2 AUDIT OF RECEIVABLES

AUDIT PROGRAM FOR RECEIVABLES

Audit Objectives
To determine that:
a. Receivables represent valid claims against customers and other parties and have been
properly recorded.
b. The related allowance for doubtful accounts, returns and allowances, and discounts are
reasonably adequate.
c. Receivables are properly described.
d. Disclosures with respect to the accounts are adequate.

Audit Procedures
1. Obtain a list of aged receivable balances from the subsidiary ledger, and:
a. Foot and cross-foot the list.
b. Check if the list reconciles with the general ledger control account.
c. Trace individual balances to the subsidiary ledger.
d. Test the accuracy of the aging.
e. Adjust non-trade accounts erroneously included in customers' accounts.
f. Investigate and reclassify significant credit balances.

2. Test accuracy of balances appearing in the subsidiary ledger.

3. Confirm accuracy of individual balances by direct communication with customers.

a. Investigate exceptions reported by customers and discuss with appropriate officer
for proper disposal
b. Send a second request for positive confirmation requests without any replies from
customers.
c. If the second request does not produce a reply from the customer, perform extended
procedures, like:
aa. Reviewing collections after year-end.
bb. Checking supporting documents.
cc. Discussing the account with appropriate officer.
d. Discuss with appropriate officer, confirmation requests returned by the post office and
and perform extended procedures
e. Prepare a summary of confirmation results.

4. Review correspondence with customers for possible adjustments.

5. Test propriety of cutoff:

a. Examine sales recorded and shipments made a week before and after the balance
sheet date and ascertain whether the sales were recorded in the proper period.
b. Investigate large amounts of sales returns shortly after the balance sheet date.
6. Perform analytical procedures, like:
a. Gross profit ratio.
b. Accounts receivable turnover.
c. Ratio of accounts written off to sales or balance of accounts receivable.
Compare with prior year and industry average.

7. Review individual balances and age of accounts with appropriate officer, and:
a. Determine accounts that should be written off.
b. Determine the adequacy of allowance for doubtful accounts.

8. Obtain analysis of significant other receivables.

9. Ascertain whether some receivables are pledged, factored, discounted, or assigned.

10. Determine financial statement presentation and adequacy of disclosures.

11. Obtain receivable representation letter from client.

 2 problems
Problem 2-1
DETERMINING THE ACCOUNTS RECEIVABLE BALANCE

The following information is from Gerald Company's first year of operations:

Merchandise purchased $ 392,000

Ending merchandise inventory 94,000
Collections from customers 288,000
All sales are on account and goods sell at 50% above cost.

Required:
Determine the accounts receivable balance at the end of the company's first year of operation.

Solution:
Purchases 392,000
Less: Ending Inventory 94,000
COGS 298,000
Sales ratio 150%
Sales 447,000
Less: Collections 288,000
Accounts receivable, end 159,000

Problem 2-2
DETERMINING THE ALLOWANCE FOR BAD DEBTS BALANCE
The following information pertains to Acer Company for the year ended December 31, 2018.

Credit sales during 2018 $ 3,450,000

Collections of accounts written off in prior periods 165,000
Worthless accounts written off in 2018 189,000
Allowance for doubtful accounts, 1/1/18 145,000

Acer company provides for doubtful accounts based on 1 1/2% of credit sales.

Required:
Compute the balance of the allowance account at December 31, 2018.

Solution:
Allowance for doubtful accounts balance 1/1/18 145,000
Bad debts expense (3,450,000 x 1.5%) 51,750
Recovery of accounts written off 165,000
Accounts written off (189,000)
Balance December 31 172,750

Problem 2-3
COMPUTING NET SALES
The Allowance for Doubtful Accounts had a credit balance of $146,000 at December 31, 2017
During 2018, uncollectible accounts of $22,000 had been written off. The company estimates its
bad debts expense to be 3% of net sales. The balance of the allowance account at the end of
2018 was $424,220.

Required:
Compute the net sales for 2018.
Solution:
Allowance balance December 31, 2018 424,220
Add: Accounts written off 22,000
Total 446,220
Less: Allowance, January 1, 2018 146,000
Bad debts for 2018 300,220
Bad debts rate 3%
Net sales, 2018 10,007,333

Problem 2-4
COMPUTING THE AMOUNT OF
ACCOUNTS RECEIVABLE WRITTEN OFF
The policy of Bloomberg Company is to debit Bad Debt Expense for 3% of all new sales. The
following are the company's sales and allowance for bad debts for the past four years.
Allowance for Bad Debts
Year Sales Year-end Balance
2015 $ 3,000,000 $ 45,000
2016 2,950,000 56,000
2017 3,120,000 60,000
2018 2,420,000 75,000

Required:
Compute the amount of accounts written off for the years 2016, 2017, and 2018.

Solution: 2016 2017 2018

Allowance balance, beg 45,000 56,000 60,000

Add: Estimated uncollectibles 88,500 93,600 72,600
Total allowance 133,500 149,600 132,600
Less: Allowance balance, end 56,000 60,000 75,000
Accounts written off 77,500 89,600 57,600

Problem 2-5
PREPARING AN ACCOUNTS RECEIVABLE AGING SCHEDULE
Carlyle Company's accounts receivable subsidiary ledger shows the following information:
Account Balance Invoice
Customer December 31, 2018 Date Amount

Axle, Inc. $ 35,180 12/06/18 $ 14,000

11/29/18 21,180

Naïve Corp. 20,920 09/27/18 12,000

08/20/18 8,920

Sailor Co. 30,600 12/08/18 20,000

10/25/18 10,600

Tiffany, Inc. 45,140 11/17/18 23,140

10/09/18 22,000

Uganda Co. 31,600 12/12/18 19,200

12/02/18 12,400
 Xyclope Corp. 17,400 09/12/18 17,400

The estimated bad debts rates below are based on Carlyle Company's receivable collection
experience.
Age of Accounts Rate

0 - 30 days 1.0%
31 - 60 days 1.5%
61 - 90 days 3.0%
91 - 120 days 10.0%
Over 120 days 50.0%

The allowance for Bad Debts account had a credit balance of $3,500 on December 31, 2018
before adjustment.

Required:
1. Prepare an aging schedule of accounts receivable on December 31, 2018.
2. Compute the required allowance on December 31, 2018.
3. Prepare the December 31, 2018 adjusting entry.
Solution:
1. Carlyle Company
Accounts receivable Aging Schedule
December 31, 2009

Balance Over
Customer 12-31-09 0-30 days 31-60 days 61-90 days 91-120 days 120 days

Axle, Inc. 35,180 14,000 21,180

Naïve Corp. 20,920 12,000 8,920
Sailor Co. 30,600 20,000 10,600
Tiffany, Inc. 45,140 23,140 22,000
Uganda Co. 31,600 31,600
Xyclope Corp. 17,400 17,400
180,840 65,600 44,320 32,600 29,400 8,920

2. Required Allowance

0 - 30 days 65,600 x 1.0% 656

31-60 days 44,320 x 1.5% 665
61-90 days 32,600 x 3.0% 978
91-120 days 29,400 x 10.0% 2,940
Over 120 days 8,920 x 50.0% 4,460
9,699
3 Adjustment

Bad debts expense 6,199

Allowance for bad debts ###

Problem 2-6
ESTIMATING BAD DEBTS EXPENSE
BY AGING ACCOUNTS RECEIVABLE
Yellow Bell Company estimates its bad debt losses by aging its accounts receivable. The aging
schedule of accounts receivable at December 31, 2018 is presented below:

Age of Accounts Amount

0 - 30 days $ 843,200
31 - 60 days 461,000
61 - 90 days 192,400
91 - 120 days 76,650
Over 120 days 39,400
$ 1,612,650
Yellow Bell Company's uncollectible accounts experience for the past 5 years are summarized in
the following schedule:
A/R Balance Over 120
Year Dec. 31 0-30 days 31-60 days 61-90 days 91-120 days days
2017 $ 1,312,500 0.30% 1.80% 12.00% 38.00% 65.00%
2016 999,999 0.50% 1.60% 11.00% 41.00% 70.00%
2015 465,000 0.20% 1.50% 9.00% 50.00% 69.00%
2014 816,000 0.40% 1.70% 10.20% 47.00% 81.00%
2013 1,243,667 0.90% 2.00% 9.70% 33.00% 95.00%
The balance of the allowance for bad debts account at December 31, 2018 (before adjustment)
is $84,500.

Required:
Prepare the necessary journal entry to adjust the allowance for bad debts account at December 31, 2018.
Solution
Over 120
Year 0-30 days 31-60 days 61-90 days 91-120 days days
2008 0.30% 1.80% 12.00% 38.00% 65.00%
2007 0.50% 1.60% 11.00% 41.00% 70.00%
2006 0.20% 1.50% 9.00% 50.00% 69.00%
2005 0.40% 1.70% 10.20% 47.00% 81.00%
2004 0.90% 2.00% 9.70% 33.00% 95.00%
Total 2.30% 8.60% 51.90% 209.00% 380.00%
Average 0.46% 1.72% 10.38% 41.80% 76.00%
Estimated
Age of Accounts Amount Rate Uncollectible

0 - 30 days 843,200 0.46% 3,879

31 - 60 days 461,000 1.72% 7,929
61 - 90 days 192,400 10.38% 19,971
91 - 120 days 76,650 41.80% 32,040
Over 120 days 39,400 76.00% 29,944
1,612,650 93,763

Entry:
Bad debts expense 9,263
Allowance for bad debts 9,263

Problem 2-7
FACTORING OF ACCOUNTS RECEIVABLE
On December 5, 2018, Bandit Company sold its accounts receivable (net realizable value, $260,000) for
cash of $230,000. Ten percent of the proceeds was withheld by the factor to allow for possible customer
returns and other account adjustments. The related allowance for bad debts is $40,000.

Required:
1. Compute the loss/gain on factoring of accounts receivable.
2. Prepare the necessary journal entry to record the sale of the accounts receivable.
Solution:
1. Net realizable value of accounts receivable 260,000
Cash proceeds 230,000
Loss on factoring 30,000

Entry 2. Cash (230,000 x 90%) 207,000

Allowance for bad debts 40,000
Loss on factoring 30,000
Receiable from factor 23,000
Accounts receivable 300,000
Problem 2-8
ASSIGNMENT OF ACCOUNTS RECEIVABLE
On April 1, 2018, Sunvalley Hill Company assigned accounts receivable totaling $400,000 as collateral
on a $300,000, 16% note from Irwig 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 $300,000 value of the note.
Additional information:

1. Collections of assigned accounts in April totaled $191,100, net of a 2% sales discount.

2. On May 1, Sunvalley Hill Company paid the bank the amount owed for April collections plus
accrued interest on note to May 1.
3. The remaining accounts were collected by Sunvalley Hill Company during May except for
$2,000 accounts written off as worthless.
4. On June 1, Sunvalley Hill Company paid the bank the remaining balance of the note plus
accrued interest.

Required:
Prepare the journal entries to record the above transactions on the books of Sunvalley Hill Company.
Solution: Entries

April April 1. Accounts receivable-assigned 400,000

Accounts receivable 400,000

1. Cash 294,000
Finance charg(300,000 x 2%) 6,000
Notes payable 300,000

(1) Cash 191,100

Sales discounts 3,900
Accounts receivable-assigned 195,000
(191,100 / 98%)

(2) Notes payable 195,000

Interest expense (300,000 x 16% x 1/12) 4,000
Cash 199,000

(3) Cash 203,000

Allowance for bad debts 2,000
Accounts receivable-assigned 205,000
(400,000-195,000)

(4) Notes payable 105,000

Interest expense (105,000 x 16% x 1/12) 1,400
Cash 106,600

Problem 2-9
NOTES RECEIVABLE: CURRENT AND NONCURRENT
PORTIONS, ACCRUED INTEREST, AND INTEREST EARNED
The following long-term receivables were reported in the December 2018, balance sheet of
Mangrove Corporation:
Note receivable from sale of plant $ 3,000,000
Note receivable from officer 800,000
The following transactions during 2018 and other information relate to the company's long-term
receivables:

1. The note receivable from sale of plant bears interest at 12% per annum. The note is payable
in 3 annual installments of $1,000,000 plus interest on the unpaid balance every April 1.
The initial principal and interest payment was made on April 1, 2018.
 2. The note receivable from officer is dated December 31, 2017, earns interest at 10% per annum
and is due on December 31, 2020. The 2018 interest was received on December 31, 2018.
3. Mangrove Corporation sold a piece of equipment to Bahamas, Inc. on April 1, 2018, in exchange
for a $400,000 noninterest-bearing note due on April 1, 2020. The note had no ready market,
and there is no established exchange price for the equipment. The prevailing interest rate for a
note of this type at April 1, 2018, was 12%. The present value factor of 1 for two periods at
12% is 0.797.

4. A tract of land was sold by Mangrove Corporation to Orlane, Inc. on July 1, 2018, for $2,000,000
under an installment sale contract. Orlane Inc., signed a 4-year 11% note for $1,400,000 on
July 1, 2018, in addition to the down payment of $600,000. The equal annual payments of
principal and interest on the note will be $451,250 payable on July 1, 2019, 2020, 2021, 2022.
The land had an establish cash price of $2,000,000, and its cost to Mangrove Corporation
was $1,500,000. The collection of the installments on this note is reasonably assured.

Required:
Compute the following:
a. Noncurrent receivables.
b. Current portion of noncurrent receivables.
c. Accrued interest receivable at December 31, 2018.
d. Interest income for the year ended December 31, 2018.
Solution: a. Noncurrent receivables