AUDIT

OF RECEIVABLES
Problem 1
To substantiate the existence of the accounts receivable balances as of December 31, 2018, of LUCAS COMPANY, you have
decided to send 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.
Customer Balance per books Comments from customers Audit findings
Terante P150,000 P90,000 was returned on December 30, 2018. Returned goods were received
Correct balance is P60,000. December 31, 2018.
Teddy P30,000 Your CM representing price adjustment dated The CM was taken up by Lucas
December 28, 2018, cancel this. Company in 2019.
Hipolito P144,000 You have overpriced us by P150. Correct price Complaint is valid.
should be P300
Flora P122,500 We received the goods only on January 6, 2019 Term is shipping point. Shipped in
2018.
Alyana P135,000 Balance was offset by our December shipment Lucas company credited accounts
of you raw materials. payable for P135,000 to record
purchases. Alyana is a supplier.

1. If the necessary adjusting journal entry is made regarding the case of Terante, the net income will
A. Decrease by P18,000. B. Increase by P18,000.
C. Decrease by P90,000. D. Increase by P90,000.
2. The effect on 2018 net income of Lucas company of its failure to record the CM involving transaction with Teddy
A. P30,000 over. B. P6,000 over.
C. P30,000 under. D. P6,000 under.
3. The overstatement of receivable from Hipolito is
A. P96,000 B. P24,000
C. P72,000 D. P48,000
4. The accounts receivable from Flora is
A. Correctly stated. B. P112,000 under.
C. P112,000 over. D. P225,000 under.
5. The adjusting entry to correct the receivable from Alyana is
A. Purchases P135,000 B. Accounts payable P135,000
Accounts receivable P135,000 Purchases P135,000
C. Accounts receivable P135,000 D. Accounts payable P135,000
Accounts payable P135,000 Accounts receivable P135,000


Problem 2
The following information is based on first audit of Alibaba Company. The client has not prepared financial statements for 2016,
2017, or 2018. During these years, no account have been written as uncollectible, and the rate of gross income on sales has
remained constant for each of the three years.

Prior to January 1, 2016, the client used the accrual method of accounting. From January 1, 2016 to December 31, 2018, only
cash receipts and disbursements records were maintained. When sales on account were made, they were entered in the
subsidiary accounts receivable ledger. No general ledger postings have been made since December 31, 2015.

As a result of your examination, the correct data shown in the table below are available:
Accounts receivable balances: 12/31/15 12/31/18
Less than one year old P15,400 P28,200
One to two years old 1,200 1,800
Two to three years old 800
Over three years old 2,200
Total accounts receivable P16,600 P33,000

Inventories P11,600 P18,800
Accounts payable for inventory purchased P5,000 P11,000

Cash received on accounts receivable in: 2016 2017 2018
 Applied to:
Current year collections P148,800 P161,000 P208,800
Accounts of the prior year 13,400 15,000 16,800
Accounts of two years prior 600 400 2,000
Total P162,800 P177,000 P227,600

Cash sales P17,000 P26,000 P31,200
Cash disbursements for inventory purchased P125,000 P141,200 P173,800

Requirements:
1. The company’s sales revenue for the three-year period amounted to?
2. What is the company’s sales revenue for 2017?
3. The aggregate amount of purchases for the three-year period is?
4. What is the company’s gross profit ratio?
5. What is the company’s gross profit in each of the three-year period?


Problem 3
In the course of your audit of CASIO company’s Receivables account as of December 31, 2014, you found out that the account
comprised the following items:
Trade accounts receivable P1,550,000
Trade accounts receivable, assigned (proceeds from assignment amounted to P650,000) 750,000
Trade accounts receivable, factored (proceeds from factoring done on a without-recourse 300,000
basis amounted to P250,000)
12% Trade notes receivable 200,000
20% Trade notes receivable, discounted at 40% upon receipt of the 180-day note on a 300,000
without recourse basis
Trade receivables rendered worthless 50,000
Installments receivable, normally due 1 year to two years 600,000
Customer’s accounts reporting credit balances arising from sales returns 60,000
Advance payments for purchase of merchandise 300,000
Customer’s 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 500,000
Advances to stockholders (collectible in 2017) 2,000,000

Requirements:
1. How much is the total trade receivables?
2. How much is the amount to be presented as “trades and other receivables” under current assets?
3. How much loss from receivable financing should be recognized in the income statements?


Problem 4
In relation to your audit of INUYASHA Inc.’s account 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 to 30 days 31 to 60 days 1 to 90 days Over 90 days
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 to 30 31 to 60 61 to 90 Over 90
a. 1% 3% 10% 20% 45%
b. 1.55 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?
3. The net realizable value of the company’s account receivable on Dec 31, 2014 should be?


Problem 5
The Amazing Speed 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. 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 2018 before any audit adjustments, the general ledger accounts showed balances of account receivable at
P1,230,000 and the allowance for uncollectible accounts at P106,000. Accounts receivable activity for 2018 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%
Total P1,223,000

It 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?
2. How much is the total bad debt expense for 2018?
3. How much is the net realizable value of accounts receivable at December 31, 2018?


Problem 6
You are auditing the Accounts receivable of Durabox Inc. as of December 31, 2018. 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
Gudang 9/12/2018 P139,200 P139,200
Tisoy 12/12/2018 153,600
12/02/2018 99,200 252,800
Gusoy 11/17/2018 185,120
10/08/2018 176,000 361,120
Naning 12/08/2018 160,000
10/25/2018 44,800
8/20/2018 40,000 244,800
Nanong 9/27/2018 96,000 96,000
Balong 8/20/2018 71,360 71,360
Badang 12/06/2018 112,000
11/29/2018 169,440 281,440
Total P1,466,720

Additional information:
a. You discovered based on your review of subsequent events that Balong recently went bankrupt, thus you suggested
that the amount receivable from the same shall be written off.
b. You also discovered that the invoice dated 12/02/2018 has already been settled by Tisoy per OR number 34675. This
amount however has been posted against Gusoy’s subsidiary ledger as a settlement for an invoice dated 11/05/2018
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%

Requirements:
1. Assuming that there were no other entries to the allowance for doubtful accounts, what is the correct bad debt
expense for the year?
2. What is the correct allowance for bad debt expense for the year ended December 31, 2018?
3. What is the net adjustment to the accounts receivable in the general ledger?
4. What is the carrying value of the company’s accounts receivable as of December 31, 2018?
5. What is the necessary adjusting entry to adjust any unallocated 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. Account receivable 20,000
Other income 20,000
d. No necessary adjustment entry


Problem 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 debts 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
7/31 Write off 24,000 1/1 Balance 30,000
12/31 Provision 72,000
c. The subsidiary ledger balances of the company’s accounts receivable as of December 31, 2018 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

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, 2019 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 Kalachuhi Inc. was a cash advance for a delivery to be made on January 15, 2019.

d. It was estimated that one percent of accounts under one month is doubtful of collection while two percent of
accounts one to six months are expected to require an allowance for doubtful of collection. The accounts 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
Total P228,000

Requirements:
1. 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 40,020
Allowance for bad debts 40,020
2. What is the correct allowance for bad debt expense for the year ended December 31, 2018?
3. What is the net adjustment to the accounts receivable in the general ledger?
4. What is the carrying value of the company’s accounts receivable as of December 31, 2018?
5. What is the necessary adjusting entry to adjust any unallocated difference between the SL and GL?
a. Sales 10,000
Accounts receivable 10,000
b. Sales 14,000
Accounts receivable 14,000
c. Account receivable 10,000
Sales 10,000
d. No necessary adjustment entry

Problem 8
On December 31, 2013, FIREWALL Company, a financing institution lent P4,000,000 to ODD-EYES Corp. due 3 years after. The
loan is supported by an 8% note receivable. Transaction costs incurred to originate the loan amounted to P248,000. P374,000
was chargeable to ODD-EYES as originating fees. Interest on the loan are collectible at the end of each year. The yield rate on
the loan is 9.25%.

FIREWALL was able to collect interest as it became due at the end of 2014. During 2015, however, due to ODD-EYES Corp.’s
business deterioration and due to to political instability and faltering global economy, the company was not able to collect
amounts due at the end of 2015. After reviewing all available evidence at December 31, 2015, FIREWALL Company determined
that it was probable that ODD-EYES would pay back only P3,400,000 collectible as follows:

December 31, 2017 P1,400,000
December 31, 2018 1,000,000
December 31, 2019 600,000
December 31, 2020 400,000

As of December 31, 2015, the prevailing rate of interest for all debt instruments is 14%.

Based on the above information and on your audit, answer the following requirements:
1. What is the carrying value of the receivables as of December 31, 2014?
2. What is the impairment loss to be recognized in the 2015 statement of comprehensive income?
3. What is the interest income to be recognized in the 2017 statement of comprehensive income?
4. What is the correct carrying value of the loans receivables of December 31, 2017?


Problem 9
Gen-EX Corp. had the following receivable financing transactions during the year:
• On March 1, 2014, Gen-EX Corp. factored P500,000 of its accounts receivables to BPI. As of the date of factoring, it
was ascertained that P20,000 of the accounts receivable is doubtful of collection. BPI advanced P350,000 cash to Gen-
EX Corp. and withheld P50,000 as factors holdback (to cover future sales discount and sales returns and allowances).
The company incurred P10,000 direct transaction costs (legal fees and other professional fees) related to the
factoring. The factoring was done on a without recourse basis, thus transferring all significant risks and rewards
associated to the receivable to BPI.
• On May 1, 2014, Gen-EX Corp. assigned P800,000 of its outstanding accounts receivable to BPI in consideration of a
P500,000, 24% loan. BPI charged the company 2% of the accounts assigned as a service charge. By the end of May,
Gen-EX collected P200,000 cash from the assigned accounts net of a P5,000 sales discount. By the end of June, Gen-
EX collected another P150,00 from the assigned accounts after P4,000 sales discount. The company accepted
merchandise originally invoiced at P30,000 as sales returns and wrote-off P20,000 of the assigned accounts as
worthless. It was agreed between parties that monthly collections shall be remitted in the bank as partial payment of
the loan and interest.
• On July 1, 2014, Gen-EX Corp. accepted from a customer a 6-month P600,000, 12% notes receivable for he sale of
merchandise. On October 31, 2014, Gen-EX Corp. discounted the note to BPI at a discount rate of 10%. The
discounting was done on a without-recourse basis, thus transferring all significant risks and rewards associated to the
receivable to BPI.

Requirements:
1. How much should be reported as gain/loss in the income statement on the transfer of receivables on the factoring of
receivable on March 1?
2. How much should be reported as gain/loss in the income statement on the transfer of receivables on the assignment
of receivables on May 1?
3. What is the carrying value of the accounts receivable-assigned as of June 30?
4. What is the carrying value of the loan payable related to the accounts receivable-assigned as June 30?
5. How much should be reported as gain/loss in the income statement on the transfer of receivables on the discounting
of the note receivable on July 1?