Receivables

PSBA A.R. Handout (Auditing Problem) – R.A. Sales Problem 1 The December 31, 2017, statement of financial position of the UP Company included the following information: Accounts receivable Less: Allowance for credit loss Notes receivable* Total Receivables

P672,000 (42,300)

P629,700 65,400 P695,100

*The company is contingently liable for discounted notes receivable of P114,000. During the year ending December 31, 2018, the following transactions occurred: 1. 2. 3. 4. 5. 6. 7.

8. 9. 10. 11.

Sales on credit Collections of accounts receivable Accounts receivable written off as uncollectible Notes receivable collected Customer notes received in payment of accounts receivable Notes receivable discounted that were paid at maturity Notes receivable discounted that were defaulted, including interest of P60 and a P15 fee. This amount is expected to be collected during 2019. Proceeds from customer notes discounted with recourse (principal P135,000, accrued interest, P600) Collections on accounts previously written off Sales returns and allowances (on credit sales) Increase in allowance for credit loss

P2,623,800 2,523,000 41,400 87,000 216,000 108,000 6,075

135,225 1,500 6,000 39,357

Based on the preceding information, determine the balance of the following accounts at December 31, 2018.

1. 2. 3. 4.

Accounts receivable Allowance for credit loss Notes receivable Notes receivable discounted

Answer: 1. Accounts receivable Sales 2. Cash Accounts receivable 3. Allowance for credit loss Accounts receivable

2,623,800 2,623,800 2,523,000 2,523,000 41,400 41,400

PSBA A.R. Handout (Auditing Problem) – R.A. Sales 4. Cash Notes receivable 5. Notes receivable Accounts receivable 6. Notes receivable discounted Notes receivable 7. Accounts receivable Cash Notes receivable discounted Notes receivable 8. Cash Loss on discounting of notes receivable Notes receivable discounted Interest income

87,000 87,000 216,000 216,000 108,000 108,000 6,075 6,075 6,000 6,000 135,225 375 135,000 600

Proceeds P135,225 CV of Note (P135,000 + P600) 135,600 Loss on discounting P375 9. Accounts receivable Allowance for credit loss Cash Accounts receivable 10. Sales returns and allowances Accounts receivable 11. Expected credit loss (Bad debt expense) Allowance for credit loss

1,500 1,500 1,500 1,500 6,000 6,000 39,357 39,357

Problem 2 Shown below is GROOT Company’s aging schedule of its accounts receivable on December 31, 2018.

Customers AA Co. BB, Inc. CC Corp. DD, Inc. EE Transport FF, Inc. GG Co. HH Corp. II Company Totals

Balance Due Current 1-30 P23,000 P0 P0 105,000 62,000 20,000 87,500 23,000 14,500 93,500 53,000 20,500 40,000 0 0 31,000 15,000 16,000 1,000 1,000 0 64,000 20,000 18,000 60,000 60,000 0 P 505,000 P 234,000 P 89,000

Days Past Due 31-60 Over 60 P 23,000 P0 13,000 10,000 10,000 40,000 10,000 10,000 0 40,000 0 0 0 0 16,000 10,000 0 0 P 72,000 P 110,000

PSBA A.R. Handout (Auditing Problem) – R.A. Sales The accounts receivable balance per general ledger is P 505,000 on December 31, 2018. The following are audit comments for possible adjustments: AA Co. Merchandise found defective; returned by the customer on November 10 for credit, but the credit memo was issued by Groot only on January 2, 2019. BB Inc. Account is food but usually pays late. CC Corp. Merchandise worth P40,000 destroyed in transit on June 4, 2018. The carrier was billed on July 1. (See EE Transport and II Company). DD, Inc. Customer billed twice in error for P10,000. Balance us collectible. EE Transport Collected in full on January 15, 2019. FF, Inc. Paid in full on December 29, 2018, but not recorded. Collections were deposited January 3, 2019. GG Co. Received amount confirmation from customer for P11,000. Investigation revealed an erroneous credit for P10,000. (See HH Corp.) HH Corp. Neglected to post P10,000 credit to customer’s account. II Company Customer wants to know the reason for receipt of P40,000 credit memo as its account payable balance is P100,000. Required: What is the adjusted balance of the Accounts receivable – trade at December 31, 2018?

PSBA A.R. Handout (Auditing Problem) – R.A. Sales Answer: Accounts receivable per general ledger AA Co. – Delayed issuance of credit memo CC Corp. – Damaged merchandise credited to II Company DD, Inc. – Double Billing FF, Inc. – Collection not recorded GG, Co. – Erroneous posting of credit for HH Corp. HH Corp. – Payment credited in error to GG Co. II Company – Credit for CC Corp. erroneously posted to II Company Adjusted Balance of accounts receivable – trade

P 505,000 (23,000) (40,000) (10,000) (31,000) 10,000 (10,000) 40,000 P 441,000

Problem 3 Presented below are unrelated situations. Answer the questions relating to each situation. A. The following information is from GUM Corp.’s first year of operations: 1. 2. 3. 4.

Merchandise purchased P450,000 Ending merchandise inventory 123,000 Collections from customers 150,000 All sales are on account and goods sell at 30% above cost What is the accounts receivable balance at the end of the company’s first year of operations? B. BANANA Co. reported the following information at the end of tis first year of operations, December 31, 2018: Expected credit loss for 2018 Uncollectible accounts written off during 2018 Net realizable value of accounts receivable

P 271,000 35,400 895,000

What is the accounts receivable balance at December 31, 2018? C. MAHONE Company’s analysis and aging of its accounts receivable at December 31, 2018, disclosed the following: Accounts Receivable Accounts estimated to be uncollectible (per aging) Allowance for credit loss (per books)

P 460,000 95,000 103,000

What is the net realizable value of MAHONE’s receivables at December 31, 2018?

PSBA A.R. Handout (Auditing Problem) – R.A. Sales D. The following amounts are shown on the 2018 and 2017 financial statements of SICILLY Co.: 2018 Accounts receivable ? Allowance for credit loss 20,000 Net Sales 2,600,000 Cost of goods sold 1,900,000 SICILLY Co.’s accounts receivable turnover for 2018 is 6.5 times.

2017 P 470,000 10,000 2,400,000 1,752,000

What is the accounts receivable balance at December 31, 2018? Answer: A. Solution Purchases Less: Merchandise inventory, ending Cost of Goods Sold Multiply by: sales ratio Sales Less: Collections from customers Accounts receivable, ending

P 450,000 123,000 327,000 X 130% 425,100 150,000 P 275,100

B. Solution Expected credit loss for 2018 Less: Accounts written off during 2018 Allowance for credit loss, Dec. 31, 2018 Add: Net realizable value of accounts receivable, Dec. 31, 2018 Accounts receivable, Dec. 31, 2018

1,130,600

C. Solution Accounts Receivable Less: Allowance for credit loss (per aging) Net realizable value

P 460,000 95,000 P 365,000

P 271,000 35,400 235,600 895,000

D. Solution (X = Net receivables, December 31, 2018) A/R turnover = Net Sales/ Ave. Net receivables 6.5 = P 2,600,000/ [(P460,000 + x)/2] X = P 340,000 Net receivables, Dec. 31, 2018 Add: Allowance for credit loss, Dec. 31, 2018 Accounts Receivable, Dec. 31, 2018

P 340,000 20,000 P 360,000

PSBA A.R. Handout (Auditing Problem) – R.A. Sales

Problem 4 INIGO Company’s accounting records disclose the following: Accounts receivable, Jan. 1, 2018 Allowance for credit loss, Jan. 1, 2018 (credit) Sales for the year Collections from customers during the year

P 1,800,000 90,000 15,000,000 13,080,000

The following additional information was also obtained: 1. Included in the amount collected from customers was the recovery of P 30,000 receivable from a customer whose account had been charged off as worthless in the prior year. 2. Inigo Company determined that its receivable from a customer of P 150,000 will not be collected, and management authorized its write-off. 3. A customer settled its account on December 2, 2018 by issuing a 12%, 6-month note for P600,000. 4. The Accounts Receivable balance on December 31, 2018 includes P900,000 past due accounts. 5. The entity estimated that 20% of past due accounts will not be collected and that the probable loss on current accounts is 5%.

Required: 1. The current assets section of Inigo Company’s statement of financial position on December 31, 2018, should include Accounts Receivable of: 2. What is the balance of the Allowance for credit loss before adjustment on December 31, 2018? 3. The required Allowance for credit loss on December 31, 2018 is: 4. The Allowance for credit loss should be increased (decreased by: 5. What is the adjusting entry to record the Expected credit loss for the current year? Solution: 1. Solution: Accounts Receivable, Jan. 1, 2018 Sales for 2018 Collections Recovery of accounts written off Customer’s account written off Accounts settled by issuance of note Accounts receivable, Dec. 31, 2018

P 1,800,000 15,000,000 (13,080,000) 30,000 (150,000) (600,000) P 3,000,000

PSBA A.R. Handout (Auditing Problem) – R.A. Sales 2. Solution: Allowance for credit loss, Jan. 1 (credit) Recovery of accounts written off Accounts written off Allowance before adjustment, Dec. 31 (debit)

P 90,000 30,000 (150,000) P (30,000)

3. Solution: Current accounts (P3,000,000 – P900,000 = P2,100,000 x 5%) Past due accounts (P 900,000 x 20%) Required allowance, Dec. 31, 2018

P 105,000 180,000 P 285,000

4. Solution: Required allowance, Dec. 31, 2018 Allowance before adjustment – Debit Increase in allowance

P 285,000 30,000 P 315,000

5. Journal Entry: Expected credit loss Allowance for credit loss

315,000 315,000

Problem 5 From inception of operations to December 31, 2018, MAHARLIKA Corp. provided for expected credit loss under the allowance method: provisions were made monthly at 2% of credit sales; bad debts written off were charged to the Allowance account; recoveries of bad debts previously written off were credited to the Allowance account; and no year-end adjustments to the Allowance account were made. Maharlika’s usual credit terms are net 30 days. The balance in the Allowance for credit loss account was P 143,000 at January 1, 2018. During 2018, credit sales totaled P 15,000,000, interim provisions for expected credit loss were made at 2% of credit sales, P 140,000 of bad debts were written off, and recoveries of accounts previously written off amounted to P 43,000. Maharlika installed a computer facility in November 2018 and an aging of accounts receivable was prepared for the first time as of December 31, 2018. A summary of the aging is as follows: Classification by Month of Sale November – December 2018 July – October 2018

Balance in Each Category P 2,160,000 1,300,000

Default Rate 2% 10%

PSBA A.R. Handout (Auditing Problem) – R.A. Sales January – June 2018 Prior to January 1, 2018

840,000 300,000 P 4,600,000

25% 70%

Based on the review of collectability of the account balances in the “prior to January 1, 2018” aging category, additional receivables totaling P 120,000 were written off as of December 31, 2018. The 70% uncollectible estimate applies to the remaining P 180,000 in the category. Effective with the year ended December 31, 2018, Maharlika adopted a new accounting method for estimating the allowance for credit loss at the amount indicated by the year-end aging analysis of accounts receivable. Required: 1. What is the balance of the Allowance for credit loss on December 31, 2018 (before year-end adjustment)? 2. What is the journal entry for the year-end adjustment to the Allowance for credit loss balance as of December 31, 2018? 3. For the year ended December 31, 2018, Maharlika’s expected credit loss would be? 4. The net realizable value of Maharlika’s accounts receivable at December 31, 2018, should be? 5. An auditor’s purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management’s assertion about: Solution: 1. Solution: Allowance for credit loss, Jan. 1, 2018 Add: Expected credit loss for 2018 (P 15,000,000 x 2%) Recoveries of accounts previously written off Total Less: Accounts written off (P140,000 + P120,000) Allowance for credit loss, Dec. 31, 2018 2. Expected credit loss Allowance for credit loss

Classification November – December 2018 July – October 2018 January – June 2018 Prior to January 1, 2018 (P300,000 – P120,000 write off) Required allowance balance, Dec. 31, 2018

P 143,000 P 300,000 43,000

343,000 486,000 260,000 P 226,000

283,200 283,200

Balance P 2,160,000 1,300,00 840,000 180,000

Rate 2% 10% 25% 70%

Amount P 43,200 130,000 210,000 126,000 P 509,200

PSBA A.R. Handout (Auditing Problem) – R.A. Sales Less: Allowance balance before adjustment (see no. 1) Increase in allowance 3. Solution: Expected credit loss recorded Additional expected credit loss to arrive at the required allowance based on aging Correct expected credit loss for 2018 4. Solution: Accounts receivable (P4,600,000 – P120,000) Less: Required allowance per aging Net realizable value, Dec. 31, 2018

226,000 P 283,200

P 300,000 283,200 P 583,200

P 4,480,000 509,200 P 3,970,800

5. Valuation and allocation.

Problem 6 Presented below are unrelated situations. Answer the questions relating to each situation. 1. On December 5, 2018, BANDILA Inc. sold its accounts receivable (net realizable value, P260,000) for cash of P 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 credit loss is P 40,000. A. What amount of loss on factoring should be recognized? B. What is the entry to record the factoring of accounts receivable? 2. On April 1, 2018, SAMGYUPSAL Corp. assigned accounts receivable totaling P 400,000 as collateral on a P 300,000, 16% note from Iwahig 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 P 300,000 value of the note. Additional information is as follows: a. Collections of assigned accounts in April totaled P191,100 net of a 2% sales discount. b. On May 1, Samgyupsal Corporation paid the bank the amount owed for April collections plus accrued interest on note to May 1. c. The remaining accounts were collected by Samgyupsal Corporation during May except for P2,000 accounts written off as worthless. d. On June 1, Samgyupsal Corporation paid the bank the remaining balance of the note plus accrued interest.

PSBA A.R. Handout (Auditing Problem) – R.A. Sales Prepare the journal entries to record the above transactions on the books of Samgyupsal Corporation. 3. ROSE Finance Corp. purchases the accounts receivable of other companies on a without recourse, notification basis. At the time the receivables are factored, 15% of the amount factored is charged to the client as commission and recognized as revenue in Rose’s books. Also, 10% of the receivables factored is withheld by Rose as protection against sales returns or other adjustments. This amount is credited by Rose to the Client Retainer Account. At the end of each month, payments are made by Rose to its clients so that the balance in the Client Retainer Account is equal to 10% of unpaid factored receivables. Based on Rose’s bad debt loss experience, an allowance for credit loss of 5% of all factored receivables is to be established. Rose makes adjusting entries at the end of each month. On January 3, 2018, Poor, Inc. factored its accounts receivable totaling P 1,000,000. By January 31, P 800,000 on these receivables had been collected by Rose. Prepared the entries on Rose’s and Poor’s books to record the above information. Solution: 1. Solution: Net Realizable value of accounts receivable Less: Cash proceeds Loss on factoring Cash (P230,000 x 90%) Allowance for credit loss Loss on factoring Receivable from factor (P230,000 x 10%) Accounts Receivable (P260,000 + P40,000)

P260,000 230,000 P 30,000 207,000 40,000 30,000 23,000 300,000

2. Journal entries: April 1 Accounts receivable – assigned Accounts Receivable

400,000 400,000

Cash Finance charge (P300,000 x 2%) Notes payable

294,000 6,000 300,000

(a) Cash Sales discounts A/R – assigned (P191,100/98%)

191,100 3,900 195,000

PSBA A.R. Handout (Auditing Problem) – R.A. Sales (b) Notes payable Interest expense (P300,000 x 16% x 1/12) Cash (c) Cash Allowance for credit loss A/R – assigned (P400,000 – P195,000) (d) Notes payable (P300,000-P195,000) Interest expense (P105,000 x 16% x 1/12) Cash

195,000 4,000 199,000

203,000 2,000 205,000

105,000 1,400 106,400

3. Journal Entries: Rose’s Books Jan.3 A/R Factored Commission Income (P1,000,000 x 15%) Client Retainer (P1,000,000 x 10%) Cash

1,000,000 150,000 100,000 750,000

31 Cash A/R factored

800,000 800,000

31 Client Retainer Cash (P100,000 – [10%Xp200,000])

80,000

31 Bad debt expense Allowance for debts (P1,000,000 x 5%)

50,000

80,000

50,000

PSBA A.R. Handout (Auditing Problem) – R.A. Sales Poor, Inc.’s Books Jan. 3 Cash Receivable from factor Commission Accounts Receivable

750,000 100,000 150,000 1,000,000

31 Cash Receivable from factor

80,000 80,000

Problem 7 During your audit of FOREVER Company for the year ended December 31, 2018, you find the following account. Notes Receivable Date Sept. 1 Oct. 1 Nov. 1 30 30 Dec. 1 1

Cornea, 20% due in 3 months Hunk Co., 24% due in 2 months Discounted Cornea note at 25% Valerie, 24% due in 13 months Cellular Co., no interest, due in one year Discounted Cellular note at 18% Tictic, 18% due in 5 months O. Reyes, President, 12% due in 3 months (for cash loan given to O. Reyes)

Debit P 80,000 300,000

Credit

P80,000 600,000 500,000 500,000 900,000 1,200,000

All notes are trade notes unless otherwise specified. The Cornea note was paid on December 1 as per notification received from the bank. The Hunk Co. note was dishonored on the due date but the legal department has assured management of its full collectability. The company, with your concurrence, will treat the discounting as a conditional sale of note receivable. 1. At what amount on the current assets section of the December 31, 2018, statement of financial position will the Notes receivable – trade be carried? 2. What amount of loss on notes receivable discounting should be reported in the 2018 income statement of the company? 3. Based on the ledger account presented, what amount of interest income should be accrued at December 31, 2018?

PSBA A.R. Handout (Auditing Problem) – R.A. Sales Solution: 1. Valerie Tictic Total N/R – Trade, December 31, 2018

P600,000 900,000 1,500,000

2. Solution: Net proceeds: Principal Interest (P80,000 x 20% x 3/12) Maturity Value Discount (P 84,000 x 25% x 2/12) Book value: Principal Accrued interest receivable (P80,000 x 20% x 1/12) Loss on discounting of Cornea note

P 80,000 4,000 84,000 (3,500

P 80,500

P 80,000 1,333

81,333 P 833

Principal/Maturity value Discount (P500,000 x 18% x 1 year) Net proceeds Book value Loss on discounting of Cellular Note

P500,000 (90,000) 410,000 500,000 P 90,000

Total loss on discounting (P833 + P90,000) = P90,833 3. Hunk (P300,000 x 24% x 3/12) Valerie (P600,000 x 24% x 2/12) Tictic (P900,000 x 18% x 1/12) O. Reyes (P1,200,000 x 12% x 1/12) Total accrued interest receivable, 12/31/2018

P18,000 24,000 13,500 12,000 P67,500