CHAPTER 4 – Audit of Receivables Problem 1 The accounts receivable of FRANCO COMPANY were stated at P1,467,000 in a balance sheet submitted to a banker for credit. You are called upon to audit the report and, upon analysis, the asset was found to consist of the following items: Due from customers on open account P 1,125,000 Acknowledged claim for damages 22,500 Due from consignee at billed price – cost price being P22,500 30,000 Investment in and advances to affiliated company 150,000 Loans to officers and employees 13,500 Deposits with municipalities – bids for contracts 67,500 Unpaid capital stock subscriptions 60,000 Advances to creditors for merchandise purchased but not received 24,000 Cash advanced to salesmen for traveling expenses 4,500 Allowance for doubtful accounts ( 30,000) P1,467,000 The amount of P1,125,000 due from customers was the remaining balance after deducting accounts with credit balances of P6,000. During your examination, you noted that on December 31, the company assigned P300,000 of customers’ accounts to secure a 17%, P240,000 note payable. A 1% commission based on the accounts assigned was charged and deducted from the cash received. The client recorded this transaction by a debit to cash and a credit to notes payable. Questions 1. How much is the Accounts Receivable (gross) balance at December 31? a. P 759,000 b. P 789,000 c. P 1,101,000 d. P 1,131,000 2. The total current non-trade receivable balance at December 31 is: a. P 64,500 b. P 96,000 c. P 120,000 d. P 192,000 3. The liability for the accounts receivable – assigned is: a. P 237,000 b. P 240,000 c. P 243,000 d. P 300,000 1
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CHAPTER 4 – Audit of ReceivablesProblem 1The accounts receivable of FRANCO COMPANY were stated at P1,467,000 in a balance sheet submitted to a banker for credit. You are called upon to audit the report and, upon analysis, the asset was found to consist of the following items:
Due from customers on open account P 1,125,000Acknowledged claim for damages 22,500Due from consignee at billed price – cost price
being P22,500 30,000Investment in and advances to affiliated company 150,000Loans to officers and employees 13,500Deposits with municipalities – bids for contracts 67,500Unpaid capital stock subscriptions 60,000Advances to creditors for merchandise purchased
but not received 24,000Cash advanced to salesmen for traveling expenses 4,500Allowance for doubtful accounts ( 30,000)
P1,467,000
The amount of P1,125,000 due from customers was the remaining balance after deducting accounts with credit balances of P6,000.
During your examination, you noted that on December 31, the company assigned P300,000 of customers’ accounts to secure a 17%, P240,000 note payable. A 1% commission based on the accounts assigned was charged and deducted from the cash received. The client recorded this transaction by a debit to cash and a credit to notes payable.
Questions
1. How much is the Accounts Receivable (gross) balance at December 31?a. P 759,000 b. P 789,000 c. P 1,101,000 d. P 1,131,000
2. The total current non-trade receivable balance at December 31 is:a. P 64,500 b. P 96,000 c. P 120,000 d. P 192,000
3. The liability for the accounts receivable – assigned is:a. P 237,000 b. P 240,000 c. P 243,000 d. P 300,000
4. The total non-trade receivable balance at December 31 is:a. P 342,000 b. P 318,000 c. P 313,500 d. P 245,000
Solution(1) Claims Receivable 22,500
Accounts receivable 22,500(2) Sales 30,000
Accounts receivable 30,000(3) Advances to affiliates 150,000
Unadjusted AR 1,467,000 Non-trade AR(1) ( 22,500) Claims receivable 22,500(2) ( 30,000) Advances to affiliates 150,000(3) ( 150,000) Advances to off/empl(4) ( 13,500) ( 13,500 + 4,500) 18,000(5) ( 67,500) Deposit for contracts 67,500(6) ( 60,000) Subscription receivable 60,000(7) ( 24,000) Advances to suppliers 24,000(8) ( 4,500)(9) 30,000(10) 6,000 __________Adjusted balance 1,131,000 Total 342,000
Current non-trade ARClaims receivable 22,500Advances to off/empl( 13,500 + 4,500) 18,000Advances to suppliers 24,000Total 64,500Answer:1. D 2. A 3. B 4. A
Problem 2In your audit of MENDOZA COMPANY for the past calendar year, you find the following accounts:
ALLOWANCE FOR BAD DEBTSJan. – Dec. Write-off of Jan. 1, 2002 P 95,000 last year’s receivables P 85,000 Dec. 31 provisions 315,000 Write-off of this year’s Receivables 15,000
In your examination, you find that the balance of Accounts Receivable represents sales of the current audit year only; that credit balances in the subsidiary ledger for accounts receivable totaled P80,000; and that the current year’s provision for bad debts expense was 5% of sales (as compared with 4½% last year, 4% of the year before, and 3½% the next previous year). Sequential to aging the accounts receivable, you and the company’s treasurer agree on an additional write-off of P50,000, and P300,000 as the probable loss to be sustained on collection of the accounts receivable balance.
Questions
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1. The adjusted Accounts Receivable balance is:a. P 830,000 b. P 1,100,000 c. P 1,130,000 d. P 1,180,000
2. The adjusted Allowance for Bad Debts is:a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000
3. The adjusted Bad Debts account is:a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000
4. The provision per record at December 31 is:a. P 260,000 b. P 300,000 c. P 315,000 d. P 355,000
SolutionAccounts Receivable 80,000
Customers’ credit balance 80,000Allowance for bad debts 50,000
Problem 3The following selected transactions occurred during the year ended December 31, 2006 of DOMINGO COMPANY:
Gross sales (cash and credit) P 900,736.80Collections from credit customers, net of 2% cash discount 294,000.00Cash sales 180,000.00Uncollectible accounts written off 19,200.00Credit memos issued to credit customers for sales ret./allow. 10,080.00Cash refunds given to cash customers for sales ret./allow. 15,168.00Recoveries on accounts receivable written-off in prior years (not included in cash received stated above) 6,505.20
At year-end, the company provides for estimated bad debts losses by crediting the Allowance for Bad Debts account for 2% of its net credit sales for the year. The allowance for bad debts at the beginning of the year is P19,327.20.
Questions1. How much is the DOMINGO COMPANY’s gross sales?
a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80
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
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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
- Sales discounts from credit sales ( 6,000.00) - Sales returns from credit sales (10,080.00)
Net credit sales 704,656.80
Bad debts:Net credit sales 704,656.80x % of uncollectible 2%Bad debts 14,093.136
Allowance for bad debts:Beg. balance 19,327.20Provision for bad debts 14,093.14Recoveries 6,505.20Less: 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 4Presented below are unaudited balances of selected accounts of MARJORIE COMPANY as of December 31, 2006:
Cash P 500,000Accounts receivable 1,300,000Allowance for doubtful accounts 8,000Net sales P 6,750,000
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.
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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 (1½%) 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 ½% P20,325
(3) C P20,325 + P8,000 debit balance P28,325
Problem 5During 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.
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:
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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
Ending balance of AR control account 270,000Add: Credits during December 560,400Less: Debits during December ( 780,000)Balance of AR control account – Dec. 1 50,400Add: 2006 Est. allowance for BD 18,000Adjusted AR control account – Dec. 1 68,400Less: AR subsidiary account – Dec. 1 177,000Credit balance of AR account – Dec. 1 108,600
Answer:1. A 2. B 3. C 4. D
Problem 6You 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:Debit Credit Balance
January 1, 2006 P 3,658October 21, 2006, Uncollectible; Marlisa Co., - P324; Abonales Co., - P 820; Cherryl Co., - P564 P 1,508 2,150December 31, 2006, 5% of P197,000 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:
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Age Net Debit Balance Amount to which the Allow. is to be adjusted after adjust.
____________ _________________ and corrections have been made
P2,000 is considered 50% uncollec-tible; the remainder is estima-ted 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 4,764.20b. 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:a. Bad debts 324 c. Allow. for BD 324
Allow. for BD 324 Bad debts 324b. Bad debts 324 d. Accounts receiv. 324
Accounts receivable 324 Bad debts 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 1,440b. Allow. for BD 1,440 d. No adjustment
Accounts receivable 1,440
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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
Per PER SUBSIDIARY LEDGERSControlAcct.
0-1 mo.
1-3 mos
3-6 mos.
Over6 mos. Total
Bal. before adjustments P 197,000 P 93,240 P 76,820 P 22,180 P 6,000 P 198,240Adjustments: Add(Deduct)(2) Correction to 10.31.02 entry to write-off uncollectible accts. (200)(3) Write-off of acct. considered definitely uncollectible ( 1,000) (1,000) (1,000)(4) Reclassification of credit balances 2,500 2,000 500 2,500
P 198,300 P 95,240 P 77,320 P 22,180 P 5,000 P 199,740(5) To adjust the control acct. to agree with SL 1,440 Adjusted balance P 199,740
Audit adjustments as of 12.31.06
(1) Bad Debts expense 324 Allowance for doubtful accounts 324
(2) Allowance for doubtful accounts 200 Accounts Receivable 200
(3) Allowance for doubtful accounts 1,000 Accounts Receivable 1,000
(4) Accounts Receivable 2,500 Customer’s Accounts with Credit Balances 2,500
(6) Allowance for Doubtful Accounts 6,359.80 Bad Debts Expense 6,359.80
Required allowance on 12.31.060-1 mo. P 95,240 x 1% P 952.401-3 mos. 77,320 x 2 % 1,546.403-6 mos. 22,180 x 3% 665.40Over 6 mos. 3,000 x 20% 600.00
2,000 x 50% 1,000.00 P 4,764.20
Beg. balance 3,658.00+ Provision per audit (squeezed figure)
3,490.20
- Write-off 2,384.00Ending balance 4,764.20
Provision per book 9,850.00Provision per audit 3,490.20Adjustment 6,359.80
Answer:1. A 2. C 3. D 4. A 5. C
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6. A 7. C 8. A
Problem 7You 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 P 848,000
Allowance for bad debts:Beginning balance P 20,000Provision per general ledger 48,000Write-offs ( 16,000)
Balance, end 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 P 360,000One to six months 368,000Over six months 152,000
P 880,000
Credit balances:Almario P 8,000 - OK; additional billing in
January 2004Peter 14,000 – Should have been credited
To Manuel Co. - 1-6 mos. classification.
Bituin 18,000 - Advance on a sales contractP 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
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 P 48,000Doubtful (estimated to be 50% collectible) 24,000Apparently good, but slow (90% collectible) 80,000
Total P152,000Questions
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. 8,000b. Sales 8,000 d. No adjustment
Accounts receivable 8,000
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2. The entry to adjust the account of Peter is:a. Accounts receivable 14,000 c. Accounts receivable 14,000
Sales 14,000 Cust. with Cr. bal. 14,000b. Sales 14,000 d. No adjustment
Accounts receivable 14,000
3. The entry to adjust the account of Bituin is:a. Accounts receivable 18,000 c. Accounts receivable 18,000
Sales 18,000 Cust. with Cr. bal. 18,000b. Sales 18,000 d. No adjustment
Accounts receivable 18,000
4. The entry to reconcile the control ledger to the subsidiary ledger is:a. Miscellaneous loss 8,000 c. Accounts receivable 8,000
Under 1 mo. 360,000 x 1% = 3,6001 to 6 mos. 354,000 x 2% = 7,080Over 6 mos.
24,000 x 50% = 12,000 80,000 x 10% = 8,000
Required allowance for bad debts 30,680
Provision for bad debts per audit:Beginning balance 20,000+ Provision – squeezed figure 74,680- Write-off per book 16,000- Additional Write-off 48,000Ending balance 30,680
Provision per book 48,000Provision per audit 74,680Adjustment 26,680
Answer:1. A 2. D 3. C 4. A 5. B6. C 7. C 8. A
Problem 8KAREN COMPANY’s accounts receivable subsidiary ledger shows the following information:
InvoiceCustomer Account Balance – 12/31/06 Date AmountPenas P 70,360 12/06/06 P 28,000
11/29/06 42,360
Jefferson 41,840 09/27/06 24,00008/20/06 17,840
Junsay 61,200 12/08/06 40,00010/25/06 21,200
Cherryl 90,280 11/17/06 46,28010/09/06 44,000
Baron 63,200 12/12/06 38,40012/02/06 24,800
Riza 34,800 09/12/06 34,800
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The estimated bad debt rates below are based on Karen Company’s receivable collection experience.
Age of Accounts Rate0 – 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 ARBalance 0-30 31-60 61-90 91-120 Over 12012/31/06Days Days Days Days Days
Bad debts expense 12,397.60Allowance for bad debts 12,397.60(P19,397.60 – P7,000)
Answer:1. D 2. D 3. C 4. A
Problem 9You 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 Comments Audit Findings
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Duque P 30,000 Balance was paid Dec. Kent received mailed29, 2006. January 2, 2007.
Odessa 74,000 Balance was offset by our Kent credited accountsDec. 10 shipment of goods. payable for P74,000 to
record purchase of goods
Solejon 16,200 The above balance has The payment was been paid. Credited to Dairen – cust.
Rubin 23,700 We do not owe Kent any- The shipment costing thing as the goods were P16,300 was made on
received January, 2007, Dec. 29, 2006 and the FOB Destination goods were not included
in recording the year-end inventory.
Jamea 150,000 Our deposit of P200,000 Kent had previously should cover this balance credited the deposit to
sales.
Ocsio 54,000 We never received these The shipment was erro-goods. neously 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.
Dela Cruz 100,000 We are rejecting the price, Kent’s clerk erroneouslywhich is too much computed the unit price
at P2,000. The correct pricing should have been at P1,200 per unit.
Ronel 18,000 Amount is okay. Since Goods cost P12,000 and this is on consignment, we were appropriately inclu-will remit payment upon ded in Kent’s inventoryselling the goods.
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 30,000b. Cash 30,000 d. No adjustment
Sales 30,000
2. The entry to adjust the finding made in the account of Odessa is:
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a. Purchases 74,000 c. Accounts 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 16,200b. Accounts payable 16,200 d. No adjustment
Accounts receivable 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 23,700b. 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. Cost of sales 16,300 c. Retained earnings 16,300
Inventory 16,300 Inventory 16,300b. 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
Answer:1. D 2. C 3. A 4. A 5. B6. C 7. D 8. B 9. C 10. A
Problem 10You 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 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
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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 36,480
Accounts receivable 36,480Sales 23,980
Accounts receivable 23,980Answer:1. D 2. D
Problem 11You 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 1,400,000Cost 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:
December Register
Invoice No. FOB Terms Date Shipped Amount300 Destination 12/30 P 50,000301 Shipping point 12/30 62,500302 Destination 12/23 47,500303 Destination 12/24 82,500304 Shipping point 01/02 56,000305 Shipping point 12/29 90,000
January Register
Invoice No. FOB Terms Date Shipped Amount306 Destination 12/29 67,500307 Shipping point 12/29 74,500308 Destination 01/02 140,000309 Shipping point 01/04 73,000310 Shipping point 12/27 67,500
Questions
1. The Sales for December is over/(under) by:a. P 36,000 under c. P 106,000 underb. P 36,000 over d. P 106,000 over
2. The Inventory for December is over/(under) by:a. P 235,600 under c. P 181,600 underb. P 235,600 over d. P 181,600 over
3. The adjusted inventory at December 31, 2006 is:
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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 c. P 19,964,000 d. P 19,894,000
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) Sales 50,000
Accounts receivable 50,000Invoice # 300
(2) Cost of sales 50,000Inventory 50,000(62,500 x 80%)
Invoice # 301(3) Sales 56,000
Accounts receivable 56,000Invoice # 304
(4) Cost of sales 72,000Inventory 72,000(90,000 x 80%)
Problem 12You 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
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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.
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 sales for December P143,000December sales recorded in January 12,500January sales recorded in December (62,000) Adjusted sales for December P 93,500
Problem 13On 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.
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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) B P260,000 – P3,500 + (P625,000 x 12% x 1/12) P262,750Problem 14On 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.
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
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
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 Corporation c. A third 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
b. Notes payable 195,000 d. Notes payable 195,000Interest expense 5,333 Interest expense 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
Problem 15UY 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. 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 Accounts receivable factored 1,000,000Commission income (P1 M x 15%) 150,000Client Retainer (P1 M x 10%) 100,000Cash 750,000
31 Client Retainer 80,000Cash (100,000 – [10% x 200,000]) 80,000
31 Bad debts expense 50,000Allowance for bad debts (P1 M x 5%) 50,000
JANETTEE COMPANY’S BOOKS
Jan. 3 Cash 750,000Receivable from factor 100,000Commission 150,000
Accounts receivable 1,000,000
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31 Cash 80,000Receivable from factor 80,000
Answer:1. A 2. D 3. B 4. A
Problem 16During your audit of the LEILANI COMPANY for the calendar year 2006, you find the following accounts:
NOTES RECEIVABLESept. 1 Samson, 12%, due in 3 mos. 36,000 36,000Nov. 1 Hazel, 15%, due in 6 mos. 90,000 126,000Nov. 1 Salazar, no interest, due in one
year 75,000 201,000Nov. 30 Rosa, Co. 12%, due in 13 mos. 15,000 216,000Dec. 1 Rona, 15%, due in 15 mos. 36,000 252,000Dec. 2 Anito, President, 18%, due in 3
mos. 18,000 270,000
NOTES RECEIVABLE DISCOUNTEDSept. 1 Samson note, discounted at
15%36,000 36,000
Nov. 1 Salazar note, discounted at 15% 75,000 111,000
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
Solution1. C
Hazel 90,000 x 15% x 2/12 = P 2,250Rosa 15,000 x 12% x 1/12 = 150Rona 36,000 x 15% x 1/12 = 450Anito 18,000 x 18% x 1/12 = 270Total accrued interest P 3,120
2. B
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Samson = P 310.50Salazar 11,250 x 2/12 = 1,875.00Total interest expense = P2,185.50
5. ASamson P 36,000 – P 310.50 = P 35,689.50Salazar P 75,000 – P11,250 = 63,750.00Total proceeds = P 99,439.50
Problem 17On 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 0.71178Present value of an ordinary annuity of 1 for 3 periods 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 c. P 39,878 d. P 0
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 17,644Equipment 160,000Discount on NR 57,644
b. Notes receivable 200,000 d. Notes receivable 200,000Equipment 160,000 Equipment 160,000Gain on sale 40,000 Gain on sale 122
Discount 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 NRb. Discount on NR d. Interest expense
Interest expense Discount on NR
Solution1. D
Sales price – present value of note (P200,000 x 0.71178) 142,356Book value of equipment 160,000Loss on sale of equipment (17,644)
2. AFace value of note 200,000
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Present value of note 142,356Discount on notes receivable 57,644
3. CNotes receivable 200,000Loss on sale of equipment 17,644
Equipment 160,000Discount on notes receivable 57,644
4. BPresent value of note, 1/1/03 142,356Add: Interest earned in 2003
(142,356 x 12%) 17,083Present value of note, 1/1/04 159,439Add: interest earned in 2004
(159,439 x 12%) 19,133Present value of note, 1/1/05 178,572
5. A
Problem 18On 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 value factor of 1 for 3 periods 0.75132Present value factor of 1 for 2 periods 0.82645Present value factor of 1 for 1 period 0.90909Present value of an ordinary annuity of 1 for 3 periods 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
SolutionAmount of cash to be received:
Interest Principal Total2003 48,000 * 400,000 448,0002004 32,000 ** 400,000 432,0002005 16,000 *** 400,000 416,000Total 1,296,000* 1,200,000 x 4%** 800,000 x 4%*** 400,000 x 4%
Cash received PV Factor Present Value2003 448,000 0.90909 407,2722004 432,000 0.82645 357,0262005 416,000 0.75132 312,549Total 1,076,847Present value of note 1,076,847Cost of land 800,000Gain on sale 276,847
Interest income for 2006 – P1,076,847 x 10% = P107,685
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Answer:1. B 2. C 3. C
Problem 19The balance sheet of PERSEVERANCE CORPORATION on December 31, 2005, includes the following cash and receivable balances:
Cash – Davao Bank P 45,000Currency and coins 16,000Petty cash fund 1,000Cash in bond sinking fund 15,000Notes receivable (including discounted with recourse, P15,500) 36,500Accounts receivable P 85,600Less: Allow. for bad debts (4,150) 81,450Interest receivable 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
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included in the total given in transaction (2) and this amount was applied on December 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 112Entertainment expenses 78Postage 93Office supplies 173Cash 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 of Note Receivable at December 31, 2006 is:a. P 15,500 b. P 12,000 c. P 11,910 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
(10) Bad debts 11,855.50Allowance for bad debts 11,855.50
(11) Cash 35,000Notes payable 35,000
Interest expense 600Notes payable 18,900
Cash 19,500(12) Operating expenses 456
Cash 456Cash 6
Other income 6(13) Sinking fund 3,000
Cash 3,000(14) No entry(15) General expenses 468,000
Cash 468,000
Answer:1. A 2. C 3. B 4. D 5. B6. C 7. C 8. B 9. B 10. D
Problem 20You 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 CORPORATIONTRADE NOTES RECEIVABLE AND RELATED INTEREST RECEIVABLE
Trade-Notes ReceivableMaker Date Terms Int. Bal. 2006 2006 Bal.
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Rate 12/31/05 debits credit 12/31/06Rubin Co.
04/01/05 1-year 12% P 60,000 P 60,000
Cardoza 05/01/06 90 days after date
- P 30,000 29,375 P 625
Pancho 07/01/06 60 days after date
12% 6,000 6,000
Betque 08/03/06 Demand 12% 15,000 15,000Gabutero
10/02/06 60 days after date
12% 50,000 50,000 -
Noval 11/01/06 90 days after date
8% 42,000 35,000 7,000
Gan 11/01/06 90 days after date
12% 32,000 32,000
INTEREST RECEIVABLEDue from Balance 2006 debit 2006 credit Balance
12/31/06Rubin Co. P 5,400 P 1,800 P 7,200Pancho 120 P 120Betque 400 400Gabutero 1,000 660 340Noval 560 560Gan ___________ 640 ___________ 640Totals P 5,400 P 4,520 P 7,860 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.
6. Noval, 90-day note was pledged as collateral for P35,000, 60-day 10% loan from the Davao National Bank on December 1.
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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 d. P 66,000
10. The total Interest Receivable at December 31, 2006 is:a. P 2,300 b. P 2,060 c. P 1,950 d. P 1,790
Solution
Adjusting Entries as of Dec. 31, 2006(2) Cardoza (a) Interest Expense 625.00
Trade Notes receivable 625.00Maturity Value = Face Value P30,000Discount (30,000 x 10% x 75/360) 625 Proceeds P29,375
Face Value P6,000.00Interest (6000 x 12% x60/360) 120.00 Maturity value P6,120.00Add.’l interest from due date , 8.30.06 to 12.31.06 (6,120 x 12% x 123/360) 250.92 Total amount due, 12.31.06 P6,370.92
