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 15,000 Trade installment receivable duel - 18 months,
(including unearned finance charges, P2,000) 22,000 Trade receivables from officers, due currently 1,500 Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks) 5,000
Total 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) ` 91,500 Advance payments to creditors on purchase orders 10,000
Interest receivable on bonds 10,000
Subscriptions receivable due in 30 days 55,000
Composition of trade accounts receivable:
Other trade accounts receivable – unassigned 50,000 Trade accounts receivable - assigned 15,000 Trade installment receivable due 1 – 18 months,
net of unearned finance charges of P2,000 20,000 Trade receivables from officers due currently 1,500 Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks) 5,000
Trade accounts receivable 91,500
Items not included:
Accounts known to be worthless 2,500 Write off
Advances to affiliated companies 25,000 Noncurrent investment Customers' account with credit balance (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 Balance Current Past Due
Love M. Do P92,000 P - P92,000
Strawberry Fields 420,000 248,000 172,000
This Boy Company 350,00 92,000 258,000
Girl Corporation 374,000 212,000 162,000
Ticket To Ride 'Transport 160,000 - 160,000
Corp. Let It Be Corp. 124,000 60,000 64,000
Hex' Jude 4,000 . 4,000
Get Back Company 256,000 80,000 176,000
Yesterday Corp. 240,000 240,900 -
Totals P2,020,000 P936,000 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 92,000 2) Strawberry Fields No Entry
3) This Boy Company No Entry
4) Girl Corporation
Sales 40,000
Accounts receivable 40,000 5) Ticket To Ride Corp.
Accounts receivable-Nontrade 160,000 Accounts receivable 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 2,020,000 Add (Deduct) adjustments:
No. 1 (92,000)
No. 4 (40,000)
No. 5 (160,000)
No. 6 (124,000)
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 P442,500
Allowance for doubtful accounts 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 Customer's Comments Audit Findings
Jessie The goods sold on December The client failed to record 1 were returned on credit memo no. 23 for December 16, 2015. P12,000. The merchandise
Was included in ending inventory At cost.
Robert We do not owe this amount investigation revealed that goods *%#@ (bad word). We did goods sold P16,000 were shipped to not receive any merchandise Robert on December 29, 2015 terms from your company. FOB shipping point. The goods were
lost in transit and the shipping company has knowledge its responsibility for the lost of merchandise.
Ann I am entitled to a 10% Anne is an employee of employee discount. Praktiscompany, starting Your bill should be reduced November 2015, employees were by P1,200. Entitled to a special discount. Jay-ar We have not yet sold the goods. Merchandise billed for P18,000
We will remit the proceeds as soon were consigned to Jay-ar on as the goods are sold. December 30, 2015.
The goods cost P13,000. Roy We do not owe you P20,000. The sale of merchandise on
We already paid our December 18, 2015 was paid accounts as evidenced by by Roy on January 6, 2016. 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 1%
61 to 90 days 2%
Over 90 days 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:
Per Books Adjustments Per Audit a. Accounts receivable 442,500 1 (16,400) 387,400
2 15,000
3 (21,000)
4 (12,000)
6 (18,000)
7 (1,500)
60 days old and below 238,500 4 (12,000) 205,800
5 (1,200)
6 (18,000)
7 (1,500)
61 to 90 days 117,200 117,200 Over 90 days 85,400 3 (21,000) 64,400
b. Allowance for doubtful accounts 15,000 2 15,000 7,622
3 (21,000)
8 (1,378)
Adjusting Entries:
1. Advances to officers and employees 16,400
Accounts receivable 16,400 2. Accounts receivable 15,000
Allowance for doubtful accounts 15,000 Erroneous recording of recovery from written off account
3. Allowance for doubtful accounts 21,000
Accounts receivable (>90 days) 21,000 Accounts that should be written off
4. Net sales 12,000
Accounts receivable (<60 days) 12,000 Unrecorded credit memo
5. Net sales 1,200
Accounts receivable (<60 days) 1,200 Unrecorded employee discount
6. Net sales 18,000
Inventory 13,000
Cost of sales 13,000
Goods out on consignment erroneously billed
7. Freight out 1,500
Accounts receivable (<60 days) 1,500 Unrecorded freight-out
8. Allowance for doubtful accounts 1,378
Doubtful accounts expense 1,378 60 days old and below 205,800 1% 2,058
61 to 90 days 117,200 2% 2,344
Over 90 days 64,400 5% 3,220
Required allowance 7,622
Balance per books before this adjustment (15,000+15,000-21,000) 9,000
Adjustment 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 Probability of Collection
64% 1 - 10 days 99.0%
18% 11 - 30 days 97.5%
8% Past due 31 - 60 days 95.0%
5% Past due. 61 - 120 days 80.0% 3% Past due 121 - 180 days 65.0%
2% Past due over 180 days 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 Aging ratio AR Balance Rate Allowance 1 – 10 days 64% 960,000 1.00% 9,600 11 – 30 days 18% 270,000 2.50% 6,750 31 – 60 days 8% 120,000 5.00% 6,000 61 – 120 days 5% 75,000 20.00% 15,000 121 – 180 days 3% 45,000 35.00% 15,750 over 180 days 2% 30,000 80.00% 24,000 100% 1,500,000 77,100 Requirement No. 2
Doubtful accounts expense 22,300
Allowance for doubtful accounts, 1/1 27,300 Add provisions (P8,000,000 x 4%) 320,000
Total 347,300
Less accounts written-off 292,500
Balance before adjustment 54,800
Required allowance (see no. 1) 77,100 Additional required allowance for doubtful accounts 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 Bad Debts Bad Debts. Written off Recoveries 2012 P1,110,000 P26,000 P2,150
2013 1,225,000 29,500 3,750
2014 1,465,000 30,000 3,600
2015 1,500,000 31,000 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, 1/1/12 209,000 Credit sales for 2012 1,500,000 Collections during 2012 (1,380,200) Accounts written off - 2012 (31,000) Accounts receivable, 12/31/12 297,800
Requirement No. 2
Allowance for doubtful accounts, 1/1/12 7,600 Doubtful accounts expense - 2012 (see computation below) 30,000 Accounts written off - 2012 (31,000) Recovery of accounts written off - 2012 4,200 Allowance for doubtful accounts, 12/31/12 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 AR writen-off Recoveries Net 2009 1,110,000 26,000 2,150 23,850 2010 1,225,000 29,500 3,750 25,750
2011 1,465,000 30,000 3,600 26,400 3,800,000 85,500 9,500 76,000
Net accounts written off (2009 to 2011) 76,000 Divide by credit sales (2009 to 2011) 3,800,000 Percentage of uncollectible accounts to charge sales 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 P19,700
November 30, 2015 P6,100 13,600
December 31, 2015 (P837,900 x 5%) P41,895 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
GL/SL 60 61 to 90 91 to 120 over 120 Unadjusted balances 837,900 387,800 307,100 89,800 53,200 Add (deduct) adjustments:
AJE No. 1 (9,000) (9,000)
AJE No. 2 (6,100) (6,100)
AJE No. 3 11,000 11,000 Adjusted balances 833,800 387,800 318,100 83,700 44,200 Requirement No. 1.b
Age of accounts balance Rate Allowance 60 387,800 1% 3,878 61 to 90 318,100 2% 6,362 91 to 120 83,700 5% 4,185 over 120 44,200 25% 11,050
Requirement No. 1.c
Unadjusted allowance for doubtful accounts 55,495 Add (deduct) adjustments:
AJE no. 1 (9,000)
AJE no. 4 (squeeze) (21,020) (30,020) Required allowance (see no. 1.b) 25,475 Balance per books (P41,895 - P6,100) 35,795 Add (deduct) adjustments:
AJE no. 2 6,100
AJE no. 4 (21,020) (14,920)
Doubtful accounts expense per audit 20,875 Requirement No. 2
Adjusting journal entries:
1. Allowance for doubtful accounts 9,000
Accounts receivable - over 120 days 9,000 To write off definitely uncollectible accounts
2. Doubtful account expense 6,100
Accounts receivable - 91 to 120 days 6,100 To correct entry made in recording accounts written off
3. Accounts receivable - 61 to 90 days 11,000
Advances from customers 11,000 To reclassify advances from customers
4. Allowance for doubtful accounts 21,020
Doubtful account expense 21,020 To adjust allowance to required balance
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 •P2,000„000 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) 4,000,000
Less installment due on April 1, 2013 2,000,000 2,000,000 Note receivable from officer, due 12/31/14 1,600,000 Note receivable from sale of equipment
Present value of note, 4/1/12 (P800,000 x 0.797) 637,600
Discount amortization-2012 (P637,600 x 12% x 9/12) 57,384 694,984 Note receivable from sale of land 2,800,000
Balance, 12/31/12
Less principal installment due on 7/1/13 594,500 2,205,500 Total amount to be received 6,500,484 Less interest (P2,800,000 x 11%) 308,000 Total noncurrent receivables, 12/31/12 6,192,484 Requirement No. 2
Note receivable from sale of plant due on 4/1/13 2,000,000 Note receivable from sale of land (see no. 1) 594,500 Current portion of long-term receivables 2,594,500 Requirement No. 3
Note receivable from sale of plant (P4,000,000 x 12% x 9/12) 360,000 Note receivable from sale of land (P2,800,000 x 11% x 6/12) 154,00
Accrued interest receivable, 12/31/12 514,000
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 9/12 360,000 540,000 Note receivable from officer (P1,600,000 x 10%) 160,000 Note receivable from sale of equipment (P637,600 x 12% x 9/12) 57,384 Note receivable from sale of land (P2,800,000 x 11% x 6/12) 154,000
Interest income 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
December 31, 2015
Cash P224,000
Notes receivable P200,000
Interest income 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 503,105
Carrying amount of land (400,000)
Correct gain on sale of land 103,105 Present value of cash flows to determine initial CA:
Date Principal Interest (4%) Total PVF (14%) PV, 1/1/12 PV, 12/31/12 12/31/12 200,000 24,000 224,000 0.8772 196,493
12/31/13 200,000 16,000 216,000 0.7695 166,212 189,475 12/31/14 200,000 8,000 208,000 0.6750 140,400 160,056
600,000 503,105 349,531
Requirement No. 1.b
Amortization schedule using effective interest method:
Date EI (14%) NI (4%) Disc. Amort. Repayment AC
1/1/12 503,105 12/31/12 70,435 24,000 46,435 200,000 349,540 12/31/13 48,936 16,000 32,936 200,000 182,476 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 96,895 Interest income for 2012 - understated (P70,435 - (46,435)
Net overstatement of 2012 profit 50,460 Requirement No. 1.d
Carrying amount, 12/31/12 349,540
Requirement No. 1.e
Amount reported as notes receivable 400,000
Correct current portion of NR (P349,540 - P182,47 167,064 Overstatement of CA/working capital 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 300,000
Notes receivable 1,705,900 Cost of goods sold 750,000
Sales P2, 005,900 Inventory 750,000 December 31 2014 Cash P341, 180 Notes receivable P341, 180 December 31 2015 Cash P341, 180 Notes receivable 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) 3.5172 Ordinary annuity factor at 13% for 5 periods 3.5172 Requirement No. 2 Profit over (under) Sales – over Reported 2,005,900 Should be 1,500,000 505,900
Interest income –under
Reported 0 Should be 156,000 (156,000) Net misstatement 349,900 Requirement No. 3 RE, 12/31/12 over (under) 2011 profit overstated (see no. 2) 349,900 2012 profit understated (interest income under)
Reported 0
Should be (refer to amortization schedule) 131,927 (131,927)
Net misstatement 217,973
Requirement No. 4
Amount reported under current assets
[P1,705,900 - (P341,180 x 2)] 1,023,540
should be 236,456
Amortization schedule:
Date Payment Interest (13%) Principal CA 1,200,000 12/31/11 341,180 156,000 185,180 1,014,820 12/31/12 341,180 131,927 209,253 805,567 12/31/13 341,180 104,724 236,456 569,111 12/31/14 341,180 73,984 267,196 301,915 12/31/15 341,180 39,265 301,915 - 1,705,900
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 debit credit
Jan. 1 Balance Forwarded Received P118,000 P25,000 6% note due 10/29/15
from Anna whose trade account was past due
Feb. 28 Discounted Anna note 24,960
Mar. 31 Received non interest-bearing
demand note from Julia, the 6,200 corporation's treasurer for a loan
Aug. 30 Received principal and interest due from Robinson in accordance
with agreement, two principal 34,200
payments in advance Sept. 4 Paid protest fee on note
Nov. 1 Received check dated 2/1/16 in settlement of Tripper note.
The check was included in cash on 8,120 hand 1.2/31/15
Date
2015 Debit Credit
Nov. 4 Paid protest fee and maturity value of Anna note to bank.
Note discounted 2/28/15 was 26,031 dishonored.
Dec. 27 Accepted equipment with a fair
market value of P24,000 in full 24,000 settlement from Anna
Dec. 31 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 6,200 demand note for the same amount.)
Dec. 31 Received principal and interest on 42,437 Pepper note
Dec. 31 Accrued interest on Robinson note 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 P70,000 interest at 6% each August 31
Tripper note discounted to Merlyn, Inc. at 6%
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 12,014
Add (Deduct) adjustments:
1/1 25,000 2/28 24,960 3/29 (6,200) 8/30 4,200 9/4 (40,500) 11/1 8,120 11/4 (26,031) (25,000) 12/27 24,000 12/31 6,200 12/31 42,437 12/31 (1,200) Adjusted trade NR, 12/31/12 48,000 Composition: Robinson (P70,000 - P30,000) 40,000 Tripper (received PDC on 11/1) 8,000
Adjusted notes receivable-trade, 12/31/12 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) 2,800
Sept. to Dec. (P40,000 x .06 x 4/12) 800 3,600 Tripper (P8,000 x .06 x 12/12) 480
Pepper (P42,437 - P40,500) 1,937 Anna (P25,000 x .06 x 2/12) 250 Julia (non-interest bearing) - Total interest income - 2012 6,267 Requirement No. 2
1/1 Notes receivable 25,000
Accounts receivable 25,000 2/28 Notes receivable 24,960
Loss on discounting (P25,250 - P24,960) 290
Notes receivable - discounted 25,000 Interest income (P25,000 x .06 x 2/12) 250 3/29 Notes receivable - Officers 6,200
Notes receivable 6,200
8/30 Notes receivable 4,200
Interest receivable 1,400
Interest income 2,800
9/4 Notes receivable dishonored 500
Notes receivable 500 Notes receivable dishonored 40,000
Notes receivable 40,000
11/1 Notes receivable 8,120
Cash 8,120
11/4 Notes receivable dishonored 26,031
Notes receivable discounted 25,000
Notes receivable 25,000
12/27 Notes receivable 24,000 Loss on settlement of NR 2,031
Notes receivable dishonored 26,031 12/31 Notes receivable 6,200
Petty cash fund 6,200
12/31 Notes receivable 42,437
Notes receivable dishonored 40,500
Interest income 1,937 12/31 Interest receivable (P40,000 x 6% x 4/12) 800 Interest income 400 Notes receivable 1,200 12/31 Interest receivable (P8,000 x 6% x 2/12) 80 Interest income 80
12/31 Unearned interest income 400
Interest income 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 EI(11%) NI (10%) Disc. Amort. C.A.
1/1/11 9,630,900 12/31/11 1,059,399 1,000,000 59,399 9,690,299 12/31/12 1,065,933 1,000,000 65,933 9,756,232 12/31/13 1,073,186 1,000,000 73,186 9,829,418 12/31/14 1,081,236 1,000,000 81,236 9,910,654 12/31/15 1,089,346 1,000,000 89,346 10,000,000 Requirement No. 3
Carrying amount, 12/31/12 (see schedule) 9,756,232 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 5,881,200 Loan impairment (bad debt expense) 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.
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
11. Which of the following procedures would an auditor most likely perform for year-end 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
