CHAPTER 4 – Audit of Receivables Problem 1
The accounts accounts receivable of FRANCO COMPANY were stated stated at P1,4 P1,467 67,0 ,000 00 in a balance balance sheet submitted su bmitted to a banker banker fo forr cr credit. edit. You are called called up upon on to aud audit it the rep report ort and, upon analysis, analysis, the asset was found to consist of the following items: Du e from customers on open accoun t Ac kn owl edged claim for damages Due from consignee consignee at billed price – cost price price bein g P22, 500 Inves estm tme ent in and advanc nce es to affil iliiate ted d company Loans to off ic ers and employees Deposi sitts with mun unic icip ipa ali littie ies s – bids for contracts Unpaid capital stoc k subscr ip ti on s Advances to cred creditors itors for merchandise merchandise pur purchased chased but not received Cash advanced to salesm sme en for tra rav velin ing g expense ses s Allowanc e for doubtf ul accoun ts
P 1,125,000 22, 500 30,000 150,0 ,00 00 13, 500 67,5 ,50 00 60, 000 24, 000 4,500 ( 30,000) P1,467,000
The am The amount ount of P1 P1,12 ,125,0 5,000 00 du due e fr from om cu custome stomers rs was the rem remaining aining bal balance ance af after ter ded deduc ucting ting accounts acco unts wi with th cre credit dit bal balances ances of P6 P6,0 ,000. 00. During your examination, you not noted ed that on December 31, the com company pany assign assigned ed P3 P300 00,00 ,000 0 of cu customer stomers’ s’ acc accou ounts nts to sec secur ure e a 17%, P240 P240,,00 000 0 note paya payable. ble. A 1% comm commissio ission n bas based ed on the ac acco counts unts assign assigned ed wa was s ch char arged ged an and d de dedu duct cted ed fr from om the ca cash sh re rece ceived ived.. Th The e cl clien ientt record recor d ed this transaction by a debit to cash and a credit to not notes es pay payable. able. Questions 1. How much much is the Ac Accounts counts Rece eceiivable (gross) bal balance ance at December 3 31? 1? a. P 759, 000 b. P 789,000 c. P 1, 101,000 d. P 1, 131, 000 2. The total total cur current rent non-trade receivable bal balance ance at December 31 31 is: is: a. P 64, 500 b. P 96,000 c. P 120,000
d. P 192,000
3. The The liabili iability ty fo forr the acc accou ounts nts rec receivable eivable – ass assiigned is: a. P 237, 000 b. P 240,000 c. P 243,000
d. P 300,000
4. The total total non non-trade -trade receivable balance balance at D December ecember 31 31 is: is: a. P 342,000 b. P 318,000 c. P 313,500
d. P 245,000
Solution (1) Claims Receiv abl e Accounts Acc ounts receiv receivable able (2) Sal es Accounts Acc ounts receiv receivable able (3) Advances to affili at ates Accounts Acc ounts receiv receivable able (4) Rece ceiva ivabl bles es - offi ffice cerrs/e s/emp mplo loye yee e Accounts Acc ounts receiv receivable able (5) Depo posi sitts for cont ntrac ractts bid iddi ding ng Accounts Acc ounts receiv receivable able
22,500 22,5 2,500 00 30,000 30,0 0,000 00 150,000 150 50,00 ,000 0 13, 3,5 500 13,5 3,500 00 67, 7,5 500 67,5 7,500 00
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(6) Sub ubsc scrripti iption on rec ecei eiva vable ble 60, 0,0 000 Accounts Acc ounts receiv receivable able 60,0 0,000 00 (7) Advances to suppliers 24,000 Accounts Acc ounts receiv receivable able 24,0 4,000 00 (8) Adv dvan anc ces to off ffic icers ers//em empl ploy oye ee 4,500 Accounts Acc ounts receiv receivable able 4,5 ,500 00 (9) Accounts receiv able 30,000 Allowance All owance for bad debts 30,0 0,000 00 (10) Accounts receiv abl e 6,000 Customers with credi t balanc e 6,000 (11) OE: Cash 237,000 Notes pay able 237,000 CE: Cash 237,000 Commi ss ssion ex pense 3,000 Notes pay able 300,000 Adj: Commi ommission ssion expense 3,0 ,000 00 Notes pay able 3,000 Unadj usted AR (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Adjusted Adjus ted balance
1,467,000 ( 22,500) ( 30,000) ( 150,000) ( 13,500) ( 67,500) ( 60,000) ( 24,000) ( 4,500) 30,000 6,000 1,1 ,131, 31,000 000
Current no Current non-trade n-trade AR Claims receiv able Advan Adva n ce ces s to off/empl ( 13,500 + 4,500) Advan Adva n ce ces s to sup suppl pl iers Total Answer: Ans wer: 1. D 2. A
Non- tr ade AR Claims receivable Advan ces to affili ates Advan ces to off/ empl ( 13,500 + 4,500) Deposi t for contracts Subscr iption receivable Advan ces to suppliers
Total
22,500 150,000 18,000 67,500 60,000 24,000
__________ 342 42,00 ,000 0
22,500 18,000 24, 4,000 000 64,500 3. B
4. A
Problem 2
In your au audit dit of ME MEND NDOZA OZA COMPAN OMPANY Y for the pa past st ca callenda endarr year, you find the follo ollowin wing g accounts: ACCOUNTS RECEIVABLES Jan. 1, 2002 P 800,0 ,00 00 Jan. – Dec. 1992 coll lle ectio ions ns P 5,9 ,90 00,0 ,00 00 Jan. – Dec. Sales 6,300,000 Jan. – Dec. wri te-of f 100,000
Jan. – Dec. Wr ite- off of last year ’s ’s receivabl es es Write-off of this year’s Rec eivables
P
ALLOWANCE FOR BAD DEBTS Jan. 1, 2002 85,000 Dec. 31 provisions
P
95,000 315, 00 000
15, 000
In your examina xamination, tion, you fin find d that the bal balance ance of Account Accounts s Receiva eceivable ble rep repres resents ents sal sales es of the cu curr rrent ent au audit dit year on onlly; that cr credit edit ba ballan ances ces in the su subs bsidia idiary ry led edger ger for ac acco coun unts ts receivable rec eivable totaled totaled P8 P80,0 0,000 00;; and that the cu current rrent year’s pr provisi ovisio o n fo forr bad deb debts ts expense was 5% of sales sales (as comp compare ared d wi with th 4!% las astt year ear,, 4% of the year be befo fore re,, an and d 3!% the next prev pr eviou ious s yea earr). Sequ equen entia tiall to ag agiing the ac acco cou unts re rece ceiva ivabl ble, e, you an and d the co comp mpan any’s y’s
2
treasurer agree on an additional additional writewrite-off off of P50, P50,000 000,, and P300 P300,0 ,000 00 as the the prob probable able lo loss ss to be sustained on collection of the the acco accounts unts receivable bal balance. ance. Questions 1. The adju adjust sted ed Accounts Accounts R Rec eceiva eivable ble balanc balanc e is is:: a. P 830, 000 b. P 1,100, 000 c. P 1, 130,000
d. P 1, 180, 000
2. The The adjusted adjusted Allowan llowance ce fo forr Bad Debts is: is: a. P 260, 000 b. P 300,000
c. P 315,000
d. P 355,000
3. The The adjusted adjusted Bad Debts acco account unt is: is: a. P 260, 000 b. P 300,000
c. P 315,000
d. P 355,000
4. The The pr provision ovision per rec record ord at December December 31 31 is: is: a. P 260, 000 b. P 300,000
c. P 315,000
d. P 355,000
Solution Accounts Rec Accounts Receivable eivable 80,0 0,000 00 Cus usttom omer ers’ s’ cr cred ediit bal alan ance ce Allowance All owance for bad debts 50,0 0,000 00 Accounts Acc ounts receiv receivable able Bad debts ex pense 40,000 Allowance All owance for bad debts Computation: Pr ov ovi si sion per records * Pr ovi si sion per audi t Adjustment Adjust ment * Beg. balance + Pr ov ovis io ions - Wr it ite-off per book - Additio na nal write -o -o ff ff Ending balance Answer: Answer: 1. C
2. B
80, 0,0 000 50,0 0,000 00 40,0 0,000 00 315,000 355,000 40,00 ,000 0 95,000 355,000 squeezed fi gu gu re re 100,000 50,000 300,000
3. D
4. C
Problem 3
The fo The folllowin lowing g sel selected ected transa ransaction ctions s occ occur urred red du durin ring g the year ended Decemb ecember er 31, 200 006 6 of DOMINGO COMPANY: Gr oss sales (cash and cred it) Col olle lec cti tion ons s from cred edit it custo tome merrs, net of 2% cas ash h di dis scoun ountt Cas h sales Uncollectible accounts written off Cred redit it mem emos os issued to credi ditt custo tome merrs for sal ales es ret et../a /alllo low w. Cash ref efun und ds give ven n to cash custo tome merrs for sales ret et../a /all llow. ow. Rec ecoveries overies on accounts accounts receivable written-off written-off in prior years (not in cluded in cash received stated above)
P 900,736.80 294,0 ,00 00.00 180, 000.00 19, 200.00 10,0 ,08 80.0 .00 0 15,1 ,16 68.0 .00 0 6,505.20
At yea earr-en end, d, the co comp mpan any y pr prov oviide des s for est stima imated ted ba bad d de debt bts s los osses ses by cred creditin iting g the Allowan llowance ce fo forr Bad Debts account account fo forr 2% of its net credit sales sales fo forr the year. Th The e all allowanc owance e for bad debts at the beginning of the year is P19,327.20. Questions 1. How much is the the DOMI OMINGO NGO COMPANY’s gross gross sal sales? es? a. P 900,7 ,73 36.80 b. P 720,736.8 .80 0 c. P 704,656.8 .80 0
d. P 689,488.8 .80 0
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2. DOMINGO COMPANY’s credit sales at December 31, 2006 is: a. P 900,736.80 b. P 720,736.80 c. P 704,656.80
d. P 689,488.80
3. How much is the DOMINGO COMPANY’s net credit sales? a. P 900,736.80 b. P 720,736.80 c. P 704,656.80
d. P 689,488.80
4. The Bad Debts Expense of DOMINGO COMPANY at December 31, 2006 is: a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14 5. The Accounts Receivable of DOMINGO COMPANY at December31, 2006 is: a. P 408.042.00 b. P 407,536.80 c. P 401,536.80 d. P 391,456.80 6. The Allowance for Bad Debts of DOMINGO COMPANY at December 31, 2006 is: a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14 Solution Cr edit Sa le s Recov er ies
Ending bal.
Accounts Recei vable 720,736.80 Co lle cti on 294, 000.00 6,505.20 Sales disc ou nt from credit cust. 6,000.00 Wr ite-off 19,200.00 Sales returns from credit customer 10,080.00 __________ Recoveries 6,505.20 727,242.00 335,785.20 391,456.80
Net credit sales: Credit sal es - Sales discounts from credit sales - Sales returns from credit sales Net credit sal es
720,736.80 ( 6,000.00) (10,080.00) 704,656.80
Bad debts: Net credit sal es x % of uncollectible Bad debts
704,656.80 2% 14,093.136
Allowance for bad debts: Beg. balance 19,327.20 Provision for bad debts 14,093.14 Recoveries 6,505.20 Less: Write-off ( 19,200.00) Allowance ending balance 20,725.54 Answer: 1. A 2. B 3. C 4. B
5. D
6. A
Problem 4
Presented below are unaudited balances of selected accounts of MARJORIE COMPANY as of December 31, 2006: Unaudited Balances, 12/31/06 Selected Accounts Debit Credit Cash P 500,000 Accounts receivable 1,300,000 Allowanc e for doubtful accounts 8,000 Net sales P 6,750,000
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Additional information are as follows: a. Goods amounting to P50,000 were invoiced for the accounts of Joy Store & Co., recorded on January 2, 2007 with terms of net, 60 days, FOB shipping point. The goods were shipped to Variety Store on December 30, 2006. b. The bank returned on December 29, 2006, a customer ’s check for P5,000 marked “DAIF”, but no entry was made. c. MARJORIE COMPANY estimates that allowance for uncollectible accounts should be one and one-half percent (1!%) of the accounts receivable balance as of year-end. No provision has yet been made for 2006. Questions 1. What is the adjusted balance of Accounts Receivable on December 31, 2006? a. P 1,355, 000 b. P 1,350, 000 c. P 1, 305,000 d. P 1, 300, 000 2. What is the adjusted balance of Allowance for doubtful accounts on December 31, 2006? a. P 36,325 b. P 28,325 c. P 20,325 d. P 8,000 3. What is the adjusted amount of 2006 Bad Debts Expense? a. P 12,325 b. P 20,325 c. P 28,325
d. P 36,325
Solution (1) A
1,300,000 + 50,000 + 5,000
P1,355,000
(2)
C
P1,355,000 x 1
P20,325
(3)
C
P20,325 + P8,000 debit balanc e
!%
P28,325
Problem 5
During December, 2006, the Accounts Receivable controlling account on the books of FERNANDEZ COMPANY showed one debit posting and two credit postings. The debit represents receivables from December sales, P780,000. One credit was for P470,400, made a result of cash collections on November and December receivables; the second credit was an adjustment for estimated uncollectibles, P90,000. The December 31 balance was P270,000. When receivables were collected, the bookkeeper credited Accounts Receivables for the cash collected. All customers who paid their accounts during December took advantage of the 2% cash discount. As of December 1, debit balance in customers’ subsidiary accounts totaled P177,000. An adjustment for estimated doubtful accounts of P18,000 had been posted to the Accounts Receivable controlling account at the end of 2002, and no write-offs were recorded during 2006. In addition, a number of customers had overpaid their accounts, and as a result, some of the customers’ subsidiary accounts had credit balances on December 1. No overpayments were made during December nor were any credit balances in customers’ accounts reduced during December.
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Questions 1. The Accounts Receivable beginning balance (unadjusted) of FERNANDEZ COMPANY at December 31, 2006 is: a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000 2. The Accounts Receivable beginning balance (adjusted) of FERNANDEZ COMPANY at December 31, 2006 is: a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000 3. The Credit Balance of Accounts Receivable at the beginning of the year of FERNANDEZ COMPANY is: a. P 48,600 b. P 66,600 c. P 108,600 d. P 126,600 4. The Accounts Receivable balance of FERNANDEZ COMPANY at December 31, 2006 is: a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000 Solution Computation for unadjusted AR beginning balance: Accounts Receivable 50,400 Co lle cti on s 780,000 Allow . for BD 830,400 End bal. 270,000 * squeezed figure * Be g. ba l. Sales
Ending balance of AR control account Add: Credits during Dec ember Less: Debits during December Balance of AR control account – Dec. 1 Add: 2006 Est. allowance for BD Adjusted AR con trol account – Dec . 1 Less: AR subsidiary account – Dec. 1 Credit balance of AR account – Dec. 1 Answer: 1. A
2. B
3. C
470,400 90,000 560,400
270,000 560,400 ( 780,000) 50,400 18,000 68,400 177,000 108,600
4. D
Problem 6
You are examining the financial statements of MATIAS CORPORATION for the year ended December 31, 2006. During the audit of the accounts receivable and other related accounts, certain information was obtained. The December 31, 2006 debit balance in the Accounts Receivable control account is P197,000. The only entries in the Bad Debts Expense account were: a credit for P324 on December 31, 2006, because Marlisa Company remitted in full for the accounts charged off October 31, 2006, and a debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts.
The Allowance for Doubtful Accounts schedule is presented below:
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Debit January 1, 2006 October 21, 2006, Uncollectible; Marlisa Co., - P324; Abonales Co., - P 820; Cherryl Co., - P564 December 31, 2006, 5% of P197,000
Credit
P 1,508
Balance P 3,658
2,150 P 9,850 12,000
An aging schedule of the accounts receivable as of December 31, 2006 and the decision are shown in the table below: Age ____________ 0 – 1 month 1 – 3 months 3 – 6 months over 6 mon th s
Net Debit Balance _________________ P
93,240 76,820 22,180 6,000
Amount to which the Allow. is to be adjusted after adjust. and corrections have been made 1 percent 2 percent 3 percent Def in itely uncollectible, P1, 000; P2,000 is considered 50% uncollectible; the remainder is estimated to be 80% collectible.
There is a credit balance in one account receivable (0-1 month) of P2,000; it represents an advance on a sales contract. Also, there is a credit balance in one of the 1-3 months accounts receivable of P500 for which merchandise will be accepted by the customer. The ledger accounts have not been closed as of December 31, 2006. The Accounts Receivable control account is not in agreement with the subsidiary ledger. The difference cannot be located, and the auditor decides to adjust the control to the sum of the subsidiaries after corrections are made. Questions 1. The adjusted balance of accounts receivable of MATIAS CORPORATION at December 31, 2006 is: a. P 199,740 b. P 199,540 c. P 198,300 d. P 198,100 2. The adjusted write-off of accounts receivable balance of MATIAS CORPORATION at December 31, 2006 is: a. P 2,708.00 b. P 2,508.00 c. P 2,384.00 d. P 1,708.00 3. The adjusted allowance of bad debts account of MATIAS CORPORATION at December 31, 2006 is: a. P 4,980.60 b. P 4,964.20 c. P 4,780.60 d. P 4,764.20 4. The bad debts expense per book of MATIAS CORPORATION at December 31, 2006 is: a. P 9,850.00 c. P 4,764.20 b. P 6,359.80 d. Cannot be determined 5. The adjusted bad debts expense of MATIAS CORPORATION at December 31, 2006 is: a. P 3,814.20 b. P 3,614.20 c. P 3,490.20 d. P 2,814.20 6. The entry to adjust the account of Marlisa Company is:
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a. Bad debts 324 Allow. for BD b. Bad debts 324 Accounts receivable
324 324
c. Allow. for BD Bad debts d. Accounts receiv. Bad debts
324 324 324 324
7. The entry to reconcile the accounts receivable control ledger to subsidiary ledger is: a. Accounts receivable 1,440 c. Accounts receiv. 1,440 Allow. for BD 1,440 Misc. income 1,440 b. Allow. for BD 1,440 d. No adjustment Accounts receivable 1,440 8. The net realizable value of accounts receivable of MATIAS CORPORATION at December 31, 2006 is: a. P 194,975.80 b. P 194,775.80 c. P 193,335.80 d.P193,319.40 Solution
Bal. before adjustments Adjustments: Add(Dedu ct) (2) Correction to 10.31.02 entr y to wri te-off uncollectibl e acc ts. (3) Write-off of acct. considered definitely uncollectibl e (4) Reclassification of credit balances
Per Control Acct. P 197,000
Total P 198,240
(200)
( 1,000)
P (5) To adjust the control acc t. to agr ee with SL Adjusted balance
0-1 mo. P 93,240
PER SUBSIDIARY LEDGERS Over 1-3 mos 3-6 mos. 6 mos. P 76,820 P 22,180 P 6,000
2,500 198,300
2,000 P 95,240
500 P 77,320
P 22,180
(1,000)
(1,000)
P 5,000
2,500 P 199,740
1,440 P 199,740
Audit adjustments as of 12.31.06 (1)
(2)
(3)
(4)
(5)
(6)
8
Bad Debts expense Allowance for doubtful accounts
324
Allowanc e for doubtful acc ou nts Accounts Receivable
200
Allowanc e for doubtful acc ou nts Accounts Receivable
1,000
Accounts Recei vable Customer’s Accounts with Credit Balances
2,500
Accounts Recei vable Mis cellaneous Revenue
1,440
Allowanc e for Doubtful Accounts Bad Debts Expense
6,359.80
324
200
1,000
2,500
1,440
6,359.80
Required allowance on 12.31.06 0-1 mo. 1-3 mos. 3-6 mos. Over 6 mos.
P 95,240 x 1% 77,320 x 2 % 22,180 x 3% 3,000 x 20% 2,000 x 50%
Beg. balanc e + Provisio n per audit (squeezed figure) - Write-off Ending balanc e Provi sion per book Provi sion per audi t Adjustment Answer: 1. A 6. A
P
952.40 1,546.40 665.40 600.00 1,000.00 P 4,764.20
3,658.00 3,490.20 2,384.00 4,764.20 9,850.00 3,490.20 6,359.80
2. C 7. C
3. D 8. A
4. A
5. C
Problem 7
You are auditing the Accounts Receivable and the related Allowance for Bad Debts account of ROY COMPANY. The following data are available: Accounts Receivable, general ledger balance Allowance for bad debts: Beginning balance Provision per general ledger Write-offs Balance, end
P 848,000
P
20,000 48,000 ( 16,000) P 52,000
Summary of Aging Schedule The summary of the subsidiary ledger as of December 31, 2006, was totaled as follows: Debit balances: Under on month On e to six months Over six months
Credit balances: Almario Peter
Bituin
P 360,000 368,000 152,000 P 880,000
P
8,000 - OK; additional billing in January 2004 14,000 – Should have been credited To Manuel Co. - 1-6 mos. classification. 18,000 - Advance on a sales contract P 40,000
The customers’ ledger is not in agreement with the accounts receivable control. The client instructs the auditor to adjust the control to the subsidiary ledger after corrections are made.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
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It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six months are expected to require a reserve of 2 percent. Accounts over six months are analyzed as follows: Definitely bad Doubtful (estimated to be 50% collectible) Apparently good, but slow (90% collectible) Total
P 48,000 24,000 80,000 P152,000
Questions 1. The entry to adjust the account of Almario is: a. Accounts receivable 8,000 c. Accounts receivable 8,000 Sales 8,000 Cust. with Cr. bal. 8,000 b. Sales 8,000 d. No adjustment Accounts receivable 8,000 2. The entry to adjust the account of Peter is: a. Accounts receivable 14,000 Sales 14,000 b. Sales 14,000 Accounts receivable 14,000
c. Accounts receivable 14,000 Cust. with Cr. bal. 14,000 d. No adjustment
3. The entry to adjust the account of Bituin is: a. Accounts receivable 18,000 Sales 18,000 b. Sales 18,000 Accounts receivable 18,000
c. Accounts receivable 18,000 Cust. with Cr. bal. 18,000 d. No adjustment
4. The entry to reconcile the control ledger to the subsidiary ledger is: a. Miscell aneous los s 8, 000 c. Acc ounts receivable 8,000 Accounts receivable 8,000 Sales 8,000 b. Accounts receivable 8,000 d. Sales 8,000 Miscellaneous gain 8,000 Accounts receivable 8,000 5. The entry to adjust the Bad Debts Expense is: a. Bad Debts Expense 74,680 c. Bad Debts Expense 30,680 Allow. for BD 74,680 Allow. for BD b. Bad Debts Expense 26,680 d. No adjus tmen t Allow. for BD 26,680
30,680
6. The Accounts Receivable balance at December 31, 2006 is: a. P 840,000 b. P 826,000 c. P 818,000
d. P 786,000
7. The Allowance for Bad Debts at December 31, 2006 is: a. P 74,680 b. P 48,000 c. P 30,680
d. P 26,680
8. The Bad Debts Expense at December 31, 2006 is: a. P 74,680 b. P 48,000 c. P 30,680
d. P 26,680
Solution
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* (1) Accounts receivable Sales
8,000 8,000
(2) Accounts receivable 14,000 Accounts receivable
14,000
* (3) Accounts receivable 18,000 Customers ’ deposit
18,000
(4) Allowance for bad debts Accounts receivable
48,000 48,000
* (5) Miscellaneous losses 8,000 Accounts receivable 8,000 To reconcile control account with subsidiary ledger. (6) Bad debts Allowance for bad debts
26,680 26,680
* ignored in the aging of AR
Unadjusted balance (1) (2) (3) (4) (5) Adjusted balance 818,000
Control Account 848,000 8,000 18,000 (48,000) ( 8,000)
Under 1 mo. 1 to 6 mos. Over 6 mos.
Aging of AR Under 1 to 6 Over 6 1 mo. mos. mos. 360,000 368,000 152,000 (14,000) (48,000) ______ _______ _______ 360,000 354,000 104,000 360,000 x 1% 354,000 x 2%
24,000 x 50% 80,000 x 10% Required allowance for bad debts
= =
3,600 7,080
= 12,000 = 8,000 30,680
Provi sion for bad debts per audit: Beginning balance + Pr ovi sion – squeezed figur e - Write-off per book - Additional Write-off Ending balanc e
20,000 74,680 16,000 48,000 30,680
Provi sion per book Provi sion per audi t Adjustment
48,000 74,680 26,680
Answer: 1. A 6. C
2. D 7. C
3. C 8. A
4. A
5. B
Problem 8
KAREN COMPANY’s accounts receivable subsidiary ledger shows the following information:
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Cu stomer Penas
Ac count Balanc e – 12/31/06 P 70,360
Date 12/06/06 11/29/06
Invoice Amoun t P 28,000 42,360
Jefferson
41,840
09/27/06 08/20/06
24,000 17,840
Junsay
61,200
12/08/06 10/25/06
40,000 21,200
Cherryl
90,280
11/17/06 10/09/06
46,280 44,000
Baron
63,200
12/12/06 12/02/06
38,400 24,800
Riza
34,800
09/12/06
34,800
The estimated bad debt rates below are based on Karen Company’s receivable collection experience. Age of Accounts Rate 0 – 30 days 1% 31 – 60 days 1.5% 61 – 90 days 3% 91 – 120 days 10% Over 120 days 50% The allowance for bad debts account had a credit balance of P7,000 on December 31, 2006, before adjustment. Questions 1. The adjusted Accounts Receivable balance of KAREN COMPANY at December 31, 2006 is: a. P 317,680 b. P 319,320 c. P 326,880 d. P 361,680 2. The adjusted balance of Allowance for Bad Debts of KAREN COMPANY at December 31, 2006 is: a. P 9,698.80 b. P 10,188.80 c. P 12,397.60 d. P 19,397.60 3. The adjusted balance of Bad Debts Expense of KAREN COMPANY at December 31, 2006 is: a. P 9,698.80 b. P 10,188.80 c. P 12,397.60 d. P 19,397.60 4. The net realizable value of Accounts Receivable of KAREN COMPANY at December 31, 2006 is: a. P 342,282.40 b. P 349,282.40 c. P 307,482.40 d. P 314,482.40
Solution Aging of AR Balance 0-30 12/31/06 Days
12
31-60 Days
61-90 91-120 Days
Over 120 Days Days
Penas P 70,360 28,000 42,360 Jefferson 41,840 24,000 Junsay 61,200 40,000 21,200 Cherryl 90,280 46,280 44,000 Baron 63,200 63,200 Riza 34,800 ______ ______ ______ 34,800 Total P361,680 131,200 88,640 65,200 58,800 x % of uncollectibility 1% 1.5% 3% Required Allowance 1,312 1,329.60 1,956
Bad debts expense Allowance for bad debts (P19,397.60 – P7,000) Answer: 1. D 2. D
17,840
_____ 17,840 10% 5,880
50% 8,920 = P 19,397.60
12,397.60 12,397.60
3. C
4. A
Problem 9
You are assigned to audit KENT COMPANY for the year ending December 31, 2006. The accounts receivable were circularized as at December 31, 2006 and the following exceptions/replies have not been disposed of at the date of your examination. Customer
Balance
Du que
P 30, 000
Comments
Audit Findings
Balanc e was paid Dec. 29, 2006.
Ken t rec eived mai led January 2, 2007.
Odessa
74,000
Balance was offset by our Dec. 10 shipment of goods.
Kent credited accounts payable for P74,000 to record purchase of goods
Solej on
16,200
The above balanc e has been paid.
The paymen t was Credited to Dairen – cust.
Ru bin
23,700
We do not owe Kent anything as the goods were received January, 2007, FOB Destination
The shipment costing P16,300 was made on Dec. 29, 2006 and the goods were not in cl uded in recording the year-end inventory.
150,000
Our deposit of P200,000 should cover this balance
Kent had previously credited the deposit to sales.
We never received th ese goods.
The shipment was er roneously made to another customer and the goods worth P51,000 are now on its way to Ocsio. The shipment, FOB Shipping Point, was made on Dec. 30, 2006.
We are rejecting the price,
Kent’s clerk erroneously
Jamea
Oc sio
Dela Cruz
54,000
100,000
13
Ro nel
18,000
which is too much
computed the unit price at P2,000. The correct pricing should have been at P1,200 per unit.
Amoun t is okay. Since this is on consignment, we will remit payment upon selling the goods.
Good s cost P12,000 and were appropriately included in Kent ’s inventory
KENT COMPANY has not recorded yet its 2006 inventory. The balance of inventory and Accounts Receivable at December 31, 2006 (per trial balance) is P 456,000 and P345,900, respectively. Questions 1. The entry to adjust the finding made in the account of Duque is: a. Cash 30,000 c. Accounts receivable 30,000 Accounts receivable 30,000 Cash 30,000 b. Cash 30,000 d. No adjustment Sales 30,000 2. The entry to adjust the finding made in the account of Odessa is: a. Purch ases 74,000 c. Acc ounts payable 74,000 Accounts receivable 74,000 Accounts receivable 74,000 b. Sales 74,000 d. No adjustment Purchases 74,000 3. The entry to adjust the finding made in the account of Solejon is: a. Accounts receivable 16,200 c. Accounts receivable 16,200 Accounts receivable 16,200 Accounts payable b. Accounts payable 16,200 d. No adjustment Accounts receivable 16,200
16,200
4. The entry to adjust the finding made in the account of Rubin is (for sales): a. Sales 23,700 c. Accounts receivable 23,700 Accounts receivable 23,700 Sales 23,700 b. Accounts payable 23,700 d. No adjustment Purchases 23,700 5. Entry to adjust the finding made in the account of Rubin is (for cost of sales): a. Co st of sales 16, 300 c. Retained earn in gs 16,300 Inventory 16,300 Inventory 16,300 b. Inventory 16,300 d. No adjustment Cost of sales 16,300
6. The entry to adjust the finding made in the account of Jamea is: a. Customers’ advances 150,000 c. Sales 200,000 Sales 150,000 Customers’ advances 50,000 Accounts receivable 150,000
14
b. Customers’ advances150,000 d. Sales 150,000 Accounts receivable 150,000 Customers’ advances 150,000 7. The entry to adjust the finding made in the account of Ocsio is: a. No adjustment c. Sales 54,000 Accounts receivable 54,000 b. Accounts receivable 51,000 d. Sales 3,000 Sales 51,000 Accounts receivable 3,000 8. The entry to adjust the finding made in the account of Dela Cruz is: a. Accounts receivable 40,000 c. Sales 60,000 Sales 40,000 Accounts receivable 60,000 b. Sales 40,000 d. No adjustment Accounts receivable 40,000 9. The adjusted balance of Kent Company’s inventory at December 31, 2006 is: a. 451,700 b. P 460,300 c. P 472,300 d. P 484,300 10. The adjusted balance of Kent Company’s accounts receivable at December 31, 2006 is: a. P 37,200 b. P 55,200 c. P 187,200 d. P 205,200 Solution For Doque For Odess a For Sol ejon For Rubin
For Jamea
For Ocsio. For dela Cruz For Ronel
No adjustment Accounts payable Accounts receivable Accounts receivable Accounts receivable Sales Accounts receivable Inventory Cost of sal es Sales Customers ’ advances Accounts receivable Sales Accounts receivable Sales Accounts receivable Sales Accounts receivable
Unadjusted Inventory Adjustment - Rubin
Adjusted balance Answer: 1. D 6. C
2. C 7. D
456,000 16,300
_________ 472,300
3. A 8. B
74,000 74,000 16,200 16,200 23,700 23,700 16,300 16,300 200,000 50,000 150,000 3,000 3,000 40,000 40,000 18,000 18,000 Unadjusted AR Adjustment - Odessa - Solejon - Rubin - Jamea - Ocsio - dela Cruz - Ronel Adjusted balance
4. A 9. C
345,900 ( 74,000) ( 23,700) (150,000) ( 3,000) ( 40,000) ( 18,000) 37,200
5. B 10. A
Problem 10
You have been assigned to audit the financial statement MALAQUI INCORPORATED. The company is a distributor of a variety of electronic appliances and parts. The company uses the calendar year for reporting purposes. Information regarding balances of MALAQUI
15
INCORPORATED’S Accounts Receivable and the related Allowance for Doubtful Accounts as of December 31, 2006 and the related audit finding, is given below. The schedule of accounts receivable furnished you by the accountant reflects some errors. The total figure in the schedule does not tally with the balance per subsidiary ledger of P919,000. Based on your review of sales invoices, purchase orders and other related documents, you noted the following information: 1. Sales on account of various electronics totaling P36,480 were returned by the customer on December 28, 2006, but no entry was made in the books. The goods were included in the year-end physical count. 2. Based on the findings per confirmation reply from a customer, he indicated that he has already paid his account of P23,980 in October, 2006. Your verification disclosed that said collection was credited to net sales account. 3. Collection of P12,950 on November 5, 2006 from Diana Corporation was credited to the account of DNA Corporation. The allowance for doubtful accounts is set at 3% of the outstanding accounts receivable at the end of the period. As of December 31, 2006, the Allowance for Doubtful Accounts has a balance of P32,400 before adjustment. Questions 1. What is the adjusted balance of Accounts Receivable as of December 31, 2006? a. P 919,000 b. P 895,020 c. P 882,520 d. P 858,540 2. What is the adjusted balance of Allowance for Doubtful Accounts as of December 31, 2006? a. P 27,570.00 b. P 26,850.60 c. P 26, 475.60 d. P 25,756.20 Solution Sales Accounts receivable Sales Accounts receivable Answer: 1. D 2. D
36,480 36,480 23,980 23,980
Problem 11
You audit of APAS COMPANY for the year 2006 disclosed the following: 1. The December 31 inventory was determined by a physical count on December 28 and based on such count, the inventory was recorded by: Inventory 1,400,000 Cost of sales 1,400,000 2. The 2006 ledger shows a sales balance of P20,000,000. 3. The company sells a mark-up of 20% based on sales. 4. The company recognizes sales upon passage of title to the customers. 5. All customers are within a four-day delivery area. The sales register for December, 2006 and January, 2007, showed the following details:
16
December Register Invoice No. 300 301 302 303 304 305
FOB Terms Destination Shipping point Destination Destination Shipping point Shipping point
Date Shipped 12/30 12/30 12/23 12/24 01/02 12/29
Amount P 50,000 62,500 47,500 82,500 56,000 90,000
FOB Terms Destination Shipping point Destination Shipping point Shipping point
Date Shipped 12/29 12/29 01/02 01/04 12/27
Amount 67,500 74,500 140,000 73,000 67,500
January Register Invoice No. 306 307 308 309 310 Questions 1. The Sales for December is over/(under) by: a. P 36,000 under b. P 36,000 over
c. P 106,000 under d. P 106,000 over
2. The Inventory for December is over/(under) by: a. P 235,600 under c. P 181,600 under b. P 235,600 over d. P 181,600 over 3. The adjusted inventory at December 31, 2006 is: a. P 1,645, 412 b. P 1,635, 600 c. P 1, 218,400
d. P 1, 164, 400
4. The adjusted sales at December 31, 2006 is: a. P 20,106,000 b. P 20,036,000
d. P 19,894,000
c. P 19,964,000
5. How much sales for the month of December 2006 were erroneously recorded in January 2007? a. P 282,000 b. P 272,500 c. P 198,000 d. P 142,000 6. How much sales for the month of January 2007 were erroneously recorded in December 2006? a. P 228,500 b. P 188,500 c. P 180,500 d. P 106,000 Solution (1) Sal es 50,000 Accounts receivable Invoice # 300
(2) Cost of sales Inventory (62,500 x 80%) Invoice # 301 (3) Sal es
50,000
50,000 50,000
56,000
17
(4)
(5)
(6)
(7)
Accounts receivable Invoice # 304 Cost of sales 72,000 Inventory (90,000 x 80%) Invoice # 305 Accounts receiv. 74,500 Sales Invoice # 307 Cost of sales 59,600 Inventory (74,500 x 80%) Accounts receiv. 67,500 Sales Invoice # 310 Unadjusted Sales (1) (3) (5) (7) Adjusted Sales
56,000
72,000
74,500
59,600
67,500
20,000,000 ( 50,000) ( 56,000) 74,500 67,500 20,036,000
Unadjusted inventor y (2) (4) (6) Adjusted inventory
1,400,000 ( 50,000) ( 72,000) ( 59,600) _________ 1,218,400
Sales for the month of Dec ember that 2003 were erroneously recorded in January 2004: Invoice # 307 74,500 Invoice # 310 67,500 Total 142,000 Sales for the month of January 2004 were erroneously rec orded in December 2003: Invoice # 300 50,000 Invoice # 304 56,000 Total 106,000 Answer: 1. A 2. D 3. C
4. B
5. D
6. D
Problem 12
You are engaged to perform an audit of the accounts of the JELLER CORPORATION for the year ended December 31, 2006, and have observed the taking of the physical inventory of the company on December 27, 2006. Only merchandise shipped by the Durian Corporation to customers up to and including December 27, 2006 have been removed or excluded from inventory. The inventory as determined by physical inventory count has been recorded on the books by the company’s controller. No perpetual inventory records are maintained. All sales are made on an FOB shipping point basis. The following lists of sales invoices are entered in the sales books for the months of December 2006 and January 2007, respectively.
December 2006
18
(a) (b) (c) (d) (e) (f) (g)
Sales Invoices Date Amount
Date Shipped
12/23/06 12/27/06 12/30/06 12/22/06 12/28/06 12/03/06 12/31/06
12/31/06 12/27/06 01/05/07 01/08/07 12/29/06 12/05/06 01/07/07
P 25,000 18,000 30,000 12,000 16,000 8,000 20,000
January 2007
(h)
12/31/06
14,000
12/31/06
(i) (j) (k) (l)
12/31/06 12/27/06 01/08/07 01/10/07
7,500 11,000 9,000 5,000
12/29/06 01/04/07 01/09/07 12/31/06
Questions 1. How much sales for month of December 2006 were erroneously recorded in January 2007? a. P 7,500 b. P 12,500 c. P 18,500 d. P 20,000 2. How much sales for the month of January 2007 were erroneously recorded in December 2006? a. Zero b. P 12,500 c. P 20,000 d. P 62,000 3. How much is the correct amount of sales for the month ended December 31, 2006? a. P 143,000 b. P 155,500 c. P 93,500 d. P 81,000 Solution (1) B
Item (I)P7,500 and Item (l), P5,000
P12,500
(2)
D
Items c, d, g
P62,000
(3)
C
Recorded sal es for December December sal es recorded in January January sal es recorded in Dec ember Adjusted sal es for December
P143,000 12,500 (62,000) P 93,500
Problem 13
On September 1, DY COMPANY assigns specific receivables totaling P750,000 to Davao Bank as collateral on a P625,000, 12% note. DY COMPANY will continue to collect the assigned accounts receivable. Davao Bank also assesses a 2% service charge on the total accounts receivable assigned. DY COMPANY is to make monthly payments to Davao Bank with cash collected on assigned accounts receivable. Collections of assigned accounts during September totaled P260,000 less cash discounts of P3,500. Questions 1. What were the proceeds from the assignment of DY COMPANYs’ accounts receivable on September 1? a. P 610,000 b. P 612,500 c. P 625,000 d. P 735,000 2. What amount is owed to Davao Bank by DY COMPANY for September collections plus accrued interest on the note to September 30? a. P 260,000 b. P 262,750 c. P 264,000 d. P 266,250 Solution (1) A
P625,000 – (2% x P750,000)
P610,000
(2)
P260,000 – P3,500 + (P625,000 x 12% x 1/12)
P262,750
B
Problem 14
On April 1, 2006, VAILOCES CORPORATION assigned accounts receivable totaling P400,000 as collateral on a P300,000, 16% note from Racel Bank. The assignment was done on a nonnotification basis. In addition to the interest on the note, the bank also receives a 2% service fee, deducted in advance on the P300,000 value of the note.
19
Additional information is as follows: 1. Collections of assigned accounts in April totaled P191,100, net of a 2% sales discount. 2. On May 1, VAILOCES CORPORATION paid the bank the amount owed for April collections plus accrued interest on note to May 1. 3. The remaining accounts were collected by VAILOCES CORPORATION during May except for P2,000 accounts written-off as worthless. 4. On June 1, VAILOCES CORPORATION paid the bank the remaining balance of the note plus accrued interest. Questions 1. The journal entry of VAILOCES CORPORATION in the assignment of accounts receivable on April 1, 2006 is: a. Cash 294,000 c. Cash 294,000 Finance charges 6,000 Finance charges 6,000 Accounts receivable 300,000 Notes payable 300,000 b. Cash 294,000 d. Cash 294,000 Finance charges 6,000 Commission exp. 6,000 AR – assigned 300,000 AR – assigned 300,000 2. The journal entry of VAILOCES CORPORATION in the assignment of accounts receivable on April 1, 2006 assuming the assignment is on notification basis: a. Cash 294,000 c. Cash 294,000 Finance charges 6,000 Finance charges 6,000 Accounts receivable 300,000 Notes payable 300,000 b. Cash 294,000 d. Cash 294,000 Finance charges 6,000 Commission exp. 6,000 AR – assigned 300,000 AR – assigned 300,000 3. The entry of VAILOCES CORPORATION on April collection of the assigned account is: a. Cash 191,100 c. Cash 191,100 Sales discounts 3,900 Sales discounts 3,900 AR – assig ned 195,000 Ac counts rec eivable 195,000 b. Cash 191,100 d No journal entry Accounts receivable 191,100 4. If the assignment is on notification basis, who should collect the assigned accounts receivable? a. Vailoces Co rporation c. A th ird party b. Racel Bank d. It is the option of the customer to whom he/she will pay the account 5. Using the assumption in number 4 above, what will be the entry of VAILOCES CORPORATION on the April collection of the assigned accounts receivable? a. Cash 191,100 c. Cash 191,100 Sales discounts 3,900 Sales discounts 3,900 AR – assig ned 195,000 Ac counts rec eivable 195,000 b. Cash 191,100 d No journal entry
20
Accounts receivable
191,100
6. The journal entry of VAILOCES CORPORATION on the on May 1, 2006 is: a. Notes payable 187,100 c. Notes payable 188,500 Interest expense 4,000 Interest expense 2,600 Cash 191,100 Cash 191,100 b. Notes payable 195,000 d. Notes payable 195,000 Interest exp ense 5,333 Inter est exp en se 4,000 Cash 200,333 Cash 199,000 7. Using the same information in number 6 (May 1 transaction) except that the assignment is done on a notification basis, the entry should be: a. Notes payable 187,100 c. Notes payable 188,500 Interest expense 4,000 Interest expense 2,600 Accounts receivable 191,100 AR –assig ned 191,100 b. Notes payable 195,000 d. No journal entry Interest expense 4,000 AR - assigned 199,000 8. The total interest expense of VAILOCES CORPORATION on the assigned accounts receivable is: a. P 5,400 b. P 8,066 d. P 10,000 c. P 11,400 Solution Apri l 1 1
(1)
(2)
(3)
(4)
Answer: 1. C 6. D
Accounts receivable – assigned 400,000 Accounts receivable Cash 294,000 Finance charges (300,000 x 2%) 6,000 Notes payable Cash 191,100 Sales di scounts 3,900 AR – assigned (191,100/98%) Notes payable 195,000 Interest expense 4,000 (300,000 x 16% x 1/12) Cash Cash 203,000 Allowance for bad debts 2,000 AR – assigned (400,000 – 195,000) Notes payable (300,000 – 195,000)105,000 Interest expense 1,400 (105,000 x 16% x 1/12) Cash 2. C 7. B
3. A 8. A
4. B
400,000
300,000
195,000
199,000
205,000
106,400 5. D
Problem 15
UY FINANCE CORPORATION purchases the accounts receivable of other companies on a without recourse, notification basis. At the time the receivables are factored, 15% of the amount factored is charged to the client as commission and recognized as revenue in UY’S books. Also, 10% of the receivables factored is withheld by Uy as protection against sales returns or other adjustments. This amount credited by Uy to the client Retainer account.
21
At the end of each month, payments are made by Uy to its clients so that the balance in the Client Retainer account is equal to 10% of unpaid factored receivables. Based on Uy’s bad debt loss experience, an allowance for bad debts of 5% of all factored receivables is to be established, Uy makes adjusting entries at the end of each month. On January 3, 2003, Jannette Company factored its accounts receivable totaling P1,000,000. By January 31, P800,000 on these receivables had been collected by Uy. Questions 1. The commission earned of Uy Finance Corporation from Jannette Company’s accounts receivable factored is: a. P 150,000 b. P 120,000 c. P 135,000 d. P 90,000 2. The proceeds received by Jannette Company on the accounts factored is: a. P 810,000 b. P 780,000 c. P 765,000 d. P 750,000 3. How much is the Client Retainer account of Uy Finance Corporation at January 31, 2003 is: a. P 0 b. P 20,000 c. P 60,000 d. P 80,000 4. How much is the bad debts expense of Uy Finance Corporation at January 31, 2003 is: a. P 50,000 b. P 40,000 c. P 20,000 d. P 0 Solution UY FINANCE CORPORATION’S BOOKS Jan.
3
31 31 31
Accounts receivable factored 1,000,000 Commission income (P1 M x 15%) Client Retainer (P1 M x 10%) Cash Cash 800,000 Accounts receivable factored Client Retainer 80,000 Cash (100,000 – [10% x 200,000]) Bad debts expense 50,000 Allowance for bad debts (P1 M x 5%)
150,000 100,000 750,000 800,000 80,000 50,000
JANETTEE COMPANY’S BOOKS Jan. 3
Cash
31
Answer: 1. A
Rece iv abl e fro m fa ctor Commission Accounts receivable Cash Receivabl e from factor
2. D
3. B
750,000 100,000 150,000 1,000,000 80,000 80,000
4. A
Problem 16
During your audit of the LEILANI COMPANY for the calendar year 2006, you find the following accounts: NOTES RECEIVABLE Sept. 1 Samson, 12%, due in 3 mos. 36,000 36,000 Nov. 1 Hazel, 15%, due in 6 mos. 90,000 126,000
22
Nov. 1 Nov. 30 Dec. 1 Dec. 2
Sept. 1 Nov. 1
Sept. 1 Nov. 1
Salazar, no interest, due in one year Ros a, Co . 12%, due in 13 mos. Rona, 15%, due in 15 mos. Anito, President, 18%, due in 3 mos.
Samson 15% Salazar 15%
75,000 15,000 36,000
201,000 216,000 252,000
18,000
270,000
NOTES RECEIVABLE DISCOUNTED note, discounted at
36,000
36,000
note,
75,000
111,000
discounted
at
INTEREST EXPENSE 310.50 11,250.00
Samson note Salazar note
310.50 11,560.50
All notes are trade notes receivable unless otherwise specified. The Samson note was paid December31, 2006. Interest income is credited only upon receipt of cash. Questions 1. The accrued interest income at December 31, 2006 is: a. P 2,748 b. P 3,018 c. P 3,120
d. P 4,200
2. The interest expense at December 31, 2006 is: a. P 1,875.00 b. P 2,185.50 c. P 4,060.50
d. P 11,560.50
3. The Notes Receivable at December 31, 2006 is: a. P 141,000 b. P 159,000 c. P 216,000
d. P 252,000
4. The Notes Receivable – discounted at December 31, 2006 is: a. P 63,750 b. P 73,125 c. P 75,000
d. P 111,000
5. How much is the proceeds in the discounting of notes receivable for the year? a. P 99,439.50 b. P 100,060.50 c. P 111,000.00 d. P 111,310.50 Solution 1. C Hazel 90,000 x 15% x Rosa 15,000 x 12% x Rona 36,000 x 15% x Anito 18,000 x 18% x Total accr ued interest 2. B Samson Salazar 11,250 x 2/12 Total interest expense 3. A Haz el 90,000 Rosa 15,000 Rona 36,000 Total 141,000 4. C Salazar 75,000 5. A
2/12 1/ 12 1/ 12 1/12
= P 2,250 = 150 = 450 = 270 P 3,120
= P 310.50 = 1,875.00 = P2,185.50
23
Samson P 36,000 – P 310.50 Salazar P 75,000 – P11,250 Total proceeds
= P 35,689.50 = 63,750.00 = P 99,439.50
Problem 17
On January 1, 2006, TUQUIB COMPANY sells its equipment with a carrying value of P160,000. The company receives a non-interest-bearing note due in 3 years with a face amount of P200,000. There is no established market value for the equipment. The prevailing interest rate for a note of this type is 12%. The following are the present value factors of 1 at 12%: Present value of 1 for 3 periods Present value of an ordinary annuity of 1 for 3 periods
0.71178 2.40183
Questions 1. The gain or loss on the sale of equipment is: a. P 40,000 b. P 122 c. P 0
d. (P 17,644)
2. The discount on notes receivable is: a. P 57,644 b. P 40,000
d. P 0
c. P 39,878
3. The entry to record the sale of equipment is: a. Notes receivable 200,000 c. Notes receivable 200,000 Equipment 200,000 Loss on sale 17,644 Equipment 160,000 Discou nt on NR 57,644 b. Notes receivable 200,000 d. Notes receivable 200,000 Equipment 160,000 Equipment 160,000 Gain on sale 40,000 Gain on sale 122 Discou nt on NR 39,878 4. The discount amortization at the end of the second year using the effective-interest amortization is: a. P 17,083 b. P 19,133 c. P 21,428 d. P 36,216 5. The entry to record the discount amortization is: a. Discount on NR c. Interest income Interest income Discount on NR b. Discount on NR d. Interest expense Interest expense Discount on NR Solution 1. D Sales price – present value of note (P200,000 x 0.71178) Book value of equipment Loss on sal e of equi pment 2.
3.
24
A Face value of not e Presen t value of note Discount on notes receivabl e C Notes rec ei vable Loss on sal e of equi pment Equipment Discount on not es receivabl e
142,356 160,000 (17,644)
200,000 142,356 57,644 200,000 17,644 160,000 57,644
4.
5.
B Pr esen t value of note, 1/ 1/ 03 Add: Interest earned in 2003 (142,356 x 12%) Pr esen t value of note, 1/ 1/ 04 Add: interest earned in 2004 (159,439 x 12%) Pr esen t value of note, 1/ 1/ 05 A
142,356 17,083 159,439 19,133 178,572
Problem 18
On January 2, 2006, a tract of land that originally cost P800,000 was sold by MAYLENE CORPORATION. The company received a P1,200,000 note as payment. It bears interest rate of 4% and is payable in 3 annual installments of P400,000 plus interest on the outstanding balance. The prevailing rate of interest for a note of this type is 10%. The present value table shows the following present value factors of 1 at 10%: Present Present Present Present
value value value value
factor of 1 for 3 periods factor of 1 for 2 periods factor of 1 for 1 period of an ordinary annuity of 1 for 3 periods
0.75132 0.82645 0.90909 2.48685
Questions 1. The gain on sale of land on January 2, 2006 is: a. P 194,740 b. P 276,847 c. P 290,740
d. P 400,000
2. The interest income on the note receivable for the year ended December 31, 2006 using effective interest method is: a. P 120,000 b. P 109,074 c. P 107,685 d. P 99,474 3. How much cash will MYLENE CORPORATION received from notes receivable? a. P 1,076,847 b. P 1,200, 000 c. P 1, 296,000 d. P 1, 476, 847 Solution Amount of cash to be received: Interest 2003 48,000 * 2004 32,000 2005 16,000 Total * 1,200,000 x 4% ** 800,000 x 4% *** 400,000 x 4%
Principal Total 400,000 448,000 ** 400,000 432,000 *** 400,000 416,000 1,296,000
Cash received 2003 448,000 2004 432,000 2005 416,000 Total Pr esen t value of note Cost of land Gain on sale
PV Factor 0.90909 0.82645 0.75132
Pr esen t Value 407,272 357,026 312,549 1,076,847
1,076,847 800,000 276,847
Interest income for 2006 – P1,076,847 x 10% = P107,685 Answer: 1. B
2. C
3. C
25
Problem 19
The balance sheet of PERSEVERANCE CORPORATION on December 31, 2005, includes the following cash and receivable balances: Cash – Davao Bank Currency and coins Petty cash fund Cash in bond sinking fund Notes receivable (including discounted with recourse, P15,500) Ac counts rec eivable P 85,600 Less: Allow. for bad debts (4,150) Interest receivable
P 45,000 16,000 1,000 15,000 36,500 81,450 525
Current liability reported in the December 31, 2005, balance sheet included: Obligation on discounted notes receivable
15,500
Transactions during 2006 included the following: 1. Sales on account were P767,000. 2. Cash collected on accounts totaled P576,500, including accounts of P93,000 with cash discounts of 2%. 3. Notes received in settlement of accounts totaled P82,500. 4. Notes receivable discounted as of December 31, 2005, were paid at maturity with the exception of one P3,000 note on which the company had to pay the bank P3,090, that included interest and protest fees. It is expected that recovery will be made on this note early in 2004. 5. Customer notes of P60,000 were discounted with recourse during the year, proceeds from their transfer being P58,500. Of this total, P48,000 matured during the year without notice of protest. 6. Customer accounts of P8,720 were written-off in prior year as worthless. 7. Recoveries of doubtful accounts written-off in prior years were P2,020. (not included in the collection in number 2) 8. Notes receivable collected during the year totaled P27,000 and interest collected was P2,450. 9. On December 31, accrued interest on notes receivable was P630. 10. Uncollectible accounts are estimated to be 5% of the December 31, 2006, accounts receivable balance. 11. Cash of P35,000 was borrowed from Davao Bank, accounts receivable of P50,000 being pledged on the loan. Collections of P19,500 had been made on these receivables included in the total given in transaction (2) and this amount was applied on December
26
31, 2006, to payment of accrued interest on the loan of P600, and the balance to partial payment of the loan. 12. Petty cash fund was reimbursed based on the following analysis of expenditure vouchers: Travel expenses P 112 Entertainment exp enses 78 Postage 93 Office supplies 173 Cash over 6 13. P3,000 cash was added to the bond sinking fund. 14. Currency on hand at December 31, 2006 was P12,000. 15. Total cash payment for all expenses during the year were P468,000. Charge to General Expense Based on the information above and some other analysis, answer the following questions: Questions 1. PERSEVERANCE CORPORATION’s Cash balance at December 31, 2006 is: a. P 269,430 b. P 265,430 c. P 252,430 d. P 219,930 2. PERSEVERANCE CORPORATION’s Accounts Receivable balance at December 31, 2006 is: a. P178,8787.00 b. P 178,824.50 c. P176,804.50 d. P174,254.50 3. PERSEVERANCE CORPORATION’s Other Cash Item (Currency and coins & Petty Cash Fund) at December 31, 2006 is: a. P 16,000 b. P 13,000 c. P 12,550 d. P 12,000 4. PERSEVERANCE CORPORATION’s Notes Receivable at December 31, 2006 is: a. P 46,500 b. P 31,000 c. P 30,910 d. P 28,500 5. PERSEVERANCE CORPORATION’s Obligation of Discounted December 31, 2006 is: a. P 15,500 b. P 12,000 c. P 11,910
of Note
Receivable
at
d. P 3,500
6. PERSEVERANCE CORPORATION’s Interest Receivable at December 31, 2006 is: a. P 2,555 b. P 1,155 c. P 630 d. P 525 7. PERSEVERANCE CORPORATION’s Bad debts at December 31, 2006 is: a. P 16, 005.20 b. P 13,875.50 c. P 11, 855.50 d. P 11,825.50 8. PERSEVERANCE CORPORATION’s Allowance for bad debts at December 31, 2006 is: a. P 9,406.50 b. P 9,305.50 c. P 9,252.00 d. P 4,150.00 9. PERSEVERANCE CORPORATION’s Sales balance at December 31, 2006 is: a. P 767,000 b. P 765,140 c. P 765,102 d. P 757,330 10. PERSEVERANCE CORPORATION’s Interest income balance at December 31, 2006 is: a. P 3,086 b. P 3,080 c. P 2,561 d. P 2,555
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Solution (1) Accounts receivable 767,000 Sales (2) Cash 576,500 Sales di scounts 1,860 Accounts receivable (3) Notes rec ei vable 82,500 Accounts receivable (4) Obligation on discounted note 12,500 Notes recei vable Accounts receivable 3,090 Cash Obligation on discounted note 3,000 Notes recei vable (5) Cash 58,500 Interest expens e 1,500 Obligation on di scounted not e Obligation on discounted note 48,000 Notes recei vable (6) Allowance for bad debts 8,720 Accounts receivable (7) Accounts receivable 2,020 Allowance for bad debts Cash 2,020 Accounts receivable (8) Cash 27,000 Notes recei vable Cash 2,450 Interest receivable Interest income (9) Interest receivable 630 Interest income (10) Bad debts 11,855.50 Allowance for bad debts (11) Cash 35,000 Notes payable Interest expens e 600 Notes payable 18,900 Cash (12) Operating expenses 456 Cash Cash 6 Other income (13) Sinking fund 3,000 Cash (14) No entry (15) Gen eral expenses 468,000 Cash Answer: 1. A 6. C
2. C 7. C
3. B 8. B
4. D 9. B
767,000
576,360 82,500 12,500 3,090 3,000
60,000 48,000 8,720 2,020 2,020 27,000 525 1,925 630 11,855.50 35,000
19,500 456 6 3,000
468,000
5. B 10. D
Problem 20
You are engaged in your fifth annual examination of the financial statements of NAVAL CORPORATION. Your examination is for the year ended December 31, 2006. The client prepared the following schedule of Trade Notes Receivable and Interest Receivable for you at December 31, 2006. You have agreed the opening balances to your prior year’s audit workpapers. NAVAL CORPORATION TRADE NOTES RECEIVABLE AND RELATED INTEREST RECEIVABLE
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Maker
Date
Terms
Rubin Co. Cardoza
04/01/05
1-year
05/01/06
Pancho
07/01/06
Betque Gabuter o Noval
08/03/06 10/02/06
Gan
11/01/06
90 days after date 60 days after date Demand 60 days after date 90 days after date 90 days after date
Due from Rubin Co. Pancho Betque Gabutero Noval Gan Totals
11/01/06
Balance P 5,400
___________ P 5,400
Trade-Notes Receivable Int. Bal. 2006 Rate 12/31/05 debits 12% P 60,000
2006 credit P 60,000
-
P 30,000
12%
6,000
6,000
12% 12%
15,000 50,000
50,000
15,000 -
8%
42,000
35,000
7,000
12%
32,000
INTEREST RECEIVABLE 2006 debit 2006 credit P 1,800 120 400 1,000 560 640 P 4,520
29,375
Bal. 12/31/06
P
625
32,000
Balanc e 12/31/06
P 7,200
660 ___________ P 7,860
P 120 400 340 560 640 P 2,060
Your examination reveals this information: 1. Interest is computed on a 360-day basis. In computing interest, it is the corporation’s practice to exclude the first day of the note’s term and to include the due date. 2. The Cardoza’s 90-day non-interest bearing note was discounted on May 15 at 10%, and the proceeds were credited to the Trade Notes Receivable account. The note was paid at maturity. 3. Pancho became bankrupt on August 31, and the corporation will recover 75 cents on the peso. All of Naval Corporation’s notes receivable provide for interest at a rate of 12% on the maturity value of a dishonored note. 4. Betque, president of Naval Corporation, confirmed that she owed Naval Corporation P15,000 and that she expected to pay the note within six months. You are satisfied that the note is collectible. 5. Gabutero’s 60-day note was discounted on November 1 at 8%, and the proceeds were credited to the Trade Notes Receivable and Interest Receivable accounts. On December 2, Naval Corporation received notice from the bank that GAbutero’s note was not paid at maturity and that it had been charged against Naval’s checking account by the bank. Upon receiving the notice from the bank, the bookkeeper recorded the note and the accrued interest in the Trade Notes Receivable and Interest Receivable account. Gabutero paid Naval Corporation the full amount due in January 2003.
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6. Noval, 90-day note was pledged as collateral for P35,000, 60-day 10% loan from the Davao National Bank on December 1. 7. On November 1, the corporation received four, P8,000, 90-day notes from Gan. On December 1, the corporation received payment from Gan for one of the P8,000 notes with accrued interest. Prepayment of the notes is allowed without penalty. The bookkeeper credited the Gan’s Accounts Receivable account for the cash received. Questions 1. At December 31, 2006, the note receivable from Cardoza has a balance of: a. P 30,000 b. P 29,375 c. P 625 d. P 0 2. The interest income from Cardoza’s note at December 31, 2006 is: a. P 750 b. P 625 c. P 500 d. P 0 3. At December 31, 2006, the note receivable from Pancho has a balance of: a. P 6,370.92 b. P 6,366.00 c. P 6,120 d. P 0 4. The interest income from Pancho’s note at December 31, 2006 is: a. P 370.92 b. P 250.92 c. P 246
d. P 0
5. At December 31, 2006, the note receivable from Betque has a balance of: a. P 15,350 b. P 15,000 c. P 14,650 d. P 0 6. At December 31, 2006 the note receivable from Gabutero has a balance of: a. P 150,000 b. P 100,000 c. P 50,000 d. P 0 7. At December 31, 2006 the note receivable from Noval has a balance of: a. P 42,000 b. P 35,000 c. P 7,000 d. P 0 8. At December 31, 2006 the note receivable from Gan has a balance of: a. P 32,480 b. P 32,000 c. P 24,000 d. P 23,950 9. The total Note Receivable – Trade at December 31, 2006 is: a. P 89,000 b. P 81,000 c. P 72,366 10. The total Interest Receivable at December 31, 2006 is: a. P 2,300 b. P 2,060 c. P 1,950
d. P 66,000
d. P 1,790
Solution
(2)
(3)
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Cardoza
Pancho
Adjusting Entries as of Dec . 31, 2006 (a) Interest Expense Trade Notes receivable Maturit y Val ue = Face Value Discount (30,000 x 10% x 75/ 360) Proceeds (b) Accounts Receivabl e Trade Notes Rec ei vable Interest Receivable Interest Revenue Face Value Interest (6000 x 12% x60/360)
625.00 625.00 P30,000 625 P29,375 6,370.92 6,000.00 120.00 250.92 P6,000.00 120.00
Maturi ty value Add.’l interest from du e date , 8.30.06 to 12.31.06 (6,120 x 12% x 123/ 360) Total amou nt du e, 12.31.06 (4)
Betque
© Notes receivabl e- Officer s
P6,120.00 250.92 P6,370.92
Interest Receivabl e Interest Revenue Trade Notes Receivabl e Accrued Interest as of 12.31.06 (15,000 x 12% x 150/360) = P750 (5)
Gabu tero
15,000 350 350 15,000
OE: Cash
50,660 Notes Receivable Interest Receivable
50,000 660
CE: Cash
50,660 NR – Discounted Interest income
50,000 660
(d) Adj: Notes Receivable Interest Receivable Interest income NR – discounted -----------------------------------------
50,000 1,000
CE: Accounts Receivabl e Cash
51,000 51,000 50,000 50,000
Accounts Receivable NR – discounted Trade Notes Receivabl e Interest Receivabl e Face Value Interest (50,000 x 12% x 60/360) Maturity Value Discount (50,000 x 8% x 30/ 360) Proc eeds
51,000 50,000 100,000 1,000 P50,000 1,000 P51,000 340 P50,660
(f)
(7)
Gan
ANSWER: 1. D
2. D
Accounts Rec ei vable Interest Revenue (51,000 x 12% x 30/360)
510
(g) Trade Notes Receivabl e Notes Payabl e- bank
35,000
(h) Accounts Receivabl e Trade Notes Receivable Interest Revenue (8,000 x 12% x 30/360) = P80 (I) Interest revenue Interest Receivabl e (Accrued Interest as of 12.31.06 24,000 x 12% x 60/360) = P480
8,080
3. D
4. A
660 50,000 ----------
51,000
(e)
Noval
-----------
OE: Notes Receivable Interest Receivable Cash
NR – discounted Notes Recei vable
(6)
50,000 660
510
35,000
8,000 80 160 160
5. B
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