Audit-of-Receivables-for-discussion

AUDIT OF RECEIVABLES
CASE 1
On December 31, 2020, the accounts receivable control account of Banaue Rice Terraces Company had a
balance of P5,870,500 which agreed with the total shown in its subsidiary ledger. As an auditor, you
perform analytical procedures and inquiry with the audit client. The following is the summary of
accounts included in the accounts receivable subsidiary ledger.
Trade installment receivable due in 18 months, including

unearned interest of P25,000 P875,000
Trade receivables from the officers 110,000
Advances to officers 360,000
Past due trade accounts receivables 720,000
Customers NSF check returned by bank (100,000)
Advances to employees 15,000
Customers’ accounts reporting credit balances (40,000)
Receivable from customer arising from sale of goods 420,000
Interest receivable on bonds 75,000
Interest receivable on notes ?
Other trade accounts receivable – unassigned 400,00
Subscriptions receivable for ordinary shares due in 24 months 670,000
Trade accounts receivable – assigned 295,000
Trade accounts on which post-dated check is held 135,000
Deposit made by customer for warehouse rent for 2 years (140,000)
Trade accounts known to be worthless 30,000
Notes receivable collectible every June 30 and December 31,
P150,000 each payment period due in 18 months arising from sale of goods. 450,000
Other findings:
a. The customers NSF check was returned by bank on December 28, 2020 due to insufficient fund,
Banaue Rice Terraces informed the customer and re-deposit the check on January of the
following year, the memo received by the client was dated January 3, 2021.
b. The company received a 10%, P500,000 3-year notes receivable for an equipment sold on July 1,
2020. The interest on this note is collectible every December 31 of each year. The note yields
12% when received.
c. The ledger of Banaue Rice Terraces showed a beginning balance for allowance for uncollectible
accounts of P15,000. The company quarterly provides allowance for uncollectible accounts
totaling to P62,000 in the current period. The management estimates that 3.5% of the
outstanding balance of trade receivable is uncollectible.
d. The outstanding balance of note receivable amounting to P450,000 was received from customer
and bears 5% annual interest based on outstanding balance.
Determine the following as a result of your audit:
1. How much is the correct amount of gross trade receivables as of December
31, 2020?
2. How much is the correct amount of “trade and other receivables” reported as
line item in its December 31, 2020 statement of financial position?
3. How much is the correct amount of non-current receivables as of December
31, 2020?
4. How much is the balance of the allowance for bad debts as of December 31,
2020?
5. How much is the amount of bad debts expense recognized in the statement
of comprehensive income in 2020?
CASE 2
In connection with the audit of the financial statements of Malapascua Company, the audit manager
provided you the instructions to examine the details of the company’s accounts receivable.
You have extracted the following balances from the trial balance prepared by your client as of December
31, 2020:
Accounts receivable P1,500,000
Allowance for bad debts – beginning 10,250
Your audit client provided you the schedule of the accounts receivable subsidiary ledger based on ageing
policy as follows:
Accounts with debit balances

60 days old and below P670,000
61 to 90 days 420,000
Over 90 days 230,300 P1,321,000
Advances to officers 281,000
Accounts with credit balances (102,000)
Accounts receivable per SL P1,500,000
The credit balance in customers accounts represents collection from a customer whose account has
been written off as uncollectible in prior year.
Accounts receivable for more than a year totaling P64,000 should be written off.
A total of P27,000 was provided as bad debts during the period based on the company’s policy of
providing bad debts.
A confirmation letters were went to various customers, an except from the exceptions noted was
summarized below:
Customer Customer’s comments Remarks

Alger The goods sold on December 4 were The client failed to record credit memo No.
returned on December 20, 2020 152 for P40,000. The merchandise was
included in the ending inventory at cost.
Aeson We do not owe this amount. We do Investigation revealed that goods sold for
not receive any merchandise from P45,000 were shipped to Aeson on
your company. December 29, 2020; FOB shipping point.
The good were lost in transit and the
shipping company has acknowledge its
responsibility for the loss of merchandise.
Alloy I am entitled to a 10% employee Alloy is an employee of Malapascua who
discount. Your bill should be reduced started working November of 2020, all
by P5,500. company employees are entitled for
special 10% discount. Sales invoice of Alloy
is dated December 7, 2020
Mark We have not yet sold the goods. We Merchandise billed for P60,000 were
will remit the proceeds as soon as consigned to Mark on October 26, 2020.
the goods are sold. The goods cost P39,000.
Reymond We do not owe you P60,000. We The sale of merchandise on
already paid our accounts as November 26,2020 was paid by Reymond
evidenced by OR#5678. on January 4, 2021.
Pierce Kindly reduced my balance by This amount represent freight paid by
P4,000 customer for the merchandise shipped on
December 20, 2020, FOB destination.
Based on your inquiry with the credit and collections manager of Malapascua, you noted that the
company’s policy in estimating bad debts (which is based on your judgment as an auditor is fair) uses the
following rates:
60 days old and below 2%

61 to 90 days 10%
Over 90 days 20%
Determine the following as a result of your audit:
1. What are the proposed adjusting journal entries in relation to your audit?
2. How much is the adjusted balance of accounts receivables as of December 31, 2020?
3. How much is the adjusted balance of allowance for bad debts as of December 31, 2020?
4. How much is the correct bad debts expense reported in 2020 statement of comprehensive
income?
5. How much is the accounts receivable reported in its December 31, 2020 statement of financial
position?

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AUDIT OF RECEIVABLES

Trade installment receivable due in 18 months, including

Accounts receivable P1,500,000

Allowance for bad debts – beginning 10,250

Accounts with debit balances

Customer Customer’s comments Remarks

60 days old and below 2%

Determine the following as a result of your audit:

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