CPA REVIEW SCHOOL OF THE PHILIPPINES AP-8907

Manila
AUDITING PROBLEMS CPA Review

AUDIT OF RECEIVABLES
PROBLEM NO. 1

To substantiate the existence of the accounts receivable balances as at December 31, 2021, of
LUKAS 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.

Name of Balance Comments

Customer Per Books From Customers Audit Findings
Concordia P150,000 P90,000 was returned on December 30, Returned goods were received
2021. Correct balance is P60,000. December 31, 2021.
Falcon P30,000 Your CM representing price adjustment The CM was taken up by Lukas
dated December 28, 2021, cancels this. Company in 2022.
Lazaro P144,000 You have overpriced us by P150. Correct The complaint is valid.
price should be P300.
Silang P112,500 We received the goods only on January 6, Term is shipping point.
2022. Shipped in 2021.
Yakal P135,000 Balance was offset by our December Lukas Company credited
shipment of your raw materials. accounts payable for
P135,000 to record purchases.
Yakal is a supplier.

1. If the necessary adjusting journal entry is made regarding the case of Concordia, the net
income will
A. Decrease by P18,000. C. Increase by P18,000.
B. Decrease by P90,000. D. Increase by P90,000.

2. The effect on 2021 net income of Lukas Company of its failure to record the CM involving
transaction with Falcon:
A. P30,000 over. C. P6,000 over.
B. P30,000 under. D. P6,000 under.

3. The overstatement of receivable from Lazaro is

A. P96,000 B. P24,000 C. P72,000 D. P48,000

4. The accounts receivable from Silang is

A. Correctly stated. C. P112,500 under.
B. P112,500 over. D. P225,000 under.

5. The adjusting entry to correct the receivable from Yakal is

A. Purchases 135,000
Accounts receivable 135,000
B. Accounts payable 135,000
Purchases 135,000
C. Accounts receivable 135,000
Accounts payable 135,000
D. Accounts payable 135,000
Accounts receivable 135,000

PROBLEM NO. 2

The following information is based on a first audit of SABILA COMPANY. The client has not
prepared financial statements for 2019, 2020, or 2021. During these years, no accounts have

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been written off as uncollectible, and the rate of gross income on sales has remained constant
for each of the three years.

Prior to January 1, 2019, the client used the accrual method of accounting. From January 1,
2019, to December 31, 2021, 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, 2018.

As a result of your examination, the correct data shown in the table below are available:
12/31/18 12/31/21
Accounts receivable balances:
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 P 5,000 P11,000

Cash received on accounts receivable in:

2019 2020 2021
Applied to:
Current year collections P148,800 P161,800 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 P177,200 P227,600

Cash sales P17,000 P26,000 P31,200

Cash disbursements for

inventory purchased P125,000 P141,200 P173,800

1. The company’s sales revenue for the three-year period amounted to

A. P658,200 B. P74,200 C. P625,400 D. P415,300

2. What is the company’s total sales revenue for 2020?

A. P206,400 B. P183,600 C. P268,200 D. P180,400

3. The aggregate amount of purchases for the three-year period is

A. P131,000 B. P440,000 C. P434,000 D. P446,000

4. What is the company’s gross profit ratio in each of the three-year period?
A. 33.33% B. 28.35% C. 35.16% D. 31.15%

5. What is the company’s gross profit for each of the three-year period?
2019 2020 2021
A. P 60,933 P 68,200 P 80,000
B. 55,533 60,133 79,000
C. 122,400 137,600 178,800
D. 61,200 68,800 89,400

PROBLEM NO. 3

You are examining the financial statements of SALUYOT COMPANY for the year ended December
31, 2021. Your audit of the accounts receivable and other related accounts disclosed the following
information:

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1. The December 31, 2021, balance in the Accounts Receivable control account is P788,000.

2. The only entries in the Bad Debts Expense account were:

a. A credit for P1,296 on December 1, 2021, because customer A remitted in full for the
account charged off October 31, 2021.
b. A debit on December 31 for the amount of the credit to Allowance for Bad Debts.

3. The Allowance for Bad Debts account is presented below:

Date Particulars Debit Credit Balance

Jan. 1 Balance P15,250
Oct. 31 Uncollectible:
Customer A P1,296
B 3,280
C 2,256 P6,032 9,218
Dec. 31 3% of P788,000 P23,640 32,858

4. An aging schedule of the accounts receivable as of December 31, 2021, and the decisions are
as shown below:
Amount to which the allowance
Net Debit is to be adjusted after adjustments
AGE Balance and corrections have been made
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 be 80% collectible
P792,960

5. There is a credit balance in one account receivable (0-1 month) of P8,000; it represents an
advance on a sales contract; also there is a credit balance in one of the 1-3 months accounts
receivable of P2,000 for which merchandise will be accepted by the customer.

6. 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.

1. The adjustment to correct the entry made on December 1, 2021, is

A. Bad debts expense 1,296
Accounts receivable 1,296
B. Bad debts expense 1,296
Allowance for bad debts 1,296
C. Accounts receivable 1,296
Allowance for bad debts 1,296
D. No adjusting entry is necessary.

2. The required allowance balance (per aging) on December 31, 2021, is

A. P29,354 C. P19,858
B. P19,058 D. P32,858

3. The net realizable value of Saluyot’s accounts receivable on December 31, 2021, amounts to
A. P779,902 C. P793,200
B. P774,142 D. P788,664

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4. Saluyot should report bad debt expense for 2021 of

A. P13,344 C. P10,296
B. P22,344 D. P33,936

5. What entry is necessary to adjust the allowance account at December 31, 2021?
A. Bad debts expense 10,296
Allowance for bad debts 10,296
B. Bad debts expense 13,800
Allowance for bad debts 13,800
C. Allowance for bad debts 10,296
Bad debts expense 10,296
D. Allowance for bad debts 13,800
Bad debts expense 13,800

PROBLEM NO. 4
DOK, Inc. had the following long-term receivable account balances at December 31, 2020.

Note receivable from sale of division P1,500,000

Note receivable from officer 400,000

Transactions during 2021 and other information relating to Dok’s long-term receivables were as
follows.

1. The P1,500,000 note receivable is dated May 1, 2020, bears interest at 9%, and represents
the balance of the consideration received from the sale of Dok’s electronics division to York
Company. Principal payments of P500,000 plus appropriate interest are due on May 1, 2021,
2022, and 2023. The first principal and interest payment was made on May 1, 2021.
Collection of the note installments is reasonably assured.

2. The P400,000 note receivable is dated December 31, 2020, bears interest at 8%, and is due
on December 31, 2023. The note is due from May Rox, president of Dok Inc. and is
collateralized by 10,000 shares of Dok’s ordinary shares. Interest is payable annually on
December 31, and all interest payments were paid on their due dates through December
31, 2021. The quoted market price of Dok’s ordinary shares was P45 per share on December
31, 2021.

3. On April 1, 2021, Dok sold a patent to Pen Company in exchange for a P100,000 zero-
interest-bearing note due on April 1, 2023. There was no established exchange price for the
patent, and the note had no ready market. The prevailing rate of interest for a note of this
type at April 1, 2021, was 12%. The present value of P1 for two periods at 12% is 0.797
(use this factor). The patent had a carrying value of P40,000 at January 1, 2021, and the
amortization for the year ended December 31, 2021, would have been P8,000. The
collection of the note receivable from Pen is reasonably assured.

4. On July 1, 2021, Dok sold a parcel of land to Sprinter Company for P200,000 under an
installment sale contract. Sprinter made a P60,000 cash down payment on July 1, 2021,
and signed a 4-year 11% note for the P140,000 balance. The equal annual payments of
principal and interest on the note will be P45,125 payable on July 1, 2022, through July 1,
2025. The land could have been sold at an established cash price of P200,000. The cost of
the land to Dok was P150,000. Circumstances are such that the collection of the installments
on the note is reasonably assured.

Based on the preceding information, calculate the following:

1. Accrued interest receivable on December 31, 2021

A. P75,400 B. P99,700 C. P67,700 D. P97,700

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2. Carrying value on December 31, 2021, of the zero-interest-bearing note from sale of patent
A. P79,700 B. P72,527 C. P92,827 D. P86,873

3. Interest income for the year ended December 31, 2021

A. P151,873 B. P137,527 C. P154,264 D. P159,573

4. Current portion of long-term receivables on December 31, 2021

A. P537,425 B. P529,725 C. P545,125 D. P640,000

5. Total long-term receivables on December 31, 2021

A. P1,103,102 B. P1,097,148 C. P1,081,748 D. P1,087,702

PROBLEM NO. 5

1. Which of the following statements would an auditor most likely add to the negative form of
confirmations of accounts receivable to encourage timely consideration by the recipients?
A. “This is not a request for payment; remittances should not be sent to our auditors in
the enclosed envelope.”
B. “Report any differences on the enclosed statement directly to our auditors; no reply is
necessary if this amount agrees with your records.”
C. “If you do not report any differences within fifteen days, it will be assumed that this
statement is correct.”
D. “The following invoices have been selected for confirmation and represent amounts that
are overdue.”

2. Auditors may use positive or negative forms of confirmation requests for accounts
receivable. An auditor most likely will use
A. The positive form to confirm all balances regardless of size.
B. A combination of the two forms, with the positive form used for large balances and the
negative form for the small balances.
C. A combination of the two forms, with the positive form used for trade receivables and
the negative form for other receivables.
D. The positive form when the combined assessed level of inherent and control risk for
assertions related to receivables is acceptably low, and the negative form when it is
unacceptably high.

3. The negative request form of accounts receivable confirmation may be used when the
Combined Assessed Level Of Number of Small Consideration By
Inherent and Control Risk Is Balances Is The Recipient Is
A. Low Many Likely
B. Low Few Unlikely
C. High Few Likely
D. High Many Likely

4. Negative confirmation of accounts receivable is less effective than positive confirmation of

accounts receivable because
A. A majority of recipients usually lack the willingness to respond objectively.
B. Some recipients may report incorrect balances that require extensive follow-up.
C. The auditor cannot infer that all nonrespondents have verified their account information.
D. Negative confirmations do not produce evidence that is statistically quantifiable.

5. All of the following are examples of substantive tests to verify the valuation of net accounts
receivable except the
A. Recomputation of the allowance for bad debts.

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B. Inspection of accounts for current versus noncurrent status in the statement of financial
position.
C. Inspection of the aging schedule and credit records of past due accounts.
D. Comparison of the allowance for bad debts with past records.

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