AUDITING PROBLEMS Review Class

AUDIT OF RECEIVABLES

PROBLEM NO. 1

On December 31, AAA Co.’s Accounts Receivable balance per ledger of P2,530,000 includes:

1. MasterCard or VISA credit card sale of merchandise to customer P150,000

2. Overpayment to supplier for inventory purchased on account 90,000
3. Insurance claim on automobile accident 10,000
4. Advance to sales manager due in one year 40,000
5. 5-year note receivable due from company president
(This was issued by the president for the loan granted to him.) 500,000
6. Interest due on the 5-year note from company president,
interest payable annually 60,000
7. Acceptance of 6-month note for past due account
arising from sale of inventory 90,000
8. Accrued interest receivable on the note above 10,000
9. Overpayment by customer of an account receivable (20,000)
10. Accounts receivable to customers definitely uncollectible 40,000
11. Other trade accounts receivable – unassigned 100,000
12. Trade accounts receivable – assigned 50,000
13. Note receivable from a customer (This is for a cash loan
made to this customer collectible in 3 years.) 60,000
14. Claim for tax refund from last year 20,000
15. Prepaid insurance – 4 months remaining in the policy period 40,000
16. Advances to subsidiaries 400,000
17. Inventory in-transit as of December 31 purchased FOB shipping pt. 150,000
18. Subscriptions receivable (currently collectible) 200,000
19. Special deposits on contract bids 80,000
20. Dividends receivable 50,000
21. Note receivable dishonored 20,000
22. Accrued rent receivable 20,000
23. Claims against common carriers 30,000
24. Acceptance of 8-month note from employees arising from sale of inventory 20,000
25. Trade installment receivable normally collectible within 16 months,
net of unearned interest income of P20,000 320,000
TOTAL P2,530,000

Questions:

Based on the above and the result of your audit, compute the following:

1. Trade receivables as of December 31

A. P750,000 B. P700,000 C. P660,000 D. P640,000

2. Current non-trade receivables as of December 31

A. P530,000 B. P590,000 C. P1,040,000 D. P1,570,000

3. Trade and other receivables to be presented as current assets as of December 31

A. P1,170,000 B. P1,280,000 C. P1,290,000 D. P2,850,000

4. Non-current receivables as of December 31

A. P530,000 B. P590,000 C. P1,040,000 D. P1,570,000

5. Amount that should be reclassified as a current liability as of December 31

A. P20,000 B. P40,000 C. P60,000 D. P80,000
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AUDIT PROBLEMS 01 – AUDIT OF RECEIVABLES

PROBLEM NO. 2

To substantiate the existence of the accounts receivable balances as at December 31, 2021, of
HELOW COMPANY, you have decided to send confirmation requests to customers. Below is a
summary of the confirmation replies together with the exceptions and audit findings. Gross profit
on sales is 20%. The company is under the perpetual inventory method.

Name of Balance Comments

Customer Per Books From Customers Audit Findings
Marimar P150,000 P90,000 was returned on Returned goods were received
December 30, 2021. Correct December 31, 2021.
balance is P60,000.
Pulgoso P30,000 Your CM representing price The CM was taken up by Helow
adjustment dated December 28, Company in 2022.
2021, cancels this.
Doreymon P144,000 You have overpriced us by P150. The complaint is valid.
Correct price should be P300.
Goku P112,500 We received the goods only on Term is shipping point. Shipped in
January 6, 2022. 2021.
Togepi P135,000 Balance was offset by our Helow Company credited accounts
December shipment of your raw payable for P135,000 to record
materials. purchases. Togepi is a supplier.

Questions:

Based on the above and the result of your audit, answer the following:

1. If the necessary adjusting journal entry is made regarding the case of Marimar, the net income
will
A. Decrease by P18,000. C. Increase by P18,000.
B. Decrease by P90,000. D. Increase by P90,000.

2. The effect on 2021 net income of Helow Company of its failure to record the CM involving
transaction with Pulgoso:
A. P30,000 over B. P30,000 under C. P6,000 over D. P6,000 under

3. The overstatement of receivable from Doreymon is

A. P96,000 B. P24,000 C. P72,000 D. P48,000

4. The accounts receivable from Goku is

A. Correctly stated. C. P112,500 under.
B. P112,500 over. D. P225,000 under.

5. The adjusting entry to correct the receivable from Togepi is

A. Purchases 135,000
Accounts receivable 135,000
B. Accounts payable 135,000
Purchases 135,000
C. Accounts receivable 135,000
Accounts payable 135,000
D. Accounts payable 135,000
Accounts receivable 135,000

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AUDIT PROBLEMS 01 – AUDIT OF RECEIVABLES

PROBLEM NO. 3

From inception of operations, BBB Co. carried no allowance for doubtful accounts.

Uncollectible accounts were expensed as written off and recoveries were credited to income as
collected.

During 2021, management recognized that the accounting policy with respect to doubtful
accounts was not correct and determined that an allowance for doubtful accounts was necessary.

A policy was established to maintain an allowance for doubtful accounts based on historical bad
debt loss percentage applied to year-end accounts receivable.

The historical bad debt loss percentage is to be recomputed each year based on all available past
years up to a maximum of five years.

Year Credit sales Write-offs Recoveries

2017 P1,500,000 P15,000 P 0
2018 2,250,000 38,000 2,700
2019 2,950,000 52,000 2,500
2020 3,300,000 65,000 4,800
2021 4,000,000 83,000 5,000

The entity reported accounts receivable of P1,250,000 on December 31, 2020 and P2,000,000 on
December 31, 2021.

Questions:

Based on the above and the result of your audit, answer the following:

1. What is the bad debt rate in 2020?

A. 1.6% B. 1.7% C. 1.8% D. 1.9%

2. What is the bad debt rate in 2021?

A. 1.6% B. 1.7% C. 1.8% D. 1.9%

3. What is the net realizable value of accounts receivable on December 31, 2020?
A. P1,228,750 B. P1,230,000 C. P1,250,000 D. P2,000,000

4. What is the net realizable value of accounts receivable on December 31, 2021?
A. P1,250,000 B. P1,966,000 C. P1,968,000 D. P2,000,000

5. What is the doubtful accounts expense for 2021?

A. P34,000 B. P78,000 C. P83,000 D. P92,000

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AUDIT PROBLEMS 01 – AUDIT OF RECEIVABLES

PROBLEM NO. 4

Cobidra Company produces paints and related products for sale to the construction industry
throughout Metro Manila. While sales have remained relatively stable despite a decline in the
amount of new construction, there has been a noticeable change in the timeliness with which the
company’s customers are paying their bills.

The company sells its products on payment terms of 2/10, n/30. In the past, over 75 percent of
the credit customers have taken advantage of the discount by paying within 10 days of the invoice
date. During the year ended December 31, 2020, the number of customers taking the full 30 days
to pay has increased. Current indications are that less than 60% of the customers are now taking
the discount. Uncollectible accounts as a percentage of total credit sales have risen from the 1.5%
provided in the past years to 4% in the current year.

In response to your request for more information on the deterioration of accounts receivable
collections, the company’s controller has prepared the following report:

Codibra Company
Accounts Receivable Collections
December 31, 2021

The fact that some credit accounts will prove uncollectible is normal, and annual bad debt write-
offs had been 1.5% of total credit sales for many years. However, during the year 2021, this
percentage increased to 4%. The accounts receivable balance is P1,500,000, and the condition
of this balance in terms of age and probability of collection is shown below:

Proportion to total Age of accounts Probability of collection

64% 1 – 10 days 99.0%
18% 11 – 30 days 97.5%
8% Past due 31 – 60 days 95.0%
5% Past due 61 – 120 days 80.0%
3% Past due 121 – 180 days 65.0%
2% Past due over 180 days 20.0%

At the beginning of the year, the Allowance for Doubtful Accounts had a credit balance of P27,300.
The company has provided for a monthly bad debt expense accrual during the year based on the
assumption that 4% of total credit sales will be uncollectible. Total credit sales for the year 2021
amounted to P8,000,000, and write-offs of uncollectible accounts during the year totaled
P292,500.

Questions:

Based on the above and the result of your audit, answer the following:

1. How much is the adjusted balance of the allowance for doubtful accounts as of December 31,
2021?
A. P22,300 B. P59,100 C. P60,750 D. P77,100

2. The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of
December 31, 2021 would include a credit to allowance for doubtful accounts of
A. P22,300 B. P5,950 C. P4,300 D. Nil

END

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