CHARIS MARIE F. URGEL
BSA – IV “RECEIVABLES”
PROBLEM NO. 1 - Composition of trade and other receivable On December 31, 2015 the accounts receivable control account ofipil- ipil Co. had a balance of P181,000. An analysis of the account; receivable account showed the following: Accounts known to be worthless P 2,500 Advance payments to creditors on purchase orders 10,000 Advances to affiliated companies 25,000 Customers' accounts reporting credit balance arising from sales return (15,000) Interest receivable on bonds 10,000 Other trade accounts receivable - unassigned 50,000 Subscriptions receivable for ordinary share capital due 55,000 in 30 days Trade accounts receivable - assigned Trade installment receivable duel - 18 months, (including unearned finance charges, P2,000)
15,000
Trade receivables from officers, due currently Trade accounts on which post-dated checks are held (no entries were made on receipts of checks) Total
1,500
22,000
5,000 P 181,000
REQUIRED: Determine the trade and other receivables to be reported on the entity's December 31, 2015 statement of financial position. SOLUTION: Items included: Trade accounts receivable (see computation below) Advance payments to creditors on purchase orders Interest receivable on bonds Subscriptions receivable due in 30 days Trade and other receivables
`
91,500 10,000 10,000 55,000 166,500
Composition of trade accounts receivable: Other trade accounts receivable – unassigned Trade accounts receivable - assigned Trade installment receivable due 1 – 18 months, net of unearned finance charges of P2,000 Trade receivables from officers due currently Trade accounts on which post-dated checks are held (no entries were made on receipts of checks) Trade accounts receivable Items not included: Accounts known to be worthless Advances to affiliated companies Customers' account with credit balance
50,000 15,000 20,000 1,500 5,000 91,500
2,500 Write off 25,000 Noncurrent investment (15,000) Trade and other payables
PROBLEM NO. 2 - Computation of adjusted accounts receivables. In the audit of Beatles Company, the auditor had an appreciation of the following schedule and noted some comments for possible adjustments: Beatles Company Accounts Receivable Schedule December 31, 2015 Customer Love M. Do Strawberry Fields This Boy Company Girl Corporation Ticket To Ride 'Transport Corp. Let It Be Corp. Hex' Jude Get Back Company Yesterday Corp. Totals
Balance P92,000 420,000 350,00 374,000 160,000 124,000 4,000 256,000 240,000 P2,020,000
Current P 248,000 92,000 212,000 60,000 . 80,000 240,900 P936,000
Past Due P92,000 172,000 258,000 162,000 160,000 64,000 4,000 176,000 Pl,084. 000
The Accounts Receivable control account balance was determined to be P2,020,000. The external auditor submitted the following audit comments for possible adjustments: Love M. Do Merchandise found defective; returned by customer on October 31, 2015 for credit, but the credit memo was issued by Beatles only on January 15, 2016.
Strawberry Fields
Account is good but usually pays late.
This Boy Company
Merchandise worth P160,000. was destroyed while in transit on May 31, 2015, terms FOB Destination. The carrier was billed on June 15, 2015. (See Ticket To Ride Corp. and Yesterday Corp.)
Girl Corporation
Customer billed twice in error for P40,000. Balance is collectible.
Ticket To Ride
Collected in full on January 31, Corp. 2016
Let It Be Corp.
Paid in full on December 30, 2015 but not recorded. Collections were deposited on January 2, 2016.
Hey Jude
Received account confirmation from customer for P44,000. Investigation revealed an erroneous credit for P40,000. (See Get Back Company)
Get Back Company
Neglected to post P40,000 credit to customer's account.
Yesterday Corp.
Customer wants to know reason for receipt of P160,00() credit memo as their accounts payable balance was P400,000.
REQUIRED: 1. Adjusting entries as of December 31, 2015. 2. Adjusted balance of Accounts Receivable - Trade as of December 31, 2015. SOLUTION: Requirement No. 1 1) Love M. Do Sales returns 92,000 Accounts receivable 2) Strawberry Fields No Entry
92,000
3) This Boy Company No Entry
4) Girl Corporation Sales
40,000 Accounts receivable
40,000
5) Ticket To Ride Corp. Accounts receivable-Nontrade Accounts receivable
160,000 160,000
6) Let It Be Corp Cash
124,000 Accounts receivable
124,000
7) Hey Jude No Entry 8) Get Back Company No Entry 9) Yesterday Corp No Entry
Requirement No. 2 Unadjusted balance Add (Deduct) adjustments: No. 1 No. 4 No. 5 No. 6 Adjusted balance
2,020,000 (92,000) (40,000) (160,000) (124,000) 1,604,000
PROBLEM NO. 3 – Audit of accounts receivable and related accounts In connection with the of the financial statements of Praktis Corporation, your audit senior instructed you to examine the company's accounts receivable. Prior to any adjustments you were able to extract the following balances from Praktis' trial balance as of December 31, 201.5: Accounts receivable Allowance for doubtful accounts
P442,500 15,000
From the schedule of accounts receivable as of December 31, 2015, you determined that this account includes the following: Accounts with debit balances: 60 days old and below P 238,500 61 to 90 days 117,200 Over 90 days 85,400 P 441,100 Advances to officers 16,400 Accounts with credit balance (5,999) Accounts receivable per GL P 442,500 The credit balance in customer's account represents collection from a customer whose account had been written-off as uncollectible in 2014. Accounts receivable for more than a year totaling P21,000 should be written off. Confirmation replies received directly from customers disclosed the following exceptions: Customer Jessie
Customer's Comments The goods sold on December 1 were returned December 16, 2015.
Robert
We do not owe this amount *%#@ (bad word). We did not receive any merchandise from your company.
Customer
customer’s comments
Audit Findings The client failed to record on credit memo no. 23 for P12,000. The merchandise Was included in ending inventory At cost. investigation revealed that goods goods sold P16,000 were shipped to Robert on December 29, 2015 terms FOB shipping point. The goods were lost in transit and the shipping company has knowledge its responsibility for the lost of merchandise. audit findings
Ann
I am entitled to a 10% employee discount. Your bill should be reduced by P1,200.
Anne is an employee of Praktiscompany, starting November 2015, employees were Entitled to a special discount.
Jay-ar We have not yet sold the goods. We will remit the proceeds as soon as the goods are sold.
Merchandise billed for P18,000 were consigned to Jay-ar on December 30, 2015. The goods cost P13,000.
Roy
The sale of merchandise on December 18, 2015 was paid by Roy on January 6, 2016.
We do not owe you P20,000. We already paid our accounts as evidenced by OR # 1234.
Carla Reduce your bill by P1,500
This amount represents freight paid by the customer for the merchandise shipped on December 17, 2015, terms, FOB destination-collect.
Based on your discussion -with PraktIS Credit Manager, you both agreed that an allowance for doubtful accounts should be maintained using the following rates: 60 days old and below 61 to 90 days Over 90 days
1% 2% 5%
REQUIRED: 1. Compute for the adjusted balances of following: a. Accounts receivable P 387, 400 b. Allowance for doubtful accounts
P 7,622
2. Adjusting entries as of December 31, 2015 SOLUTION: a. Accounts receivable
Per Books 442,500
1 2 3 4 5
Adjustments (16,400) 15,000 (21,000) (12,000) (1,200)
Per Audit 387,400
60 days old and below
238,500
61 to 90 days Over 90 days
117,200 85,400
b. Allowance for doubtful accounts 7,622
6 7
(18,000) (1,500)
4 5 6 7
(12,000) (1,200) (18,000) (1,500)
3
15,000
Adjusting Entries: 1. Advances to officers and employees Accounts receivable
(21,000) 2
3 8
205,800
117,200 64,400
15,000 (21,000) (1,378)
16,400 16,400
2. Accounts receivable 15,000 Allowance for doubtful accounts Erroneous recording of recovery from written off account
15,000
3. Allowance for doubtful accounts Accounts receivable (>90 days) Accounts that should be written off
21,000 21,000
4. Net sales Accounts receivable (<60 days) Unrecorded credit memo
12,000
5. Net sales Accounts receivable (<60 days) Unrecorded employee discount
1,200
6. Net sales Accounts receivable (<60 days)
18,000
12,000
1,200
18,000
Inventory Cost of sales Goods out on consignment erroneously billed
13,000 13,000
7. Freight out Accounts receivable (<60 days) Unrecorded freight-out
1,500
8. Allowance for doubtful accounts Doubtful accounts expense
1,378
1,500
60 days old and below 205,800 1% 61 to 90 days 117,200 2% Over 90 days 64,400 5% Required allowance Balance per books before this adjustment (15,000+15,000-21,000) Adjustment
1,378 2,058 2,344 3,220 7,622 9,000 1,378
PROBLEM NO. 4 - Audit of allowance for doubtful accounts Professional Company produces paints and related products for sale to the construction industry throughout Metro Manila. While sales have remained relatively stable despite a decline in the amount of new construction, there has been a noticeable change in the timeliness with which the company's customers are paying their bills. The company sells its products on payment terms of 2/10, n/30. In the past, over 75 percent of the credit customers have taken advantage of the discount by paying within 10 days of the invoice date. During the year ended December 31, 2015, the number of customers taking the full 30 days to pay has increased. Current indications are that less than 60% -of the customers are now taking the discount. Uncollect.ible accounts as a percentage of total credit sales have risen from the 1.5% provided in the past years to 4% in the current year. In response to your request for more information on the deterioration of accounts receivable collections, the company's controller has prepared the following report: Professional Company Accounts Receivable Collections December 31, 2015 The fact that some credit accounts will prove uncollectible is normal, and annual bad debt write-offs had been 1.5% of total credit sales for many years. However, during the
year 2015, this .percentage increased to 4%. The accounts receivable balance is P1,500,000, and the condition of this balance in terms of age and probability of collection is shown below: Proportion to total
Age of accounts
64% 18% 8% 5% 3% 2%
1 - 10 days 11 - 30 days Past due 31 - 60 days Past due. 61 - 120 days Past due 121 - 180 days Past due over 180 days
Probability of Collection 99.0% 97.5% 95.0% 80.0% 65.0% 20.0%
At the beginning of the year, the Allowance for Doubtful Accounts had a credit balance of 1'27,300. The company has provided for a monthly bad debt expense accrual during the year based on the assumption that 4% of total credit sales will be uncollectible. Total credit sales for the year 2015 amounted to P8,000,000, and write-offs of unc011ectible accounts during the year totaled P292,500. REQUIRED: 1. Adjusted balance of the allowance for doubtful accounts as of December 31, 2015 2. The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of December 31, 2015 SOLUTION: Requirement No.1 Category 1 – 10 days 11 – 30 days 31 – 60 days 61 – 120 days 121 – 180 days over 180 days
Aging ratio 64% 18% 8% 5% 3% 2% 100%
Requirement No. 2 Doubtful accounts expense Allowance for doubtful accounts
AR Balance Rate Allowance 960,000 1.00% 9,600 270,000 2.50% 6,750 120,000 5.00% 6,000 75,000 20.00% 15,000 45,000 35.00% 15,750 30,000 80.00% 24,000 1,500,000 77,100
22,300 22,300
Allowance for doubtful accounts, 1/1 Add provisions (P8,000,000 x 4%) Total Less accounts written-off Balance before adjustment Required allowance (see no. 1) Additional required allowance for doubtful accounts
27,300 320,000 347,300 292,500 54,800 77,100 22,300
PROBLEM NO. 5 - Analysis of accounts receivable and related accounts The Poster Co. sells direct to retail customers and also to wholesalers. Accounts receivable and an allowance for had debts are maintained separately for each division. On January 1, 2015 the balance of the retail accounts receivable was P209,000 while the bad debts with respect to retail customers was a credit of P7,600. The following summary pertains only to retail sales since 2012: Credit Sales 2012 2013 2014 2015
P1,110,000 1,225,000 1,465,000 1,500,000
Bad Debts Written off P26,000 29,500 30,000 31,000
Bad Debts. Recoveries P2,150 3,750 3,600 4,200
Bad debts are provided for as a percentage GI credit sales. The accountant calculates the percentage annually by using the experience of the three years prior to the current year. The formula is bad debts written off less recoveries expressed as a percentage of the credit sales for the same period. Cash receipts in 2015 from credit sales to retail customers was P1,380,200. REQUIRED: Determine the following: 1. Adjusted accounts receivable as of December 31, 2015 2. Adjusted allowance for doubtful accounts as of December 31, 2015 SOLUTION: Requirement No. 1. Accounts receivable, 1/1/12 Credit sales for 2012 Collections during 2012 Accounts written off - 2012 Accounts receivable, 12/31/12
209,000 1,500,000 (1,380,200) (31,000) 297,800
Requirement No. 2 Allowance for doubtful accounts, 1/1/12 Doubtful accounts expense - 2012 (see computation below) Accounts written off - 2012 Recovery of accounts written off - 2012 Allowance for doubtful accounts, 12/31/12
7,600 30,000 (31,000) 4,200 10,800
Computation of doubtful accounts expense - 2012: Doubtful accounts expense for 2012 (P1,500,000 x 2%)
30,000
Computation of bad debt rate: Year Credit sales 2009 1,110,000 2010 1,225,000 2011 1,465,000 3,800,000
AR writen-off 26,000 29,500 30,000 85,500
Net accounts written off (2009 to 2011) Divide by credit sales (2009 to 2011) Percentage of uncollectible accounts to charge sales
Recoveries 2,150 3,750 3,600 9,500
Net 23,850 25,750 26,400 76,000
76,000 3,800,000 2.00%
PROBLEM NO. 6 - Audit of accounts receivable and related accounts In connection with your examination of the financial statements of Ringo, Inc. for the year ended December 31, 2015, you were able to obtain certain information during your audit of the accounts receivable and related accounts. • The December 31, 2015 balance in the Accounts Receivable control accounts is P837,900. • An aging schedule of the accounts receivable as of December 31, 2015 is presented below: Net debit Percentage to be applied after Aging Balance correction have been made 60 days & under P387,800 1 percent 61 to 90 days 307,100 2 percent 91 to 120 days 89,800 5 percent Over 120 days 53,200 Definitely uncollectible, P9,000; k the remainder is estimated to be P837,900 25% uncollectible.
• The Allowance for Doubtful Accounts schedule is presented below: Debit January 1, 2015 November 30, 2015 December 31, 2015 (P837,900 x 5%)
Credit
P6,100 P41,895
Balance P19,700 13,600 P55,495
• Entries made to Doubtful Accounts Expense account were: 1 A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts. 2. A credit Or P6,100 on November 30, 2015, and a debit to Allowance for Doubtful Accounts because of a bankruptcy. The related sales took place on October 1, 2015. • There is a credit balance in one account receivable (61 to 90 days) of P11,000; it represents an advance on a sales contract. REQUIRED: 1. Determine the following as of and for the year ended December 31, 2015: a. Accounts receivable b. Allowance for doubtful account c. Doubtful accounts expense 2. Adjusting entries as of December 31, 2015 SOLUTION: Requirement No. 1.a Unadjusted balances Add (deduct) adjustments: AJE No. 1 AJE No. 2 AJE No. 3 Adjusted balances Requirement No. 1.b Age of accounts 60 61 to 90 91 to 120 over 120
GL/SL 60 837,900 387,800 (9,000) (6,100) 11,000 833,800 387,800
balance 387,800 318,100 83,700 44,200 833,800
61 to 90 307,100
91 to 120 89,800
over 120 53,200 (9,000)
(6,100) 11,000 318,100
Rate 1% 2% 5% 25%
83,700
44,200
Allowance 3,878 6,362 4,185 11,050 25,475
Requirement No. 1.c Unadjusted allowance for doubtful accounts Add (deduct) adjustments: AJE no. 1 AJE no. 4 (squeeze) Required allowance (see no. 1.b) Balance per books (P41,895 - P6,100) Add (deduct) adjustments: AJE no. 2 AJE no. 4 Doubtful accounts expense per audit
55,495 (9,000) (21,020)
(30,020) 25,475 35,795
6,100 (21,020)
Requirement No. 2 Adjusting journal entries: 1. Allowance for doubtful accounts Accounts receivable - over 120 days To write off definitely uncollectible accounts
(14,920) 20,875
9,000 9,000
2. Doubtful account expense 6,100 Accounts receivable - 91 to 120 days To correct entry made in recording accounts written off 3. Accounts receivable - 61 to 90 days Advances from customers To reclassify advances from customers
11,000
4. Allowance for doubtful accounts Doubtful account expense To adjust allowance to required balance
21,020
6,100
11,000
21,020
PROBLEM NO. 7 - Analysis of notes receivable and related accounts The balance sheet of Yoko Corporation reported the following long-term receivables as of December 31, 2014: Note receivable from sale of plant P6, 000,000 Note receivable from officer 1,600,000 In connection with your audit, you were able to gather the following transactions during 2015 and other information pertaining to the company's long-term receivables:
a. The note receivable from sale of plant bears interest at 12% per annum. The note is payable in 3 annual installments of •P2,000„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) Less installment due on April 1, 2013 Note receivable from officer, due 12/31/14 Note receivable from sale of equipment
4,000,000 2,000,000
2,000,000 1,600,000
Present value of note, 4/1/12 (P800,000 x 0.797) Discount amortization-2012 (P637,600 x 12% x 9/12) Note receivable from sale of land Balance, 12/31/12 Less principal installment due on 7/1/13 Total amount to be received Less interest (P2,800,000 x 11%) Total noncurrent receivables, 12/31/12
637,600 57,384 2,800,000 594,500
694,984
2,205,500 6,500,484 308,000 6,192,484
Requirement No. 2 Note receivable from sale of plant due on 4/1/13 Note receivable from sale of land (see no. 1) Current portion of long-term receivables
2,000,000 594,500 2,594,500
Requirement No. 3 Note receivable from sale of plant (P4,000,000 x 12% x 9/12) Note receivable from sale of land (P2,800,000 x 11% x 6/12) Accrued interest receivable, 12/31/12
360,000 154,00 514,000
Requirement No. 4 Note receivable from sale of plant: P6,000,000 x 12% x 3/12 180,000 P4,000,000 x 12% x 9/12 360,000 Note receivable from officer (P1,600,000 x 10%) Note receivable from sale of equipment (P637,600 x 12% x 9/12) Note receivable from sale of land (P2,800,000 x 11% x 6/12) Interest income
540,000 160,000 57,384 154,000 911,384
PROBLEM NO. 8 - Audit of notes receivable and related accounts On January 1, 2015, Pedro Company sold land that originally cost P400,00() to Buyer Company. As payment, Buyer gave Pedro Company a P600,000 note. The note bears an interest rate of 4% and is to be repaid in three annual installments of P200,000 (plus interest on the outstanding balance). The first payment is due on December 3'1, 2015. The market price of the land is not reliably determinable. The prevailing rate of interest for notes of this type is 14% on January 1, 2015 and 15% on December 31, 2015. Pedro made the following journal entries in relation to the sale of land and the related note receivable: January 1, 2015 Notes receivable P600, 000 Land P400, 000 Gain on sale of land 200,000
December 31, 2015 Cash
P224,000
Notes receivable 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 Carrying amount of land Correct gain on sale of land
503,105 (400,000) 103,105
Present value of cash flows to determine initial CA: Date Principal Interest (4%) Total PVF (14%) 12/31/12 200,000 24,000 224,000 0.8772 12/31/13 200,000 16,000 216,000 0.7695 12/31/14 200,000 8,000 208,000 0.6750 600,000
PV, 1/1/12 196,493 166,212 140,400 503,105
Requirement No. 1.b Amortization schedule using effective interest method: Date EI (14%) NI (4%) Disc. Amort. Repayment 1/1/12 12/31/12 70,435 24,000 46,435 200,000 12/31/13 48,936 16,000 32,936 200,000 12/31/14 25,524 8,000 17,524 200,000 Interest income - 2012 (P503,105 x .1)
70,435
Requirement No. 1.c Gain on sale of land - overstated (P200,000 - P10 Interest income for 2012 - understated (P70,435 -
96,895 (46,435)
PV, 12/31/12 189,475 160,056 349,531
AC 503,105 349,540 182,476 -
Net overstatement of 2012 profit Requirement No. 1.d Carrying amount, 12/31/12
50,460 349,540
Requirement No. 1.e Amount reported as notes receivable 400,000 Correct current portion of NR (P349,540 - P182,47 Overstatement of CA/working capital
167,064 232,936
PROBLEM NO. 9 - Audit of notes receivable and related accounts My Love Corporation is a local company engaged in buying and selling manufacturing equipment. On 1 January 2014, My Love Corporation sold equipment, with a cash price of P1, 500,000, to Silly Love Company. The cost of the equipment is P750,000. Silly Love signed a deferred payment contract that provides for a down payment of P300,000 and a 5-year note for P1,705,900. The note is to be paid in 5 equal annual payments of P341, 180. The payments include interest and are made on) December 31 of each year, beginning on December 31, 2014. My Love Corporation made the following entries in relation to the sale of the equipment and the related note receivable: January 1, 2014 P Cash Notes receivable Cost of goods sold Sales Inventory
300,000 1,705,900 750,000 P2, 005,900 750,000
December 31 2014 Cash Notes receivable
P341, 180
December 31 2015 Cash Notes receivable
P341, 180
P341, 180
P341, 180
My Love Corporation reported the notes receivable in its statement of financial position at December 31, 2014 and 2015 as part of trade and other receivables. REQUIRED: Determine the following: 1. The effective interest rate
2. Overstatement of profit for 2014 3. Overstatement of retained earnings as of December 31, 2015 4. Overstatement of working capital as of December 31, 2015 SOLUTION: Requirement No. 1 PVF used to calculate the annual payment (P1.2M/P341,180) Ordinary annuity factor at 13% for 5 periods
3.5172 3.5172
Requirement No. 2 Profit over (under) Sales – over Reported Should be Interest income –under Reported Should be Net misstatement
2,005,900 1,500,000 0 156,000
505,900
(156,000) 349,900
Requirement No. 3
2011 profit overstated (see no. 2) 2012 profit understated (interest income under) Reported Should be (refer to amortization schedule) Net misstatement Requirement No. 4 Amount reported under current assets [P1,705,900 - (P341,180 x 2)] should be Net misstatement of WC, 12/31/12 - over (under)
RE, 12/31/12 over (under) 349,900 0 131,927
(131,927) 217,973
1,023,540 236,456 787,084
Amortization schedule: Date Payment
Interest (13%)
Principal
12/31/11 12/31/12 12/31/13 12/31/14 12/31/15
156,000 131,927 104,724 73,984 39,265
185,180 209,253 236,456 267,196 301,915
341,180 341,180 341,180 341,180 341,180 1,705,900
CA 1,200,000 1,014,820 805,567 569,111 301,915 -
PROBLEM NO. 10 - Analysis of notes receivable and related accounts You are examining the financial statements of Merlyn, .Inc., for the year ended December 31, 2015. Your analysis of the 2015 entries in the Notes Receivable account follows: Merlyn, Inc. Analysis of Notes Receivable For the Year Ended December 31, 2015
Date 2015 Jan. 1
Feb. 28 Mar. 31
Aug. 30
Sept. 4
Balance Forwarded Received P25,000 6% note due 10/29/15 from Anna whose trade account was past due Discounted Anna note Received non interest-bearing demand note from Julia, the corporation's treasurer for a loan
debit P118,000
24,960
6,200
Received principal and interest due from Robinson in accordance with agreement, two principal payments in advance Paid protest fee on note dishonored by Pepper
credit
34,200
500
Nov. 1
Date 2015 Nov. 4
Dec. 27
Dec. 31
Received check dated 2/1/16 in settlement of Tripper note. The check was included in cash on hand 1.2/31/15
8,120
Debit Paid protest fee and maturity value of Anna note to bank. Note discounted 2/28/15 was dishonored.
Credit
26,031
Accepted equipment with a fair market value of P24,000 in full settlement from Anna
24,000
Received check dated 1./2/16 from Julia in payment of 3/31/15 note. (The cash was included in petty cash until 1/2/16 when it was returned to Julia in exchange for new demand note for the same amount.)
Dec. 31
Received principal and interest on Pepper note
Dec. 31
Accrued interest on Robinson note
6,200
42,437
1,200 P 151, 931
P 139,917
The following information is available (1) Balances at January 1, 2015, were a debit of P1,400 in the Accrued Interest Receivable account and a credit of P400 in the Unearned Interest Income account. The P118,000 debit in the Note Receivable • account consisted the following three notes: Robinson note of 8/31/08 payable in annual installments of P10,000 principal plus accrued interest at 6% each August 31 Tripper note discounted to Merlyn, Inc. at 6% 11/1/1.4 due 11/1/15
P70,000
8,000
Pepper note for P40,000 plus 6% interest dated 12/31/14 due on 9/1/15
40,000
(2) No entries were made during 2015 to the Accrued Interest Receivable or the Unearned Interest Income account and only one entry for a credit of P1,200 on December 31., appeared in the Interest Income account. (3) All notes were from the trade customers unless otherwise indicated.
(4) Debits and credits affecting Notes Receivables were correctly recorded unless the facts indicate otherwise. REQUIRED: 1. Determine the following as of and for the year ended December 31, 2015: a. Notes receivable-trade b. Interest income 2. Adjusting entries as of December 31, 2015 SOLUTION: Requirement No. 1.a Unadjusted trade NR Add (Deduct) adjustments: 1/1 2/28 3/29 8/30 9/4 11/1 11/4
12,014
12/27 12/31 12/31 12/31 Adjusted trade NR, 12/31/12
25,000 24,960 (6,200) 4,200 (40,500) 8,120 (26,031) (25,000) 24,000 6,200 42,437 (1,200) 48,000
Composition: Robinson (P70,000 - P30,000) Tripper (received PDC on 11/1) Adjusted notes receivable-trade, 12/31/12
40,000 8,000 48,000
Notes: 1) NR from Pepper - collected on 12/31/12 2) NR from Anna - accepted equipment in full settlement on 12/27/12 3) NR from Julia - non-trade Requirement No. 1.b Robinson: Jan. to Aug. (P70,000 x .06 x 8/12) Sept. to Dec. (P40,000 x .06 x 4/12) (P8,000 x .06 x 12/12) Pepper (P42,437 - P40,500) Anna (P25,000 x .06 x 2/12) Julia (non-interest bearing) Total interest income - 2012 Requirement No. 2 1/1 Notes receivable Accounts receivable 2/28
3/29
8/30
9/4
11/1
11/4
2,800 800 3,600 Tripper 480 1,937 250 6,267
25,000 25,000
Notes receivable Loss on discounting (P25,250 - P24,960) Notes receivable - discounted Interest income (P25,000 x .06 x 2/12)
24,960 290
Notes receivable - Officers Notes receivable
6,200
Notes receivable Interest receivable Interest income
4,200
25,000 250
6,200
1,400 2,800
Notes receivable dishonored Notes receivable
500
Notes receivable dishonored Notes receivable
40,000
Notes receivable Cash Notes receivable dishonored Notes receivable
500
40,000 8,120 8,120 26,031 26,031
Notes receivable discounted Notes receivable
25,000 25,000
12/27 Notes receivable Loss on settlement of NR Notes receivable dishonored
24,000 2,031
12/31 Notes receivable Petty cash fund
6,200
12/31 Notes receivable Notes receivable dishonored Interest income
42,437
12/31 Interest receivable (P40,000 x 6% x 4/12) Interest income Notes receivable
800 400
12/31 Interest receivable (P8,000 x 6% x 2/12) Interest income 12/31 Unearned interest income Interest income
26,031
6,200
40,500 1,937
1,200 80 80 400 400
PROBLEM NO. 11 - Loan impairment Bahrain Bank granted a loan to a borrower in the amount of P10, 000,000 on January 1, 2014. The interest rate on the loan is 10% payable annually starting December 31, 2014. The loan matures in five years on December 31, 2018. Bahrain Bank incurs P130,900 of direct loan origination cost and P50,000 of indirect loan origination cost. In addition, Bahrain Bank charges the borrower a 5-point nonrefundable loan origination fee. The borrower paid the interest due on December 31, 2014. However, during 2015 the borrower began to experience financial difficulties, requiring the bank to reassess the collectability of the loan. As of December 31, 2015, the bank expects that only P8,000,000 of the principal will be recovered. The P8,000,000 principal amount is expected to be collected in two equal installments on 'December 31, 2017 and December 31, 2019. The prevailing interest rates for similar type of note as of December 31, 2014 and 2015 are 15% and 16%, respectively.
REQUIRED: Determine the following: 1. Interest income to be recognized in 2014 2. Carrying amount of the loan as of December 31, 2014 3. Loan impairment loss to be recognized in 2013 • SOLUTION: Requirement No. 1 & 2 Principal 10,000,000 Direct origination cost 130,900 Origination fee received from borrower (P10M x .05) (500,000) Carrying amount, 1/1/12 9,630,900 Amortization schedule Date 1/1/11 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15
EI(11%)
NI (10%)
1,059,399 1,065,933 1,073,186 1,081,236 1,089,346
1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Disc. Amort. 59,399 65,933 73,186 81,236 89,346
C.A. 9,630,900 9,690,299 9,756,232 9,829,418 9,910,654 10,000,000
Requirement No. 3 Carrying amount, 12/31/12 (see schedule) Less PV of expected cash flows: 12/31/14 (P4M x 0.8116) 3,246,400 12/31/16 (P4M x 0.6587) 2,634,800 Loan impairment (bad debt expense)
9,756,232
5,881,200 3,875,032
PROBLEM NO. 12 - Theory Select the best answer for each of the following 1. In the audit of which of the following general ledger accounts will tests of controls be particularly appropriate? a. Equipment b. Bank charges c. Bonds payable d. Sales ANSWER - D
2. The purpose of tests of controls over shipping is to determine whether a. Billed goods have been shipped. b. Shipments are billed. c. Shipping department personnel are competent. d. Credit is approved before goods are shipped. ANSWER - B
3. The purpose of tests of controls over billing is to determine whether a. It Billed goods have been shipped. b. Shipments are billed. c. Billing department personnel are competent. d. Credit is approved before goods are billed. ANSWER - A 4. An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of a. Existence or occurrence b. Rights and obligations c. Valuation d. Completeness ANSWER - D 5. Which of the following might be detected by an auditor's review of the client's sales cut-off? a. Excessive goods returned for credit . b. Unrecorded sales discounts c. Lapping of year-end accounts receivable d. inflated sales for the year ANSWER - D 6. An auditor who has confirmed accounts receivable may discover that the sales journal was held open past year-end if a. Positive confirmations sent to debtors are not returned b. Negative confirmations sent to debtors are not returned c. Most of the returned negative confirmations indicate that the debtor owes a larger balance that the amount being confirmed. d. Most of the returned positive confirmations indicate that the debtor owes a smaller balance than the amount being confirmed. ANSWER - D
7. The auditor finds situation in which one person has the ability to collect receivables, make deposits, issue credit memos and record receipt of payments. The auditor suspects the individual may be stealing from cash receipts. Which of the following audit procedures would be most effective in discovering fraud in this scenario? a. Send positive confirmations to a random selection of customers. b. Send negative confirmations to all outstanding accounts receivable customers. c. Perform a detailed review of debits to customer discounts, sales returns, or other debit accounts, excluding cash posted to the cash receipts journal. d. Take a sample of bank deposits and trace the detail in each bank deposit back to the entry in the cash receipts journal. ANSWER - C 8. All of the following are examples of substantive tests to verify valuation of net accounts receivable except a. The Re-computation of the allowance for bad debts. b. Inspection of accounts for current versus non-current status in the statement of financial position. c. Inspection of the aging schedule and credit records of past due accounts. d. Comparison of the allowance for bad debts with past records. ANSWER - B 9. Confirmation, which is a specific type of inquiry, is the process of obtaining a representation of information or of an existing condition directly from a third party. Two assertions for which confirmation of accounts receivable balances provides primary evidence are a. Completeness and valuation b. Rights and obligations and existence c. Valuation and rights and obligations d. Existence and completeness ANSWER – B 10. The negative request form of accounts receivable be used when the Combined Assessed Level Of Inherent and Control Risk Is a. Low b. low c. high d. High ANSWER - A
Number of Small balances is Many few few Many
consideration by the recipient is likely unlikely likely likely
11. Which of the following procedures would an auditor most likely perform for yearend accounts receivable confirmations when the auditor did not receive replies to second requests? a. Review the cash receipts journal for the month prior to year-end. b. Intensify the study of internal control concerning the revenue cycle. c. Increase the assessed level of detection risk for the existence assertion d. Inspect the shipping records documenting the merchandise sold to the debtors. ANSWER - D 12. Which of the following is the greatest drawback of using subsequent collections evidenced only by a deposit slip as an alternative procedure when responses to positive accounts receivable confirmations are not received? a. Checking of subsequent collections can never be used as an alternative auditing procedure. b. By examining a deposit slip only, the auditor does not know whether the payment is for the receivable at the balance sheet date or a subsequent transaction. c. deposit slip is not received directly by the auditor. d. A customer may not have made a payment on a timely basis. ANSWER - B
