Chapter 4 Caselette - Audit of Receivables PDF

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CHAPTER 4 – Audit of ReceivablesProblem 1 The accounts receivable of FRANCO COMPANY were stated at P1,467,000 in a balance sheet submitted to a banker for credit. You are called upon to audit the report and, upon analysis, the asset was found to consist of the following items:Due from customers on o...

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CHAPTER 4 – Audit of Receivables Problem 1 The accounts receivable of FRANCO COMPANY were stated at P1,467,000 in a balance sheet submitted to a banker for credit. You are called upon to audit the report and, upon analysis, the asset was found to consist of the following items: Due from customers on open account Acknowledged claim for damages Due from consignee at billed price – cost price being P22,500 Investment in and advances to affiliated company Loans to officers and employees Deposits with municipalities – bids for contracts Unpaid capital stock subscriptions Advances to creditors for merchandise purchased but not received Cash advanced to salesmen for traveling expenses Allowance for doubtful accounts

P 1,125,000 22,500 30,000 150,000 13,500 67,500 60,000 24,000 4,500 ( 30,000) P1,467,000

The amount of P1,125,000 due from customers was the remaining balance after deducting accounts with credit balances of P6,000. During your examination, you noted that on December 31, the company assigned P300,000 of customers’ accounts to secure a 17%, P240,000 note payable. A 1% commission based on the accounts assigned was charged and deducted from the cash received. The client recorded this transaction by a debit to cash and a credit to notes payable. Questions 1. How much is the Accounts Receivable (gross) balance at December 31? a. P 759,000 b. P 789,000 c. P 1,101,000 d. P 1,131,000 2. The total current non-trade receivable balance at December 31 is: a. P 64,500 b. P 96,000 c. P 120,000 d. P 192,000 3. The liability for the accounts receivable – assigned is: a. P 237,000 b. P 240,000 c. P 243,000

d. P 300,000

4. The total non-trade receivable balance at December 31 is: a. P 342,000 b. P 318,000 c. P 313,500

d. P 245,000

Solution (1) Claims Receivable Accounts receivable (2) Sales Accounts receivable (3) Advances to affiliates Accounts receivable (4) Receivables - officers/employee Accounts receivable (5) Deposits for contracts bidding Accounts receivable

22,500 22,500 30,000 30,000 150,000 150,000 13,500 13,500 67,500 67,500

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(6) Subscription receivable Accounts receivable (7) Advances to suppliers Accounts receivable (8) Advances to officers/employee Accounts receivable (9) Accounts receivable Allowance for bad debts (10) Accounts receivable Customers with credit balance (11) OE: Cash Notes payable CE: Cash Commission expense Notes payable Adj: Commission expense Notes payable Unadjusted AR (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Adjusted balance

60,000 60,000 24,000 24,000 4,500 4,500 30,000 30,000 6,000 6,000 237,000 237,000 237,000 3,000 300,000 3,000 3,000 1,467,000 ( 22,500) ( 30,000) ( 150,000) ( 13,500) ( 67,500) ( 60,000) ( 24,000) ( 4,500) 30,000 6,000 1,131,000

Current non-trade AR Claims receivable Advances to off/empl ( 13,500 + 4,500) Advances to suppliers Total Answer: 1. D 2. A

Non-trade AR Claims receivable Advances to affiliates Advances to off/empl ( 13,500 + 4,500) Deposit for contracts Subscription receivable Advances to suppliers

Total

22,500 150,000 18,000 67,500 60,000 24,000

__________ 342,000

22,500 18,000 24,000 64,500 3. B

4. A

Problem 2 In your audit of MENDOZA COMPANY for the past calendar year, you find the following accounts: ACCOUNTS RECEIVABLES Jan. 1, 2002 P 800,000 Jan. – Dec. 1992 collections P 5,900,000 Jan. – Dec. Sales 6,300,000 Jan. – Dec. write-off 100,000

Jan. – Dec. Write-off of last year’s receivables Write-off of this year’s Receivables

P

ALLOWANCE FOR BAD DEBTS Jan. 1, 2002 85,000 Dec. 31 provisions

P

95,000 315,000

15,000

In your examination, you find that the balance of Accounts Receivable represents sales of the current audit year only; that credit balances in the subsidiary ledger for accounts receivable totaled P80,000; and that the current year’s provision for bad debts expense was 5% of sales (as compared with 4½% last year, 4% of the year before, and 3½% the next previous year). Sequential to aging the accounts receivable, you and the company’s

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treasurer agree on an additional write-off of P50,000, and P300,000 as the probable loss to be sustained on collection of the accounts receivable balance. Questions 1. The adjusted Accounts Receivable balance is: a. P 830,000 b. P 1,100,000 c. P 1,130,000

d. P 1,180,000

2. The adjusted Allowance for Bad Debts is: a. P 260,000 b. P 300,000

c. P 315,000

d. P 355,000

3. The adjusted Bad Debts account is: a. P 260,000 b. P 300,000

c. P 315,000

d. P 355,000

4. The provision per record at December 31 is: a. P 260,000 b. P 300,000 c. P 315,000

d. P 355,000

Solution Accounts Receivable 80,000 Customers’ credit balance 80,000 Allowance for bad debts 50,000 Accounts receivable 50,000 Bad debts expense 40,000 Allowance for bad debts 40,000 Computation: Provision per records 315,000 * Provision per audit 355,000 Adjustment 40,000 * Beg. balance + Provisions - Write-off per book - Additional write-off Ending balance Answer: 1. C

2. B

95,000 355,000 squeezed figure 100,000 50,000 300,000 3. D

4. C

Problem 3 The following selected transactions occurred during the year ended December 31, 2006 of DOMINGO COMPANY: Gross sales (cash and credit) Collections from credit customers, net of 2% cash discount Cash sales Uncollectible accounts written off Credit memos issued to credit customers for sales ret./allow. Cash refunds given to cash customers for sales ret./allow. Recoveries on accounts receivable written-off in prior years (not included in cash received stated above)

P 900,736.80 294,000.00 180,000.00 19,200.00 10,080.00 15,168.00 6,505.20

At year-end, the company provides for estimated bad debts losses by crediting the Allowance for Bad Debts account for 2% of its net credit sales for the year. The allowance for bad debts at the beginning of the year is P19,327.20. Questions 1. How much is the DOMINGO COMPANY’s gross sales?

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a.

P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. 689,488.80 2. DOMINGO COMPANY’s credit sales at December 31, 2006 is: a. P 900,736.80 b. P 720,736.80 c. P 704,656.80 d. P 689,488.80 3. a.

4. a.

How much is the DOMINGO COMPANY’s net credit sales? P 900,736.80 b. P 720,736.80 c. P 704,656.80 689,488.80

d.

P

P

The Bad Debts Expense of DOMINGO COMPANY at December 31, 2006 is: P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14

5. The Accounts Receivable of DOMINGO COMPANY at December31, 2006 is: a. P 408.042.00 b. P 407,536.80 c. P 401,536.80 d. P 391,456.80 6. The Allowance for Bad Debts of DOMINGO COMPANY at December 31, 2006 is: a. P 20,725.54 b. P 14,093.14 c. P 8,030.74 d. P7,829.14 Solution Credit Sales Recoveries

Ending bal.

Accounts Receivable 720,736.80 Collection 294,000.00 6,505.20 Sales discount from credit cust. 6,000.00 Write-off 19,200.00 Sales returns from credit customer 10,080.00 __________ Recoveries 6,505.20 727,242.00 335,785.20 391,456.80

Net credit sales: Credit sales - Sales discounts from credit sales - Sales returns from credit sales Net credit sales

720,736.80 ( 6,000.00) (10,080.00) 704,656.80

Bad debts: Net credit sales x % of uncollectible Bad debts

704,656.80 2% 14,093.136

Allowance for bad debts: Beg. balance 19,327.20 Provision for bad debts 14,093.14 Recoveries 6,505.20 Less: Write-off ( 19,200.00) Allowance ending balance 20,725.54 Answer: 1. A 2. B 3. C 4. B

5. D

6. A

Problem 4 Presented below are unaudited balances of selected accounts of MARJORIE COMPANY as of December 31, 2006: Unaudited Balances, 12/31/06 Selected Accounts Debit Credit Cash P 500,000 Accounts receivable 1,300,000 Allowance for doubtful accounts 8,000

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Net sales

P 6,750,000

Additional information are as follows: a. Goods amounting to P50,000 were invoiced for the accounts of Joy Store & Co., recorded on January 2, 2007 with terms of net, 60 days, FOB shipping point. The goods were shipped to Variety Store on December 30, 2006. b. The bank returned on December 29, 2006, a customer’s check for P5,000 marked “DAIF”, but no entry was made. c. MARJORIE COMPANY estimates that allowance for uncollectible accounts should be one and one-half percent (1½%) of the accounts receivable balance as of year-end. No provision has yet been made for 2006. Questions 1. What is the adjusted balance of Accounts Receivable on December 31, 2006? a. P 1,355,000 b. P 1,350,000 c. P 1,305,000 d. P 1,300,000 2. What is the adjusted balance of Allowance for doubtful accounts on December 31, 2006? a. P 36,325 b. P 28,325 c. P 20,325 d. P 8,000 3. What is the adjusted amount of 2006 Bad Debts Expense? a. P 12,325 b. P 20,325 c. P 28,325

d. P 36,325

Solution (1)

A

1,300,000 + 50,000 + 5,000

P1,355,000

(2)

C

P1,355,000 x 1 ½%

P20,325

(3)

C

P20,325 + P8,000 debit balance

P28,325

Problem 5 During December, 2006, the Accounts Receivable controlling account on the books of FERNANDEZ COMPANY showed one debit posting and two credit postings. The debit represents receivables from December sales, P780,000. One credit was for P470,400, made a result of cash collections on November and December receivables; the second credit was an adjustment for estimated uncollectibles, P90,000. The December 31 balance was P270,000. When receivables were collected, the bookkeeper credited Accounts Receivables for the cash collected. All customers who paid their accounts during December took advantage of the 2% cash discount. As of December 1, debit balance in customers’ subsidiary accounts totaled P177,000. An adjustment for estimated doubtful accounts of P18,000 had been posted to the Accounts Receivable controlling account at the end of 2002, and no write-offs were recorded during 2006. In addition, a number of customers had overpaid their accounts, and as a result, some of the customers’ subsidiary accounts had credit balances on December 1. No

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overpayments were made during December nor were any credit balances in customers’ accounts reduced during December.

Questions 1. The Accounts Receivable beginning balance (unadjusted) of FERNANDEZ COMPANY at December 31, 2006 is: a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000 2. The Accounts Receivable beginning balance (adjusted) of FERNANDEZ COMPANY at December 31, 2006 is: a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000 3. The Credit Balance of Accounts Receivable at the beginning of the year of FERNANDEZ COMPANY is: a. P 48,600 b. P 66,600 c. P 108,600 d. P 126,600 4. The Accounts Receivable balance of FERNANDEZ COMPANY at December 31, 2006 is: a. P 50,400 b. P 68,400 c. P 252,000 d. P 270,000 Solution Computation for unadjusted AR beginning balance: Accounts Receivable 50,400 Collections 780,000 Allow. for BD 830,400 End bal. 270,000 * squeezed figure

* Beg. bal. Sales

Ending balance of AR control account Add: Credits during December Less: Debits during December Balance of AR control account – Dec. 1 Add: 2006 Est. allowance for BD Adjusted AR control account – Dec. 1 Less: AR subsidiary account – Dec. 1 Credit balance of AR account – Dec. 1 Answer: 1. A

2. B

3. C

470,400 90,000 560,400

270,000 560,400 ( 780,000) 50,400 18,000 68,400 177,000 108,600

4. D

Problem 6 You are examining the financial statements of MATIAS CORPORATION for the year ended December 31, 2006. During the audit of the accounts receivable and other related accounts, certain information was obtained. The December 31, 2006 debit balance in the Accounts Receivable control account is P197,000. The only entries in the Bad Debts Expense account were: a credit for P324 on December 31, 2006, because Marlisa Company remitted in full for the accounts charged off October

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31, 2006, and a debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts.

The Allowance for Doubtful Accounts schedule is presented below: Debit Credit January 1, 2006 October 21, 2006, Uncollectible; Marlisa Co., - P324; Abonales Co., - P 820; Cherryl Co., - P564 P 1,508 December 31, 2006, 5% of P197,000 P 9,850

Balance P 3,658

2,150 12,000

An aging schedule of the accounts receivable as of December 31, 2006 and the decision are shown in the table below: Age ____________ 0 – 1 month 1 – 3 months 3 – 6 months over 6 months

Net Debit Balance _________________ P

93,240 76,820 22,180 6,000

Amount to which the Allow. is to be adjusted after adjust. and corrections have been made 1 percent 2 percent 3 percent Definitely uncollectible, P1,000; P2,000 is considered 50% uncollectible; the remainder is estimated to be 80% collectible.

There is a credit balance in one account receivable (0-1 month) of P2,000; it represents an advance on a sales contract. Also, there is a credit balance in one of the 1-3 months accounts receivable of P500 for which merchandise will be accepted by the customer. The ledger accounts have not been closed as of December 31, 2006. The Accounts Receivable control account is not in agreement with the subsidiary ledger. The difference cannot be located, and the auditor decides to adjust the control to the sum of the subsidiaries after corrections are made. Questions 1. The adjusted balance of accounts receivable of MATIAS CORPORATION at December 31, 2006 is: a. P 199,740 b. P 199,540 c. P 198,300 d. P 198,100 2. The adjusted write-off of accounts receivable balance of MATIAS CORPORATION at December 31, 2006 is: a. P 2,708.00 b. P 2,508.00 c. P 2,384.00 d. P 1,708.00 3. The adjusted allowance of bad debts account of MATIAS CORPORATION at December 31, 2006 is: a. P 4,980.60 b. P 4,964.20 c. P 4,780.60 d. P 4,764.20 4. The bad debts expense per book of MATIAS CORPORATION at December 31, 2006 is:

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a. P 9,850.00 b. P 6,359.80

c. P 4,764.20 d. Cannot be determined

5. The adjusted bad debts expense of MATIAS CORPORATION at December 31, 2006 is: a. P 3,814.20 b. P 3,614.20 c. P 3,490.20 d. P 2,814.20 6. The entry to adjust the account of Marlisa Company is: a. Bad debts 324 c. Allow. for BD 324 Allow. for BD 324 Bad debts b. Bad debts 324 d. Accounts receiv. 324 Accounts receivable 324 Bad debts

324 324

7. The entry to reconcile the accounts receivable control ledger to subsidiary ledger is: a. Accounts receivable 1,440 c. Accounts receiv. 1,440 Allow. for BD 1,440 Misc. income 1,440 b. Allow. for BD 1,440 d. No adjustment Accounts receivable 1,440 8. The net realizable value of accounts receivable of MATIAS CORPORATION at December 31, 2006 is: a. P 194,975.80 b. P 194,775.80 c. P 193,335.80 d.P193,319.40

Solution

Bal. before adjustments Adjustments: Add(Deduct) (2) Correction to 10.31.02 entry to write-off uncollectible accts. (3) Write-off of acct. considered definitely uncollectible (4) Reclassification of credit balances

Per Control Acct. P 197,000

Total P 198,240

(1,000)

(1,000)

(200)

( 1,000)

P (5) To adjust the control acct. to agree with SL Adjusted balance

0-1 mo. P 93,240

PER SUBSIDIARY LEDGERS Over 1-3 mos 3-6 mos. 6 mos. P 76,820 P 22,180 P 6,000

2,500 198,300

2,000 P 95,240

500 P 77,320

P 22,180

P 5,000

2,500 P 199,740

1,440 P 199,740

Audit adjustments as of 12.31.06 (1)

(2)

(3)

(4)

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Bad Debts expense Allowance for doubtful accounts

324

Allowance for doubtful accounts Accounts Receivable

200

Allowance for doubtful accounts Accounts Receivable

1,000

Accounts Receivable Customer’s Accounts with Credit Balances

2,500

324

200

1,000

2,500

(5)

(6)

Accounts Receivable Miscellaneous Revenue

1,440

Allowance for Doubtful Accounts Bad Debts Expense

6,359.80

Required allowance on 12.31.06 0-1 mo. 1-3 mos. 3-6 mos. Over 6 mos.

1,440

6,359.80

P 95,240 x 1% 77,320 x 2 % 22,180 x 3% 3,000 x 20% 2,000 x 50%

Beg. balance + Provision per audit (squeezed figure) - Write-off Ending balance Provision per book Provision per audit Adjustment Answer: 1. A 6. A

2. C 7. C

P

952.40 1,546.40 665.40 600.00 1,000.00 P 4,764.20

3,658.00 3,490.20 2,384.00 4,764.20 9,850.00 3,490.20 6,359.80

3. D 8. A

4. A

5. C

Problem 7 You are auditing the Accounts Receivable and the related Allowance for Bad Debts account of ROY COMPANY. The following data are available: Accounts Receivable, general ledger balance Allowance for bad debts: Beginning balance Provision per general ledger Write-offs Balance, end

P 848,000

P

20,000 48,000 ( 16,000) P 52,000

Summary of Aging Schedule The summary of the subsidiary ledger as of December 31, 2006, was totaled as follows: Debit balances: Under on month One to six months Over six months

Credit balances: Almario Peter

Bituin

P 360,000 368,000 152,000 P 880,000

P

8,000 - OK; additional billing in January 2004 14,000 – Should have been credited To Manuel Co. - 1-6 mos. classification. 18,000 - Advance on a sales contract

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P 40,000 The customers’ ledger is not in agreement with the accounts receivable control. The client instructs the auditor to adjust the control to the subsidiary ledger after corrections are made.

ALLOWANCE FOR DOUBTFUL ACCOUNTS 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 percent. Accounts over six months are analyzed as follows: Definitely bad Doubtful (estimated to be 50% collectible) Apparently good, but slow (90% collectible) Total

P 48,000 24,000 80,000 P152,000

Questions 1. The entry to adjust the account of Almario is: a. Accounts receivable 8,000 c. Accounts receivable 8,000 Sales 8,000 Cust. with Cr. bal. 8,000 b. Sales 8,000 d. No adjustment Accounts receivable 8,000 2.

The entry to adjust the account of Peter is: a. Accounts receivable 14,000 c. Accounts receivable 14,000 Sales 14,000 Cust. with Cr. bal. 14,000 b. Sales 14,000 d. No adjustment Accounts receivable 14,000

3. The entry to adjust the account of Bituin is: a. Accounts receivable 18,000 Sales 18,000 b. Sales 18,000 Accounts receivable 18,000

c. Accounts receivable 18,000 Cust. with Cr. bal. 18,000 d. No adjustment

4. The entry to reconcile the control ledger to the subsidiary ledger is: a. Miscellaneous loss 8,000 c. Accounts receivable 8,000 Accounts receivable 8,000 Sales 8,000 b. Accounts receivable 8,000 d. Sales 8,000 Miscellaneous gain 8,000 Accounts receivable 8,000 5. The entry to adjust the Bad Debts Expense is: a. Bad Debts Expense 74,680 c. Bad Debts Expense 30,680 Allow. for BD 74,680 Allow. for BD b. Bad Debts Expense 26,680 d. No adjustment Allow. for BD 26,680 6. The Accounts Receivable balance at December 31...