AUDIT OF RECEIVBLES

EXERCISE 1

In the course of your audit of Jill Company’s Receivables account as of

December 31, 2014, you found out that the account comprised the following
items.

Trade accounts receivable P 1,550,000

Trade accounts receivable, assigned (proceeds 750,000
from assignment amounted to P 650,000)
Trade accounts receivable, factored (proceeds 300,000
from factoring done on a without recourse
basis amounted to P 250,000)
12% Trade notes receivable 200,000
20% Trade notes receivable, discounted at 40% 300,000
upon receipt of the 180 day note on a without
recourse basis
Trade receivables rendered worthless 50,000
Installment receivables, normally due 1 year 600,000
to 2 years
Customer’s account reporting credit balances 60,000
arising from sales returns
Advance payments for purchase of merchandise 300,000
Customer’s account reporting credit balances 40,000
arising from advance payments
Cash advances to subsidiary 800,000
Claim from insurance company 30,000
Subscription receivable due in 60 days 600,000
Accrued interest receivable 20,000
Deposit on contract bids 500,000
Advances to Stockholders collectible in 2017 2,000,000

1. How much is the trade receivables?

A. 3,650,000 C. 3,000,000
B. 3,100,000 D. 2,950,000

2. How much is the amounted to be presented as trade and other receivables

under current assets?
A. 7,350,000 C. 4,850,000
B. 5,350,000 D. 4,050,000

3. How much loss from receivable financing to be presented in the income

statements?
A. 36,000 C. 86,000
B. 50,000 D. 105,000

EXERCISE 2

In relation to your audit of Phil Inc.’s accounts receivable you ascertained

the following information.

A. General ledger balances of the clients receivable and related accounts were:
Accounts Receivable 3,225,000
Allowance for bad debts (169,000)
Amortized cost 3,056,000

B. Phil Inc. estimates its bad debt losses by aging its accounts receivable,
the aging schedule of accounts receivable at December 31, 2017, is presented
below.
Age of accounts Amount
Current 1,686,400
1 to 30 days past due 922,000
31 to 60 days past due 384,800

APPLIED AUDITING PART I

 AUDIT OF RECEIVBLES

61 to 90 days past due 153,300

Over 90 days past due 78,800

C. The company normally sells n/30.

D. Furthermore, the company uncollectible accounts experience for the past 5

years are summarized in the schedule that follows

Year Current 1 – 30 31 – 60 1 – 90 More than

days PD days PD days PD 30 days
PD
2016 1% 6% 9% 23% 55%
2015 2% 8% 10% 18% 60%
2014 1% 4% 11% 16% 45%
2013 3% 5% 12% 22% 45%
2012 3% 2% 8% 21% 45%

1. What are the corresponding percentages to be used as per age category in

computing for the client’s require allowance for bad debts?

Current 1 – 30 31 – 60 1 – 90 More than

days PD days PD days PD 30 days PD
A. 1% 3% 10% 20% 45%
B. 1.5% 5% 10% 25% 50%
C. 2% 5% 10% 20% 50%
D. 2% 3% 10% 25% 45%

2. The required allowance for bad debt expense is:

A. 173,653 C. 188,368
B. 185,415 D. 220,842

3. The net realizable value of the company’s accounts receivable on December

31, 2017, should be?
A. 3,036,932 C. 2,986,345
B. 3,004,458 D. 2,976,540

EXERCISE 3

You are auditing the Accounts Receivables of AI Inc. as of December 31 2017.

You found out the following information in the general journal.

Accounts Receivable 1,466,720

Less: Allowance for doubtful accounts 46,720
Accounts Receivable, net 1,420,000

The accounts subsidiary ledger had the following details:

Customer Invoice date Amount Balance

Tepi 09/12/2017 139,200 139,200
Ger 12/12/2017 153,600
12/02/2017 99,200 252,800
Mer 11/17/2017 185,120
10/08/2017 176,000 361,120
Ed 12/08/2017 160,000
10/25/2017 44,800
08/20/2017 40,000 244,800
Inah 09/27/2017 96,000 96,000
Jeff 08/20/2017 71,360 71,360
Lec 12/06/2017 112,000
11/29/2017 169,440 281,440
TOTAL 1,446,720

APPLIED AUDITING PART I

 AUDIT OF RECEIVBLES

Additional Information:

A. You discovered based on your review of subsequent events that Jeff recently
went bankrupt, thus your suggested that the amount receivable from the same
shall be written off.

B. You also discovered that the invoice dated 12/02/2017 has already been
settled by Ger per OR number 34567. This amount however has been erroneously
posted against Mer’s subsidiary ledger as a settlement for an invoice dated
11/05/2017 for the same amount.

C. The estimated bad debt rates below are based on the company’s receivable
collection experience:

Age of accounts % of collectability

0 – 30 days 98%
31 – 60 days 95%
61 – 90 days 90%
91 – 120 days 80%
Over 120 days 50%

1. Assuming that there were no other entries to the allowance for doubtful
accounts, what is the correct bad debt expense for the year?
A. 95,680 C. 141,984
B. 92,704 D. 144,960

2. What is the correct allowance for bad debt expense for the year ended
December 31, 2017?
A. 156,000 C. 120,320
B. 153,024 D. 117,344

3. What is the net adjustment to the Accounts Receivable in the general ledger?
A. 172,560 C. 91,360
B. 119,200 D. 71,360

4. What is the carrying value of the company’s accounts receiva1ble as of

December 31, 2017?
A. 1,255,040 C. 1,275,040
B. 1,258,016 D. 1,295,040

5. What is the necessary adjusting entry to adjust any unlocated difference

between the SL and GL?
A. Bad debt expense 20,000
Accounts Receivable 20,000
B. Sales 20,000
Accounts Receivable 20,000
C. Accounts Receivable 20,000
Other Income 20,000
D. No necessary entry

EXERCISE 4

On January 01, 2014, CM Inc. gave loan to ABC Corp. amounting to 1,000,000 and
received a three year 6% note. The calls for annual interest to be paid each
December 31. The company incurred origination cost amounting to ____. The
company charged 80,000 to ABC as origination fees. As a result, the yield on
the loan was at 8%.

At December 31, 2015 based on ABC’s financial crisis CM Inc. was not able to
collect the 2015 interest and that only 600,000 of the principal due December

APPLIED AUDITING PART I

 AUDIT OF RECEIVBLES

31, 2016 will be collected. The 600,000 principal is expected to be collected

in two equal installments on December 31, 2016 and December 31, 2018.

1. What is the origination cost incurred by CM Inc. on January 1, 2014 in

relation to the loans receivable.
A. 28,458 C. 108,458
B. 51,542 D. none

2. What is the impairment loss to be recognized in 2015?

A. 981,481 C. 525,554
B. 532,190 D. 542,170

3. What is the carrying value of the loans receivable from ABC on December 31,
2015?
A. 981,481 C. 515,927
B. 532,190 D. 542,170

EXERCISE 5

On December 31, 2013, Pablo Company, a financing institution lent P 4,000,000 to

Geoven Corp due 3 years after. The loan is supported by an 8% note receivable.
Transactions costs incurred to originate the loan amounted to P 248,000. P 374,000
was chargeable to Geoven as origination fees. Interest on the loan are collectible
at the end of each year. The yield rate on the loan is 9.25%.

Pablo was able to collect interest as it become due at the end of 2014. During
2015, however, due to Geoven Corp business deterioration and due to political
instability and faltering global economy, the company was not able to collect
amounts due at the end of 2015. After reviewing all available evidence at December
31, 2015, Pablo Company determined that it was probable that Geoven would pay
back only P 3,400,000 collectible as follows:

December 31, 2017 1,400,000

December 31, 2018 1,000,000
December 31, 2019 600,000
December 31, 2020 400,000

As of December 31, 2015 the prevailing rate of interest for all debt instruments
is 14%

Based on the above information and on your audit, answer the following
requirements:

1. What is the carrying value of the loans receivables as of December 31, 2014?
A. 3,874,000 C. 3,954,237
B. 3,912,345 D. 4,000,000

2. What is the impairment loss to be recognized in the 2015 statement of

comprehensive income?
A. 1,336,188 C. 1,094,018
B. 1,294,296 D. 1,656,187

3. What is the interest income to be recognized in the 2017 statement of

comprehensive income?
A. 228,818 C. 159,542
B. 264,570 D. 242,170

4. What is the correct carrying value of the loans receivable as of December

31, 2107?
A. 2,860,219 C. 1,724,789
B. 2,013,832 D. 1,884,332

APPLIED AUDITING PART I

 AUDIT OF RECEIVBLES

EXERCISE 6

Brendan Corp. had the following receivable financing transactions during the
year.

 On March 1, 2014, Brendan Corp factored P 500,000 of its accounts receivables

to BPI. As of the date of factoring, it was ascertained that P 20,000 of
the accounts receivable is doubtful of collection. BPI advanced P 350,000
cash to Brendan Corp. and withheld P 50,000 factors holdback (to cover
future sales discount and sales returns and allowances). The company
incurred P 10,000 direct transaction costs (legal fees and other
professional fees) related to the factoring. The factoring was done on a
without recourse basis, thus transferring all the risks and rewards
associated to the receivable to BPI.

 On May 1, 2014, Brendan Corp. assigned P 800,000 of its outstanding accounts

receivable to BPI in consideration of a P 500,000, 24% loan. BPI charge the
company of 2% of the accounts assigned as service charge. By the end of May,
Brendan Corp collected P 200,000 cash from the assigned accounts net of a P
5,000 sales discount. By the end of June, Brendan Corp. collected another P
150,000 from the assigned accounts after P 4,000 sales discount. The company
accepted merchandise originally invoiced at P 30,000 as sales returns and
wrote off P 20,000 of the assigned accounts as worthless. It was agreed
between parties that monthly collections shall be remitted to the bank as
partial payment of the loan and interest.

 On July 01, 2014, Brendan accepted from a customer a 6-month P 600,000, 12%
notes receivable for the sale of merchandise. On October 31, 2014, Brendan
Corp. discounted the note to BPI at a discount rate of 10%. The discounting
was done on a without recourse basis, thus transferring all significant
risks and rewards associated to the receivable to BPI.

1. How much to be reported as gain/loss in the income statement on the transfer

of receivables on the factoring of receivables on March 1?
A. 90,000 B. 100,000 C. 80,000 D. none

2. How much to be reported as gain/loss in the income statement on the transfer

of receivables on the assignment of receivables on May 1?
A. 16,000 B. 126,000 C. 316,000 D. none

3. What is the carrying value of the accounts receivable assigned as of June 30?
A. 391,000 B. 400,000 C. 450,000 D. none

4. What is the carrying value of the loans payable related to the accounts
receivable assigned as of June 30?
A. 150,000 B. 166,200 C. 310,000 D. none

5. How much to be reported as gain/loss in the income statement on the transfer

of receivables on the discounting of the notes receivables on July 1?
A. 10,600 B. 1,400 C. 24,000 D. none

APPLIED AUDITING PART I