chapter 4 audit of receivables

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CHAPTER 4 – Audit of Receivables

Problem 1

The accounts receivable of FRANCO COMPANY were stated at P1,467,000 in a balance sheet

submitted to a banker for credit. You are called upon to audit the report and, upon

analysis, the asset was found to consist of the following items:

Due from customers on open account P 1,125,000

Acknowledged claim for damages 22,500

Due from consignee at billed price – cost price

being P22,500 30,000

Investment in and advances to affiliated company 150,000

Loans to officers and employees 13,500

Deposits with municipalities – bids for contracts 67,500

Unpaid capital stock subscriptions 60,000

Advances to creditors for merchandise purchased

but not received 24,000

Cash advanced to salesmen for traveling expenses 4,500

Allowance for doubtful accounts ( 30,000)

P1,467,000

The amount of P1,125,000 due from customers was the remaining balance after deducting

accounts with credit balances of P6,000.

During your examination, you noted that on December 31, the company assigned P300,000

of customers’ accounts to secure a 17%, P240,000 note payable. A 1% commission based

on the accounts assigned was charged and deducted from the cash received. The client

recorded this transaction by a debit to cash and a credit to notes payable.

Questions

1. How much is the Accounts Receivable (gross) balance at December 31?

a. P 759,000 b. P 789,000 c. P 1,101,000 d. P 1,131,000

2. The total current non-trade receivable balance at December 31 is:

a. P 64,500 b. P 96,000 c. P 120,000 d. P 192,000

3. The liability for the accounts receivable – assigned is:

a. P 237,000 b. P 240,000 c. P 243,000 d. P 300,000

4. The total non-trade receivable balance at December 31 is:

a. P 342,000 b. P 318,000 c. P 313,500 d. P 245,000

Solution (1) Claims Receivable 22,500 Accounts receivable 22,500 (2) Sales 30,000 Accounts receivable 30,000 (3) Advances to affiliates 150,000 Accounts receivable 150,000 (4) Receivables - officers/employee 13,500

Accounts receivable 13,500 (5) Deposits for contracts bidding 67,500 Accounts receivable 67,500

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(6) Subscription receivable 60,000 Accounts receivable 60,000 (7) Advances to suppliers 24,000 Accounts receivable 24,000 (8) Advances to officers/employee 4,500 Accounts receivable 4,500 (9) Accounts receivable 30,000 Allowance for bad debts 30,000 (10) Accounts receivable 6,000 Customers with credit balance 6,000 (11) OE: Cash 237,000 Notes payable 237,000 CE: Cash 237,000 Commission expense 3,000 Notes payable 300,000 Adj: Commission expense 3,000 Notes payable 3,000 Unadjusted AR 1,467,000 Non-trade AR (1) ( 22,500) Claims receivable 22,500 (2) ( 30,000) Advances to affiliates 150,000 (3) ( 150,000) Advances to off/empl

(4) ( 13,500) ( 13,500 + 4,500) 18,000 (5) ( 67,500) Deposit for contracts 67,500 (6) ( 60,000) Subscription receivable 60,000 (7) ( 24,000) Advances to suppliers 24,000 (8) ( 4,500) (9) 30,000 (10) 6,000 __________ Adjusted balance 1,131,000 Total 342,000 Current non-trade AR Claims receivable 22,500 Advances to off/empl ( 13,500 + 4,500) 18,000 Advances to suppliers 24,000 Total 64,500 Answer: 1. D 2. A 3. B 4. A

Problem 2

In your audit of MENDOZA COMPANY for the past calendar year, you find the following

accounts:

ACCOUNTS RECEIVABLES

Jan. 1, 2002 P 800,000 Jan. – Dec. 1992 collections P 5,900,000

Jan. – Dec. Sales 6,300,000 Jan. – Dec. write-off 100,000

ALLOWANCE FOR BAD DEBTS

Jan. – Dec. Write-off of Jan. 1, 2002 P 95,000

last year’s receivables P 85,000 Dec. 31 provisions 315,000

Write-off of this year’s

Receivables 15,000

In your examination, you find that the balance of Accounts Receivable represents sales of

the current audit year only; that credit balances in the subsidiary ledger for accounts

receivable totaled P80,000; and that the current year’s provision for bad debts expense was

5% of sales (as compared with 4½% last year, 4% of the year before, and 3½% the next

previous year). Sequential to aging the accounts receivable, you and the company’s

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treasurer agree on an additional write-off of P50,000, and P300,000 as the probable loss to

be sustained on collection of the accounts receivable balance.

Questions

1. The adjusted Accounts Receivable balance is:

a. P 830,000 b. P 1,100,000 c. P 1,130,000 d. P 1,180,000

2. The adjusted Allowance for Bad Debts is:

a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000

3. The adjusted Bad Debts account is:

a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000

4. The provision per record at December 31 is:

a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000

Solution Accounts Receivable 80,000 Customers’ credit balance 80,000 Allowance for bad debts 50,000 Accounts receivable 50,000 Bad debts expense 40,000 Allowance for bad debts 40,000 Computation: Provision per records 315,000 * Provision per audit 355,000 Adjustment 40,000 * Beg. balance 95,000 + Provisions 355,000 squeezed figure - Write-off per book 100,000 - Additional write-off 50,000 Ending balance 300,000 Answer: 1. C 2. B 3. D 4. C

Problem 3

The following selected transactions occurred during the year ended December 31, 2006 of

DOMINGO COMPANY:

Gross sales (cash and credit) P 900,736.80

Collections from credit customers, net of 2% cash discount 294,000.00

Cash sales 180,000.00

Uncollectible accounts written off 19,200.00

Credit memos issued to credit customers for sales ret./allow. 10,080.00

Cash refunds given to cash customers for sales ret./allow. 15,168.00

Recoveries on accounts receivable written-off in prior years

(not included in cash received stated above) 6,505.20

At year-end, the company provides for estimated bad debts losses by crediting the

Allowance for Bad Debts account for 2% of its net credit sales for the year. The allowance

for bad debts at the beginning of the year is P19,327.20.

Questions

1. How much is the DOMINGO COMPANY’s gross sales?

a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80

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2. DOMINGO COMPANY’s credit sales at December 31, 2006 is:

a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80

3. How much is the DOMINGO COMPANY’s net credit sales?

a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80

4. The Bad Debts Expense of DOMINGO COMPANY at December 31, 2006 is:

a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14

5. The Accounts Receivable of DOMINGO COMPANY at December31, 2006 is:

a. P 408.042.00 b. P 407,536.80 c. P 401,536.80 d. P 391,456.80

6. The Allowance for Bad Debts of DOMINGO COMPANY at December 31, 2006 is:

a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14

Solution Accounts Receivable Credit Sales 720,736.80 Collection 294,000.00 Recoveries 6,505.20 Sales discount from credit cust. 6,000.00 Write-off 19,200.00 Sales returns from credit customer 10,080.00 __________ Recoveries 6,505.20 727,242.00 335,785.20 Ending bal. 391,456.80 Net credit sales: Credit sales 720,736.80 - Sales discounts from credit sales ( 6,000.00) - Sales returns from credit sales (10,080.00)

Net credit sales 704,656.80 Bad debts: Net credit sales 704,656.80 x % of uncollectible 2% Bad debts 14,093.136 Allowance for bad debts: Beg. balance 19,327.20 Provision for bad debts 14,093.14 Recoveries 6,505.20 Less: Write-off ( 19,200.00) Allowance ending balance 20,725.54 Answer: 1. A 2. B 3. C 4. B 5. D 6. A

Problem 4

Presented below are unaudited balances of selected accounts of MARJORIE COMPANY as of

December 31, 2006:

Unaudited Balances, 12/31/06

Selected Accounts Debit Credit

Cash P 500,000

Accounts receivable 1,300,000

Allowance for doubtful accounts 8,000

Net sales P 6,750,000

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Additional information are as follows:

a. Goods amounting to P50,000 were invoiced for the accounts of Joy Store & Co.,

recorded on January 2, 2007 with terms of net, 60 days, FOB shipping point. The goods

were shipped to Variety Store on December 30, 2006.

b. The bank returned on December 29, 2006, a customer’s check for P5,000 marked

“DAIF”, but no entry was made.

c. MARJORIE COMPANY estimates that allowance for uncollectible accounts should be one

and one-half percent (1½%) of the accounts receivable balance as of year-end. No

provision has yet been made for 2006.

Questions

1. What is the adjusted balance of Accounts Receivable on December 31, 2006?

a. P 1,355,000 b. P 1,350,000 c. P 1,305,000 d. P 1,300,000

2. What is the adjusted balance of Allowance for doubtful accounts on December 31, 2006?

a. P 36,325 b. P 28,325 c. P 20,325 d. P 8,000

3. What is the adjusted amount of 2006 Bad Debts Expense?

a. P 12,325 b. P 20,325 c. P 28,325 d. P 36,325

Solution (1) A 1,300,000 + 50,000 + 5,000 P1,355,000 (2) C P1,355,000 x 1 ½% P20,325 (3) C P20,325 + P8,000 debit balance P28,325

Problem 5

During December, 2006, the Accounts Receivable controlling account on the books of

FERNANDEZ COMPANY showed one debit posting and two credit postings. The debit

represents receivables from December sales, P780,000. One credit was for P470,400, made

a result of cash collections on November and December receivables; the second credit was

an adjustment for estimated uncollectibles, P90,000. The December 31 balance was

P270,000.

When receivables were collected, the bookkeeper credited Accounts Receivables for the cash

collected. All customers who paid their accounts during December took advantage of the

2% cash discount.

As of December 1, debit balance in customers’ subsidiary accounts totaled P177,000. An

adjustment for estimated doubtful accounts of P18,000 had been posted to the Accounts

Receivable controlling account at the end of 2002, and no write-offs were recorded during

2006. In addition, a number of customers had overpaid their accounts, and as a result,

some of the customers’ subsidiary accounts had credit balances on December 1. No

overpayments were made during December nor were any credit balances in customers’

accounts reduced during December.

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Questions

1. The Accounts Receivable beginning balance (unadjusted) of FERNANDEZ COMPANY at

December 31, 2006 is:

a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

2. The Accounts Receivable beginning balance (adjusted) of FERNANDEZ COMPANY at


a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

3. The Credit Balance of Accounts Receivable at the beginning of the year of FERNANDEZ

COMPANY is:

a. P 48,600 b. P 66,600 c. P 108,600 d. P 126,600

4. The Accounts Receivable balance of FERNANDEZ COMPANY at December 31, 2006 is:

a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000

Solution Computation for unadjusted AR beginning balance: Accounts Receivable * Beg. bal. 50,400 Collections 470,400 Sales 780,000 Allow. for BD 90,000 830,400 560,400 End bal. 270,000 * squeezed figure Ending balance of AR control account 270,000 Add: Credits during December 560,400 Less: Debits during December ( 780,000) Balance of AR control account – Dec. 1 50,400 Add: 2006 Est. allowance for BD 18,000 Adjusted AR control account – Dec. 1 68,400 Less: AR subsidiary account – Dec. 1 177,000 Credit balance of AR account – Dec. 1 108,600 Answer: 1. A 2. B 3. C 4. D

Problem 6

You are examining the financial statements of MATIAS CORPORATION for the year ended

December 31, 2006. During the audit of the accounts receivable and other related

accounts, certain information was obtained.

The December 31, 2006 debit balance in the Accounts Receivable control account is

P197,000.

The only entries in the Bad Debts Expense account were: a credit for P324 on December

31, 2006, because Marlisa Company remitted in full for the accounts charged off October

31, 2006, and a debit on December 31 for the amount of the credit to the Allowance for

Doubtful Accounts.

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The Allowance for Doubtful Accounts schedule is presented below:

Debit Credit Balance

January 1, 2006 P 3,658

October 21, 2006, Uncollectible;

Marlisa Co., - P324; Abonales Co.,

- P 820; Cherryl Co., - P564 P 1,508 2,150

December 31, 2006, 5% of P197,000 P 9,850 12,000

An aging schedule of the accounts receivable as of December 31, 2006 and the decision are

shown in the table below:

Age Net Debit Balance Amount to which the Allow.

is to be adjusted after adjust.

____________ _________________ and corrections have been made

0 – 1 month P 93,240 1 percent

1 – 3 months 76,820 2 percent

3 – 6 months 22,180 3 percent

over 6 months 6,000 Definitely uncollectible, P1,000;

P2,000 is considered 50% uncollec-

tible; the remainder is estima-

ted to be 80% collectible.

There is a credit balance in one account receivable (0-1 month) of P2,000; it represents an

advance on a sales contract. Also, there is a credit balance in one of the 1-3 months

accounts receivable of P500 for which merchandise will be accepted by the customer.

The ledger accounts have not been closed as of December 31, 2006. The Accounts

Receivable control account is not in agreement with the subsidiary ledger. The difference

cannot be located, and the auditor decides to adjust the control to the sum of the

subsidiaries after corrections are made.

Questions

1. The adjusted balance of accounts receivable of MATIAS CORPORATION at December 31,

2006 is:

a. P 199,740 b. P 199,540 c. P 198,300 d. P 198,100

2. The adjusted write-off of accounts receivable balance of MATIAS CORPORATION at


a. P 2,708.00 b. P 2,508.00 c. P 2,384.00 d. P 1,708.00

3. The adjusted allowance of bad debts account of MATIAS CORPORATION at December 31,

2006 is:

a. P 4,980.60 b. P 4,964.20 c. P 4,780.60 d. P 4,764.20

4. The bad debts expense per book of MATIAS CORPORATION at December 31, 2006 is:

a. P 9,850.00 c. P 4,764.20

b. P 6,359.80 d. Cannot be determined

5. The adjusted bad debts expense of MATIAS CORPORATION at December 31, 2006 is:

a. P 3,814.20 b. P 3,614.20 c. P 3,490.20 d. P 2,814.20

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6. The entry to adjust the account of Marlisa Company is:

a. Bad debts 324 c. Allow. for BD 324

Allow. for BD 324 Bad debts 324

b. Bad debts 324 d. Accounts receiv. 324

Accounts receivable 324 Bad debts 324

7. The entry to reconcile the accounts receivable control ledger to subsidiary ledger is:

a. Accounts receivable 1,440 c. Accounts receiv. 1,440

Allow. for BD 1,440 Misc. income 1,440

b. Allow. for BD 1,440 d. No adjustment

Accounts receivable 1,440

8. The net realizable value of accounts receivable of MATIAS CORPORATION at December

31, 2006 is:

a. P 194,975.80 b. P 194,775.80 c. P 193,335.80 d.P193,319.40

Solution

Per PER SUBSIDIARY LEDGERS Control

Acct.

0-1 mo.

1-3 mos

3-6 mos. Over

6 mos.

Total Bal. before adjustments P 197,000 P 93,240 P 76,820 P 22,180 P 6,000 P 198,240 Adjustments: Add(Deduct)

(2) Correction to 10.31.02 entry to write-off uncollectible accts.

(200)

(3) Write-off of acct. considered definitely uncollectible

( 1,000)

(1,000)

(1,000)

(4) Reclassification of credit balances

2,500

2,000

500

2,500

P 198,300 P 95,240 P 77,320 P 22,180 P 5,000 P 199,740 (5) To adjust the control acct. to agree with SL

1,440

Adjusted balance P 199,740 Audit adjustments as of 12.31.06 (1) Bad Debts expense 324 Allowance for doubtful accounts 324 (2) Allowance for doubtful accounts 200 Accounts Receivable 200 (3) Allowance for doubtful accounts 1,000 Accounts Receivable 1,000 (4) Accounts Receivable 2,500 Customer’s Accounts with Credit Balances 2,500 (5) Accounts Receivable 1,440 Miscellaneous Revenue 1,440 (6) Allowance for Doubtful Accounts 6,359.80 Bad Debts Expense 6,359.80

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Required allowance on 12.31.06 0-1 mo. P 95,240 x 1% P 952.40 1-3 mos. 77,320 x 2 % 1,546.40 3-6 mos. 22,180 x 3% 665.40 Over 6 mos. 3,000 x 20% 600.00 2,000 x 50% 1,000.00 P 4,764.20 Beg. balance 3,658.00 + Provision per audit (squeezed figure)

3,490.20

- Write-off 2,384.00 Ending balance 4,764.20

Provision per book 9,850.00 Provision per audit 3,490.20 Adjustment 6,359.80 Answer: 1. A 2. C 3. D 4. A 5. C 6. A 7. C 8. A

Problem 7

You are auditing the Accounts Receivable and the related Allowance for Bad Debts account

of ROY COMPANY. The following data are available:

Accounts Receivable, general ledger balance P 848,000

Allowance for bad debts:

Beginning balance P 20,000

Provision per general ledger 48,000

Write-offs ( 16,000)

Balance, end P 52,000

Summary of Aging Schedule

The summary of the subsidiary ledger as of December 31, 2006, was totaled as follows:

Debit balances:

Under on month P 360,000

One to six months 368,000

Over six months 152,000

P 880,000

Credit balances:

Almario P 8,000 - OK; additional billing in

January 2004

Peter 14,000 – Should have been credited

To Manuel Co. - 1-6 mos.

classification.

Bituin 18,000 - Advance on a sales contract

P 40,000

The customers’ ledger is not in agreement with the accounts receivable control. The client

instructs the auditor to adjust the control to the subsidiary ledger after corrections are

made.

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ALLOWANCE FOR DOUBTFUL ACCOUNTS

It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six

months are expected to require a reserve of 2 percent. Accounts over six months are

analyzed as follows:

Definitely bad P 48,000

Doubtful (estimated to be 50% collectible) 24,000

Apparently good, but slow (90% collectible) 80,000

Total P152,000

Questions

1. The entry to adjust the account of Almario is:

a. Accounts receivable 8,000 c. Accounts receivable 8,000

Sales 8,000 Cust. with Cr. bal. 8,000

b. Sales 8,000 d. No adjustment


2. The entry to adjust the account of Peter is:





3. The entry to adjust the account of Bituin is:





4. The entry to reconcile the control ledger to the subsidiary ledger is:

a. Miscellaneous loss 8,000 c. Accounts receivable 8,000

Accounts receivable 8,000 Sales 8,000

b. Accounts receivable 8,000 d. Sales 8,000

Miscellaneous gain 8,000 Accounts receivable 8,000

5. The entry to adjust the Bad Debts Expense is:

a. Bad Debts Expense 74,680 c. Bad Debts Expense 30,680

Allow. for BD 74,680 Allow. for BD 30,680

b. Bad Debts Expense 26,680 d. No adjustment

Allow. for BD 26,680

6. The Accounts Receivable balance at December 31, 2006 is:

a. P 840,000 b. P 826,000 c. P 818,000 d. P 786,000

7. The Allowance for Bad Debts at December 31, 2006 is:

a. P 74,680 b. P 48,000 c. P 30,680 d. P 26,680

8. The Bad Debts Expense at December 31, 2006 is:

a. P 74,680 b. P 48,000 c. P 30,680 d. P 26,680

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Solution * (1) Accounts receivable 8,000 Sales 8,000 (2) Accounts receivable 14,000 Accounts receivable 14,000 * (3) Accounts receivable 18,000 Customers’ deposit 18,000 (4) Allowance for bad debts 48,000 Accounts receivable 48,000 * (5) Miscellaneous losses 8,000 Accounts receivable 8,000 To reconcile control account with subsidiary ledger. (6) Bad debts 26,680 Allowance for bad debts 26,680 * ignored in the aging of AR

Aging of AR Control Under 1 to 6 Over 6 Account 1 mo. mos. mos. Unadjusted balance 848,000 360,000 368,000 152,000 (1) 8,000 (2) - (14,000) (3) 18,000 (4) (48,000) (48,000) (5) ( 8,000) ______ _______ _______ Adjusted balance 818,000 360,000 354,000 104,000 Under 1 mo. 360,000 x 1% = 3,600 1 to 6 mos. 354,000 x 2% = 7,080 Over 6 mos.

24,000 x 50% = 12,000 80,000 x 10% = 8,000 Required allowance for bad debts 30,680 Provision for bad debts per audit:

Beginning balance 20,000 + Provision – squeezed figure 74,680 - Write-off per book 16,000 - Additional Write-off 48,000 Ending balance 30,680

Provision per book 48,000 Provision per audit 74,680 Adjustment 26,680 Answer: 1. A 2. D 3. C 4. A 5. B 6. C 7. C 8. A

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Problem 8

KAREN COMPANY’s accounts receivable subsidiary ledger shows the following information:

Invoice

Customer Account Balance – 12/31/06 Date Amount

Penas P 70,360 12/06/06 P 28,000

11/29/06 42,360

Jefferson 41,840 09/27/06 24,000

08/20/06 17,840

Junsay 61,200 12/08/06 40,000

10/25/06 21,200

Cherryl 90,280 11/17/06 46,280

10/09/06 44,000

Baron 63,200 12/12/06 38,400

12/02/06 24,800

Riza 34,800 09/12/06 34,800

The estimated bad debt rates below are based on Karen Company’s receivable collection

experience.

Age of Accounts Rate

0 – 30 days 1%

31 – 60 days 1.5%

61 – 90 days 3%

91 – 120 days 10%

Over 120 days 50%

The allowance for bad debts account had a credit balance of P7,000 on December 31, 2006,

before adjustment.

Questions

1. The adjusted Accounts Receivable balance of KAREN COMPANY at December 31, 2006

is:

a. P 317,680 b. P 319,320 c. P 326,880 d. P 361,680

2. The adjusted balance of Allowance for Bad Debts of KAREN COMPANY at December 31,

2006 is:

a. P 9,698.80 b. P 10,188.80 c. P 12,397.60 d. P 19,397.60

3. The adjusted balance of Bad Debts Expense of KAREN COMPANY at December 31, 2006

is:

a. P 9,698.80 b. P 10,188.80 c. P 12,397.60 d. P 19,397.60

4. The net realizable value of Accounts Receivable of KAREN COMPANY at December 31,

2006 is:

a. P 342,282.40 b. P 349,282.40 c. P 307,482.40 d. P 314,482.40

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Solution Aging of AR Balance 0-30 31-60 61-90 91-120 Over 120 12/31/06 Days Days Days Days Days Penas P 70,360 28,000 42,360 Jefferson 41,840 24,000 17,840 Junsay 61,200 40,000 21,200 Cherryl 90,280 46,280 44,000 Baron 63,200 63,200 Riza 34,800 ______ ______ ______ 34,800 _____ Total P361,680 131,200 88,640 65,200 58,800 17,840 x % of uncollectibility 1% 1.5% 3% 10% 50%

Required Allowance 1,312 1,329.60 1,956 5,880 8,920 = P 19,397.60

Bad debts expense 12,397.60 Allowance for bad debts 12,397.60 (P19,397.60 – P7,000) Answer: 1. D 2. D 3. C 4. A

Problem 9

You are assigned to audit KENT COMPANY for the year ending December 31, 2006. The

accounts receivable were circularized as at December 31, 2006 and the following

exceptions/replies have not been disposed of at the date of your examination.

Customer Balance Comments Audit Findings

Duque P 30,000 Balance was paid Dec. Kent received mailed

29, 2006. January 2, 2007.

Odessa 74,000 Balance was offset by our Kent credited accounts

Dec. 10 shipment of goods. payable for P74,000 to

record purchase of goods

Solejon 16,200 The above balance has The payment was

been paid. Credited to Dairen – cust.

Rubin 23,700 We do not owe Kent any- The shipment costing

thing as the goods were P16,300 was made on

received January, 2007, Dec. 29, 2006 and the

FOB Destination goods were not included

in recording the year-end

inventory.

Jamea 150,000 Our deposit of P200,000 Kent had previously

should cover this balance credited the deposit to

sales.

Ocsio 54,000 We never received these The shipment was erro-

goods. neously made to another

customer and the goods

worth P51,000 are now

on its way to Ocsio. The

shipment, FOB Shipping

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Point, was made on Dec.

30, 2006.

Dela Cruz 100,000 We are rejecting the price, Kent’s clerk erroneously

which is too much computed the unit price

at P2,000. The correct

pricing should have been

at P1,200 per unit.

Ronel 18,000 Amount is okay. Since Goods cost P12,000 and

this is on consignment, we were appropriately inclu-

will remit payment upon ded in Kent’s inventory

selling the goods.

KENT COMPANY has not recorded yet its 2006 inventory. The balance of inventory and

Accounts Receivable at December 31, 2006 (per trial balance) is P 456,000 and P345,900,

respectively.

Questions

1. The entry to adjust the finding made in the account of Duque is:

a. Cash 30,000 c. Accounts receivable 30,000

Accounts receivable 30,000 Cash 30,000

b. Cash 30,000 d. No adjustment

Sales 30,000

2. The entry to adjust the finding made in the account of Odessa is:

a. Purchases 74,000 c. Accounts payable 74,000

Accounts receivable 74,000 Accounts receivable 74,000


Purchases 74,000

3. The entry to adjust the finding made in the account of Solejon is:


Accounts receivable 16,200 Accounts payable 16,200

b. Accounts payable 16,200 d. No adjustment


4. The entry to adjust the finding made in the account of Rubin is (for sales):

a. Sales 23,700 c. Accounts receivable 23,700

Accounts receivable 23,700 Sales 23,700

b. Accounts payable 23,700 d. No adjustment

Purchases 23,700

5. Entry to adjust the finding made in the account of Rubin is (for cost of sales):

a. Cost of sales 16,300 c. Retained earnings 16,300

Inventory 16,300 Inventory 16,300

b. Inventory 16,300 d. No adjustment

Cost of sales 16,300

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6. The entry to adjust the finding made in the account of Jamea is:

a. Customers’ advances 150,000 c. Sales 200,000

Sales 150,000 Customers’ advances 50,000


b. Customers’ advances150,000 d. Sales 150,000

Accounts receivable 150,000 Customers’ advances 150,000

7. The entry to adjust the finding made in the account of Ocsio is:

a. No adjustment c. Sales 54,000


b. Accounts receivable 51,000 d. Sales 3,000

Sales 51,000 Accounts receivable 3,000

8. The entry to adjust the finding made in the account of Dela Cruz is:

a. Accounts receivable 40,000 c. Sales 60,000

Sales 40,000 Accounts receivable 60,000



9. The adjusted balance of Kent Company’s inventory at December 31, 2006 is:

a. 451,700 b. P 460,300 c. P 472,300 d. P 484,300

10. The adjusted balance of Kent Company’s accounts receivable at December 31, 2006 is:

a. P 37,200 b. P 55,200 c. P 187,200 d. P 205,200

Solution For Doque No adjustment For Odessa Accounts payable 74,000 Accounts receivable 74,000 For Solejon Accounts receivable 16,200 Accounts receivable 16,200 For Rubin Sales 23,700 Accounts receivable 23,700

Inventory 16,300 Cost of sales 16,300 For Jamea Sales 200,000

Customers’ advances 50,000 Accounts receivable 150,000 For Ocsio. Sales 3,000 Accounts receivable 3,000 For dela Cruz Sales 40,000 Accounts receivable 40,000 For Ronel Sales 18,000 Accounts receivable 18,000

Unadjusted Inventory 456,000 Unadjusted AR 345,900 Adjustment - Rubin 16,300 Adjustment - Odessa ( 74,000) - Solejon - - Rubin ( 23,700) - Jamea (150,000) - Ocsio ( 3,000) - dela Cruz ( 40,000) _________ - Ronel ( 18,000) Adjusted balance 472,300 Adjusted balance 37,200

Answer: 1. D 2. C 3. A 4. A 5. B 6. C 7. D 8. B 9. C 10. A

16

Problem 10

You have been assigned to audit the financial statement MALAQUI INCORPORATED. The

company is a distributor of a variety of electronic appliances and parts. The company uses

the calendar year for reporting purposes. Information regarding balances of MALAQUI

INCORPORATED’S Accounts Receivable and the related Allowance for Doubtful Accounts as

of December 31, 2006 and the related audit finding, is given below.

The schedule of accounts receivable furnished you by the accountant reflects some errors.

The total figure in the schedule does not tally with the balance per subsidiary ledger of

P919,000. Based on your review of sales invoices, purchase orders and other related

documents, you noted the following information:

1. Sales on account of various electronics totaling P36,480 were returned by the customer

on December 28, 2006, but no entry was made in the books. The goods were included

in the year-end physical count.

2. Based on the findings per confirmation reply from a customer, he indicated that he has

already paid his account of P23,980 in October, 2006. Your verification disclosed that

said collection was credited to net sales account.

3. Collection of P12,950 on November 5, 2006 from Diana Corporation was credited to the

account of DNA Corporation.

The allowance for doubtful accounts is set at 3% of the outstanding accounts receivable at

the end of the period. As of December 31, 2006, the Allowance for Doubtful Accounts has a

balance of P32,400 before adjustment.

Questions

1. What is the adjusted balance of Accounts Receivable as of December 31, 2006?

a. P 919,000 b. P 895,020 c. P 882,520 d. P 858,540

2. What is the adjusted balance of Allowance for Doubtful Accounts as of December 31,

2006?

a. P 27,570.00 b. P 26,850.60 c. P 26,475.60 d. P 25,756.20

Solution Sales 36,480 Accounts receivable 36,480 Sales 23,980 Accounts receivable 23,980 Answer: 1. D 2. D

Problem 11

You audit of APAS COMPANY for the year 2006 disclosed the following:

1. The December 31 inventory was determined by a physical count on December 28 and

based on such count, the inventory was recorded by:

Inventory 1,400,000

Cost of sales 1,400,000

2. The 2006 ledger shows a sales balance of P20,000,000.

3. The company sells a mark-up of 20% based on sales.

17

4. The company recognizes sales upon passage of title to the customers.

5. All customers are within a four-day delivery area.

The sales register for December, 2006 and January, 2007, showed the following details:

December Register

Invoice No. FOB Terms Date Shipped Amount

300 Destination 12/30 P 50,000

301 Shipping point 12/30 62,500

302 Destination 12/23 47,500

303 Destination 12/24 82,500



January Register

Invoice No. FOB Terms Date Shipped Amount

306 Destination 12/29 67,500


308 Destination 01/02 140,000



Questions

1. The Sales for December is over/(under) by:

a. P 36,000 under c. P 106,000 under

b. P 36,000 over d. P 106,000 over

2. The Inventory for December is over/(under) by:

a. P 235,600 under c. P 181,600 under

b. P 235,600 over d. P 181,600 over

3. The adjusted inventory at December 31, 2006 is:

a. P 1,645,412 b. P 1,635,600 c. P 1,218,400 d. P 1,164,400

4. The adjusted sales at December 31, 2006 is:

a. P 20,106,000 b. P 20,036,000 c. P 19,964,000 d. P 19,894,000

5. How much sales for the month of December 2006 were erroneously recorded in January

2007?

a. P 282,000 b. P 272,500 c. P 198,000 d. P 142,000

6. How much sales for the month of January 2007 were erroneously recorded in December

2006?

a. P 228,500 b. P 188,500 c. P 180,500 d. P 106,000

Solution (1) Sales 50,000 Accounts receivable 50,000 Invoice # 300

18

(2) Cost of sales 50,000 Inventory 50,000 (62,500 x 80%) Invoice # 301 (3) Sales 56,000 Accounts receivable 56,000 Invoice # 304 (4) Cost of sales 72,000 Inventory 72,000 (90,000 x 80%) Invoice # 305 (5) Accounts receiv. 74,500 Sales 74,500 Invoice # 307 (6) Cost of sales 59,600 Inventory 59,600 (74,500 x 80%) (7) Accounts receiv. 67,500 Sales 67,500 Invoice # 310

Unadjusted Sales 20,000,000 Unadjusted inventory 1,400,000 (1) ( 50,000) (2) ( 50,000)

(3) ( 56,000) (4) ( 72,000) (5) 74,500 (6) ( 59,600) (7) 67,500 _________ Adjusted Sales 20,036,000 Adjusted inventory 1,218,400

Sales for the month of December that 2003 were erroneously recorded in January 2004: Invoice # 307 74,500 Invoice # 310 67,500 Total 142,000 Sales for the month of January 2004 were erroneously recorded in December 2003: Invoice # 300 50,000 Invoice # 304 56,000 Total 106,000 Answer: 1. A 2. D 3. C 4. B 5. D 6. D

Problem 12

You are engaged to perform an audit of the accounts of the JELLER CORPORATION for the

year ended December 31, 2006, and have observed the taking of the physical inventory of

the company on December 27, 2006. Only merchandise shipped by the Durian Corporation

to customers up to and including December 27, 2006 have been removed or excluded from

inventory. The inventory as determined by physical inventory count has been recorded on

the books by the company’s controller. No perpetual inventory records are maintained. All

sales are made on an FOB shipping point basis.

The following lists of sales invoices are entered in the sales books for the months of

December 2006 and January 2007, respectively.

Sales Invoices

Date Amount Date Shipped

December 2006 (a) 12/23/06 P 25,000 12/31/06

(b) 12/27/06 18,000 12/27/06

(c) 12/30/06 30,000 01/05/07

19

(d) 12/22/06 12,000 01/08/07

(e) 12/28/06 16,000 12/29/06

(f) 12/03/06 8,000 12/05/06

(g) 12/31/06 20,000 01/07/07

(h) 12/31/06 14,000 12/31/06

January 2007 (i) 12/31/06 7,500 12/29/06

(j) 12/27/06 11,000 01/04/07

(k) 01/08/07 9,000 01/09/07

(l) 01/10/07 5,000 12/31/06

Questions

1. How much sales for month of December 2006 were erroneously recorded in January

2007?

a. P 7,500 b. P 12,500 c. P 18,500 d. P 20,000

2. How much sales for the month of January 2007 were erroneously recorded in December

2006?

a. Zero b. P 12,500 c. P 20,000 d. P 62,000

3. How much is the correct amount of sales for the month ended December 31, 2006?

a. P 143,000 b. P 155,500 c. P 93,500 d. P 81,000

Solution (1) B Item (I)P7,500 and Item (l), P5,000 P12,500 (2) D Items c, d, g P62,000 (3) C Recorded sales for December P143,000

December sales recorded in January 12,500 January sales recorded in December (62,000) Adjusted sales for December P 93,500

Problem 13

On September 1, DY COMPANY assigns specific receivables totaling P750,000 to Davao Bank

as collateral on a P625,000, 12% note. DY COMPANY will continue to collect the assigned

accounts receivable. Davao Bank also assesses a 2% service charge on the total accounts

receivable assigned. DY COMPANY is to make monthly payments to Davao Bank with cash

collected on assigned accounts receivable. Collections of assigned accounts during

September totaled P260,000 less cash discounts of P3,500.

Questions

1. What were the proceeds from the assignment of DY COMPANYs’ accounts receivable on

September 1?

a. P 610,000 b. P 612,500 c. P 625,000 d. P 735,000

2. What amount is owed to Davao Bank by DY COMPANY for September collections plus

accrued interest on the note to September 30?

a. P 260,000 b. P 262,750 c. P 264,000 d. P 266,250

Solution (1) A P625,000 – (2% x P750,000) P610,000 (2) B P260,000 – P3,500 + (P625,000 x 12% x 1/12) P262,750

20

Problem 14

On April 1, 2006, VAILOCES CORPORATION assigned accounts receivable totaling P400,000

as collateral on a P300,000, 16% note from Racel Bank. The assignment was done on a

nonnotification basis. In addition to the interest on the note, the bank also receives a 2%

service fee, deducted in advance on the P300,000 value of the note.

Additional information is as follows:

1. Collections of assigned accounts in April totaled P191,100, net of a 2% sales discount.

2. On May 1, VAILOCES CORPORATION paid the bank the amount owed for April collections

plus accrued interest on note to May 1.

3. The remaining accounts were collected by VAILOCES CORPORATION during May except

for P2,000 accounts written-off as worthless.

4. On June 1, VAILOCES CORPORATION paid the bank the remaining balance of the note

plus accrued interest.

Questions

1. The journal entry of VAILOCES CORPORATION in the assignment of accounts receivable

on April 1, 2006 is:

a. Cash 294,000 c. Cash 294,000

Finance charges 6,000 Finance charges 6,000

Accounts receivable 300,000 Notes payable 300,000

b. Cash 294,000 d. Cash 294,000

Finance charges 6,000 Commission exp. 6,000

AR – assigned 300,000 AR – assigned 300,000

2. The journal entry of VAILOCES CORPORATION in the assignment of accounts receivable

on April 1, 2006 assuming the assignment is on notification basis:

a. Cash 294,000 c. Cash 294,000

Finance charges 6,000 Finance charges 6,000

Accounts receivable 300,000 Notes payable 300,000

b. Cash 294,000 d. Cash 294,000

Finance charges 6,000 Commission exp. 6,000

AR – assigned 300,000 AR – assigned 300,000

3. The entry of VAILOCES CORPORATION on April collection of the assigned account is:

a. Cash 191,100 c. Cash 191,100

Sales discounts 3,900 Sales discounts 3,900

AR – assigned 195,000 Accounts receivable 195,000

b. Cash 191,100 d No journal entry


4. If the assignment is on notification basis, who should collect the assigned accounts

receivable?

a. Vailoces Corporation c. A third party

b. Racel Bank d. It is the option of the customer to

whom he/she will pay the account

21

5. Using the assumption in number 4 above, what will be the entry of VAILOCES

CORPORATION on the April collection of the assigned accounts receivable?

a. Cash 191,100 c. Cash 191,100

Sales discounts 3,900 Sales discounts 3,900

AR – assigned 195,000 Accounts receivable 195,000

b. Cash 191,100 d No journal entry


6. The journal entry of VAILOCES CORPORATION on the on May 1, 2006 is:

a. Notes payable 187,100 c. Notes payable 188,500

Interest expense 4,000 Interest expense 2,600

Cash 191,100 Cash 191,100

b. Notes payable 195,000 d. Notes payable 195,000


Cash 200,333 Cash 199,000

7. Using the same information in number 6 (May 1 transaction) except that the assignment

is done on a notification basis, the entry should be:

a. Notes payable 187,100 c. Notes payable 188,500


Accounts receivable 191,100 AR –assigned 191,100

b. Notes payable 195,000 d. No journal entry

Interest expense 4,000

AR - assigned 199,000

8. The total interest expense of VAILOCES CORPORATION on the assigned accounts

receivable is:

a. P 5,400 b. P 8,066 d. P 10,000 c. P 11,400

Solution April 1 Accounts receivable – assigned 400,000 Accounts receivable 400,000 1 Cash 294,000 Finance charges (300,000 x 2%) 6,000 Notes payable 300,000 (1) Cash 191,100 Sales discounts 3,900 AR – assigned (191,100/98%) 195,000 (2) Notes payable 195,000 Interest expense 4,000

(300,000 x 16% x 1/12) Cash 199,000 (3) Cash 203,000 Allowance for bad debts 2,000 AR – assigned 205,000 (400,000 – 195,000) (4) Notes payable (300,000 – 195,000)105,000 Interest expense 1,400 (105,000 x 16% x 1/12) Cash 106,400

Answer: 1. C 2. C 3. A 4. B 5. D 6. D 7. B 8. A

22

Problem 15

UY FINANCE CORPORATION purchases the accounts receivable of other companies on a

without recourse, notification basis. At the time the receivables are factored, 15% of the

amount factored is charged to the client as commission and recognized as revenue in UY’S

books. Also, 10% of the receivables factored is withheld by Uy as protection against sales

returns or other adjustments. This amount credited by Uy to the client Retainer account.

At the end of each month, payments are made by Uy to its clients so that the balance in the

Client Retainer account is equal to 10% of unpaid factored receivables. Based on Uy’s bad

debt loss experience, an allowance for bad debts of 5% of all factored receivables is to be

established, Uy makes adjusting entries at the end of each month.

On January 3, 2003, Jannette Company factored its accounts receivable totaling

P1,000,000. By January 31, P800,000 on these receivables had been collected by Uy.

Questions

1. The commission earned of Uy Finance Corporation from Jannette Company’s accounts

receivable factored is:

a. P 150,000 b. P 120,000 c. P 135,000 d. P 90,000

2. The proceeds received by Jannette Company on the accounts factored is:

a. P 810,000 b. P 780,000 c. P 765,000 d. P 750,000

3. How much is the Client Retainer account of Uy Finance Corporation at January 31, 2003

is:

a. P 0 b. P 20,000 c. P 60,000 d. P 80,000

4. How much is the bad debts expense of Uy Finance Corporation at January 31, 2003 is:

a. P 50,000 b. P 40,000 c. P 20,000 d. P 0

Solution UY FINANCE CORPORATION’S BOOKS Jan. 3 Accounts receivable factored 1,000,000 Commission income (P1 M x 15%) 150,000 Client Retainer (P1 M x 10%) 100,000 Cash 750,000

31 Cash 800,000 Accounts receivable factored 800,000 31 Client Retainer 80,000 Cash (100,000 – [10% x 200,000]) 80,000 31 Bad debts expense 50,000 Allowance for bad debts (P1 M x 5%) 50,000 JANETTEE COMPANY’S BOOKS Jan. 3 Cash 750,000 Receivable from factor 100,000 Commission 150,000 Accounts receivable 1,000,000 31 Cash 80,000 Receivable from factor 80,000 Answer: 1. A 2. D 3. B 4. A

23

Problem 16

During your audit of the LEILANI COMPANY for the calendar year 2006, you find the

following accounts:

NOTES RECEIVABLE

Sept. 1 Samson, 12%, due in 3 mos. 36,000 36,000

Nov. 1 Hazel, 15%, due in 6 mos. 90,000 126,000

Nov. 1 Salazar, no interest, due in one

year

75,000

201,000

Nov. 30 Rosa, Co. 12%, due in 13 mos. 15,000 216,000

Dec. 1 Rona, 15%, due in 15 mos. 36,000 252,000

Dec. 2 Anito, President, 18%, due in 3

mos.

18,000

270,000

NOTES RECEIVABLE DISCOUNTED

Sept. 1 Samson note, discounted at

15%

36,000 36,000

Nov. 1 Salazar note, discounted at

15%

75,000 111,000

INTEREST EXPENSE

Sept. 1 Samson note 310.50 310.50

Nov. 1 Salazar note 11,250.00 11,560.50

All notes are trade notes receivable unless otherwise specified. The Samson note was paid

December31, 2006. Interest income is credited only upon receipt of cash.

Questions

1. The accrued interest income at December 31, 2006 is:

a. P 2,748 b. P 3,018 c. P 3,120 d. P 4,200

2. The interest expense at December 31, 2006 is:

a. P 1,875.00 b. P 2,185.50 c. P 4,060.50 d. P 11,560.50

3. The Notes Receivable at December 31, 2006 is:

a. P 141,000 b. P 159,000 c. P 216,000 d. P 252,000

4. The Notes Receivable – discounted at December 31, 2006 is:

a. P 63,750 b. P 73,125 c. P 75,000 d. P 111,000

5. How much is the proceeds in the discounting of notes receivable for the year?

a. P 99,439.50 b. P 100,060.50 c. P 111,000.00 d. P 111,310.50

Solution 1. C

Hazel 90,000 x 15% x 2/12 = P 2,250 Rosa 15,000 x 12% x 1/12 = 150 Rona 36,000 x 15% x 1/12 = 450 Anito 18,000 x 18% x 1/12 = 270 Total accrued interest P 3,120

2. B Samson = P 310.50 Salazar 11,250 x 2/12 = 1,875.00 Total interest expense = P2,185.50

24

3. A Hazel 90,000 Rosa 15,000 Rona 36,000 Total 141,000 4. C Salazar 75,000 5. A Samson P 36,000 – P 310.50 = P 35,689.50 Salazar P 75,000 – P11,250 = 63,750.00 Total proceeds = P 99,439.50

Problem 17

On January 1, 2006, TUQUIB COMPANY sells its equipment with a carrying value of

P160,000. The company receives a non-interest-bearing note due in 3 years with a face

amount of P200,000. There is no established market value for the equipment. The

prevailing interest rate for a note of this type is 12%. The following are the present value

factors of 1 at 12%:

Present value of 1 for 3 periods 0.71178

Present value of an ordinary annuity of 1 for 3 periods 2.40183

Questions

1. The gain or loss on the sale of equipment is:

a. P 40,000 b. P 122 c. P 0 d. (P 17,644)

2. The discount on notes receivable is:

a. P 57,644 b. P 40,000 c. P 39,878 d. P 0

3. The entry to record the sale of equipment is:

a. Notes receivable 200,000 c. Notes receivable 200,000

Equipment 200,000 Loss on sale 17,644

Equipment 160,000

Discount on NR 57,644

b. Notes receivable 200,000 d. Notes receivable 200,000

Equipment 160,000 Equipment 160,000

Gain on sale 40,000 Gain on sale 122

Discount on NR 39,878

4. The discount amortization at the end of the second year using the effective-interest

amortization is:

a. P 17,083 b. P 19,133 c. P 21,428 d. P 36,216

5. The entry to record the discount amortization is:

a. Discount on NR c. Interest income

Interest income Discount on NR

b. Discount on NR d. Interest expense

Interest expense Discount on NR

Solution 1. D

Sales price – present value of note (P200,000 x 0.71178) 142,356 Book value of equipment 160,000 Loss on sale of equipment (17,644)

25

2. A Face value of note 200,000

Present value of note 142,356 Discount on notes receivable 57,644 3. C Notes receivable 200,000 Loss on sale of equipment 17,644 Equipment 160,000 Discount on notes receivable 57,644 4. B Present value of note, 1/1/03 142,356 Add: Interest earned in 2003 (142,356 x 12%) 17,083 Present value of note, 1/1/04 159,439 Add: interest earned in 2004 (159,439 x 12%) 19,133 Present value of note, 1/1/05 178,572 5. A

Problem 18

On January 2, 2006, a tract of land that originally cost P800,000 was sold by MAYLENE

CORPORATION. The company received a P1,200,000 note as payment. It bears interest

rate of 4% and is payable in 3 annual installments of P400,000 plus interest on the

outstanding balance. The prevailing rate of interest for a note of this type is 10%. The

present value table shows the following present value factors of 1 at 10%:

Present value factor of 1 for 3 periods 0.75132

Present value factor of 1 for 2 periods 0.82645

Present value factor of 1 for 1 period 0.90909

Present value of an ordinary annuity of 1 for 3 periods 2.48685

Questions

1. The gain on sale of land on January 2, 2006 is:

a. P 194,740 b. P 276,847 c. P 290,740 d. P 400,000

2. The interest income on the note receivable for the year ended December 31, 2006 using

effective interest method is:

a. P 120,000 b. P 109,074 c. P 107,685 d. P 99,474

3. How much cash will MYLENE CORPORATION received from notes receivable?

a. P 1,076,847 b. P 1,200,000 c. P 1,296,000 d. P 1,476,847

Solution Amount of cash to be received:

Interest Principal Total 2003 48,000 * 400,000 448,000 2004 32,000 ** 400,000 432,000 2005 16,000 *** 400,000 416,000 Total 1,296,000

* 1,200,000 x 4% ** 800,000 x 4% *** 400,000 x 4%

Cash received PV Factor Present Value 2003 448,000 0.90909 407,272 2004 432,000 0.82645 357,026 2005 416,000 0.75132 312,549 Total 1,076,847

26

Present value of note 1,076,847 Cost of land 800,000 Gain on sale 276,847 Interest income for 2006 – P1,076,847 x 10% = P107,685 Answer: 1. B 2. C 3. C

Problem 19

The balance sheet of PERSEVERANCE CORPORATION on December 31, 2005, includes the

following cash and receivable balances:

Cash – Davao Bank P 45,000

Currency and coins 16,000

Petty cash fund 1,000

Cash in bond sinking fund 15,000

Notes receivable (including discounted with

recourse, P15,500) 36,500

Accounts receivable P 85,600

Less: Allow. for bad debts (4,150) 81,450

Interest receivable 525

Current liability reported in the December 31, 2005, balance sheet included:

Obligation on discounted notes receivable 15,500

Transactions during 2006 included the following:

1. Sales on account were P767,000.

2. Cash collected on accounts totaled P576,500, including accounts of P93,000 with cash

discounts of 2%.

3. Notes received in settlement of accounts totaled P82,500.

4. Notes receivable discounted as of December 31, 2005, were paid at maturity with the

exception of one P3,000 note on which the company had to pay the bank P3,090, that

included interest and protest fees. It is expected that recovery will be made on this note

early in 2004.

5. Customer notes of P60,000 were discounted with recourse during the year, proceeds

from their transfer being P58,500. Of this total, P48,000 matured during the year

without notice of protest.

6. Customer accounts of P8,720 were written-off in prior year as worthless.

7. Recoveries of doubtful accounts written-off in prior years were P2,020. (not included in

the collection in number 2)

8. Notes receivable collected during the year totaled P27,000 and interest collected was

P2,450.

27

9. On December 31, accrued interest on notes receivable was P630.

10. Uncollectible accounts are estimated to be 5% of the December 31, 2006, accounts

receivable balance.

11. Cash of P35,000 was borrowed from Davao Bank, accounts receivable of P50,000 being

pledged on the loan. Collections of P19,500 had been made on these receivables

included in the total given in transaction (2) and this amount was applied on December

31, 2006, to payment of accrued interest on the loan of P600, and the balance to partial

payment of the loan.

12. Petty cash fund was reimbursed based on the following analysis of expenditure

vouchers:

Travel expenses P 112

Entertainment expenses 78

Postage 93

Office supplies 173

Cash over 6

13. P3,000 cash was added to the bond sinking fund.

14. Currency on hand at December 31, 2006 was P12,000.

15. Total cash payment for all expenses during the year were P468,000. Charge to General

Expense

Based on the information above and some other analysis, answer the following questions:

Questions

1. PERSEVERANCE CORPORATION’s Cash balance at December 31, 2006 is:

a. P 269,430 b. P 265,430 c. P 252,430 d. P 219,930

2. PERSEVERANCE CORPORATION’s Accounts Receivable balance at December 31, 2006 is:

a. P178,8787.00 b. P 178,824.50 c. P176,804.50 d. P174,254.50

3. PERSEVERANCE CORPORATION’s Other Cash Item (Currency and coins & Petty Cash

Fund) at December 31, 2006 is:

a. P 16,000 b. P 13,000 c. P 12,550 d. P 12,000

4. PERSEVERANCE CORPORATION’s Notes Receivable at December 31, 2006 is:

a. P 46,500 b. P 31,000 c. P 30,910 d. P 28,500

5. PERSEVERANCE CORPORATION’s Obligation of Discounted of Note Receivable at


a. P 15,500 b. P 12,000 c. P 11,910 d. P 3,500

6. PERSEVERANCE CORPORATION’s Interest Receivable at December 31, 2006 is:

a. P 2,555 b. P 1,155 c. P 630 d. P 525

7. PERSEVERANCE CORPORATION’s Bad debts at December 31, 2006 is:

a. P 16,005.20 b. P 13,875.50 c. P 11,855.50 d. P 11,825.50

28

8. PERSEVERANCE CORPORATION’s Allowance for bad debts at December 31, 2006 is:

a. P 9,406.50 b. P 9,305.50 c. P 9,252.00 d. P 4,150.00

9. PERSEVERANCE CORPORATION’s Sales balance at December 31, 2006 is:

a. P 767,000 b. P 765,140 c. P 765,102 d. P 757,330

10. PERSEVERANCE CORPORATION’s Interest income balance at December 31, 2006 is:

a. P 3,086 b. P 3,080 c. P 2,561 d. P 2,555

Solution

(1) Accounts receivable 767,000 Sales 767,000 (2) Cash 576,500 Sales discounts 1,860 Accounts receivable 576,360 (3) Notes receivable 82,500 Accounts receivable 82,500 (4) Obligation on discounted note 12,500 Notes receivable 12,500 Accounts receivable 3,090 Cash 3,090 Obligation on discounted note 3,000 Notes receivable 3,000 (5) Cash 58,500 Interest expense 1,500 Obligation on discounted note 60,000 Obligation on discounted note 48,000 Notes receivable 48,000 (6) Allowance for bad debts 8,720 Accounts receivable 8,720 (7) Accounts receivable 2,020 Allowance for bad debts 2,020 Cash 2,020 Accounts receivable 2,020 (8) Cash 27,000 Notes receivable 27,000 Cash 2,450 Interest receivable 525 Interest income 1,925 (9) Interest receivable 630 Interest income 630 (10) Bad debts 11,855.50 Allowance for bad debts 11,855.50 (11) Cash 35,000 Notes payable 35,000 Interest expense 600 Notes payable 18,900 Cash 19,500 (12) Operating expenses 456 Cash 456 Cash 6 Other income 6 (13) Sinking fund 3,000 Cash 3,000 (14) No entry

(15) General expenses 468,000 Cash 468,000 Answer: 1. A 2. C 3. B 4. D 5. B 6. C 7. C 8. B 9. B 10. D

29

Problem 20

You are engaged in your fifth annual examination of the financial statements of NAVAL

CORPORATION. Your examination is for the year ended December 31, 2006. The client

prepared the following schedule of Trade Notes Receivable and Interest Receivable for you

at December 31, 2006. You have agreed the opening balances to your prior year’s audit

workpapers.

NAVAL CORPORATION

TRADE NOTES RECEIVABLE AND RELATED INTEREST RECEIVABLE

Trade-Notes Receivable

Maker Date Terms Int.

Rate

Bal.

12/31/05

2006

debits

2006

credit

Bal.

12/31/06

Rubin

Co.

04/01/05 1-year 12% P 60,000 P 60,000

Cardoza 05/01/06 90 days

after date

- P 30,000 29,375 P 625

Pancho 07/01/06 60 days

after date

12% 6,000 6,000

Betque 08/03/06 Demand 12% 15,000 15,000

Gabuter

o

10/02/06 60 days

after date

12% 50,000 50,000 -

Noval 11/01/06 90 days

after date

8% 42,000 35,000 7,000

Gan 11/01/06 90 days

after date

12% 32,000 32,000

INTEREST RECEIVABLE

Due from Balance 2006 debit 2006 credit Balance

12/31/06

Rubin Co. P 5,400 P 1,800 P 7,200

Pancho 120 P 120

Betque 400 400

Gabutero 1,000 660 340

Noval 560 560

Gan ___________ 640 ___________ 640

Totals P 5,400 P 4,520 P 7,860 P 2,060

Your examination reveals this information:

1. Interest is computed on a 360-day basis. In computing interest, it is the corporation’s

practice to exclude the first day of the note’s term and to include the due date.

2. The Cardoza’s 90-day non-interest bearing note was discounted on May 15 at 10%, and

the proceeds were credited to the Trade Notes Receivable account. The note was paid

at maturity.

3. Pancho became bankrupt on August 31, and the corporation will recover 75 cents on the

peso. All of Naval Corporation’s notes receivable provide for interest at a rate of 12% on

the maturity value of a dishonored note.

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4. Betque, president of Naval Corporation, confirmed that she owed Naval Corporation

P15,000 and that she expected to pay the note within six months. You are satisfied that

the note is collectible.

5. Gabutero’s 60-day note was discounted on November 1 at 8%, and the proceeds were

credited to the Trade Notes Receivable and Interest Receivable accounts. On December

2, Naval Corporation received notice from the bank that GAbutero’s note was not paid at

maturity and that it had been charged against Naval’s checking account by the bank.

Upon receiving the notice from the bank, the bookkeeper recorded the note and the

accrued interest in the Trade Notes Receivable and Interest Receivable account.

Gabutero paid Naval Corporation the full amount due in January 2003.

6. Noval, 90-day note was pledged as collateral for P35,000, 60-day 10% loan from the

Davao National Bank on December 1.

7. On November 1, the corporation received four, P8,000, 90-day notes from Gan. On

December 1, the corporation received payment from Gan for one of the P8,000 notes

with accrued interest. Prepayment of the notes is allowed without penalty. The

bookkeeper credited the Gan’s Accounts Receivable account for the cash received.

Questions

1. At December 31, 2006, the note receivable from Cardoza has a balance of:

a. P 30,000 b. P 29,375 c. P 625 d. P 0

2. The interest income from Cardoza’s note at December 31, 2006 is:

a. P 750 b. P 625 c. P 500 d. P 0

3. At December 31, 2006, the note receivable from Pancho has a balance of:

a. P 6,370.92 b. P 6,366.00 c. P 6,120 d. P 0

4. The interest income from Pancho’s note at December 31, 2006 is:

a. P 370.92 b. P 250.92 c. P 246 d. P 0

5. At December 31, 2006, the note receivable from Betque has a balance of:

a. P 15,350 b. P 15,000 c. P 14,650 d. P 0

6. At December 31, 2006 the note receivable from Gabutero has a balance of:

a. P 150,000 b. P 100,000 c. P 50,000 d. P 0

7. At December 31, 2006 the note receivable from Noval has a balance of:

a. P 42,000 b. P 35,000 c. P 7,000 d. P 0

8. At December 31, 2006 the note receivable from Gan has a balance of:

a. P 32,480 b. P 32,000 c. P 24,000 d. P 23,950

9. The total Note Receivable – Trade at December 31, 2006 is:

a. P 89,000 b. P 81,000 c. P 72,366 d. P 66,000

10. The total Interest Receivable at December 31, 2006 is:

a. P 2,300 b. P 2,060 c. P 1,950 d. P 1,790

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Solution

Adjusting Entries as of Dec. 31, 2006 (2) Cardoza (a) Interest Expense 625.00 Trade Notes receivable 625.00

Maturity Value = Face Value P30,000 Discount (30,000 x 10% x 75/360) 625 Proceeds P29,375

(3) Pancho (b) Accounts Receivable 6,370.92 Trade Notes Receivable 6,000.00 Interest Receivable 120.00 Interest Revenue 250.92

Face Value P6,000.00 Interest (6000 x 12% x60/360) 120.00 Maturity value P6,120.00 Add.’l interest from due date , 8.30.06 to 12.31.06 (6,120 x 12% x 123/360)

250.92

Total amount due, 12.31.06 P6,370.92

(4) Betque © Notes receivable- Officers 15,000 Interest Receivable 350 Interest Revenue 350

Trade Notes Receivable 15,000 Accrued Interest as of 12.31.06

(15,000 x 12% x 150/360) = P750

(5) Gabutero OE: Cash

Notes Receivable Interest Receivable CE: Cash NR – Discounted Interest income (d) Adj: Notes Receivable Interest Receivable Interest income NR – discounted -----------------------------------------

50,660 50,660 50,000 660 -----------

50,000 660 50,000 660 660 50,000 ----------

OE: Notes Receivable Interest Receivable Cash CE: Accounts Receivable Cash NR – discounted Notes Receivable

50,000 1,000 51,000 50,000

51,000 51,000 50,000

(e) Accounts Receivable

NR – discounted 51,000 50,000

Trade Notes Receivable 100,000 Interest Receivable 1,000

Face Value P50,000 Interest (50,000 x 12% x 60/360) 1,000 Maturity Value P51,000 Discount (50,000 x 8% x 30/360) 340 Proceeds P50,660

(f) Accounts Receivable 510 Interest Revenue 510 (51,000 x 12% x 30/360)

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(6) Noval (g) Trade Notes Receivable 35,000 Notes Payable- bank 35,000 (7) Gan (h) Accounts Receivable 8,080 Trade Notes Receivable 8,000 Interest Revenue 80 (8,000 x 12% x 30/360) = P80 (I) Interest revenue 160 Interest Receivable 160 (Accrued Interest as of 12.31.06

24,000 x 12% x 60/360) = P480

ANSWER: 1. D 2. D 3. D 4. A 5. B 6. D 7. A 8. C 9. D 10. D

chapter 4 audit of receivables

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