PSBA A.R. Handout (Auditing Problem) – R.A.

Sales

Problem 1

The December 31, 2017, statement of financial position of the UP Company included the following
information:

Accounts receivable P672,000

Less: Allowance for credit loss (42,300) P629,700
Notes receivable* 65,400
Total Receivables P695,100

*The company is contingently liable for discounted notes receivable of P114,000.

During the year ending December 31, 2018, the following transactions occurred:

1. Sales on credit P2,623,800

2. Collections of accounts receivable 2,523,000
3. Accounts receivable written off as uncollectible 41,400
4. Notes receivable collected 87,000
5. Customer notes received in payment of accounts receivable 216,000
6. Notes receivable discounted that were paid at maturity 108,000
7. Notes receivable discounted that were defaulted, including 6,075
interest of P60 and a P15 fee. This amount is expected to be
collected during 2019.
8. Proceeds from customer notes discounted with recourse 135,225
(principal P135,000, accrued interest, P600)
9. Collections on accounts previously written off 1,500
10. Sales returns and allowances (on credit sales) 6,000
11. Increase in allowance for credit loss 39,357

Based on the preceding information, determine the balance of the following accounts at December 31,
2018.

1. Accounts receivable
2. Allowance for credit loss
3. Notes receivable
4. Notes receivable discounted

Answer:

1. Accounts receivable 2,623,800

Sales 2,623,800
2. Cash 2,523,000
Accounts receivable 2,523,000
3. Allowance for credit loss 41,400
Accounts receivable 41,400
PSBA A.R. Handout (Auditing Problem) – R.A. Sales

4. Cash 87,000
Notes receivable 87,000
5. Notes receivable 216,000
Accounts receivable 216,000
6. Notes receivable discounted 108,000
Notes receivable 108,000
7. Accounts receivable 6,075
Cash 6,075
Notes receivable discounted 6,000
Notes receivable 6,000
8. Cash 135,225
Loss on discounting of notes receivable 375
Notes receivable discounted 135,000
Interest income 600

Proceeds P135,225
CV of Note (P135,000 + P600) 135,600
Loss on discounting P375

9. Accounts receivable 1,500

Allowance for credit loss 1,500
Cash 1,500
Accounts receivable 1,500
10. Sales returns and allowances 6,000
Accounts receivable 6,000
11. Expected credit loss (Bad debt expense) 39,357
Allowance for credit loss 39,357

Problem 2

Shown below is GROOT Company’s aging schedule of its accounts receivable on December 31, 2018.

Days Past Due

Customers Balance Due Current 1-30 31-60 Over 60
AA Co. P23,000 P0 P0 P 23,000 P0
BB, Inc. 105,000 62,000 20,000 13,000 10,000
CC Corp. 87,500 23,000 14,500 10,000 40,000
DD, Inc. 93,500 53,000 20,500 10,000 10,000
EE Transport 40,000 0 0 0 40,000
FF, Inc. 31,000 15,000 16,000 0 0
GG Co. 1,000 1,000 0 0 0
HH Corp. 64,000 20,000 18,000 16,000 10,000
II Company 60,000 60,000 0 0 0
Totals P 505,000 P 234,000 P 89,000 P 72,000 P 110,000
PSBA A.R. Handout (Auditing Problem) – R.A. Sales

The accounts receivable balance per general ledger is P 505,000 on December 31, 2018.

The following are audit comments for possible adjustments:

AA Co.

Merchandise found defective; returned by the customer on November 10 for credit, but the credit
memo was issued by Groot only on January 2, 2019.

BB Inc.

Account is food but usually pays late.

CC Corp.

Merchandise worth P40,000 destroyed in transit on June 4, 2018. The carrier was billed on July 1. (See
EE Transport and II Company).

DD, Inc.

Customer billed twice in error for P10,000. Balance us collectible.

EE Transport

Collected in full on January 15, 2019.

FF, Inc.

Paid in full on December 29, 2018, but not recorded. Collections were deposited January 3, 2019.

GG Co.

Received amount confirmation from customer for P11,000. Investigation revealed an erroneous credit
for P10,000. (See HH Corp.)

HH Corp.

Neglected to post P10,000 credit to customer’s account.

II Company

Customer wants to know the reason for receipt of P40,000 credit memo as its account payable balance
is P100,000.

Required:

What is the adjusted balance of the Accounts receivable – trade at December 31, 2018?
PSBA A.R. Handout (Auditing Problem) – R.A. Sales

Answer:

Accounts receivable per general ledger P 505,000

AA Co. – Delayed issuance of credit memo (23,000)
CC Corp. – Damaged merchandise credited to II (40,000)
Company
DD, Inc. – Double Billing (10,000)
FF, Inc. – Collection not recorded (31,000)
GG, Co. – Erroneous posting of credit for HH 10,000
Corp.
HH Corp. – Payment credited in error to GG Co. (10,000)
II Company – Credit for CC Corp. erroneously 40,000
posted to II Company
Adjusted Balance of accounts receivable – trade P 441,000

Problem 3

Presented below are unrelated situations. Answer the questions relating to each situation.

A. The following information is from GUM Corp.’s first year of operations:

1. Merchandise purchased P450,000

2. Ending merchandise inventory 123,000
3. Collections from customers 150,000
4. All sales are on account and goods sell
at 30% above cost
What is the accounts receivable balance at the end of the company’s first year of operations?

B. BANANA Co. reported the following information at the end of tis first year of operations,
December 31, 2018:

Expected credit loss for 2018 P 271,000

Uncollectible accounts written off during 2018 35,400
Net realizable value of accounts receivable 895,000

What is the accounts receivable balance at December 31, 2018?

C. MAHONE Company’s analysis and aging of its accounts receivable at December 31, 2018,
disclosed the following:

Accounts Receivable P 460,000

Accounts estimated to be uncollectible (per aging) 95,000
Allowance for credit loss (per books) 103,000

What is the net realizable value of MAHONE’s receivables at December 31, 2018?
PSBA A.R. Handout (Auditing Problem) – R.A. Sales

D. The following amounts are shown on the 2018 and 2017 financial statements of SICILLY Co.:

2018 2017
Accounts receivable ? P 470,000
Allowance for credit loss 20,000 10,000
Net Sales 2,600,000 2,400,000
Cost of goods sold 1,900,000 1,752,000
SICILLY Co.’s accounts receivable turnover for 2018 is 6.5 times.

What is the accounts receivable balance at December 31, 2018?

Answer:

A. Solution
Purchases P 450,000
Less: Merchandise inventory, ending 123,000
Cost of Goods Sold 327,000
Multiply by: sales ratio X 130%
Sales 425,100
Less: Collections from customers 150,000
Accounts receivable, ending P 275,100

B. Solution
Expected credit loss for 2018 P 271,000
Less: Accounts written off during 2018 35,400
Allowance for credit loss, Dec. 31, 2018 235,600
Add: Net realizable value of accounts 895,000
receivable, Dec. 31, 2018
Accounts receivable, Dec. 31, 2018 1,130,600

C. Solution
Accounts Receivable P 460,000
Less: Allowance for credit loss (per aging) 95,000
Net realizable value P 365,000

D. Solution
(X = Net receivables, December 31, 2018)
A/R turnover = Net Sales/ Ave. Net receivables
6.5 = P 2,600,000/ [(P460,000 + x)/2]
X = P 340,000

Net receivables, Dec. 31, 2018 P 340,000

Add: Allowance for credit loss, Dec. 31, 2018 20,000
Accounts Receivable, Dec. 31, 2018 P 360,000
PSBA A.R. Handout (Auditing Problem) – R.A. Sales

Problem 4

INIGO Company’s accounting records disclose the following:

Accounts receivable, Jan. 1, 2018 P 1,800,000

Allowance for credit loss, Jan. 1, 2018 (credit) 90,000
Sales for the year 15,000,000
Collections from customers during the year 13,080,000

The following additional information was also obtained:

1. Included in the amount collected from customers was the recovery of P 30,000 receivable
from a customer whose account had been charged off as worthless in the prior year.
2. Inigo Company determined that its receivable from a customer of P 150,000 will not be
collected, and management authorized its write-off.
3. A customer settled its account on December 2, 2018 by issuing a 12%, 6-month note for
P600,000.
4. The Accounts Receivable balance on December 31, 2018 includes P900,000 past due
accounts.
5. The entity estimated that 20% of past due accounts will not be collected and that the
probable loss on current accounts is 5%.

Required:

1. The current assets section of Inigo Company’s statement of financial position on December
31, 2018, should include Accounts Receivable of:
2. What is the balance of the Allowance for credit loss before adjustment on December 31,
2018?
3. The required Allowance for credit loss on December 31, 2018 is:
4. The Allowance for credit loss should be increased (decreased by:
5. What is the adjusting entry to record the Expected credit loss for the current year?

Solution:

1. Solution:

Accounts Receivable, Jan. 1, 2018 P 1,800,000

Sales for 2018 15,000,000
Collections (13,080,000)
Recovery of accounts written off 30,000
Customer’s account written off (150,000)
Accounts settled by issuance of note (600,000)
Accounts receivable, Dec. 31, 2018 P 3,000,000
PSBA A.R. Handout (Auditing Problem) – R.A. Sales

2. Solution:
Allowance for credit loss, Jan. 1 (credit) P 90,000
Recovery of accounts written off 30,000
Accounts written off (150,000)
Allowance before adjustment, Dec. 31 (debit) P (30,000)

3. Solution:

Current accounts (P3,000,000 – P900,000 = P 105,000

P2,100,000 x 5%)
Past due accounts (P 900,000 x 20%) 180,000
Required allowance, Dec. 31, 2018 P 285,000

4. Solution:

Required allowance, Dec. 31, 2018 P 285,000

Allowance before adjustment – Debit 30,000
Increase in allowance P 315,000

5. Journal Entry:

Expected credit loss 315,000

Allowance for credit loss 315,000

Problem 5

From inception of operations to December 31, 2018, MAHARLIKA Corp. provided for expected credit loss
under the allowance method: provisions were made monthly at 2% of credit sales; bad debts written off
were charged to the Allowance account; recoveries of bad debts previously written off were credited to
the Allowance account; and no year-end adjustments to the Allowance account were made. Maharlika’s
usual credit terms are net 30 days.

The balance in the Allowance for credit loss account was P 143,000 at January 1, 2018. During 2018,
credit sales totaled P 15,000,000, interim provisions for expected credit loss were made at 2% of credit
sales, P 140,000 of bad debts were written off, and recoveries of accounts previously written off
amounted to P 43,000.

Maharlika installed a computer facility in November 2018 and an aging of accounts receivable was
prepared for the first time as of December 31, 2018.

A summary of the aging is as follows:

Classification by Month of Sale Balance in Each Default Rate

Category
November – December 2018 P 2,160,000 2%
July – October 2018 1,300,000 10%
PSBA A.R. Handout (Auditing Problem) – R.A. Sales

January – June 2018 840,000 25%

Prior to January 1, 2018 300,000 70%
P 4,600,000

Based on the review of collectability of the account balances in the “prior to January 1, 2018” aging
category, additional receivables totaling P 120,000 were written off as of December 31, 2018. The 70%
uncollectible estimate applies to the remaining P 180,000 in the category.

Effective with the year ended December 31, 2018, Maharlika adopted a new accounting method for
estimating the allowance for credit loss at the amount indicated by the year-end aging analysis of
accounts receivable.

Required:

1. What is the balance of the Allowance for credit loss on December 31, 2018 (before year-end
adjustment)?
2. What is the journal entry for the year-end adjustment to the Allowance for credit loss balance as
of December 31, 2018?
3. For the year ended December 31, 2018, Maharlika’s expected credit loss would be?
4. The net realizable value of Maharlika’s accounts receivable at December 31, 2018, should be?
5. An auditor’s purpose in reviewing credit ratings of customers with delinquent accounts
receivable most likely is to obtain evidence concerning management’s assertion about:

Solution:

1. Solution:

Allowance for credit loss, Jan. 1, 2018 P 143,000

Add: Expected credit loss for 2018 (P 15,000,000 x 2%) P 300,000
Recoveries of accounts previously written off 43,000 343,000
Total 486,000
Less: Accounts written off (P140,000 + P120,000) 260,000
Allowance for credit loss, Dec. 31, 2018 P 226,000

2. Expected credit loss 283,200

Allowance for credit loss 283,200

Classification Balance Rate Amount

November – December 2018 P 2,160,000 2% P 43,200
July – October 2018 1,300,00 10% 130,000
January – June 2018 840,000 25% 210,000
Prior to January 1, 2018 180,000 70% 126,000
(P300,000 – P120,000 write off)
Required allowance balance, Dec. 31, 2018 P 509,200
PSBA A.R. Handout (Auditing Problem) – R.A. Sales

Less: Allowance balance before adjustment 226,000

(see no. 1)
Increase in allowance P 283,200

3. Solution:
Expected credit loss recorded P 300,000
Additional expected credit loss to arrive at the 283,200
required allowance based on aging
Correct expected credit loss for 2018 P 583,200

4. Solution:
Accounts receivable (P4,600,000 – P120,000) P 4,480,000
Less: Required allowance per aging 509,200
Net realizable value, Dec. 31, 2018 P 3,970,800

5. Valuation and allocation.

Problem 6

Presented below are unrelated situations. Answer the questions relating to each situation.

1. On December 5, 2018, BANDILA Inc. sold its accounts receivable (net realizable value, P260,000)
for cash of P 230,000. Ten percent of the proceeds was withheld by the factor to allow for
possible customer returns and other account adjustments. The related allowance for credit loss
is P 40,000.

A. What amount of loss on factoring should be recognized?

B. What is the entry to record the factoring of accounts receivable?

2. On April 1, 2018, SAMGYUPSAL Corp. assigned accounts receivable totaling P 400,000 as

collateral on a P 300,000, 16% note from Iwahig Bank. The assignment was done on a
nonnotification basis. In addition to the interest on the note, the bank also receives a 2% service
fee, deducted in advance on the P 300,000 value of the note.

Additional information is as follows:

a. Collections of assigned accounts in April totaled P191,100 net of a 2% sales discount.
b. On May 1, Samgyupsal Corporation paid the bank the amount owed for April collections plus
accrued interest on note to May 1.
c. The remaining accounts were collected by Samgyupsal Corporation during May except for
P2,000 accounts written off as worthless.
d. On June 1, Samgyupsal Corporation paid the bank the remaining balance of the note plus
accrued interest.
PSBA A.R. Handout (Auditing Problem) – R.A. Sales

Prepare the journal entries to record the above transactions on the books of Samgyupsal
Corporation.

3. ROSE Finance Corp. purchases the accounts receivable of other companies on a without
recourse, notification basis. At the time the receivables are factored, 15% of the amount
factored is charged to the client as commission and recognized as revenue in Rose’s books. Also,
10% of the receivables factored is withheld by Rose as protection against sales returns or other
adjustments. This amount is credited by Rose to the Client Retainer Account. At the end of each
month, payments are made by Rose to its clients so that the balance in the Client Retainer
Account is equal to 10% of unpaid factored receivables. Based on Rose’s bad debt loss
experience, an allowance for credit loss of 5% of all factored receivables is to be established.
Rose makes adjusting entries at the end of each month.

On January 3, 2018, Poor, Inc. factored its accounts receivable totaling P 1,000,000. By January
31, P 800,000 on these receivables had been collected by Rose.

Prepared the entries on Rose’s and Poor’s books to record the above information.

Solution:

1. Solution:
Net Realizable value of accounts receivable P260,000
Less: Cash proceeds 230,000
Loss on factoring P 30,000

Cash (P230,000 x 90%) 207,000

Allowance for credit loss 40,000
Loss on factoring 30,000
Receivable from factor (P230,000 x 10%) 23,000
Accounts Receivable (P260,000 + P40,000) 300,000

2. Journal entries:

April 1
Accounts receivable – assigned 400,000
Accounts Receivable 400,000

Cash 294,000
Finance charge (P300,000 x 2%) 6,000
Notes payable 300,000

(a)
Cash 191,100
Sales discounts 3,900
A/R – assigned (P191,100/98%) 195,000
PSBA A.R. Handout (Auditing Problem) – R.A. Sales

(b)
Notes payable 195,000
Interest expense (P300,000 x 16% x 1/12) 4,000
Cash 199,000

(c)
Cash 203,000
Allowance for credit loss 2,000
A/R – assigned 205,000
(P400,000 – P195,000)

(d)
Notes payable (P300,000-P195,000) 105,000
Interest expense (P105,000 x 16% x 1/12) 1,400
Cash 106,400

3. Journal Entries:

Rose’s Books

Jan.3

A/R Factored 1,000,000

Commission Income (P1,000,000 x 15%) 150,000
Client Retainer (P1,000,000 x 10%) 100,000
Cash 750,000

31
Cash 800,000
A/R factored 800,000

31
Client Retainer 80,000
Cash (P100,000 – [10%Xp200,000]) 80,000

31
Bad debt expense 50,000
Allowance for debts (P1,000,000 x 5%) 50,000
PSBA A.R. Handout (Auditing Problem) – R.A. Sales

Poor, Inc.’s Books

Jan. 3

Cash 750,000
Receivable from factor 100,000
Commission 150,000
Accounts Receivable 1,000,000

31
Cash 80,000
Receivable from factor 80,000

Problem 7

During your audit of FOREVER Company for the year ended December 31, 2018, you find the following
account.

Notes Receivable

Date Debit Credit

Sept. 1 Cornea, 20% due in 3 months P 80,000
Oct. 1 Hunk Co., 24% due in 2 months 300,000
Discounted Cornea note at 25% P80,000
Nov. 1 Valerie, 24% due in 13 months 600,000
30 Cellular Co., no interest, due in one year 500,000
30 Discounted Cellular note at 18% 500,000
Dec. 1 Tictic, 18% due in 5 months 900,000
1 O. Reyes, President, 12% due in 3 months (for 1,200,000
cash loan given to O. Reyes)

All notes are trade notes unless otherwise specified. The Cornea note was paid on December 1 as per
notification received from the bank. The Hunk Co. note was dishonored on the due date but the legal
department has assured management of its full collectability.

The company, with your concurrence, will treat the discounting as a conditional sale of note receivable.

1. At what amount on the current assets section of the December 31, 2018, statement of financial
position will the Notes receivable – trade be carried?
2. What amount of loss on notes receivable discounting should be reported in the 2018 income
statement of the company?
3. Based on the ledger account presented, what amount of interest income should be accrued at
December 31, 2018?
PSBA A.R. Handout (Auditing Problem) – R.A. Sales

Solution:

1. Valerie P600,000
Tictic 900,000
Total N/R – Trade, December 31, 2018 1,500,000

2. Solution:
Net proceeds:
Principal P 80,000
Interest (P80,000 x 20% x 4,000
3/12)
Maturity Value 84,000
Discount (P 84,000 x 25% x (3,500 P 80,500
2/12)
Book value:
Principal P 80,000
Accrued interest receivable 1,333 81,333
(P80,000 x 20% x 1/12)
Loss on discounting of Cornea P 833
note

Principal/Maturity value P500,000

Discount (P500,000 x 18% x 1 year) (90,000)
Net proceeds 410,000
Book value 500,000
Loss on discounting of Cellular Note P 90,000

Total loss on discounting (P833 + P90,000) = P90,833

3. Hunk (P300,000 x 24% x 3/12) P18,000

Valerie (P600,000 x 24% x 2/12) 24,000
Tictic (P900,000 x 18% x 1/12) 13,500
O. Reyes (P1,200,000 x 12% x 1/12) 12,000
Total accrued interest receivable, 12/31/2018 P67,500