Holy Trinity College of General Santos City

College of Business Management and Accountancy

Accountancy Program

Applied Auditing John Mark Cadua, CPA

Monday to Friday

Name: Score:

INSTRUCTIONS: Answer this questionnaire within two (2) hours. Write the capital letter of your answers in the blanks.
Erasures are allowed. Good luck.

Answers:

PROBLEM NO. 1
In connection with your examination of the financial statements of IVY,Inc. for the year ended December 31, 2013, you
were able to obtain certain information during your audit of the Accounts Receivable and related accounts.

A. The December 31, 2013 balance in the Accounts Receivable control account is P558,600.

B. An aging schedule of the account receivable as of December 31, 2013 is presented below:
Net Debit Percentage To Be Applied After
Age Balance Corrections Have Been Made
60 days and under P 258,513 1 percent
61 to 90 days 204,735 3 percent
91 to 120 days 59,886 6 percent
Over 120 days 35,466 Definitely uncollectible, P6,300;
P 558,600 the remainder is estimated to be
25% uncollectible

C. The only entries made in the Doubtful Expense account were:

1. A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts.
2. A credit for P4,110on November 30, 2013, and a debit to Allowance for Doubtful Accounts because of
bankruptcy. The related sales took place on October 1, 2013.

D. The Allowance for Doubtful Accounts schedule is presented below:

Debit Credit Balance
January 1, 2013 P4,110 P13,125
November 30, 2013 P27,930 9,015
December 31, 2013 (P558,600 x 5%) P36,945

E. There is a credit balance in one account receivable (61 to 90 days) of P7,260; it represents an advance on a sales
contract.

REQUIRED:
1. How much is the adjusted balance of Accounts Receivable as of December 31, 2013?
A. P555,450 B. P559,560 C. P540,930 D. P548,190

2. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31, 2013?
A. P19,706 B. P19,583 C. P19,830 D. P19,147

3. How much is the doubtful accounts expense for the year 2013?
A. P16,991 B. P16,868 C. P17,115 D. P27,930

4. How much is the net adjustment to the Doubtful Accounts Expense account?
A. P6,952 credit B. P6,705 credit C. P6,829 credit D. P4,110 debit

PROBLEM NO. 2
DAISY JOY Company started operations in 2009. The company has no allowance for doubtful accounts. Uncollectible
receivables were expensed as written off and recoveries were credited to income as collected. Data from the company’s
records for five years are as follows:
Amount
Credit Written
Year Sales Off Recovery
2009 P 3,000,000 P 30,000 P 0
2010 4,500,000 76,000 5,400
2011 5,900,000 104,000 5,000
2012 6,600,000 130,000 9,600
2013 8,000,000 166,000 10,000

Balances of accounts receivable are as follows:

As of December 31, 2012 P3,000,000
As of December 31, 2013 P3,500,000

On March 1, 2013, right after the2012 financial statements were released, the management realized that the company’s
policy regarding treatment of bad accounts was not correct, and decided that an allowance method must be followed. A
policy was established to set-up an allowance for doubtful accounts based on the company’s historical debt loss
percentage applied to year-end accounts receivable. The historical bad debt loss percentage shall be recomputed each
year based on the average of all available past years up to a maximum of five years.

REQUIRED:
5. How much is the allowance for doubtful accounts that should be set-up as of January 1, 2013 (with
corresponding charge to Retained Earnings)?
A. P48,000 B. P51,000 C. P54,000 D. P120,400

6. What is the average percentage of net doubtful accounts to credit sales that should be used in setting up the
2013 allowance?
A. 1.80% B. 1.50% C. 1.70% D. 1.60%

7. How much is the balance of allowance for doubtful accounts as of December 31, 2013?
A. P56,000 B. P59,500 C. P110,500 D. P63,000

8. The doubtful accounts expense for 2013 is

A. P156,000 B. P136,000 C. P168,000 D. P167,500

PROBLEM NO. 3
Cristine Company furnished you with a schedule of accounts receivable as of December 31, 2013. Reconciliation between
the general ledger control account and subsidiary balances shows:

Per subsidiary ledger:

Total accounts with debit balances P 610,000
Total accounts with credit balances (20,000)
Balance 590,000
Advances to officers collectible in one year 30,000
Advances for affiliated company - no definite
repayment date 50,000
Claim against transportation company 60,000
Total per WBS P 730,000

Below are your audit findings:

1. A cut-off examination revealed that goods having a selling price of P40,000 were shipped to a customer FOB
Shipping Point on December 28, 2013, but the sale was recorded on January 4, 2014. The goods were not
included in the December 31, 2013 inventory. Company’s gross profit rate is 20%. Term of sales is n/30.

2. The claim against Transportation Company represents claims for damage goods while in transit. The claim was
paid on February 14, 2014.

3. On December 28, 2013, a customer notified the Company that goods billed and shipped FOB shipping point on
December 20, 2013, were lost in transit. The invoice amount was P20,000.
 4. On December 29, 2013, P50,000 of accounts receivable were factored without recourse for P45,000. The
Company recorded this transaction by debiting Cash and crediting Notes Payable – Finance Co. for P45,000. The
factored accounts are classified under 61-120 days past due category.

5. Goods sold for P7,500 on December 20, 2013 were returned on December 27, 2013. The goods were included in
the ending inventory at selling price which is 125% of cost. A credit memo was issued on January 6, 2014 at
which time the sales return was recorded.

Fifty accounts (out of total of 120) were selected for confirmation. Positive confirmation request were mailed asking
customers to confirm account balances as of December 31, 2013. Second request were sent out on 15 accounts from
which no reply was received. Fifteen were signed without comments: 10 had minor differences which have been cleared
satisfactorily; one was returned by the post office unopened and marked “not at address indicated”.

Five confirmations had the following comments:

1. Glenn – The balance of P10,000 was paid on December 26, 2013.

2. Esperdion – We never received the goods.
3. Jeneses – Your credit memo dated January 4, 2014 cancels P1,000 of the above amount of P7,000.
4. Ivy- An advance payment of P20,000 was made by us on December 28, 2013. This should b enough to cover the
amount of P16,000 shown on your statement.
5. Daisy – We do not owe you anything on December 31, 2013 as the goods represented by your invoice dated
December 30, 2013 in the amount of P15,000 were received on January 4, 2014 on FOB destination terms.

Audit Notes:
1. The P10,000 from Glenn per O.R. No. 1570 was credited to Blend resulting to a credit balance amounting to
P10,000 to Blend’s account. Glenn’s account was classified under 60 days past due category.

2. Goods costing P5,600 were set aside on December 29, 2013, and excluded from the physical inventory. Shipping
company states that the vessel was temporarily stranded on the way to its destination.

3. Credit memo No. 29-5 was issued to Jeneses on January 4, 2014, granting an allowance of P1,000 for defective
merchandise. Company policy is to record returns and allowances in the period in which credit memo was
issued. The account of Jeneses was included under current to 60 days past due.

4. Ivy’s advance payment was credited to sales when received; the unused portion will be applied to another
shipment on January 4, 2014. Ivy’s account was classified under current to 60 days past due.

5. Goods were shipped at 125% above cost FOB destination to Daisy on December 30, 2013. These goods were
excluded from the physical inventory on December 31, 2013.

An analysis of the Allowance for Doubtful Accounts in the General Ledger shows:

Balance, January 1, 2013 P 64,000

Accounts written off (24,000)
Provisions for the year 70,000
Bad Debt Recoveries 12,000
Balance, December 31, 2013 P 122,000

Below is an aging schedule prepared by the client at your request:

Age Category Amount
Current - 60 days past due P 300,000
61 - 120 days past due 160,000
121 - 180 days past due 90,000
Over 180 days past due 60,000
Total Debit Balances P 610,000

After consulting with the credit manager, the following percentages are to be applied to the total of the account in each
age category (after adjustments per audit) for the purpose of estimating the required balance in the Allowance for
Doubtful Accounts:
Age Category
Current - 60 days past 2%
 due
61 - 120 days past due 15%
121 - 180 days past due 30%
Over 180 days past due 50%

REQUIRED:
9. What is the gross amount of Trade Accounts Receivable to be reported in the audited balance sheet at December
31, 2013?
B. P633,500 B. P553,500 C. P543,500 D. P423,500

10. How much is the Allowance for Doubtful Accounts to be reported in the audited balance sheet at December 31,
2013?
A. P110,070 B. P79,370 C. P79,170 D. P74,490

11. How much is the Doubtful Accounts Expense to be reported in the audited income statement for year 2013?
A. P58,070 B. P27,370 C. P27,170 D. P22,490

12. Audit adjustments will increase (decrease) merchandise inventory by

A. P16,100 B. (P16,100) C. (P1,500) D. P5,600

For questions 13 to 16, determine the adjusted amount to be used as a basis for estimating uncollectible accounts in
each age group.

13. Current to 60 days past due

A. P299,500 B. P293,500 C. P283,500 D. P238,500

14. 61 to 120 days past due

A. P160,000 B. P140,000 C. P120,000 D. P110,000

15. 121 to 180 days past due

A. P90,000 B. P70,000 C. P80,000 D. P60,000

16. Over 180 days past due

A. P60,000 B. P70,000 C. P80,000 D. P90,000

The End