Virgen Virgen Milagrosa University Foundation College of Business Administration and Accountancy APPLIED AUDITI! Audit of "eceiva#les • • • • • •
Trade and ot$er receiva#les% Definition& Classification& Measurement& Presentation "evie' of t$e sales and collection cycle Accounts "eceiva#le( Estimation of Allo'ance for Dou#tful Accounts( )rite*off and "ecoveries otes "eceiva#les( interest and non*interest #earing( s$ort*term and long*term Loan "eceiva#les and Im+airment Loss "eceiva#le Financing
"evie' ,uestions% A#e Com+any sold merc$andise on credit to Bee Com+any for -.&/// on 0uly .& 'it$ terms of 12./& net 23/4 5n 0uly 6& Bee returned -1// 'ort$ of merc$andise claiming t$e m aterials 'ere defective4 5n 0uly 7& A#e received a +ayment from Bee and credited Accounts "eceiva#le for -38/4 5n 0uly 19& Bee Com+any +aid t$e remaining #alance on its account4 .4 14
:ee A#e A#e Com+any Com+any information information a#ove4 a#ove4 ;o' muc$ muc$ 'as t$e total total :ales Discounts Discounts given given to Bee during during 0uly< 0uly< :ee A#e A#e Com+any Com+any information information a#ove4 a#ove4 )$at )$at 'as t$e total total cas$ receiv received ed from Bee Bee during during 0uly<
T$e follo'ing information 'as a#stracted from t$e records of t$e orric= Cor+oration% Accounts "eceiva#le& Decem#er 3.& 1/.9 444444444444 Allo'ance for Dou#tful Accounts #efore ad?ustment& Decem#er 3.& 1/.9 4444444444444444444444444444444 :ales**1/.94444444444444444444444444444444444444444 :ales Discounts**1/.9 44444444444444444444444444444 :ales "eturns**1/.9 4444444444444444444444444444444
- 8> 8>/&/// .7&/// 1&.7/&/// .7&/// 1&///
@dr
34 Pre+are Pre+are t$e ad?usting ad?usting entry for for dou#tful dou#tful accounts accounts e+ense e+ense under under eac$ of t$e follo'ing follo'ing assum+tion assum+tions% s% @A 3 +erce +ercent nt of of outstanding outstanding accounts accounts receiva#le receiva#le are uncollecti#le uncollecti#le44 @B .48 +ercen +ercentt of 1/.9 1/.9 net sale saless are are uncol uncollec lecti#l ti#le4 e4 @C An aging aging sc$edule sc$edule of t$e accounts accounts s$o's s$o's t$at t$at -1.&9// -1.&9// of of t$e accounts accounts are are uncollecti uncollecti#le4 #le4 Teeming Teeming Com+any uses t$e allo'ance met$od m et$od of accounting for #ad de#ts4 T$e follo'ing summ ary sc$edule 'as +re+ared from an aging of accounts receiva#le outstanding on Decem#er 3. of t$e current year4 o4 of Days 5utstanding /*3/ days 3. 3.*6/ days 5ver 6/ days
Amount -8//&/// 1//&/// .//&///
T$e follo'ing additional information is availa#le for t$e current year% et credit sales for t$e year 444444444444444 444 Allo'ance for Dou#tful Accounts% Balance& 0anuary . 44444444444444444444444444444 Balance #efore ad?ustment& Decem#er 3. 444444444 94 a4 #4 c4 d4 84 a4 #4 c4 d4
Pro#a#ility of Collection 4>7 4> / 47 /
-9&///&/// 98&/// 9&///
@cr @dr
:ee Teeming Teeming Com+any Com+any information information a#ove4 a#ove4 If Teeming Teeming #ases its estimate estimate of #ad de#ts on t$e aging of accounts accounts receiva# receiva#le& le& dou#tful accounts e+ense for t$e current year ending Decem#er 3. is -9&///4 -97&///4 -8/&///4 -89&///4 :ee Teeming Teeming Com+any Com+any information information a#ove4 a#ove4 If Teeming Teeming determines determines #ad de#t e+ense e+ense using using .48 +ercent of net credit credit sales& t$e net realia#le value of accounts receiva#le on t$e Decem#er 3. #alance s$eet 'ill #e -37&///4 -9/&///4 -99&///4 -8/&///4
For t$e mont$ of Decem#er& t$e records of Former Cor+oration s$o' t$e follo'ing information% Cas$ received on accounts receiva#le 444444444444444444 Cas$ sales 44444444444444444444444444444444444444444444 Accounts "eceiva#le& Decem#er . 44444444444444444444444 Accounts "eceiva#le& Decem#er 3. 4444444444444444444444 Accounts "eceiva#le 'ritten off as uncollecti#le 444444
- /&/// 6/&/// .6/&/// .97&/// 1&///
64 a4 #4 c4 d4
T$e cor+oration uses t$e direct 'rite*off met$od in accounting for uncollecti#le accounts receiva#le4 )$at are t$e gross sales for t$e mont$ of Decem#er< -.99&/// -.3/&/// -..7&/// -.1/&///
An analysis and aging of accounts receiva#le of t $e !i#son Com+any at Decem#er 3.& 1/.9& s$o'ed t$e follo'ing% Accounts "eceiva#le 4444444444444444444444444444444444 Allo'ance for Dou#tful Accounts @#efore ad?ustment 44444444444444444444444444444444 Accounts estimated to #e uncollecti#le 444444444444444 4 a4 #4 c4 d4
-7//&/// 36&/// 6&7//
@cr
Com+ute t$e net realia#le value of t$e accounts receiva#le of !i#son Com+any at Decem#er 3.& 1/.94 -7/9&/// ->>&1// -13&1// -1&1//
An analysis and aging of t$e accounts receiva#le of Ma$i Com+any at Decem#er 3. revealed t$e follo'ing data% Accounts "eceiva#le 444444444444444444444444444444444 Allo'ance for Dou#tful Accounts @#efore ad?ustment44 Accounts estimated to #e uncollecti#le 44444444444444 74 a4 #4 c4 d4
-98/&/// 18&/// @cr 31&///
T$e net realia#le value of t$e accounts receiva#le at Decem#er 3. s$ould #e -98/&///4 -993&///4 -918&///4 -9.7&///4
As+en Com+any +rovides for dou#tful accounts e+ense at t$e rate of 3 +ercent of credit sales4 T$e follo'ing data are availa#le for last year% Allo'ance for Dou#tful Accounts& 0anuary . 44444 - 89&/// @cr Accounts 'ritten off as uncollecti#le during t$e year 4444444444444444444444444444444444 6/&/// Collection of accounts 'ritten off in +rior years44 @customer credit 'as re*esta#lis$ed 44444444444 .8&/// Credit sales& year*ended Decem#er 3. 44444444444 3&///&/// >4 a4 #4 c4 d4
T$e allo'ance for dou#tful accounts #alance at Decem#er 3.& after ad?usting entries& s$ould #e -98&///4 ->>&///4 ->/&///4 -79&///4
T$e follo'ing information is from t$e records of :umter& Inc4 for t$e year ended Decem#er 3.& 1/.94 Allo'ance for Dou#tful Accounts& 0anuary .& 1/.9 44 :ales& 1/.9 444444444444444444444444444444444444444 :ales "eturns and Allo'ances& 1/.9 4444444444444444 ./4 a4 #4 c4 d4
- 6&/// @cr 1&>1/&/// 31&///
If t$e #asis for estimating #ad de#ts is . +ercent of net sales& t$e correct amount of dou#tful accounts e+ense for 1/.9 is -11&7//4 -13&1//4 -17&77/4 -39&77/4
Based on t$e aging of its accounts receiva#le at Decem#er 3.& uanto Com+any determi ned t$at t$e net realia#le value of t$e receiva#les at t$at date is -6/&///4 Additional information is as follo's% Accounts "eceiva#le at Decem#er 3. 4444444444444444 Allo'ance for Dou#tful Accounts at 0anuary . 444444 Accounts 'ritten off as uncollecti#le during t$e year 44444444444444444444444444444444444444444444 ..4 a4 #4 c4 d4
uantos dou#tful accounts e+ense for t$e year ended Decem#er 3. is -7/&///4 ->6&///4 -.1/&///4 -.6/&///4
-77/&/// .17&/// 77&///
@cr
.14 Based on its +ast collection e+erience& Base Com+any +rovides for #ad de#ts at t$e rate of 1 +ercent of net credit sales4 5n 0anuary .& 1/.9& t$e allo'ance for dou#tful accounts credit #alance 'as -./&///4 During 1/.9& Base 'rote off -.7&/// of uncollecti#le receiva#les and recovered -8&/// on accounts 'ritten off in +rior years4 If net credit sales for 1/.9 t otaled -.&///&///& t$e dou#tful accounts e+ense for 1/.9 s$ould #e a4 -.&///4 #4 -1/&///4 c4 -13&///4 d4 -38&///4 ;arris& Inc4 re+orted t$e follo'ing #alances @after ad?ustment at t$e end of 1/.9 and 1/.34
Total accounts receiva#le 44444444444444444 et accounts receiva#le 4444444444444444444
.123.21/.9 -./8&/// ./1&///
.123.21/.3 ->6&/// >9&8//
.34 During 1/.9& ;arris 'rote off customer accounts totaling -3&1// and collected -7// on accounts 'ritten off in +revious years4 ;arrisG dou#tful accounts e+ense for t$e year ending Decem#er 3.& 1/.9 is a4 -.&8//4 #4 -1&9//4 c4 -3&///4 d4 -3&>//4 T$e follo'ing information is availa#le for Closer Com+any relative to 1/.9 o+erations% Accounts receiva#le& 0anuary .& 1/.9 Accounts receiva#le collected during 1/.9 Cas$ sales during 1/.9 Inventory& 0anuary .& 1/.9
.94 a4 #4 c4 d4
-
9/&/// 79&/// 1/&/// 97&///
Inventory& Decem#er 3.& 1/.9
99&///
Purc$ases of inventory during 1/.9 !ross margin on sales
7/&/// 91&///
)$at is Closer Com+anyGs accounts receiva#le #alance at Decem#er 3.& 1/.9< -71&/// -61&/// -1/&/// -.96&///
.84 :andy Cor+oration uses t$e allo'ance met$od of accounting for uncollecti#le accounts4 During 1/.9& :andy $ad c$arged -7/&/// to Bad De#t E+ense& and 'rote off accounts receiva#le of ->/&/// as uncollecti#le4 )$at 'as t$e amount of t$e decrease in 'or=ing ca+ital as a result of t$ese entries< a4 -/ #4 ->/&/// c4 -7/&/// d4 -./&/// .64 T$e follo'ing information is availa#le for Longvie' Com+any% Credit sales during 1/.9 Allo'ance for Dou#tful Accounts& Dec4 3.& 1/.3 Accounts receiva#le 'ritten off during 1/.9
-
8/&/// .&7// .&>//
As a result of a revie' and aging of accounts receiva#le& it $as #een determined t$at t$e Allo'ance for Dou#tful Accounts s$ould s$o' a #alance of -1&9// at Decem#er 3.& 1/.94 )$at amount s$ould Longvie' record as #ad de#t e+ense for t$e year ended Decem#er 3.& 1/.9< a4 -1&8// #4 -.&3// c4 -1&9// d4 -3&// .4 5n Decem#er .& 1/.9& Laramie Com+any received a -./&///& 6/*day& 6H note from a customer4 5n Decem#er 3.& 1/.9& t$e com+any discounted t$e note at t$e #an=4 T$e #an=Gs discount rate is >H4 )$at 'ere t$e +roceeds t$at Barnes received from t$e discounting of t$e note< a4 -./&/19418 #4 ->&//4// c4 ->&>19418 d4 -./&/8/4// .74 a4 #4 c4 d4
Accounts receiva#le usually are factored 'it$ recourse on a notification #asis4 'it$ recourse on a no*notification #asis4 'it$out recourse on a notification #asis4 'it$out recourse on a no*notification #asis4
.>4 A firm factors -9/&/// of accounts receiva#le 'it$out recourse4 T$e factor agrees to +rovide financing #ased on t$ese receiva#les& #ut im+oses a ./H fee4 In addition& t$e transferor and transferee agree t$at -3&/// of sales returns and allo'ances can #e e+ected from t$ese accounts4 )$at is t$e loss or e+ense to recorded #y t$e transferor< a4 -&/// #4 -9&/// c4 -3&/// d4 -/ 1/4 5n August .& a firm assigned -3/&/// of its -86&/// of accounts receiva#le4 T$e finance com+any advanced >/H of t$e assigned accounts less a -1&/// fee4 Interest is .1H and +aya#le mont$ly on t$e #eginning*of*+eriod loan #alance4 A loan +ayment is remitted at t$e end of eac$ mont$4 Eac$ +ayment includes +rinci+al and interest4 T$e amount of eac$ loan +ayment e,uals t$e cas$ collected on receiva#les during t$e mont$ +lus interest on t$e loan #alance4 If -7&/// 'as collected on accounts receiva#le during August& t$e entry for t $e first loan +ayment 'ould include a a4 de#it to Interest E+ense of -17/4 #4 credit to Cas$ of -7&///4 c4 credit to Account "eceiva#le Assigned of -7&///4 d4 de#it to otes Paya#le of -7&17/4 1.4 ;alen Com+any factored -8/&/// of its accounts receiva#le 'it$ recourse4 T$e factor retained 7H for sales ad?ustments and c$arged -3&/// as a financing fee4 For sim+licit y& assume t$e estimated and actual amounts of t$e follo'ing items are e,ual% :ales ad?ustments Uncollecti#le accounts
-1&8// 8//
Assume t$e transfer is recorded as a sale # y ;alen Com+any4 )$at is t$e loss or financing e+ense to #e recognied on t $e transfer< a4 -..&/// #4 -6&/// c4 -3&/// d4 -7&/// 114 5rc$ids Com+anyGs accounts receiva#le at Decem#er 3.& 1/.1 $ad a #alance of P.&1//&///4 T$e allo'ance for #ad de#ts account $ad a credit #alance of P9/&///4 et sales in 1/.1 'ere P6&/9&/// @net of sales discounts of P86&///4 An aging sc$edule s$o's t$at P.8/&/// of t$e outstanding accounts receiva#le are dou#tful4 )$at is t$e ad?usting entry for estimated #ad de#t e+ense< 134 T$e follo'ing selected transactions occurred during t$e year ended Decem#er 3.& 1/.1% !ross :ales @cas$ and credit 8/&/// Collections from credit customers& net of 1H cas$ discount 198&/// Cas$ sales .8/&/// Uncollecti#le accounts 'ritten off .6&/// Credit memos issued to credit customers for sales returns and Allo'ances 7&9// Cas$ refunds given to cas$ customers for sales returns and allo'ances .1&69/ "ecoveries on accounts receiva#le 'ritten off in +rior years @not Included in cas$ received stated a#ove 8&91. At year*end t$e com+any +rovides for estimated #ad de#t losses #y crediting t$e Allo'ance for Bad De#t account for 1H of its net credit sales for t$e year4 a4 )$at is t$e com+anyGs net credit sales in 1/.1< #4 )$at is t$e #ad de#t e+ense for 1/.1< Problem 1 :$o'n #elo' os !5"5:PE C5MPAGs aging sc$edule of its accounts receiva#le on Decem#er 3.& 1/.14 Customers AA Co4 BB& Inc4 CC Cor+ DD Inc EE Trans+ort FF Inc4 !! Co ;; Cor+ II Com+any Totals
AA Co4 BB& Inc4 CC Cor+ DD Inc EE Trans+ort FF Inc4 !! Co ;; Cor+ II Com+any
Merc$andise found defective( returned #y customer on ovem#er ./ for credit& #ut t$e credit memo 'as issued #y !oros+e only on 0anuary 1& 1/.34 Account is good #ut usually +ays late4 Merc$andise 'ort$ P9/&/// destroyed in transit on 0une 9& 1/.14 T$e carrier 'as #illed on 0uly .4 @see EE trans+ort and II com+any Customer #illed t'ice in error for ./&///4 Balance is collecti#le4 Collected in full on 0anuary .8& 1/.3 Paid in full on Decem#er 1>& 1/.1 #ut not recorded4 Collections 'ere de+osited 0anuary 3& 1/.34 "eceived account confirmation from customer for P..&///4 Investigation revealed an erroneous credit for P./&///4 @see ;; cor+ eglected to +ost P./&/// credit to customerGs account4 Customer 'ants to =no' t$e reason for recei+t of P9/&/// credit memo as its accounts +aya#le #alance is P.//&///4
Based on t$e foregoing information& '$at s$ould #e t$e ad?usted #alance of t$e Accounts receiva#le J trade at Decem#er 3.& 1/.1< Problem 2 Calac$uc$i Cor+Gs accounts receiva#le su#sidiary ledger s$o's t$e follo'i ng information%
T$e estimated #ad de#t rates #elo' are #ased on Calac$uc$i Cor+4Gs receiva#le collection e+erience4 Age of Accounts "ate /*3/ days .H 3.*6/ days .48H 6.*>/ days 3H >.*.1/ days ./H 5ver .1/ days 8/H T$e allo'ance for #ad de#ts account $ad a de#it #alance of P8&8// on Decem#er 3.& 1/.1 #efore ad?ustment4 .4
14 34
94 84
T$e com+anyGs accounts receiva#le under 6.*>/ days category s$ould #e a4 31&6// #4 99&31/ c4 99&6// d4 91&/// T$e com+anyGs accounts receiva#le under >.*.1/ days category s$ould #e NNNNNNNNNNNN T$e allo'ance for #ad de#ts to #e re+orted in t$e statement of financial +osition at Decem#er 3.& 1/.1 is a4 >&66> #4 .8&.>> c4 9&.>> d4 8&8// )$at entry s$ould #e made on Decem#er 3.& 1/.1 to ad?ust t$e allo'ance for #ad de#ts account< )$at is t$e net realia#le value of accounts receiva#le at Decem#er 3.& 1/.1< a4 .68&69. #4 ..&.9. c4 .>6&/3> d4 .76&39/
Problem 3
T$e financial statements su#mitted for your eamination #y !errit Com+any included t$e follo'ing% Dec4 3.& 1/.3 Dec4 3.& 1/.9
Accounts "eceiva#le 7//&/// Allo'ance for dou#tful accounts .6&/// :ales on account 8&///&/// Cas$ on account 9&8//&/// Among t$e cas$ collections 'as t$e full recovery of a P1/&/// receiva#le from C$arlie Com+any& a customer '$ose account $ad #een 'ritten off as 'ort$less late in 1/.34 During 1/.9& it 'as necessary to 'rite off uncollecti#le customersG accounts totaling P38&///4 5n Decem#er .& 1/.9& a customer settled $is account #y issuing to !errit Com+any a ./H si mont$ note for P18/&///4 At Decem#er 3.& 1/.9 t$e accounts receiva#le i ncluded P.8/&/// +ast due accounts4 After careful study of all +ast due accounts& t$e management estimated t$at t$e +ro#a#le loss contained t$erein 'as ./H4 In addition& 8H of current accounts receiva#le mig$t +rove uncollecti#le4 .4
14
34
94
84
.4
)$at s$ould #e t$e #alance of Accounts "eceiva#le as of Decem#er 3.& 1/.9< a4 ./.8&/// c4 .&168&/// #4 .&/38&/// d4 .&8.8&/// )$at is t$e amount of t$e current accounts receiva#le t$at mig$t +rove to #e uncollecti#le< a4 93&/// c4 88&8/ #4 99418/ d4 8>&18/ )$at is t$e #alance of Allo'ance for Dou#tful Accounts on Decem#er 3.& 1/.9 #efore ta=ing u+ t$e dou#tful accounts e+ense< a4 .&/// credit #4 .8&/// de#it c4 .&/// de#it d4 .8&/// credit ;o' muc$ dou#tful accounts e+ense s$ould #e +resented on t$e income statement for t$e year ended Decem#er 3.& 1/.9< a4 93&18/ c4 87&18/ #4 99&18/ d4 67&18/ )$at is t$e net realia#le value of t$e accounts receiva#le on Decem#er 3.& 1/.9< a4 .&93.&8/ c4 >8&8/ #4 .&.>9&18/ d4 >86&8/ e4 f. Problem 4 g4 During your eamination of t$e 1//9 financial statements of t$e "Com you find t$at t$e com+any does not +rovide allo'ance for dou#tful accounts ever since it started o+erations in 1/./4 T$e com+anyGs +ractice is to directly 'rite*off as e+ense dou#tful accounts and credit recoveries to income4 T$e ocm+anyGs contracts are generally for t'o years4 $4 i4 U+on your recommendation& t$e com+any agreed to c$ange its accounts for 1//9 and to give effect to dou#tful treatment on t$e allo'ance #asis4 T$e allo'ance is to #e #ased on a +ercentage of sales '$ic$ is derived from t$e e+erience of +rior years4 statistics for 1/./ to 1/.9 are s$o'n as follo's% ?4 =4 ear of :ale 1/./ 1/.. 1/.1 1/.3 1/.9 l4 C$arge sales 6//&/// .&8//&/// .&7//&/// .&>8/&/// .&68/&/// m4 n4 Accounts 'ritten off and o4 ear of sale +4 1/./ 3&3// ,4 1/.. >&/// 6&/// r4 1/.1 3&/// 19&/// &7// s4 1/.3 &1// 1&/// >&/// t4 1/.9 .6&1// 3/&/// 7&9// u4 "ecoveries and ear of :ale v4 1/./ 6// '4 1/.. 1&9// 4 1/.1 3&/// y4 1/.3 3&6// 4 aa4 Accounts "eceiva#le at Decem#er 3.& 1/.9 'ere as follo's% a#4 From 1/.3 sales >/&/// ac4 From 1/.9 sales 7./&/// ad4 Total >//&/// ae4 af4 "e,uired% ag4 Based on t$e a#ove and t$e result of your audit& you are to +rovide t$e ans'ers to t$e follo'ing% T$e average +ercentage of net dou#tful accounts to c$arge sales t$at s$ould #e used in setting u+ t$e 1/.9 allo'ance is a4 14/8 c4 .4>/ #4 148/ d4 .4
14
;o' muc$ is t$e dou#tful accounts e+ense for 1/.9< a4 31&78/ c4 93&7// #4 9.&18/ d4 89&6// 34 T$e dou#tful accounts e+ense for 1/.9 is over @under stated #y a4 88&>8/ c4 @31&78/ #4 .3&38/ d4 @9.&18/ 94 T$e net realia#le value of accounts receiva#le t$at s$ould #e +resented on t$e Decem#er 3.& 1/.9 statement of financial +osition is a4 73.&6// c4 767&68/ #4 783&7// d4 7./&///
84
.4 14
34
94
84
64
.4 14 34 94 84
.4 14 34 94
e4 T$e ad?usting ?ournal entry necessary to set u+ t$e allo'ance for dou#tful accounts as of Decem#er 3.& 1/.9 'ill #e f4 g4 $4 i. Problem 5 ?4 ou are eamining t$e financial of Miss Universe for t$e year ended Decem#er 3.& 1/.94 our audit of t$e accounts receiva#le and ot$er related accounts disclosed t$e follo'in g information% T$e Decem#er 3.& 1/.9 de#it #alance in t$e Accounts "eceiva#le control account is 77&///4 T$e only entries in t$e Bad De#t E+ense account 'ere% a4 A credit for P.&1>6 on Decem#er .4 1/.9 #ecause Customer A remitted in full for t$e account c$arged off 5cto#er 3.& 1/.94 #4 A de#it on Decem#er 3. for t$e amount of t$e credit allo'ance for Bad De#ts4 T$e allo'ance for Bad De#ts sc$edules is +resented #elo'% =4 1/.9 l4 m4 n4 De#it o4 Credit +4 Balance ,4 0an4 . r4 s4 t4 u4 v4 .9&631 '4 4 Uncolle y4 4 aa4 a#4 cti#le% ac4 ad4 Custome ae4 .&1>6 af4 ag4 a$4 rA ai4 a?4 B a=4 3&17/ al4 am4 an4 ao4 a+4 C a,4 1&186 ar4 6&731 as4 at4 &7// au4 Dec4 3. av4 8H of a'4 a4 ay4 3>&9// a4 9&1// 77&/// An aging sc$edule fo t$e accounts receiva#le as of Decem#er 3.& 1/.9 and t$e decisions are as s$o'n in t$e ta#le #elo'% #a4 A!E ##4 et #c4 Amount ot '$ic$ t$e allo'ance is to #e ad?usted after de#it #alance ad?ustments and corrections $ave #een made #d4 /*. #e4 31&> #f4 .H mont$ 6/ #g4 .*3 #$4 3/&1 #i4 1H mont$s 7/ #?4 3*6 #=4 77&1 #l4 3H mont$s / #m4 5ver 6 #n4 19&// #o4 Definitely uncollecti#le& P9&///( P7&/// is considered 8/H mont$s / uncollecti#le( t$e remainder is estimated to #e 7/H collecti#le4 #+4 Total #,4 >1&> #r4 6/ T$ere is a credit #alance in one account receiva#le /*. mont$ of P7&///( it re+resents and advance on a sales contract( also t$ere is a credit #alance in one of t$e .*3 mont$Gs accounts receiva#le of P1&/// for '$ic$ merc$andise 'ill #e acce+ted #y t$e customer4 T$e Accounts "eceiva#le control accont is not in agreement 'it$ t$e su#sidiary ledger4 T$e differences cannot #e located( and t$e auditor decides to ad?ust t$e control to t$e sum of t$e su#sidiaries after corrections are made4 #s4 #t4 Based on t$e a#ove and t$e result of your audit& ans'er t$e follo'ing% ;o' muc$ is t$e ad?usted #alance of Accounts "eceiva#le as of Decem#er 3.& 1/.9< ;o' muc$ is t$e ad?usted #alance of t$e allo'ance for Dou#tful accounts as of Decem#er 3.& 1/.9< ;o' muc$ is t$e net ad?ustment to t$e allo'ance for dou#tful accounts e+ense< ;o' muc$ is t$e dou#tful accounts e+ense for t$e year 1/.6< ;o' muc$ is t$e net ad?ustment to t$e Dou#tful Accounts E+ense account< #u4 #v4 bw. Problem 6 #4 :igay Ban= granted a loan to a #orro'er in t$e amount of P8&///&/// on 0anuary .& 1/./4 T$e interest rate on t$e loan is ./H +aya#le annually starting Decem#er 3.& 1/./4 T$e loan matures in five years on Decem#er 3.& 1/.94 :igay incurs P3>&9// of direct loan origination cost and P./&/// of indirect loan origination cost4 In addition& :igay Ban= c$arges t$e #orro'er an 7*+oint nonrefunda#le origination fee4 #y4 #4 Based on t$e a#ove data& ans'er t$e follo'ing @round off +resent value factors to four decimal +laces T$e carrying amount of t$e loan as of 0anuary .4 1/./ is T$e effective interest rate of t$e loan is T$e interest income to #e recognied in 1/./ T$e carrying amount of t$e loan as of Decem#er 3.& 1/./ ca4 cb. Problem 7 cc4 5n 0anuary .& 1//6& #atac Com+any loaned Badoc Com+any amounting to 1&///&/// and received a t'o*year& 6H& P1&///&/// note4 T$e note calls for annual interest to #e +aid eac$ Decem#er 3.4 Batac collected t$e 1//6 interest on sc$edule4 ;o'ever& on Decem#er 3.& 1//& #ased on t$e BadocGs recent financial difficulties& Batac e+ects t$at t$e 1// interest& '$ic$ 'as recorded in t$e #oo=s& 'ill not #e collected and t$at only .&1//&/// of t$e +rinci+al 'ill #e
recovered4 T$e .&1//&/// +rinci+al amount is e+ected to #e collected in t'o e,ual annual installments on Decem#er 3.& 1//> and Decem#er 3.& 1/..4 T$e +revailing interest rate for simi lar ty+e of note as of Decem#er 3.& 1// is 7H4
.4 14 34 94
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cd4 ce4 Based on t$e a#ove data& ans'er t$e follo'ing% @round off +resent value factors to four decimal +laces T$e +resent value of t$e e+ected future cas$ flo's as of Decem#er 3.& 1// is T$e loan im+airment loss in 1// is ;o' muc$ is t$e interest income for t$e year 1//7< Carrying amount of t$e loan as of Decem#er 3.& 1//>< cf4 cg. Problem 8 c$4 our sales cut*off eamination revealed t$e follo'ing information% T$e Decem#er 3. inventory 'as determined #ased on a +$ysical count conducted on Decem#er 1>4 Based on suc$ count& inventory 'as valued at P36/&/// T$e 1/.6 ledger s$o's a :ales #alance of P9&///&///4 T$e com+anyGs gross +rofit rate is 1/H4 All customers are 'it$in a t$ree*day delivery area of t$e com+any +lant4 T$e sales register for Decem#er 1/.6 and 0anuary 1/.& s$o'ed t$e follo'ing details4 ci4 c?4 Decem#er c=4 cl4 cm4 "egister cn4 Invoice co4 F5B terms c+4 Date :$i++ed c,4 Amount um#er cr4 .// cs4 DE:TIATI5 ct4 .1217 cu4 ./&/// cv4 ./. c'4 :;IPPI! c4 .123/ cy4 .1&/// P5IT c4 ./1 da4 DE:TIATI5 d#4 .121 dc4 >&/// dd4 ./3 de4 :;IPPI! df4 .121> dg4 .&8// P5IT d$4 ./9 di4 DE:TIATI5 d?4 .123/ d=4 &1// dl4 ./8 dm4 :;IPPI! dn4 .1217 do4 .7&/// P5IT d+4 0anuary d,4 dr4 ds4 "egister dt4 Invoice du4 F5B terms dv4 Date :$i++ed d'4 Amount um#er d4 ./6 dy4 DE:TIATI5 d4 .123. ea4 19&/// e#4 ./ ec4 :;IPPI! ed4 .121> ee4 .8&/// P5IT ef4 ./7 eg4 DE:TIATI5 e$4 .2/1 ei4 11&8// e?4 ./> e=4 DE:TIATI5 el4 .121 em4 3/&/// en4 ../ eo4 :;IPPI! e+4 .123. e,4 8&/// P5IT er4 es4 )$at is t$e ad?usted sale in 1/.6< et4 )$at is t$e ad?usted inventory #alance at Decem#er3.& 1/.6< eu4 ev. Problem 9 e'4 e4 Unless ot$er'ise identified& t$e notes receiva#le of t$e uirino Com+any on Decem#er 3.& 1/.8 'ere trade notes receiva#le4 5n t$is date t$e #alance of t$e account& P3&/36&>.8& consisted of t$e follo'ing notes all received during t$e calendar year under audit% ey4 e4 fa4 D f#4 fc4 "ate fd4 Amou fe4 "ema M a Ter nt r=s t e ff4 fg4 5 f$4 fi4 .7H f?4 8&9. f=4 Four A c 6 6 notes t to 4 settle +ast due . accou fl4 fm4 5 fn4 fo4 .7H f+4 .//&/
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gi4 T$is note is for a cas$ loan made to t$is custo mer4 o intere st $as #een collec ted to date4 go4 All intere st collec ted on 5ct4 . gu4 Loan a++ro ved in minut es #oo=& 0an4 1/4 5n Aug4 .& t$is note 'as +ledg ed as collat eral for a #an= loan P8//& ///4 $a4 Intere st +aya# le at
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$$4 $i4 All of t$e a#ove notes are considered good ece+t t$at of A com+any '$ic$ is some'$at dou#tful4 An allo'ance of 18H s$ould #e esta#lis$ed against t$e notes receiva#le of t$is com+any4 $?4 $=4 Based on t$e a#ove and t$e result of your audit& com+ute t$e follo'ing% Ad?usted #alance of Trade otes "eceiva#le as of Decem#er 3.& 1/.8< a4 .&.>&9>> #4 >1&763 c4 1&/36&>.8 d4 .&836&>.8 et realia#le value of Trade otes "eceiva#le as of Dec4 3.& 1/.8< a4 .&99&86. #4 .&>9&86. c4 .&/>/&.98 d4 737&8/> Interest income for t$e year ended Decem#er 3.& 1/.8< a4 193&9> #4 183&.78 c4 1/7&.78 d4 93&.78 Accrued interest income as of Decem#er 3.& 1/.8< a4 183&.78 #4 7&9> c4 193&9> d4 .>7&9> $l4 hm. Problem 10 $n4 $o4 In connection 'it$ your audit of t$e :alcedo Cor+oraton& you ntoed t$at t$e com+anyGs otes "eceiva#le consists of t$e follo'ing% $+4 A 9*mont$ note dated ovem#er 3/& 1/.8 from AA com+any& P1//&///& interest rate .6H( discounted on ovem#er 3/& 1/./ at .6H4 A draft dra'n +aya#le 3/ days after for P>//&/// #y t$e BB com+any on t$e C$arlie C5m+nay in favor of t$e Delta Com+any& endorsed to :alcedo Cor+4 on Decem#er 1& 1/.8 and acce+ted on Decem#er 9& 1/.84 A >/*day note dated ovem#er .& 1/./ from E4Dy& P8//&///( interst at .6H( t$e note is for su#scri+tion to 8&/// +reference s$ares of :alcedo Cor+4 at P.// +er s$are4 A 6/*day note dated May 3& 1/.8 from CC Com+any& P6//&///( interest rate .6H( dis$onored at maturity( ?udgment o#tained on 5cto#er ./& 1/.84 Collection 'it$in t$e net t'elve mont$s is dou#tful4 A >/*day note dated 0anuary 9& 1/.8& from A+ol 5reyn?& +resident of :alcedo& P.6/&///( no interest( note not rene'ed( +resident confirmed4 A .1/*day note dated :e+tem#er .9& 1/.8 from DD Com+any& P.1/&///( interest rate& .6H( note is $eld #y #an= as collateral4 $,4 $r4 Based on t$e a#ove and t$e result of your audit& you are to +rovide t$e ans'ers to t$e follo'ing% T$e ad?usted #alance of otes "eceiva#le as of Decem#er 3.& 1/.8 is a4 1&97/&/// #4 .&11/&/// c4 .&/1/&/// d4 >//&/// ;o' muc$ of foregoing notes receiva#le 'ill #e re+orted in t$e current assets section of t$e statement of financial +osition< a4 .&11/&/// #4 1&97/&/// c4 .&67/&/// d4 .&81/&/// ;o' muc$ is t$e net interest income from t$e foregoing notes receiva#le for 1/./< a4 .>&/>3 #4 /&6.3 c4 .66&6.3 d4 38&/>3 T$e ad?usted #alance of interest receiva#le as of Decem#er 3.& 1/./< a4 .>&/>3 #4 8&6/
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/&6.3 / Problem 11
T$e statement of financial +osition of :antiago Cor+oration re+orted t$e follo'ing long*term receiva#les as of Decem#er 3.& 1/.8% $'4 ote receiva#le from sale of +lant >&///&/// $4 ote receiva#le from officer 1&9//&/// $y4 In connection 'it$ your audit& you 'ere a#le to gat$er t$e follo'ing transactions during 1/./ and ot$er information +ertaining to t$e com+anyGs long*term receiva#les% T$e note receiva#le from t$e sale of +lant #ears interest at .1H +er annum4 T$e note is +aya#le in 3 annual installments of P3&///&/// +lus interest on t$e un+aid #alance every A+ril .4 T$e initial +rinci+al and interest +ayment 'as made on A+ril .& 1/.84 T$e note receiva#le from officer is dated Decem#er 3.& 1/.9 earns interest at ./H +er annum& and is due on Decem#er 3.& 1/.4 T$e 1/.8 interest 'as received on Decem#er 3.& 1/.84 T$e cor+oration sold a +iece of e,ui+ment to es& Inc4& on A+ril .& 1/.8& in ec$ange for an P.&1//&/// non*interest #earing note due on A+ril .& 1/.4 T$e note $ad no ready mar=et& and t$ere 'as no esta#lis$ed ec$ange +rice for t$e e,ui+ment4 T$e +revailing interest rate for a note of t$is ty+e at A+ril& 1/.8 'as .1H4 A tract of land 'as sold #y t$e cor+oration to 5 Co4 on 0uly .& 1/.8& for P6&///&/// under an installment sale contract4 o Co& signed a 9*year ..H note for P9&1//&/// on 0uly .& 1/.8& in addition to t$e do'n +ayment of P.&7//&///4 T$e e,ual annual +ayments of +rinci+al and interest on t$e note 'ill #e P.&383&8/ +aya#le on 0uly .& 1/.6& 1/.& 1/.7& 1/.>4 T$e land $ad an esta#lis$ed cas$ +rice of P6&///&/// and its cost to t$e cor+oration 'as P9&8//&///4 T$e collection of t$e installments on t$is note is reasona#ly assured4 $4 ia4 Based on t$e a#ove and t$e result of your audit& determine t$e follo'ing% i#4 oncurrent notes receiva#le as of Decem#er 3.& 1/.8< a4 .3&886&9// #4 >&669&68/ c4 ./&886&9// d4 >&8/&16 Current +ortion of long*term notes receiva#le as of Decem#er 3.& 1/.8< a4 3&7>.&8/ #4 9&383&8/ c4 3&///&/// d4 / Accrued interest receiva#le as of Decem#er 3.& 1/.8< a4 .&/// #4 9&383&/6 c4 89/&/// d4 .&/..&/// Interest income for t$e year 1/.8< a4 .&17.&/// #4 .&63&/6 c4 .&36&/6 d4 .&8.1&/// ic4 id. Problem 12 ie4 if4 A5O5A BAO loaned P8&8//&/// to OAAO5PA Com+any on 0anuary .& 1/.84 T$e initial loan re+ayment terms include a ./H interest rate +lus annual +rinci+al +ayments of P.&.//&/// on 0anuary . eac$ year4 OAAO5PA made t$e re,uired interest +ayment in 1/.8 #ut did not ma=e t$e P.&.//&/// +rinci+al +ayment in 1/.64 A5O5A BAO is +re+aring its annual financial statements on Decem#er 3.& 1/.64 OAAO5PA is $aving financial difficulty& and A5O5A $as concluded t$at t$e loan is im+aired4 ig4 i$4 Analysis of OAAO5PAGs financial condition on Decem#er 3.& 1/.6 indicates t$e +rinci+al +ayments 'ill #e collected& #ut t$e collection of interest is unli=ely4 A5O5A did not accrue t$e interest on Decem#er 3.& 1/.64 ii4 i?4 T$e +ro?ected cas$ flo's are% i=4 Decem#er 3.& 1/. .&8/&/// il4 Decem#er 3.& 1/.7 1&///&/// im4 Decem#er 3.& 1/.> .&8/&/// in4 io4 )$at is t$e loan im+airment loss on Decem#er 3.& 1/.6< >9.&8// 88/&/// / 8&8//&/// i+4 i,4 )$at is t$e interest income to #e re+orted #y A5O5A BAO in 1/.<
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8/.&938 / 988&78/ 88/&/// ir4 )$at is t$e carrying value of t$e loan receiva#le on Decem#er 3.& 1/.7< .&8>/&78 .&8/&/// 3&169&38/ 9&887&8// is4 )$at is t$e interest income in 1/.7< .8>&/> 88/&/// 988&78/ 316&938 it4 )$at is t$e interest income in 1/.>< .8>&/> 88/&/// 316&938 988&78/ iu4 iv. Problem 13 i'4 i4 5n 0an4 .& 1/.8& ME"5 Co4 loaned P3&///&/// to )ALA co4 Under t$e loan agreement& )ALA I to ma=e an annual +rinci+al +ayment of P6//&/// for 8 years +lus interest at 7H4 T$e first +rinci+al and interest +ayment is due on 0anuary .& 1/.64 T$e re,uired +ayments 'ere made #y )ALA for 1/.6 and 1/.4 ;o'ever& during 1/.& )ALA #egan to face financial difficulties& re,uiring ME"5 co& to reevaluate t$e collecta#ility of t$e loan4 5n Decem#er 3.& 1/.& ME"5 determines t$at it 'ill #e a#le to collect t$e remaining +rinci+al& #ut it is unli=ely t$at t$e interest 'ill #e collected4 iy4 i4 Use 8 decimal +laces for PV Factors4 )$at is t$e +resent value of t$e e+ected future cas$ flo's as of Decem#er 3.& 1/.< )$at is t$e amount of loan im+airment on Decem#er 3.& 1/.< Assuming t$at ME"5 Co4Gs assessment of t$e collecta#ility of t$e loan $as not c$anged& '$at amount of interest revenue s$ould #e recognied for 1/.7< ?a4 ?#4 ?c4 ?d4 ?e4 ?f4 ?g4 ?$4 ?i4 ??4 ?=4 ?l4 ?m4 ?n4 ?o4 jp. 5nly '$at 'as done for !od 'ill last4
