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CAFOFORO, NEIL JOY P.

ESTRELLA, JOSE ENRIQUE A.


PATENIO, SANDRA FAYE S.
RECEIVABLES
PROBLEM NO. 1 - Composition of trade and other receivable
On December 31, 2015 the accounts receivable control account of Ipil-Ipil Co.
had a balance of P181,000. An analysis of the account; receivable account
showed the following:
Accounts known to be worthless P
2,500
Advance payments to creditors on purchase orders
10,000
Advances to affiliated companies
25,000 Customers' accounts reporting credit balance arising from sales
return (15,000)
Interest receivable on bonds 10,000
Other trade accounts receivable - unassigned
50,000
Subscriptions receivable for ordinary share capital due
55,000
in 30 days

Trade accounts receivable - assigned


15,000
Trade installment receivable duel - 18 months,
(including unearned finance charges, P2,000)
22,000

Trade receivables from officers, due currently


1,500
Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks) 5,000
Total P 181,000

REQUIRED:
Determine the trade and other receivables to be reported on the entity's
December 31, 2015 statement of financial position.

SOLUTION:
Items included:
Trade accounts receivable (see computation below) `
91,500
Advance payments to creditors on purchase orders
10,000
Interest receivable on bonds
10,000
Subscriptions receivable due in 30 days
55,000
Trade and other receivables
166,500

Composition of trade accounts receivable:


Other trade accounts receivable unassigned
50,000
Trade accounts receivable - assigned
15,000
Trade installment receivable due 1 18 months,
net of unearned finance charges of P2,000
20,000
Trade receivables from officers due currently
1,500
Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks)
5,000
Trade accounts receivable
91,500

Items not included:


Accounts known to be worthless 2,500 Write off
Advances to affiliated companies 25,000 Noncurrent
investment Customers' account with credit balance (15,000) Trade
and other payables

PROBLEM NO. 2 - Computation of adjusted accounts receivables.


In the audit of Beatles Company, the auditor had an appreciation of the
following schedule and noted some comments for possible adjustments:
Beatles Company
Accounts Receivable Schedule
December 31, 2015

Customer Balance Current Past Due


Love M. Do P92,000 P -
P92,000 Strawberry Fields 420,000 248,000
172,000
This Boy Company 350,00 92,000
258,000
Girl Corporation 374,000 212,000 162,000
Ticket To Ride 'Transport 160,000 -
160,000 Corp. Let It Be Corp. 124,000 60,000
64,000
Hex' Jude 4,000 . 4,000
Get Back Company 256,000 80,000
176,000 Yesterday Corp. 240,000 240,900
-
Totals P2,020,000 P936,000 Pl,084. 000

The Accounts Receivable control account balance was determined to be


P2,020,000.

The external auditor submitted the following audit comments for possible
adjustments:
Love M. Do Merchandise found defective; returned by
customer on October 31, 2015 for credit, but
the credit memo was issued by Beatles only on
January 15, 2016.

Strawberry Fields Account is good but usually pays late.

This Boy Company Merchandise worth P160,000. was destroyed


while in transit on May 31, 2015, terms FOB
Destination. The carrier was billed on June 15,
2015. (See Ticket To Ride Corp. and Yesterday
Corp.)

Girl Corporation Customer billed twice in error for P40,000. Balance is


collectible.

Ticket To Ride Collected in full on January 31, Corp. 2016


Let It Be Corp. Paid in full on December 30, 2015 but not recorded.
Collections were deposited on January 2, 2016.

Hey Jude Received account confirmation from customer for


P44,000. Investigation revealed an erroneous credit
for P40,000. (See Get Back Company)

Get Back Company Neglected to post P40,000 credit to customer's


account.

Yesterday Corp. Customer wants to know reason for receipt of


P160,00() credit memo as their accounts payable
balance was P400,000.

REQUIRED:
1. Adjusting entries as of December 31, 2015.

2. Adjusted balance of Accounts Receivable - Trade as of December 31,


2015.

SOLUTION:
Requirement No. 1

1) Love M. Do

Sales returns 92,000


Accounts receivable 92,000

2) Strawberry Fields

No Entry

3) This Boy Company

No Entry

4) Girl Corporation

Sales 40,000
Accounts receivable 40,000

5) Ticket To Ride Corp.


Accounts receivable-Nontrade 160,000
Accounts receivable 160,000

6) Let It Be Corp

Cash 124,000
Accounts receivable 124,000

7) Hey Jude

No Entry

8) Get Back Company

No Entry

9) Yesterday Corp

No Entry

Requirement No. 2

Unadjusted balance 2,020,000


Add (Deduct) adjustments:
No. 1 (92,000)
No. 4 (40,000)
No. 5 160,000)
No. 6 (124,000)
Adjusted balance 1,604,000

PROBLEM NO. 3 Audit of accounts receivable and related accounts

In connection with the of the financial statements of Praktis Corporation,


your audit senior instructed you to examine the company's accounts
receivable.

Prior to any adjustments you were able to extract the following balances
from Praktis' trial balance as of December 31, 201.5:

Accounts receivable P442,500

Allowance for doubtful accounts 15,000


From the schedule of accounts receivable as of December 31, 2015, you
determined that this account includes the following:

Accounts with debit balances:


60 days old and below P 238,500
61 to 90 days 117,200
Over 90 days 85,400 P 441,100
Advances to officers 16,400
Accounts with credit balance (5,999)
Accounts receivable per GL P 442,500
The credit balance in customer's account represents collection from a
customer whose account had been written-off as uncollectible in 2014.

Accounts receivable for more than a year totaling P21,000 should be written
off.

Confirmation replies received directly from customers disclosed the following


exceptions:

Customer Customer's Comments Audit Findings


Jessie The goods sold on December The client failed to record
1 were returned on credit memo no. 23 for
December 16, 2015. P12,000. The merchandise
Was included in ending inventory
At cost.
Robert We do not owe this amount investigation revealed that goods
(bad word). We did goods sold P16,000 were shipped
to
not receive any merchandise Robert on December 29, 2015
terms
from your company. FOB shipping point. The goods
were lost in transit and the
shipping company has knowledge
its responsibility for the lost of
merchandise.
Customer customers comments audit findings

Ann I am entitled to a 10% Anne is an employee of


employee discount. Praktiscompany,
starting
Your bill should be reduced November 2015,
employees were
by P1,200. Entitled to a special discount.

Jay-ar We have not yet sold the goods. Merchandise billed for
P18,000
We will remit the proceeds as soon were consigned to Jay-ar on
as the goods are sold. December 30, 2015.
The goods cost P13,000.

Roy We do not owe you P20,000. The sale of merchandise on


We already paid our December 18, 2015 was paid
accounts as evidenced by by Roy on January 6,
2016.
OR # 1234.

Carla Reduce your bill by P1,500 This amount represents


freight
paid by the customer for the
merchandise shipped on
December 17, 2015, terms,
FOB destination-collect.

Based on your discussion -with PraktIS Credit Manager, you both agreed that
an allowance for doubtful accounts should be maintained using the following
rates:

60 days old and below 1%


61 to 90 days 2%
Over 90 days 5%

REQUIRED: 1. Compute for the adjusted balances of following:


a. Accounts receivable P 387, 400

b. Allowance for doubtful accounts P 7,622

2. Adjusting entries as of December 31, 2015

SOLUTION:
Per Books Adjustments Per Audit
a. Accounts receivable 442,500 1 (16,400)
387,400
2 15,000
3 (21,000)
4 (12,000)
5 (1,200)
6 (18,000)
7 (1,500)

60 days old and below 238,500 4 (12,000)


205,800
5 (1,200)
6 (18,000)
7 (1,500)

61 to 90 days 117,200
117,200
Over 90 days 85,400 3 (21,000)
64,400

b. Allowance for doubtful accounts 15,000 2 15,000


7,622
3 (21,000)
8 (1,378)

Adjusting Entries:
1. Advances to officers and employees 16,400
Accounts receivable
16,400

2. Accounts receivable 15,000


Allowance for doubtful accounts
15,000
Erroneous recording of recovery from written off account

3. Allowance for doubtful accounts 21,000


Accounts receivable (>90 days)
21,000
Accounts that should be written off

4. Net sales 12,000


Accounts receivable (<60 days)
12,000
Unrecorded credit memo

5. Net sales 1,200


Accounts receivable (<60 days)
1,200
Unrecorded employee discount

6. Net sales 18,000


Accounts receivable (<60 days)
18,000

Inventory 13,000
Cost of sales
13,000
Goods out on consignment erroneously billed

7. Freight out 1,500


Accounts receivable (<60 days) 1,500
Unrecorded freight-out

8. Allowance for doubtful accounts 1,378


Doubtful accounts expense 1,378

60 days old and below 205,800 1%


2,058
61 to 90 days 117,200 2%
2,344
Over 90 days 64,400 5%
3,220
Required allowance 7,622
Balance per books before this adjustment (15,000+15,000-21,000)
9,000
Adjustment
1,378

PROBLEM NO. 4 - Audit of allowance for doubtful accounts

Professional Company produces paints and related products for sale to the
construction industry throughout Metro Manila. While sales have remained
relatively stable despite a decline in the amount of new construction, there
has been a noticeable change in the timeliness with which the company's
customers are paying their bills.

The company sells its products on payment terms of 2/10, n/30. In the past,
over 75 percent of the credit customers have taken advantage of the
discount by paying within 10 days of the invoice date. During the year ended
December 31, 2015, the number of customers taking the full 30 days to pay
has increased. Current indications are that less than 60% -of the customers
are now taking the discount. Uncollect.ible accounts as a percentage of total
credit sales have risen from the 1.5% provided in the past years to 4% in the
current year.

In response to your request for more information on the deterioration of


accounts receivable collections, the company's controller has prepared the
following report:

Professional Company
Accounts Receivable Collections
December 31, 2015

The fact that some credit accounts will prove uncollectible is normal, and
annual bad debt write-offs had been 1.5% of total credit sales for many
years. However, during the year 2015, this .percentage increased to 4%. The
accounts receivable balance is P1,500,000, and the condition of this balance
in terms of age and probability of collection is shown below:

Proportion to total Age of accounts Probability of


Collection
64% 1 - 10 days 99.0%
18% 11 - 30 days 97.5%
8% Past due 31 - 60 days 95.0%
5% Past due. 61 - 120 days 80.0%
3% Past due 121 - 180 days 65.0%
2% Past due over 180 days 20.0%

At the beginning of the year, the Allowance for Doubtful Accounts had a
credit balance of 1'27,300. The company has provided for a monthly bad
debt expense accrual during the year based on the assumption that 4% of
total credit sales will be uncollectible. Total credit sales for the year 2015
amounted to P8,000,000, and write-offs of unc011ectible accounts during
the year totaled P292,500.

REQUIRED:
1. Adjusted balance of the allowance for doubtful accounts as of
December 31, 2015
2. The necessary adjusting journal entry to adjust the allowance for
doubtful accounts as of December 31, 2015
SOLUTION:
Requirement No.1
Category Aging ratio AR Balance Rate Allowance
1 10 days 64% 960,000 1.00% 9,600
11 30 days 18% 270,000 2.50%
6,750
31 60 days 8% 120,000 5.00%
6,000
61 120 days 5% 75,000 20.00%
15,000
121 180 days 3% 45,000 35.00%
15,750
over 180 days 2% 30,000 80.00%
24,000
100% 1,500,000 77,100

Requirement No. 2
Doubtful accounts expense 22,300
Allowance for doubtful accounts 22,300
Allowance for doubtful accounts, 1/1 27,300
Add provisions (P8,000,000 x 4%) 320,000
Total 347,300
Less accounts written-off 292,500
Balance before adjustment 54,800
Required allowance (see no. 1) 77,100
Additional required allowance for doubtful accounts 22,300

PROBLEM NO. 5 - Analysis of accounts receivable and related


accounts

The Poster Co. sells direct to retail customers and also to wholesalers.
Accounts receivable and an allowance for had debts are maintained
separately for each division. On January 1, 2015 the balance of the retail
accounts receivable was P209,000 while the bad debts with respect to retail
customers was a credit of P7,600.

The following summary pertains only to retail sales since 2012:

Credit Sales Bad Debts Bad Debts.


Written off Recoveries
2012 P1,110,000 P26,000 P2,150
2013 1,225,000 29,500 3,750
2014 1,465,000 30,000 3,600
2015 1,500,000 31,000 4,200

Bad debts are provided for as a percentage GI credit sales. The accountant
calculates the percentage annually by using the experience of the three
years prior to the current year. The formula is bad debts written off less
recoveries expressed as a percentage of the credit sales for the same period.
Cash receipts in 2015 from credit sales to retail customers was P1,380,200.

REQUIRED: Determine the following:


1. Adjusted accounts receivable as of December 31, 2015
2. Adjusted allowance for doubtful accounts as of December 31, 2015

SOLUTION:
Requirement No. 1.
Accounts receivable, 1/1/12 209,000
Credit sales for 2012 1,500,000
Collections during 2012 (1,380,200)
Accounts written off - 2012 (31,000)
Accounts receivable, 12/31/12 297,800

Requirement No. 2
Allowance for doubtful accounts, 1/1/12 7,600
Doubtful accounts expense - 2012 (see computation below) 30,000
Accounts written off - 2012 (31,000)
Recovery of accounts written off - 2012 4,200
Allowance for doubtful accounts, 12/31/12 10,800

Computation of doubtful accounts expense - 2012:


Doubtful accounts expense for 2012 (P1,500,000 x 2%) 30,000

Computation of bad debt rate:


Year Credit sales AR writen-off Recoveries Net
2009 1,110,000 26,000 2,150
23,850
2010 1,225,000 29,500 3,750
25,750
2011 1,465,000 30,000 3,600
26,400 3,800,000 85,500
9,500 76,000
Net accounts written off (2009 to 2011) 76,000
Divide by credit sales (2009 to 2011) 3,800,000
Percentage of uncollectible accounts to charge sales 2.00%

PROBLEM NO. 6 - Audit of accounts receivable and related accounts

In connection with your examination of the financial statements of Ringo, Inc.


for the year ended December 31, 2015, you were able to obtain certain
information during your audit of the accounts receivable and related
accounts.

The December 31, 2015 balance in the Accounts Receivable control


accounts is P837,900.

An aging schedule of the accounts receivable as of December 31, 2015 is


presented below:
Net debit Percentage to be applied
after
Aging Balance correction have been
made
60 days & under P387,800 1 percent
61 to 90 days 307,100 2 percent
91 to 120 days 89,800 5 percent
Over 120 days 53,200 Definitely uncollectible,
P9,000; k
the remainder is estimated to be
P837,900 25% uncollectible.

The Allowance for Doubtful Accounts schedule is presented below:

Debit Credit
Balance
January 1, 2015 P19,700
November 30, 2015 P6,100
13,600
December 31, 2015 (P837,900 x 5%) P41,895
P55,495

Entries made to Doubtful Accounts Expense account were:

1 A debit on December 31 for the amount of the credit to the Allowance for
Doubtful Accounts.

2. A credit Or P6,100 on November 30, 2015, and a debit to Allowance for


Doubtful Accounts because of a bankruptcy. The related sales took place on
October 1, 2015.

There is a credit balance in one account receivable (61 to 90 days) of


P11,000; it represents an advance on a sales contract.

REQUIRED:
1. Determine the following as of and for the year ended December 31, 2015:
a. Accounts receivable
b. Allowance for doubtful account
c. Doubtful accounts expense
2. Adjusting entries as of December 31, 2015

SOLUTION:
Requirement No. 1.a
GL/SL 60 61 to 90 91 to 120 over
120
Unadjusted balances 837,900 387,800 307,100 89,800
53,200
Add (deduct) adjustments:
AJE No. 1 (9,000) (9,000)
AJE No. 2 (6,100) (6,100)
AJE No. 3 11,000 11,000

Adjusted balances 833,800 387,800 318,100 83,700


44,200

Requirement No. 1.b


Age of accounts balance Rate Allowance
60 387,800 1% 3,878
61 to 90 318,100 2% 6,362
91 to 120 83,700 5% 4,185
over 120 44,200 25% 11,050
833,800 25,475
Requirement No. 1.c

Unadjusted allowance for doubtful accounts 55,495


Add (deduct) adjustments:
AJE no. 1 (9,000)
AJE no. 4 (squeeze) (21,020) (30,020)
Required allowance (see no. 1.b) 25,475

Balance per books (P41,895 - P6,100) 35,795


Add (deduct) adjustments:
AJE no. 2 6,100
AJE no. 4 (21,020) (14,920)
Doubtful accounts expense per audit 20,875

Requirement No. 2
Adjusting journal entries:
1. Allowance for doubtful accounts 9,000
Accounts receivable - over 120 days 9,000
To write off definitely uncollectible accounts

2. Doubtful account expense 6,100


Accounts receivable - 91 to 120 days
6,100
To correct entry made in recording accounts written off

3. Accounts receivable - 61 to 90 days 11,000


Advances from customers
11,000
To reclassify advances from customers

4. Allowance for doubtful accounts 21,020


Doubtful account expense
21,020
To adjust allowance to required balance

PROBLEM NO. 7 - Analysis of notes receivable and related accounts

The balance sheet of Yoko Corporation reported the following long-term


receivables as of December 31, 2014:

Note receivable from sale of plant P6, 000,000


Note receivable from officer 1,600,000
In connection with your audit, you were able to gather the following
transactions during 2015 and other information pertaining to the company's
long-term receivables:

a. The note receivable from sale of plant bears interest at 12% per
annum. The note is payable in 3 annual installments of P2,000000
plus interest on the unpaid balance every April 1. The initial principal
and interest payment was made on April 1, 2015.

b. The note receivable from officer is dated December 31, 2014, earns
interest at 10% per annum, and is due on December 31, 2017. The
2015 interest was received on December 31, 2015.

c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2015,


in. exchange for an P800,000 non-interest bearing note due on April 1.,
2017. The note had no ready market, and there was no established
exchange price for the equipment. The prevailing interest rate for a
note of this type at April 1, 201.5, was 12%.. The present value factor
of 1 for two periods at 12% is 0.797.

d. A tract of land was sold by the corporation to No Co. on July 1, 2015,


for P4,000,000 under an installment sale contract. No Co. signed a 4-
year 11% note for P2,800,000 on July 1, 2015, in addition to the down
payment of P1,200,000. The equal annual payments of principal and
interest on the note will be P902,500 payable on July 1, 2016, 2017,
2018,and 2019. The land had an established cash price of P4,000,000,
and its cost to the corporation was P3,000,000. The collection of the-
installments on this note is reasonably assured.

REQUIRED:
Determine the following as of and for the year ended December 31, 2015:
1. Noncurrent receivables
2. Current portion of long-term receivables
3. Accrued interest receivable
4. Interest income

SOLUTION:
Requirement No. 1
Note receivable from sale of plant
Balance, 12/31/12 (P6,000,000 - P2,000,000) 4,000,000
Less installment due on April 1, 2013 2,000,000
2,000,000
Note receivable from officer, due 12/31/14
1,600,000
Note receivable from sale of equipment
Present value of note, 4/1/12 (P800,000 x 0.797) 637,600
Discount amortization-2012 (P637,600 x 12% x 9/12) 57,384
694,984
Note receivable from sale of land 2,800,000
Balance, 12/31/12
Less principal installment due on 7/1/13 594,500
2,205,500
Total amount to be received
6,500,484
Less interest (P2,800,000 x 11%)
308,000
Total noncurrent receivables, 12/31/12
6,192,484

Requirement No. 2
Note receivable from sale of plant due on 4/1/13
2,000,000
Note receivable from sale of land (see no. 1)
594,500
Current portion of long-term receivables
2,594,500

Requirement No. 3
Note receivable from sale of plant (P4,000,000 x 12% x 9/12)
360,000
Note receivable from sale of land (P2,800,000 x 11% x 6/12)
154,00
Accrued interest receivable, 12/31/12 514,000

Requirement No. 4
Note receivable from sale of plant:
P6,000,000 x 12% x 3/12
180,000
P4,000,000 x 12% x 9/12 360,000
540,000
Note receivable from officer (P1,600,000 x 10%)
160,000
Note receivable from sale of equipment (P637,600 x 12% x 9/12)
57,384
Note receivable from sale of land (P2,800,000 x 11% x 6/12)
154,000
Interest income 911,384

PROBLEM NO. 8 - Audit of notes receivable and related accounts

On January 1, 2015, Pedro Company sold land that originally cost P400,00()
to Buyer Company. As payment, Buyer gave Pedro Company a P600,000
note. The note bears an interest rate of 4% and is to be repaid in three
annual installments of P200,000 (plus interest on the outstanding balance).
The first payment is due on December 3'1, 2015. The market price of the
land is not reliably determinable. The prevailing rate of interest for notes of
this type is 14% on January 1, 2015 and 15% on December 31, 2015.

Pedro made the following journal entries in relation to the sale of land and
the related note receivable:
January 1, 2015
Notes receivable P600, 000
Land P400, 000
Gain on sale of land 200,000

December 31, 2015

Cash P224,000
Notes receivable P200,000
Interest income 24,000
Pedro reported the notes receivable in its statement of financial position at
December 31, 2015 as part of trade and other receivables.

REQUIRED:
1. Determine the following as of and for the year ended December 31, 2015:
a. Correct gain on sale of land
b. Correct interest income
c. Overstatement of profit
d. Correct carrying amount of note receivable
e. Overstatement of working capital
2. Adjusting entries as of December 31, 2015
Requirement No. 1.a
PV of consideration receivable (see computation b 503,105
Carrying amount of land (400,000)
Correct gain on sale of land 103,105

Present value of cash flows to determine initial CA:


Date Principal Interest (4%) Total PVF (14%) PV, 1/1/12 PV,
12/31/12 12/31/12 200,000 24,000 224,000 0.8772
196,493
12/31/13 200,000 16,000 216,000 0.7695 166,212
189,475
12/31/14 200,000 8,000 208,000 0.6750 140,400
160,056
600,000 503,105 349,531

Requirement No. 1.b


Amortization schedule using effective interest method:
Date EI (14%) NI (4%) Disc. Amort. Repayment
AC
1/1/12 503,105
12/31/12 70,435 24,000 46,435 200,000
349,540
12/31/13 48,936 16,000 32,936 200,000
182,476 12/31/14 25,524 8,000 17,524
200,000 -

Interest income - 2012 (P503,105 x .1) 70,435

Requirement No. 1.c


Gain on sale of land - overstated (P200,000 - P10 96,895
Interest income for 2012 - understated (P70,435 - (46,435)
Net overstatement of 2012 profit 50,460
Requirement No. 1.d
Carrying amount, 12/31/12 349,540

Requirement No. 1.e


Amount reported as notes receivable 400,000
Correct current portion of NR (P349,540 - P182,47 167,064
Overstatement of CA/working capital 232,936

PROBLEM NO. 9 - Audit of notes receivable and related accounts


My Love Corporation is a local company engaged in buying and selling
manufacturing equipment. On 1 January 2014, My Love Corporation sold
equipment, with a cash price of P1, 500,000, to Silly Love Company. The cost
of the equipment is P750,000. Silly Love signed a deferred payment contract
that provides for a down payment of P300,000 and a 5-year note for
P1,705,900. The note is to be paid in 5 equal annual payments of P341, 180.
The payments include interest and are made on) December 31 of each year,
beginning on December 31, 2014.

My Love Corporation made the following entries in relation to the sale of the
equipment and the related note receivable:
January 1, 2014 P

Cash 300,000
Notes receivable 1,705,900
Cost of goods sold 750,000
Sales P2, 005,900
Inventory 750,000

December 31 2014
Cash P341, 180
Notes receivable P341, 180

December 31 2015
Cash P341, 180
Notes receivable P341, 180

My Love Corporation reported the notes receivable in its statement of


financial position at December 31, 2014 and 2015 as part of trade and other
receivables.

REQUIRED:
Determine the following:
1. The effective interest rate
2. Overstatement of profit for 2014
3. Overstatement of retained earnings as of December 31, 2015
4. Overstatement of working capital as of December 31, 2015

SOLUTION:
Requirement No. 1
PVF used to calculate the annual payment (P1.2M/P341,180)
3.5172
Ordinary annuity factor at 13% for 5 periods
3.5172

Requirement No. 2
Profit
over (under)
Sales over
Reported 2,005,900
Should be 1,500,000 505,900
Interest income under
Reported 0
Should be 156,000
(156,000)
Net misstatement 349,900

Requirement No. 3
RE,
12/31/12
over
(under)
2011 profit overstated (see no. 2)
349,900
2012 profit understated (interest income under)
Reported 0
Should be (refer to amortization schedule) 131,927
(131,927)
Net misstatement 217,973

Requirement No. 4
Amount reported under current assets
[P1,705,900 - (P341,180 x 2)]
1,023,540 should be
236,456
Net misstatement of WC, 12/31/12 - over (under)
787,084

Amortization schedule:
Date Payment Interest (13%) Principal CA
1,200,000
12/31/11 341,180 156,000 185,180 1,014,820
12/31/12 341,180 131,927 209,253 805,567
12/31/13 341,180 104,724 236,456 569,111
12/31/14 341,180 73,984 267,196 301,915
12/31/15 341,180 39,265 301,915 -
1,705,900

PROBLEM NO. 10 - Analysis of notes receivable and related accounts


You are examining the financial statements of Merlyn, .Inc., for the year
ended December 31, 2015. Your analysis of the 2015 entries in the Notes
Receivable account follows:

Merlyn, Inc.
Analysis of Notes Receivable
For the Year Ended December 31, 2015

Date
2015 debit credit
Jan. 1 Balance Forwarded Received P118,000
P25,000 6% note due 10/29/15
from Anna whose trade account
was past due
Feb. 28 Discounted Anna note 24,960

Mar. 31 Received non interest-bearing


demand note from Julia, the 6,200
corporation's treasurer for a loan

Aug. 30 Received principal and interest


due from Robinson in accordance
with agreement, two principal
34,200
payments in advance

Sept. 4 Paid protest fee on note


dishonored by Pepper 500

Nov. 1 Received check dated 2/1/16 in


settlement of Tripper note.
The check was included in cash on 8,120
hand 1.2/31/15
Date
2015 Debit Credit
Nov. 4 Paid protest fee and maturity
value of Anna note to bank.
Note discounted 2/28/15 was 26,031
dishonored.

Dec. 27 Accepted equipment with a fair


market value of P24,000 in full
24,000
settlement from Anna

Dec. 31 Received check dated 1./2/16


from Julia in payment of 3/31/15
note. (The cash was included in
petty cash until 1/2/16 when it was
returned to Julia in exchange for new 6,200
demand note for the same amount.)

Dec. 31 Received principal and interest on 42,437


Pepper note

Dec. 31 Accrued interest on Robinson note 1,200


P 151, 931 P 139,917
The following information is available

(1)Balances at January 1, 2015, were a debit of P1,400 in the Accrued


Interest Receivable account and a credit of P400 in the Unearned
Interest Income account. The P118,000 debit in the Note Receivable
account consisted the following three notes:

Robinson note of 8/31/08 payable in annual


installments of P10,000 principal plus accrued P70,000
interest at 6% each August 31

Tripper note discounted to Merlyn, Inc. at 6%


11/1/1.4 due 11/1/15 8,000

Pepper note for P40,000 plus 6% interest dated


12/31/14 due on 9/1/15 40,000
(2)No entries were made during 2015 to the Accrued Interest Receivable
or the Unearned Interest Income account and only one entry for a
credit of P1,200 on December 31., appeared in the Interest Income
account.

(3)All notes were from the trade customers unless otherwise indicated.

(4)Debits and credits affecting Notes Receivables were correctly recorded


unless the facts indicate otherwise.

REQUIRED:
1. Determine the following as of and for the year ended December 31, 2015:
a. Notes receivable-trade
b. Interest income
2. Adjusting entries as of December 31, 2015

SOLUTION:
Requirement No. 1.a
Unadjusted trade NR 12,014
Add (Deduct) adjustments:
1/1 25,000
2/28 24,960
3/29 (6,200)
8/30 4,200
9/4 (40,500)
11/1 8,120
11/4 (26,031)
(25,000)
12/27 24,000
12/31 6,200
12/31 42,437
12/31 (1,200)
Adjusted trade NR, 12/31/12 48,000

Composition:
Robinson (P70,000 - P30,000) 40,000
Tripper (received PDC on 11/1) 8,000
Adjusted notes receivable-trade, 12/31/12 48,000

Notes:
1) NR from Pepper - collected on 12/31/12
2) NR from Anna - accepted equipment in full settlement on 12/27/12
3) NR from Julia - non-trade

Requirement No. 1.b


Robinson:
Jan. to Aug. (P70,000 x .06 x 8/12) 2,800
Sept. to Dec. (P40,000 x .06 x 4/12) 800 3,600
Tripper (P8,000 x .06 x 12/12) 480
Pepper (P42,437 - P40,500) 1,937
Anna (P25,000 x .06 x 2/12) 250
Julia (non-interest bearing) -
Total interest income - 2012 6,267
Requirement No. 2
1/1 Notes receivable 25,000
Accounts receivable
25,000

2/28 Notes receivable 24,960


Loss on discounting (P25,250 - P24,960) 290
Notes receivable - discounted 25,000
Interest income (P25,000 x .06 x 2/12)
250

3/29 Notes receivable - Officers 6,200


Notes receivable 6,200

8/30 Notes receivable 4,200


Interest receivable 1,400
Interest income 2,800

9/4 Notes receivable dishonored 500


Notes receivable 500

Notes receivable dishonored 40,000


Notes receivable 40,000

11/1 Notes receivable 8,120


Cash 8,120

11/4 Notes receivable dishonored 26,031


Notes receivable 26,031

Notes receivable discounted 25,000


Notes receivable 25,000

12/27 Notes receivable 24,000


Loss on settlement of NR 2,031
Notes receivable dishonored 26,031

12/31 Notes receivable 6,200


Petty cash fund 6,200

12/31 Notes receivable 42,437


Notes receivable dishonored 40,500
Interest income 1,937

12/31 Interest receivable (P40,000 x 6% x 4/12) 800


Interest income 400
Notes receivable 1,200

12/31 Interest receivable (P8,000 x 6% x 2/12) 80


Interest income 80

12/31 Unearned interest income 400


Interest income 400

PROBLEM NO. 11 - Loan impairment

Bahrain Bank granted a loan to a borrower in the amount of P10, 000,000 on


January 1, 2014. The interest rate on the loan is 10% payable annually
starting December 31, 2014. The loan matures in five years on December 31,
2018. Bahrain Bank incurs P130,900 of direct loan origination cost and
P50,000 of indirect loan origination cost. In addition, Bahrain Bank charges
the borrower a 5-point nonrefundable loan origination fee.

The borrower paid the interest due on December 31, 2014. However, during
2015 the borrower began to experience financial difficulties, requiring the
bank to reassess the collectability of the loan. As of December 31, 2015, the
bank expects that only P8,000,000 of the principal will be recovered. The
P8,000,000 principal amount is expected to be collected in two equal
installments on 'December 31, 2017 and December 31, 2019. The prevailing
interest rates for similar type of note as of December 31, 2014 and 2015 are
15% and 16%, respectively.
REQUIRED:
Determine the following:
1. Interest income to be recognized in 2014
2. Carrying amount of the loan as of December 31, 2014
3. Loan impairment loss to be recognized in 2013

SOLUTION:
Requirement No. 1 & 2

Principal 10,000,000
Direct origination cost 130,900
Origination fee received from borrower (P10M x .05) (500,000)
Carrying amount, 1/1/12 9,630,900

Amortization schedule

Date EI(11%) NI (10%) Disc. Amort. C.A.


1/1/11 9,630,900
12/31/11 1,059,399 1,000,000 59,399
9,690,299
12/31/12 1,065,933 1,000,000 65,933
9,756,232
12/31/13 1,073,186 1,000,000 73,186
9,829,418
12/31/14 1,081,236 1,000,000 81,236
9,910,654
12/31/15 1,089,346 1,000,000 89,346
10,000,000

Requirement No. 3

Carrying amount, 12/31/12 (see schedule)


9,756,232 Less PV of expected cash flows:
12/31/14 (P4M x 0.8116) 3,246,400
12/31/16 (P4M x 0.6587) 2,634,800
5,881,200
Loan impairment (bad debt expense)
3,875,032

PROBLEM NO. 12 - Theory


Select the best answer for each of the following
1. In the audit of which of the following general ledger accounts will tests
of controls be particularly appropriate?
a. Equipment
b. Bank charges
c. Bonds payable
d. Sales
ANSWER D

2. The purpose of tests of controls over shipping is to determine whether


a. Billed goods have been shipped.
b. Shipments are billed.
c. Shipping department personnel are competent.
d. Credit is approved before goods are shipped.
ANSWER B

3. The purpose of tests of controls over billing is to determine whether


a. It Billed goods have been shipped.
b. Shipments are billed.
c. Billing department personnel are competent.
d. Credit is approved before goods are billed.
ANSWER - A

4. 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 or occurrence
b. Rights and obligations
c. Valuation
d. Completeness
ANSWER - D

5. Which of the following might be detected by an auditor's review of the


client's sales cut-off?
a. Excessive goods returned for credit .
b. Unrecorded sales discounts
c. Lapping of year-end accounts receivable
d. inflated sales for the year
ANSWER - D

6. An auditor who has confirmed accounts receivable may discover that


the sales journal was held open past year-end if
a. Positive confirmations sent to debtors are not returned
b. Negative confirmations sent to debtors are not returned
c. Most of the returned negative confirmations indicate that the debtor
owes a larger balance that the amount being confirmed.
d. Most of the returned positive confirmations indicate that the debtor
owes a smaller balance than the amount being confirmed.
ANSWER - D

7. The auditor finds situation in which one person has the ability to collect
receivables, make deposits, issue credit memos and record receipt of
payments. The auditor suspects the individual may be stealing from
cash receipts. Which of the following audit procedures would be most
effective in discovering fraud in this scenario?
a. Send positive confirmations to a random selection of customers.
b. Send negative confirmations to all outstanding accounts receivable
customers.
c. Perform a detailed review of debits to customer discounts, sales
returns, or other debit accounts, excluding cash posted to the cash
receipts journal.
d. Take a sample of bank deposits and trace the detail in each bank
deposit back to the entry in the cash receipts journal.
ANSWER - C

8. All of the following are examples of substantive tests to verify valuation


of net accounts receivable except
a. The Re-computation of the allowance for bad debts.
b. Inspection of accounts for current versus non-current 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.
ANSWER - B

9. Confirmation, which is a specific type of inquiry, is the process of


obtaining a representation of information or of an existing condition
directly from a third -party. Two assertions for which confirmation of
accounts receivable balances provides primary evidence are
a. Completeness and valuation
b. Rights and obligations and existence
c. Valuation and rights and obligations
d. Existence and completeness
ANSWER B
10. The negative request form of accounts receivable be used when
the

Combined Assessed Number of consideration by


Level Of Inherent and Small balances the recipient is
Control Risk Is is
a. Low Many likely
b. low few unlikely
c. high few likely
d. High Many likely
ANSWER A

11. Which of the following procedures would an auditor most likely


perform for year-end accounts receivable confirmations when the
auditor did not receive replies to second requests?
a. Review the cash receipts journal for the month prior to year-
end.
b. Intensify the study of internal control concerning the revenue
cycle.
c. Increase the assessed level of detection risk for the existence
assertion
d. Inspect the shipping records documenting the merchandise
sold to the debtors.
ANSWER - D

12. Which of the following is the greatest drawback of using


subsequent collections evidenced only by a deposit slip as an
alternative procedure when responses to positive accounts receivable
confirmations are not received?
a. Checking of subsequent collections can never be used as an
alternative auditing procedure.
b. By examining a deposit slip only, the auditor does not know
whether the payment is for the receivable at the balance sheet date
or a subsequent transaction.
c. deposit slip is not received directly by the auditor.
d. A customer may not have made a payment on a timely basis.
ANSWER - B