TRAPO, Inc. estimates its bad debt losses by aging its accounts receivable.

The aging schedule of

accounts receivable at December 31, 2016, is presented below:
Age of Accounts Amount
0 – 30 days P 843,200
31 – 60 days 461,000
61 – 90 days 192,400
91 – 120 days 76,650
Over 120 days 39,400
P1,612,650
TRAPO, Inc.’s uncollectible accounts experience for the past 5 years are summarized in the following
schedule:

A/R Balance 0-30 31-60 61-90 91-120 Over120

Year __Dec. 31__ Days Days Days Days Days
2015 P1,312,500 0.3% 1.8% 12% 38% 65%
2014 999,999 0.5% 1.6% 11% 41% 70%
2013 465,000 0.2% 1.5% 9% 50% 69%
2012 816,000 0.4% 1.7% 10.2% 47% 81%
2011 1,243,667 0.9% 2.0% 9.7% 33% 95%
The balance of the allowance for bad debts account at December 31, 2016, (before adjustment) is
P84,500.
1. What is the average bad debt expense rate for “91-120 days” accounts?
A. 76% C. 10.38%
B. 8.6% D. 41.80%
2. What is the average bad debt expense rate for “31-60 days” accounts?
A. 10.38% C. 0.46%
B. 41.80% D. 1.72%
3. The net realizable value of the company’s accounts receivable on December 31, 2016, should be
A. P1,518,887 C. P1,528,150
B. P1,612,650 D. P1,603,358
4. What entry should be made to adjust the allowance for bad debts on December 31, 2016?
A. Bad debt expense 178,263
Allowance for bad debts 178,263
B. Bad debt expense 93,763
Allowance for bad debts 4,19993,763
C. Allowance for bad debts 9,263
Bad debt expense 9,263
D. Bad debt expense 9,263
Allowance for bad debts 9,263

5. In evaluating the adequacy of the allowance for bad debts, an auditor most likely reviews the
entity’s aging of receivables to support management’s financial statement assertion of
A. Existence
B. Valuation and allocation
C. Completeness
D. Rights and obligations
Solution 2-7
1. Answer: D
2. Answer: D
0-30 31-60 61-90 91-120 Over120
Year Days Days Days Days Days
2015 0.3% 1.8% 12% 38% 65%
2014 0.5% 1.6% 11% 41% 70%
2013 0.2% 1.5% 9% 50% 69%
2012 0.4% 1.7% 10.2% 47% 81%
2011 0.9% 2.0% 9.7% 33% 95%
Total 2.30% 8.6% 51.90% 209.00% 380.00%
Average 0.46% 1.72% 10.38% 41.80% 76.00%

3. Answer: A
Estimated
Age of Accounts Amount Rate Uncollectible
0 – 30 days P 843,200 0.46% P3,878.72
31 – 60 days 461,000 1.72 7,929.20
61 – 90 days 192,400 10.38 19,971.12
91 – 120 days 76,650 41.80 32,039.70
Over 120 days 39,400 76.00 29,944.00
P1,612,650 P93,762.74

Accounts Receivable P1,612,650

Less: Required allowance balance per aging 93,763
Net realizable value, Dec. 31, 2016 P1,518,887

4. Bad debt expense 9,263

Allowance for bad debts 9,263

Required allowance per aging P93,763

Less: Allowance balance before adjustment 84,500
Increase in Allowance P 9,263

Answer: C

5. Assertions about valuation and allocation concern whether assets, liabilities, and equity interests
are included in the financial statements at appropriate amounts and any resulting valuation or
allocation adjustments are properly recorded. Management, for example, asserts that accounts
receivables are stated at net realizable value, i.e., the amount that is expected to be received from
its customers (gross receivable minus allowance for bad debts). Aging the receivable is a
procedure for assessing the reasonableness of the allowance for bad debts.

Answer: B