AUDITING OF RECEIVABLES

PROBLEM 1: (GL AND SL RECONCILIATION AND AGING OF RECEIVABLE)

In line with your audit of Harry Corp.’s receivable balances as of December 31, 2020, the client’s
accountant provided you the following SL to GL reconciliation:

Balance per Subsidiary Ledger P3,890,000

a. Charge for consignment sales, goods delivered on December 5, 2020. Consignee’s
response to inquiry indicated that 40% of goods are still unsold. All sales were made at 40%
GP based on Sales. Commission rate as agreed upon is at 20% based on selling price. (140,000)
b. Charge for deliveries on December 29, goods still in-transit under FOB Shipping Point term 39,000
c. Charge for deliveries on December 30,2020, goods still in-transit under FOB Destination term (18,000)
d. Charge for goods delivered on January 2, 2021 but is covered by a bill and hold
agreement with a customer, contract completed in December 2020 (20,000)
e. Subscriptions receivable from shareholders due March 2, 2021 80,000
f. Deposits on long-term contracts 500,000
g. Credit balance in customer accounts (44,000)
h. Credit memos for merchandise returns for invoice originally dated August 10 (12,000)
i. Portion of an October 10 outstanding invoice to a customer, expected to be returned by the (6,000)
customer.
j. Cash advances to an affiliated company 200,000
k. Write-off of a receivable from customer who recently declared bankruptcy. Outstanding
invoices were dated April 5 (P60,000), and July 20, 2020 (P75,000) (135,000)
Balance per General Ledger P4,334,000

The client’s accountant also provided you the following aging of accounts receivable, along with
the company’s policy of providing allowance for doubtful accounts:
Age Amount % Uncollectible
Current (60 days) P1,550,000 -
1-60 days past due 1,100,000 5%
61-120 days past due 740,000 10%
More than 120 days past due 500,000 20%

All sales were made under the terms 10/30, n/60. The company estimates based on past experience
that 30% of the accounts that are still current (60 days) will probably be paid within the discount
period over the next year, and another 2% of the accounts that are still current (60 days) is a fair
estimate for customer returns.
The company has not recorded any bad debt expense for the year. During the year, however, it had
a P23,500 recovery of a previously written-off account and a P135,000 write-off of uncollectible
accounts (see reconciliation above).
Requirements:
1. What is the correct balance of the accounts receivable – trade?
2. What is the carrying value/amortized cost of the accounts receivable–trade?
3. What is the correct bad debt expense for the year assuming that the
allowance for doubtful accounts had a balance of P105,700 as of January 1,
2020?
PROBLEM 2: (CONFIRMATION OF RECEIVABLES AND AGING OF RECEIVABLES)

You are assigned to audit Bonifacio Inc. for the year ended June 30, 2020. Prior to any
adjustments, you were
able to extract the following balances from the
client’s records: Accounts receivable,
control account P221,250 Allowance for doubtful accounts
(7,500)
Amortized cost P213,750
Accounts receivable, subsidiary records:
60 days old and below P110,625 61 – 120 days 66,375
> 120 days 51,750
Credit balance (7,500) Total P221,250
The credit balance in the accounts receivable represents collection from a customer whose
account had been written off as uncollectible in the previous year. Upon investigation, the only
entry made by the client upon the recovery was a debit to cash and a credit to accounts
receivable.
Certain Accounts Receivable balances were circularized/confirmed as of June 30, 2020
and the following exceptions/replies have not been disposed of as at the date of your
examination.
Custom Balances Comments from Customers Audit Findings
Alpha P4,000 This balance for the invoice Bonifacio Inc. received the mailed
dated June 5, 2020 was paid check on July 2, 2020.
on June 29, 2020.
Beta 13,800 The balance for the invoice Bonifacio Inc. erroneously credited
dated June 1 was offset by our accounts payable for P13,800 to record
June 10, shipment of tires. the purchase of tires.
Charlie 16,600 The above balance for the The payment was credited to customer
invoice dated April 20 has Delta’s subsidiary records.
been paid.
Delta 20,000 The records show a bigger A new confirmation was mailed.
balance, please check. All outstanding invoices to Delta are
dated June.
Echo 11,600 We do not owe Bonifacio Inc. The shipment costing P8,000 was made
anything as the goods were on June 29, 2020 and the goods were
received July, 2020, FOB included in recording the June 30, 2020
Destination. inventory summary.
Foxtrot 14,000 Our deposit of P18,000 Bonifacio Inc. had previously
should cover this balance credited the deposit to sales.
The P14,000 balance was for a June
shipment.
 Juliet 6,000 Amount is okay. Since this is Goods costing P4,400 were
on consignment, we will remit appropriately included in Bonifacio
payment upon selling the Inc.’s inventory. The amount is
goods. included in the “below 60 days”
receivables.
Hotel 1,200 CM No. 8118 cancels this The CM dated April 30, 2020 was
balance. recorded by Bonifacio Inc. in July 2020.
The amount is for an April
15 sales invoice.
India 22,400 No reply on the 2 sets of Upon your recommendation, the
confirmation letters sent. management agreed to write-off this
receivable. The amount is for an invoice
dated May 19, 2019.

Based on your discussions with the client, the following estimated rates are appropriate for
computing the uncollectible accounts:
60 days and below 2%
61 to 120 days 10%
More than 120 days 20%
Requirements:
1. What is the adjusted balance of accounts receivable?
2. What is the required allowance for bad debts as of June 30?
3. Assuming that there were no other entries affecting the allowance account during the
fiscal year, how much is the bad debt expense?

PROBLEM 3: LOANS RECEIVABLE – FINANCING CONCERN/EXPECTED CREDIT LOSS RECOGNITION

On January 1, 2020, YZA Inc. extended a loan to ABC Corp. amounting to P1,000,000 and received
a three- year, 6% note. The note calls for annual interest to be paid each December 31, beginning
2020. The company incurred origination costs amounting to ?. The company charged ABC P80,000
as origination fees. As a result, the yield on the loan was at 8%. According to the company’s initial
estimates, based on ABC Corp.’s good financial standing, there is neither a 12-month expected
credit loss (ECL) nor a lifetime expected credit loss. Furthermore, the probability of default (PD)
is 0%.

Required:
1. What is the amount of the origination cost incurred by YZA on January 1, 2020 in
relation to the loans receivable?
2. What is the amortized cost of the loan as of December 31, 2021 and the corresponding
interest income for the year ended December 31, 2021?

PROBLEM 4: LOANS RECEIVABLE – FINANCING CONCERN/EXPECTED CREDIT LOSS RECOGNITION

On January 1, 2020, YZA Inc. extended a loan to ABC Corp. amounting to P1,000,000 and received
a three- year, 6% note, with a yield rate at 8% on this date. The note calls for annual interest to be
paid each December
 31. Based on the company’s initial estimates on initial recognition date, the present value of the
12-months expected credit loss discounted at 8% is P100,000. The probability of default is at
12%.
At the end of 2020, there was no evidence of significant increase in credit risk, the receivable is
determined to have a “low credit risk”, and there were no changes in the initial estimate of the
12-month expected credit loss.
On December 31, 2021, the interest for the period was collected. On this date, based on available
forward- looking information, there is evidence that there was a significant increase in credit
risk, thus, the entity had to change its basis of calculating loss allowance from a 12-month
expected credit loss to a lifetime expected credit loss. The present value of the lifetime expected
credit loss discounted at 8% is at P400,000. The probability of default is at 20%.
On December 31, 2022, due to the financial crisis ABC is experiencing, the entity was not able to
collect the receivables at maturity date and that only P600,000 of the principal and interest due
on December 31, 2022 will be collected. The amount is expected to be collected in two equal
installments on December 31, 2023 and December 31, 2024. After reviewing all available evidence
on December 31, 2022, it was determined that the receivable is credit-impaired and that
impairment loss should be recognized.

Required:
1. What is the initial carrying value of the loans receivable and how much is the bad
expense/credit loss that should be immediately recognized?
2. What is the carrying value of the loans receivable as of December 31, 2021 and the
amount of the bad debt expense/credit loss that should be recognized in 2021?
3. What is the impairment loss in 2022?