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CPA REVIEW SCHOOL OF THE PHILIPPINESM a n i l a

AUDITING PROBLEMS

AUDIT OF RECEIVABLES – QUIZZERS

PROBLEM NO. 1

During your examination of the 2005 financial statements of the Yesterday Company you find that the company does not provide allowance for doubtful accounts ever since it started operations in 2001. The company’s practice is to directly write-off as expense doubtful accounts and credit recoveries to income. The company’s contracts are generally for two years.

Upon your recommendation, the company agreed to change its accounts for 2005 to give effect to doubtful treatment on the allowance basis. The allowance is to be based on a percentage of sales which is derived from the experience of prior years. Statistics for 2001 to 2005 are shown as follows:

Year of Sale 2001 2002 2003 2004 2005Charge Sales P600,000 P1,500,000 P1,800,000 P1,950,000 P1,650,000

Accounts Written off & Year of Sale2001 3,3002002 9,000 6,0002003 3,000 24,000 7,8002004 7,200 27,000 9,0002005 16,200 30,000 8,400

Recoveries & Year of Sale20012002 6002003 2,4002004 3,0002005 3,600

Accounts receivable at December 31, 2005 were as follows:

From 2004 sales P90,000From 2005 sales 810,000 Total P900,000

REQUIRED:

Based on the above and the result of your audit, you are to provide the answers to the following:

1. The average percentage of net doubtful accounts to charge sales that should be used in setting up the 2005 allowance isa. 2.05% b. 2.50% c. 1.90% d. 1.77%

2. How much is the doubtful accounts expense for 2005?a. P32,850 b. P54,600 c. P43,800 d. P41,250

3. The doubtful accounts expense for 2005 is over(under) stated bya. P13,350 b. P55,950 c. (P32,850) d. (P41,250)

4. The net realizable value of accounts receivable that should be presented on the December 31, 2005 balance sheet isa. P831,600 b. P853,800 c. P868,650 d. P810,000

SUGGESTED ANSWERS: B, D, A, B

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PROBLEM NO. 2

Your audit client, Help Corporation, provided for uncollectible accounts receivable under the allowance method since the start of its operations to December 31, 2005. Provisions were made monthly at 2 percent of credit sales; bad debts written off were charged to the allowance account; recoveries of bad debts previously written off were credited to the allowance account; and no year-end adjustments to the allowance account were made. Help's usual credit terms are net 30 days.

The credit balance in the allowance for doubtful accounts was P260,000 at January 1, 2005. During 2005, credit sales totaled P18,000,000, interim provisions for doubtful accounts were made at 2 percent of credit sales, P180,000 of bad debts were written off, and recoveries of accounts previously written off amounted to P30,000. Help installed a computer system in November 2005 and an aging of accounts receivable was prepared for the first time as of December 31, 2005. A summary of the aging is as follows:

Classifications by Month of SaleBalance in

Each CategoryEstimated % Uncollectible

November-December 2005 P2,280,000 2%July-October 2005 1,200,000 15%January-June 2005 800,000 25%Prior to January 1, 2005 260,000 80%

Based on the review of collectibility of the account balances in the "prior to January 1, 2005" aging category, additional receivables totaling P120,000 were written off as of December 31, 2005. Effective with the year ended December 31, 2005, Help adopted a new accounting method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging analysis of accounts receivable.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. How much is the adjusted balance of the allowance for doubtful accounts as of December 31, 2005?a. P537,600 b. P350,000 c. P633,600 d. P753,600

2. How much is the doubtful accounts for the year 2005?a. P427,600 b. P577,600 c. P547,600 d. P457,600

3. The recorded allowance for doubtful accounts should be increased bya. P283,600 b. P187,600 c. P67,600 d. P0

SUGGESTED ANSWERS: A, C, B

PROBLEM NO. 3

Don’t Let Me Down, Inc. estimates its doubtful accounts by aging its accounts receivable. The aging schedule of accounts receivable at December 31, 2005 is presented below:

Age of accounts Amount0 – 30 days

31 – 60 days61 – 90 days

91 – 120 daysover 120 days

P1,264,800691,500288,600114,975

59,100 P2,418,975

Don’t Let Me Down, Inc.’s uncollectible accounts experience for the past 5 years are summarized in the following schedule:

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YearA/R Balance

Dec. 310 – 30 Days

31 – 60 Days

61 – 90 Days

91 – 120 Days

Over120Days

20042003200220012000

P1,968,7501,500,000

697,5001,224,0001,865,500

0.3%0.5%0.2%0.4%0.9%

1.8%1.6%1.5%1.7%2.0%

12%11%9%

10.2%9.7%

38%41%50%47%33%

65%70%69%81%95%

The balance of the allowance for doubtful accounts at December 31, 2005 (before adjustment) is P126,750.

QUESTIONS:

Based on the foregoing, answer the following:

1. How much is the adjusted balance of the allowance for doubtful accounts as of December 31, 2005?a. P126,750 b. P13,894 c. P140,644 d. P630,675

2. The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of December 31, 2005 would include:a. No adjusting journal entry is necessary.b. A debit to retained earnings of P13,894.c. A debit to doubtful accounts expense P140,644.d. A credit to allowance for doubtful accounts of P13,894.

SUGGESTED ANSWERS: C, D

PROBLEM NO. 4

The following were noted during your audit of the I Should Have Known Better Corp. for the calendar year 2005:

Notes ReceivableDate Particulars Debit CreditSept. 1 Michelle, 21%, due in 3 months P320,000 1 Discounted Michelle note P320,000Oct. 1 Mabelle Co., 24%, due in 2 months 1,200,000Nov. 1 Eleanor, 24%, due in 13 months 2,400,000 30 Rigby Co., no interest, due in one year 2,000,000 30 Discounted Rigby Co. note 2,000,000Dec. 1 Sgt. Pepper, 18%, due in 5 months 3,600,000 1 Ms. Anna, President, 12%, due in 3 months

(For cash loan given to Ms. Anna) 4,800,000

All notes are trade notes receivable unless otherwise specified. The Michelle note was paid on December 1 as per notification received from the bank. The Mabelle Co. note was dishonored on the due date but the legal department has assured management of its full collectibility.

The Corporation, with your concurrence, will not use the Notes Receivable Discounted account but will merely note on the face of the balance sheet the amount of notes receivable discounted but still outstanding.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. At what amount on the current assets section of the balance sheet as of December 31, 2005 will Notes Receivable-trade be carried?a. P3,600,000 b. P7,200,000 c. P6,000,000 d. P8,000,000

2. How much is the accrued interest income as of December 31, 2005?a. P150,000 b. P270,000 c. P198,000 d. P222,000

SUGGESTED ANSWERS: C, B

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