MODULE – 4 AUDIT OF RECEIVABLES AND RELATED REVENUES

Revenue Cycle Procedures

The revenue cycle starts when you begin taking the order and is not complete until your
company receives payment AND pass the point of no returns. Use these sample accounting
revenue cycle procedures to ensure efficiency and success in your accounting department.
Sales Order Entry Procedure
The first accounting revenue cycle procedure you should utilize deals with your sales order. All
customer orders will be processed in an efficient and organized manner to ensure accurate and
prompt shipments. The company should summarize the preparation of documents, paperwork
flow, and responsibilities by individuals and departments for obtaining a sales order from a
customer through shipping and billing the customer.
Each individual involved in the sales order process should take the responsibility to determine
that all required and necessary activities and documents are properly completed. This applies to
all individuals and departments involved in consummation of the sales process, specifically
including Sales, Customer Service, Credit, Manufacturing and Billing.
Point-Of-Sale Orders Procedure
The Company should provide POS Point-Of-Sales procedures for ensuring that all sales are
proper and collectible and the effect on inventory and cash is posted correctly. There should be
proper transaction controls over sales and proper reviews and authorizations by the store
manager. This applies to all cashiers and cash handlers.
Customer Credit Approval and Terms Procedure
To reduce potential collection problems, new customer accounts or credit limit increases will be
properly evaluated and approved prior to extending credit. The company should outline the
activities and responsibilities involved in obtaining credit approval for a potential customer
before sales orders are consummated. These credit procedures are to be followed for all credit
approvals requested by the Sales or Customer Service Departments for customers interested in
open account, lease or rental financing.
Sales Order Acceptance Procedure
To ensure the highest customer services levels and reduce potential order problems, sales
orders will be properly evaluated and approved prior to entry into the accounting system and
fulfilment by the company. The company should outline the activities and responsibilities
involved in verifying the acceptability of all sales orders received before they are consummated.
This applies all sales orders taken by the Sales or Customer Service Departments.
Internal Control of Revenue Cycle

Revenue Cycle and Control Activities

The revenue cycle for many companies is considered the primary source to earn revenue from
the sale of goods or service. Good controls must be established to maintain the effectiveness of
receivables and credit sales, not doing so can harm the company and might be costly to the
business.
Six classes of internal controls guides us in evaluating and designing transaction processing.
They are authorization, supervision, segregation of duties, access control, independent
verification, and accounting records. The first section discusses the departments that make the
revenue cycle, starting with Sales Department and ending with Billing Department, knowingly
that collections must be received and adjustments must be made. The second section
discusses the six activities mentioned earlier.

Departments

The revenue cycle is composed of five independent (in activities and personnel) departments
that are required to make function and make a sale. Each department carry out it's own, and
every department depends on the preceding department in order to function properly. An
additional two activities must be considered in the revenue cycle are collection of receivables
and adjustments to sales and receivables.

Sales Department

Every sales process starts with receiving a customer purchase order- by mail, in person, or
telephone. Thus controlling the customer's orders is carefully done, and operating procedures
must be maintained in an adequate manners. The department then identifies and reviews items
and quantities to determine whether the order can be placed, then they prepare The Sales
Order. The sales order is not the standard format that the seller's order processing system
needs. The sales order has vital information, such as the customer's name account number,
description of the items sold quantities, and prices. A copy of sales order is placed in the open
order file, the customer getting the ordered goods might take days or even weeks. The
customer might check about the status of his or her order, order file is updated every time the
status of the order changes .It also sets instructions to guide various divisions and department,
including credit, finished goods, shipping, billing, and accounts receivable units.

Credit Approval Department

To provide independence to the credit authorization process, the credit department is

organizationally and physically separate from the Sales Department. The credit approval
department receives a copy of the sales order from the sales department. The document
 received serves as an authorization to perform a client credit check. The check includes
investigating new customers' ability to pay and creditworthiness, and a line of credit is
established.

Warehouse Procedures

After a credit check has been performed and approved, and a sales order is received. The
warehouse is responsible of issuing merchandise and items that were mentioned in the sales
order to the shipping department. In a typical company that have finished goods in it's inventory,
this inventory is supervised and controlled by a storekeeper. He is responsible for issuing the
goods. Another control activity must be done is updating the inventory records by the
accountant, not by the storekeeper. This separation of duty prevents theft of inventory.

The Shipping department

When receiving the finished goods from the warehouse, the shipping clerk must reconcile the
products received from the warehouse with the products mentioned in the sales order.

Audit Assertions for Accounts Receivable

In the audit of accounts receivable, we usually test the audit assertions included in the table
below:

Audit assertions for accounts receivable

The accounts receivable that are shown on the balance sheet at the reporting
Existence
date really exist.

The amount of receivables recorded in the client’s account is mathematically

Valuation
correct and their balances reflect the actual economic value.

All accounts receivable transactions that should have been recorded have been
Completeness
recorded.

Right and The client has the right of controls on the accounts receivable included in the
obligation financial statements.
Audit Procedures for Accounts Receivable

Existence

Existence assertion tests whether the accounts receivable on the balance sheet actually exist.
Similar to other asset items, the existence is usually the major auditing issue for us when we
perform the audit of accounts receivable.

This is due to receivable is likely to be a material area and its inherent risk is usually related to
fraud and sales revenue manipulation. In order to test existence on accounts receivable, the
confirmation is usually made by sending the letter to the client’s customers asking them to
confirm whether they really owe such amount to the client.

In the audit of accounts receivable, we can achieve two objectives in performing the receivable
confirmation. First, we can verify the existence of the customer’s balances; second, we can
ensure the correctness of those balances.

There are two types of confirmation, positive confirmation and negative confirmation, as
included in the table below:

Two types of confirmation

Positive confirmation is the confirmation sent to customers asking them to sign

on the letter and mail back directly to us, auditors. The letter is needed to be
sent back regardless of the amount is correct or not.
In the case that the amount is incorrect, in which the customer’s account is not
agreed to the client’s account, the customer still needs to indicate the correct
Positive amount on the letter and send it back to us. We will make further investigation
confirmation on the issue.

Also, if we do not receive the confirmation letter back from the client’s
customers, we will need to perform follow-up procedures in order to confirm the
existence of the client’s accounts receivable.

Negative Negative confirmation is the confirmation sent to customers asking them to reply
confirmation and mail directly back to us only when they disagree with the balance stated in
the confirmation letter.
We usually only perform this type of receivable confirmation when the assessed
level of risk of material misstatement on accounts receivable and related
accounts are low and there is a large number of small customers in the accounts
receivable balance.
 In this case, when there is no response from the client’s customers, we will take
it as they agree with the balance stated in the confirmation letter. We do not
perform follow-up procedures, hence the cost of administering the negative
confirmation is lower compared to positive confirmation.

Valuation

Valuation assertion tests whether the accounts receivable recorded in the client’s accounts
reflect their actual economic value. Though the receivable confirmation in the audit of accounts
receivable mentioned above can ensure the existence and the accuracy of customers’
balances, it cannot provide evidence on the correctness of accounts receivable valuation.

For example, the client’s customers may confirm on the letter that they really owe such amount
to the client. However, they may not have sufficient resources to pay the debt that they owe at
all.

We usually test valuation by performing both substantive analytical procedures and tests of

details. In substantive analytical procedures, we usually compare figures and ratios with the
previous year and industry average.

Example: test of valuation in the audit of accounts receivable

 Compare the irrecoverable debt expense as percentage of sales with the previous year
and the industry average
 Compare the allowance for irrecoverable debts as percentage of accounts receivable
with the previous year and the industry average
 Compare accounts receivable turnover and receivables days with the previous year and
the industry average
 Obtain and agree the detailed aged receivables listing to trial balance
 Select a sample of old debts on detailed aged accounts receivable to discuss the
recoverability with management and further review on customers’ responses
 Review and discuss with management on allowance for doubtful accounts
 Determine the reasonableness of allowance for doubtful accounts
 Examine credit notes issued after year-end that should be made against current period
balances 

Completeness

Completeness assertion tests whether all accounts receivable have been recorded. Lack of
completeness usually results in the understatement of the accounts and balance; in this case,
as we audit accounts receivable, the lack of completeness means the understatement of
accounts receivable balances.

Example: test of completeness in the audit of accounts receivables

  Select a sample of shipping documents such as bill and lading and trace back to sale
invoices and then to sales and accounts receivable ledger account.
 Agree individual balance on detailed aged receivables listing to the sales ledger account
 Agree total balance of detailed aged receivables listing to the sales ledger account

Right and obligation

Right and obligation assertion tests whether the client has the right of control on all accounts
receivable show on its financial statement. The concern in the audit of accounts receivable is
usually on the factoring of the receivables in which the client should no longer have the right of
control to receivables.

This is because the control should have been transferred when the company sold or factored its
receivable. Hence, the factored receivables should be removed from the balance sheet.

We usually test the right and obligation assertion on accounts receivable by making inquiries of
management on factoring matter, reviewing the loan agreement and reviewing board minutes
for any evidence that receivables have been sold or factored.

All in all, accounts receivable’ existence and valuation are the primary concerns for us as
auditors. The existence of accounts receivable itself is the high-risk area as the misstatement
in this area could be due to fraud or manipulation of sales.

On the other hand, misstatement occurred in the area of valuation usually tends to be an
overstatement of net receivables as the client might forget to make sufficient allowance for
receivables or they are perhaps not willing to make sufficient allowance as the bigger allowance
means the bigger expense, hence the lower profit.
Receivables are assets that represent contractual rights to received cash or other asset from
another entity.
Examples of receivables:
Accounts receivable – receivables supported by oral or informal promises to pay, and are not
supported by formal promissory notes.
Notes receivable – receivables supported by written or formal promises to pay in the form of
promissory notes. Some notes receivable are supported by postdated checks.
Loans receivable – receivables arising from loans extended by financial institutions, such as
banks, financing companies, and lending institutions. Loans receivable are also supported by
promissory notes and are generally backed by collateral securities or postdated checks.
Advances – receivables arising from advances to officers and employees, advances to
suppliers, and advances to affiliates.
Accrued income – receivables arising from income earned but not yet collected, such as interest
income, dividend income and the like.
Deposits – receivables from reimbursable deposits paid to cover potential damages or losses,
deposits for guarantee of performance or payment, and deposits for returnable items.
Claims receivable – receivable from insurance companies for casualties sustained, defendants
under suit, government agencies for refundable taxes and other remittances, common carriers
for damaged or lost goods, and suppliers for returned or damaged goods.

Initial and subsequent measurement of receivables

Type of receivable Initial measurement Subsequent measurement
1. Short-term receivable Fair value plus transaction If the initial measurement is:
(trade or non-trade) cost. a. Face amount, the
Fair value is equal to: subsequent
a. Face amount; or measurement is
b. Present value (if recoverable historical
transaction cost.
contains a b. Transaction price, the
significant measurement is
financing subsequently updated
component; or using the principles of
c. Transaction price PFRS 15.
with allowed
practical expedient
d. (for trade
receivable)
2. Long-term receivables Fair value plus transaction Recoverable historical cost
bearing reasonable cost.
interest rate Fair value is equal to face
amount
3. Long-term non- Fair value plus transaction Amortized cost
interest-bearing cost.
receivables Fair value is equal to
present value of future
cash flows from the
receivable.
4. Long-term receivables Fair value plus transaction Amortized cost
bearing unreasonable cost.
Interest rate (below- Fair value is equal to
market interest rate) present value of future
cash flows from the
receivable
If the initial measurement is cash price equivalent of the non-cash asset given up, the
subsequent measurement is amortized cost.
Illustrative problem: Analysis of accounts receivable and related accounts

Your audit client, Ivan Corporation, provided for uncollectible accounts receivable under the
allowance method since the start of its operations to December 31, 2020. Provisions were
made monthly at 2 percent 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. Ivan's usual credit terms
are net 30 days.

The credit balance in the allowance for doubtful accounts was P260,000 at January 1, 2020.
During 2020, credit sales totaled P18,000,000, interim provisions for doubtful accounts were
made at 2 percent of credit sales, P180,000 of bad debts were written off, and recoveries of
accounts previously written off amounted to P30,000. Ivan installed a computer system in
November 2020 and an aging of accounts receivable was prepared for the first time as of
December 31, 2020. A summary of the aging is as follows:

Balance in Estimated %
Classifications by Month of Sale Each Category Uncollectible
November-December 2020 P2,280,000 2%
July-October 2020 1,200,000 15%
January-June 2020 800,000 25%
Prior to January 1, 2020 260,000 80%

Based on the review of collectibility of the account balances in the "prior to January 1, 2020"
aging category, additional receivables totaling P120,000 were written off as of December 31,
2020. Effective with the year ended December 31, 2020, Ivan adopted a new accounting
method for estimating the allowance for doubtful accounts at the amount indicated by the year-
end aging analysis of accounts receivable.

QUESTIONS:

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

1. How much is the adjusted balance of the allowance for doubtful accounts as of December
31, 2020?
2. How much is the doubtful accounts for the year 2020?
3. The recorded allowance for doubtful accounts should be increased by

Solution:

Question No. 1

Account classification Adjusted Required

balance Rate Allowance
November-December 2020 P2,280,000 2% P 45,600
July-October 2020 1,200,000 15% 180,000
January-June 2020 800,000 25% 200,000
Prior to January 1, 2020
(P260,000 - P120,000) 140,000 80% 112,000
P537,600
Question No. 2

Required allowance, 12/31/2020 (see no. 1) P537,600

Accounts written off in 2020 (P180,000 + P120,000) 300,000
Bad debt recoveries in 2020 (30,000)
Allowance for doubtful accounts, 1/1/2020 (260,000)
Doubtful accounts expense in 2020 P547,600

Question No. 3

Required allowance, 12/31/2020 (see no. 1) P537,600

Less allowance for doubtful accounts,
12/31/2020 – per books:
Allowance for doubtful accounts, P260,000
1/1/2020
Recorded provision for 2020 (P18M x 360,000
2%)
Bad debt recoveries in 2020 30,000
Accounts written off in 2020 (300,000) (350,000)
Increase in allowance for doubtful accounts P187,600

Notes Receivable
A note receivable is a written promise to receive a specific amount of cash from another party
on one or more future dates. This is treated as an asset by the holder of the note. Overdue
accounts receivable are sometimes converted into notes receivable, thereby giving the debtor
more time to pay, while also sometimes including a personal guarantee by the owner of the
debtor.

Notes Receivable Terms

The payee is the party who receives payment under the terms of the note, and the maker is the
party obligated to send funds to the payee. The amount of payment to be made, as listed in the
terms of the note, is the principal. The principal is to be paid on the maturity date of the note.
A note receivable usually includes a specific interest rate, or a rate which is tied to another
interest rate, such as a bank’s prime rate. The calculation of the interest earned on a note
receivable is:

Principal x Interest rate x Time period = Interest earned

If an entity has a large number of notes receivable outstanding, it should consider setting up an
allowance for doubtful notes receivable, in which it can accrue a bad debt balance that it can
use to write off any notes receivable that later become uncollectible. An uncollectible note
receivable is said to be a dishonored note.

Notes Receivable Classification

You should classify a note receivable in the balance sheet as a current asset if it is due within
12 months or as non-current (i.e., long-term) if it is due in more than 12 months. If a note has a
duration of longer than one year, and the maker does not pay interest on the note during the
first year, it is customary to add the unpaid interest to the beginning principal balance in the
second year, and use that as the basis upon which to calculate interest in the second year.
A company's auditors will examine the classification of notes receivable from the most
conservative perspective, and so will insist on their classification as short-term if there are
reasonable grounds for doing so.

Illustrative Problem: Analysis of notes receivable and related accounts

Unless otherwise identified, the notes receivable of the Cleo Company on December 31, 2020,
were trade notes receivable. On this date the balance of the account, P3,036,915, consisted of
the following notes all received during the calendar year under audit:

Maker Date Term Rate Amount Remarks

A Co. Oct. 1 6 mos. 18% P 57,416 Four notes to
Oct. 1 12 mos. 18% 100,000 settle past due
Oct. 1 18 mos. 18% 100,000 account.
Oct. 1 24 mos. 18% 100,000 Current billings
are on a 10 –
day credit basis.
B Co. July 1 36 mos. 18% 500,000 This note is for a
cash loan made
to this customer.
No interest has
been collected
to date.
C Co. Oct. 1 4 mos. 15% 251,636 All interest
collected on
Oct. 1.
Mr. Pogi Feb. 1 Demand 18% 1,000,000 Loan approved
(Compan in minutes book,
y Jan. 20. On
President) Aug. 1 this note
was pledged as
collateral for a
bank loan
P500,000.
D Co. Nov. 1 12 mos. 15% 546,387 Interest payable
at maturity
E, Inc. Dec. 10 90 days 18% Interest payable
381,476 at maturity
P3,036,915

All of the above notes are considered good except that of A Company which is somewhat
doubtful. An allowance of 25% should be established against the notes receivable of this
company.

QUESTIONS:

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

1. Adjusted balance of Trade Notes Receivable as of December 31, 2020

2. Net realizable value of Trade Notes Receivable as of December 31, 2020
3. Interest income for the year ended December 31, 2020
4. Accrued interest income as of December 31, 2020

Solution:

Question No. 1

Unadjusted Trade Notes Receivable P3,036,915

Less Non-Trade Notes Receivable:
B Company (Cash Loan) P 500,000
Mr. Pogi (Loan to officer) 1,000,000 1,500,000
Adjusted Trade Notes Receivable P1,536,915

Question No. 2

Adjusted Trade Notes Receivable P1,536,915

Less allowance for doubtful accounts
(P357,416 x 25%) 89,354
Net realizable value P1,447,561

Questions No. 3 & 4

Interest
Maker Date Amount Rate Income AIR
A Co. Oct. 1 P 57,416 18% P 2,584 P 2,584
Oct. 1 100,000 18% 4,500 4,500
Oct. 1 100,000 18% 4,500 4,500
Oct. 1 100,000 18% 4,500 4,500
B Co. Jul. 1 500,000 18% 45,000 45,000
C Co. Oct. 1 251,636 15% 9,436 -
Mr. Feb. 1 1,000,000 18% 165,000 165,000
Pogi
D Co. Nov. 1 546,387 15% 13,660 13,660
E, Inc. Dec. 10 381,476 18% 4,005 4,005
P253,185 P243,749

Loans Receivable
Loans receivable are receivables arising from loans extended by financial institutions, such as
banks, financing companies, and lending institutions. Loans receivable are also supported by
promissory notes and are generally backed by collateral securities or postdated checks.

The accounting treatment for a loan receivable is the same as that of a notes receivable.

Illustrative Problem: Measurement of loans receivable; computation of effective interest rate

PNB Bank granted a loan to a borrower in the amount of P5,000,000 on January 1, 2020. The
interest rate on the loan is 10% payable annually starting December 31, 2020. The loan
matures in five years on December 31, 2024. 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.

QUESTIONS:

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, 2020 is

2. The effective interest rate of the loan is
3. The interest income to be recognized in 2020 is
4. The carrying amount of the loan as of December 31, 2020 is

Solution:

Question No. 1

Principal P5,000,000
Origination fee (P5,000,000 x 8%) (400,000)
Direct loan origination cost 39,400
Carrying amount, 1/1/2020 P4,639,400

Question No. 2

 The effective interest rate may be estimated using the straight line amortization method,
using the following steps:
1. Compute the nominal interest income (P5,000,000 x 10% = P500,000)
2. Compute the straight line amortization of the discount
(P360,600/5 = P72,120)
3. Get the effective interest income, i.e. the total of the nominal interest and the
amortization of the unearned interest income
(P500,000 + P72,120 = P572,120)
4. Using effective interest method, the effective interest income is arrived at by multiplying
the previous carrying amount by the effective interest rate. Therefore, rearranging the
formula, the effective interest rate is effective interest income divided by the previous
carrying amount.
5. Applying the formula, the rough estimate of the effective interest rate is 12.33%
(P572,120/P4,639,400).
6. Take note that 12.33% is not yet the effective interest rate. This only suggests that the
effective interest rate is somewhere between 12% and 13%. Therefore, to find the
effective interest rate, you can start at 12%.
PV of principal (P5,000,000 x 0.5674) P2,837,000
PV of interest (P5,000,000 x 10% x 3.6048) 1,802,400
Total P4,639,400

The effective interest rate is 12% since it exactly discounts estimated future cash receipts over
the term of the loan to the net carrying amount of the loans receivable.
Trial and error method using the interest rates given in the choices:

Another way to find the effective interest rate is to discount the cash flows using the interest
rates given in the choices until you arrive at the carrying amount of loans receivable of
P4,639,400.

Question Nos. 3 & 4

Effective Nominal Carrying

Date interest Interest Amortization amount
01/01/2020 P4,639,400
12/31/2020 P556,728 P500,000 P56,728 4,696,128
12/31/2021 563,535 500,000 63,535 4,759,663
12/31/2022 571,160 500,000 71,160 4,830,823
12/31/2023 579,699 500,000 79,699 4,910,522
12/31/2024 589,478 500,000 89,478 5,000,000
 ODULE # 4 Post-test
APPLIED AUDITING
AUDIT OF RECEIVABLES

PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. Your audit of Kaila Corporation for the year ended December 31, 2020 revealed that the
Accounts Receivable account consists of the following:

Trade accounts receivable (current) P3,440,000

Past due trade accounts 640,000
Uncollectible accounts to be written off 128,000
Credit balances in customers’ accounts (80,000)
Notes receivable dishonored 240,000
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, 2021. 320,000
Total 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 2020 bad debt expense.

Based on the above and the result of your audit, determine the adjusted balance of following:

1. Trade accounts receivable

a. P4,080,000 c. P4,464,000
b. P3,440,000 d. P3,584,000

2. Allowance for doubtful accounts

a. P204,000 c. P172,000
b. P216,000 d. P179,200

3. Doubtful accounts expense

a. P264,000 c. P252,000
b. P220,000 d. P227,200

2. The accounts receivable subsidiary ledger of Jerome Corporation shows the following
information:
Dec. 31, 2020 Invoice
Customer Account balance Date Amount
Maybe, Inc. P140,720 12/06/2020 P56,000
11/29/2020 84,720
Perhaps Co. 83,680 09/27/2020 48,000
 08/20/2020 35,680
Pwede Corp. 122,400 12/08/2020 80,000
10/25/2020 42,400
Perchance Co. 180,560 11/17/2020 92,560
10/09/2020 88,000
Possibly Co. 126,400 12/12/2020 76,800
12/02/2020 49,600
Luck, Inc. 69,600 09/12/2020 69,600
Total P723,360 P723,360

The estimated bad debt rates below are based on the Corporation’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 Doubtful Accounts had a credit balance of P14,000 on December 31, 2020,
before adjustment.

Based on the foregoing, answer the following:

1. How much is the adjusted balance of the allowance for doubtful accounts as of December
31, 2020?
a. P52,795 b. P24,795
c. P38,795 d. P14,000

2. The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of
December 31, 2020 would include:
a. No adjusting journal entry is necessary.
b. A debit to retained earnings of P24,795.
c. A debit to doubtful accounts expense P38,795.
d. A credit to allowance for doubtful accounts of P24,795.

3. The financial statements of Bulls Corporation included the following:

December 31, 2019 December 31, 2020

Accounts Receivable P 735,000
Allowance for doubtful accounts 16,200
Sales on account P 4,500,000
Cash collected from customers 4,200,000

Among the cash collections was the full recovery of a 16,000 receivable from Robert Jawo, a
customer whose account had been written off as worthless late in 2019.

During 2020, it was necessary to write off uncollectible customers’ accounts totaling 20,200.

On December 1, 2020, a customer settled his account by issuing to Bulls Corporation a 9% six-
month note for 250,000.
 At December 31, 2020, the accounts receivable included 100,800 past due accounts. After
careful study of all past due accounts, the management estimated the probable loss contained
therein was 10%. In addition, 2% of the current accounts’ receivable might prove uncollectible.

1. What is the balance of Accounts Receivable as of Dec. 31, 2020?

a. 780,800
b. 801,000
c. 821,200
d. 1,051,000

2. What is the amount of the current accounts receivable that might prove to be uncollectible?
a. 13,600
b. 14,004
c. 14,408
d. 19,004

3. What is the balance of the allowance for uncollectible accounts before adjustments on
December 31, 2020?
a. 4,000
b. 12,000
c. 12,200
d. 32,200

4. What is the balance of the allowance for uncollectible accounts after all necessary adjusting
entries on December 31, 2020?
a. 10,080
b. 12,084
c. 14,004
d. 23,680

4. Presented below is information related to the Accounts Receivable accounts of Ramil, Inc.
during the current year 2020.

a. An aging schedule of the accounts receivable as of December 31, 2020 is as follows:

% to be Applied After Correction
Age Net Debit Balance
Made
Under 60 days P175,000 1%
61 – 90 days 80,000 3%
91 – 120 days 42,000 6%
Over 120 days 24,000 P4,200 definitely uncollectible
remainder estimated 25%
uncollectible

b. The Accounts Receivable control account has a debit balance of P321,000 on December 31,
2020.

c. Two entries were made in the Uncollectible Accounts Expense account during the year: (1) a
debit on December 31 for the amount credited to Allowance for Uncollectible Accounts as
provisions, (2) and a credit of 2,740 because of customer bankruptcy to write off which is
related to the 91-120 day category.
 d. The Allowance for Uncollectible Accounts is as follows for 2020:

Date Particulars Debit Credit Balance

Jan. 1 Beginning balance 8,750
Nov. 3 Write off P2,740 6,010
Dec. 31 Provision (5% of P16,050 22,060
P321,000)

e. A credit balance exists in the Accounts Receivable (61 – 90 days) of P4,800, which
represents an advance on a sales contract.

1. Compute the correct balances of Accounts Receivable at December 31, 2020.

a.)318, 860 b.)314, 060
c.) 325, 800 d.) 323, 060

2. Compute the correct amount of Uncollectible Accounts Expense for the year 2020.
a.)16, 050 b.)9,789 c.) 7, 049 d.) 16, 831

5. On January 2, 2020, a tract of land that originally cost P800,000 was sold by Angel
CORPORATION. The company received a P1,200,000 note as payment. It bears interest rate
of 4% and is payable in 3 annual installments of P400,000 plus interest on the outstanding
balance. The prevailing rate of interest for a note of this type is 10%. The present value table
shows the following present value factors of 1 at 10%:

Present value factor of 1 for 3 periods 0.75132

Present value factor of 1 for 2 periods 0.82645
Present value factor of 1 for 1 period 0.90909
Present value of an ordinary annuity of 1 for 3 periods 2.48685

1. The gain on sale of land on January 2, 2020 is:

a. P 194,740 b. P 276,847 c. P 290,740 d. P 400,000

2. The interest income on the note receivable for the year ended December 31, 2020 using
effective interest method is:
a. P 120,000 b. P 109,074 c. P 107,685 d. P 99,474

3. How much cash will MYLENE CORPORATION received from notes receivable?
a. P 1,076,847 b. P 1,200,000 c. P 1,296,000 d. P 1,476,847

6. The Cleo Company included the following in its notes receivable as of December 31, 2020:

Note receivable from sale of land P 880,000

Note receivable from consultation 1,200,000
Note receivable from sale of equipment 1,600,000

In connection with your audit, you were able to gather the following transactions during 2020
and other information pertaining to the company’s notes receivable:
  On January 1, 2020, Cleo Company sold a tract of land. The land, purchased 10 years ago,
was carried on Cleo Company’s books at a value of 500,000. Cleo received a noninterest-
bearing note for 880,000. The note is due on December 31, 2021. There is no readily
available market value for the land, but the current market rate of interest for comparable
notes is 10%.

 On January 1, 2020, Cleo Company finished consultation services and accepted in

exchange a promissory note with a face value of 1,200,000, a due date of December 31,
2022, and a stated rate of 5%, with interest receivable at the end of each year. The fair
value of the services is not readily determinable and the note is not readily marketable.
Under the circumstances, the note is considered to have an appropriate imputed rate of
interest of 10%.

 On January 1, 2020, Cleo Company sold equipment with a carrying amount of 1,600,000 to
X Company. As payment, X gave Cleo Company a 2,400,000 note. The note bears an
interest rate of 4% and is to be repaid in three annual installments of 800,000 (plus interest
on the outstanding balance). The first payment was received on December 31, 2020. The
market price of the equipment is not reliably determinable. The prevailing rate of interest for
notes of this type is 14%.

Based on the above and the result of your audit, answer the following: (Round off present value
factors to four decimal places and final answers to nearest hundred)

1. The consultation service fee revenue that should be recognized in 2020 is

a. 1,050,800 c. 901,600
b. 1,095,800 d. 1,200,000

2. The gain on sale of equipment that should be recognized in 2020 is

a. 331,600 c. 412,400
b. 257,280 d. 800,000

3. The noncurrent notes receivable as of December 31, 2020 is

a. 2,605,706 c. 2,494,000
b. 1,825,800 d. 2,625,700

4. The current portion of long-term notes receivable as of December 31, 2020 is

a. 1,600,000 c. 1,468,200
b. 1,680,000 d. 800,000

5. The interest income to be recognized in 2020 is

a. 464,000 c. 459,500
b. 435,800 d. 156,000

7. 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
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

8. Ramil Company assigned specific accounts receivable totaling 3,100,000 as collateral on a

2,500,000, 12% note from a certain bank on December 1, 2020,. The entity will continue to
collect the assigned accounts receivable. In addition to the interest on the note, the bank also
charged a 5% finance charge deducted in advance on the 2,500,000 value of the note. The
December collections of assigned accounts receivable amounted to 1,000,000 less cash
discounts of 50, 000. On December 31, 2020, the entity remitted the collections to the bank in
payment for the interest accrued on December 31, 2020 and the note payable.

1. What is the carrying amount of note on December 31, 2020?

a. 1, 550, 000
b. 1, 575, 000
c. 1, 600, 000
d. 1, 757, 000

2. What amount should be disclosed as the equity of Ramil Company in assigned accounts on
December 31, 2020?
a. 425, 000
b. 475, 000
c. 495, 000
d. 525, 000

3. What amount of cash was received from the assignment of accounts receivable on
December 1, 2020?
a. 2, 000, 000
b. 2, 150, 0000
c. 2, 375, 0000
d. 3, 100, 000

9. During your audit of the Joshtin COMPANY for the calendar year 2020, you find the following
accounts:
NOTES RECEIVABLE
Sept. 1 Samson, 12%, due in 3 mos. 36,000 36,000
Nov. 1 Hazel, 15%, due in 6 mos. 90,000 126,000
Nov. 1 Salazar, no interest, due in one
year 75,000 201,000
Nov. 30 Rosa, Co. 12%, due in 13 mos. 15,000 216,000
Dec. 1 Rona, 15%, due in 15 mos. 36,000 252,000
Dec. 2 Anito, President, 18%, due in 3
mos. 18,000 270,000

NOTES RECEIVABLE DISCOUNTED

 Sept. 1 Samson note, discounted at 15% 36,000 36,000
Nov. 1 Salazar note, discounted at 15% 75,000 111,000

INTEREST EXPENSE
Sept. 1 Samson note 310.50 310.50
Nov. 1 Salazar note 11,250.00 11,560.50

All notes are trade notes receivable unless otherwise specified. The Samson note was paid
December31, 2020. Interest income is credited only upon receipt of cash.

1. The accrued interest income at December 31, 2020 is:

a. 2,748 b. 3,018 c. 3,120 d. 4,200

2. The interest expense at December 31, 2020 is:

a. 1,875.00 b. 2,185.50 c. 4,060.50 d. 11,560.50

3. The Notes Receivable at December 31, 2020 is:

a. 141,000 b. 159,000 c. 216,000 d. 252,000

4. The Notes Receivable – discounted at December 31, 2020 is:

a. 63,750 b. 73,125 c. 75,000 d. 111,000

5. How much is the proceeds in the discounting of notes receivable for the year?
a. 99,439.50 b. 100,060.50 c. 111,000.00 d. 111,310.50

10. Montreal Bank granted a loan to a borrower on January 1, 2020. The interest rate on the loan is
10% payable annually starting December 31, 2020. The loan matures in five years on
December 31, 2020. The data related to the said loan are:

 Principal Amount 8,000,000

 Origination fee received from the borrower 1,250,000
 Direct organization cost incurred 50,000

The effective rate on the loan after considering the direct organization cost incurred and the
origination fee is 15%.

1. What is the carrying amount of the loan receivable on January 1, 2020?

a. 3,544,000
b. 4,600,000
c. 5,504,000
d. 6,800,000

2. What is the interest income for 2020?

a. 1,709,000
b. 1,907,000
c. 1,020,000
d. 2,000,000

3. What is the carrying amount of the loan receivable on December 31, 2020?
a. 7,020,000
b. 8,000,000
 c. 6,200,000
d. 5,100,000

11. Scotia Bank loaned 5,000,000 to MIJA Company on January 1, 2018. The terms of the loan
require principal payments of 1,000,000 each year for 5 years plus interest at 8%. The first
principal and interest payment is due on January 1, 2019. MIJA Company made the required
payments during 2019 and 2020. However, during 2020 MIJA Company began to experience
financial difficulties, requiring Scotia to reassess the collectibility of the loan. On December 31,
2020, Scotia Bank determines that the remaining principal payment will be collected but the
collection of the interest is unlikely. The present value of 1 at 8% is as follows:
For one period 0.93
For two periods 0.86
For three periods 0.79
Q1. What is the loan impairment loss on December 31, 2020?
a. 420,000
b. 210,000
c. 630,000
d. 0

Q2. What is the interest income to be reported by Scotia Bank in 2021?

a. 223,200
b. 143,200
c. 240,000
d. 0

12. You are engaged to perform an audit of the accounts of the Montreal CORPORATION for the
year ended December 31, 2020, and have observed the taking of the physical inventory of the
company on December 27, 2020. Only merchandise shipped by the Montreal Corporation to
customers up to and including December 27, 2020 have been removed or excluded 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.

The following lists of sales invoices are entered in the sales books for the months of December
2020 and January 2021, respectively.

Sales Invoices
Date Amount Date Shipped

December 2020 (a) 12/23/2020 P 25,000 12/31/2020

(b) 12/27/2020 18,000 12/27/2020
(c) 12/30/2020 30,000 01/05/2021
(d) 12/22/2020 12,000 01/08/2021
(e) 12/28/2020 16,000 12/29/2020
(f) 12/03/2020 8,000 12/05/2020
(g) 12/31/2020 20,000 01/07/2021
(h) 12/31/2020 14,000 12/31/2020

January 2021 (i) 12/31/2020 7,500 12/29/2020

(j) 12/27/2020 11,000 01/04/2021
(k) 01/08/2021 9,000 01/09/2021
 (l) 01/10/2021 5,000 12/31/2020

1. How much sales for month of December 2020 were erroneously recorded in January 2021?
a. 7,500 b. 12,500 c. 18,500 d. 20,000

2. How much sales for the month of January 2021 were erroneously recorded in December
2020?
a. Zero b. 12,500 c. 20,000 d. 62,000

3. How much is the correct amount of sales for the month ended December 31, 2020?
a. 143,000 b. 155,500 c. 93,500 d. 81,000