AUDIT OF RECEIVABLES

Problem 1:
Your audit disclosed that on December 31, 2020, the accounts receivable control account of DDD
Company had a balance of P1,432,500. An analysis of the accounts receivable account showed the
following:
Accounts known to be worthless P18,750
Advance payments to suppliers on purchase orders 75,000
Advances to affiliated companies 187,500
Customers’ accounts reporting credit balances arising from sales return (112,500)
Interest receivable on bonds 75,000
Other trade accounts receivable – unassigned 375,000
Subscriptions receivable due in 30 days 412,500
Trade accounts receivable – assigned (DDD Company’s equity in assigned accounts
is P75,000) 187,500
Trade installment receivable due 1-18 months, including unearned finance charges of
P15,000 165,000
Trade receivables from officers due currently 11,250
Trade accounts on which post-dated checks are held (no entries were made on receipts
of checks) 37,500
Total P1,432,500
Required:
1. Trade accounts receivable balance as of December 31, 2020.
2. Net current trade and other receivables balance as of December 31, 2020
3. How much will be presented under noncurrent asset as of December 31, 2020?

Problem 2:
In connection with the audit of the financial statements of Charm Corporation, your audit senior
instructed you to examine the company’s accounts receivable.

Prior to any adjustments you were able to extract the following balances from Charm’s trial balance as of
December 31, 2020:

Accounts receivable P1,327,500

Allowance for doubtful accounts 45,000

From the schedule of accounts receivable as of December 31, 2020, you determined that this account
includes the following:

Accounts with debit balances:

60 days old and below P715,500
61 to 90 days 351,600
Over 90 days 256,200 P1,323,300
Advances to officers 49,200
Accounts with credit balances (45,000)
Accounts receivable per GL P1,327,500

The credit balance in customer’s account represents collection from a customer whose account had been
written-off as uncollectible in 2019.
Accounts receivable for more than a year totaling P63,000 should be written off.

Confirmation replies received directly from customers disclosed the following exceptions:
Customer Customer’s Comments Audit Findings
A The goods sold on December 1 were The client failed to record credit memo no.
returned on December 16, 2020. 23 for P36,000. The merchandise was
included in the ending inventory at cost.
B We do not owe this amount *%#@ Investigation revealed that goods sold for
(bad word). We did not receive any P48,000 were shipped to B on December
merchandise from your company. 29, 2020, terms FOB shipping point. The
goods were lost in transit and the shipping
company has acknowledged its
responsibility for the lost of the
merchandise.
C I am entitled to a 10% employee C is an employee of Charm. Starting
discount. Your bill should be reduced November 2020, all company employees
by P3,600. were entitled to a special discount. The
sale occurred in November 5
D We have not yet sold the goods. We Merchandise billed for P54,000 were
will remit the proceeds as soon as the consigned to D on December 30, 2020.
goods are sold. The goods cost P39,000.
E We do not owe you P60,000. We The sale of merchandise on December 18,
already paid our accounts as 2020 was paid by E on January 6, 2021.
evidenced by OR # 1234.
F Reduce your bill by P4,500 This amount represents freight paid by the
customer for the merchandise shipped on
December 17, 2020, terms, FOB
destination-collect.

Based on your discussion with Charm’s Credit Manager, you both agreed that an allowance for doubtful
accounts should be maintained using the following rates:

60 days old and below 1%

61 to 90 days 2%
Over 90 days 5%

Required: Based on the above and the result of your audit, answer the following:
1. The adjusted balance of accounts receivable in the 60 days and below category as of December 31,
2020
2. The adjusted balance of accounts receivable as of December 31, 2020
3. The adjusted allowance for doubtful accounts as of December 31, 2020
4. The entry to adjust the allowance for doubtful accounts

Problem 3:
You were engaged to perform an audit of the accounts of the Hello Corporation for the year ended
December 31, 2020 and have observed the taking of the physical inventory of the company on December
30, 2020. Only merchandise shipped by the Hello Corporation to customers up to and including
December 30, 2020 has been eliminated from inventory. The inventory as determined by physical
inventory count has been recorded on the books by the company’s controller. No perpetual inventory
records are maintained. All sales are made on an FOB shipping point basis. You are to assume that all
purchase invoices have been correctly recorded.
The following list of sales invoices are entered in the sales books for months of December, 2020 and
January, 2021, respectively.
Month Recorded Sales Sales Invoice Cost of Date Shipped
Invoice Date Goods Sold
Amount
December 2020 A. P30,000 December 21 P20,000 December 31, 2020
B. 22,000 December 31 18,000 December 31, 2020
C. 10,000 December 29 6,000 December 30, 2020
D. 40,000 December 31 24,000 January 3, 2021
E. 100,000 December 30 56,000 December 29, 2020*
(shipped to consignee)
F. 120,000 December 30 80,000 January 2, 2021

January 2021 G. 60,000 December 31 40,000 December 30, 2020

H. 40,000 January 2 23,000 January 2, 2021
I. 80,000 January 3 55,000 December 31, 2020
J 90,000 January 4 64,000 December 29, 2020

*Verification from consignee indicates that 60% of the merchandise is still unsold at December 31, 2020.

Required: Prepare the necessary adjusting journal entries at December 31, 2020 in connection with the
foregoing data.

Problem 4:
In connection with your examination of the financial statements of Ruth, Inc. for the year ended
December 31, 2020, you were able to obtain certain information during your audit of the accounts
receivable and related accounts.

§ The December 31, 2020 balance in the Accounts Receivable control accounts is P837,900.
§ An aging schedule of the accounts receivable as of December 31, 2020 is presented below:
Age Net Debit Percentage to be applied after
Balance corrections have been made
60 days and under P387,800 1%
61 to 90 days 307,100 2%
91 to 120 days 89,800 5%
Over 120 days 53,200 Definitely uncollectible, P9,000;
the remainder is estimated to be
25% uncollectible
Total P837,900

Two entries made in the Doubtful Accounts Expense account were:

1. A debit on December 31 for the amount of the credit to the allowance for Doubtful Accounts.
2. A credit for P6,100 on November 30, 2020, and a debit to Allowance for Doubtful Accounts because
of a bankruptcy. The related sales took place on October 1, 2020.
The allowance for Doubtful Accounts schedule is presented below:
Debit Credit Balance
January 1, 2020 P19,700
November 30, 2020 P6,100 13,600
December 31, 2020(P837,900 x 5%) P41,895 P55,495

There is a credit balance in one account receivable (61 to 90 days) of P11,000; it represents an advance on
a sales contract.

Required:
1. How much is the adjusted balance of Accounts Receivable as of December 31, 2020?
2. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31, 2020?
3. How much is the Doubtful Accounts expense for the year 2020?
4. How much is the net adjustment to the Doubtful Accounts expense account?

Problem 5:
During the course of the audit of the financial statements of N, Inc. for the year ended December 31,
2020, you examined the Trade Notes Receivable account represented by the following items.

a. A 90-day note dated November 1, 2020 from E, P250,000; interest rate at 8%; the note is for
subscriptions to 2,500 shares of the preference share capital of N, Inc. at P100 per share.
b. A 60-day note dated May 3, 2020 from H Company P30,000: interest rate, 6%; dishonored at
maturity; judgment obtained on October 10, 2020, collection doubtful.
c. A 120-day note dated September 14, 2020, from the D Company, P60,000; interest rate, 9%, note is
held by bank as collateral.
d. A two year non-interest bearing note from B Company for P200,000 received and dated August 31,
2020. The note was received in exchange for an agreement sold. The equipment had an original cost
of P400,000 and had an accumulated depreciation on January 1, 2020 of P160,000. Such equipment is
being depreciated at a rate of 10% a year, rounded to the nearest month. The prevailing interest rate
for a note of this type is 12%. N recorded the sale by debiting notes receivable and crediting
equipment of the face value of the note. No depreciation has yet been provided on this equipment for
the year 2020.

Required:
1. Audit adjustment entries at December 31, 2020.
2. Correct balance of Trade Notes Receivables, Interest Receivable/Accrued Interest Income and
Interest Income.

Problem 6:
You are the auditing the loans receivables account of Prosperous Bank for the year 2020. In your review,
you noted the following information about a loan worth P10M.

Loans Receivable, 10% P10,000,000

Less: Discount on Loans Receivable 243,768
Carrying Amount 9,756,232

§ Upon examination of the related contract and documents, you noted that the 10% loan was granted to
a borrower on January 1, 2019. The loan matures in five years on December 31, 2021 while the
interest is expected to be received annually starting December 31, 2019. Prosperous Bank incurred
P130,900 direct loan origination cost and P50,000 of indirect loan origination cost. In addition,
 Prosperous Bank charges the borrower a 5-point nonrefundable loan origination fee. The adjusted
effective rate is 11% after origination. The borrower was able to pay the interests due on December
31, 2019&2020.

§ Upon inquiry with credit manager, the borrower began to experience financial difficulties during
2020 thus, requiring the bank to reassess the collectability of the loan. The bank expects that only
P8,000,000 of the principal will be recovered. The P8,000,000 principal amount is expected to be
collected in two equal installments on December 31, 2020 and December 31, 2022. The prevailing
interest rates for similar type of notes as of December 31, 2019 and 2020 are 15% and 16%,
respectively.

§ Per your examination, no impairment was recognized for this receivable in the current and previous
year.

Required:Based on the above and the result of your audit, determine the following:
1. The interest income to be recognized in 2020
2. The recoverable amount of the loan as of 2020
3. The loan impairment loss to be recognized in 2020
4. The expected interest income to be recognized in 2021
5. The expected carrying amount of the loan as of December 31, 2021