Receivables

1 PRACTICAL ACCOUNTING 1 – REVIEW RECEIVABLES PROF. U.C. VALLADOLID Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. On December 31, 2016, the accounts receivable control account of Kaila Company had a balance of P2,865,000. An analysis of the accounts receivable account showed the following: Accounts known to be worthless Advance payments to creditors on purchase orders Advances to affiliated companies Customers’ accounts reporting credit balances arising from sales return Interest receivable on bonds Other trade accounts receivable – unassigned Subscriptions receivable due in 30 days Trade accounts receivable - assigned (Kaila company’s equity in assigned accounts is P150,000) Trade installment receivable due 1 – 18 months, including unearned finance charges of P30,000 Trade receivables from officers due currently Trade accounts on which post-dated checks are held (no entries were made on receipts of checks)

P

37,500 150,000 375,000

(225,000) 150,000 750,000 825,000 375,000 330,000 22,500 75,000 P2,865,000

Based on the above information, determine the adjusted balance of following: 1. The trade accounts receivable as of December 31, 2016 is a. P1,147,500 c. P1,485,000 b. P1,522,500 d. P1,447,500 2. The net current trade and other receivables as of December 31, 2016 is a. P2,647,500 c. P2,272,500 b. P2,610,000 d. P1,822,500 3. How much of the foregoing will be presented under noncurrent assets as of December 31, 2016? a. P1,200,000 c. P525,000 b. P 375,000 d. P 0 2. Presented below are a series of unrelated situations. Answer the following questions relating to each of the independent situations as requested. 1. Kaila Company’s unadjusted trial balance at December 31, 2016, included the following accounts: Debit Credit Accounts receivable P1,000,000 Allowance for doubtful accounts 40,000 Sales P15,000,000 Sales returns and allowances 700,000 Kaila Company estimates its bad debt expense to be 1 1/2% of net sales. Determine its bad debt expense for 2016. a. P225,000 c. P214,500 b. P254,500 d. P 55,000 2. An analysis and aging of Connie Corp. accounts receivable at December 31, 2016, disclosed the following: Amounts estimated to be uncollectible P 1,800,000 Accounts receivable 17,500,000 Allowance for doubtful accounts (per books) 1,250,000 1

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What is the net realizable value of Connie’ receivables at December 31, 2016? a. P15,700,000 c. P16,250,000 b. P17,500,000 d. P14,450,000 3. Connie Company provides for doubtful accounts based 3% of credit sales. The following data are available for 2016. Credit sales during 2016 Allowance for doubtful accounts 1/1/2016 Collection of accounts written off in prior years (Customer credit was reestablished) Customer accounts written off as uncollectible during 2016

P21,000,000 170,000 80,000 300,000

What is the balance in allowance for doubtful accounts at December 31, 2016? a. P630,000 c. P500,000 b. P420,000 d. P580,000 4. At the end of its first year of operations, December 31, 2016, Joseph, Inc. reported the following information: Accounts receivable, net of allowance for doubtful accounts Customer accounts written off as uncollectible during 2016 Bad debts expense for 2016

P9,500,000 240,000 840,000

What should be the balance in accounts receivable at December 31, 2016, before subtracting the allowance for doubtful accounts? a. P10,100,000 c. P 9,740,000 b. P10,340,000 d. P10,580,000 5. The following accounts were taken from Joseph Inc.’s statement of financial position at December 31, 2016. Debit Credit Accounts receivable P4,100,000 Allowance for doubtful accounts 100,000 Net credit sales P7,500,000 If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be reported for 2016. a. P123,000 c. P223,000 b. P 23,000 d. P225,000 3. Joseph Company’s statement of financial position shows the accounts receivable balance at December 31, 2017 as follows: Accounts receivable Allowance for doubtful accounts

P3,600,000 72,000 P3,528,000

During 2016, transactions relating to the accounts were as follows: Sales on account, P38,400,000. Cash received from collection of current receivable totaled P31,360,000, after discount of P640,000 were allowed for prompt payment. Customers’ accounts of P160,000 were ascertained to be worthless and were written off. 2

3 Bad accounts previously written off prior to 2016 amounting to P40,000 were recovered. The company decided to provide P184,000 for doubtful accounts by journal entry at the end of the year. Accounts receivable of P5,600,000 have been pledged to a local bank on a loan of P3,200,000. Collections of P1,200,000 were made on these receivables (not included in the collections previously given) and applied as partial payment to the loan. Based on the above data, answer the following: 1. The accounts receivable as of December 31, 2016 is a. P8,680,000 c. P4,240,000 b. P9,840,000 d. P8,640,000 2. The allowance for doubtful accounts as of December 31, 2016 is a. P 8,000 c. P184,000 b. P136,000 d. P176,000 3. The net realizable value of accounts receivable as of December 31, 2016 is a. P8,544,000 c. P8,504,000 b. P8,456,000 d. P4,104,000 4. If receivables are hypothecated against borrowings, the amount of receivables involved should be a. Disclosed in the statements or notes b. Excluded from the total receivables, with disclosure c. Excluded from the total receivables, with no disclosure d. Excluded from the total receivables and a gain or loss is recognized between the face value and the amount of borrowings 4. For the year ended December 31, 2016, Kaila Corporation revealed that the Accounts Receivable account consists of the following: Trade accounts receivable (current) Past due trade accounts Uncollectible accounts Credit balances in customers’ accounts Notes receivable dishonored Consignment shipments – at cost The consignee sold goods costing P96,000 for P160,000. A 10% commission was charged by the consignee and remitted the balance to Kaila. The cash was received in January, 2017. Total

P3,440,000 640,000 128,000 (80,000) 240,000

320,000 P4,688,000

The balance of the allowance for doubtful accounts before audit adjustment is a credit of P80,000. It is estimated that an allowance should be maintained to equal 5% of trade receivables, net of amount due from the consignee who is bonded. The company has not provided yet for the 2016 bad debt expense. Based on the above information, determine the adjusted balance of following: 1. Trade accounts receivable a. P4,080,000 b. P3,440,000

c. P4,464,000 d. P3,584,000

2. Allowance for doubtful accounts a. P204,000 b. P216,000

c. P172,000 d. P179,200

3. Doubtful accounts expense a. P264,000 b. P220,000

c. P252,000 d. P227,200

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4 5. Jerome Company was organized in 2016. For the year ended December 31, 2016, Jerome made available the following information: Total merchandise purchases for the year Merchandise inventory at December 31 Collection from customers

7,000,000 1,400,000 4,000,000

All merchandise was marked to sell at 40% above cost. Assuming that all sales are on credit basis and all receivables are collectible, what should be the balance in accounts receivable at December 31, 2016? a. 1,000,000 b. 3,840,000 c. 5,000,000 d. 5,800,000 6. Joseph Company provided some information on their financial records on December 31,2016: Accounts receivable, January 1 Collections of account receivable Bad debts Inventory, January 1 Inventory, December 31 Accounts payable, January 1 Accounts payable, December 31 Cash sales Purchases Gross Profit on Sales

P1,920,000 6,240,000 200,000 2,880,000 2,640,000 1,000,000 1,500,000 1,200,000 4,800,000 2,160,000

What is the ending balance of accounts receivable on December 31, 2016? a. 1,680,000 b. 2,880,000 c. 3,120,000 d. 4,080,000 7. Leaf Co. purchased from Oak Co. a 20,000, 8%, five-year note that required five equal annual year-end payments of 5,009. The note was discounted to yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of 19,485. What should be the total interest revenue earned by Leaf over the life of this note? a. 5,045 b. 5,560 c. 8,000 d. 9,000 8. On January 1, 2016, JP Co. sells its equipment with a carrying value of P160,000. The company receives a non-interest bearing note due in 3 years with a face amount of P200,000. There is no established market value for the equipment. The prevailing interest rate for a note of this type is 12%. The following are the present value factors of 1 at 12%: Present value of 1 for 3 periods Present value of an ordinary annuity of 1 for 3 periods

0.71178 2.40183

Q1. What is the gain or loss to be recognized on the sale of the equipment? a. 17,644 loss b. 122 gain c. 17,644 gain d. 40,000 gain Q2. The discount on note receivable on January 1, 2016, is a. 57,644 b. 0 c. 40,000 d. 17,644

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Q3. The discount amortization at the end of the third year using the effective interest method is a. 13,333 b. 19,215 c. 21,428 d. 0 9. Jason Co. assigned 1,000,000 of accounts receivable to Quick Finance Co. as security for a loan of 840,000. Quick charged a 2% commission on the amount of the loan; the interest rate on the note was 10%. During the first month, Jason collected 220,000 on assigned accounts after deducting 760 of discounts. Jason accepted returns worth 2,700 and wrote off assigned accounts totaling 7,400. Q1.

The amount of cash Jason received from Quick at the time of the transfer was a. 756,000. b. 820,000. c. 823,200. d. 840,000.

Q2.

Entries during the first month would include a a. debit to Cash of 220,760. b. debit to Bad Debt Expense of 7,400. c. debit to Allowance for Doubtful Accounts of 7,400. d. debit to Accounts Receivable of 230,860.

10. On December 1, 2016, Hero Company assigned P400,000 of accounts receivable in consideration for a loan of 335,000 to Halo Company charged a 2% commission on the amount of the loan; the interest rate on the note was 10%. During December, Hero collected P110,000 on assigned accounts after deducting P380 of discounts. Hero accepted returns worth P1,350 and wrote off assigned accounts totalling P2,980. Question 1: How much cash did Hero receive from Halo at the time of the transfer? a) P301,500 c) P328,300 b) P327,000 d) P335,000 Question 2: What is the carrying value of the account receivable assigned as of December 31, 2016? a) None c) P289,620 b) P285,290 d) P335,000 11. On the February 1, 2016, New York Corporation factored receivables with a carrying of P2,000,000 to Chicago Corporation. New York Corporation assesses a a finance charge of 3% of the receivables and retains 5% of the receivables. Question 1: If the factoring is treated as a sale, what amount of loss from sale should the company report in its 2016 statement of comprehensive income for the year 2016? a) none c) P100,000 b) P60,000 d) P160,000 Question 2: Assume that New York Company retained significant amount of risk and rewards of ownership and had a continuing involvement on the factored financial asset, what amount of loss from factoring should the company recognize? a) none c)P100,000 b) P60,000 d)P160,000 12. Carla Received from a customer a one-year, P375,000 note bearing annual interest of 8%.After holding the note for six months, Carla discounted the note at I-Bank at an effective interest rate of 10%. Q1. How much should Carla receive from the bank? a. 371,428.50

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6 b. 384,750.00 c. 392,857.50 d. 405,000.00 Q2. If the discounting is treated as a sale, what amount of loss on discounting should Carla recognize? a. 0 b. 5,250 c. 9,750 d. 20,250 13. Pink Bank granted a 10-year loan to Blue Company in the amount of P1,500,000 with a stated interest rate of 6%. Payments are due monthly and are computed to be P16,650. Pink Bank incurred P40,000 of direct loan origination cost and P20,000 of indirect loan origination cost. In addition, the bank charged Blue Company a 4% nonrefundable loan origination fee. Q1. Pink Bank, the lender, has a carrying amount of a. 1,440,000 b, 1,480,000 c. 1,500,000 d. 1,520,000 Q2. Blue Company, the borrower, has carrying amount of a. 1,440,000 b. 1,480,000 c. 1,500,000 d. 1,520,000 14. PNB Bank granted a loan to a borrower in the amount of P5,000,000 on January 1, 2016. The interest rate on the loan is 10% payable annually starting December 31, 2016. The loan matures in five years on December 31, 2020. PNB Bank incurs P39,400 of direct loan origination cost and P10,000 of indirect loan origination cost. In addition, PNB Bank charges the borrower an 8-point nonrefundable loan origination fee. Based on the above information, answer the following: (Round off present value factors to four decimal places) 1. The carrying amount of the loan as of January 1, 2016 is a. P5,000,000 c. P5,039,400 b. P4,639,400 d. P4,649,400 2. The effective interest rate of the loan is a. 10.00% c. 12.00% b. 11.94% d. 9.80% 3. The interest income to be recognized in 2016 is a. P500,000 c. P493,861 b. P555,138 d. P556,728 4. The carrying amount of the loan as of December 31, 2016 is a. P5,000,000 c. P5,033,261 b. P4,696,128 d. P4,704,538 15. On January 1, 2015, Omar Company loaned Alex Company amounting to P2,000,000 and received a two-year, 6%, P2,000,000 note. The note calls for annual interest to be paid each December 31. Omar collected the 2015 interest on schedule. However, on December 31, 2016, based on the Alex’s recent financial difficulties, Omar expects that the 2016 interest, which was recorded in the books, will not be collected and that only P1,200,000 of the principal will be recovered. The P1,200,000 principal amount is expected to be collected in two equal installments on December 31, 2018 and December 31, 2020. The prevailing interest rate for similar type of note as of December 31, 2016 is 8%. Based on the above information, answer the following: (Round off present value factors to four decimal places) 6

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1. The present value of the expected future cash flows as of December 31, 2016 is a. P 955,380 c. P1,009,260 b. P2,079,060 d. P 950,920 2. The loan impairment loss in 2016 is a. P1,164,620 c. P1,110,740 b. P 990,740 d. P 40,940 3. How much is the interest income for the year 2017? a. P 60,556 c. P57,323 b. P124,744 d. P 0 4. Carrying amount of the loan as of December 31, 2016 is a. P473,465 c. P1,736,032 b. P534,005 d. P1,134,005 16. At December 31, 2016, Josh Co. had a receivable from A Company of 400,000 that has been outstanding for quite some time. Further investigation revealed that F Company is taking over to run and operate the business affairs of A Company. However F Company is more than willing to assume only 75% of A company’s obligation and pay by the end of 2017. At the time the receivable was recognized the prevailing rate of interest for similar financial asset is 14%. Q1. What amount should Josh report its receivable on December 31, 2016 statement of financial position ? a. 136,843 b. 263,157 c. 300,000 d. 400,000 Q2. How much impairment loss should be recognize related to its accounts receivable in 2016? a. 136,843 b. 263,157 c. 300,000 d. 400,000 17. On December 31, 2016, general ledger of Martin Company’s account receivable showed a balance of P1,400,000. Because of continuing decrease in expected cash flows on its financial assets. Martin Company has decided to estimate the cash flow of the outstanding receivables. The estimates are based on the expected peso amount to be received on the outstanding receivables: the category (age) which also includes the length and period of collectibility and time factor for similar borrowers. Category A B C D

Amount P400,000 300,000 250,000 150,000

Time Factor .909 .826 .751 .683

Question 1 : How much should Martin Company report its account receivable in its December 31, 2016 statement of financial position? a) P799,150 c) P1,200,000 b) P901,600 d) P1,400,000 Question 2 : What amount of loss impairment on receivable should Martin Company recognize in its December 31, 2016 statement of comprehensive income? a)P200,000 c)P300,850 b)P300,000 d)P498,400 18. Rosalie Corporation is located in Los Angeles but does business throughout Europe. The company builds and sells equipment used in manufacturing pharmaceuticals. On December 31, 2016, Rosalie's accounts receivable are as follows: 7

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Individually significant receivables Finley Company 80,000 Rios, Inc. 200,000 Rafael Co. 120,000 Hunter, Inc. 100,000 All other receivables 500,000 Total 1,000,000 Rosalie Corporation determines that Finley Company's receivable is impaired by 40,000 and Hunter, Inc.'s receivable is totally impaired. The other receivables from Rafael and Rios are not considered impaired. Rosalie determines that a composite rate of 2% is appropriate to measure impairment on all other receivables. What is the total impairment of receivables for Rosalie Corporation for 2016? a. 156,400 b. 140,000 c. 150,000 d. 123,600 19. Sun Inc. factors 2,000,000 of its accounts receivables with guarantee (recourse) for a finance charge of 3%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. What would be recorded as a gain (loss) on the transfer of receivables? a. Gain of 60,000. b. Loss of 60,000. c. Loss of 260,000. d. 0. 20. Sun Inc assigns 2,000,000 of its accounts receivables as collateral for a 1 million 8% loan with a bank. Sun Inc. also pays a finance fee of 1% on the transaction upfront. What would be recorded as a gain (loss) on the transfer of receivables? a. Loss of 20,000. b. Loss of 160,000. c. Loss of 180,000. d. 0. 21. Moon Inc assigns 1,500,000 of its accounts receivables as collateral for a 1 million loan with a bank. The bank assesses a 3% finance fee and charges interest on the note at 6%. What would be the journal entry to record this transaction? a. Debit Cash for 970,000, debit Finance Charge for 30,000, and credit Notes payable for 1,000,000. b. Debit Cash for 970,000, debit Finance Charge for 30,000, and credit Accounts Receivable for 1,000,000. c. Debit Cash for 970,000, debit Finance Charge for 30,000, debit Due from Bank for 500,000, and credit Accounts Receivable for 1,500,000. d. Debit Cash for 910,000, debit Finance Charge for 90,000, and credit Notes Payable for 1,000,000. 22. Fenn Stores, Inc. had sales of 1,000,000 during December, 2016. Experience have shown that merchandise equaling 7% of sales will be returned within thirty days an additional 3% will be returned within ninety days. Returned merchandise is readily resalable. In addition, merchandise equaling 15% of sales will be exchanged for merchandise of equal or greater value. What amount should Fenn report for net sales in its income statement for the month of December 2016? a 900,000 b. 850,000 c. 780,000 d. 750,000 23. On October 31, 2016, Bundle Company engaged in the following transactions. Obtained a P500,000, six-month loans from City Bank, discounted at 12%. The company pledged P500,000 of accounts receivables as security for the loan. 8

9 Factored P1,000,000 of accounts receivable without recourse on a non notification basis with Help Company . Help charged a factoring fee of 2% of the amount of receivable factored and withheld 10% of the amount factored. What is the total cash received from the financing of receivables? a) P1,320,000 c) P1,380,000 b) P1,350,000 d) P1,470,000 24. On December 28, 2016, Legend Company sells a loan portfolio that has a carrying amount of 300,000 for 290,000 and provides the buyer with guarantee to compensate for any impairment losses. What amount of financial asset Legend Company should continue to recognize in its December 31, 2016 statement of financial position? a. none b. 10,000 c. 290,000 d. 300,000 25. The statement of financial position of Cleo Corporation reported the following long-term receivables as of December 31, 2015: Note receivable from sale of plant P9,000,000 Note receivable from officer 2,400,000 In connection with your audit, you were able to gather the following transactions during 2016 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 P3,000,000 plus interest on the unpaid balance every April 1. The initial principal and interest payment was made on April 1, 2016. b. The note receivable from officer is dated December 31, 2015, earns interest at 10% per annum, and is due on December 31, 2018. The 2016 interest was received on December 31, 2016. c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2016, in exchange for an P1,200,000 non-interest bearing note due on April 1, 2018. The note had no ready market, and there was no established exchange price for the equipment. The prevailing interest rate for a note of this type at April 1, 2016, 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 No Co. on July 1, 2016, for P6,000,000 under an installment sale contract. No Co. signed a 4-year 11% note for P4,200,000 on July 1, 2016, in addition to the down payment of P1,800,000. The equal annual payments of principal and interest on the note will be P1,353,750 payable on July 1, 2017, 2018, 2019,and 2020. The land had an established cash price of P6,000,000, and its cost to the corporation was P4,500,000. The collection of the installments on this note is reasonably assured. Based on the above and the result of your audit, determine the following: 1. Noncurrent notes receivable as of December 31, 2016 a. P13,556,400 c. P10,556,400 b. P 9,664,650 d. P 9,750,726 2. Current portion of long-term notes receivable as of December 31, 2016 a. P3,891,750 c. P3,000,000 b. P4,353,750 d. P 0 3. Accrued interest receivable as of December 31, 2016 a. P771,000 c. P 540,000 b. P857,076 d. P1,011,000 4. Interest income for the year 2016 a. P1,281,000 b. P1,637,076

c. P1,367,076 d. P1,512,000

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