College of Accounting Education

3/F F. Facundo Hall, B & E Bldg.

Matina, Davao City Philippines
Phone No.: (082) 305-0645

Applied Auditing
Audit of Receivables

Audit Objectives of Receivables and Sales

The auditors objectives are to determine that:

1. Adequate internal control structure policies and procedures exist

2. All sales and receivables that should be recorded are properly recorded (COMPLETENESS)
3. Only sales and receivables that should be recorded are recorded (EXISTENCE)
4. Receivable records and supporting schedules are mathematically correct and agree with
general ledger accounts (ACCURACY)

5. The valuation of receivables approximates their realizable values (VALUATION)

6. The presentation and disclosure of receivables is adequate and appropriate
Internal Control of Sales Transactions and Accounts Receivables
Internal controls over sales must be put in place to prevent:
1. Merchandise shipped to customers whose credit standing has not been approved
2. Shipments may be made to customers without notice being given to the billing department;
consequently no sales invoice is prepared
3. Sales invoices may contain errors in prices and quantities
4. If sales invoices are not controlled by serial numbers, some may be lost and never recorded as
accounts receivable. (Completeness)

Audit Working Papers for Receivables and Sales

1. Aged trial balance of trade accounts receivable
2. Analyses of other receivables
3. Analysis of notes receivable and related interest
4. Summary of results of confirmation of accounts receivable
5. Analysis of allowance for uncollectible accounts and notes
6. Comparative analyses of sales transactions by month, by product or territory, or relating
actual sales to forecasted sales

Audit Procedures for Accounts Receivables and Sales Transactions

Presentation and Disclosure
• Review loan agreements (RECEIVABLE FINANCING)
• Review of the accounts receivable trial balance
Existence or Occurrence
• Examine all aspects of a sample of sales transactions
• Confirm accounts receivable on a test basis
Rights and Obligations

• Review sales discount procedures and documentation

• Vouch debits in individual accounts receivable amounts to sales invoices
• Review the year-end cutoff of sales and cash receipts transactions
Completeness

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 • Compare a sample of shipping documents to the related sales invoices (TRACING)
• Reconcile a sample of cash register tapes and sales tickets with the sales journals
• Perform analytical procedures for accounts receivable and sales
Valuation (ALLOWANCE FOR DOUBTFUL ACCOUNTS)
• Test foot the sales journal and reconcile with postings to the general ledger
• Vouch debit entries in the allowance for doubtful accounts to the individual accounts and
original write-off authorizations
• Prepare or obtain an aged accounts receivable schedule
• Investigate any unusual items, transactions, or amounts
• Recalculate and review bad debt expense and allowance
• Examine cash receipts after the balance sheet date
Special audit considerations for receivables

(1) Lapping . Lapping is an embezzlement scheme in which cash collections from customers are
stolen and the shortage is concealed by delaying the recording of subsequent cash receipts.

Lapping most frequently occurs when one individual has responsibility for both recordkeeping and
custody of cash. Although the best way to control lapping is to segregate duties and thereby make its
occurrence difficult, it may be detected by using the following procedures:

(a) Analytical procedures—calculate age of receivables and turnover of receivables (lapping increases
the age and decreases turnover)
(b) Confirm receivables—investigate all exceptions noted, emphasize accounts that have been written
off and old accounts. For all accounts watch for postings of cash receipts which have taken an
unusually long time. For example, when a reply to a confirmation suggests that the account was paid
on December 29, investigate when the posting occurred.

(c) Deposit slips

1] Obtain authenticated deposit slips from bank and compare names, dates, and amounts on
remittance advices to information on deposit slips (where possible).
2] Perform surprise inspection of deposits, and compare deposit slip with remittances.

(d) Bookkeeping system

1] Compare remittance advices with information recorded.
2] Verify propriety of noncash credits to accounts receivable.
3] Foot cash receipts journal, customers’ ledger accounts, and accounts receivable control
account.
4] Reconcile individual customer accounts to accounts receivable control account.
5] Compare copies of monthly statements with customer accounts.

(2) Confirmations. Confirmation of accounts receivable is a generally accepted auditing procedure.

Auditors are to confirm receivables unless (1) accounts receivable are immaterial, (2) confirmations
would be ineffective as an audit procedure, or (3) the combined assessment of inherent and control
risk is low, and that assessment, with other substantive evidence, is sufficient to reduce audit risk to
an acceptably low level.

Receivable confirmations primarily test the existence assertion, and only to a limited extent the
completeness and valuation assertions. Know the difference between the positive and negative
forms of confirmation request.

The positive form requests a reply from debtors. Some positive forms request the recipient to
indicate either agreement or disagreement with the information stated on the request. Other positive
forms, “blank forms,” do not state the amount (or other information), but request the respondent to
fill in the balance or furnish other information, and when used, often result in lower response rates.

The negative form requests the recipient to respond only if he or she disagrees with the information
stated on the request. Negative confirmation requests may be used when
(a) The combined assessed level of inherent risk and control risk is low,
(b) A large number of small balances is involved, and
(c) The auditor has no reason to believe that recipients are unlikely to give them adequate

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 consideration.

Note that when no reply is received to the negative form, the assumption is made that the debtor
agrees with the amount and that evidence as to the existence assertion has been collected.

When no reply is received to a positive confirmation, a second request is normally mailed to the
debtor; if no reply to the second request is received, the auditor normally performs alternative
procedures (e.g., examination of shipping documents, subsequent cash receipts, sales agreements).
However, the auditor may consider not performing alternative procedures when (1) no unusual
qualitative factors or systematic characteristics related to responses have been identified, and (2) the
nonresponses in total, when projected as 100% misstatements to the population, are immaterial.

Typical substantive audit procedures for receivables

(1) Review disclosures for compliance with generally accepted accounting principles.
(2) Inquire of management about pledging, or discounting of receivables to verify that
appropriate disclosure is provided.
(3) Review loan agreements for pledging and factoring of receivables to verify that appropriate
disclosure is provided.
(4) Confirm accounts and notes receivable by direct communication with debtors to verify the
existence and gross valuation of the accounts.
(5) Inspect notes on hand and confirm those not on hand by direct communication with
holders. For notes receivable, the auditor will generally be able to inspect the actual note. This
procedure is particularly important in situations in which the note is negotiable (i.e., salable)
to third parties.
(6) Vouch receivables to supporting customer orders, sales orders, invoices, shipping
documents, and credit memos to verify the existence of accounts, and occurrence and
accuracy of sales transactions.
(7) Review the cutoff of sales and cash receipts around year-end to verify that transactions
affecting accounts receivable are recorded in the proper period. A sale is properly recorded
when title passes on the items being sold. Title passes for items sold FOB shipping point when
the item is shipped from inventory; title passes for items sold FOB destination when the item
is received by the purchaser. You should realize that a proper credit sales cutoff generally
affects at least four components of the financial statements: accounts receivable, sales, cost of
goods sold, and inventory. Cash receipts should be recorded when the check (or cash) is
received from a customer.
(8) Inquire about factoring of receivables to verify that the client maintains rights to the
accounts.
(9) Perform analytical procedures for accounts receivable, sales, notes receivable, and interest
revenue. Typical ratios include: (a) the gross profit rate, (b) accounts receivable turnover, (c)
the ratio of accounts receivable to credit sales, (d) the ratio of accounts written off to the
ending accounts receivable, and (e) the ratio of interest revenue to notes receivable. These
procedures typically provide evidence to support the existence, completeness, accuracy, and
valuation assertions.
(10) Foot the accounts and notes receivable subsidiary ledgers to verify clerical accuracy.
(11) Reconcile subsidiary ledgers to the general ledger control accounts to verify clerical
accuracy.
(12) Examine cash receipts subsequent to year-end to test the adequacy of the allowance for
doubtful accounts to determine appropriate valuation.
(13) Age accounts receivable to test the adequacy of the allowance for doubtful accounts. An
aging schedule is used to address the receivable valuation assertion. Such a schedule
summarizes receivables by their age (e.g., 0-30 days since sale, 31-60 days since sale...).
Estimates of the likely amount of bad debts in each age group are then made (typically based
on historical experience) to estimate whether the amount in the allowance for doubtful
accounts is adequate at year-end.
(14) Discuss the adequacy of the allowance for doubtful accounts with management and the
credit department and compare it to historical experience to verify valuation.
(15) Consider changes in the economy or the company’s customers that might affect the
valuation of accounts receivable.

Multiple Choice (SET A)

1. Which of the following is not a balance-related audit objective evaluated in the audit of accounts
receivable?
a. Timing
b. Realizable value
c. Completeness
d. Accuracy
2. The appropriate evidence to be obtained from tests of details must be decided on a(n):
a. efficiency basis.
b. effectiveness basis.
c. audit objectives basis.
d. none of the above.

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 3. Which of the following is not a balance-related audit objective evaluated in the audit of accounts
receivable?
a. Occurrence
b. Completeness
c. Rights
d. Accuracy
4. Which of the following types of receivables would not deserve the special attention of the auditor?
a. Accounts receivables with credit balances.
b. Accounts that have been outstanding for a long time.
c. Receivables from affiliated companies.
d. Each of the above would receive special attention.
5. A listing of the balances in the accounts receivable master file at the balance sheet date, by total
balance outstanding and by the amount of time the component parts have been outstanding, is
the:
a. customer list.
b. aged trial balance.
c. accounts receivable ledger.
d. schedule of accounts receivable.
6. Testing the information on the aged trial balance for detail tie-in is a necessary audit procedure,
which would normally include:

Test-footing the total

column and the columns Comparing the total of the aged trial balance
depicting the aging with the general ledger accounts receivable
account
a. Yes Yes
b. No No
c. Yes No
d. No Yes

7. Generally accepted accounting principles require that material sales returns and allowances be:
a. recorded in the period when the merchandise is returned.
b. recorded in the period when the credit memo is issued.
c. matched with related sales.
d. recorded as a debit to the sales account.
8. Communication addressed to the debtor requesting him or her to confirm whether the balance as
stated on the communication is correct or incorrect is a:
a. representation letter.
b. negative confirmation.
c. bank confirmation.
d. positive confirmation.
9. Which of the following is likely to be determined first when performing tests of details for accounts
receivable?
a. Recorded accounts receivable exist.
b. Accounts receivable in the aged trial balance agree with related master file amounts, and the
total is correctly added and agrees with the general ledger.
c. Accounts receivable are owned.
d. Existing accounts receivable are included.
10. Analytical procedures are substantive tests and, if the results of the analytical procedures are
favorable, the auditor will:
a. reduce the extent of tests of details of balances.
b. reduce the extent of tests of controls.
c. reduce the tests of transactions.
d. reduce all of the other tests.
11. The most effective test of details of accounts receivable is the:
a. detail tie-in of the records.

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 b. analysis of the allowance for doubtful accounts.
c. confirmation of accounts receivable.
d. examination of sales invoices.
12. If the client’s internal control for recording sales returns and allowances is evaluated as
ineffective:
a. a larger sample is needed to verify cutoff.
b. sampling is not appropriate.
c. all sales returns must be traced to supporting documentation.
d. all sales returns must be confirmed with the customer.
13. A customer mails and records a check to a client for payment of an unpaid account on December
30.
The client receives and records the amount on January 2. The records of the two organizations
will be different on December 31. This represents

A cutoff A timing difference

misstatement
a. Yes Yes
b. No No
c. Yes No
d. No Yes
14. Which of the following audit procedures would not likely detect a client’s decision to pledge or
factor accounts receivable? (presentation and disclosure)
a. A review of the minutes of the board of directors’ meetings.
b. Discussions with the client.
c. Confirmation of receivables. (existence)
d. Examination of correspondence files.
15. When do most companies record sales returns and allowances?
a. During the month in which the sale occurs.
b. During the accounting period in which the return occurs.
c. Whenever the customer contacts the company regarding the credit.
d. During the month after the sale occurs.

Multiple Choice (SET B)

1. The purpose of test 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 shipped

2. Proper authorization of write-offs of uncollectibles should be approved in which of the following

department?
A. Accounts Receivable
B. Credit
C. Accounts Payable
D. Treasurer

3. The purpose of tests 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

4. 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 discount
C. Lapping of year-ends accounts receivable
D. Inflated sales for the year

5. An auditor most likely would review an entity's periodic accounting for numerical sequence of
shipping documents and invoices to support management's financial statement assertion of
A. Existence or occurrence
B. Valuation

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 C. Right and obligation
D. Completeness

6. An inappropriate audiy objective relative to accounts receivable is to determine that

A. The accounts exist and are properly valued
B. The client has rights in the receivable
C. The accounts represent the complete transaction process
D. The accounts are collected by the balance sheet date
7. All of the following are examples of substantive tests to verify valuation of net accounts receivable
except the
A. Recomputation if allowance for bad debts
B. Inspection of accounts for current versus non-current status in the statement of financial position
C. Inspection of aging schedule and credit records of past due accounts
D. Comparison of the allowance for bad debts with past records

8.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 assertion for which confirmation
of accounts receivable balances provides primary evidence are
A. Completeness and valuation
B. Rights and obligation existence
C. Valuation and rights and obligations
D. Existence and completeness

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

10. The auditor finds situation in which one person has the ability to collect receivables,make deposits,
issue credit memos and record receipt if 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 all 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
D. Take a sample of bank deposits and trace the detail in each bank deposit back to the entry in the
cash receipts journal

11. The positive request form of accounts receivable confirmation may be used when the

Combined Assessed Level of Individual Account Receivable

Inherent and Control Risk is Balance are
A. Low Large
B. Low Small
C. High Small
D. High Large

12. The negative request form of accounts receivable confirmation may be used whan the
Combined Assessed Number of Small Consideration by the
Level of Inherent and Balances Is Recipient
Control Risks
A. Low Many Likely
B. Low Few Unlikely
C. High Few Likely

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 D. High Many Likely

13. Which of the following is the greatest drawback of using the subsequent collections evidenced only
by a deposit slip as an alternative procedure when responses to positive accounts receivable
confirmation 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 whther the payment is for the
receivable at the balance sheet date or subsequent transaction
C. A depositor slip is not received directly by the auditor
D. A customer may not have made a payment in a timely basis.

14. Confirmation of accounts receivable is generally accepted auditing procedure. The presumption
that an auditor will confirm accounts receivable is not overcome if
A. Based on a prior year's audit experience response rates will be inadequate

B. Based in experience with similar engagements, responses are expected to be unreliable

C. The accounts receivable are immaterial
D. The combined assessed level of inherent and control risk is high

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

16.An auditor should perform alternative procedures to substantiate the existence of accounts
receivable when
A. No reply to a positive confirmation request is received
B. No reply to a negative confirmation request is received
C. Collectibility of the receivables is in doubt
D. Pledging of the receivables is probable

17.An auditor's purpose in reviewing credit ratings of customers with deliquent accounts receivable
most likely is to obtain evidence concerning management's assertion about
A. Valuation or allocation
B. Presentation and disclosure
C. Existence and occurence
D. Rights and obligations

18. An aged trial balance of accounts receivable is usually used by the auditor to
A. Verify the validity of recorded receivables
B. Ensure that all accounts are promptly credited
C. Evaluate the results of compliance test
D. Evaluate type of provision for bad debt expense

19. In verifying a November 30, 2018 sales cut off date , an auditor would be most cincerned wuth
comparing records of
A. November 2018 cash receipts with December 2018 bank deposits
B. November 2018 purchases with December 2018 shipments
C. November 2018 accounts receivable with November2018 sales
D. November 2018 sales with November 2018 shipping documents

20. To conceal defalcation involving receivables, the auditor would expect an experienced bookkeeper
to charge which of the following accounts
A. Miscellaneous income
B. Petty cash
C. Miscellaneous expense

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 D. Sales returns

Lease Schedule and Aging of Receivables

Problem 1
Your audit disclosed that on December 31, 2018, the accounts receivable control account of Maine Co.
had a balance of P1,432,500. An analysis of the accounts receivable account showed the following:

Accounts known to be worthless ​ ​ ​18,750

Advance payments to creditors on purchase orders ​ ​50,000
Advances to affiliated companies ​ ​ ​187,500
Customers' accounts reporting credit balances arising from sales ​ ​ (112,500)
return

Interest receivable on bonds ​ ​ ​100,000

Other trade accounts receivable - unassigned ​ ​
Subscription receivable due in 30 days ​ ​ ​412,500
Trade accounts receivable - assigned (Maine Co.'s equity in ​ ​207,500
assigned accounts is P75,000)

Trade installment receivable due 1-18 months, including ​ ​165,000

unearned finance charges of P15,000

Trade accounts receivables from officers due currently ​ ​15,000

Trade accounts receivable on which post-dated check are held (no entries ​37,500
were made on receipts of checks)

1. Trade accounts receivable balance as of December 31,2018.

2. Net current trade and other receivables balance as if December 31,2018.
3. How much will be presented under noncurrent assets as of December 31,2018?

Problem 2 (Adapted)
Abad Company provided the following ledger summarizing the transactions affecting the accounts
receivable for the current year:

Accounts Receivable

Jan. 1 balance ​ ​ ​600,000 ​Collections from

customers ​ ​5,300,000
Charge sales ​ ​ 6,000,000 ​ ​Write-off ​ ​ ​35,000
Shareholders’ subscriptions ​ 00,000
2 ​Merchandise returns ​ ​
​40,000
Deposit on contract ​ ​120,000 ​Allow. for cust. for shipping loss ​25,000
Claims against shipper for loss ​ 00,000
1 ​ ollections on claims
C from shipper

​40,000
IOUs from employees ​ ​ 10,000

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 Cash advances to affiliates ​100,000
Advances to a supplier ​ ​ 50,000
Questions:
1. Compute the correct amount of accounts receivable.
2. Prepare one compound entry to adjust the accounts receivable.

Problem 3 (Adapted)
When examining the accounts of Abalunan Company, it is ascertained that balances relating to both
receivables and payables are included in a single controlling account called “receivable control” that
has a debit balance of P4,850,000.

An analysis of the make-up of this account revealed the following:

​ ​ ​ ​ ​ ​ ​Debit ​ ​ ​Credit
Accounts receivable – customers ​ ​ 7,800,000

Accounts receivable – officers (current) ​ ​ ​500,000

Debit balances – creditors ​ ​ ​ ​300,000
Postdated checks from customers ​ ​ ​400,000
Subscription receivable ​ ​ ​ ​ ​800,000
Accounts payable for merchandise ​ ​ ​ ​ ​ 4,500,000

Credit balances in customers’ accounts ​ ​ ​ ​ ​ ​ 200,000

Cash received in advance from customers for goods
not yet shipped ​ ​ ​ ​ ​ ​ ​ ​ 100,000

Expected doubtful accounts ​ ​ ​ ​150,000

After further analysis of the aged accounts receivable, it is determined that the allowance for doubtful
accounts should be P200,000.

Question:
1. Compute the amount that should be reported as trade and other receivables.
2. Prepare a compound entry to adjust the accounts receivable account.

Problem 4
KAREN COMPANY’s accounts receivable subsidiary ledger shows the following information:

​ ​ ​ ​ ​ ​ ​ ​ Invoice

Customer ​Account Balance – 12/31/16 ​ ​Date ​ ​Amount

Penas ​ ​ ​P 70,360 ​ ​ ​12/16/16 ​P 28,000
​ ​ ​ ​ ​ ​ ​11/29/16 ​ 42,360

Jefferson ​ ​ 41,840 ​ ​ ​09/27/16 ​ 24,000

​ ​ ​ ​ ​ ​ ​08/20/16 ​ 17,840

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 Junsay ​ ​ ​ 61,200 ​ ​ ​12/08/16 ​ 40,000

​ ​ ​ ​ ​ ​ ​10/25/16 ​ 21,200

Cherryl ​ ​ ​90,280 ​ ​ ​ ​11/17/16 ​ 46,280

​ ​ ​ ​ ​ ​ ​10/09/16 ​ 44,000

Baron ​ ​ ​ 63,200 ​ ​ ​12/12/16 ​ 38,400

​ ​ ​ ​ ​ ​ ​12/02/16 ​ 24,800

Riza ​ ​ ​ 34,800 ​ ​ ​09/12/16 ​ 34,800

The estimated bad debt rates below are based on Karen Company’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 bad debts account had a credit balance of P7,000 on December 31, 2016, before adjustment.

Questions

1. The adjusted Accounts Receivable balance of KAREN COMPANY at December 31, 2016 is:

2. The adjusted balance of Allowance for Bad Debts of KAREN COMPANY at December 31, 2016 is:

3. The adjusted balance of Bad Debts Expense of KAREN COMPANY at December 31, 2016 is:

4. The net realizable value of Accounts Receivable of KAREN COMPANY at December 31, 2016 is:

Confirmation and Reconciliation

Problem 5
In the audit of Beatles Company, the auditor had an appreciation of the following schedule and
noted some comments for possible adjustments:

Beatles Company
Accounts Receivable Subsidiary Schedule
December 31, 2005

Customer Balance Current Past Due

1. Love M. Do P92,000 P- P92,000

2. Strawberry Fields 420,000 248,000 172,000

3. This Boy Company 350,000 92,000 258,000
4. Girl Corporation 374,000 212,000 162,000

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 5. Ticket To Ride Transport Corp. 160,000 - 160,000

6. Let It Be Corporation 124,000 60,000 64,000

7. Hey Jude 4,000 4,000 -

8. Get Back Company 256,000 80,000 176,000
9. Yesterday Corporation 240,000 240,000 -
Totals P2,020,000 P936,000 P1,084,000

The Accounts Receivable control account balance was determined to be P2,020,000.

The external auditor submitted the following audit comments for possible adjustments:

1. Love M. Do Merchandise found defective; returned by customer on

October 31, 2005 for credit, but the credit memo was
issued by Beatles only on January 15, 2006.

2. Strawberry Fields Account is good but usually pays late.

3. This Boy Company Merchandise worth P160,000 was destroyed while in transit
on May 31, 2005, terms FOB Destination. The carrier was
billed on June 15, 2005. (See Ticket To Ride Corp. and
Yesterday Corp.)

4. Girl Corporation Customer billed twice in error for P40,000. Balance is

collectible.

5. Ticket To Ride Transport Corp. Collected in full on January 31, 2006.

6. Let It Be Corporation Paid in full on December 30, 2005 but not recorded.
Collections were deposited on January 2, 2006.

7. Hey Jude Received account confirmation from customer for P44,000.

Investigation revealed an erroneous credit for P40,000.
(See Get Back Company)

8. Get Back Company Neglected to post P40,000 credit to customer’s account.

9. Yesterday Corporation Customer wants to know reason for receipt of P160,000

credit memo as their accounts payable balance was
P400,000.

REQUIRED:

1. What is the entry to adjust Love M. Do receivable?

2. What is the entry to adjust Girl Corporation receivable?
3. What is the entry to adjust Get Back Company receivable?
4. What is the amount of unlocated difference, if there is any?
5. What is the adjusted balance of accounts receivable at year-end?

Problem 6
You sent out positive confirmation request to customers of Ernelly Corporation on December 31, 2018.
Replies disputing amounts shown on the statements are summarized below.
Confirmation
No. Customer’s Comments Audit findings
17 Check for P1, 200 was mailed on Check received 1/4/19 and
December 30, 2018 credited on that date
40 Goods should have been billed at Pricing policy confirmed by sales
80% of P5, 000 retail price since manager. The cost of consigned
we received them on goods amounts to P3,500.
consignment.

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 63 We returned the goods on Examined receiving report for
12/03/18 returned goods. Credit memo for
P5, 000 dated 12/07/2018 in
advertently not recorded.
78 We do not owe the amount of Received sales documentation
P2,000 confirmed a posting error.
112 Per our telephone conversation, Credit manager agreed; credit
you agreed to reduce the price by memo for P2, 500 will be issued
50% since some of the goods in January 2019.
were damaged.
113 The balance of P2,500 was paid Amount was erroneously credited
on December 23, 2018 per your to subsidiary ledger account of
official receipt No. 9876. Nelly instead of Ernel.
122 Returned merchandise amounting Merchandise was included in the
to P12, 000 on December 26, inventory, P7,200. Credit memo
2018. was issued on January 3, 2019.
138 Reduce your bill by P2, 000. I am Special discount of 20%
entitled to a special discount of confirmed by sales manager. E.
20%. nelly is an employee of Ernelly
Corporation. Sale was made in
the ordinary course of business
and granting of credit passed
through the routine process.
156 The goods worth P5, 000 were Goods shipped FOB shipping point
received in January 2019. on December 28, 2018. GPR is
30%.

Required:
1. Prepare adjusting entries
2. If the unadjusted balance of accounts receivable is P250,000, how much is the correct balance
of the receivable after the following adjustments?

Problem 7 (Adapted)
In connection with your examination of the financial statements of Aguilar, Inc for the year ended
December 31, 2019, you were able to obtain certain information during your audit of the accounts
receivable and related accounts.

The December 31, 2019 balance in the Accounts Receivable control accounts is P788,000.

The only entries in the Doubtful Accounts Expense account were:

• A credit for P1,296 on December 2, 2019 because Company A remitted in full for the accounts
charged off on October 31, 2019; and
• A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts.

The Allowance for Doubtful Accounts schedule is presented below:

​ ​ ​ ​ ​Debit ​ ​Credit ​ ​Balance

January 1, 2019 ​ ​ ​ ​ ​ ​ ​P14,632
October 31, 2019
​Uncollectible accounts:
​ ​ ompany A – P1,296
C

​ ​ ompany B – P3,280
C ​
​ ​ ompany C – P2,256
C ​P6,032 ​ ​ ​ ​ 8,600

December 31, 2019 ​ ​ ​ ​ ​P39,400 ​P48,000

An aging schedule of the accounts receivable as of December 31, 2019 is presented below:

​Age ​Net debit balance ​Amount to which the Allowance is to be

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 ​ ​ ​ ​ ​ Adjusted after adjustment and

​ ​ ​ ​ ​ ​Corrections have been made

0 to 1 month ​ ​P372,960 ​ ​1 percent
1 to 3 months ​ ​ 307,280 ​ ​ percent
2

3 to 6 months ​ ​ 88,720 ​ ​3 percent

over 6 months ​ ​ 24,000 ​ ​Definitely uncollectible, P4,000;
​ ​ ​ ​ ​ ​P8,000 is considered 50%
​ ​ ​ ​ ​ ​uncollectible; the remainder is
​estimated to be 80% collectible.
There is a credit balance in one account receivable (0 to 1 month) of P8,000; it represents an advance
on a sales contract. Also, there is a credit balance in one of the 1 to 3 months account receivable of
P2,000 for which merchandise will be accepted by the customers.

The ledger accounts have not been closed as of December 31, 2019. The Accounts Receivable control
account is not in agreement with the subsidiary ledger. The difference cannot be located, and you
decided to adjust the control account to the sum of the subsidiaries after corrections are made.

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

6. How much is the adjusted balance of Accounts Receivable as of December 31, 2019?

7. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31,
2019?

8. How much is the net adjustment to the Allowance for Doubtful Accounts?

9. How much is the Doubtful Accounts expense for the year 2019?

10. How much is the net adjustment to the Doubtful Accounts expense account?

Problem 8 (ACQ)
Using the same information in the preceding problem, except the following:

An aging schedule of the accounts receivable as of December 31, 2019 is presented below:

​Age ​Gross debit balance ​Amount to which the Allowance is to be

​ ​ ​ ​ ​Adjusted after adjustment and
​ ​ ​ ​ ​ orrections have been made
C

0 to 1 month ​ ​ 380,960
P ​ percent
1

1 to 3 months ​ ​ 307,280 ​ percent

2

3 to 6 months ​ ​ 90,720 ​ percent

3

over 6 months ​ ​ 24,000 ​ efinitely uncollectible, P4,000; P8,000 is

D

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 ​ ​ ​ ​ ​considered 50% uncollectible; the
​ ​ ​ ​ ​remainder is estimated to be 80%
​ ​ ​ ​ ​collectible.
Questions:
1. How much is the Accounts Receivable at year-end?

2. Prepare the necessary adjusting journal entry/ies?

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