AUDIT ON RECEIVABLES – PART 1

1. Mango Company had the following information relating to its accounts receivable for the year 2020:

Accounts receivable – 1/1 P12,000,000

Credit sales 20,000,000
Collections from customers, excluding the recovery of accounts written off 17,000,000
Accounts written off as worthless 300,000
Sales return 1,000,000
Recovery of accounts written off 100,000
Estimated future sales returns on 12/31 400,000
Estimated uncollectible accounts on 12/31, per aging 1,000,000

Mango should report the December 31, 2020 accounts receivables, before allowance for sales returns and
uncollectible accounts, at _______________________.

2. Bark Company operates in an industry that has a high rate of bad debts. On December 31, 2020, before any
year-end adjustments, the accounts receivable balance was P20,000,000 and its allowance for doubtful accounts
balance was P1,500,000. The year-end balance reported for the allowance for doubtful accounts is based on the
following schedule:
Time Outstanding Accounts Receivable Percent Uncollectible
Under 30 days 10,000,000 5%
31 – 180 days 5,000,000 10%
181 – 360 days 3,000,000 30%
More than 1 year 2,000,000 100%
The accounts which have been outstanding for more than 1 year and 100% uncollectible would be written off
immediately. What should be the doubtful accounts expense for the year-ended December 31, 2020?

3. Cera Company determined that the net realizable value of its accounts receivable at December 31, 2020 based
on an aging of the receivables, was P15,000,000. Additional information is as follows:

Allowance for uncollectible accounts – 1/1/2020 P1,500,000

Uncollectible accounts written off during 2020 1,000,000
Uncollectible accounts recovered during 2020 200,000
Accounts receivables – December 31, 2020 17,000,000

For 2020, what should be Cera’s uncollectible accounts expense?

4. Durian Company sells to wholesalers on terms of 5/15, net 30. Durian has no cash sales but 50% of customers
take advantage of the discount. Durian uses the gross method of recording sales. An analysis of trade
receivables at December 31, 2020 revealed the following:
Age Amount Collectible
0 – 15 days 15,000,000 100%
16 – 30 days 3,000,000 95%
Over 30 days 2,000,000 1,500,000
On the December 31, 2020, balance sheet, what amount should be reported as allowance for discounts and net
accounts receivables?
5. The following accounts were abstracted from Villain Company’s unadjusted trial balance at December 31, 2020:
Debit Credit
Accounts receivable 20,000,000
Allowance for doubtful accounts 300,000
Net credit sales 70,000,000
Villain estimates that 5% of the gross accounts receivables will become uncollectible. The doubtful accounts
expense for the year ended December 31, 2020 should be _______________.
6. All of Unicorn Company’s sales are on a credit basis. The following information is available for 2020:

Allowance for doubtful accounts, 1/1/2020 P1,000,000

Sales 22,000,000
Sales returns 2,000,000
Accounts written off as uncollectible 600,000
Recovery of accounts written off 200,000

Unicorn provides for doubtful accounts expense at the rate of 10% of net sales. At December 31, 2020, the
allowance for doubtful accounts balance should be _______________.

7. On January 1, 2020, the balance of accounts receivable of Manticore Company was P5,000,000 and the
allowance for doubtful accounts on the same date was P800,000. The following data were gathered:
Credit sales Write-offs Recoveries
2017 10,000,000 250,000 20,000
2018 14,000,000 400,000 30,000
2019 16,000,000 650,000 50,000
2020 25,000,000 1,100,000 145,000
Doubtful accounts are provided for as percentage of credit sales. The accountant calculates the percentage
annually by using the experience of the three years prior to the current year. How much should be reported as 2020
doubtful accounts expense?

8. The Nymph Publishing Company follows the procedure of debiting Bad Debts Expense for 2% of all new
sales. Sales for 4 consecutive years and year-ended allowance account balances were as follows:
Year Sales Allowance for Bad Debts End-
of-year Credit Balance
2017 2,100,000 21,500
2018 1,975,000 35,500
2019 2,500,000 50,000
2020 2,350,000 66,000
Compute the amounts of accounts written off for the year 2020.
9. Apple Corporation provided for uncollectible accounts receivable under the allowance method since the start of
its operations to December 31, 2020. 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. Apple’s usual credit
terms are net 30 days.

The credit balance in the allowance for doubtful accounts was P260,000 at January 1, 2020. During 2020, credit
sales totaled P18,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, P180,000 of
bad debts were written off, and recoveries of accounts previously written off amounted to P30,000. Apple installed
a computer system in November 2020 and an aging of accounts receivable was prepared for the first time as of
December 31, 2020. A summary of the aging is as follows:
Classifications by month of sale Balance in each category Estimated % uncollectible
November – December 2020 2,280,000 2%
July – October 2020 1,200,000 15%
January – June 2020 800,000 25%
Prior to January 1, 2020 260,000 80%

Based on the review of collectability of the account balances in the “prior to January 1, 2020” aging category,
additional receivables totaling P120,000 were written off as of December 31, 2020. Effective with the year ended
December 31, 2020, Apple adopted a new accounting method for estimating the allowance for doubtful accounts at
the amount indicated by the year-end aging analysis of accounts receivable.

QUESTIONS:
a. How much is the adjusted balance of the allowance for doubtful accounts as of December 31, 2020?
b. How much is the doubtful accounts for the year 2020?
c. The recorded allowance for doubtful accounts should be increased by ____________.

10. In the audit of Johnny’s Company, the auditor had an appreciation of the following schedules and noted some
comments for possible adjustments:
The accounts receivable control account balance was determined to be P2,020,000.

The external auditor submitted the following audit comments for possible adjustments:
SMAP Merchandise found defective; returned by customer on October 31, 2020 for credit,
but the credit memo was issued by Johnny’s only on January 15, 2021.
TOKIO Account is good but usually pays late.
Shonentai Merchandise worth P160,000 was destroyed while in transit on May 31, 2020, terms
FOB destination. The carrier was billed on June 15, 2020. (See Arashi and
King&Prince)
V6 Customer billed twice in error for P40,000. Balance is collectible.
Arashi Collected in full on January 31, 2021.
NEWS Paid in full on December 30, 2020 but not recorded. Collections were deposited on
January 2, 2021.
Hey Say Jump Received account confirmation from customer for P44,000. Investigation revealed
an erroneous credit for P40,000. (See Sexy Zone)
Sexy Zone Neglected to post P40,000 credit to customer’s account.
King&Prince Customer wants to know reason for receipt of P160,000 credit memo as their
accounts payable balance was P400,000.

REQUIRED:
a. Adjusting entries as of December 31, 2020.
b. Adjusted balance of Accounts Receivable – Trade as of December 31, 2020.

11. The Periwinkle Corporation started its business on January 1, 2020. After considering the collections
experience of other companies in the industry, Periwinkle Corporation established an allowance for bad debts
estimated to be 5% of credit sales. Outstanding receivables recorded in the books of accounts on December 31,
2020 totaled P575,000, while the allowance for bad debts account had a credit balance of P62,500 after
recording estimated doubtful account expense for December and after writing off P12,500 of uncollectible
accounts.

Further analysis of the company’s accounts showed that merchandise purchased in 2020 amounted to P2,250,000
and ending merchandise inventory was P375,000. Goods were sold at 40% above cost.

80% of total sales were on account. Total collections from customers, on the other hand, excluding proceeds from
cash sales, amounted to P1,500,000.

Questions:
Based on the above and the result of your audit, answer the following:
a. The recorded accounts receivable as of December 31, 2020 is understated by ____________.
b. The doubtful accounts expense for the year ended December 31, 2020 should be ___________.
c. The recorded allowance for doubtful accounts receivable as of December 31, 2020 is understated by
___________.
d. The net realizable value of accounts receivable as of December 31, 2020 is _______________.
12. The accounts receivable subsidiary ledger of Ichigo Corporation shows the following information:
December 31, 2020 Invoice
Customer Account balance Date Amount
12/6/2020 56,000.00
Red, Inc. 140,720.00
11/29/2020 84,720.00

9/27/2020 48,000.00
Blue Co. 83,680.00
8/20/2020 35,680.00

12/8/2020 80,000.00
Blu Corp. 122,400.00
10/25/2020 42,400.00

11/17/2020 92,560.00
Sky Blue Co. 180,560.00
10/9/2020 88,000.00

12/12/2020 76,800.00
Royal Blue Co. 126,400.00
12/2/2020 49,600.00

Green, Inc. 69,600.00 9/12/2020 69,600.00

Total 723,360.00 723,360.00

The estimated bad debts rates below are based on the Corporation’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 doubtful accounts had a credit balance of P14,000 on December 31, 2020, before adjustment.

QUESTIONS:
Based on the foregoing, answer the following:
a. How much is the adjusted balance of the allowance for doubtful accounts as of December 31, 2020?
b. The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of December 31,
2020 would be ______________________.
 AUDIT ON RECEIVABLES – PART 2
1. Myu Company obtained a 1-year loan of P5,000,000 from a bank on April 1, 2020. The loan was discounted at
12%. The company signed a note and pledge its accounts receivable of P5,000,000 as collateral for the loan. In
relation to the loan, Myu should report note payable on December 31, 2020 at ____________.

2. On December 1, 2020, Pepper Company assigned on a non-notification basis accounts receivable of P5,000,000
to a bank in consideration for a loan of 90% of the receivables less a 5% service on the accounts assigned.
Pepper signed a note for the bank loan. On December 31, 2020, Pepper collected assigned accounts of
P3,000,000 less discount of P200,000. Pepper remitted the collections to thee bank in partial payment for the
loan. The bank applied first h collection to the interest and the balance to the principal. The agreed interest is
1% per month on the loan balance. In its December 31, 2020, balance sheet, Pepper should report note payable
as a current liability at ______________.

3. Bright Company factored P5,000,000 of accounts receivable to Hikari Company on July 1, 2020. Control was
surrendered by Bright. Hikari assessed a fee of 5% and retains a holdback equal to 20% of the accounts
receivable. In addition, Hikarri charged 12% computed on a weighted average time to maturity of the
receivables of 30 days.
a. Bright Company will receive and record cash of ____________.
b. Assuming all receivables are collected, Bright Company cost of factoring the receivables would be ____.
4. On September 30, 2020, Akai Company discounted at the bank a customer’s P5,000,000 6-month 10% note
receivable dated June 30, 2020. The bank discounted the note at 12%. The proceeds from this discounted note
amounted to ________________.

5. Universe Company accepted from a customer PP5,000,000, 120-day, 12% note dated August 31, 2020. On
September 30, 2020, Universe discounted the note at the National Bank. However, the proceeds were not
received until October 1, 2020. In the September 30, 2020, balance sheet, the amount receivable from the bank
includes accrued interest revenue of _________________.

6. Umi Company has a 10% note receivable dated June 30, 2020, in the original amount of P9,000,000. Payments
of P3,000,000 in principal plus accrued interest are due annually on July 1, 2021, 2022, and 2023. In its June 30,
2022, balance sheet, what about should Umi report as a current asset for interest on the note receivable?

7. Basket Company accepted a P5,000,000, 2% interest bearing note from Raisins Company on December 31,
2020, in exchange for a machine with a list price of P4,000,000 and a cash price of P3,750,000. The note is
payable on December 31, 2022. In its 2020 income statement, Basket should report the sale at _________.

8. On January 2, 2020, Tennis Company sold equipment with a carrying amount of P6,500,000 in exchange for
P8,000,000 non-interest bearing note due on January 2, 2023. There was no established exchange price for the
equipment. The prevailing interest rate for this note on January 2, 2020, was 10%. The present value of 1 at
10% for three periods is 0.75.
a. In the 2020 income statement, what amount should be reported as interest income?
b. In the 2020 income statement, what amount should be reported as gain or loss on sale of equipment?
9. The balance sheet of Yoko Corporation reported the following long-term receivables as of December 31, 2019
Note receivable from sale of plant P6,000,000
Note receivable from officer 1,600,000

In connection with your audit, you were able to gather the following transactions during 2020 and other
information pertaining to the company’s long-term receivables:
a. The note receivable from sale of plant bears interest at 12% per annum. The note is payable in 3 annual
installments of P2,000,000 plus interest on the unpaid balance every April 1. The initial principal and
interest payment was made on April 1, 2020.
b. The note receivable from officer is dated December 31, 2019, earns interest at 10% per annum, and is due
on December 31, 2022. The 2020 interest was received on December 31, 2020.
c. The corporation sold a piece of equipment to Yume, Inc. on April 1, 2020, in exchange for an P800,000
non-interest bearing note due on April 1, 2022. 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, 2020, was
12%. The present value factor of 1 for two periods at 12% is 0.797.
d. A tract of land was sold by the corporation to Rola Company on July 1, 2020, for P4,000,000 under an
installment sale contract. Rola Company signed a 4-year 11% note for P2,800,000 on July 1, 2020, in
addition to the down payment of P1,200,000. The equal annual payments of principal and interest on the
note will be P902,500 payable on July 1, 2021, 2022, 2023, and 2024. The land had an established cash price
of P4,000,000, and its cost to the corporation was P3,000,000. The collection of the installments on this
note is reasonably assured.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
a. Noncurrent receivables as of December 31, 2020
b. Current portion of long-term receivables as of December 31, 2020
c. Accrued interest receivable as of December 31, 2020
d. Interest income for the year 2020
10. During your examination of the 2020 financial statements of the Day Company, you find that the company does
not provide allowance for doubtful accounts ever since it started operations in 2016. The company’s practice is
to directly write-off as expense doubtful accounts and credit recoveries to income.

Upon your recommendation, the company agreed to change its accounts for 2020 to give effect to doubtful
treatment on the allowance basis. The allowance is to be based on a percentage of sales which is derived from
the experience of prior years. Statistics for 2016 to 2020 are shown as follows:

Accounts receivable at December 31, 2020 were as follows:

From 2019 sales P 90,000
From 2020 sales 810,000
Total P900,000

REQUIRED:
Based on the above and the result of your audit, you are to provide the answers to the following
1. The average percentage of net doubtful accounts to charge sales that should be used in setting up the 2020
allowance is ___________.
2. How much is the doubtful accounts expense for 2020?
3. The doubtful accounts expense for 2020 is over (under) stated by _____________.
4. The net realizable value of accounts receivable that should be presented on the December 31, 2020 balance
sheet is ___________________.
11. Breathless, Inc. estimates its doubtful accounts by aging its accounts receivable. The aging schedule of accounts
receivable at December 31, 2020 is presented below:

Breathless, Inc.’s uncollectible account experience for the past 5 years are summarized in the following schedule:

The balance of the allowance for doubtful accounts at December 31, 2020 (before adjustment) is P126,750.

QUESTIONS:
Based on the foregoing, answer the following:
a. How much is the adjusted balance of the allowance for doubtful accounts as of December 31, 2020?
b. The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of December 31, 2020
would include _________________.
12. The following were noted during your audit of the Love So Sweet Corp. for the calendar year 2020:

All notes are trade notes receivable unless otherwise specified. The Pearl note was paid on December 1 as per bank
notification. The Amethyst Co. note was dishonored on the due date but the legal department has assured
management of its full collectability.

The Corporation, with your concurrence, will not use the Notes Receivable Discounted account but will merely
note on the face of thee balance sheet the amount of notes receivable discounted but still outstanding.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
a. At what amount on the current assets section of the balance sheet as of December 31, 2020 will Notes
Receivable – trade be carried?
b. How much is the accrued interest income as of December 31, 2020?