AUDIT OF RECEIVABLES

Problem 1: The December 31, 2013 statement of financial position of the CAMILLE Company included the
following information:

Accounts Receivable P672,000

Less: Allowance for bad debts (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, 2014, the following transactions occurred:

 Sales on credit amounted to P2,623,800

 Collections of accounts receivable amounted to P2,523,000
 Accounts receivable written off as uncollectible totalled P41,400
 Notes receivable collected were P87,000
 Customer notes received in payment of accounts receivable were P216,000
 Notes receivable discounted that were paid at maturity amounted to P108,000
 Notes receivable discounted that were defaulted, including interest of P60 and a P15 fee. This amount
is expected to be collected during 2015 amounted to P6,075
 Proceeds from customer notes discounted with recourse (principal P135,000, accrued interest, P600)
amounted to P135,225
 Collections on accounts previously written off amounted to P1,500
 Bad debts were estimated to be 1.5% of credit sales

Based on the preceding information, determine the balances of the following accounts at December 31, 2014.

1.) Accounts receivable

2.) Allowance for doubtful accounts
3.) Notes receivable
4.) Notes receivable discounted

Problem 2: NIKKI AUTO PARTS sells new parts to auto dealers. Company policy requires that a prenumbered
shipping document be issued for each sale. At the time of pick-up or shipment, the shipping clerk writes the
date on the shipping document. The last shipment made in the year ended December 31, 2014, was recorded
on document 3167. Shipments are billed in the order that the billing clerk receives the shipping documents.

For late December 2014 and early January 2015, shipping documents are billed on sales invoices as follows:

Shipping Document Number Sales Invoice Number

3163 5332
3164 5326
3165 5327
3166 5330
3167 5331
3168 5328
3169 5329
3170 5333
3171 5335
3172 5334

The December 2014 and January 2015 sales journals have the following information included:

SALES JOURNAL – DECEMBER 2014

Day of Month Sales Invoice No. Amount of Sale

30 5326 P72,611
30 5329 191,430
31 5327 41,983
31 5328 62,022
31 5330 4,774

SALES JOURNAL – JANUARY 2015

Day of Month Sales Invoice No. Amount of Sale

1 5332 P264,131
1 5331 10,639
1 5333 85,206
2 5335 125,050
2 5334 64,658

1.) What is the net overstatement (understatement) of NIKKI’s sales for the year ended December 31,
2014?
A. P21,318
B. P253,452
C. (P253,452)
D. (P21,318)
2.) What adjusting entry is necessary to correct NIKKI’s financial statements for the year ended December
31, 2014?
A. (Dr) Accounts Receivable; (Cr) Sales – P21,318
B. (Dr) Accounts Receivable; (Cr) Sales – P253,452
C. (Dr) Sales; (Cr) Accounts Receivable – P21,318
D. (Dr) Sales; (Cr) Accounts Receivable – P253,452
3.) Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in
the subsequent year provide assurance about management’s assertion of
A. Rights and obligations
B. Completeness
C. Existence
D. Valuation and allocation
4.) Tracing shipping documents to prenumbered sales invoices provides evidence that
A. No duplicate shipments or billings occurred
B. Shipments to customers were properly invoiced
C. All goods ordered by customers were shipped
D. All prenumbered invoices were accounted for
5.) An auditor most likely would review an entity’s periodic accounting for the numerical sequence of
shipping documents and invoices to support management’s financial statement assertion of
A. Existence
B. Rights and obligations
C. Valuation and allocation
D. Completeness

Problem 3: From the inception of operations to December 31, 2014, KENT CORP. provided for uncollectible
accounts receivable 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 written off were credited to
the Allowance account; and no year-end adjustments to the Allowance account were made. Kent’s usual credit
terms are net 30 days.

The balance in the Allowance for Bad Debts account was P143,000 at January 1, 2014. During 2014, credit
sales totalled P15,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, P140,000
of bad debts were written off, and recoveries of accounts previously written off amounted to P43,000. Kent
installed a computer facility in November 2014 and an aging of accounts receivable was prepared for the first
time as of December 31, 2014. A summary of the aging is as follows:

Classification by month of sale Balance in each category Estimated % uncollectible

November – December 2014 P2,160,000 2%
July – October 2014 1,300,000 10%
January – June 2014 840,000 25%
Prior to January 1, 2014 300,000 70%
P4,600,000
Based on the review of collectability of the account balances in the “prior to January 1, 2014” aging category,
additional receivables totalling P120,000 were written off as of December 31, 2014. The 70% uncollectible
estimate applies to the remaining P180,000 in the category. Effective with the year ended December 31, 2014,
Kent adopted a new accounting method for estimating the allowance for doubtful accounts at the amount
indicated by the year-end aging analysis of accounts receivable.

1.) What is the balance of the Allowance for Bad Debts account on December 31, 2014 (before year-end
adjustment)
A. P300,000
B. P143,000
C. P226,000
D. P346,000

2.) What is the journal entry for the year-end adjustment to the Allowance for Bad Debts account balance
as of December 31, 2014?
A. Bad Debts Expense 283,200
Allowance for Bad Debts 283,200
B. Bad Debts Expense 163,200
Allowance for Bad Debts 163,200
C. Allowance for Bad Debts 143,000
Bad Debts Expense 143,000
D. Bad Debts Expense 509,200
Allowance for Bad Debts 509,200

3.) For the year ended December 31, 2014, KENT’s bad debt expense would be
A. P626,200
B. P283,200
C. P300,000
D. P583,200

4.) The net realizable value of KENT’s accounts receivables at December 31, 2014, should be
A. P4,374,000
B. P3,896,800
C. P3,970,800
D. P4,090,800

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
A. Completeness
B. Existence
C. Rights and obligations
D. Valuation and allocation

Problem 4: On December 5, 2014, SARAHLINE, INC. sold its accounts receivable (net realizable value,
P260,000) for cash of P230,000. Ten percent of the proceeds was withheld by the factor to allow for possible
customer returns and other account adjustments. The related allowance for bad debts is P40,000

1.) What amount of loss on factoring should be recognized?

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

Problem 5: On April 1, 2014, JAN MICHAEL CORPORATION assigned accounts receivable totalling
P400,000 as collateral on a P300,000, 16% note from Kaboom Bank. The assignment was done on a non-
notification basis. In addition to the interest on the note, the bank also receives a 2% service fee, deucted in
advance from the P300,000 value of the note.

Additional information is as follows:

a. Collections of assigned accounts in April totalled P191,100, net of a 2% sales discount

 b. On May 1, JAN MICHAEL paid the bank the amount owed for April collections plus accrued interest on
note to May 1.
c. The remaining accounts were collected by JAN MICHAEL during May except for P2,000 accounts
written off as worthless.
d. On June 1, JAN MICHAEL Corporation paid the bank the remaining balance of the note plus accrued
interest.

Required: Prepare the journal entries to record the above transactions on the books of JAN MICHAEL
Corporation.

Problem 6: KAREN 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 KAREN’s books. Also, 10% of the receivables factored is
withheld by KAREN as protection against sales returns and other adjustments. This amount is credited by
KAREN to the Client Retainer account. At the end of each month, payments are made by Karen to its clients
so that the balance in the Client Retainer account is equal to 10% of the unpaid factored receivables. Based on
KAREN’s bad debt loss experience, an allowance for bad debts of 5% of all factored receivables is to be
established. KAREN makes adjusting entries at the end of each month.

On January 3, 2014, PINEDA, Inc. factored its accounts receivables totalling P1,000,000. By January 31,
P800,000 of these receivables had been collected by KAREN.

Requried: Prepare the entries on KAREN’s and PINEDA’s books to record the above information.

Problem 7: During your audit of JUSTINE MARY COMPANY for the year ended December 31, 2014, you find
the following account:

Notes Receivable
Date Particulars Debit Credit
09/01 Cornea, 20%, due in 3 months P80,000
10/1 Hunk Co., 24%, due in 2 months 300,000
10/1 Discounted Cornea note at 25% P80,000
11/1 Valerie, 24%, due in 13 months 600,000
11/30 Cellular Co, no interest, due in one (1) 500,000
year
11/30 Discounted Cellular note at 18% 500,000
12/1 Tictic, 18%, due in 5 months 900,000
12/1 L. Basco, President, 12%, due in 3 1,200,000
months (for cash loan given to L. Basco)

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 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, 2014, statement of financial position
will the Notes Receivable – Trade be carried?
A. P1,500,000
B. P1,800,000
C. P2,400,000
D. P2,080,000
2.) What amount of loss on notes receivable discounting should be reported in the 2014 income statement
of the company?
A. P90,500
B. P90,833
C. P90,000
D. P0
3.) Based on the ledger account presented, what amount of interest income should be accrued at
December 31, 2014?
 A. P55,500
B. P61,500
C. P49,500
D. P67,500

Problem 8: On January 1, 2012, KIM LAMBERTH CORP, loaned P3,000,000 to Manipon Company. Under
the loan agreement, Manipon is to make an annual principal payment of P600,000 for 5 years plus interest at
8%. The first principal and interest payment is due on January 1, 2013. The required payments were made by
Manipon Company for 2013 and 2014. However, during 2014, Manipon Company began to face financial
difficulties, requiring KIM LAMBERTH to re-evaluate the collectability of the loan. On December 31, 2014, KIM
LAMBERTH determines that it will be able to collect the remaining principal, but it is unlikely that the interest
will be collected.

The following present value factors are taken from the table of present values:

Present value of 1 at 8% for:

1 period 0.92593
2 periods 0.85734
3 periods 0.79383

1.) What is the present value of the expected future cash flows as of December 31, 2014?
A. P1,800,000
B. P2,146,260
C. P1,669,962
D. P1,428,894
2.) What is the amount of loan impairment on December 31, 2014?
A. P371,106
B. P130,038
C. P730,038
D. P0
3.) Assuming that KIM LAMBERTH’s assessment of the collectability of the loan has not changed, what
amount of interest income should be recognized for 2015?
A. P85,597
B. P144,000
C. P96,000
D. P133,597

--end of receivable handouts--