CAFOFORO, NEIL JOY P. ESTRELLA, JOSE ENRIQUE A. PATENIO, SANDRA FAYE S. “RECEIVABLES” PROBLEM NO. 1 - Composition of trade and other receivable On December 31, 2015 the accounts receivable control account of Ipil-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) Total
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) 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 Trade and other receivables 166,500
`
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 Advances to affiliated companies 25,000 investment Customers' account with credit balance and other payables
Write off Noncurrent (15,000) Trade
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 Love M. Do P92,000 P92,000 Strawberry Fields 172,000 This Boy Company 350,00 258,000 Girl Corporation 374,000 Ticket To Ride 'Transport 160,000 160,000 Corp. Let It Be Corp. 64,000 Hex' Jude 4,000 Get Back Company 256,000 176,000 Yesterday Corp. Totals P2,020,000
Current P 420,000
Past Due 248,000 92,000
212,000
162,000 -
124,000 . 80,000 240,000 P936,000
60,000 4,000 240,900 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 account. Yesterday Corp.
Neglected to post P40,000 credit to customer's
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
5) Ticket To Ride Corp.
40,000
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
Robert
Customer's Comments Audit Findings 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. 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.
Customer Ann
customer’s comments
I am entitled to a 10% employee discount. starting Your bill should be reduced employees were
FOB shipping point. The goods were lost in transit and the shipping company has knowledge its responsibility for the lost of merchandise. audit findings Anne is an employee of Praktiscompany, November 2015,
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. We already paid our accounts as evidenced by
The sale of merchandise on December 18, 2015 was paid by Roy on January 6,
2016. OR # 1234. Carla Reduce your bill by P1,500 freight
This amount represents 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 387,400
Per Books 442,500 2 3 4
Adjustments Per Audit 1 (16,400) 15,000 (21,000) (12,000)
5 6 7 60 days old and below 205,800
238,500
(1,200) (18,000) (1,500) 4
5 6 7
61 to 90 days 117,200 Over 90 days 64,400
(12,000) (1,200) (18,000) (1,500)
117,200 85,400
b. Allowance for doubtful accounts 7,622
15,000 3 8
Adjusting Entries: 1. Advances to officers and employees Accounts receivable 16,400
3
(21,000)
2
15,000
(21,000) (1,378)
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 Accounts receivable (>90 days) 21,000 Accounts that should be written off 4. Net sales Accounts receivable (<60 days) 12,000 Unrecorded credit memo 5. Net sales
21,000
12,000
1,200
Accounts receivable (<60 days) 1,200 Unrecorded employee discount 6. Net sales Accounts receivable (<60 days) 18,000
18,000
Inventory 13,000 Cost of sales 13,000 Goods out on consignment erroneously billed 7. Freight out Accounts receivable (<60 days) Unrecorded freight-out 8. Allowance for doubtful accounts Doubtful accounts expense
1,500 1,500 1,378 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 64% 18% 8% 5% 3% 2%
Age of accounts 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 Aging ratio 1 – 10 days 64% 11 – 30 days 18% 6,750 31 – 60 days 8% 6,000 61 – 120 days 5% 15,000 121 – 180 days 3% 15,750 over 180 days 2% 24,000 100%
AR Balance 960,000 270,000 120,000 75,000 45,000 30,000
Rate 1.00%
Allowance 9,600 2.50% 5.00%
20.00% 35.00% 80.00%
1,500,000
Requirement No. 2 Doubtful accounts expense Allowance for doubtful accounts 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
77,100
22,300 22,300 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
P1,110,000
Bad Debts Bad Debts. Written off Recoveries P26,000 P2,150
2013 2014 2015
1,225,000 1,465,000 1,500,000
29,500 30,000 31,000
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 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) Divide by credit sales (2009 to 2011) Percentage of uncollectible accounts to charge sales
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 Balance January 1, 2015 November 30, 2015 13,600
Credit P19,700
P6,100
December 31, 2015 (P837,900 x 5%) P55,495
P41,895
• 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
120 Unadjusted balances 837,900 387,800 53,200 Add (deduct) adjustments: AJE No. 1 (9,000) AJE No. 2 (6,100) AJE No. 3 11,000 11,000 Adjusted balances 44,200 Requirement No. 1.b Age of accounts 60 61 to 90 91 to 120 over 120
833,800 387,800
balance 387,800 318,100 83,700 44,200 833,800
91 to 120 307,100
89,800
(9,000) (6,100)
318,100
83,700
Rate 1% 2% 5% 25%
over
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 6,100 To correct entry made in recording accounts written off 3. Accounts receivable - 61 to 90 days Advances from customers 11,000 To reclassify advances from customers
11,000
4. Allowance for doubtful accounts Doubtful account expense 21,020 To adjust allowance to required balance
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 4year 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 theinstallments 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 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) Discount amortization-2012 (P637,600 x 12% x 9/12) 694,984 Note receivable from sale of land Balance, 12/31/12 Less principal installment due on 7/1/13 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
2,000,000
637,600 57,384 2,800,000 594,500
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
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 9/12 540,000
360,000
514,000
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 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%) 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 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) 3.5172
Ordinary annuity factor at 13% for 5 periods 3.5172 Requirement No. 2 Profit over (under) Sales – over Reported Should be Interest income –under Reported Should be (156,000) Net misstatement
2,005,900 1,500,000 505,900 0 156,000 349,900
Requirement No. 3 RE, 12/31/12 over (under) 2011 profit overstated (see no. 2) 349,900 2012 profit understated (interest income under) Reported Should be (refer to amortization schedule) (131,927) Net misstatement
0 131,927 217,973
Requirement No. 4 Amount reported under current assets [P1,705,900 - (P341,180 x 2)] 1,023,540 should be 236,456 Net misstatement of WC, 12/31/12 - over (under) 787,084 Amortization schedule: Date Payment
Interest (13%)
12/31/11 12/31/12 12/31/13
156,000 131,927 104,724
341,180 341,180 341,180
Principal
CA 1,200,000 185,180 1,014,820 209,253 805,567 236,456 569,111
12/31/14 12/31/15
341,180 341,180 1,705,900
73,984 39,265
267,196 301,915
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
Received non interest-bearing demand note from Julia, the 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 dishonored by Pepper
Nov. 1
debit P118,000
Balance Forwarded Received P25,000 6% note due 10/29/15 from Anna whose trade account was past due Discounted Anna note
credit
24,960
6,200
500
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
Date 2015 Nov. 4
Debit 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 demand note for the same amount.)
Dec. 31
Credit
6,200
Received principal and interest on Pepper note
42,437
Dec. 31
Accrued interest on Robinson note 1,200 P 151, 931 The following information is available
P 139,917
(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
Pepper note for P40,000 plus 6% interest dated 12/31/14 due on 9/1/15
P70,000
8,000
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) Tripper (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 25,000 2/28
3/29
Notes receivable Loss on discounting (P25,250 - P24,960) Notes receivable - discounted Interest income (P25,000 x .06 x 2/12) 250
11/4
24,960 290 25,000
6,200 6,200 4,200 1,400 2,800
Notes receivable dishonored Notes receivable Notes receivable dishonored Notes receivable
11/1
25,000
Notes receivable - Officers Notes receivable
8/30 Notes receivable Interest receivable Interest income 9/4
800
Notes receivable Cash Notes receivable dishonored Notes receivable Notes receivable discounted
2,800 3,600 480 1,937 250 6,267
500 500 40,000 40,000 8,120 8,120 26,031 26,031 25,000
Notes receivable 12/27 Notes receivable Loss on settlement of NR Notes receivable dishonored
25,000 24,000 2,031 26,031
12/31 Notes receivable Petty cash fund 12/31 Notes receivable Notes receivable dishonored Interest income
12/31
6,200 6,200 42,437 40,500 1,937
Interest receivable (P40,000 x 6% x 4/12) Interest income Notes receivable
12/31 Interest income
800 400 1,200
Interest receivable (P8,000 x 6% x 2/12)
12/31 Unearned interest income Interest income
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 EI(11%) NI 1/1/11 12/31/11 1,059,399 9,690,299 12/31/12 1,065,933 9,756,232 12/31/13 1,073,186 9,829,418 12/31/14 1,081,236 9,910,654 12/31/15 1,089,346 10,000,000
(10%) 1,000,000
Disc. Amort. C.A. 9,630,900 59,399
1,000,000
65,933
1,000,000
73,186
1,000,000
81,236
1,000,000
89,346
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. 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
The negative request form of accounts receivable be used when
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 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 yearend. 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
