Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

AUDIT OF RECEIVABLES
Accounting 152

PROBLEM 1 – Trade and Other Receivable

During the annual audit of Kahapon Company, you encountered the following account,
entitled “Receivables and Payables”:
Debit Credit
Due from customers P156,000
Payable to creditors for merchandise P62,000
Note receivable, long term 80,000
Expected cumulative losses on bad debts 4,000
Due from employees, current 2,200
Cash dividends payable 24,000
Special receivable, dishonored* 22,000
Accrued wages 2,400
Rent received in advance 1,600
Insurance premium paid in advance 1,200
Mortgage payable 40,000
*Collection probable in a year.
Based on your audit, what is the amount to be reported as trade and other receivables in the
year-end statement of financial position? Answer: P176,200.

PROBLEM 2 – Trade and Other Receivables

When examining the accounts of Brute Company, it is ascertained that balances relating to
both receivables and payables are included in a single controlling account called Receivables
Control that has a debit balance of P4,850,000. An analysis of the makeup of this account
revealed the following:
Debit Credit
Accounts receivable – customers P 7,800,000
Accounts receivable – officers 500,000
Debit balances – creditors 300,000
Postdated checks from customers 400,000
Subscriptions receivable 800,000
Accounts payable for merchandise P 4,500,000
Credit balances in customers’ accounts 200,000
Customer’s deposit 100,000
Expected bad debts 150,000
After further analysis of the aged accounts receivable, it is determined that the allowance for
doubtful accounts should be P200,000. Based on your audit, what amount should be
presented as “Trade and other receivables, net” under current assets? Answer:
P8,800,000.

PROBLEM 3 – Trade and Other Receivables

On December 31, 2010, the “Receivables” account of Banayoyo Company shows a debit
balance of P6,732,620. Subsidiary details show the following:

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 Accounts known to be worthless P 23,580
The Trade accounts receivable – assigned, equity in
assigned accounts is P50,000 250,000
Trade accounts receivable – unassigned 1,874,500
Trade notes receivable 775,000
Trade installment receivable normally due 1-2 years,
including unearned finance charges of P30,000 300,000
Trade accounts on which postdated checks are held, no
entries were made upon receipt 50,000
Past due trade accounts receivable 123,450
Customers’ accounts reporting credit balance arising
from sales return (15,000)
Trade accounts receivables from officers due currently 20,000
Advance payments for purchase of merchandise 213,640
Notes receivable dishonored 82,300
Customers’ accounts reporting credit balance arising
from advance payments (27,820)
Creditor's accounts reporting debit balances 18,900
Consignment shipments – at cost 320,000
Advances to employees and officers, due in 6 months 77,500
Cash advances to subsidiary 1,250,800
Claims from insurance company 33,570
Special deposits on contract bids 750,000
Subscriptions receivable, due in 30 days 286,260
Subscriptions receivable, due in 15 months 311,500
Accrued interest receivable 14,440
consignee sold goods costing P96,000 for P160,000. A 10% commission was charged by the
consignee and remitted the balance to Banayoyo. The cash was received in January 2011.
The balance of the allowance for doubtful accounts before any adjustments was P50,000.
Proper aging analysis at year-end showed P75,000 of the accounts is doubtful of collection.
Based on the above and the result of your audit, answer the following questions:
1. The trade accounts receivable of Banayoyo as of December 31, 2010 is: Answer:
P2,814,250.
2. The doubtful accounts expense for 2010 is: Answer: P48,580.
3. Banayoyo’s trade receivables, net of necessary allowances as of December 31, 2010 is:
Answer: P3,514,250.
4. How much should be presented as “Trade and other receivables, net” under current
assets at December 31, 2010? Answer: P4,158,560.
5. How much of the foregoing will be presented under non-current assets at December 31,
2010? Answer: P2,000,800.

PROBLEM 4 – Accounts Receivable

Presented below are unaudited balances of selected accounts of Lazy Company as of
December 31, 2011:
Debit Credit
P
Cash 250,000
Accounts receivable 650,000
Allowance for bad debts 4,000
P
Net sales 3,375,000
Additional information follows:
A. Goods amounting to P25,000 were invoiced for the accounts of Vase Company,
recorded on January 2, 2012 with terms of n/60, FOB shipping point. The goods were
shipped to Vase Co. on December 30, 2011.
B. The bank returned on December 29, 2011 a customer’s check for P2,500 marked “No
Sufficient Funds” but no entry was made.
C. Lazy Company estimated that allowance for bad debts should be 1.5% of the
accounts receivable balance as of year-end. No provision has yet been made for
2011.
Based on the above and the result of your audit, answer the following questions:
1. What is the adjusted balance of the accounts receivable on December 31, 2011?
2. What is the adjusted balance of the allowance for bad debts on December 31, 2011?

PROBLEM 5 – Transactions Affecting Accounts Receivable

The January 1, 2011 statement of financial position of Francis, Inc. shows the following
balances:

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 Accounts receivable P 2,000,000
Allowance for doubtful accounts 100,000
Additional information for 2011 follows:
A. Cash sales of the company amount to P800,000 representing 10% of gross sales.
B. 90% of the credit sales customers do not take advantage of the 5/10, n/30 credit
terms.
C. Customers who did not take advantage of the discount paid P5,940,000.
D. It is expected that cash discounts of P10,000 will be taken on accounts receivable
outstanding at December 31, 2011.
E. Sales returns in 2011 amounted to P80,000. All returns were from charge sales.
F. During 2011, accounts totaling P60,000 were written off as uncollectible. Recoveries
during the year amounted to P10,000. This amount is not included in the foregoing
collections.
G. The allowance for doubtful accounts is adjusted so that it represents a certain
percentage of the outstanding receivable at year-end.
Based on the above and the result of your audit, answer the following questions:
1. The accounts receivable as of December 31, 2011 is: Answer: P2,400,000.
2. The allowance for doubtful accounts as of December 31, 2011 is: Answer: P120,000.
3. What is the net realizable value of Francis, Inc.’s accounts receivable on December 31,
2011? Answer: P2,270,000.
4. What is the doubtful accounts expense for 2011? Answer: P70,000.

PROBLEM 6 – Accounts Receivable

To substantiate the existence of accounts receivable balances as at December 31, 2012 of
Clippers Company, you have decided to send confirmation requests to customers. Below is a
summary of the confirmation requests to customers and replies from them together with the
exceptions and audit findings. Gross profit on sales is 20%. The company is using the
perpetual inventory system.
Balance Customer’s Com-
Customer Audit Findings
per Books ments
Paul P 50,000 P30,000 was returned Returned goods were
on 1/2/2013. Correct received 1/5/2013.
balance is P20,000.

Your credit memo rep-

Griffin 10,000 The credit memo was
resenting price adjust-
taken up by Clippers
ments dated
in 2013.
12/29/2012 cancels
this.

Billups 48,000 You have overpriced The complaint is valid.

us by P50. Correct
price should be P100.

Jordan 37,500 We received the goods Term is shipping point.

only on 1/5/2013. Shipped in 2012.

Butler 45,000 Clippers credited ac-

Balance was offset by counts payable for
our December ship- P45,000 to record pur-
ment of raw materials. chases. Butler is a
supplier.
Based on the above and the result of your audit, answer the following questions:
1. If the necessary adjusting journal entry is made regarding the case of Mr. Paul, the
net income will increase (decrease) by: Answer: Decrease by P6,000.
2. The effect on the 2012 net income of Clippers Company of its failure to record the
credit memo involving transactions with Mr. Griffin is: Answer: P10,000
overstated.
3. The overstatement of receivable from Mr. Billups is: Answer: P16,000.
4. The accounts receivable from Mr. Jordan is overstated (understated) by: Answer:
Correctly stated.
5. The adjusting journal entry to correct the receivable from Mr. Butler is:
Answer: Accounts payable P40,000
Accounts receivable P40,000

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 6. Assuming that the accounts confirmed are the only receivables of Clippers, what is
the amount of adjusted accounts receivable that will be presented in the December
31, 2012 statement of financial position? Answer: P89,500.

PROBLEM 7 – Accounts Receivable

Cardis Corporation has the following data relating to accounts receivable for the year ended
December 31, 2010:
Accounts receivable, January 1, 2010 P 480,000
Allowance for doubtful accounts, January 1, 2010 19,200
Sales during the year (all on account, terms 2/10, 1/15,
n/60) 2,400,000
Cash received from customers during the year 2,560,000
Accounts written off during the year 17,600
An analysis of cash received from customers during the year revealed that the P1,421,000
was received from customers availing the 10-day discount period, P891,000 from customers
availing the 15-day discount period, P4,800 represented recovery of accounts written off and
the balance was received from customers paying beyond the discount period. Cardis’ year-
end balance of allowance for doubtful accounts is adjusted so that it represents a certain
percentage of the outstanding receivable at year-end. The required percentage at December
31, 2010 is 150% of the rate used on December 31, 2009. Based on the above and the result
of your audit, answer the following questions:
1. The accounts receivable at December 31, 2010 is: Answer: P269,200.
2. The allowance for doubtful accounts at December 31, 2010: Answer: P16,152.
3. The doubtful accounts expense for the year ended December 31, 2010 is: Answer:
P9,752.

PROBLEM 9 – Accounts Receivable

In connection with your examination of the financial statements of Faria Company for the
year ended December 31, 2012, you were able to obtain certain information during your au-
dit of the accounts receivable and related accounts as follows:
A. The December 31, 2012 balance of the accounts receivable control accounts is
P1,576,000.
B. The only entries in the doubtful accounts expense account were:
 A credit of P2,592 on December 2, 2012 because Company A remitted in full
for the accounts charged off on October 31, 2012.
 A debit on December 31 for the amount of the credit to the allowance for
doubtful accounts.
C. The allowance for doubtful accounts schedule is presented below:
Debit Credit Balance
January 1, 2012 P 29,264
October 31, 2012
Uncollectible accounts
Company A – P2,592
Company B – P6,560
Company C – P4,512 P 12,064 17,200
December 31, 2012 P 78,800 P 96,000
D. An aging schedule of the accounts receivable as of December 31, 2012 is presented
below:
Amount to Which the Allowance
is to be Adjusted After
Net Debit Adjustments and Corrections
Age Balance Have Been Made
0 to 1 Month P 745,920 1 percent
1 to 3 Months 614,560 2 percent
3 to 6 Months 177,440 3 percent
Over 6 Months 48,000 Definitely uncollectible, P8,000;
P16,000 is considered 50%
uncollectible; remainder is
estimated to be 80% collectible.
E. There is a credit balance in one account receivable (0 to 1 month) of P16,000. It rep-
resents an advance on a sales contract. Also, there is a credit balance in one of the 1
to 3 months account receivable of P4,000 for which merchandise will be accepted by
the customer.
F. The ledger accounts have not been closed as of December 31, 2012. The accounts
receivable control account is not in agreement with the subsidiary ledger. The differ-

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 ence cannot be located, so you decided to adjust the control account to the sum of
the subsidiaries after corrections are made.
Based on the above and the result of your audit, answer the following:
1. How much is the adjusted balance of accounts receivable as of December 31, 2012?
Answer: P1,597,920
2. How much is the adjusted balance of the allowance for doubtful accounts as of Decem-
ber 31, 2012? Answer: P38,113.
3. How much is the net adjustment to the allowance for doubtful account? Answer:
P57,887 debit.
4. How much is the doubtful accounts expense for the year 2012? Answer: P27,921.
5. How much is the net adjustment to the doubtful accounts expense account? Answer:
P48,287 credit.

PROBLEM 10 – Cash and Accounts Receivable

The adjusted trial balance of Arabia Company on December 31, 2010, includes the following
cash and receivables balances:
Debit Credit
Cash – Allied Bank P 450,000
Currency on hand 160,000
Petty cash fund 10,000
Cash in bond sinking fund 150,000
Notes receivable* 365,000
Accounts receivable 856,000
Allowance for doubtful accounts 41,500
Interest receivable 5,250
*Including notes discounted with recourse, P155,000.
Current liabilities reported in December 31, 2010, statement of financial position included an
obligation on discounted notes receivable for P155,000. Transactions during 2011 included
the following:
A. Sales on account during the year were P7,670,000. Cash collected on the accounts
totaled P5,765,000, including accounts of P930,000 with cash discounts of 2% while
notes received in settlement of accounts totaled P825,000.
B. Notes receivable discounted as of December 31, 2010, were paid at maturity with the
exception of one P30,000 note on which the company had to pay the bank P30,900,
which include interest and protest fees. It is expected that recovery will be made on
this note early in 2012.
C. Customer notes of P585,000 were discounted with recourse during the year, pro-
ceeds from their transfer being P585,000. (All discounting transactions were recorded
as loans). Of this total, P480,000 matured during the year without notice of protest.
D. Customer accounts of P87,200 were written off during the year as worthless. Also,
there were recoveries of bad debts written off in prior years worth P20,200.
E. Notes collected during the year totaled P270,000 and interest collected was P24,500.
On December 31, accrued interest on notes receivable was P6,300.
F. Cash of P350,000 was borrowed from Allied Bank with accounts receivable of
P400,000 being pledged on the loan. Collections of P195.000 had been made on
these receivables (included in the total given in transaction B), and this amount was
applied on December 31, 2011, to payment of accrued interest of the loan of P6,000,
and the balance to the partial payment of the loan.
G. The petty cash fund was reimbursed based on the following analysis of expenditure
vouchers:
Travel expense P 1,120
Entertainment expense 780
Postage expense 930
Office supplies expense 1,730
Cash short or over (income account) 60
H. Cash of P30,000 was added to the bond retirement fund and currency on hand at De -
cember 31, 2011, was P120,000.
I. Total cash payments for all expenses during the year were P6,800,000 which were
charged to general expenses.
J. Uncollectible accounts are estimated to be 5% of the December 31, 2011 accounts
receivable balance.
Based on the above and the result of your audit, answer the following questions:
1. The total cash to be reported in the company’s December 31, 2011 statement of finan-
cial position is: Answer: P574,300.
2. The doubtful accounts expense to be recognized for the year ended December 31, 2011
is: Answer: P117,010.
3. The net accounts receivable as of December 31, 2011 is: Answer: P1,738,690.

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4. The net trade and other receivables to be reported in the company’s December 31,
2011 balance sheet is: Answer: P2,060,890.

PROBLEM 11 – Accounts Receivable

In connection with the audit of the financial statements of Praktis Company, your audit
senior instructed you to examine the company’s accounts receivable. Prior to any
adjustments you were able to extract the following balances from Praktis’ trial balance as of
December 31, 2010:
Accounts receivable P 442,500
Allowance for doubtful accounts 15,000
From the schedule of accounts receivable as of December 31, 2010, you determined that
this account includes the following:
Accounts with debit balance
60 days old and below P 238,500
61 to 90 days 117,200
Over 90 days 85,400 P441,100
Advances to officers 16,400
Accounts with credit balances (15,000)
Accounts receivable per GL P442,500
The credit balance in customer’s account represents collection from a customer whose
account had been written-off as uncollectible in 2009. Accounts receivable for more than a
year totaling P21,000 should be written off. Confirmation replies received directly from
customers disclosed the following exceptions:
Custom Customer’s Comments Audit Findings
er
Jessie The goods sold on December The client failed to record Credit Memo No. 23
1 were returned on December for P12,000. The merchandise was included in
16, 2010. the ending inventory at cost.

Robert We do not owe this amount Investigation revealed that goods sold for
#### (bad word). We did not P16,000 were shipped to Robert on December
receive any merchandise 29, 2010, terms FOB Shipping point. The
from your company. goods were lost in transit and the shipping
company has acknowledged its responsibility
for the loss of merchandise.

Anne I am entitled to a 10 percent Anne is an employee of Praktis. Starting

employee discount. Your bill November 2010, all company employees were
should be reduced by P1,200. entitled to a special discount.

Jay-ar We have not yet sold the Merchandise billed for P18,000 were
goods. We will remit the consigned to Jay-ar on December 30, 2010.
proceeds as soon as the The goods cost P13,000.
goods are sold.

Roy We do not owe you P20,000. The sale of merchandise on December 18,
We already paid our accounts 2010 was paid by Roy on January 6, 2011.
as evidenced by O. R. #
1234.

Gay Reduce your bill by P1 500. This amount represents freight paid by the
customer for the merchandise shipped on
December 17, 2010, terms, FOB destination-
collect.
Based on your discussion with Praktis’ credit manager, you both agreed that an allowance
for doubtful accounts should be maintained using the following rates:
60 days old and below 1%
61 to 90 days 2%
Over 90 days 5%
Based on the above and the result of your audit, answer the following:
1. The adjusted balance of accounts receivable in the 60 days and below category as of
December 31, 2010: Answer: P205,800.

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2. The adjusted balance of accounts receivable as of December 31, 2010: Answer:
P387,400.
3. The adjusted allowance for doubtful accounts as of December 31, 2010: Answer: P7,622
4. Give the entry to adjust the allowance for doubtful accounts.
Answer: Allowance for doubtful accounts P1,378
Doubtful accounts expense P1,378

PROBLEM 12 – Accounts Receivable

In the audit of Bibo Company, the auditor had an appreciation of the following schedule and
noted some comments for possible adjustments:
Bibo Company
Accounts Receivable Schedule
December 31, 2011
Customer Balance Current Past Due
Love M. Do P 92,000 P 92,000
Strawberry Fields 420,000 P 248,000 172,000
This Boy Company 350,000 92,000 258,000
Girl Company 374,000 212,000 162,000
Ticket to Ride, Inc. 160,000 160,000
Let it Be 124,000 60,000 64,000
Corporation
Hey Jude 4,000 4,000
Get Back Company 256,000 80,000 176,000
Yesterday Company 240,000 240,000
Totals P P P 1,084,000
2,020,000 936,000
The external auditor submitted the following audit comments:
Customer Audit Findings and Comments
Love M. Do Merchandise found defective; returned by customer on
October 31, 2011 for credit, but the credit memo was
issued by Bibo only on January 15, 2012.

Strawberry Fields Account is good but usually pays late.

This Boy Company Merchandise worth P160,000 was destroyed.

Girl Company Customer billed twice in error for P40,000. Balance is

collectible.

Ticket to Ride, Inc. Collected in full on January 31, 2012.

Let It Be Corporation Paid in full on December 30, 2011 but unrecorded.

Collections were deposited on January 2, 2012.

Hey Jude Received account confirmation from customer for

P44,000. Investigation revealed an erroneous credit for
P40,000 (see Get Back Company).

Get Back Company Neglected to post P40,000 credit to customer’s account.

Yesterday Company Customer wants to know reason for receipt of P160,000

credit memo as their accounts payable was P400,000.

Based on the above and the result of your audit, what is the adjusted balance of the ac-
counts receivable account as of December 31, 2011? Answer: P1,604,000.

PROBLEM 13 – Accounts Receivable

The following information is based on the first audit of Merill Company. The client has not
prepared financial statements for 2009, 2010 or 2011. During these years, no accounts have
been written off as uncollectible, and the rate of gross profit on sales has remained constant
for each of the three years. Prior to January 1, 2009, the client used the accrual methods of
accounting. From January 1, 2009 up to December 31, 2011, only cash receipts and
disbursements records were maintained. When sales on account were made, they were

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entered in the subsidiary accounts receivable ledger. No general ledger postings have been
made since December 31, 2009. As a result of your examination, the correct data shown
below were available:
12/31/20 12/31/20
Accounts receivable balances: 08 11
P P
Less than 1 year old 77,000 141,000
1 to 2 years old 6,000 9,000
2 to 3 years old 4,000
Over 3 years old 11,000
P P
Total accounts receivable 83,000 165,000
P P
Inventories 58,000 94,000
Accounts payable for inventory purchased 25,000 55,000
2009 2010 2011
Cash received applied to:
P P P
Current year sales 744,000 809,000 1,044,000
Accounts of prior year 67,000 75,000 84,000
Accounts of two years prior 3,000 2,000 10,000
P P P
Cash sales 85,000 130,000 156,000
Payments of accounts payable 625,000 706,000 869,000
Based on the above and the result of your audit, answer the following questions:
1. Compute for the total sales for each year – 2009, 2010 and 2011. Answer: P918,000;
P1,032,000; P1,341,000.
2. Compute for the total purchases of Merill from 2009, 2010 and 2011. Answer:
P2,230,000.
3. Compute for the total cost of sales of Merill from 2009, 2010 and 2011. Answer:
P2,194,000.
4. Compute for the total gross profit for each year – 2009, 2010 and 2011. Answer:
P306,000; P344,000; P447,000.

PROBLEM 14 – Accounts Receivable

In connection with your examination of the financial statements of Xexe Company for the
year ended December 31, 2009, you were able to obtain certain information during your
audit of the accounts receivable and related accounts as follows:
A. The December 31, 2009 balance in the accounts receivable control account is
P837,900.
B. An aging schedule of the accounts receivable as of December 31, 2009 is presented
below:
Net Debit Percentage
Age Balance Uncollectible
60 days and under P 387,800 1%
60 to 90 days 307,100 2%
91 to 120 days 89,800 5%
Over 120 days 53,200 Definitely uncollectible
P9,000; balance, 25%
uncollectible.
C. Two entries were made in the bad debts expense account:
 A debit on December 31, 2009 for the amount of the credit to the allowance
for bad debts account.
 A credit for P6,100 on November 30, 2009 and a debit to allowance for bad
debts account because of bankruptcy. The related sales took place on October
1, 2009.
D. The allowance for bad debts schedule is presented:
Debit Credit Balance
January 1, 2009 P 19,700
November 30, 2009 P 6,100 13,600
P
December 31, 2009 41,895* P 55,495
* P837,900 times 5%.
E. There is a credit balance in one account receivable (61 to 90 days) of P11 000. It
represents an advance on a sales contract.

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Based on the above and the result of your audit, answer the following questions:
1. How much is the adjusted balance of the accounts receivable account? Answer:
P833,800.
2. How much is the adjusted balance of the allowance for bad debts? Answer: P25,475.
3. How much is the bad debts expense for the year? Answer: P20,875.
4. The net adjustment to the bad debts accounts expense account is a debit (credit) of:
Answer: P14,920 credit.

PROBLEM 15 – Accounts Receivable

You were able to obtain the following information from your audit of Magsingal Corporation’s
accounts receivable and allowance for doubtful accounts:
A. From the general ledger, you noted that the accounts receivable has a balance of
P848,000 as of December 31, 2010. Below is a transcript of the allowance for doubt-
ful accounts:
Debit Credit Balance
January 1 – Balance P 20,000
July 31 – Write off P 16,000 4,000
December 31 – Provision P 48,000 P 52,000
B. The summary of the subsidiary ledger as of December 31, 2010 was totaled as fol-
lows:
Debit Credit
balances: balances:
Under 1 month P 360,000 Alien Ah P 8,000 a
1 to 6 months 368,000 T. Twister 14,000 b
Over 6 months 152,000 Dee Lah 18,000 c
P
Total P 880,000 Total 40,000
a – OK, additional billing in January 2011; c – Advances on sales contracts.
b – Should have been credited to Apol; account is in one to six months classification.
C. The customer’s ledger is not in agreement with the accounts receivable control. The
client requested you to adjust the control account to the subsidiary ledger after cor-
rections are made.
D. It is agreed that 1 percent is adequate for accounts under one month. Accounts one
to six months are expected to require a reserve of 2%. Accounts over six months are
analyzed as follows:
Definitely bad P 48,000
Doubtful (50% collectible) 24,000
Apparently good, but slow (90% collectible) 80,000
P
Total 152,000
Based on the above and the result of your audit, answer the following questions:
1. How much is the adjusted balance of the accounts receivable as of December 31, 2010?
Answer: P818,000.
2. How much is the adjusted balance of the allowance for doubtful accounts as of Decem-
ber 31, 2010? Answer: P30,680.
3. How much is the doubtful accounts expense for the year 2010? Answer: P74,680.
4. The total unlocated difference between the accounts receivable control account and the
subsidiary ledgers is: Answer: P8,000.

PROBLEM 16 – Accounts Receivable

Your audit client, Troy Corporation provided for uncollectible accounts receivable under the
allowance method since the start of its operations to December 31, 2011. 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. Troy
Corporation’s usual credit terms are net 30 days.
The balance in the allowance for doubtful accounts was P65,000 at January 1, 2011. During
2011, credit sales totaled P4,500,000, interim provisions for doubtful accounts were made at
2% of credit sales, P45,000 of bad debts were written off and recoveries of accounts
previously written off amounted of P7,500. Troy Corporation installed a computer facility in
November 2011 and an aging of accounts receivable was prepared for the first time as of
December 31, 2011. A summary of the aging is as follows:
Classification Percentage of
(By month of sale) Amount Uncollectability
P
November to December 570,000 2%
July to October 300,000 15%

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 January to June 200,000 25%
Prior to January 1, 2011 65,000 80%
Based on the review of collectibility of the account balances in the over “Prior to January 1,
2011” category, additional receivables totaling P30,000 were written off as of December 31,
2011. Effective with the year ended December 31, 2011, Troy 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. Based on the above and the result of your
audit, answer the following questions:
1. How much is the adjusted balance of the allowance for doubtful accounts as of
December 31, 2011? Answer: P134,400.
2. How much is the doubtful accounts expense for the year 2011? Answer: P136,900.
3. The recorded allowance for doubtful accounts should be increased (decreased) by: An-
swer: P46,900 increase.

PROBLEM 17 – Accounts Receivable

From inception of operation in 2007, Peter Co. carried no allowance for doubtful accounts.
Uncollectible receivables were expenses as written off and recoveries were credited to
income as collected. On March 1, 2011 (after the 2010 financial statements were issued),
management recognized that Peter’s accounting policy with respect to doubtful accounts
was not correct and determined that an allowance for doubtful accounts was necessary. A
policy was established to maintain an allowance for doubtful accounts based on Peter’s
historical bad debt loss percentage applied to year end accounts receivable. The historical
bad debt loss percentage is to be recomputed each year based on the relationship of net
write offs to credit sales for all available past years up to a maximum of five years.
Information from Peter’s records for five years is as follows:
Accounts
Year Credit Sales Written Of Recoveries
2007 P 750,000 P 7,500 Nil
2008 1,125,000 19,000 P 1,350
2009 1,475,000 26,000 1,250
2010 1,650,000 32,500 2,400
2011 2,000,000 41,500 2,500
Accounts receivable balances were P750,000 and P875,000 at December 31, 2010 and
December 31, 2011 respectively. Based on the above and the result of your audit, answer
the following questions:
1. What entry would be made to set up the allowance for doubtful account as of January 1,
2011? Answer: P12,000.
Answer: Retained earnings P12,000
Allowance for doubtful accounts P12,000
2. The average percentage of net doubtful accounts to credit sales that should be used in
setting up the 2011 allowance is: Answer: 1.70%.
3. The balance of the allowance for doubtful accounts as of December 31, 2011 should be:
Answer: P14,875.
4. The doubtful accounts expense for 2010 is: Answer: P41,875.

PROBLEM 18 – Sales Cutoff Test

Daffodil Auto Parts sells new parts to auto dealers. Company policy requires that a pre-
numbered shipping document be issued for each sale. At the time of pickup or shipment, the
shipping clerk writes the date on the shipping document. The last shipment made in the
year ended December 31, 2010 was recorded on Document No. 3167. Shipments are billed
in the order that the billing clerk receives the shipping documents. For late December 2010
and early January 2011, shipping documents are billed on sales invoices as follows:
Shipping Sales Invoice Shipping Sales Invoice
Document No. No. Document No. No.
3163 5332 3168 5328
3164 5326 3169 5329
3165 5327 3170 5333
3166 5330 3171 5335
3167 5331 3172 5334
The December 2010 and January 2011 sales journals have the following information
included:
SALES JOURNAL – DECEMBER 2010
Day of Month Sales Invoice No. Amount of Sale
30 5326 P 72,611
30 5329 191,430
31 5327 41,983

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 31 5328 62,022
31 5330 4,774

SALES JOURNAL – JANUARY 2011

Day of Month Sales Invoice No. Amount of Sale
1 5332 P 264,131
1 5331 10,639
1 5333 85,206
2 5335 125,050
2 5334 64,658
Based on the above and the result of your audit, answer the following questions:
1. How much of the sales invoices recorded in December 2010 must be included in
Daffodil’s accounts receivable balance as of December 31, 2010? Answer: P119,368.
2. How much of the sales invoices recorded in January 2011 must be included in Daffodil’s
accounts receivable balance as of December 31, 2010? Answer: P274,770.
3. What adjusting entry is necessary to correct Daffodil’s financial statements for the year
ended December 31, 2010?
Answer: Accounts receivable P21,318
Sales P21,318

PROBLEM 19 – Accounts Receivable

Calachuchi Company, which started operations in 2008, manufactures and sells appliances
on account basis, n/30. Its accounts receivable subsidiary ledger shows the following
information as of December 31, 2010:
Customer Account Balance Invoice Date Invoice Amount
Aruy, Inc. P 35,180 12/6/2010 P 14,000
11/29/2010 21,180
Naku Company 20,920 9/27/2010 12,000
8/20/2010 8,920
Syak Corporation 30,600 12/8/2010 20,000
10/25/2010 10,600
Trip Company 45,140 11/17/2010 23,140
10/9/2010 22,000
Uy Company 31,600 12/12/2010 19,200
12/2/2010 12,400
Xak Corporation 17,400 9/12/2010 17,400
The estimated bad debt rates below are based on Calachuchi Company’s receivable
collection experience.
Age of Accounts Rate
Accounts which are overdue by less than 30 days 1%
Accounts which are overdue by 31 to 60 days 1.5%
Accounts which are overdue by 61 to 90 days 3%
Accounts which are overdue by 91 to 120 days 10%
Accounts which are overdue by more than 120 days 50%
The allowance for bad debts account had a debit balance of P5,500 on December 31, 2010
before adjustment. Based on the above and the result of your audit, answer the following
questions:
1. The company’s accounts receivable under “overdue by 31 to 60 days” category should
be: Answer: P32,600.
2. The company’s accounts receivable under “overdue by 61 to 90 days” category should
be: Answer: P29,400.
3. The allowance for bad debts to be reported on the statement of financial position at
December 31, 2010 is: Answer: P2,706.20.
4. The bad debts expense for 2010 is: Answer: P8,206.20.
5. What is the net realizable value of accounts receivable at December 31, 2010? Answer:
P178,133.80.

PROBLEM 20 – Accounts Receivable

Pito Pito Company produces herbal tea and other slimming products that are sold throughout
the Philippines. While the company is expecting a steady growth in sales, it has become
noticeable that collections of accounts receivable from customers are no longer as fast as
they used to be.
Pito Pito Company’s products are sold on terms of 2/10, n/30. In the past, more than 75% of
the credit customers have availed of the discount by paying within the discount period.

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During the year ended December 31, 2010, there has been an increase in the number of
customers taking the full 30 days to pay. The company estimates that less than 60% of the
customers are taking advantage of the discount. Bad debt losses as a percentage of gross
credit sales have increased from the 1.5% provided in prior years to about 4% in the current
year.
The deterioration of accounts receivable collections has prompted the company’s controller
to prepare the following report:
ACCOUNTS RECEIVABLE COLLECTIONS
December 31, 2010

A. It is normal that some receivables will prove uncollectible. In fact, annual bad debt
write-offs had been 1.5% of total credit sales for many years. However, this rate has
increased to 5% during the current year.
B. The accounts receivable balance at December 31, 2010, is P3,000,000. The condition
of this balance in terms of age and probability of collection is presented below:
Proportion Age Probability
of Total Categories of collection
64% 1 to 10 days 99%
18% 11 to 30 days 97.5%
8% Past due 31 to 60 days 95%
5% Past due 61 to 120 days 80%
3% Past due 121 to 180 days 65%
2% Past due over 180 days 20%
C. The allowance for bad debts had a credit balance of P54,600 on January 1, 2010. The
P650,000 bad debt expense provided during the year is based on the assumption
that 5% of total credit sales will be uncollectible. Accounts written off during the year
totaled P585,000.
Based on the above and the results of your audit, answer the following questions:
1. What is the required allowance balance on December 31, 2010? Answer: P154,200.
2. What year-end adjustment is necessary to bring Pito Pito Company’s allowance for
doubtful accounts to the balance indicated by the aging analysis?
Answer: Bad debt expense P34,600
Allowance for doubtful accounts P34,600
3. What is the net realizable value of Pito Pito Company’s accounts receivable at
December 31, 2010? Answer: P2,845,800.
4. Pito Pito should report bad debt expense: Answer: P686,400.
5. Pito Pito’s credit sales for 2010 is: Answer: P13,000,000.

PROBLEM 21 – Accounts Receivable

Lagundi Company applies the allowance method to value its accounts receivable. The
company estimates its bad debts based on past experience, which indicates that 1.5% of net
credit sales will be uncollectible. Its total sales for the year ended December 31, 2010
amounted to P4,000,000 including cash sales of P400,000. After a thorough evaluation of the
accounts receivable from Nolog Company amounting to P20,000, Lagundi has decided to
write off this account before year-end adjustments are made. Shown below are Lagundi’s
account balances at December 31, 2010 before any adjustments are made. Shown below
are Lagundi’s account balances at December 31, 2010 before any adjustments and the
P20,000 write off:
Sales P 4,000,000
Accounts receivable 1,500,000
Sales discounts 250,000
Allowance for bad debts 33,000
Sales returns and allowances 350,000
Bad debt expense Nil
Lagundi has decided to value its accounts receivable using the statement of financial
position approach as suggested by its external auditors. Presented below is the aging of the
accounts receivable subsidiary ledger accounts at December 31, 2010:
Under 60 61 to 90 91 to 120 Over 120
Account Balance
days days days days
Antiporda P P 100,000
100,000
Balbakwa 256,000 180,000 P 76,000
Curdapia 654,000 500,000 154,000
Dagul 50,000 P 50,000
Empoy 420,000 P 420,000
Total P P P P P

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 1,480,000 780,000 230,000 420,000 50,000

Percentage collectible 99% 95% 85% 60%

Based on the above and the result of your audit, answer the following questions:
1. The entry to write off Lagundi’s accounts receivable from Nolog of P20,000 will increase
(decrease) the net income for 2010 and net working capital, respectively by: Answer:
None.
2. Lagundi’s estimated bad debt expense for 2010 based on net credit sales is: Answer
3. The net adjustment to the allowance for bad debts account is a debit (credit) of:
Answer: P44,300.
4. What is the net realizable value of Lagundi’s accounts receivable on December 31,
2010? Answer: P1,377,700.

PROBLEM 22 – Accounts Receivable

Yellow Bells, Inc. estimates its bad debt losses by aging its accounts receivable. The aging
schedule of accounts receivable at December 31, 2010 is presented below:
Age of Accounts Amount
Accounts outstanding for 0 to 30 days P 843,200
Accounts outstanding for 31 to 60 days 461,000
Accounts outstanding for 61 to 90 days 192,400
Accounts outstanding for 91 to 120 days 76,650
Accounts outstanding for over 120 days 39,400
P
Total 1,612,650
Yellow Bells, Inc.’s uncollectible accounts experience for the past 5 years are summarized in
the following schedule:
Under 61 to 90 91 to Over Over
Year Balance
60 days days 120 days 120 days 120 days
2009 P 0.30% 1.80% 12.00% 38.00% 65.00%
1,312,500
2008 999,999 0.50% 1.60% 11.00% 41.00% 70.00%
2007 465,000 0.20% 1.50% 9.00% 50.00% 69.00%
2006 816,000 0.40% 1.70% 10.20% 47.00% 81.00%
2005 1,243,667 0.90% 2.00% 9.70% 33.00% 95.00%
The January 1, 2010 balance of the allowance for bad debts account was P76,311. During
the year, accounts worth P12,000 were written off and P10,189 were recovered from
previously written off accounts. Based on the above and the result of your audit, answer the
following questions:
1. The required balance of the allowance for bad debts account per aging is: Answer:
P93,762.74.
2. The bad debts expense for 2010 is: Answer: P19,262.74.
3. The net realizable value of the accounts receivable at December 31, 2010 is: Answer:
P1,518,887.26.

PROBLEM 23 – Notes Receivable

The statement of financial position of Santiago Corporation reported the following long-term
receivables as of December 31, 2009:
Note receivable from sale of plant P 6,000,000
Note receivable from officer 2,400,000
In connection with your audit, you were able to gather the following transactions during
2010 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 P2,000,000 plus interest on the unpaid balance
every April 1. The initial principal and the interest payment was made on April 1,
2010.
B. The note receivable from officer is dated December 31, 2009, earns interest at 10%
per annum and is due on December 31, 2012. The 2010 interest was received on
January 1, 2011.
C. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2010 in exchange
for a P1,200,000 non-interest bearing note due April 1, 2012. 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, 2010 was 12%.
D. A tract of land was sold by the corporation to No Company on July 1, 2010, for
P4,000,000 under an installment sale contract. No Company signed a 4-year, 11%
note for P2,800,000 on July 1, 2010, in addition to the down payment of P1,200,000.
The equal annual payments of principal and interest on the note will be P902,500
payable on July 1, 2011, 2012, 2013, and 2014. The land had an established cash

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 price of P4,000,000 and its cost to the company was P3,000,000. The collection of
the note is reasonably assured.
Based on the above and the result of your audit, answer the following questions:
1. Non-current notes receivable as of December 31, 2010 is: Answer: P7,648,237.60.
2. Current portion of long-term notes receivable as of December 31, 2010 is: Answer:
P2,594,500.
3. The accrued interest receivable as of December 31, 2010 is: Answer: P754,000.
4. Interest income for the year 2010 is: Answer: P1,020,097.60.

PROBLEM 24 – Notes Receivable

The Vigan Company included the following in its notes receivable as of December 31, 2010:
Note receivable from sale of land P 220,000
Note receivable from consultation 1,200,000
Note receivable from sale of equipment 600,000
In connection with your audit, you were able to gather the following transactions during
2010 and other information pertaining to the company’s notes receivable:
A. On January 1, 2010, Vigan Company sold a tract of land to three doctors. The land,
purchased 10 years ago, was carried on Vigan’s books at a value of P125,000. Vigan
Company received a non-interest bearing note for P220,000 from the doctors. The
note is due on December 31, 2011. There is no readily available market value for the
land, but the current market rate of interest for comparable notes is 10%.
B. On January 1, 2010, Vigan Company finished consultation services and accepted in
exchange P500,000 cash and a promissory note with a face value of P1,200,000, a
due date of December 31, 2012 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%.
C. On January 1, 2010, Vigan Company sold equipment with a carrying amount of
P400,000 to Xerxes, Inc. As payment, Xerxes gave Vigan a P600,000 note. The note
bears an interest rate of 4% and is to be repaid in three equal annual installments of
P200,000 plus interest on the unpaid balance. The first payment is due December 31,
2010. The market price of the equipment is not reliably determinable. The prevailing
interest rate for notes of this type is 14%.
Based on the above and the result of your audit, answer the following questions:
1. The consultation service fee revenue that should be recognized in 2010 is: Answer:
P1,550,774.
2. The gain on sale of equipment that should be recognized in 2010 is: Answer:
P103,104.80.
3. The non-current notes receivable as of December 31, 2010 is: Answer:
P1,278,326.40.
4. The current portion of long-term notes receivable as of December 31, 2010 is: Answer:
P367,053.27.
5. The interest income to be recognized in 2010 is: Answer: P193,692.87.

PROBLEM 25 – Notes Receivable

In connection with your audit of the Salcedo Corporation, you noted that the company’s
Notes Receivable account consists of the following:
A. A 4-month note dated November 30, 2010 from AA Company, P200,000; interest
rate, 16%, discounted on November 30, 2010 at 16%.
B. A draft drawn payable 30 days after for P900,000 by the BB Company on the Charlie
Company in favor of the Delta Company, endorsed to Salcedo Corporation on
December 2, 2010 and accepted on December 4, 2010.
C. A 90-day note dated November 1, 2010 from Ernesto Dy, P500,000; interest at 16%;
the note is for subscription to 5,000 preference shares of Salcedo Corporation at P100
per share.
D. A 60-day note dated May 3, 2010 from CC Company, P600,000; interest rate, 16%;
dishonored note at maturity; judgment obtained on October 10, 2010; collection
within the next twelve months is doubtful.
E. A 90-day note dated January 4, 2010 from Apol Bobads, president of Salcedo,
P160,000; no interest; note not renewed; president confirmed.
F. A 120-day note dated September 14, 2010 from DD Company, P120,000; interest
rate, 16%; note is held by bank as collateral.
Based on the above and the result of your audit, answer the following questions:
1. The adjusted balance of notes receivable as of December 31, 2010 is: Answer:
P1,220,000.
2. How much of the foregoing notes receivable will be reported in the current assets
section of the statement of financial position? Answer: P1,680,000.

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3. How much is the net interest income from the foregoing notes receivable for 2010?
Answer: P35,093.33.
4. The adjusted balance of the interest receivable as of December 31, 2010 is: Answer:
P19,093.33.

PROBLEM 26 – Notes Receivable

Unless otherwise identified, the notes receivable of the Quirino Company on December 31,
2010 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:
Rat
Maker Date Term Amount Remarks
e
P Four notes to settle past
Oct. 1 6 months 18%
57,416 due account. Current
A Company billings are on a 10-day
12 credit basis
Oct. 1 18% 100,000
months
18
Oct. 1 18% 100,000
months
24
Oct. 1 18% 100,000
months

36
B Company July 1 18% 500,000 This note is for a cash loan
months
made to this customer. No
interest has been collected
to date.

C Company Oct. 1 4 months 15% 251,636 All interest collected on Oc-

tober 1.

Mr. Jericho Ng, 1,000,00

Feb. 1 Demand 18% Loan approved in minutes
Company Presi- 0
book on January 20. On Au-
dent
gust 1, this note was
pledged as collateral for a
bank loan of P500,000.

12
D Company Nov. 1 15% 546,387 Interest payable at maturity.
months

E, Inc. Dec. 9 90 days 15% 381,476 Interest payable at maturity.

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. Based on the above and the result of your audit, answer the following questions:
1. What is the adjusted trade notes receivable as of December 31, 2010? Answer:
P1,536,915.
2. The net realizable value of the trade notes receivable as of December 31, 2010 is:
Answer: P1,447,561.
3. How much interest income will Quirino recognize for 2010? Answer: P252,868.
4. What is the balance of the accrued interest receivable account as of December 31,
2010? Answer: P243,432.

PROBLEM 27 – Accounts Receivable and Notes Receivable

The December 31, 2010 statement of financial position of Yeng Company included the
following information:
Notes receivable P 598,000
Less: Notes receivable discounted (380,000)
P
Notes receivable, net 218,000

Accounts receivable P 2,240,000

Less: Allowance for doubtful accounts (141,000)
P
Accounts receivable, net 2,099,000
The following transactions occurred during 2011:
Sales on account P

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 8,812,000
Collections on accounts 8,410,000
Accounts written off as uncollectible 138,000
Notes receivable collected 290,000
Customer notes received in payment of accounts
receivable 740,000
Notes receivable discounted paid at maturity 360,000
Notes receivable discounted defaulted, including
interest of P200 and a P100 fee, and is expected to
be collected in 2012. 20,300
Proceeds from customer notes discounted with face
value of P450,000 and accrued interest of P2,000 448,500
Collections on accounts previously written off 5,000
Sales returns and allowances 20,000
Required allowance for doubtful accounts based on
impairment assessment at year-end 12,000
Based on the above and the result of your audit, answer the following questions:
1. The loss from discounting of notes receivable is: Answer: P3,500.
2. The adjusted balance of Accounts Receivable as of December 31, 2011 is: Answer:
P1,764,300.
3. The adjusted balance of Notes Receivable as of December 31, 2011 is: Answer:
P668,000.
4. The amount to be reported as Trade and other Receivables in the entity’s Statement of
Financial Position as of December 31, 2011 is: Answer: P1,970,300.

PROBLEM 28 – Notes Receivable and Note Discounting

Vintage Company has the following transactions in 2010 involving notes receivable:
May 1 Received a P1,000,000, 90-day, 12% interest bearing note from A
Company in settlement of account.
1 Received a P1,500,000, six-month, 12% interest bearing note from B
Company in settlement of account.
July 30 A Company defaulted on the P1,000,000 note.
Aug. 1 Discounted the B Company note at a bank at 15%.
Sep. 1 Received a one-year noninterest bearing note from C Company in
settlement of P600,000 account receivable. The face value of the
note was P660,000.
28 Collected the defaulted A Company note plus accrued interest at
12% per annum on the total amount due.
Oct. 1 Received a P2,500,000, 90-day note from D Company. The note is
for the payment of goods purchased and bears interest at 12%.
Nov. 1 B Company defaulted on the P1,500,000 note. Vintar Company paid
the bank the total amount due plus P60,000 for protest fee and
other bank charges.
Dec. 30 Collected D Company note in full.
31 Collected from B Company in full including interest on the total
amount due at 12% since default date.
Based on the above and the results of your audit, answer the following questions:
1. The proceeds from the discounted B Company note on August 1, 2010 is: Answer:
P1,530,375.
2. The amount collected on September 28, 2010 on the defaulted a company note is:
Answer: P1,050,600
3. The amount collected on December 31, 2010 on defaulted F Company note is: Answer:
P1,683,000.
4. The interest income to be recognized in 2010 related to these transactions is: Answer:
P223,600.

PROBLEM 29 – Installment Contract Receivable, Patent and Investment

Among the account balances of NDL Corporation at December 31, 2010 is the following:
Patent, net P 2,450,000
Installment contract receivable 7,200,000
Relevant transactions and other information for 2011 were as follows:

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 A. The patent was purchased from Lake Company for P3,150,000 on September 1, 2007.
On that date, the remaining legal life was fifteen years, which was also determined to
be the useful life.
B. The installment contract receivable represents the balance of the consideration
received from the sale of a factory building to Pitt Company on March 31, 2009, for
P12,000,000. Pitt made a P3,000,000 down payment and signed a five-year, 13%
note for the P9,000,000 balance. The first of equal annual principal payments of
P1,800,000 was received on March 31, 2010 together with interest to that date. The
note is collateralized the factory building with a fair value of P10,000,000 at
December 31, 2011. The 2011 payment was received on time.
C. On January 2, 2011, NDL purchased a trademark from Kerr Corporation for
P2,500,000. NDL considers the life of the trademark to be indefinite.
D. On May 1, 2011, NDL sold the patent to Strand Company in exchange for P5,000,000
noninterest bearing note due on May 1, 2014. There was no established exchange
price for the patent, and the note had no ready market. The prevailing rate of interest
for the note of this type at May 1, 2011 was 14%. The present value of 1 for three
periods at 14% is 0.675. The collection of the note is reasonably assured.
E. On July 1, 2011, NDL paid P18,800,000 for 750,000 ordinary shares of Black
Corporation, which represented a 25% investment in Black. The fair value of all
Black’s identifiable assets net of liabilities equals their carrying amount of
P64,000,000. The market price of Black’s ordinary share on December 31, 2011 was
P26 per share.
F. Black reported net income and paid dividends of:
Dividends
Net Income Paid
Six months ended June 30, 2011 P 5,760,000 None
Six months ended December 31,
2011 7,040,000 P2 per share*
*Paid on November 31, 20011.
Based on the above and the result of your audit, answer the following questions:
1. What is the gain on the sale of the patent on May 1, 2011? Answer: P995,000.
2. The total interest income for 2011 is: Answer: P1,075,500.
3. The non-current portion of the installment contract receivable as of December 31, 2011
is: Answer: P3,600,000.
4. The carrying amount of the note receivable from the sale of patent as of December 31,
2011 is: Answer: P3,690,000.
5. The carrying amount of the investment in Black Corporation as of December 31, 2011
is: Answer: P19,060,000.

PROBLEM 30 – Loan Receivable

Sigay Bank granted a loan to a borrower in the amount of P5,000,000 on January 1, 2010.
The interest rate on the loan is 10% payable annually starting December 31, 2010. The loan
matures in five years on December 31, 2014. Sigay Bank incurs P63,550 of direct loan
origination cost and P159,050 of indirect loan origination cost. In addition, Sigay charges the
borrower a 15-point non-refundable loan origination fee. Based on the above and the result
of your audit, answer the following questions (round off present value factors to four decimal
places):
1. The carrying amount of the loan as of January 1, 2010 is: Answer: P4,313,550.
2. The interest income to be recognized in 2011 is: Answer: P618,443.
3. The carrying amount of the loan as of December 31, 2012 is: Answer: P4,670,914.

PROBLEM 31 – Loan Receivable

On January 1, 2009, Batac Company loaned Badoc 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. Batac collected the 2009 interest on schedule. However, on December 31,
2010, based on the Badoc’s recent financial difficulties, Batac expects that the 2010
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, 2012 and December 31, 2014. The prevailing
interest rate for similar type of note as of December 31, 2010 is 8%. Based on the above and
the result of your audit, answer the following questions (round off present value factors to
four decimal places):
1. The present value of the expected future cash flows as of December 31, 2010 is:
Answer: P1,009,260.
2. The loan impairment loss in 2010 is: Answer: P1,110,740.
3. How much is the interest income for the year 2011? Answer: P60,556.

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4. The balance of the allowance for loan impairment as of December 31, 2011 is: Answer:
P130,184.
5. The carrying amount of the loan as of December 31, 2012 is: Answer: P534,005.
6. The balance of the allowance for loan impairment as of December 31, 2013 is: Answer:
P33,955.

PROBLEM 32 – Loan Receivable

On December 31, 2008, Ms. Tah signed a P2,000,000 note to Laoag Bank. The market
interest rate at that time was 12%. The stated interest rate on the note was 10% payable
annually. The note matures in five years. Unfortunately, because of lower sales, Ms. Tah’s
financial condition worsened. On December 31, 2010, Laoag Bank determined that it was
probable that Ms. Tah would pay back only P1,200,000 of the principal at maturity. However,
it was also considered likely that interest would continue to be paid, based on the
P2,000,000 loan. The prevailing interest rate for similar type of note as of December 31,
2010 is 14%. Based on the above and the result of your audit, answer the following
questions (round off present value factors to four decimal places):
1. The amount of cash Ms Tah received from the loan on December 31, 2008 is: Answer:
P1,855,760.
2. The interest income for 2010 is: Answer: P225,414.
3. The loan impairment loss in 2010 is: Answer: P569,345.
4. The interest income for 2012 is: Answer: P155,359.

PROBLEM 33 – Loan Receivable

On January 1, 2008, Sinait Company loaned P3,000,000 to Ilocos Company. The terms of the
loan were payment in full on January 1, 2013, plus annual interest payments at 11%. The
interest payment was made as scheduled on January 1, 2009. However, due to financial
setbacks, Ilocos was unable to make its 2010 interest payment. Sinait considers the loan
impaired and projects the following cash flows from the loan as of December 31, 2010 and
2011. Sinait accrued the interest at December 31, 2009 but did not continue to accrue the
interest due to the impairment of the loan.
Amount Projected as of
Date of Flow December 31, 2010 December 31, 2011
December 31, 2011 P 200,000 P 200,000
December 31, 2012 400,000 600,000
December 31, 2013 800,000 1,200,000
December 31, 2014 1,200,000 1,000,000
December 31, 2015 400,000
Based on the above and the result of your audit, answer the following questions (round off
present value factors to four decimal places):
1. The entry to record the loan impairment loss in 2010 is:
Answer: Loan impairment loss P1,212,380
Interest receivable P330,000
Allowance for loan impairment 882,380
2. The interest income in 2011 assuming the P200,000 was collected on December 31,
2011 as scheduled: Answer: P232,938.
3. The allowance for loan impairment as of December 31, 2011 is: Answer: P554,340.
4. The gain on reversal of loan impairment on December 31, 2011 is: Answer: P95,102.
5. The interest income in 2012 assuming the P600,000 was collected on December 31,
2012 as scheduled is: Answer: P247,023.
6. The carrying amount of the loan receivable as of December 31, 2012 is: Answer:
P1,892,683.

PROBLEM 34 – Loan Receivable

Urban Bank granted a loan of P3,000,000 to a borrower on January 1, 2011. The terms of the
laon were payment in full on December 31, 2016 plus annual interest payment at 8% every
December 31. The first interest payment was made on December 31, 2011. However, on
December 31, 2011, due to financial difficulties, the borrower informed Urban Bank that it
would probably miss the interest payments for the next two years. After that, the borrower
expects to resume the annual interest payment but the principal would be paid on
December 31, 2017 or one year late with interest paid for that additional year. Accordingly,
the payments from the borrower are scheduled as follows:
Date of Flow Cash Flow Amount
December 31, 2012 No interest payment
December 31, 2013 No interest payment
December 31, 2014 Interest payment P 240,000
December 31, 2015 Interest payment 240,000
December 31, 2016 Interest payment 240,000

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 18
 December 31, 2017 Interest payment 240,000
Principal payment 3,000,000
Based on the above and the result of your audit, answer the following questions (round off
present value factors to four decimal places):
1. The loan impairment loss to be recognized in 2011 is: Answer: P427,896.
2. The carrying amount of the loan as of December 31, 2012 is: Answer: P2,777,872.
3. The interest income in 2013 is: Answer: P222,128.
4. The interest income in 2014 is: Answer: P240,000.

PROBLEM 35 – Receivable Financing

During 2011, Malala Company required additional cash for its operations and used its
accounts receivable to raise such needed cash as follows:
A. On December 1, 2010, Malala Company assigned on a non-notification basis accounts
receivable of P5,000,000 to a bank in consideration for a loan of 90% of the
receivables less a 5% service fee on the accounts assigned. Malala signed a note for
the bank loan. On December 31, 2010, Malala collected assigned accounts of
P3,000,000 less discount of P200,000. Malala remitted the collections to the bank in
partial payment for the loan. The bank applied first the collection to the interest and
the balance to the principal. The agreed interest is 1% per month on the loan
balance.
B. Malala Company factored P6,000,000 of accounts receivable to a finance entity on
October 1, 2010 subject to recourse for non-payment. The factor assessed a fee of
3% and retains a holdback equal to 5% of the accounts receivable. In addition, the
factor charged15% interest computed on a weighted average time to maturity of the
accounts receivable of 54 days. The fair value of the recourse obligation is P9,000.
On December 31, 2010, the factored accounts were fully collected and the amount
withheld by the factor was remitted in full to Malala.
C. Malala Company received an advance of P300,000 from Union Bank by pledging
P360,000 of accounts receivable. Malala also signed a note for this bank loan.
D. On June 30, 2010, Malala Company discounted at a bank, a customer’s P600,000, 6-
month, 10% note receivable dated April 30, 2010. The bank discounted the note at
12% on the same date. The note discounting was with recourse and was treated as
secured borrowing.
Based on the above and the result of your audit, answer the following questions:
1. What amount of cash was initially received by Malala from the assignment of its
accounts receivable? Answer: P4,250,000.
2. What is the equity in the assigned accounts that Malala must disclose in its December
31, 2010 notes to financial statements? Answer: P255,000.
3. What amount will Malala report as total notes payable relating to its assignment
transaction in its December 31, 2010 statement of financial position? Answer:
P2,045,000.
4. What amount of cash was initially received by Malala from the factoring of its accounts
receivable? Answer: P5,385,000.
5. What is the cost of factoring the accounts receivable? Answer: P315,000.
6. What amount of cash was ultimately received by Malala from the factoring of its
accounts receivable? Answer: P5,685,000.
7. What is the total loss on factoring the accounts receivable? Answer: P324,000.
8. What amount of cash was received from the note discounting on June 30, 2010?
Answer: P604,800.
9. What amount shall be disclosed as contingent liability in relation to the note
discounting? Answer: P600,000.
10. What amount shall be recognized by Malala as loss on note receivable discounting?
Answer: Nil; Interest expense of P5,200.

PROBLEM 36 – Receivable Financing

On its second year, U2, Inc. thought of expanding its business. In order to generate
additional cash necessary for this expansion, the company on September 1, 2011, factored
P200,000 of accounts receivable to Jewels Company. Factoring fee was 10% of the
receivables purchased. The Jewels Company withheld 5% of the purchase price as
protection against sales returns and allowances. On November 2, 2011, accounts amounting
to P500,000 was assigned to Curacha Bank as a collateral on a P300,000, 20% annual
interest rate loan. A 3% finance charge was deducted in advance. As of December 31, 2011,
data relating to accounts receivable follows:
Allowance for doubtful accounts – credit P 6,700
Estimated uncollectibles 2% of accounts receivable
Accounts receivable excluding factored and
assigned accounts 95,000

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 19
 Collections on assigned accounts None
Based on the above, what is the total cash generated from factoring and assigning the
accounts receivable? Answer: P461,000.

PROBLEM 37 – Factoring of Accounts Receivable

Freelance Factors provides financing to other companies by purchasing their accounts
receivable on a non-recourse basis. Freelance charges a commission to its clients of 15% of
all receivables factored. In addition, Freelance withholds 10% of receivables factored for
protection against sales returns or adjustments. Freelance credits the 10% withheld to Client
Retainer and makes payments to clients at the end of each month so that the balance in the
retainer is equal to 10% of unpaid receivables at the end of the month. Freelance recognizes
its 15% commissions as revenue at the time the receivables are factored. Also, experience
has led Freelance to establish allowance for bad debts of 4% of all receivables purchased.
On January 2, 2011, Freelance purchased receivables from Committed Company totaling
P3,000,000. Committed has previously established an allowance for bad debts for these
receivables of P100,000. By January 31, Freelance had collected P2,500,000 on these
receivables. Based on the above and the results of your audit, answer the following
questions:
1. What is the amount of loss on factoring the accounts receivable? Answer: P350,000.
2. At January 31, 2011, what amount of receivable would be shown by Committed relating
to the factoring transaction? Answer: P50,000.
3. Freelance should recognize a doubtful accounts expense of: Answer: P20,000.

PROBLEM 38 – Comprehensive
Tagudin Company is a very successful manufacturer of bicycles. It was organized way back
in 2000 and now has a 25% share in the bicycle market in the Philippines. As of January 1,
2010, the following balances were gathered from the statement of financial position of
Tagudin Company:
Accounts receivable P 9,500,000
Allowance for doubtful accounts 900,000
Notes receivable 3,750,000
For the year 2010, sales of Tagudin was P25,000,000, of which 10% was on cash. During the
year, it collected P9,000,000, gross of P300,000 discounts from its accounts receivable and
P1,750,000 from its notes receivable. Also, it received notes from customers to settle their
accounts in the amount of P2,500,000. In June, Tagudin wrote off P750,000 worth of
accounts receivable which it deemed to be worthless and it collected P50,000 from
previously written off accounts. Also, some customers’ accounts report credit balances of
P200,000 arising from advance payments included in the collections reported above.
During the year, Tagudin Company required additional cash for its operations and used its
accounts receivable to raise such needed cash as follows:
A. On December 1, 2010, Tagudin Company assigned on a non-notification basis
accounts receivable of P5,000,000 to a bank in consideration for a loan of 90% of the
receivables less a 5% service fee on the accounts assigned. Tagudin signed a note for
the bank loan. On December 31, 2010, Tagudin collected assigned accounts of
P3,000,000 less discount of P200,000. Tagudin remitted the collections to the bank in
partial payment for the loan. The bank applied first the collection to the interest and
the balance to the principal. The agreed interest is 1% per month on the loan
balance.
B. Tagudin Company factored P6,000,000 of accounts receivable to a finance entity on
October 1, 2010. The factor assessed a fee of 3% and retains a holdback equal to 5%
of the accounts receivable. In addition, the factor charged 15% interest computed on
a weighted average time to maturity of the accounts receivable of 54 days. On
December 31, 2010, the factored accounts were fully collected and the amount
withheld by the factor was remitted in full to Tagudin.
C. Tagudin Company received an advance of P300,000 from Union Bank by pledging
P360,000 of accounts receivable. Tagudin also signed a note for this bank loan.
D. On June 30, 2010, Tagudin Company discounted at a bank, a customer’s P600,000, 6-
month, 10% note receivable dated April 30, 2010. The bank discounted the note at
12% on the same date. The note discounting was with recourse and was treated as a
conditional sale.
Tagudin Company provided for uncollectible accounts receivable under the allowance
method since the start of its operations. It uses the income statement approach in providing
for doubtful accounts. Doubtful accounts provision were made monthly at 2% of its gross
credit sales. Total provisions made for the year amounted to P500,000. At year-end, Tagudin
decided to switch to the percent of accounts receivable to estimate its doubtful accounts.

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 20
Per analysis, Tagudin determined that 15% of its outstanding accounts receivable is doubtful
of collection as of year-end. In addition, P500,000 worth of goods is expected to be returned
and discounts of P250,000 are expected to be availed as at December 31, 2010.
Also, on December 31, 2010, Tagudin sold four dozens of bicycle to Rodeo Company for
which the cash selling price was P758,200. The bicycles has a total cost of P500,000.
Tagudin received a P1,000,000, non-interest bearing note from Rodeo on this transaction.
The note has an implicit interest rate of 10% and requires a payment of P200,000 a year
over 5 years with the first payment due on December 31, 2011. Data above does not include
this transaction with Rodeo.
Aside from its accounts and notes receivable, Tagudin has the following other receivables as
of December 31, 2010:
P
Advance payments to creditors on purchase orders 500,000
Advances to affiliated companies 1,000,000
Creditors’ accounts reporting debit balances 500,000
Interest receivable on bonds 100,000
Subscriptions receivable due in 30 days 2,000,000
Advances to officers and employees, due in 60
days 750,000
Claim receivable from insurance agencies 1,200,000
Special deposits on contract bids 5,000,000
Based on the above and the result of your audit, answer the following questions:
1. What amount of cash was initially received by Tagudin from the assignment of its
accounts receivable? Answer: P4,250,000.
2. What is the equity in the assigned accounts that Tagudin must disclose in its December
31, 2010 notes to financial statements? Answer: P255,000.
3. What amount will Tagudin report as total notes payable in its December 31, 2010
statement of financial position? Answer: P2,045,000.
4. What amount of cash was initially received by Tagudin from the factoring of its accounts
receivable? Answer: P5,385,000.
5. What is the cost of factoring the accounts receivable? Answer: P315,000.
6. What amount of cash was received from the note discounting on June 30, 2010?
Answer: P604,800.
7. What amount shall be disclosed as contingent liability in relation to the note
discounting? Answer: P600,000.
8. What amount shall be recognized by Tagudin as loss on note receivable discounting?
Answer: P5,200.
9. What is the total accounts receivable of Tagudin as of December 31, 2010? Answer:
P10,950,000.
10. What is the desired balance of the allowance for doubtful accounts of Tagudin as of
December 31, 2010? Answer: P1,642,500.
11. What amount of doubtful accounts expense will Tagudin recognize in 2010? Answer:
P1,442,500.
12. What amount should the recorded allowance for doubtful accounts be increased
(decreased)? Answer: P942,500 increased.
13. What is the net realizable value of the accounts receivable of Tagudin? Answer:
P8,557,500.
14. What amount of gross income was earned by Tagudin on the sale transaction with
Rodeo? Answer: P258,200.
15. What amount shall be shown as current note receivable by Tagudin in its December 31,
2010 statement of financial position? Answer: P4,024,180.
16. What amount shall be shown as non-current note receivable by Tagudin in its December
31, 2010 statement of financial position? Answer: P634,020.
17. What amount of interest income will Tagudin recognize on the note received from Rodeo
in 2013? Answer: P49,742.
18. What is the balance of the unearned interest income account of Tagudin pertaining to
the note received from Rodeo by 2012? Answer: P102,578.
19. What is the total trade receivables, net of necessary allowances of Tagudin as of
December 31, 2010? Answer: P13,215,700.
20. What amount will Tagudin present as “Trade and other receivables, net” under current
assets in its December 31, 2010 statement of financial position? Answer:
P17,631,680.

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 21