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Audit of Receivables PDF
Audit of Receivables PDF
Audit of Receivables PDF
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:
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
Solution
(1) Claims Receivable 22,500
Accounts receivable 22,500
(2) Sales 30,000
Accounts receivable 30,000
(3) Advances to affiliates 150,000
Accounts receivable 150,000
(4) Receivables - officers/employee 13,500
Accounts receivable 13,500
(5) Deposits for contracts bidding 67,500
Accounts receivable 67,500
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(6) Subscription receivable 60,000
Accounts receivable 60,000
(7) Advances to suppliers 24,000
Accounts receivable 24,000
(8) Advances to officers/employee 4,500
Accounts receivable 4,500
(9) Accounts receivable 30,000
Allowance for bad debts 30,000
(10) Accounts receivable 6,000
Customers with credit balance 6,000
(11)
OE: Cash 237,000
Notes payable 237,000
CE: Cash 237,000
Commission expense 3,000
Notes payable 300,000
Adj: Commission expense 3,000
Notes payable 3,000
Current non-trade AR
Claims receivable 22,500
Advances to off/empl
( 13,500 + 4,500) 18,000
Advances to suppliers 24,000
Total 64,500
Answer:
1. D 2. A 3. B 4. A
Problem 2
In your audit of MENDOZA COMPANY for the past calendar year, you find the following
accounts:
ACCOUNTS RECEIVABLES
Jan. 1, 2002 P 800,000 Jan. – Dec. 1992 collections P 5,900,000
Jan. – Dec. Sales 6,300,000 Jan. – Dec. write-off 100,000
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
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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
Solution
Accounts Receivable 80,000
Customers’ credit balance 80,000
Allowance for bad debts 50,000
Accounts receivable 50,000
Bad debts expense 40,000
Allowance for bad debts 40,000
Computation:
Provision per records 315,000
* Provision per audit 355,000
Adjustment 40,000
Problem 3
The following selected transactions occurred during the year ended December 31, 2006 of
DOMINGO COMPANY:
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.
Questions
1. 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
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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
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
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
Accounts Receivable
Credit Sales 720,736.80 Collection 294,000.00
Recoveries 6,505.20 Sales discount
from credit cust. 6,000.00
Write-off 19,200.00
Sales returns from
credit customer 10,080.00
__________ Recoveries 6,505.20
727,242.00 335,785.20
Ending bal. 391,456.80
Bad debts:
Net credit sales 704,656.80
x % of uncollectible 2%
Bad debts 14,093.136
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
Allowance 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 (1½%) of the accounts receivable balance as of year-end. No
provision has yet been made for 2006.
Questions
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
Solution
(1) A 1,300,000 + 50,000 + 5,000 P1,355,000
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.
5
Questions
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
Accounts Receivable
* Beg. bal. 50,400 Collections 470,400
Sales 780,000 Allow. for BD 90,000
830,400 560,400
End bal. 270,000
* squeezed figure
Answer:
1. A 2. B 3. C 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.
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The Allowance for Doubtful Accounts schedule is presented below:
Debit Credit Balance
January 1, 2006 P 3,658
October 21, 2006, Uncollectible;
Marlisa Co., - P324; Abonales Co.,
- P 820; Cherryl Co., - P564 P 1,508 2,150
December 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:
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
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
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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 324
b. 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 1,440
b. Allow. for BD 1,440 d. No adjustment
Accounts receivable 1,440
Solution
8
Required allowance on 12.31.06
0-1 mo. P 95,240 x 1% P 952.40
1-3 mos. 77,320 x 2 % 1,546.40
3-6 mos. 22,180 x 3% 665.40
Over 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 3,490.20
(squeezed figure)
- Write-off 2,384.00
Ending balance 4,764.20
Answer:
1. A 2. C 3. D 4. A 5. C
6. A 7. C 8. A
Problem 7
You are auditing the Accounts Receivable and the related Allowance for Bad Debts account
of ROY COMPANY. The following data are available:
The summary of the subsidiary ledger as of December 31, 2006, was totaled as follows:
Debit balances:
Under on month P 360,000
One to six months 368,000
Over six months 152,000
P 880,000
Credit balances:
Almario P 8,000 - OK; additional billing in
January 2004
Peter 14,000 – Should have been credited
To Manuel Co. - 1-6 mos.
classification.
Bituin 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.
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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:
4. The entry to reconcile the control ledger to the subsidiary ledger is:
a. Miscellaneous loss 8,000 c. Accounts 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
10
Solution
Answer:
1. A 2. D 3. C 4. A 5. B
6. C 7. C 8. A
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Problem 8
KAREN COMPANY’s accounts receivable subsidiary ledger shows the following information:
Invoice
Customer Account Balance – 12/31/06 Date Amount
Penas P 70,360 12/06/06 P 28,000
11/29/06 42,360
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
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Solution
Aging of AR
Balance 0-30 31-60 61-90 91-120 Over 120
12/31/06 Days Days Days Days Days
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.
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Point, was made on Dec.
30, 2006.
Dela Cruz 100,000 We are rejecting the price, Kent’s clerk erroneously
which is too much computed the unit price
at P2,000. The correct
pricing should have been
at P1,200 per unit.
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. 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 16,200
b. 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 23,700
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. Cost of sales 16,300 c. Retained earnings 16,300
Inventory 16,300 Inventory 16,300
b. Inventory 16,300 d. No adjustment
Cost of sales 16,300
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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
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 No adjustment
For Odessa Accounts payable 74,000
Accounts receivable 74,000
For Solejon Accounts receivable 16,200
Accounts receivable 16,200
For Rubin Sales 23,700
Accounts receivable 23,700
Inventory 16,300
Cost of sales 16,300
For Jamea Sales 200,000
Customers’ advances 50,000
Accounts receivable 150,000
For Ocsio. Sales 3,000
Accounts receivable 3,000
For dela Cruz Sales 40,000
Accounts receivable 40,000
For Ronel Sales 18,000
Accounts receivable 18,000
Answer:
1. D 2. C 3. A 4. A 5. B
6. C 7. D 8. B 9. C 10. A
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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
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
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 36,480
Sales 23,980
Accounts receivable 23,980
Answer:
1. D 2. D
Problem 11
You audit of APAS COMPANY for the year 2006 disclosed the following:
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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
January Register
Questions
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 50,000
Invoice # 300
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(2) Cost of sales 50,000
Inventory 50,000
(62,500 x 80%)
Invoice # 301
(3) Sales 56,000
Accounts receivable 56,000
Invoice # 304
(4) Cost of sales 72,000
Inventory 72,000
(90,000 x 80%)
Invoice # 305
(5) Accounts receiv. 74,500
Sales 74,500
Invoice # 307
(6) Cost of sales 59,600
Inventory 59,600
(74,500 x 80%)
(7) Accounts receiv. 67,500
Sales 67,500
Invoice # 310
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.
Sales Invoices
Date Amount Date Shipped
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(d) 12/22/06 12,000 01/08/07
(e) 12/28/06 16,000 12/29/06
(f) 12/03/06 8,000 12/05/06
(g) 12/31/06 20,000 01/07/07
(h) 12/31/06 14,000 12/31/06
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
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
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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.
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
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 – assigned 195,000 Accounts receivable 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 Corporation c. A third party
b. Racel Bank d. It is the option of the customer to
whom he/she will pay the account
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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 – assigned 195,000 Accounts receivable 195,000
b. Cash 191,100 d No journal entry
Accounts receivable 191,100
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 –assigned 191,100
b. Notes payable 195,000 d. No journal entry
Interest expense 4,000
AR - assigned 199,000
Solution
April 1 Accounts receivable – assigned 400,000
Accounts receivable 400,000
1 Cash 294,000
Finance charges (300,000 x 2%) 6,000
Notes payable 300,000
(1) Cash 191,100
Sales discounts 3,900
AR – assigned (191,100/98%) 195,000
(2) Notes payable 195,000
Interest expense 4,000
(300,000 x 16% x 1/12)
Cash 199,000
(3) Cash 203,000
Allowance for bad debts 2,000
AR – assigned 205,000
(400,000 – 195,000)
(4) Notes payable (300,000 – 195,000)105,000
Interest expense 1,400
(105,000 x 16% x 1/12)
Cash 106,400
Answer:
1. C 2. C 3. A 4. B 5. D
6. D 7. B 8. A
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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.
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.
Questions
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
Answer:
1. A 2. D 3. B 4. A
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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
Nov. 1 Salazar, no interest, due in one
year 75,000 201,000
Nov. 30 Rosa, Co. 12%, due in 13 mos. 15,000 216,000
Dec. 1 Rona, 15%, due in 15 mos. 36,000 252,000
Dec. 2 Anito, President, 18%, due in 3
mos. 18,000 270,000
INTEREST EXPENSE
Sept. 1 Samson note 310.50 310.50
Nov. 1 Salazar note 11,250.00 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
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 2/12 = P 2,250
Rosa 15,000 x 12% x 1/12 = 150
Rona 36,000 x 15% x 1/12 = 450
Anito 18,000 x 18% x 1/12 = 270
Total accrued interest P 3,120
2. B
Samson = P 310.50
Salazar 11,250 x 2/12 = 1,875.00
Total interest expense = P2,185.50
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3. A
Hazel 90,000
Rosa 15,000
Rona 36,000
Total 141,000
4. C
Salazar 75,000
5. A
Samson P 36,000 – P 310.50 = P 35,689.50
Salazar P 75,000 – P11,250 = 63,750.00
Total proceeds = 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%:
Questions
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
Solution
1. D
Sales price – present value of note (P200,000 x 0.71178) 142,356
Book value of equipment 160,000
Loss on sale of equipment (17,644)
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2. A
Face value of note 200,000
Present value of note 142,356
Discount on notes receivable 57,644
3. C
Notes receivable 200,000
Loss on sale of equipment 17,644
Equipment 160,000
Discount on notes receivable 57,644
4. B
Present value of note, 1/1/03 142,356
Add: Interest earned in 2003
(142,356 x 12%) 17,083
Present value of note, 1/1/04 159,439
Add: interest earned in 2004
(159,439 x 12%) 19,133
Present value of note, 1/1/05 178,572
5. A
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%:
Questions
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:
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Present value of note 1,076,847
Cost of land 800,000
Gain on sale 276,847
Answer:
1. B 2. C 3. C
Problem 19
The balance sheet of PERSEVERANCE CORPORATION on December 31, 2005, includes the
following cash and receivable balances:
Current liability reported in the December 31, 2005, balance sheet included:
2. Cash collected on accounts totaled P576,500, including accounts of P93,000 with cash
discounts of 2%.
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.
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.
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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
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 expenses 78
Postage 93
Office supplies 173
Cash over 6
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
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
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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
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
Solution
(1) Accounts receivable 767,000
Sales 767,000
(2) Cash 576,500
Sales discounts 1,860
Accounts receivable 576,360
(3) Notes receivable 82,500
Accounts receivable 82,500
(4) Obligation on discounted note 12,500
Notes receivable 12,500
Accounts receivable 3,090
Cash 3,090
Obligation on discounted note 3,000
Notes receivable 3,000
(5) Cash 58,500
Interest expense 1,500
Obligation on discounted note 60,000
Obligation on discounted note 48,000
Notes receivable 48,000
(6) Allowance for bad debts 8,720
Accounts receivable 8,720
(7) Accounts receivable 2,020
Allowance for bad debts 2,020
Cash 2,020
Accounts receivable 2,020
(8) Cash 27,000
Notes receivable 27,000
Cash 2,450
Interest receivable 525
Interest income 1,925
(9) Interest receivable 630
Interest income 630
(10) Bad debts 11,855.50
Allowance for bad debts 11,855.50
(11) Cash 35,000
Notes payable 35,000
Interest expense 600
Notes payable 18,900
Cash 19,500
(12) Operating expenses 456
Cash 456
Cash 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. B
6. C 7. C 8. B 9. B 10. D
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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
Trade-Notes Receivable
Maker Date Terms Int. Bal. 2006 2006 Bal.
Rate 12/31/05 debits credit 12/31/06
Rubin 04/01/05 1-year 12% P 60,000 P 60,000
Co.
Cardoza 05/01/06 90 days - P 30,000 29,375 P 625
after date
Pancho 07/01/06 60 days 12% 6,000 6,000
after date
Betque 08/03/06 Demand 12% 15,000 15,000
Gabuter 10/02/06 60 days 12% 50,000 50,000 -
o after date
Noval 11/01/06 90 days 8% 42,000 35,000 7,000
after date
Gan 11/01/06 90 days 12% 32,000 32,000
after date
INTEREST RECEIVABLE
Due from Balance 2006 debit 2006 credit Balance
12/31/06
Rubin Co. P 5,400 P 1,800 P 7,200
Pancho 120 P 120
Betque 400 400
Gabutero 1,000 660 340
Noval 560 560
Gan ___________ 640 ___________ 640
Totals P 5,400 P 4,520 P 7,860 P 2,060
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.
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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.
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
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Solution
NR – discounted 50,000
Notes Receivable 50,000
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(6) Noval (g) Trade Notes Receivable 35,000
Notes Payable- bank 35,000
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