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AUDIT OF RECEIVABLES AND SALES

CHAPTER 3-EXERCISE 1:
In the course of your audit of DKNY Company's "Receivables" account as of December 31,
2014, you found out that the account comprised the following items:
Trade accounts receivable PI,550,000
Trade accounts receivable, assigned (proceeds from assignment 750,000
amounted to P650,000)
Trade accounts receivable, factored (proceeds from factoring done on
a without-recourse basis amounted to P250,000 300,000
12% Trade-notes receivable 200,000
20% Trade notes receivable: discounted at 40% upon receipt
of the 180-day note on a without recourse basis 300,000
Trade receivables rendered worthless 50,000
Installments receivable, normally due 1 year to two years 600,000
Customers' accounts reporting credit balances
arising from sales returns 60,000
Advance payments for purchase of merchandise 300,000
Customers' accounts reporting credit balances arising
from advance payments 40,000
Cash advances to subsidiary 800,000
Claim from insurance company 30,000
Subscription receivable due in 60 days, 600,000
Accrued interest receivable 20,000
Deposit on contract bids 50,000
Advances to stockholders (collectible in 2017) 2,000,000

Requirements:

1. How much is the total trade receivables?


a. 3,650,000 c. 3,000,000
b. 3,100,000 d. 2,950,000

2.How much is the amount to be presented as "trade and other receivables" under current assets?
a. 7,350,000 c. 4,850,000
b. 5,350,000 d. 4,050,000

3. How much loss from receivable financing should be recognized in the income statements?
a. 36,000 c. 86,000
b. 50,000 d. 105,000
CHAPTER 3-EXERCISE 2:

In your audit of Morgan Inc. for the year 2014, you concluded that the allowance for doubtful
accounts should be adjusted to equal the estimated amount required based on aging of the
accounts as of December 31.
During your audit, you were able to gather the following data:
Allowance for doubtful accounts, Jan 1, 2014 P600,000 -
Provision for doubtful accounts during 2014 (3% of 10M Sales) 300,000
Bad debts written-off in 2014 375,000+
Recovery of bad debts written-off during 2014 100,000-
Estimated doubtful accounts per aging of accounts 700,000+
on December 31, 2014
Accounts receivable, December 31 2014 2,375,600

1. Based on the result of your audit, what is the correct doubtful accounts expenses for the year
2014?
a. 375,000 c.175,000
b. 300,000 d. 75,000

2. What is the correct net book value of the receivables as of December 31, 2014?
a. 2,375,000 c. 2,000,000
b. 1,675,000 d. 1,975,000

CHAPTER 3-EXERCISE 3:

In relation to your audit of Inuyasha Inc.'s accounts receivable you ascertained the following
information:
a. The general ledger balances of the client's receivable and related accounts were:
Accounts receivables P3,225, 300
Allowance for bad debts (169,000)
Amortized cost P3.056,300

b. Inuyasha Inc. estimates its bad debt losses by aging its accounts receivable, the aging
schedule of accounts receivable at December 31, 2014, Is presented below:
Age of accounts Amount
Current P1,686,400
1 to 30 days past due 922,000
31 to 60 days past due 384,800
61 to 90 days past due 153,300
Over 90 days past due 78,800

c. The company normally sells n/30.


d. Furthermore, the company's uncollectible accounts experience for the past 5 years
are summarized in the schedule that follows:
Year Current 1-30 days 31-60 days 1-90 days More than 90
PD PD PD days PD
2013 1% 6% 9% 23% 55%
2012 2% 8% 10% 18% 60%
2011 1% 4% 11% 16% 45%
2010 3% 5% 12% 22% 45%
2009 3% 2% 8% 21% 45%

Requirements: 1. What are the corresponding percentages to be used per age category in
computing for the client's required allowance for bad debts?
Current 1-30 31-60 1-90 >90
a 1% 3% 10% 20% 45%
b. 1.5% 5% 10% 25% 50%
c. 2% 5% 10% 20% 50%
d. 2% 3% 10% 25% 45%

2. The required allowance for bad debt expense is:


a. 173,653 c. 188,368
b. 185,415 d. 220,842 88

3. The net realizable value of the company's accounts receivable on December 31, 2014, should
be:
a. 3,036,932 c. 2,986,345
b. 3,004,458 d. 2,976,540

CHAPTER 3-EXERCISE 4:

The Mexican Corp. grants its customers 30 days credit. The company uses the allowance method
for its uncollectible accounts receivable. During the year, a monthly bad debt accrual is made by
multiplying 2% by the amount of credit sales for the month only. At the fiscal year-end of
December 31, an aging of accounts receivable schedule is prepared and the allowance for
uncollectible accounts is adjusted accordingly.

At the end of 2014 before any audit adjustments, the general ledger accounts showed balances of
account receivable at P1,230,000 and the allowance for bad debt at P106,000. Accounts
receivable activity for 2014 included the following:
Credit sales P12,800,000
Write offs, 82,000
The company's controller prepared the following aging summary of year-end accounts
receivable:
Age Group Amount Percent Collectible
0-60 days P825,000 98%
61-90 days 220,000 90%
91 120 days 50,000 70%
Over 120 days 128,000 60%
P1.223,000

1t was ascertained that P40,000 from the over 120 days accounts are absolutely worthless.

Requirements:

1. How much is the unreconciled difference between the general ledger and the subsidiary ledger
balance of accounts receivable and how should it be accounted for:
a. P7,000; GL prevailing over SL, with the difference being charged against sales
b. P10,000; GL prevailing over SL, with the difference being charged to bad debt expense.
c. P7,000; SL prevailing over GL, with the difference being charged against sales.
d. P10,000; SL prevailing over GL, with the difference being charged to bad debt expense

2. How much is the total bad debt expense for 2014?


a. 304,700. c. 280,700
b. 278,700. d. 294,700

3. How much is the net realizable value of accounts receivable at December 31, 2014?
a. 1,123,000 c. 1,094,300
b. 1,118,300 d. 1,223,000

CHAPTER 3-EXERCISE 5:

You are auditing the Accounts Receivable of Rovers Inc, as of December 31, 2014. You found
the following information in the general journal:
Accounts receivable P1,466,720
Less: Allowance for doubtful accounts (46,720)
Accounts receivable net P1,420,000

The accounts receivable subsidiary ledger had the following details:


Customer Invoice date Amount Balance Balance
Gudang 9/12/2014 P139,200 P139,200
Tisoy 12/12/2014 153,600
12/02/2014 99,200 252,800
Gusoy 11/17/2014 185,120
10/08/2014 176,000 361,120
Naning 12/08/2014 160,000
10/25/2014 44,800
8/20/2014 40,000 244,800
Nanong 9/27/2014 96,000 96,000
Balong 8/20/2014 71,360 71,360
Peejong 12/06/2014 112,000
11/29/2014 169,440 281,440
Total P1,446,720

Additional information:
a. You discovered based on your review of subsequent events that Balong recently went
bankrupt, thus your suggested that the amount receivable from the same shall be written
off.
b. You also discovered that the invoice dated 12/02/2014 has already been settled by Tisoy
per OR number 34675. This amount however has been erroneously posted against
Gusoy's subsidiary ledger as a settlement for an invoice dated 11/05/2014 for the same
amount
c. The estimated bad debt rates below are based on the company's receivable collection
experience:
Age of accounts % of Collectibility
0 30 days 98%
31 -60 days 95%
61-90 days 90%
91-120 days 80%
Over 120 days 50%

Required:

1. Assuming that there were no other entries to the allowance for doubtful accounts, what is the
correct bad debt expense for the year?
a. 95,680 c.141,984
b. 92,704 d. 144,960

2. What is the correct allowance for bad debt expense for the year ended December 31, 2014?
a. 156,000 c. 120,320
b. 153,024 d. 117,344

3. What is the net adjustment to the Accounts receivable in the general ledger?
a. 172,560 c. 91,360
b. 119,200 d. 71,360

4. What it the carrying value of the company's accounts receivable as of December 31, 2014?
a. 1,255,040 c. 1,275,040
b. 1,258,016 d. 1,295,040

5. What is the necessary adjusting entry to adjust any unlocated difference between the SL and
GL?
a. Bad debt expense 20,000
Accounts receivable 20,000
b. Sales 20,000
Accounts receivable 20,000
c. Accounts receivable 20,000
Other Income 20,000
d. No necessary entry

CHAPTER 3-EXERCISE 6:

You were assigned to audit Natasha Inc.'s accounts receivable which had an unadjusted balance
per books of (P755,142, net of an allowance for bad debts amounting to P32,858. Your inquiries
and investigations revealed the following information:

a. The only entries in the Bad debt expense account were:


 A credit for P1,296 on December 1, 2014, because a customer remitted in full
account charged off on October 31, 2014.
 A debit on December 31, for the amount of the credit to Allowance for bad
debt on the same date

b. The allowance for bad debt accounts had the following details:
Jan. 1, balance P15,250
June. 30, write off of accounts (1,296)
Aug. 31, write off of accounts (3,280)
Oct. 31, write off of accounts (2,256)
Dec. 31, Bad debt expense (3%*788,000) 23,640
Dec. 31, balance P32,858

Records revealed that the December 31, 2014 bad debt expense was debited to the bad debt
expense account and credited to allowance for bad debt for the amount shown above, while the
write offs credited to accounts receivable amounted only to P6,032, Further investigation
revealed that the correct amounts to be written off were shown in the analysis above.

c. An aging schedule of the accounts receivable as of December 31, 2014, and the
decisions are as shown in the table below:
Amount to which the allowance is to be adjusted
after adjustments and corrections have been made
Age Net debit bal.
0-1 Month P372,960 1%
1 - 3 months 307,280 2%
3-6 months 88,720 3%
Over 6 months 24,000
Definitely uncollectible, P4,000; P8,000 is
considered to be 50% uncollectible; the remainder
is estimated to be750% collectible

d. There is a credit balance in one accounts receivable (0 1 months) of P8,000; it


represents an advance on a sales contract; also there is a e in one of the 1-3 months
accounts receivable of P2,000 for which merchandise will be accepted by the
customer.

e. The accounts receivable control account is not in agreement with the subsidiary
ledger The differences cannot be located, and the company's accountant decides to
adjust the control to the sum of the subsidiaries after corrections are made.

Requirements:

1. What is the correct bad debt expense for the year?


a. 10,296 c. 13,343
b. 10,640 d. 14,640

2. What is the adjusting journal entry to record the remaining unlocated difference between e
general ledger and the subsidiary ledger after consideration of all adjustments?

a. Accounts receivable P5,760


Bad debt expense P5,760

b. Accounts receivable P5,760


Sales P5,760

c. Accounts receivable P4,960


Sales P4,960

d. Accounts receivable P9,760


Bad debt expense P9,760

3. What is the accounts receivable balance on December 31, 2014?


a. 793,200 c. 798,960
b. 798,160 d. 808,960

4. What is the required allowance for bad debt expense on December 31, 2014?
a. 19,057 c. 29,357
b. 19,857 d. 32,857

5. What is the accounts receivable net of allowance for bad debts?


a. 774,143 c. 779,503
b. 779,103 d. 779,903
CHAPTER 3-EXERCISE 7:

You are auditing the accounts receivable and the related allowance for bad debts account of
Sayote Inc. The control account of the aforementioned accounts had the following balances:
Accounts Receivable P1,270,000
Less: Allowance for bad debt (78,000)
Net Book Value P1,192,000

Upon your investigation, you found out the following information:

a. The company's normal sales term is n/30.


b. The allowance for bad debt account had the following details in the general ledger:

Allowance for Bad Debts


July 31 write off 24,000 Jan. 31 Balance 30,000
Dec. 31 Provision 72,000

c. The subsidiary ledger balances of the company's accounts receivable as of December


31, 2014 contained the following information:

Debit balances Credit balances


Under one month P540,000 Kamote Co. P12,000
One to six months 552,000 Kutchay Corp. 21,000
Over six months 228,000 Kalachuchi Inc. 27,000
P1,320,000 P60,000

Additional information
 The credit balance with Kamote Co. was for an overpayment from the customer The
company delivered additional merchandise to Kamote Co. on January 3, 2015 to cover
such overstatement.
 The credit balance of Kutchay Corp. was due to a posting error, the amount should have
been credited to Kutchara Corp for a 60 day outstanding receivable.
 The credit balance from Kalachuchi was a cash advance for a delivery to be made on
January 15, 2015.

d. It was estimated that 1 percent of accounts under one month is doubtful of collection
while 2 percent of accounts one to six months are expected to require an allowance
for doubtful of collection. The account over six months are analyzed as follows:
Definitely uncollectible P72,000
Doubtful (estimated to be 50% collectible) 36,000
Apparently good, but slow (estimated to be 90% collectible) 120,000
P228,000
Required: Based on your audit, answer the following:

1. What is the entry to adjust any unlocated difference between the control account and the
subsidiary ledger?
a. Sales 10,000
Accounts Receivable 10,000
b. Accounts Receivable 10,000
Sales 10,000
c. Sales 14,000
Accounts Receivable 14,000
d. No Unlocated Difference

2. The adjusted accounts receivable balance on December 31, 2014, should be


a. 1,212,000 c. 1,239,000
b. 1,227,000 d. 1,260,000

3. The required balance of the allowance for bad debts account on December 31, 2014 is
a. 46,020 c. 64,020
b. 46,440 d. 142,020

4. The entry to adjust the allowance for bad debts account is


a. Bad debts expense 46,020
Allowance for bad debts 46,020
b. Bad debts expense 52,020
Allowance for bad debts 52,020
c. Allowance for bad debts 6,000
Bad debts Expense 6,000
d. Bad debts expense 40,000
Allowance for bad debts 40,000

CHAPTER 3-EXERCISE 8:

The substantiate the existence of the accounts receivable balances as at December 31, 2014 of
Lucrative Company, you have decided to send confirmation requests to customers. Below is a
summary of the confirmation requests to customers. Below is a summary of the confirmation
replies together with the exceptions and audit findings. Gross profit on sales is 20%. The
company is under the perpetual inventory method.
Name of Balance Per Comments from Audit Findings
Customer Books Customers
P30,000 was Returned goods
Cruz P50,000 returned on were received
January 2, 2015. January 5, 2015.
Correct balance is
P20,000. The CM was
Frias P10,000 Your CM taken up by
representing price Lucrative in 2015.
adjustment dated
December
29,2014 cancels The complaint is
Lazo P48,000 this. valid.
You have
overpriced us by
P50. Correct price Term is shipping
Sia P37,500 should be P100. point. Shipped in
We received the 2014.
gods only on Lucrative credited
Yao P45,000 January 5, 2015. accounts payable
Balance was for P45,000 to
offset by our record purchases.
December Yao is a supplier.
shipment of your
raw materials.

Requirements:

1. If the necessary adjusting journal entry is made regarding the case of Mr. Cruz, the income
will:
a. increase by P6,000
b. decrease by P30,000
c. decrease by P6,000
d. increase by P30,000

2. The effect on 2014 net income of Lucrative Company of its failure to record CM involving
transaction with Mr. Frias:
a. P10,000 over c. P2,000 over
b. P10,000 under d. P2,000 under

3. The actual number of units sold to Mr. Lazo is:


a. 960 c. 480
b. 320 d. 1,920

4. The overstatement of receivable from Mr. Lazo is:


a. 32,000 c. 24,000
b. 8,000 d. 16,000

5. The accounts receivable from Mr. Sia is:


a. correctly stated c. 37,500 under
b. 37,500 over d. 75,000 over

6. The adjusting journal entry to correct the receivable from Mr. Yao is:
a. Purchases 45,000
Accounts Payable 45,000
b. Accounts payable 45,000
Purchases 45,000
c. Accounts receivable 45,000
Accounts Payable 45,000
d. Accounts payable 45,000
Accounts receivable 45,000

CHAPTER 3-EXERCISE 9:

Milk Corp.'s general ledger showed the following information:


Accounts receivable P550,000
Allowance for doubtful accounts (debit) 16,500

Milk Corp.'s accounts receivable subsidiary ledger on the other hand shows the following
composition:

Customer Invoice Date Invoice Amount Balance


Zulu Inc. 12/0614 P42,000
11/29/14 63.540 P105,540
Yankee Co. 09/27/14 36,000
08/20/14 26,760 62,760

Xylon Inc. 12/30/14 20,000


12/08/14 40,000
10/25/14 31,800 91,800

Whiskey Co. 11/17/14 69,420


10/09/14 66,000 135,420

Victory Corp. 12/12/14 57,600


8/20/14 37,200 94,800

Uniform Inc. 9/12/14 52,200 52,200

Audit Notes:
a. The accounts receivables balance were confirmed with the customers. You have
noted the following exceptions:
Customer Balance Remarks
per reply
Yankee P36,000 Invoice dated 08/20/14 was already settled.
Investigation revealed that Yankee's payment was
erroneously posted against Victory Corp.'s
account for an invoice dated 12/20/14 for the same
amount.
Xylon Inc. 71,800 The difference was due to the invoice dated
12/30/14 Goods have not been received by Xylon
Inc. yet as of 12/31/14. Term of sale is FOB
Destination.
Victory Corp. 121,560 "Amount per our records appear to be higher,
please check.”
Uniform Inc. No reply Uniform Inc is under liquidation and the amount
receivable from the company is deemed definitely
uncollectible.

b. The company's policy with regard uncollectible accounts are summarized below:
Age % uncollectible
0-30 days 1%
31-60 days 2%
61-90 days 5%
91-120 days 10%
Over 120 days 50%
Required:

1. What is the correct allowance for bad debts as of December 31, 2014?
a. 31,413 c. 31,613
b. 44,525 d. 44,725

2. What is the correct amortized cost of the accounts receivable as of December 31,
2014?
a. 470,320 c. 458,707
b. 425,795 d. 438,907

3. What is the correct bad debt expense for the year?


a. 100,113 c. 113,225
b. 67,113 d. 100,313
4. What is the entry to record the unlocated difference between the general ledger and the
subsidiary ledger?

a. Dr: Bad debt expense 7,480


Cr: Accounts receivable 7,480

b. Dr: Sales 7,480


Cr: Accounts receivable 7,480

c. Dr: Alowance for bad debts 7,480


Cr: Accounts receivables 7,480

d. No entry.