CHARIS MARIE F.

URGEL

BSA IV
RECEIVABLES

PROBLEM NO. 1 - Composition of trade and other receivable

On December 31, 2015 the accounts receivable control account ofipil- 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
Trade installment receivable duel - 18 months,
(including unearned finance charges, P2,000)

15,000

Trade receivables from officers, due currently

Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks)
Total

1,500

22,000

5,000
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)
Advance payments to creditors on purchase orders
Interest receivable on bonds
Subscriptions receivable due in 30 days
Trade and other receivables

91,500
10,000
10,000
55,000
166,500

Composition of trade accounts receivable:

Other trade accounts receivable unassigned
Trade accounts receivable - assigned
Trade installment receivable due 1 18 months,
net of unearned finance charges of P2,000
Trade receivables from officers due currently
Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks)
Trade accounts receivable
Items not included:
Accounts known to be worthless
Advances to affiliated companies
Customers' account with credit balance

50,000
15,000
20,000
1,500
5,000
91,500

2,500
Write off
25,000
Noncurrent investment
(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
Love M. Do
Strawberry Fields
This Boy Company
Girl Corporation
Ticket To Ride 'Transport
Corp. Let It Be Corp.
Hex' Jude
Get Back Company
Yesterday Corp.
Totals

Balance
P92,000
420,000
350,00
374,000
160,000
124,000
4,000
256,000
240,000
P2,020,000

Current
P
248,000
92,000
212,000
60,000
.
80,000
240,900
P936,000

Past Due
P92,000
172,000
258,000
162,000
160,000
64,000
4,000
176,000
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
2) Strawberry Fields
No Entry

92,000

3) This Boy Company

No Entry
4) Girl Corporation
Sales

40,000
Accounts receivable

40,000

5) Ticket To Ride Corp.

Accounts receivable-Nontrade
Accounts receivable

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

2,020,000
(92,000)
(40,000)
(160,000)
(124,000)
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
Allowance for doubtful accounts

P442,500
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
Jessie

Customer's Comments
The goods sold on December
1 were returned
December 16, 2015.

Robert

We do not owe this amount

*%#@ (bad word). We did
not receive any merchandise
from your company.

Customer

customers comments

Ann

I am entitled to a 10%

Audit Findings
The client failed to record
on credit memo no. 23 for
P12,000. The merchandise
Was included in ending inventory
At cost.
investigation revealed that goods
goods sold P16,000 were shipped to
Robert on December 29, 2015 terms
FOB shipping point. The goods were
lost in transit and the shipping company
has knowledge its responsibility for the
lost of merchandise.
audit findings
Anne is an employee of

employee discount.
Your bill should be reduced
by P1,200.

Praktiscompany, starting
November 2015, employees were
Entitled to a special discount.

Jay-ar We have not yet sold the goods.

We will remit the proceeds as soon
as the goods are sold.

Merchandise billed for P18,000

were consigned to Jay-ar on
December 30, 2015.
The goods cost P13,000.

Roy

The sale of merchandise on

December 18, 2015 was paid
by Roy on January 6, 2016.

We do not owe you P20,000.

We already paid our
accounts as evidenced by
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
61 to 90 days
Over 90 days

1%
2%
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:
a. Accounts receivable

Per Books
442,500

1
2
3
4
5
6
7

Adjustments
(16,400)
15,000
(21,000)
(12,000)
(1,200)
(18,000)
(1,500)

Per Audit
387,400

60 days old and below

238,500

61 to 90 days
Over 90 days

117,200
85,400

b. Allowance for doubtful accounts

7,622

4
5
6
7

(12,000)
(1,200)
(18,000)
(1,500)

15,000

(21,000)
2

3
8

205,800

117,200
64,400

15,000
(21,000)
(1,378)

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

16,400
16,400

2. Accounts receivable
15,000
Allowance for doubtful accounts
Erroneous recording of recovery from written off account

15,000

3. Allowance for doubtful accounts

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

21,000
21,000

4. Net sales
Accounts receivable (<60 days)
Unrecorded credit memo

12,000

5. Net sales
Accounts receivable (<60 days)
Unrecorded employee discount

1,200

6. Net sales
Accounts receivable (<60 days)

18,000

Inventory
Cost of sales
Goods out on consignment erroneously billed

12,000

1,200

18,000
13,000
13,000

7. Freight out
Accounts receivable (<60 days)
Unrecorded freight-out

1,500

8. Allowance for doubtful accounts

Doubtful accounts expense

1,378

1,500

60 days old and below

205,800 1%
61 to 90 days
117,200 2%
Over 90 days
64,400 5%
Required allowance
Balance per books before this adjustment (15,000+15,000-21,000)
9,000
Adjustment

1,378
2,058
2,344
3,220
7,622

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

64%
18%
8%
5%
3%
2%

1 - 10 days
11 - 30 days
Past due 31 - 60 days
Past due. 61 - 120 days
Past due 121 - 180 days
Past due over 180 days

Probability of
Collection
99.0%
97.5%
95.0%
80.0%
65.0%
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
1 10 days
11 30 days 18%
31 60 days
61 120 days
121 180 days
over 180 days

Aging ratio
64%
8%
5%
3%
2%
100%

AR Balance
960,000
270,000
120,000
75,000
45,000
30,000
1,500,000

Requirement No. 2
Doubtful accounts expense
Allowance for doubtful accounts

Allowance for doubtful accounts, 1/1

Add provisions (P8,000,000 x 4%)
Total

Rate
Allowance
1.00%
9,600
2.50%
6,750
5.00%
6,000
20.00%
15,000
35.00%
15,750
80.00%
24,000
77,100

22,300
22,300

27,300
320,000
347,300

Less accounts written-off

Balance before adjustment
Required allowance (see no. 1)
Additional required allowance for doubtful accounts

292,500
54,800
77,100
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
2012
2013
2014
2015

P1,110,000
1,225,000
1,465,000
1,500,000

Bad Debts
Written off
P26,000
29,500
30,000
31,000

Bad Debts.
Recoveries
P2,150
3,750
3,600
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
Credit sales for 2012
Collections during 2012
Accounts written off - 2012
Accounts receivable, 12/31/12

209,000
1,500,000
(1,380,200)
(31,000)
297,800

Requirement No. 2
Allowance for doubtful accounts, 1/1/12
Doubtful accounts expense - 2012 (see computation below)

7,600
30,000

Accounts written off - 2012

Recovery of accounts written off - 2012
Allowance for doubtful accounts, 12/31/12

(31,000)
4,200
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
2009
1,110,000
2010
1,225,000
2011
1,465,000
3,800,000

AR writen-off
26,000
29,500
30,000
85,500

Net accounts written off (2009 to 2011)

Divide by credit sales (2009 to 2011)
Percentage of uncollectible accounts to charge sales

Recoveries
2,150
3,750
3,600
9,500

Net
23,850
25,750
26,400
76,000

76,000
3,800,000
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
November 30, 2015
December 31, 2015 (P837,900 x 5%)

P6,100
P41,895

P19,700
13,600
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
Unadjusted balances
Add (deduct) adjustments:
AJE No. 1
AJE No. 2
AJE No. 3
Adjusted balances
Requirement No. 1.b
Age of accounts
60
61 to 90
91 to 120
over 120

GL/SL
60
837,900 387,800
(9,000)
(6,100)
11,000
833,800 387,800

balance
387,800
318,100
83,700
44,200
833,800

61 to 90
307,100

91 to 120
89,800

over 120
53,200
(9,000)

(6,100)
11,000
318,100

Rate
1%
2%
5%
25%

83,700

44,200

Allowance
3,878
6,362
4,185
11,050
25,475

Requirement No. 1.c

Unadjusted allowance for doubtful accounts

55,495

Add (deduct) adjustments:

AJE no. 1
AJE no. 4 (squeeze)
Required allowance (see no. 1.b)
Balance per books (P41,895 - P6,100)
Add (deduct) adjustments:
AJE no. 2
AJE no. 4
Doubtful accounts expense per audit

(9,000)
(21,020)

(30,020)
25,475
35,795

6,100
(21,020)

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

(14,920)
20,875

9,000
9,000

2. Doubtful account expense

6,100
Accounts receivable - 91 to 120 days
To correct entry made in recording accounts written off
3. Accounts receivable - 61 to 90 days
Advances from customers
To reclassify advances from customers

11,000

4. Allowance for doubtful accounts

Doubtful account expense
To adjust allowance to required balance

21,020

6,100

11,000

21,020

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)
Less installment due on April 1, 2013
Note receivable from officer, due 12/31/14
Note receivable from sale of equipment
Present value of note, 4/1/12 (P800,000 x 0.797)
Discount amortization-2012 (P637,600 x 12% x 9/12)
Note receivable from sale of land
Balance, 12/31/12
Less principal installment due on 7/1/13
Total amount to be received

4,000,000
2,000,000

637,600
57,384
2,800,000
594,500

2,000,000
1,600,000

694,984

2,205,500
6,500,484

Less interest (P2,800,000 x 11%)

Total noncurrent receivables, 12/31/12

308,000
6,192,484

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

2,000,000
594,500
2,594,500

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

360,000
154,00
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
Note receivable from officer (P1,600,000 x 10%)
Note receivable from sale of equipment (P637,600 x 12% x 9/12)
Note receivable from sale of land (P2,800,000 x 11% x 6/12)
Interest income

540,000
160,000
57,384
154,000
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
Interest income

P200,000
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
Carrying amount of land
Correct gain on sale of land

503,105
(400,000)
103,105

Present value of cash flows to determine initial CA:

Date
Principal Interest (4%) Total PVF (14%)
12/31/12
200,000 24,000
224,000
0.8772
12/31/13
200,000
16,000 216,000
0.7695
12/31/14
200,000
8,000 208,000
0.6750
600,000

PV, 1/1/12
196,493
166,212
140,400
503,105

Requirement No. 1.b

Amortization schedule using effective interest method:
Date
EI (14%)
NI (4%)
Disc. Amort. Repayment
1/1/12
12/31/12
70,435
24,000
46,435
200,000
12/31/13
48,936
16,000
32,936
200,000
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
Interest income for 2012 - understated (P70,435 Net overstatement of 2012 profit
Requirement No. 1.d
Carrying amount, 12/31/12
Requirement No. 1.e
Amount reported as notes receivable

400,000

96,895
(46,435)
50,460
349,540

PV, 12/31/12
189,475
160,056
349,531

AC
503,105
349,540
182,476
-

Correct current portion of NR (P349,540 - P182,47

Overstatement of CA/working capital

167,064
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
Notes receivable
Cost of goods sold
Sales
Inventory

300,000
1,705,900
750,000
P2, 005,900
750,000

December 31 2014
Cash
Notes receivable

P341, 180

December 31 2015
Cash
Notes receivable

P341, 180

P341, 180

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)

Ordinary annuity factor at 13% for 5 periods

3.5172
3.5172

Requirement No. 2
Profit
over (under)
Sales over
Reported
Should be
Interest income under
Reported
Should be
Net misstatement

2,005,900
1,500,000
0
156,000

505,900

(156,000)
349,900

Requirement No. 3

2011 profit overstated (see no. 2)

2012 profit understated (interest income under)
Reported
Should be (refer to amortization schedule)
Net misstatement

RE, 12/31/12
over (under)
349,900
0
131,927

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

1,023,540
236,456
787,084

Amortization schedule:
Date
Payment

Interest (13%)

Principal

12/31/11
12/31/12
12/31/13

156,000
131,927
104,724

185,180
209,253
236,456

341,180
341,180
341,180

(131,927)
217,973

CA
1,200,000
1,014,820
805,567
569,111

12/31/14
12/31/15

341,180
341,180
1,705,900

73,984
39,265

267,196
301,915

301,915
-

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
Jan. 1

Feb. 28
Mar. 31

Aug. 30

Sept. 4

Nov. 1

Date

Balance Forwarded Received

P25,000 6% note due 10/29/15
from Anna whose trade account
was past due
Discounted Anna note
Received non interest-bearing
demand note from Julia, the
corporation's treasurer for a loan

debit
P118,000

24,960

6,200

Received principal and interest

due from Robinson in accordance
with agreement, two principal
payments in advance
Paid protest fee on note
dishonored by Pepper

Received check dated 2/1/16 in

settlement of Tripper note.
The check was included in cash on
hand 1.2/31/15

credit

34,200

500

8,120

2015
Nov. 4

Dec. 27

Dec. 31

Debit
Paid protest fee and maturity
value of Anna note to bank.
Note discounted 2/28/15 was
dishonored.

Credit

26,031

Accepted equipment with a fair

market value of P24,000 in full
settlement from Anna

24,000

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
demand note for the same amount.)

Dec. 31

Received principal and interest on

Pepper note

Dec. 31

Accrued interest on Robinson note

6,200

42,437

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
interest at 6% each August 31

P70,000

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
Add (Deduct) adjustments:
1/1
2/28
3/29
8/30
9/4
11/1
11/4

12,014

12/27
12/31
12/31
12/31
Adjusted trade NR, 12/31/12

25,000
24,960
(6,200)
4,200
(40,500)
8,120
(26,031)
(25,000)
24,000
6,200
42,437
(1,200)
48,000

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

40,000
8,000
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)

Sept. to Dec. (P40,000 x .06 x 4/12)
(P8,000 x .06 x 12/12)
Pepper (P42,437 - P40,500)
Anna (P25,000 x .06 x 2/12)
Julia (non-interest bearing)
Total interest income - 2012
Requirement No. 2
1/1
Notes receivable
Accounts receivable
2/28

3/29

8/30

9/4

11/1

11/4

2,800
800
3,600 Tripper
480
1,937
250
6,267

25,000
25,000

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

24,960
290

Notes receivable - Officers

Notes receivable

6,200

Notes receivable
Interest receivable
Interest income

4,200

25,000
250

6,200

1,400
2,800

Notes receivable dishonored

Notes receivable

500

Notes receivable dishonored

Notes receivable

40,000

Notes receivable
Cash
Notes receivable dishonored
Notes receivable
Notes receivable discounted
Notes receivable

12/27 Notes receivable

Loss on settlement of NR
Notes receivable dishonored

500

40,000
8,120
8,120
26,031
26,031
25,000
25,000
24,000
2,031
26,031

12/31 Notes receivable

Petty cash fund

6,200

12/31 Notes receivable

Notes receivable dishonored
Interest income

42,437

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

Interest income
Notes receivable

800
400

12/31
Interest receivable (P8,000 x 6% x 2/12)
Interest income
12/31 Unearned interest income
Interest income

6,200

40,500
1,937

1,200
80
80
400
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
1/1/11
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15

EI(11%)

NI (10%)

1,059,399
1,065,933
1,073,186
1,081,236
1,089,346

1,000,000
1,000,000
1,000,000
1,000,000
1,000,000

Disc. Amort. C.A.

59,399
65,933
73,186
81,236
89,346

9,630,900
9,690,299
9,756,232
9,829,418
9,910,654
10,000,000

Requirement No. 3
Carrying amount, 12/31/12 (see schedule)
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
Loan impairment (bad debt expense)

9,756,232

5,881,200
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 yearend 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