P8,500 - P134,000 - P500 - P4,600 = P19,900

e

Estim Estimate ated. d. The bad debts writ written ten off in the thir third d year year fol follow lowing ing the sale have averaged about 7.8% [(P300 + P400)     (P3,300 + P5,700)] of the total actual bad debts in the previous previous 2 years. There Therefore, fore, the bad debts on 2005 sales of P6,200 and P1,000 are about 92.2% of the total bad debts expected on 2005 sales. P19,900 + P210,000 - P200 - P14,200 - P178,800 - P300 - P700 - P6,200 = P29,500

f 

 

Substantive Tests of Receivables and Sales   8-13 2.

 

Bad debts estimated as a percentage of year-end accounts receivable P29,500 + P235,000 - P300 - P19,500 - P400 - P1,000 - P200,000 = P43,300 P43,300 x 0.285 = P12,340.50, P12,340.50, or approximately approximately P12,300. P12,300. Criteria for  rec recogn ognitio ition n of bad debts or impairme impairment nt of receiv receivable abless und under er PAS 39 should be applied.

8-14.   Flores Corporation

 Requirement (1) Flores Corporation Analysis of Changes in the Allowance for Doubtful Accounts For the Year Ended December 31, 2006 Balance at January 1, 2006 Provision for doubtful accounts (P9,000,000 x 2%) Recovery in 2006 of bad debts written off previously

P130,000 180,000 15,000

Deduct write-offs for (P90,000 + P60,000) Bala Balanc ncee at De Dece cem mbe berr 31 31,, 20 2006 06,, be befo fore re addi additi tion onal al impa impair irme ment nt loss loss Increase Incre ase in estim estimated ated uncoll uncollect ectible ible accou accounts nts during 2006 (P235, (P235,300 300 - P175,00 P175,000) 0) Balance at December 31, 2006, adjusted (Schedule 1)

P325,000 150,000 P175 P175,0 ,000 00 60,300 P235,300

Schedule 1:

Computation of Allowance for Doubtful Accounts at December 31, 2006 Aging category  November-December 2006 July-October January-June Prior to 1/1/06 a

Balance P1,140,000 600,000 400,000 70,000 a

Percent 2 10 10 25 75

Doubtful accounts P 22,800 60,000 100,000 52,500 P235,300

P130,000 - P60,000

 Requirement (2)

Flores Corporation Journall Entry Journa December 31, 2006

Bad Debt Expense Allowance for Doubtful Accounts To incr increa ease se the the allo allowa wanc ncee for for doub doubtf tfu ul accoun acc ounts ts at Decemb December er 31, 2006, 2006, res resulti ulting ng from evaluation of collectibility of remaining receivables.

60,300 60,300

 

8-14   Solutions Manua Manuall to Accompany Applied Auditing, Auditing, 2006 Edition 8-15.   Visayas Company

 Requirement (a) Visayas Company Accounts Receivable 12.31.06

Balance, 12.31.05 Add: Sales on account for the year Total Less: Collec Collections tions during the ye year  ar  - with discount (1) - without discount (2) Accounts written off Cr Cred edit it memo memo fo forr sa sale less re retu turn rnss & al allo lowa wanc nces es

P 546,400 2,622,832 P3,169,232 P2,050,859 848,118 18,700 37,0 37,000 00

Balance, 12.31.06 Total collections Less Less:: A Acc ccts ts paid paid w/ di disc scou ount nt Accts paid by customers w/o discount

2, 2,95 954, 4,67 677 7 P 214,555

P2,857,960 2, 2,00 009, 9,84 842 2   (   98% = P2,050,8 P2,050,859) 59) (1) P 848,118

(2)

 Requirement (b) AJE (1) Doubtful accounts expense Allowance for doubtful accounts

6,599 6, 599

Supporting Analysis: % allowance to AR 12.31.05 Required % allowance Required allowance to AR 12.31.06 Required allowance 12.31.06 2% x P214,555

P 16,392 P546,400

=

3%

2/3 x 3%

=

2%

P4,291

Al Allo lowa wanc ncee fo forr do doub ubtf tful ul ac acco coun unts ts ba bala lanc ncee, 12 12.3 .31. 1.05 05 Less: Accounts written off Required balance, 12.31.06 Estimated bad debts expense for 12.31.06

P 16,3 16,392 92 18,700 P( 2,308) 4,291 P 6,599

 

Substantive Tests of Receivables and Sales   8-15 8-16.   Charry Company

 Requirement (a)   Adjusting Journal Entries ( 1)

( 2)

( 3)

( 4)

( 5)

( 6)

( 7)

( 8)

Accounts Receivable Customers’ accounts with credit balances (P500 + P5,000 P5,000))

5, 500

Sales Accounts Receivable

5, 000

Subscriptions Receivable Accounts Receivable

15,000

Deposit on Contract Accounts Receivable

15,000

Claims Receivable Accounts Receivable

500

Advances to Employees Accounts Receivable

500

Advances to Affiliated Company Accounts Receivable Advances to Supplier Accounts Receivable

5, 500

5, 000

15,000

15,000

500

500 10,000 10,000 5, 000 5, 000

 Requirement (b)   Balance Sheet Presentation 12-31-06 Current Assets Accounts Receivable - Trade Claims Receivable A mppplloieyrees Ad dv vaan ncceess tto oE Su

P59,500 50 0 5,5 00 00 0

Investments Advances to Affiliated Company

10,000

Other Assets Deposit on Contract

15,000

Shareholders’ Equity Subscribed Share Capital (net of subscriptions receivable of P15,000)

xxx

 

8-16   Solutions Manua Manuall to Accompany Applied Auditing, Auditing, 2006 Edition Supporting Analysis: Charry Company Accounts Receivable -Trade 12-31-06 Balance per ledger Add (Deduct) Adjustments: AJE (1) To reclassify accounts with credit balances (2 (2)) To re rev verse entry fo forr con onssig ign nment deliv liveries ies (3 ) To reclassify subscriptions receivable (4 ) To reclassify deposit on contract (5 (5)) To re recl clas assi sify fy bal balan ance ce of clai claims ms fr from om carr carrie ierr fo for  r  shipping damages (6 ) T To o reclassify emplo yee’s IOU’s (7 ) To reclassify advances to affiliate (8 ) To reclassify advances to supplier

P105,000

 Net adjustments Balance as adjusted

( 45,500) P 59,500

5,500 ( 5, 5,00 000 0) ( 15,000) ( 15,000) ( 50 0) ( 50 5 00) ( 10,000) ( 5,000)

If co corre rrect ct en entri tries es were were made made for th thee trans transac actio tions ns gi give ven, n, th thee Acco Accoun unts ts Receivable account would show the following postings: Accounts Receivable

Jan. 1 Balance Charge Sales Recoveries of ac acco coun unts ts wr writ itte ten n of offf

P 56,000 625,000 1, 1,00 000 0  ________ P682,000  ________ P682,000

Collections Write offs Merchandise returns Al Allo lowa wanc ncee fo forr sh ship ippi ping ng damages

Balance Dec. 31

P615,000 3, 500 2, 500 1,500 P622,500 59,500 P682,000

8-17.   The Preston Companies (amountss in P millions) (amount

 Requirement (1) (a) Pres Preston’ ton’ss earnings earnings would would have have increas increased ed (1 – 0.40) 0.40) P10 P105 5 million million or P63 million mill ion in 200 2006. 6. Net account accountss rec receiv eivable able and total assets assets would have been P105 P10 5 million million highe higherr than actually actually reported reported in 2006. 2006. Ignorin Ignoring g differe difference ncess  between tax and financial reporting, income tax payable would have increas incr eased ed by P0.40 P0.40 (P105 (P105 million) million) or P42 mill million, ion, and reta retained ined earni earnings ngs

 

Substantive Tests of Receivables and Sales   8-17 would be greater by P63 million. This examp example le illustrates the mater material ial effect estimated bad debts can have on reported earnings and total assets. (b) Under the allow allowance ance method, method, failure to write off an account account has no effect on earnings (assuming a sufficient balance exists in the allowance account), or  any net balances balances in the balan balance ce sheet. Only the components components of net accounts re rece ceiv ivab able le would would be af affec fecte ted. d. Bo Both th gr gros osss acco accoun unts ts rece receiva ivable ble and th thee allowance for doubtful accounts would be overstated P0.6 million.  Requirement (2)

Beginning allowance balance Bad debt expense Ending allowance balance Write-offs of accounts

1998 P183 105 (212) P 76

 Requirement (3) (a) The ratio of bad debt expe expense nse to operatin operating g revenue for the two years years is: 2006, P105/P3,729 P105/P3 ,729 = 2.8%; 2005, P81/P3,534 = 2.3%. This ratio appears appears relatively stable although is increasing. (b) The The co comp mpos osite ite ra rate te of un unco colle llect ctib ible le acco accoun unts ts as a perc percen entag tagee of gr gros osss accounts receivable = ending allowance balance/ending accounts receivable. The ratio for 2006 is P212 / (P951 + P212) = 18.2%, and for 2005 is P183 / (P972 + P183) = 15.8%. This ratio is less stable stable and also is increasing increasing.. (c) Bad deb debtt ex expen pense se is consid considera erably bly hig higher her than the write-o write-offs ffs in 2006. The firm has experienced experienced an increase increase in expected write-offs. Apparently Apparently the firm expects exp ects an increas increasee in bad debts, debts, which which is part partiall ially y an estimat estimatee of fut future ure write-offs. 8-18.   Rain Company

 Requirement (1) Present value of the note: P150,00 P15 0,000 0 x (PV1, (PV1, 12% 12%,, 3) (0.71 (0.71178 178)) = P106,7 P106,767 67

 

8-18   Solutions Manua Manuall to Accompany Applied Auditing, Auditing, 2006 Edition  Requirement (2) Correction and Collection Schedule: Date 1-1-2005 12-31 -31-2005 12-3 12-311-20 2005 05 12-3 12-311-20 2006 06 12-3 12-311-20 2007 07 12-31-2007

Explanation and Interest Revenue R Reecorded originally at face amount Correction to res ta tate to present value To ac accr crue ue in inte tere rest st,, P106 P106,7 ,767 67 x 12% 12% = P12, P12,81 8122 To ac accr crue ue in inte tere rest st,, P119 P119,5 ,579 79 x 12% 12% = P14, P14,34 3499 To ac accr crue ue in inte tere rest st,, P133 P133,9 ,928 28 x 12% 12% = P16, P16,07 072* 2* Collection on face amount, debit Cash

– + + + –

Note Receivable Change Balance P150,000 P 43,233 106,767 12 12,8 ,812 12 119, 119,57 5799 14 14,3 ,349 49 133, 133,92 9288 16 16,0 ,072 72 150, 150,00 0000 150,000 0

* Roun Rounded. ded.

8-19.

1.   d .

Th Thee Jo Jose sefin finaa no note te is a sh shor ortt-ter term m no note te and is repo reporte rted d at fac facee va valu luee althoug alth ough h the note note can be record recorded ed at present present valu value. e. The Nico Nicole le note is reported at present value: [(P20,000 + 5(0.3) (P20,000)] (PV1, 8%, 5) = P23,000 (0.68058) = P15,653

2.   c.

The an annua nuall paymen paymentt is compute computed d as: P10 P10,00 ,000 0 (PVA, (PVA, 8%, 5) = P10 P10,000 ,000 / 3.99271 = P2,505. Discounting Discoun ting this stream stream of payment paymentss at 9% yi yields elds cash proc proceed eedss of: P2,505 (PVA, 9%, 5) = P2,505 (3.88965) = P9,744. Total interest equals total payments less proceeds = 5 (P2,505) – P9,744 = P2,781.

3.   b.

Interes Interestt rec receivab eivable le is recorded recorded for for one one mo month. nth.

4.   c.

Maturity value............................... value............................................. ............................ ........................ .......... P100,000 P100,000 Discount P100,000 Discount P100,000 (0.10) (6/12)...................... (6/12)..................................... ................... .... (5,000) Proceeds Procee ds ........................... .......................................... ............................. .......................... ...................... .......... P 95,00 95,000 0

8-20.   Luce Company

( 1)

AJE:

S Saales returns and allowances Inventory 12.31.06 Accounts receivable Cost of sales

30,000 24, 000 30,000 24,000

Income wil Income willl dec decrea rease se by P6,000 P6,000 if  the above AJE is made. Ans.   (c) ( 2)

AJE:

Sales Accounts receivable Income was overstated by P10,000

Ans.   (a)

10,000 10,000

 

Substantive Tests of Receivables and Sales   8-19 (3 (3))

Actu Actuaal numb number er of un unit itss so sold ld to Mr. Mr. Lazo Lazo was was 320. 320.

P4 P48, 8,00 000 0 P150

Ans.   (b) (4)

Co Corre rrect ct rec recei eiva vable ble fro from m Mr. Lazo : 320 x P100 Per client Overstatement Ans.   (d)

P 32,000 48,000 P 16,000

(5)

Acc Accoun ounts ts receiva receivable ble fro from m Mr. Sia is correc correctly tly sta stated ted be beca cause use the g goods oods are considered sold in 2006. Ans.   (a)

( 6)

Ans.   (d)

8-21.   ETC Co.

Adjusting Journal Entries AJE 1. 2. 3.

4.

5. 6.

Cash Oth theer Curre rrent Lia iab bilitie itiess (UCPB UCPB Overd rdra rafft)

225,000 225,0 ,00 00

Accounts Receivable Cash

37,500

Cash Accounts Payable

28,709

Notes Payable Interest Expense Cash

67,500 16,200

Cash – BPI Oth theer Curre rrent Lia iab bilitie itiess (UCPB UCPB Overd rdra rafft)

25,000

Cash – SBTC Accounts Receivable

73,690

37,500 28,709

83,700 25,0 ,00 00 73,690

Cash 5.31.06  Per books AJE 1. 2. 3. 4. 5. 6. Adjusted balance

 

P 15,825,000 225,000 (37,500) 28,709 (83,700) 25,000 73,690 P16,056,199   (1)   (c)

 

8-20   Solutions Manua Manuall to Accompany Applied Auditing, Auditing, 2006 Edition  Accounts Receivable 5.31.06 

AJE 2. 6.

Subs Subsidi idiary ary Le Ledg dger er P8,047,054 37,500 (375,215) 122,500 P7,831,839

Ge Gene nera rall Ledg Ledger  er  P7,868,029 37,500 (73,690)

 

P7,831,839

 

(2)   (b)

 Allowance for Doubtful Accounts  Aging   Distribution Subsidiary Ledger Curr Curren entt P1,7 P1,737 37,6 ,690 90.0 .00 0 + P1 P122 22,5 ,500 00 = P1,8 P1,860 60,1 ,190 90.0 .00 0 Past due: 1 – 30 3 1 – 60 6 1 – 90 Over Over 90

P1,617,340.00 P1,437,706.50 P1,474,450.00 P1 P1,7 ,779 79,8 ,867 67.5 .50 0 + P37,5 P37,500 00  ___________ – P375,215 P 375,215 P8,047,054.00

 Amount   Estimated to be % Uncollectible x 2 = P 37,2 37,203 03.8 .80 0

= 1,617,340.00 x 5 = 80,867.00 = 1 1,,437,706.50 x 10 = 143,770.70 = 1 1,,474,450.00 x 15 = 221,167.50 = 1,442,152.50 P7,831,839.00

x 20 = 288,430.50   P771,439.50 (3)  (a)

8-22.   Ling, Inc.

 Requirement (1) LING, INC. Long-term Receivables Section of Balance Sheet December 31, 2005 9% no note te re rece ceiv ivab able le fro from m sa sale le of di divi visio sion, n, du duee in an annu nual al ins install tallmen ments ts of P500,0 P500,000 00 to May 1, 2007, 2007, less less cur curren rentt installment 8% no note te rec recei eiva vabl blee fro from m of offic ficer er,, due Dece Decembe mberr 31 31,, 20 2007, 07, collaterized by 10,000 shares of Ling, Inc., ordinary shares with a fair value of P450,000  Non-interest-bearing note from sale of patent, net of 15% imputed interest, due April 1, 2007 Installment Installme nt contract contract receivable receivable,, due in annual annual installments installments of  P5 P50, 0,0 000 to July 1, 2009, le lesss curre rrent in insstall tallme men nt Total long-term receivables

P 500,000 [1]

400,000 84,105 [2] 112 12,,400 [3] P1,096,505

 

Substantive Tests of Receivables and Sales   8-21  Requirement (2) LING, INC. Selected Balance Sheet Balances December 31, 2005 Current portion of long-term receivables:  Note receivable ffrom rom sale of division Installment contract receivable Total

P500,000 [1] 27,600 [3] P527,600

Accrued interest receivable:  Note receivable ffrom rom sale of division Installment contract receivable Total

P 60,000 [4] 11,200 [5] P 71,200

 Requirement (3) LING, INC. Interest Income from Long-Term Receivables and Gains Recognized on Sale of Assets For the Year Ended December December 31, 2005 Interest income:  Note receivable ffrom rom sale of division  Note receivable ffrom rom sale of patent  Note receivable ffrom rom of officer ficer In Inssta talllm lmeent contra tract re recceiva ivable fro rom m sale of lan land Tota tall inte tere resst in inccome fo forr year ended 12/3 /31 1/05

P105,000 8,505 32,000 11 11,,200 P15 P156,705

Gains recognized on sale of assets: Patent Land Tota tall gains re reccogniz izeed for year ended 12/3 /31 1/05

P 37,600 [8] 50,000 [9] P 87,600

 Explanation of amounts:

[1] LongLong-term term Portion of 9% Note Receivable Receivable at 12/31/05 12/31/05 Face amount, 5/1/00 Less: installment received 5/1/05 Balance, 12/31/05 Less: installment due 5/1/06 Long-term portion, 12/31/05

P1,500,000 (500,000) P1,000,000 (500,000) P 500,000

[6] [2] [7] [5]

 

8-22   Solutions Manua Manuall to Accompany Applied Auditing, Auditing, 2006 Edition [2] Non-inte Non-interest-be rest-bearing aring Note, Net of Imputed Inter Interest est at 12/31/05 Face amount, 4/1/05 Less: imputed interest interest [P100,000 – (P100,0000 x 0.756)] Balance, 4/1/05 Add: interest interest earned to 12/31/05 12/31/05 (P75,600 x 15% x 9/12) Balance, 12/31/05

P 100,000 P

(24,400) 75,600

P

8,505 84,105

[3] LongLong-term term Portion of Installment Installment Contract Receivable Receivable at 12/3 12/31/05 1/05 Contract selling price, 7/1/05 P 200,000 Less: down payment, 7/1/05 (60,000) Balance, 12/31/05 P 140,000 Less: instal installment lment due 7/ 7/1/06 1/06 [P50,000 – (P140,000 x 16%)] (27,600) Long-term portion, 12/31/05 P 112,400 [4] Accrue Accrued d Interest – Note Receivable, Receivable, Sale of Division Division,, at 12/31/05 Interest accrued from 5/1 to 12/31/05 (P1,000,000 x 9% x 8/12) P 60,000 [5] Accrue Accrued d Interest – Installmen Installmentt Contract at 12/31 12/31/05 /05 Interest accrued from 7/1 to 12/31/05 (P140,000 x 16% x ½)

P

11,200

[6] Interes Interestt Income – Note Rec Receivable eivable,, Sale of Division, Division, for 2005 Interestt earned Interes earned from 1/1 to 5/1/05 (P1,500,000 x 9% x 4/12) P 45,000 Interestt earned Interes earned from 5/1 to 12/31 12/31/05 /05 (P1,000,000 x 9% x 8/12) 60,000 Interest income P 105,000 [7] Interes Interestt Income – Note Rec Receivable eivable,, Officer, for 2005 In Inte tere rest st ea earn rned ed 1/ 1/1 1 to 12/3 12/31/ 1/05 05 (P (P40 400, 0,00 000 0 x 8%) 8%) [8] Gain Re Recognize cognized d on Sale of Patent Patent Stated selling price Less: imputed interest Actual selling price (P100,000 x 0.756) Less: cost of p patent atent (ne (net) t) Carrying value 1/1/05 Less amortization 1/1 to 4/1/06 (P8,000 x ¼) Gain recognized

P

32 32,0 ,000 00

P 100,000 (24,400)[2] P 75,600 P40,000 (2,000) P

(38,000) 37,600

 

Substantive Tests of Receivables and Sales   8-23 [9] Gain Re Recognize cognized d on Sale of Land Sale of price Less: cost Gain recognized

P 200,000 (150,000) P 50,000

8-23.   Grande Company

 Requirement 1 PAS 39, paragr paragrap aph h 63 will be ap appl plied ied in this this case case.. On Dec Decem embe berr 31, 200 2006, 6, Grande Company should record the 2006 accrued interest and the impairment:  Notes / Interest Receivable (0.06) (100,000) Interest Income

6,000 6, 000

Bad Debts Expense Allowance for decline in note value

55,537 * 55,537

* Carrying Carrying value value of note and interes interestt (100 (100,00 ,000 0 + 6,0 6,000) 00) Present value / New carrying Present carrying value of  note (discount (discount rate – 6%) Principal: Due Due on 12 12.3 .31. 1.08 08 (P30, (P30,00 000 0 x 0. 0.89 8900 000) 0) Due on 12.31.10 (P30 30,,000 x 0.7920 209 9) Impairment write-down

P106 P106,00 ,000 0

P26 P26,7 ,700 00 23 23,,763

50 50,,463 P 55,537

 Requirement 2 The entries with the corresponding computations follow: Effective Interest Method  December 31, 2007 

 Allowance for decline in note value  Allowance Interest income (0.06) (50,463)

3,028 3,028

December 31, 2008 

 Allowanc  Allowance e forincome decline in note value Interest (0.06) (50,463 + 3,028) Cash Notes receivable

3,209 3,209 30,000 30,000

December 31, 2009

 Allowance for decline in note value  Allowance Interest income (0.06) (5 (50,463 + 3, 3,208 + 3, 3,209 – 3300,000)

1,602 1,602

 

8-24   Solutions Manua Manuall to Accompany Applied Auditing, Auditing, 2006 Edition December 31, 2010 

 Allowance for decline in note value  Allowance Interest income * 0.06 (26,700 + 1,602)

1,698*

Cash Notes receivable

30,000

 Allowance for decline in note value  Allowance Notes receivable To close remaining balance in notes receivable and allowance

46,000

1,698

*

30,000

46,000

* At this point, the amortized cost of the notes receivable receivable is zero. Notes Receivable

100,000 6,000

30,000 30,000

106,000

60,000 46,000 bal

Allowance for Decline in Note Value

3,028 3,209

55,537

1,602 1,698 9,537 46,000

55,537

8-24.   Amy Corporation

 Requirement 1 Accounts Receivable (Trade) Accounts Receivable (Officer) Ord rdiinary Shares Subsc scrriptio tions Receiv ivaable Advances to Emplo yees  Notes Receivable (Trade) ( Trade) Dep epo osit to Gua uara ran nte teee Contra tract Per Perfo form rmaanc ncee Utility Deposit Receivables

15,500 3,600 12,000 1,800 6,000 5,000 500 44,400

 Requirement 2 Accounts receivable (trade)--current asset, trade receivable Accounts receivable (officer)--normally current nontrade receivable Ordinary shares subscription receivable--current or noncurrent asset, depending on due date; nontrade receivable Advances to employees--current asset, nontrade receivable  Notes receivable (trade)--noncurrent asset, tr trade ade rreceivable eceivable Deposit to guarantee contract performance--separately classify, could be current or noncurrent asset, depending on the length of the contract; nontrade receivable Utility deposit--separately classify, probably noncurrent nontrade receivable

 

Substantive Tests of Receivables and Sales   8-25 8-25.   Jane’s Department Store

 Requirement 1

Age Under 30 days 30- 60 days 61-120 days 121-240 days 241-360 days Over 360 days

Balance P193,000 114,000 73,000 41,000 25,000 19,000 P465,000

Estimated Percentage Uncollectible 0.008 0.020 0.050 0.200 0.350 0.600

Estimated Amount Uncollectible P 1,544 2,280 3,650 8,200 8,750 11,400 P35,824

 Requirement 2 a.

Bad Debt Expense Allowance for Doubtful Accounts

35,824

 b.

Bad D Debt ebt Expense (P35,824 + P3,000) P 3,000) Allowance for Doubtful Accounts

38,824

c.

Bad De Debt bt Expense (P35,8 ,82 24 – P2, P2,800) Allowance for Doubtful Accounts

33,0 ,02 24

35,824 38,824 33, 024

8-26.   Blue Corporation

 Requirement 1 2005 Dec. Dec.

Dec.

1

1

Ca Cash sh [( [(P1 P175 75,0 ,000 00 x 0.80 0.80)) – P1,4 P1,400 00]] 138, 138,60 600 0 Assignment Service Charge Expense (P175,000 x 0.80 x 0.01) 1,400  Notes Payable P ayable (P175,000 x 0.80) Accou oun nts Receiv ivaable Assigned

17 175 5,000

Accounts Receivable 11

31

31

140,000

175,000

Sales Returns and Allowances Accounts Receivable Assigned

1, 000

Cash Accounts Receivable Assigned

86,000

Notes Payable Interest Expense (P140,000 x 0.12 x 1/12) Cash

86,000

1,000

86,000

1,400 87,400

 

8-26   Solutions Manua Manuall to Accompany Applied Auditing, Auditing, 2006 Edition 2006  Jan.

29

29

29

Cash Accounts Receivable Assigned

60,000 60,000

No Notes tes Pay Payab able le (P140 (P140,00 ,000 0 – P86,00 P86,000) 0) 54 54,00 ,000 0 Interest Expense (P54,000 x 0.12 x 1/12) 54 0 Cash

54,540

Accounts Receivable Accounts Receivable Assigned (P175,0 (P1 75,000 00 – P1,000 P1,000 –  P86,000 – P60,000)

28,000

28,000

 Requirement 2 On the December 31, 2005 balance sheet of the Blue Corporation, the assigned accounts receivable and the remaining liability would be reported as follows: Current Assets: Accounts receivable assigned

P88,000

Current Liabilities:  Note payable

P54,000

8-27.   Tandy Shoes

Sept. 15

21

29

A Acccounts Receivable Cred Credit it Ca Card rd Ex Expe pens nsee (P (P2, 2,10 100 0 x 0. 0.05 05)) Sa l e s Sales Returns and Allowances Accounts Receivable Credit Card Expense (P200 x 0.05) Cash Accounts Receivable

1, 995 105 105 2, 100 200 1 90 10 1,805 1,805

 

Substantive Tests of Receivables and Sales   8-27 8-28.   Gabe Company

GABE COMPANY Income Statement Effect For the Year Ended December December 31, 2005 Expenses resulting from accounts receivable assigned (Schedule 1) Expenses resulting from accounts receivable sold (P300,000 – P260,000) Total expenses

P15,100 40,000 P55,100

Schedule 1: 1: Compu Computation tation of Expenses Expenses for Acco Accounts unts Receiva Receivable ble Assigned Assignment expense: Accounts receivable assigned Advance by Belle

P200,000 x 85% P170,000 x P

Interest expense Total expenses

3% 5,10 100 0 10,000 P 15,100