Assignment

Audit of Receivables
Problems

Problem #1. Trade and other receivables

On December 31, 2018, Jenah Co.’s Accounts receivable includes the following:
1 Accounts receivable, net of P40,000 credit balance in customers’ Page | 1
accounts, including P3,000 accounts receivable to customers which P240,000
is definitely uncollectible
2 Mastercard or Visa Credit card sale of merchandise to customer 150,000
3 Overpayment to supplier for inventory purchased on account 10,000
.
4 Accounts payable, net of P30,000 debit balance in suppliers’ 130,000
. accounts
5 Special desposits on contract bids 110,000
.
6 Dividend receivables 15,000
.
7 Other trade accounts receivable-unassigned 70,000
.
8 Advances to or receivables from stockholders, (P80,000 is 300,000
. collectible currently)
9 Trade accounts receivable-assigned 100,000
.
Questions:
Based on the above data , determine the following
1. Trade receivables
a. 170,000 b. 427,000 c. 597,000 d. 497,000

2. Trade and other receivables

a. 427,000 b. 482,000 c. 732,000 d. 497,000

Problem #2. Different freight terms

On January 13, 2018, Karell Co. sold on account goods with selling price of P300,000
with terms of 2/10, n/30. Freight costs amounted to P5,000. The goods were
received by the buyer on January 15, 2018. Kerel Co. collected the receivable on
January 23, 2018.
Questions:
Based on the above data, answer the following:
1. How much net cash did Karell receive from the buyer if the terms are FOB
destination, freight prepaid?
a. 289,000 b. 294,000 c. 299,000 d. 305,000

2. How much net cash did Karell receive from the buyer if the terms are FOB
destination, freight collect?
a. 289,000 b. 294,000 c. 299,000 d. 305,000

3. How much net cash did Karell receive from the buyer if the terms are FOB
shipping point, freight prepaid?
a. 289,000 b. 294,000 c. 299,000 d. 305,000

4. How much net cash did Karell receive from the buyer if the terms are FOB
shipping point?, freight collect?
a. 289,000 b. 294,000 c. 299,000 d. 305,000

Problem #3. Gross method and Net method

On January 1, 2018, Wackisan Co. sells inventory with a list price of P100,000 on
account under credit terms of 15%, 20%, 3/10, n/30.
Questions:
Based on the above data, answer the following:
1. Under the gross method, how much should be debited to Accounts receivable on
January 1, 2018?
a. 100,000 b. 85,000 c. 68,000 d. 65,960
2. Under the net method, how much should be debited to Accounts receivable on
January 1, 2018?
a. 100,000 b. 85,000 c. 68,000 d. 65,960

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Problem #4. Computation of Percentage of bad debt expense
Since it started its operations in 2015, Valdez Co. carried no allowance for doubtful
accounts. Uncollectible receivables were expensed as written off and recoveries
were credited to income as collected. On March 1, 2019 (after the financial
statements were issued), management recognized that Valdez’s accounting policy
with respect to doubtful accounts were not correct, and determined Pagethat
| 3 an
allowance for doubtful accounts was necessary.

Data for five years follow:

Credit sales Accounts written Recoveries
off
2015 1,500,000 20,000 15,000
2016 2,000,000 40,000 20,000
2017 3,500,000 270,000 15,000
2018 2,000,000 65,000 30,000
2019 3,000,000 85,000 40,000

The year-end balances of accounts receivable are as follows:

December 31, 2018 - P3,000,000
December 31, 2019 - P3,400,000

Questions:
Based on the above data, answer the following:
Case No. 1. Bad debts are provided for as a percentage of credit sales.
1. The percentage to be used to compute the allowance for bad debts on
December 31, 2019 is:
a. 1.50% b. 3.00% c. 3.50% d. 4.00%

2. How much is the doubtful accounts expense for 2019?

a. 45,000 b. 90,000 c. 105,000 d. 120,000

3. Assuming the allowance for doubtful accounts on January 1, 2019 is P400,000,

how much is the allowance for doubtful accounts December 31, 2019?
a. 400,000 b. 445,000 c. 460,000 d. 475,000

Case no. 2: Bad debts are provided for as a percentage of credit sales.
The company’s contracts are generally two years.
4. The percentage to be used to compute the allowance for bad debts on December
31, 2019?
a. 1.50% b. 3.00% c. 3.50% d. 4.00%

5. How much is the doubtful accounts expense for 2019?

a. 45,000 b. 90,000 c. 105,000 d. 120,000

6. How much is the allowance for doubtful accounts December 31, 2019?
a. 105,000 b. 115,000 c. 165,000 d. 280,000

Case 3. Assume that a policy was established to maintain an allowance

for doubtful accounts based on historical bad debt loss percentage
applied to year end accounts receivable. The historical bad debt loss
percentage is to be recomputed each year based on all available years up
to a maximum of five years.
7. The percentage to be used to compute the allowance for bad debts on December
31, 2019 is
a. 1.50% b. 3.00% c. 3.50% d. 4.00%

8. How much is the doubtful accounts expense for 2019?

a. 102,000 b. 90,000 c. 45,000 d. 42,000

9. How much is the allowance for doubtful accounts December 31, 2019?
a. 45,000 b. 105,000 c. 102,000 d. 120,000
Page | 4
Problem #5. Aging based on outstanding receivables
Zyrah Co. has the following data relating to its accounts receivable during the
current year:
Categories
No of days Balance % collectible
0-30 days 500,000 98% Page | 5
31-60 days 600,000 97%
61-90 days 750,000 95%
Over 91 days 400,000 (P100,000 definitely
uncollectible, balance is
90% collectible

The beginning balance of the allowance for doubtful accounts is P40,000. During
the year, Zyrah wrote off P23,000 receivables and recovered P12,000 of accounts
previously written off in prior years.

Questions:
Based on the above data, answer the following:
1. How much is the doubtful accounts expense during the current year?
a. 166,500 b. 95,500 c. 123,000 d. 111,000

2. How much is the net realizable value of the accounts receivable at the end of the
current year?
a. 2,054,500 b. 2,150,000 c. 1,983,500 d. 2,027,000

Problem # 6 Aging based on Days past due

Primadonna Co. sells to different customers but under the same terms of 3/15, n/30.
An analysis of the balance of the accounts receivable on December 31 of the
current year year showed the following:
Age in days Balances
0-30 days 450,000
31-60 days 300,000
61-90 days 220,000
91-120 days 150,000
121-150 days 60,000

Primadonna Co. uses aging of receivables method. Based on past experience, the
following estimated percentages are to be used:
Overdue accounts % collectible
For less than 31 days 95%
From 31-60 days 94%
From 61-90 days 92%
From 91-120 days 85%
For over 121 days 80%

The beginning balance of allowance for doubtful accounts is P20,000. There were
no recoveries or accounts written off during the year.

Questions:
Based on the above data, answer the following:
1. How much is the balance of the allowance for doubtful accounts at the end of the
current year?
a. 49,200 b. 92,600 c. 40,200 d. 80,600

2. How much is the doubtful accounts expense during the current year?
a. 29,200 b. 72,600 c. 20,200 d. 60,600
Problem #7. Interest bearing note with realistic interest rate
On January 1, 2018, Josh Co. sold a machine to Groban Co. In lieu of cash payment,
Groban gave Josh a 4-year P100,000, 10% note. The note requires interest to be
paid annually on December 31. The machine has a cost of P500,000 and
accumulated depreciation as of January 1, 2018 of P350,000. The 10% interest rate
is a realistic rate of interest for a note of this type. Page | 6

Required:
Compute for the following as of December 31, 2018:
1) Gain or loss on sale of machinery
2) interest income
3) current portion of the notes receivable
4) noncurrent portion of the notes receivable

Problem #8. Interest-bearing note with unrealistic interest rate. Interest

is payable annually. One-time collection of principal.
On January 1, 2018, Jima Company sold office equipment with a cost of P1,000,000
and accumulated depreciation of P150,000 in exchange for a 3-year, 10%
P2,000,000 note receivable. Principal is due on December 31, 2020 but interest is
due annually every December 31. The prevailing interest rate for this type of note
is 12%.

Questions:
Based on the above data, answer the following:
1. How much is the gain or loss on sale of office equipment in 2018?
a. 1,903,960 b. 1,053,960 c. 903,960 d. 1,051,750

2. How much is the interest income for 2018?

a. 200,000 b. 228,475 c. 235,704 D, 114,104

3. How much is the carrying amount of the note ob December 31, 2018?
a. 1,932,435 b. 1,964,327 c. 2,000,000 d. 1,915,834

4. How much is the current portion of the note on December 31, 2018?
a. nil b. 33,892 c. 14,950 d. 1,964,327

5. How much is the noncurrent portion of the note on December 31, 2018?
a. nil b. 31,892 c. 1,932,435 d. 1,964,327

Problem #9. Interest bearing note with unrealistic interest rate, interest
is payable semi-annually, one time collection of principql
On January 1, 2018, Fiona Co. sold an office equipment with a cost of P1,000,000
and accumulated depreciation of P150,000 in exchange for a 3-year, 10%
P2,000,000 note receivable. Principal is due on December 31. The prevailing
interest rate for this type of note is 12%.

Questions:
Based on the above data, answer the following:
1. How much is the gain or loss on sale of office equipment in 2018?
a. 1,901,730 b. 1,051,730 c. 901,730 d. 1,053,960

2. How much is the interest income for 2018?

a. 200,000 b. 229,054 c. 215,847 d. 232,643

3. How much is the carrying amount of the note on December 31, 2018?
a. 1,915,834 b. 1,930,784 c. 2,000,000 d. 1,963,395
4. How much is the current portion of the note on December 31, 2018?
a. nil b. 14,950 c. 1,963,395 d. 1,930,784

5. How much is the noncurrent portion of the note on December 31, 2018?
a. nil b. 14,950 c. 1,915,834 d. 1,930,784
Page | 7
Problem #10. Interest bearing note with unrealistic interest rate.
Uniform collection of principal
On January 1, 2018, Czerny Co. sold delivery equipment costing P1,000,000 with
accumulated depreciation of P150,000 in exchange for a 3-year, 10%, P1,800,000
interest bearing note. Principal is due in equal annual payments, starting December
31, 2018. Interest is also collectible every December 31. The prevailing rate of
interest for this type of note is 12%.

Questions:
Based on the above data, answer the following:
1. How much is the gain or loss on sale of delivery equipment in 2018?
a. nil b. 890,234 c. 746,234 d. 1,131,942

2. How much is the interest income for 2018?

a. nil b. 208,828 c. 140,287 d. 198,194

3. How much is the carrying amount of the note on December 31, 2018?
a. 1,169,062 b. 980,136 c. 1,620,000 d. 501,986

4. How much is the current portion of the note on December 31, 2018?
a. 20,287 b. 579,713 c. 589,349 d. 10,651

5. How much is the noncurrent portion of the note on December 31, 2018?
a. 589,350 b. 20,287 c. 501,986 d. 478,150

Problem #11. Non-interest bearing note with unrealistic interest rate.

Non-unifor collection of principal
On January 1, 2018, Gale Co. sold deliver equipment costing P1,000,000 with
accumulated depreciation of P150,000 in exchange for a 3-year, P1,800,000
noninterest bearing note receivable due as follows:
Expected date of Amount of cas flow
collection
Dec. 31, 2018 1,000,000
Dec. 31, 2019 600,000
Dec. 31, 2020 200,000
total P1,800,000

The prevailing rate of interestfor this type of note is 12%.

Questions:
Based on the above data, answer the following:
1. How much is the gain or loss on sale of delivery equipment in 2018?
a. nil b. 663,580 c. 513,580 d. 1,513,580

2. How much is the interest income for 2018?

a. nil b. 181,638 c. 83,425 d. 188,728

3. How much is the carrying amount of the note on December 31, 2018?
a. 695,210 b. 876,008 c. 178,635 c. 512,399

4. How much is the current portion of the note on December 31, 2018?
a. 600,000 b. 516,575 c. 83,425 d. 178,635

5. How much is the noncurrent portion of the note on December 31, 2018?
a. 600,000 b. 516,575 c. 83,425 d. 178,635
Page | 8
Problem 12. Noninterest-bearing note. One-time collection of principal
On January 1, 2018, Shierly Co. sold delivery equipment costing P1,000,000 with
accumulated depreciation of p150,000 in exchange for a 3-year P1,800,000
noninterest-bearing note receivable due on December 31, 2020. The prevailing rate
of interest for this type is 12%.
Page | 9
Questions:
Based on the above data answer the following:
1. How much is the gain or loss on sale of delivery equipment in 2018?
a. nil b. 431,240 c. 281,240 d. 150,000

2. How much is the interest income for 2018?

a. nil b. 153,749 c. 172,199 d. 600,000

3. How much is the carrying amount of the note in December 31, 2018?
a. 1,434,989 b. 1,800,000 c. 1,607,187 d. 1,200,000

4. How much is the current portion of the note on December 31, 2018?
a. 172,199 b. nil c. 1,607,187 d. 1,434,989

5. How much is the noncurrent portion of the note on December 31, 2018?
a. 1,434,989 b. 172,199 c. 1,607,187 d. nil

Problem # 13. Computation of annual payment or collection

On January 1, 2018, Teresa Company sold an inventory to Msria Company for
P1,500,000. A note was received in exchange for the product which provides that
three (3) equal annual installments will be made every December 31 starting
December 31, 2018. The effective rate of the notes which is compounded annually
is 12%.

Required:
Compute for the:
1. Annual collection
2. Interest income in 2018

Case no. 1. Based on the given data

Case no. 2. Assume instead that the first payment is made on January 1,
2018.

Problem # 14. Impairment of Receivable, one-time of collection of

principal.
On January 1, 2016, Marcy Co. received a P16,000,000 note receivable from Lynn
Inc. The principal is due on December 31 2020 while interest at 10% is due
annually at the end of each year for five (5) years.

Lynn Inc. made the required payments during 2016 and 2017. However, during
2018, Lynn Inc. began to experience financial difficulties, requiring Marcy Co. to
reassess the collectability of the note. Interest was accrued in 2018. On December
31, 2018, Marcy Co. determined that the note has been impaired and projects future
cash flows as follows:
Expected date of Amount of cash flow
collections
December 31, 2019 1,600,000
December 31, 2020 3,200,000
December 31, 2021 4,000,000

Questions:
Based on the above data, answer the following:
1. How much is the loan impairment in 2018?
a. 9,894,720 b. 8,294,720 c. 7,705,280 d. 2,189,440
Page | 10
2. How much is the interest income for 2019?
a. nil b. 770,528 c. 687,581 d. 1,600,000

3. How much is the carrying amount of the note on December 31, 2019?
a. 4,800,000 b. 6,875,800 c. 4,363,389 d. 8,000,000

Page | 11
Problem # 15. Pledge of receivable
On September 1, of the current year, David Company borrowed P900,000 for one
year from Brayden Bank with a stated interest rate of 10%. As a security for the
loan, David hypothecated its accounts receivable amounting to P1,200,000.
Brayden Bank deducted the one year interest in advance.
How much cash is received on September 1, as a result of pledging of accounts
receivable?
a. 900,000 b. 810,000 c. 870,000 d. 855,000

Problem #16. Assignment of Accounts receivable

On December 1, 2018, Belle Company assigned specific accounts receivable
totaling P200,000 as collateral on a P150,000, 12% note from a certain bank. Belle
Company will continue to collect the assigned accounts receivable . In addition to
the interest on the note, the bank also charged a 5% finance fee deducted in
advance on the P150,000 value of the note. The December collection of assigned
accounts receivable amounted to P100,000 less cash discounts of P5,000. On
December 31, 2018, Belle Company remitted the collections to the bank in
payment for the interest accrued on December 31, 2018 and the note payable.

Questions:
Based on the above data, answer the following:
1. What amount of cash was received from the assignment of accounts receivable
on December 1, 2018?
a. 200,000 b. 150,000 c. 190,000 d. 142,500

2. What is the carrying amount of note payable on December 31, 2018?

a. 200,000 b. 150,000 c. 190,000 d. 142,500

3. What amount should be disclosed as the equity of Belle Company in assigned

accounts on December 31, 2018?
a. 50,000 b. 45,000 c. 43,500 d. 27,000

Problem #17. Factoring of receivables

On June 30, 2018, Blondie Fixtures was considering alternatives to bolster its cash
position. Option one called for transferring P400,000 in accounts receivable to
Dogwoood Finance Company without recourse for a 5% fee. Option two calls for
Blondie to transfer the P400,000 in receivables to Dogwood with recourse.
Dogwood charges a 4% fee for receivable factored with recourse. Option two meets
the conditions to be considered a sale, but Blondie estimates a P3,000 recorse
liability. Under either option, Dogwood will immediately remit 90% of the factored
receivables to Blondie, and retain 10%. When Dogwood collects the remaining
receivables, it remits the amount, less the fee, to Blondie. Blondie estimates that
the far value of the final 10% of the receivables is P25,000 (ignoring the factoring
fee)
Questions:
Based on the above data, answer the following:
1. The necessary journal entry or entries if receivables are factored under Option
One would include
a. Debit to cash P335,000
b. Debit to Loss on sale of receivable, P35,000
c. Credit to estimated recourse liability, P3,000
d. Debit to Receivable from Factor, P25,000.

2. The necessary journal entry or entries if receivables are factored under Option
Two would include
a. Debit to Cash, P335,000
b. Debit to Loss on sale of receivable, P35,000
c. Credit to Estimated recourse liability, P3,000
d. Debit to Receivable from factor, P25,000

Problem #18. Notes Receivable Discounting and Notes Receivable

Dishonored Page | 12
On January 1, Sheena accepted a P600,000, 9%, 90 day note from a customer. On
February 10, the note was discounted at 12%.

Questions:
Based on the above data, answer the following:
Case No. 1. Assume that the note was discounted on a without recourse
basis
Compute the following:
1. Cash received from discounting
a. 613,500 b. 600,000 c. 600,207.50 d. 595,095

2. Gain (or loss) on notes receivable discounting

a. (3,542.50) b. 207.50 c. 13,500 d. 3,750

Case No. 2. Assume that the note was discounted with recourse and treat
the discounting as a conditional sale recognizing contingent liability.
Compute for the following:
3. Gain (or loss) on notes receivable discounting
a. (3,542.50) b. 207.50 c. 13,500 d. 3,350

4. Assume that on April 16, the maturity date of the note, the maker of
the note receivable which is discounted defaulted from payment and the
bank charged Sheena for the maturity value of the note plus a P5,000
protest fee.
How much will be debited to accounts receivable on April 16?
a. 613,500 b. 603,750 .c. 618,500 d. 608,750

Case no. 3 Assume that the note was discounted with recourse and treat
the discounting as a secured borrowing. Compute fo the following:
5. Net interest income (or expense) as a result of discounting of notes receivable
a. (3,542.50) b. 207.50 c. 13,500 d. 3,750

6. Assume that on April 16, the maturity date of the note, the maker of
the note receivable which is discounted defaulted from payment and the
bank charged for the maturity value of the note plus a P5,000 protest fee.
How much will be debited to accounts receivable on April 16?
a. 613,500 b. 603,750 c. 618,500 d. 608,750