PROBLEM 1 The 2012 audit of the financial statements of KITTEN Company discloses the following information: Accounts receivable, ending Allowance for doubtful accounts, ending Allowance for sales, returns and allowances, ending Gross sales returns and allowances (estimated for the year) Estimated bad debts for the year Sales discounts not taken at end of year Credit sales during the year (terms, 2/10, n/60) Cash collected on accounts receivable during the year (net of discounts taken)
2011 P558,000 22,200 14,100
2012 P561,300 21,000 11,748
14,700
11,748
21,600 0 1,125,000
22,500 1,200 1,140,000
1,056,000
1,102,500
REQUIRED: Reconstruct the journal entries that were made by Kitten Company during 2012 to record changes in the following accounts. (Assume that sales returns and allowances are estimated in the period of sale and the net method is used in accounting for sales discounts). a. Allowance for doubtful accounts b. Allowance for sales returns and allowances c. Accounts receivable PROBLEM 2 Shown below is GOROSPE COMPANY’S aging schedule of its accounts receivable on December 31, 2012. Balance Days Past Due Customers Due Current 1-30 31-60 Over 60 AA Co. P 23,000 P0 P0 P23,0 P0 00 BB, Inc. 105,000 62,000 20,000 13,00 10,000 0 CC Corp. 87,500 23,000 14,500 10,00 40,000 0 DD, Inc. 93,500 53,000 20,500 10,00 10,000 0 EE Transport 40,000 0 0 0 40,000 FF, Inc. 31,000 15,000 16,000 0 0 GG Co. 1,000 1,000 0 0 0 HH Corp. 64,000 20,000 18,000 16,00 10,000 0 II Company 60,000 60,000 0 0 0 Totals P505,00 P234,00 P89,000 P72,0 P110,000 0 0 00 The accounts receivable balance per general ledger is P505,000 on December 31, 2012. The following are audit comments for possible adjustment: AA Co. Merchandise found defective; returned by the customer on November 10 for credit, but the credit memo was issued by Gorospe only on January 2, 2013. BB, Inc. Account is good but usually pays late. CC Corp. Merchandise worth P40,000 destroyed in transit on June 4, 2012. The carrier was billed on July 1. (See EE Transport and II Company). DD, Inc. Customer billed twice in error for P10,000. Balance is collectible. EE Transport
Collected in full on January 15, 2013. FF, Inc. Paid in full on December 29, 2012, but not recorded. Collections were deposited January 3, 2013. GG Co. Received account confirmation from customer for P11,000. Investigation revealed an erroneous credit for P10,000. (See HH Corp). HH Corp. Neglected to post P10,000 credit to customer’s account II Company Customer wants to know the reason for receipts of P40,000 credit memo as its account payable balance is P100<000. Based on the foregoing information, what should be the adjusted balance of the Accounts receivable-trade at December 31, 2012? PROBLEM 3 DAFFODIL AUTO PARTS Sells new parts to auto dealers. Company policy requires that a prenumbered shipping document be issued for each sale. At the time of pickup or shipment, the shipping clerk writes the date on the shipping document. The last shipment made in the year ended December 31, 2012, was recorded on document 3167. Shipments are billed in the order that the billing clerk receives the shipping documents. For late December 2012 and early January 2013, shipping documents are billed on sales invoices as follows: SHIPPING DOCUMENT NO. 3163 3164 3165 3166 3167 3168 3169 3170 3171 3172
SALES INVOICE NO. 5332 5326 5327 5330 5331 5328 5329 5333 5335 5334
The December 2012 and January 2013 sales journals have the following information included: SALES JOURNAL-December 2012 Day of Month Sales Invoice No. Amount of Sale 30 5326 P72,611 30 5329 191,430 31 5327 41,983 31 5328 62,022 31 5330 4,774 SALES JOURNAL-JANUARY 2013 Day of Month Sales Invoice No. 1 5332 1 5331 1 5333 2 5335 2 5334
Amount of Sale P264,131 10,639 85,206 125,050 64,658
1. What is the net overstatement (understatement) of Daffodil’s sales for the year ended December 31, 2012? a. P21,318 c. (P253,452) b. P253,452 d. (P21,318) 2. What adjusting entry is necessary to correct Daffodil’s financial statements for the year ended December 31, 2012?
a. Accounts receivable 21,318 Sales 21,318 b. Accounts receivable 253,452 Sales 253,452 c. Sales 21,318 Accounts receivable 21,318 d. Sales 253,452 Accounts receivable 253,452 3. Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management’s assertion of a. Rights and obligations b. Completeness c. Existence d. Valuation and allocation 4. Tracing shipping documents to prenumbered sales invoices provides evidence that a. No duplicate shipments or billings occurred b. Shipments to customers were properly invoiced c. All goods ordered by customers were shipped d. All prenumbered sales invoices were accounted for 5. An auditor most likely 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 b. Rights and obligations c. Valuation and allocation d. Completeness PROBLEM 4 Presented below are unrelated situations. Answer the questions relating to each situation: 1. The following information is from GUMAMELA CORP.’s first year of operations: a. Merchandise purchased P450,000 b. Ending merchandise inventory 123,000 c. Collections from customers 150,000 d. All sales are on account and goods sell at 30% above cost. What is the accounts receivable balance at the end of the company’s first year of operation? 2. BANABA CO. reported the following information at the end of its first year of operations, December 31, 2012: Bad debt expense for 2012 P271,000 Uncollectible accounts written off during 2012 35,400 Net realizable value of accounts receivable 895,000 What is the accounts receivable balance at December 31, 2012? 3. SUNFLOWER COMPANY sells a variety of imported goods. By selling on credit, Sunflower cannot expect to collect 100% of its accounts receivable. At December 31, 2011, Sunflower reported the following in its statement of financial position: Accounts receivable P2,197,500 Less: Allowance for bad debts (133,500) Accounts receivable, net P2,064,000 a. What is the accounts receivable balance at December 31, 2012? b. What is the December 31, 2012, balance of the Allowance for Bad Debts account? 4. The following information pertains to ACACIA, INC. for the year ended December 31, 2012: Credit sales during 2012 P4,450,000 Collection of accounts written off in prior periods 170,000 Worthless accounts written off in 2012 191,000 Allowance for doubtful accounts, Jan. 1 2012 155,000 Acacia, Inc. provides for doubtful accounts based on 1½% of credit sales. What is the balance of the allowance for doubtful accounts at December 31, 2012? 5. MAHOGANY COMPANY’s analysis and aging of its accounts receivable at December 31, 2012, disclosed the following: Accounts receivable P460,000
Accounts estimated to be uncollected (per aging) 95,000 Allowance for bad debts (per books) 103,000 What is the net realizable value of Mahogany’s receivables at December 31, 2012? 6. The following amounts are shown on the 2012 and 2011 financial statements of SAN FRANCISCO CO.: 2012 2011 Accounts receivable ? P470,000 Allowance for bad debts 20,000 10,000 Net sales 2,600,000 2,400,000 Cost of goods sold 1,900,000 1,752,000 San Francisco Co.’s accounts receivable turnover for 2012 is 6.5 times. What is the accounts receivable balance at December 31, 2012? 7. The policy of ILANGILANG, INC. is to debit bad debt expense for 3% of all new sales. The following are the company’s sales and allowance for bad debts for the past four years. Year Sales Allowance for Bad Debts Year-End Balance 2009 P3,000,000 P45,000 2010 2,950,000 56,000 2011 3,120,000 60,000 2012 2,420,000 75,000 What are the amounts of accounts written off in 2010, 2011, and 2012? PROBLEM 5 CALACHUCHI CORP.’s accounts receivable subsidiary ledger shows the following information: Customer Account Balance Invoice Dec. 31, 2012 Date Amount Aruy, Inc. P35,180 12/06/12 P14,000 11/29/12 21,180 Naku Co. 20,920 09/27/12 12,000 08/20/12 8,900 Syak Co. 30,600 12/08/12 20,000 10/25/12 10,600 Trip Co. 45,140 11/17/12 23,140 10/09/12 22,000 Uy Co. 31,600 12/12/12 19,200 12/02/12 12,400 Xak Co. 17,400 09/12/12 17,400 The estimated bad debt rates below are based on Calachuchi Corp.’s receivable collection experience. Age of Accounts 1 – 30 days 31 – 60 days 61 – 90 days 91 – 12 days Over 120 days
Rate 1% 1.5% 3% 10% 50%
The allowance for bad debts account had a debit balance of P5,500 on December 31, 2012, before adjustment. 1. The company’s accounts receivable under “61 – 90 days” category should be a. P32,320 c. P44,600 b. P44,320 d. P42,000 2. The company’s accounts receivable under “91 – 120 days” category should be a. P9,699 c. P29, 400 b. P40,000 d. P12,000 3. The allowance for bad debts to be reported in the statement of financial position at December 31, 2012, is a. P9,699 c. P4,199 b. P15,199 d. P5,500 4. What entry should be made on December 31, 2012, to adjust the allowance for bad debts account? a. Bad debt expense 15,199 Allowance for bad debts 15,199
b. Bad debt expense Allowance for bad debts c. Allowance for bad debts Bad debt expense d. Bad debt expense Allowance for bad debts 5. What is the net realizable value of accounts a. P165,641 b. P171,141
4,199 4,199 5,500 5,500 9,699 9,699 receivable at December 31, 2012? c. P196,039 d. P186,340
PROBLEM 6 YELLOW BELLS, INC., estimates its bad debt losses by agig its accounts receivable. The aging schedule of accounts receivable at December 31, 2012, is presented below: Age of Accounts Amount 0 – 30 days P 843,200 31 – 60 days 461,000 61 – 90 days 192,400 91 – 120 days 76,650 Over 120 days 39,400 P1,612,650 Yellow Bells, Inc.’s uncollectible accounts experience for the past 5 years is summarized in the following schedule: Year A/R 0 – 30 31 – 60 61 – 90 91 – 120 Over 120 Balance Days Days Days Days Days Dec. 31 2011 P1,312,5 0.3% 1.8% 12% 38% 65% 00 2010 999,999 0.5% 1.6% 11% 41% 70% 2009 465,000 0.2% 1.5% 9% 50% 69% 2008 816,000 0.4% 1.7% 10.2% 47% 81% 2007 1,243,66 0.9% 2.0% 9.7% 33% 95% 7 The balance of the allowance for bad debts account at December 31, 2012, (before adjustment) as P84,500. 1. What is the average bad debt expense rate for “91 – 120 days” accounts? a. 76% c. 10.38% b. 8.6% d. 41.80% 2. What is the average bad debt expense rate for “31 – 60 days” accounts? a. 10.38% c. 0.46% b. 41.80% d. 1.72% 3. The net realizable value of the company’s accounts receivable on December 31, 2012, should be a. P1,518,887 c. P1,528,150 b. P1,612,650 d. P1,603,358 4. What entry should be made to adjust the allowance for bad debts on December 31, 2012? a. Bad debt expense 178,263 Allowance for bad debts 178,263 b. Bad debt expense 93,763 Allowance for bad debts 93,673 c. Bad debt expense 9,263 Allowance for bad debts 9,263 d. Allowance for bad debts 9,263 Bad debt expense 9,263 5. In evaluating the adequacy of the allowance for bad debts, an auditor likely reviews the entity’s aging of receivables to support management’s financial statement assertion of a. Existence b. Valuation and allocation c. Completeness d. Rights and obligations PROBLEM 7
Presented below are unrelated situations. Answer the questions relating to each situation. 1. ORCHIDS COMPANY’s Accounts receivable at December 31, 2012 had a balance of P1.200,000. The allowance for bad debts account had a credit balance of P40,000. Net sales in 2012 were P6,704,000 (net of sales discounts of P56,000). An aging schedule shows that P150,000 of the outstanding accounts receivable are doubtful. What is the adjusting entry for estimated bad debt expense? 2. The following selected transactions occurred during the year ended December 31, 2012: Gross sales (cash and credit) P750,000 Collections from credit customers, not of 2% cash discount 245,000 Cash sales 150,000 Uncollectible accounts written off 16,000 Credit memos issued to credit customers for sales Returns and allowances 8,400 Cash refunds given to cash customers for sales returns And allowances 12,640 Recoveries on accounts receivable written off in prior years (not included in cash received stated above) 5,421 At the year-end, the company provides for estimated bad debt losses by crediting the Allowance for Bad Debts account for 2% of its net credit sales for the year. a. What is the company’s net credit sales in 2012? b. What is the bad debt expense for 2012? 3. COCONUT CO. estimates its bad debt expense to be 3% of net sales. The company’s unadjusted trial balance at December 31, 2012, included the following accounts: Debit Credit Allowance for bad debts P8,000 Sales 2,600,000 Sales returns and allowances P45,000 What is the company’s bad debt expense for 2012? 4. BANAWE, INC. estimates its uncollected accounts to be 3% of the accounts receivable balance. The following information was taken from the company’s statement of financial position at December 31, 2012: Debit Credit Net sales (including cash sales of P3,460,000 P825,000) Allowance for bad debts P69,000 Accounts receivable 2,460,000 What is the bad debt expense to be reported for 2012? PROBLEM 8 LAGUNDI COMPANY applies the allowance method to value its accounts receivable. The company estimates its bad debts based on past experience, which indicates that 1.5% of net credit sales will be uncollectible. Its total sales for the year ended December 31, 2012, amounted to P4,000,000 including cash sales of P400,000. After a thorough evaluation of the accounts receivable from Nolog Company amounting to P20,000, Lagundi has decided to write off this account before year-end adjustments are made. Shown below are Lagundi’s account balances at December 31, 2012, before any adjustments and the P20,000 write off. Sales P4,000,000 Accounts receivable 1,500,000 Sales discounts 250,000 Allowance for bad debts 33,000 Sales returns and allowances 350,000 Bad debt expense 0 Lagundi has decided to value its accounts receivable using the statement of financial position approach as suggested by its external auditors. Presented below is the aging of the accounts receivable subsidiary ledger accounts at December 31, 2012. Account Balance Less than 61 – 90 91 – 120 Over 120 60 days days days days Antiporda P100,000 P100,000 Balbakwa 256,000 180,000 P76,000 Curdapia 654,000 500,000 154,000 Dagul 50,000 P50,000
Empoy Total % collectible
420,000 P1,480,0 00
P780,000
P230,000
P420,000 P420,000
99%
95%
85%
P50,000 60%
1. The entry to write off Lagundi’s accounts receivable from Nolog of P20,000 will a. Decrease total assets and net income for 2012 b. Increase total assets and decrease net income for 2012 c. Have no effect on total assets and net income for 2012 d. Have no effect on total assets and increase net income for 2012 2. Lagundi’s estimated bad debt expense for 2012 based on net credit sales is a. P60,000 c. P45,000 b. P12,000 d. P56,250 3. The final entry to adjust the allowance for bad debs account is a. Bad debt expense 44,300 Allowance for bad debts 44,300 b. Bad debt expense 45,000 Allowance for bad debts 45,000 c. Bad debt expense 24,300 Allowance for bad debts 24,300 d. Allowance for bad debts 24,300 Bad debt expense 24,300 4. What is the net realizable value of Lagundi’s accounts receivable on December 31, 2012? a. P1,435,700 c. P1,397,700 b. P1,435,000 d. P1,377,700 5. Which of the following, most likely would give the most assurance concerning the valuation and allocation assertions of accounts receivable? a. Vouching amounts in the subsidiary ledger to details on shipping documents. b. Comparing receivables turnover ratios with industry statistics for reasonableness. c. Inquiring about receivables pledged under loan agreements. d. Assessing the allowance for uncollectible accounts for reasonableness. PROBLEM 9 From inception of operations to December 31, 2012, MAKAHIYA CORP. provided for uncollected accounts receivable under the allowance method: provisions were made monthly at 2% of credit sales; bad debts written off were charged to the Allowance account; recoveries of bad debts previously written off were credited to the Allowance account; and no year-end adjustments to the Allowance account were made. Makahiya’s usual credit terms are net 30 days. The balance in the Allowance for Bad Debts account was P143,000 at January 1, 2012. During 2012, credit sales totaled P15,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, P140,000 of bad debts were written off, and recoveries of accounts previously written off amounted to P43,000. Makahiya installed a computer facility in November 2012 and an aging of accounts receivable was prepared for the first time as of December 31, 2012. A summary of the aging is as follows: Classification by Month Balance in Each Estimated % of Sale Category Uncollectible November-December P2,160,000 2% 2012 July-October 2012 1,300,000 10% January-June 2012 840,000 25% Prior to January 1, 2012 300,000 70% P4,600,000 Based on the review of collectability of the account balances in the “prior to January 2, 2012” aging category, additional receivables totaling P12,000 were written off as of December 31, 2012. The 70% uncollectible estimate applies to the remaining P180,000 in the category. Effective with the year ended December 31, 2012, Makahiya adopted a new accounting method for estimating the allowance for doubtful accounts ate the amount indicated by the year-end aging analysis of accounts receivable. 1. What is the balance of the Allowance for Bad Debts account on December 31, 2012 (before year-end adjustment)?
2.
3. 4.
5.
a. P300,000 c. P226,000 b. P143,000 d. P346,000 What is the journal entry for the year-end adjustment to the allowance for Bad Debts account balance as of December 31, 2012? a. Bad Debts Expense 283,200 Allowance for Bad Debts 283,200 b. Bad Debts Expense 163,200 Allowance for Bad Debts 163,200 c. Allowance for Bad Debts 143,000 Bad Debts Expense 143,000 d. Bad Debts Expense 509,200 Allowance for Bad Debts 509,000 For the year ended December 31, 2012, Makahiya’s bad debt expense would be a. P626,200 c. P300,000 b. P283,200 d. P583,200 The net realizable value of Makahiya’s accounts receivable at December 31, 2012 should be a. P4,374,000 c. P3,970,800 b. P3,896,800 d. P4,090,800 An auditor’s purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management’s assertion about a. Completeness b. Existence c. Rights and obligations d. Valuation and allocation
PROBLEM 10 You are examining the financial statements of SALUYOT COMPANY for the year ended December 31, 2012. Your audit of the accounts receivable and other related accounts disclosed the following information: 1. The December 31, 2012, balance in the Accounts Receivable control account is P788,000. 2. The only entries in the Bad Debts Expense account were: a. A credit for P1,296 on December 1, 2012, because customer A remitted in full for the account charged off October 31, 2012. b. A debit on December 31 for the amount of the credit to Allowance for Bad Debts. 3.
The Allowance for Bad Debts account is presented below: Date Particulars Debit Credit Jan. 1 Balance Oct. 31 Uncollectible: Customer A P1,296 B P6,032 3,280 C 2,256 Dec. 31 3% of P788,000 P23,640
Balance P15,250
9,218
32,858
4. An aging schedule of the accounts receivable as of December 31, 2012, and the decisions are as shown in the table below: Age Net Debit Amount to which the allowance is to be adjusted after Balance adjustments and corrections have been made 0 – 1 month P372,960 1% 1–3 307,280 2% months 3–6 88,720 3% months Over 6 24,000 Definitely uncollectible, P4,000; P8,000 is considered to months be 50% uncollectible; the remainder is estimated to be 80% collectible P792,960 5. There is a credit balance in one account receivable(0-1 month) of P8,000; it represents an advance on a sales contract; also there is a credit balance in one of the 1-3 months accounts receivable of P2,000 for which merchandise will be accepted by the customer.
6. The Accounts Receivable control account is not in agreement with the subsidiary ledger. The differences cannot be located, and the company’s accountant decides to adjust the control to the sum of the subsidiaries after corrections are made. 1. The Adjustments to correct the entry made on December 1, 2012, is a. Bad debts expense 1,296 Accounts receivable 1,296 b. Bad debts expense 1,296 Allowance for bad debts 1,296 c. Accounts receivable 1,296 Allowance for bad debts 1,296 d. No adjusting entry is necessary 2. The required allowance balance (per aging) on December 31, 2012, is a. P29,354 c. P19,858 b. P19,058 d. P32,858 3. The net realizable value of Saluyot’s accounts receivable on December 31, 2012 amounts to a. P779,902 c. P793,200 b. P774,142 d. P788,664 4. Saluyot should report bad debt expense for 2012 of a. P13,344 c. P10,296 b. P22,344 d. P33,936 5. What entry is necessary to adjust the allowance account at December 31, 2012? a. Bad debts expense 10,296 Allowance for bad debts 10,296 b. Bad debts expense 13,800 Allowance for bad debts 13,800 c. Allowance for bad debts 10,296 Bad debts expense 10,296 d. Allowance for bad debts 13,800 Bad debts expense 13,800 PROBLEM 11 The following information is based on a first audit of SABILA COMPANY.The client has not prepared financial statements for 2012, 2011, or 2012. During these years, no accounts have been written off as uncollectible, and the rate of gross income on sales has remained constant for each of the three years. Prior to January 1, 2012, the client used the accrual method of accounting. From January 1, 2012, to December 31, 2012, only cash receipts and disbursements records were maintained. When sales on account were made, they were entered in the subsidiary accounts receivable ledger. No general ledger posting have been made since December 31, 2009. As a result of your examination, the correct data shown in the table below are available: 12/31/09 12/31/12 Accounts receivable balances: Less than one year old P15,400 P28,200 One to two years old 1,200 1,800 Two to three years old 800 Over three years old 2,200 Total accounts receivable Inventories Accounts payable for inventory purchased
P16,600 P11,600 P5,000
P33,000 P18,800 P11,000
Cash received on accounts receivable in: Applied to: Current year collections Accounts of the prior year Accounts of two years prior Total Cash sales Cash disbursements for inventory purchased
2010
2011
2012
P148,800 13,400 600 P162,800 P17,000 P125,000
P161,800 15,000 400 P177,200 P26,000 P141,200
P208,800 16,800 2,000 P227,600 P31,200 P173,800
1. The company’s sales revenue for the three-year period amounted to a. P658,200 c. P625,400 b. P74,200 d. P415,300 2. What is the company’s total sales revenue for 2011? a. P206,400 c. P268,200 b. P183,600 d. P180,400 3. The aggregate amount of purchases for the three-year period is a. P131,000 c. P434,000 b. P440,000 d. P446,000 4. What is the company’s gross income ratio in each of the three-year period? a. 33.33% c. 35.16% b. 28.35% d. 31.15% 5. What is the company’s gross income for each of the three-year period? 2010 2011 a. P60,933 P68,200 b. 55,533 60,133 c. 122,400 137,600 d. 61,200 68,800
2012 P 80,000 79,000 178,800 89,400
PROBLEM 12 You are auditing the accounts receivable and the related allowance for bad debts account of IKEBANA COMPANY. The following data are available General Ledger Accounts receivable 2012 Dec. 31 424,000 Allowance for Bad Debts 2012 2012 July 31 GJ-Write off 8,000 Jan. 1 Balance 10,000 Dec. 31 GJ-Provision 24,000 Summary of Aging Schedule The summary of the subsidiary ledger balances as of December Debit balances: Under one month P180,000 One to six months 184,000 Over six months 76,000 P440,000 Credit balances: AA Co. P 4,000 2013 BB Co. 7,000 DD Co.* CC Co. 9,000 P20,000 *Account is in “one to six months” classification.
31, 2012, is shown below:
OK; additional billing in Jan. Should have been credited to Advance on a sale contract
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 Bad Debts Requirements It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six months are expected to require an allowance of 2 percent. Accounts over six months are analyzed as follows: Definitely bad P24,000 Doubtful (estimated to be 50% collectible) 12,000 Apparently good, but slow (estimated to be 90% collectible) 40,000 Total P76,000 1. The adjusted balance of Ikebana’s “1 to 6 months” accounts receivable is a. P164,000 c. P177,000 b. P171,000 d. P184,000 2. The adjusted balance of Ikebana’s “over 6 months” accounts receivable is a. P76,000 c. P69,000
b. P52,000 d. P45,000 3. The adjusted accounts receivable balance on December 31, 2012 should be a. P404,000 c. P69,000 b. P420,000 d. P413,000 4. The required balance of the allowance for bad debts account on December 31, 2012 is a. P404,000 c. P15,480 b. P15,340 d. P21,340 5. The entry to adjust the allowance for bad debts account is a. Bad debts expense 13,340 Allowance for bad debts 13,340 b. Allowance for bad debts 2,000 Bad debts expense 2,000 c. Bad debts expense 17,340 Allowance for bad debts 17,340 d. Bad debts expense 15,340 Allowance for bad debts 15,340 PROBLEM 13 PITO-PITO COMPANY produces herbal tea and other slimming products that are sold throughout the Philippines. While the company is experiencing a steady growth in sales, it has become noticeable that collections of accounts receivable from customers are no longer as fast as they used to be. Pito-Pito Company’s products are sold on payment terms of 2/10, n/30. In the past, more than 75% of the credit customers have availed of the discount by paying within the discount period. During the year ended December 31, 2012, there has been an increase in the number of customers taking the full 30 days to pay. The company estimates that less than 60% of the customers are taking advantage of the discount. Bad debt losses as a percentage of gross credit sales have increased from the 1.5% provided in prior years to about 4% in the current year. The deterioration of accounts receivable collections has prompted the company’s controller to prepare the following report. ACCOUNTS RECEIVABLE COLLECTIONS December 31, 2012 A. It is normal that some receivables will prove uncollectible. In fact, annual bad debt writeoffs had been 1.5% of total credit sales for many years. However, this rate has increased to 4% during the current year. B. The accounts receivable balance at December 31, 2012 is P3,000,000. The condition of this balance in terms of age and probability of collection is presented below. Proportion of Total Age Categories Probability of Collection 64% 1 to 10 days 99% 18% 11 to 30 days 97.5% 8% Past due 31 to 60 days 95% 5% Past due 61 to 120 days 80% 3% Past due 121 to 180 days 65% 2% Past due over 180 days 20% C. The allowance for bad debts had a credit balance of P54,600 on January 1, 2012. D. The P640,000 bad debt expense provided during the year is based on the assumption that 4% of total credit sales will be uncollectible. E. Accounts written-off during the year totaled P585,000. 1. What is the required allowance balance on December 31, 2012? a. P154,200 c. P209,200 b. P109,600 d. P55,000 2. What year-end adjustment is necessary to bring Pito-Pito Company’s allowance for doubtful accounts to the balance indicated by the aging analysis? a. Bad debt expense 10,400 Allowance for doubtful accounts 10,400 b. Allowance for doubtful accounts 10,400 Bad debt expense 10,400 c. Bad debt expense 44,600 Allowance for doubtful accounts 44,600 d. Bad debt expense 154,200 Allowance for doubtful accounts 15,200 3. What is the net realizable of Pito-Pito Company’s accounts receivable at December 31, 2012? a. P2,955,400 c. P2,736,200
b. P2,845,800 d. P1,675,800 4. Pito-Pito should report bad debt expense for 2012 of a. P99,600 c. P640,000 b. P595,400 d. P684,600 5. Pito-Pito’s total credit sales for 2012 is a. P16,000,000 c. P25,600,000 b. P42,666.667 d. P14,625,000 PROBLEM 14 Presented below are unrelated situations. Answer the questions relating to each situation. 1. On December 5, 2012, BANDERA ESPAÑOLA, INC. sold its accounts receivable (net realizable value, P260,000) for cash of P230,000. Ten percent of the proceeds was withheld by the factor to allow for possible customer returns and other account adjustments. The related allowance for bad debts is P40,000. A. What amount of loss on factoring should be recognized? B. What is the entry to record the factoring of accounts receivable? 2. On April 1, 2012, SAMPAGUITA CORPORATION assigned accounts receivable totaling P400,000 as collateral on a P300,000, 16% note from Iwahig Bank. The assignment was done on a nonnotification basis. In addition to the interest on the note, the bank also receives a 2% service fee, deducted in advance on the P300,000 value of the note. Additional information is as follows: A. Collections of assigned accounts in April totaled P191,100, net of a 2% sales discount. B. On May 1, Sampaguita Corporation paid the bank the amount owed for April collections plus accrued interest on note to May 1. C. The remaining accounts were collected by Sampaguita Corporation during May except for P2,000 accounts written off as worthless. D. On June 1, Sampaguita Corporation paid the bank the remaining balance of Sampaguita Corporation. Prepare the journal entries to record the above transactions on the books of Sampaguita Corporation. 3. ROSAL FINANCE CORP. 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 Rosal’s books. Also, 10% of the receivables factored is withheld by Rosal as protection against sales returns or other adjustments. This amount is credited by Rosal to the Client Retainer account. At the end of each month, payments are made by Rosal to its clients so that the balance in the Client Retainer account is equal to 10% of unpaid factored receivables. Based on Rosal’s bad debt loss experience, an allowance for bad debts of 5% of all factored receivables is to be established. Rosal makes adjusting entries at the end of each month. On January 3, 2012, Poor Inc. factored its accounts receivable totaling P1,000,000. By January 31, P800,000 on these receivables had been collected by Rosal. Prepare the entries on Rosal’s and Poor’s books to record the above information. PROBLEM 15 During your audit of FOREVER COMPANY for the year ended December 31, 2012, you find the following account. NOTES RECEIVABLE Date Debit Credit Sep. 1 Cornea, 20%, due in 3 months P80,000 Oct. 1 Hunk Co., 24%, due in 2 months 300,000 1 Discounted Cornea note at 25% P80,00 0 Nov. 1 Valerie, 24%, due in 13 months 600,000 30 Cellular Co., no interest, due in one year 500,000 30 Discounted note at 18% 500,00 0 Dec. 1 Tictic, 18% due in 5 months 900,000 1 O. Reyes, President, 12%, due in 3 months (for cash loan given to O. 1,200,000 Reyes)
All noted are trade notes unless otherwise specified. The Cornea note was paid on December 1 as per notification received from the bank. The Hunk Co. note was dishonored on the due date but the legal department has assured management of its full collectability. The company, with your concurrence, will treat the discounting as a conditional sale of note receivable. 1. At what amount on the current assets section of the December 31, 2012 statement of financial position will the Notes receivable-trade be carried? a. P1,500,000 c. P2,400,000 b. P1,800,000 d. P2,080,000 2. What amount of loss on notes receivable discounting should be reported in the 2012 income statement of the company? a. P90,500 c. P90,000 b. P90,833 d. P0 3. Based on the ledger account presented, what amount of interest income should be accrued at December 31, 2012? a. P55,500 c. P49,500 b. P61,500 d. P67,500 PROBLEM 16 The AUTOMATIC COMPANY sells plastic products to wholesalers. The end of the company’s reporting period is December 31. During 2012, the following transactions related to receivable occurred: March 31 Sold merchandise to Mismo Co. and accepted a 10% note. Payment of P120,000 principal plus interest is due on March 31, 2013. April 12 Sold merchandise to Ace Co. for P20,000 with terms 2/10, n/30. Automatic uses the gross method to account for cash discounts. April 21 Collected the entire amount due from Abe Co. April 27 A customer returned merchandise costing Automatic P60,000. Automatic reduced the customers receivable balance by P80,000, the sales price of the merchandise. The company records sales returns as they occur. May 30 Transferred receivables of P1,000,000 to a factor without recourse. The factor charged Automatic a @5 finance charge on the receivables transferred. The criteria to derecognize the asset are met. July 31 Sold merchandise to Fabon Company for P150,000 and accepted an 8%, 6-month note. 8% is an appropriate rate for this type of note. Sept. 30 Discounted the Fabon Company note ate the bank. The bank’s discount rate is 12%. The note was discounted without recourse. Required: 1. Prepare the necessary journal entries to account for the above transactions. For transactions involving the sale of merchandise, ignore the entry for the cost of goods sold. 2. Prepare any necessary adjusting entries at December 31, 2012. Adjusting entries are only recorded at year-end. PROBLEM 17 The following long term receivable were reported in the December 31, 2011statement of financial position of MANGO CORPORATION: Note receivable from sale of plant P3,000,000 Note receivable from officer 800,000 The following transactions during 2012 and other information relate to the company’s long term receivables: 1. The note receivable from sale of plant interest at 12% per annum. The note is payable in 3 annual installments of P1,000,000 plus interest on the unpaid balance every April1. The initial principal and interest payment was made on April 1, 2012. 2. The note receivable from officer is dated December 31, 2011, earns interest at 10% per annum, and is due on December 31, 2014. The 2012 interest was received on December 31, 2012. 3. Mango sold a piece of equipment to Banana, Inc. on April 1, 2012, in exchange for a P400,000 non-interest-bearing note due on April 1, 2014. 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, 2012 was 12%. The present value factor of 1 for two periods at 12% is 0.797.
4. A tract of land was sold by Mango to Orange, Inc. on July 1, 2012, for P2,000,000 under an installment sale contract. Orange signed a 4-year 11% note for P1,400,000 on July 1, 2012, in addition to the down payment of P600,000. The equal annual payments of principal and interest on the note will be P451,250 payable on July 1, 2013, 2014, 2015, and 2016. The land had an established cash price of P2,000,000, and its cost to Mango was P1,500,000. The collection of the installments on this note is reasonably assured. 1. The amount to be reported as noncurrent receivables in the statement of financial position at December 31, 2012 is a. P3,096,242 c. P3,221,550 b. P3,067,550 d. P3,250,242 2. The current portion of notes receivable on December 31, 2012 should be a. P1,451,250 c. P2,097,250 b. P1,297,250 d. P2,297,250 3. The accrued interest receivable on December 31, 2012 should be a. P257,000 c. P285,692 b. P180,000 d. P334,000 4. On December 31, 2012, the unamortized discount on note receivable sale of equipment should be a. P42,944 c. P0 b. P109,892 d. P52,508 5. The total interest income for the year ended December 31, 2012 should be a. P427,000 c. P375,692 b. P455,692 d. P532,692 PROBLEM 18 Presented below are unrelated situations. Answer the questions relating to each situation. 1. On January 1, 2012, WALING-WALING CO. 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 to 12%: Present value of 1 to 3 periods 0.71178 Present value of an ordinary annuity of 1 to 3 periods 2.40183 a. What is the gain or loss to be recognized on the sale of the equipment? b. What is the discount on note receivable on January 1, 2012? c. What is the discount amortization at the end of the third year (using the effective interest method)? 2. On January 2, 2012, a tract of land that originally cost P800,000 was sold by VIETNAM ROSE COMPANY. 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 to 10%: Present value factor of 1 to 3 periods 0.75132 Present value factor of 1 to 12 for 2 periods 0.82645 Present value factor of 1 for 1 period 0.90909 Present value of an ordinary annuity of 1 for 3 periods 2.48685 a. What amount of gain on sale of land should be recognized on January 2, 2012? b. How much interest income should be reported for 2012? 3. The notes receivable account of CAMITO, INC. consisted of the following: A. 60-day note of P10,000 dated May 15 with a 9% interest rate, discounted at the bank on June 8 at 12%. B. 120-day note of P100,000 (face amount) dated October 1 with no stated interest rate and a market rate of (% interest, discounted at the bank on November 30 at 12%. This note was received from the sale of equipment. Determine the proceeds from discounting of notes receivable. PROBLEM 19 The Notes Receivable account of BUNSOY CO. has a debit balance of P239,200 on December 31, 2012. There was no balance at the beginning of the year. Your analysis of the account reveals the following: 1. Notes amounting to P845,000 were received from customers during the year.
2. Notes of P 416,000 were collected on due date and notes amounting to P221,000 were discounted at the Aggressive Bank. The notes Receivable account was credited for the notes discounted. 3. Of the P221,000 notes discounted, P104,000 was paid on maturity date while a note for P31,200 was dishonored and was charged bak to Notes Receivable account. 4. Cash of P33,000 was received as partial payment on notes not yet due. The amount received was credited to Liability on Partial Payments account. 5. A note for P50,000 was pledged as collateral for a bank loan. 6. Included in the company’s cash account balance iss a three-month note from an officer amounting to P8,000 which is over past due. Assuming that Bunsoy Co. will use a Notes Receivable Discounted account, the adjusted balance of the Notes Receivable account on December 31, 2012 is A. P260,800 C. P364,800 B. P323,200 D. P175,000 PROBLEM 20 YOKOHANA BANK loaned P5,500,000 to Bargain Company on January 1, 2012. The initial loan repayment terms include a 10% interest rate plus annual principal payments of P1,100,000on January 1 each year. Bargain made the required interest payment in 2012 but did not make the P1,100,000 principal payment nor the P550,000 interest payment for 2013. Yokohana is preparing its annual financial statements on December 31, 2013. Bargain is having financial difficulty, and Yokohana has concluded that the loan is impaled. Analysis of Bargain’s financial condition on December 31, 2013 indicates the principal payments will be collected, but the collection of interest is unlikely. Yokohana did not accrue the interest on December 31, 2013. The projected cash flows are: December 31, 2014 P1,750,000 December 31, 2015 2,000,000 December 31, 2016 1,750,000 P5,500,000 1. What a. b. 2. What a. b. 3. What a. b. 4. What a. b. 5. What a. b.
is the loan impairment loss on December 31, 2013? P941,500 c. P0 P550,000 d. P5,500,000 is the interest income to be reported by Yokohana Bank in 2014? P501,435 c. P455,850 D. P550,000 is the carrying value of the loan receivable on December 31, 2015? P1,590,785 b. P3,264,350 P1,750,000 d. P4,558,500 is the interest income in 2015? P159,079 b. P455,850 P550,000 d. P326,435 is the interest income in 2016? P159,079 b. P326,435 P550,000 d. P455,850
PROBLEM 21 On January 1, 2010, MELON CORP. loaned P3,000,000 to Debtor Company. Under the loan agreement, Debtor Company is to make an annual principal payment of P600,000 for 5 years plus interest 1t 8%. The first principal and interest payment is due on January 1, 2011. The required payments were made by Debtor Company for 2011 and 2012. However, during 2012, Debtor Company began to face financial difficulties, requiring Melon Corp. to reevaluate the collectability of the loan. On December 31, 2012, Melon Corp. determines that it will be able to collect the remaining principal, but it is unlikely that the interest will be collected. The following present value factors are taken from the table of present values: Present value of 1 at 8% for: 1 period 0.92593 2 periods 0.85734 3 periods 0.79383 1. What is the present value of the expected future cash flows as of December 31, 2012? a. P1,800,000 c. P1,669,962 b. P2,146,260 d. P1,428,894
2. What is the amount of loan impairment on December 31, 2012? a. P371,106 c. P730,038 b. P130,038 d. P0 3. Assuming that Melon Corp.’s assessment of the collectability of the loan has not changed, what amount of interest revenue should be recognized for 2013? a. P85,597 c. P96,000 b. P144,000 d. P133,597
