AUDIT OF RECEIVABLES

SUBSTANTIVE AUDIT PROCEDURES FOR RECEIVABLES

Sales and Account Receivable Balances

Existence or Completeness: Rights and Valuation and Presentation and
occurrence: Sales Sales transactions obligations: allocation: disclosure: Sales
and accounts that occurred and Accounts receivable Accounts receivable and accounts
receivable are for existing receivables are owned by the are properly valued receivable are
shipments made are recorded client properly presented
to customers and disclosed in
accordance with
-Verify GAAP.
-Confirm accounts -Perform a test of -Review minutes of mathematical
receivable and sales cutoff. the board of accuracy of the -Review financial
perform procedures directors’ meetings, accounts receivable statements and
for confirmations inquire of the client aging schedule and perform analytical
not returned. personnel, read trace it to the procedures to
contracts and accounts receivable determine whether
-Perform analytical agreements, and subsidiary ledger. accounts are
procedures to test confirm with lenders classified and
sales and accounts any indications that -Test the adequacy disclosed in
receivable. accounts have been of the allowance for accordance with
assigned, sold, or uncollectible GAAP
pledged. accounts.

Sales Transactions Completeness: Occurrence: Classification: Accuracy

sales transactions Recorded sales are Sales and accounts (Valuation): Sales
that occurred are for shipments receivable are correctly billed
recorded actually made to transactions have and recorded
customers been recorded in the
For a sample of proper accounts. For a sample of
shipping documents, For a sample of entries in the sales
trace sales invoice entries in the sales For a sample of journal (a) examine
and entry into sales journal, compare entries in the sales sales invoice,
journal and accounts sales invoice copy, journal, verify the shipping document,
receivable subsidiary customer order, and accuracy of account and a customer for
ledger. Perform sales invoice. coding. consistency of
cutoff tests. descriptions and
quantities; (b)
examine sales
orders for credit
approval; and (c)
check prices and
extensions. Foot
sales journal and
general ledger
account.
Audit of Receivables: Internal Control Measures and Substantive Audit Procedures

Internal Control Measures

1. Proper internal control over receivables should observe the following:

a. Sales must be separated from the accounting for them.
b. Accounting for sales must be separated from the receipt of cash arising from the receivables.
c. Returns, allowances, discounts, and uncollectible charge-offs must be properly approved and
separated from the cash receipts function.
d. Periodically, receivables should be aged in order to determine the actions and efficiency of the credit
department.

2. Notes receivable custodian should not have access to cash or to the accounting record.

3. A responsible official who does not have access to the notes should approve note renewals as well as
charge- offs of defaulted notes in writing.

4. Proper procedures should be adopted for the follow-up of defaulted notes.

Substantive Audit Procedures

Sales and Accounts Receivable Balances

Existence or occurrence: Sales and accounts receivable are for shipments made to customers
1. Confirm accounts receivable and perform procedures for confirmations not returned.
2. Perform analytical procedures to test sales and accounts receivable.

Completeness: Sales transactions that occurred and existing receivables are recorded

3. Perform a test of sales cutoff.

Rights and obligations: Accounts receivable are owned by the client

4. Review minutes of the board of directors' meetings, inquire of the client personnel, read contracts and
agreements, and confirm with lenders any indications that accounts have been assigned, sold, or
pledged.

Valuation and allocation: Accounts receivable are properly valued

5. Verify mathematical accuracy of the accounts receivable aging schedule and trace it to the accounts
receivable subsidiary ledger.
6. Test the adequacy of the allowance for uncollectible accounts.

Presentation and disclosure: Sales and accounts receivable are properly presented and disclosed in
accordance with GAAP.

7. Review financial statements and perform analytical procedures to determine whether accounts are
classified and disclosed in accordance with GAAP.

Sales Transactions

Completeness: Sales transactions that occurred are recorded

1. For a sample of shipping documents, trace sales invoice and entry into sales journal and accounts
receivable subsidiary ledger. Perform cutoff tests.

Occurrence: Recorded sales are for shipments actually made to customers

2. For a sample of entries in the sales journal, compare sales invoice copy, customer order, and sales
invoice.

Classification: Sales and accounts receivable transactions have been recorded in the proper accounts
3. For a sample of entries in the sales journal, verify the accuracy of account coding.

Accuracy (Valuation): Sales are correctly billed and recorded

 4. For a sample of entries in the sales journal, (a) examine sales invoice, shipping document, and customer
for consistency of descriptions and quantities; (b) examine sales orders for credit approval; and (c) check
prices and extensions. Foot sales journal and general ledger account.

Problem 1: Identify by letter the assertions addressed in each of the following substantive procedures relating to
audit of the revenue and collection cycle:

Assertions:
A. Existence
B. Rights and Obligations
C. Completeness
D. Valuation and Allocation
E. Presentation and Disclosure

Substantive Procedures:
1. Obtain confirmation of receivables
2. Compare the disclosures made in the financial statements with the requirements of the IFRS.
3. Obtain confirmation of receivables pledged under loan agreements.
4. Vouch recorded sales transactions back to customer order and shipping document.
5. Perform cutoff tests for sales and sales returns.
6. Perform cutoff tests for cash collections.
7. Compare current year’s cash sales with those of previous years.
8. Reconcile subsidiary records with the general ledger records for accounts receivable.
9. Review credit collection policies and procedures and analyze the age of the receivables.
10. Examine credit files for large accounts.
11. Perform analytical review procedures to evaluate appropriateness of the balance of the allowance for
uncollectible accounts.
12. Inspect notes receivable
13. Recompute interest revenue
14. Identify related party transactions
15. Inquire from management, examine bank confirmations and review minutes of meetings to identify
receivables pledged or collateralized.

Problem 1

1. A
2. E
3. B, E
4. A,C,D
5. A,C,D
6. A,C
7. D
8. C,D
9. D
10. D
11. D
12. A,B,C
13. D
14. E
15. E

THEORIES

Select the best answer for each of the following:

1. In the audit of which of the following general ledger accounts will tests of controls be particularly appropriate?
A. Equipment
B. Bank charges
C. Bonds payable
D. Sales
2. The purpose of test of controls over shipping is to determine whether
A. Billed goods have been shipped.
B. Shipments are billed.
C. Shipping department personnel are competent.
D. Credit is approved before goods are shipped.

3. The purpose of tests of controls over billing is to determine whether

A. Billed goods have been shipped.
B. Shipments are billed.
C. Billing department personnel are competent.
D. Credit is approved before goods are billed.

4. An auditor most likely would review an entity’s periodic accounting for the numerical sequence of shipping
documents and invoices to support managements financial statement assertion of
A. Existence of occurrence
B. Rights and obligations
C. Valuation
D. Completeness

5. Which of the following might be detected by an auditor’s review of the client’s sales cut-off?
A. Excessive goods returned for credit
B. Unrecorded sales discounts
C. Lapping of year-end accounts receivable
D. Inflated sales for the year

6. An auditor who has confirmed accounts receivable may discover that the sales journal was help open past
year-end if
A. Positive confirmation sent to debtors are not returned
B. Negative confirmations sent to debtors are not returned
C. Most of the returned negative confirmations indicate that the debtor owes a larger balance that the
amount bei9ng confirmed.
D. Most of the returned positive confirmations indicate that the debtor owes a smaller balance than the
amount being confirmed.

7. The auditor finds situation in which one person has the ability to collect receivables, make deposits, issue
credit memos and record receipt of payments. The auditor suspects the individual may be stealing from cash
receipts. Which of the following audit procedures would be most effective in discovering fraud in this scenario?
A. Send positive confirmations to a random selection of customers.
B. Send negative confirmations to all outstanding accounts receivable customers.
C. Perform a detailed review of debits to customer discounts, sales returns, or other debit accounts,
excluding cash posted to the cash receipts journal.
D. Take a sample of bank deposits and trace the detail in each bank deposit back to the entry in the cash
receipts journal.

8. All of the following are examples of substantive tests to verify valuation of net accounts receivable except the
A. Re-computation of the allowance for bad debts.
B. Inspection of accounts for current versus non-current status in the statement of financial position.
C. Inspection of the aging schedule and credit records of past due accounts.
D. Comparison of the allowance for bad debts with past records.

9. Confirmation, which is a specific type of inquiry, is the process of obtaining a representation of information or
of an existing condition directly from a third party. Two assertions for which confirmation of accounts
receivable balances provides primary evidence are
A. Completeness and valuation
B. Rights and obligations and existence
C. Valuation and rights and obligations
D. Existence and completeness

10. The negative request form of accounts receivable confirmation may be used when the

Combined Assessed Level Of Number of Small Consideration by the

Inherent and Control Risk is Balance is Recipient is
A. Low Many Likely
B. Low Few Unlikely
C. High Few Likely
D. High Many Likely

11. Which of the following procedures would an auditor most likely perform for a year-end accounts receivable
confirmations when the auditor did not receive replies to second requests?
A. Review the cash receipts journal for the month prior to year-end.
B. Intensify the study of internal control concerning the revenue cycle.
C. Increase the assessed level of detection risk for the existence assertion.
D. Inspect he shipping records documenting the merchandise sold to the debtors.

12. Which of the following is the greatest drawback of using subsequent collections evidenced only by a deposit
slip as an alternative procedure when responses to positive accounts receivable confirmations are not
received?
A. Checking of subsequent collections can never be used as an alternative auditing procedure.
B. By examining a deposit slip only, the auditor does not know whether the payment is for the receivable at
the balance sheet date or a subsequent transaction.
C. A deposit slip is not received directly by the auditor.
D. A customer may not have made a payment on a timely basis.

13. Which of the following audit procedures would an auditor most likely perform to test controls relating to
management’s assertion concerning the completeness of sales transactions?
A. Verify that extensions and footings on the entity’s sales invoices and monthly customer statements have
been computed
B. Inspect the entity’s reports of pre-numbered shipping documents that have been recorded in the sales
journal
C. Compare the invoiced prices on pre-numbered sales invoices to the entity’s authorized price list
D. Inquire about the entity’s credit granting policies and the consistent application of credit checks.

14. To achieve good internal control, which department should perform the activities of matching shipping
schedule with sales orders and preparing daily sales summaries?
A. Billing
B. Shipping
C. Credit
D. Sales order

15. Which of the following would the auditor consider to be an incompatible operation for a cashier if the cahier
receives remittance from the mailroom?
A. Posting the receipts to the accounts receivable subsidiary ledger cards
B. Making the daily deposit at the local bank
C. Preparing the daily deposit
D. Endorsing the checks

16. The most likely result of ineffective internal controls in the sales cycle is that
A. Fictitious transactions could be recorded, causing an understatement of revenues and an overstatement of
receivables
B. Irregularities in recording transactions in the subsidiary accounts could delay the shipping of goods
C. Omission of shipping documents could go undetected, causing an understatement of inventory
D. Final authorization of credit memos by personnel in the sales department could permit an employee
defalcation scheme

17. For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also
approve
A. Employee overtime wages
B. Credit granted to customers
C. Write-offs of customer accounts
D. Cash disbursements

18. During an audit of the accounts receivable function, you found that the accounts receivable turnover rate had
fallen from 7.3 to 4.3 over the last three years. What is the most likely cause of the decrease?
A. An increase in the discount offered for early payment
B. A more liberal credit policy
C. A change from net 30 net 25
D. Greater cash sales

19. Shipping documents should be traced and compared to sales records or invoices to:
A. Determine whether payments are properly applied to customer accounts
 B. Ensure that shipments are billed to customers
C. Determine whether unit prices billed are in accordance with sales contracts
D. Ascertain whether all sales are supported by shipping documents

20. An auditor noted that the accounts receivable department is separate from other accounting activities. Credit is
approved by a separate credit department. Control accounts and subsidiary ledgers are balanced monthly.
Similarly, accounts are aged monthly. The accounts receivable manager writes off delinquent accounts after
one year or sooner, if a bankruptcy or other unusual circumstances is involved. Credit memoranda are pre-
numbered an internal control weakness of the above organization?
A. Write-offs of delinquent accounts
B. Credit approvals
C. Monthly aging of receivables
D. Handling of credit memos

21. Sending accounts receivable confirmation letters to the client’s customers is consistent with the auditor’s
objective of validating client’s receivable assertion on:
A. Existence and rights
B. Completeness and valuation
C. Completeness and rights
D. Existence and valuation

22. The auditor’s analysis of the clients aged accounts receivable schedule is consistent with the auditor’s objective
of validating client’s receivable assertion on:
A. Existence
B. Completeness
C. Rights and obligation
D. Valuation

PRACTICAL APPLICATION

Problem 1: The following summaries and transactions recorded in the Accounts receivable- trade account of
Presario Corporation:
 Accounts Receivable - Trade
Jan. 1 balance, net of credit P9,000 balance 106,000 Receipts from customers, including overpayment of P10,000 1,240,000
Charge sales 1,250,000 Write offs 7,000
Charge for consignment sales 25,000 Merchandise return 5,500
Shareholders subscriptions 60,000 Allowance to customers for shipping damages 3,000
Recovery of previous write-offs 5,000 Collections on carrier claims 2,000
Refunds to customers with credit balances 5,000 Collection on subscription 45,000
Deposit on contract 50,000
Claim against common carrier for shipping damages 5,000
IOUs from employees 1,000
Cash advance to affiliate 50,000
Advance to supplier 10,000

Audit notes:
a. It was ascertained that half of the adjusted outstanding accounts receivable- trade balance are still currently
uncollectible. The term of sale is 5/30, n/60. Based on past experience, a 25% of customers whose accounts
are still current normally pay within the discount period.
b. 30% of the adjusted accounts receivable- trade is 60 days past due and is expected to be only 90% collectible.
c. 20% of the adjusted accounts receivable- trade balance is more than 120 days past due and is expected to be
50% collectible.

Requirements:
1. What is the correct accounts receivable-trade balance?
2. What is the carrying value of the accounts receivable- trade?
3. Prepare the necessary adjusting journal entities.
Problem 2: Your audit of Dell Company’s accounts receivable and its related allowance for doubtful accounts
expense revealed the following information:

a. The general ledgers of Dell Company have the following balances:

Accounts receivable P360,000
Allowance for doubtful accounts (1,320)
Amortized cost P358,680

b. An aging of Dell Company’s accounts receivable per subsidiary ledgers, on December 31, 2014 contained the
following information:
Time Outstanding Amount of Accounts Receivable
Under 30 days P240,000
30-60 days 48,000
61-120 days 36,000
121-180 days 24,000
Over 180 days 12,000
Total P360,000

c. Investigators revealed that 50% of the over 180 days account definitely uncollectible and that a P12, 000
customer credit balance for an advance payment for a future delivery was included in the under 30 days
account.

d. Based on past experiences, the company believes that the following uncollectible percentages are appropriate:
 Under 30 days -
30-60 days 3%
61-120 days 15%
121-180 days 30%
Over 180 days 60%

e. The term of sale is 10/15, n/30. As per past experience, 20% of the customer whose accounts are still current
are expected take advantage of the cash discount.

f. Also, based on past experience, you have ascertained that 5% of the current account should be provided for
probable future sales returns.

Requirements:
1. What is the adjustments balance of the accounts receivable account?
2. What is the correct doubtful accounts expense for the period?
3. What is the allowance for doubtful accounts for the period?
4. What is the carrying value of the company’s accounts receivable as of December 31, 2014?
5. Assuming that the allowance for doubtful accounts had a P1, 680 debit balance before any adjustments, what
is the correct doubtful accounts expense?

Problem 3: From inception of operations to December 31, 2014, Twinhead Corporation provided for uncollectible
accounts receivable under the allowance method: provision 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 allocation were made. Twinhead’s usual credit terms
are 2/30, n/60.

The balance in the allowance for doubtful accounts was P65, 000 at January 1, 2014. During 2014 credit sales
totalled P4, 500, 000, interim provision for doubtful accounts were made at 2% of credit sales; P45, 000 of bad
debts were written off, and recoveries of accounts previously written off amounted to P7, 500. Twinhead installed a
computer facility in November, 2014, and an aging of accounts receivable was prepared for the first time as of
December 31, 2014.

A summary of the aging is as follows:

Classification by Month of Sale Balance in Each Category Estimated % Uncollectible
Nov. – Dec. 2014 P1,140,000 1.5
July – October 600,000 8.0
January – June 400,000 35.0
Prior to 1/1/14 130,000 70.0
 P2,270,000

Based on the review of collectability of account balances in the “prior to 1/1/14” aging category, additional
receivables totalling P30, 000, were written off as of December 31, 2014. Effective with the year ended December
31, 2014. Twinhead adopted the revised accounting standards in recognizing bad debts.

Further investigation revealed that P700, 000 of the Nov-Dec balance were sales in December and that 30% of the
amount is anticipated to be collected within the discount period the following period.

Requirements:
1. Prepare the journal entry for the year-end adjustment to the allowance for doubtful accounts balance as of
December 31, 2014.
2. What is the correct balance of the allowance for doubtful accounts at year-end?
3. What is the carrying value of the accounts receivable at year-end?

Problem 4: The accountant of ABC Corp. presented to you in the following details of its subsidiary ledger in
relation to your audit of the company’s accounts receivable balance as of December 31, 2014:

Invoice Date Amount

Zulu Inc. December 20 P550,000
December 1 1,200,000
 October 11 950,000
August 4 420,000

Whiskey Co. Customer November 20 2,000,000

September 4 900,000
August 2 500,000

Uniform Inc. December 10 1,750,000

October 4 600,000
July 5 500,000

Tango Corp. September 9 2,600,000

July 10 1,250,000
March 5 900,000

Romeo Corp. December 1 (500,000)

Audit notes:
a. The company’s term is n/60 days.

b. The company’s general ledger shows the following balances as of December 31, 2014:
Accounts Receivable P13,650,000
Allowance for doubtful accounts (950,000)

c. The credit balance of the receivable resulted from Romeo Co.’s overpayment of its account. The same shall be
settled by a delivery of merchandise the following period.

d. You have discovered that Uniform Inc.’s payment of an October 4 invoice amounting to P600,000 was posted
against Whiskey Co.’s account for an invoice dated December 4, for the same amount.

e. Discussion with the credit department manager revealed the following appropriate credit policy:
Accounts Receivable Age % doubtful of collection
Current 2%
1-60 days past due 5%
61-120 days past due 20%
More than 120 days past due 50%

Requirements:
1. How much is the unreconciled difference between the control account the subsidiary ledger?
2. What is the correct accounts receivable balance as of December 31, 2014?
3. Assuming that there were no other entries affecting the allowance for bad debts, what is the correct bad debts
expense for 2014?
4. What is the correct amortized cost of the receivables as of December 31, 2014?
Problem 5: You are assigned to audit Bonifacio Inc. for the year ending June 30, 2014.

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)

The credit balance in the accounts receivable represents collection from a customer whose account had been
written off as uncollectible in the previous year.

The Accounts Receivable were circularized as at June 30, 2014 and the following exceptions/replies have not been
disposed off at the date of your examination.
 Customer Balances Comments from Customers Audit Findings

Aye P 4,000 This balance for invoice dated June Bonifacio Inc. received mailed check on
5, 2014 was paid in June 29, 2014. July 2, 2014.
Bee 13,800 The balance for invoice dated June Bonifacio Inc. credited accounts payable
1 was offset by our June 10, for P13800 to record purchase of tires.
shipment of tires.
See 16,600 The above balance for invoice The payment was credited to customer
dated April 20 has been paid. Dee.

Dee 20,000 The records show a bigger A new confirmation was mailed. All
balance, please check. outstanding invoices to Dee are dated
June.
Eee 11,600 We do not owe Bonifacio Inc. The shipment costing P8000 was made on
anything as the goods were June 29, 2014 and the goods were not
received July, 2014, FOB included in recording the June 30, 2014
Destination. inventory summary.
Eff 14,000 Our deposit of P18000 should Bonifacio Inc. had previously credited the
cover this balance. deposit to sales. The P14000 balance was
for a June shipment.
Jeeh 6,000 Amount okay. Since this is on Goods cost P4, 400 and were appropriately
consignment, we will remit included in Bonifacio Inc.'s inventory. The
payment upon selling the goods. amount is included in the “below 60 days”
receivables.
Eych 1,200 CM No. 8118 cancels this balance. The CM dated April 30, 2014 was recorded
by Bonifacio Inc. in July 2014. The amount
is for an April 15 sale invoice.

Based on your discussion 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 adjustment to the controlling account appropriate for customer's See account?
2. What is the adjusted accounts receivable account balance?
3. What is the required allowance for bad debts as of June 30, 2014?
4. Assuming that there were no other entries affecting the allowance account during the fiscal year, how much is
the bad debt expense?
Problem 6: On January 1, 2014, ABC Company, a calendar-year firm, gave a loan to XYZ Enterprises amounting
to P1,000,000 and received a two-year, 12%, P1, 000, 000 note. The note calls for annual interest to be paid each
January 2. ABC collected the interest on January, 2015 as scheduled. The company incurred origination cost
amounting to P57, 851, 40% of which had been charged to XYZ Enterprises. Yield rate on the loan with this
arrangement was at 10%.

At December 31, 2015, however, based on XYZ's recent financial problems, ABC expects to collect only P900,000
of the amounts due.

The P900,000 principal amount is expected to be collected in three equal installments on December 31, 2016,
2017, and 2018.

ABC believes that 8% is the market's assessment of the time value of money as of December 31, 2015.

Requirements:
1. How much should the loans receivable be initially recognized?
2. What is the carrying value of the loans receivable as of December 31, 2014?
3. How much loss should be recognized in relation to the loan on December 31, 2015?
4. Assume that ABC Company collects the expected payments from XYZ. What entries should be made on
December 31, 2016; December 31, 2017; and December 31, 2018?
Problem 7: In the course of your audit of the Loans receivable account of ABC Corp., a lending company, for the
year ended December 31, 2014, you discovered the following information from the company's subsidiary ledger
accounts:
Balances per ledger
DEF Corp. 10% P5,000,000
GHI, 12% 2,000,000
KLM, non-interest bearing 4,000,000
NOP, 10% serial 4,000,000

Audit notes:

a. The three-year loan to DEF Corp. was made on January 1, 2013 when the prevailing rate of interest was at
12%. The company recorded the loan as a debit to the loans receivable account at the face value of the loan
charging any difference between the loaned amount and the face value of the loan to interest income. Semi-
annual interest collection on the loan every June 30 and December 31 has been appropriately recorded.

b. Loan to GHI, an associate, was made at face value on January 1, 2014 and is due on December 31, 2016. The
first annual interest collection on the loan on December 31, was correctly recorded.

c. The P4M, five years non-interest bearing loan to KLM was made on January 1, 2012. The total amount
disbursed on that date was based on the appropriate discount rate prevailing on that date at 10%. The
transaction was recorded by the client as a debit to loans receivable at face value of the loan charging interest
income for its difference to the amount credited to cash.

d. The NOP serial notes which were dated January 1, 2014 were collectible at the rate of P1,000,000 every
December 31. The company recorded the loan as a debit to the loans receivable account at the face value of
the loan charging any difference between the loaned amount and the face value of the loan to interest income.
The first collection was made on December 31 of the current year. The amount extended on the loan was
consistent with the prevailing interest rate for similar note which was 12%.

e. Notes are from normal lending operations not unless otherwise specified.

Required:
1. Total amount extended to DEF on January 1, 2013 and the outstanding balance of the loan as of December 31,
2014.
2. What is the retroactive, adjustment to retained earnings, if any, as a result of your audit of loans receivable
from DEF?
3. Total amount extended to GHI on January 1, 2014 and the outstanding balance of the loan as of December 31,
2014.
4. Total amount extended to KLM on January 1, 2014 and the outstanding balance of the loan as of December 31,
2014.
5. What is the retroactive, adjustment to retained earnings, if any, as a result of your audit of loans receivable
from KLM?
6. Total amount extended to NOP on January 1, 2014 and the outstanding balance of the loan as of December
31, 2014.
7. Correct interest income for 2014.
8. Accrued interest receivable as of December 31, 2014.
9. Total correct balance of the loans and receivable to be presented as current asset.
10. Total correct balance of the loans and receivable to be presented as non-current asset.
Problem 8: The balance sheet of DWARF CORP. reported the following long-term receivables as of December 31,
2013:
Note receivable from sale of plant P4,500,000
Note receivable from officer 1,200,000

In connection with your audit, you were able to gather the following transactions during 2014 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 P1, 500, 00 plus interest on the unpaid balance every April 1. The initial principal and interest
payment was made on April 1, 2014.

b.) The note receivable from officer is dated December 31, 2013, earns interest at 10% per annum, and is due on
December 31, 2016. The 2014 interest was received at year-end.

c.) The corporation sold a piece of equipment to SNOW INC. on April 1, 2014, in exchange for a P600,000 non-
interest bearing note due on April 1, 2016. The note had no ready market, and here was no established
exchange price for the equipment. The prevailing interest rate for a note of this type at April 1, 2014 was 12%.
The present value factor of 1 for two periods at 12% is 0.797 while the present value factor of ordinary annuity
of 1 for two periods at 12% is 1.690

d.) A tract of land was sold by the corporation to WHITE CO. on July 1, 2014, for P3,000,000, under an installment
sale contract. White signed a 4-year 11% note for P2,100,000 on July 1, 2014, in addition to the downpayment
of P900,000. The equal annual payments of principal and interest on the note will be P676,875 payable on July
1, 2015, 2016, 2017, and 2018. The land had an established cash price of P3,000,000, and its cost to the
corporation was P2,250,000. The collection of the installments on this note is reasonably assured.

Requirements:
1. How much is the total noncurrent notes receivable as of December 31, 2014?
2. How much is the total current portion of long-term notes receivable as of December 31, 2014?
3. What is the accrued interest receivable as of December 31, 2014?
4. What is the correct income for the year 2014?
 Problem 9: Whiskey Inc. had the following receivable financing transactions for the fiscal year ended August 31,
2014:

a. On June 30, 2014, Whiskey Inc. had an outstanding accounts receivable balance amounting to P4,000,000.
The receivables was pledged to BDO Bank in consideration of a 12% loan. The loan amount is 80% of the
outstanding receivables. BDO charged the company 5% outstanding accounts receivable as service charge.

By the end of July, Whiskey collected P1,200,000 cash from the accounts receivable net of a P120,000 sales
discount. Also, by the end of July, Whiskey accepted from customers merchandise originally invoiced at
P80,000 as returns.

By the end of August, Whiskey collected another P900,000 after a P50,000 sales discount. The company
wrote-off P200,000 of the accounts receivable as worthless.

It was agreed-upon with BDO that remittances from collections will be made to the bank on a monthly basis
and that the collections from customer will cover both interest and loan principal.

b. On May 1, 2014, Whiskey discounted to BDO a 12-month, 10% note receivable dated January 1, 2014 and
with a face value of P2,000,000. BDO's discount rate was at 8%. The discounting was done on a without-
recourse basis, thus transferring all significant risk and rewards associated to the notes receivable to BDO.

Required:
1. Entries to reflect the transactions;
2. The balance of the accounts receivable account as of August 31, 2014;
3. The balance of the loans payable account as of August 31, 2014;
4. The balance of the notes receivable as of August 31, 2014;
5. Gain or loss to be reported in the 2014 profit or loss from derecognition of any receivables.
Problem 10: Victory Inc. had the following receivable financing transactions in 2014:

a. At the beginning of November, Victory Inc. assigned P2,000,000 out of its P10,000,000 outstanding
accounts receivable to BPI in consideration of a P1,500,000, 12% loan. BPI charged the company 5% of
the loan principal as a service charge, By the end of November, Victory collected P600,000 cash from the
assigned accounts net of a P50,000 sales discount. Also, by the end of November, Victory accepted from
customers merchandise originally invoiced at P60,000 as returns.

By the end of December, Victory collected another P700,000 from the assigned accounts after P40,000
sales discount. The company wrote-off P80,000 of the assigned accounts as worthless.

The agreement with BPI calls for monthly remittance of customer collections for the month. The
collections will cover both interest and loan principal.

b. Also beginning of November, Victory Inc. factored another P500,000 of its accounts receivable to BPI. As
of the date of factoring, it was ascertained that P20,000 of the accounts receivable is doubtful of
collection. BPI advanced P350,000 cash to Victory and withheld P50,000 as factors holdback (to cover
future sales discount and sales returns and allowances). The company incurred P10,000 direct transaction
costs (legal fees and other professional fees) related to the factoring. The factoring was done on a
without-recourse basis, thus transferring all significant risk and reward related to the receivables to BPI.

Required:
1. Entries to reflect the transactions;
2. The balance of the accounts receivable-assigned account as of November 30, 2014;
3. The balance of the loans payable account as of November 30, 2014;
4. Gain of loss to be reported in the 2014 profit or loss from derecognition of any receivables?