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FINANCIAL ACCOUNTING & REPORTING1) The following transaction (in summary) affecting the accounts receivable of Sharype Company occurred during the year ended December 31, 2022: Accounts receivable balance, January 1 674, Allowance for bad debt balance, January 1 (credit balance) 24, Sales (all o...

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FINANCIAL ACCOUNTING & REPORTING

! 1) The following transaction (in summary) affecting the accounts receivable of Sharype Company occurred during the year ended December 31, 2022: Accounts receivable balance, January 1 674,000 Allowance for bad debt balance, January 1 (credit balance) 24,000 Sales (all on account, terms: 2/10, 1/15, n/60) 3,000,000 Cash received includes the following: 3,200,000 The cash received includes the following: Customers paying within the 10-day discount period 1,764,000 Customers paying within the 15-day discount period 990,000 Recovery of accounts written off 6,000 Customers paying beyond the discount period ? Accounts receivable written-off as worthless 22,000 Credit memo for sales return 12,000 It is the company’s policy to provide for uncollectible accounts equal to 1% of sales. How much is the carrying amount of the accounts receivable as of December 31, 2022? A. 362,000 B. 368,000 C. 400,000 D. 406,000 !

ANSWER: A Trade Receivable 674,000 3,000,000 3,200,000 6,000 --- 22,000 46,000 12,000

Beginning balance (a) Sale on account (b) Recovery of written of receivables (c) Freight FOB shipping point, prepaid

Ending balance

(a) (b) (c) (d) (e) (f)

Collection of accounts receivable Collection of recovery Write off of accounts receivable Discount taken by customers Sales actually returned Other form of payment

400,000

!

(a) Write off of accounts receivable

Allowance for Doubtful Accounts 24,000 22,000 30,000 6,000 38,000

Beginning balance (a) Bad debt expense / provision (b) Recovery of write off Ending balance

!

Accounts receivable at December 31 (a) Allowance for doubtful accounts NRV of Accounts receivable at December 31

400,000 (38,000) 362,000

! !

[(1,764,000 / 98%) x 2% + (990,000 / 99%) x 1%] = 46,000 3,000,000 x 1% = 30,000 2) Presented below are unaudited balances of selected accounts of Drain Company as of December 31, 2020: Debit Credit Cash 500,000 Accounts receivable 1,300,000 Allowance for uncollectible accounts 8,000 Sales (net) 6,750,000 Additional information: Goods amounting to P50,000 were invoiced for the account of a customer recorded in January 2, 2021 with terms of net 60 days, FOB Shipping point. The goods were shipped to customer on December 30, 2020. The bank returned on December 29, 2020, a customer’s check for P5,000 marked “No sufficient funds” but no entry was made. What is the correct balance of accounts receivable account at December 31, 2020? A. 1,355,000 B. 1,347,000 C. 1,305,000 D. 1,350,000 !

ANSWER: A Unadjusted Accounts Receivable at December 31 Usual adjustments: a) Reversal of NSF / Stale / Postdated b) Adjustment of goods shipped “still in transit” Adjusted Accounts receivable at December 31 !

1,300,000 5,000 50,000 1,355,000

!

Use the following information for the next two (2) questions: Starboy Company has the following data relating to accounts receivable for the year ended December 31, 2020: Accounts receivable, January 1, 2020 480,000 Allowance for doubtful accounts, January 1, 2020 19,200 Sales during the year, all on account, terms: 2/10, 1/15, n/30 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 P1,411,200 was received from customers availing the 10-day discount period, P792,000 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. Starboy’s year end balance of allowance for doubtful accounts was estimated to be 5% of the outstanding accounts receivable as at December 31, 2020, based on the aging of the accounts. 3) What was the balance of accounts receivable as at December 31, 2020? A. 265,600 B. 270,400 C. 288,000

D.

307,200

4) How much was Starboy’s doubtful accounts expense for the year ended December 31, 2020? A. 8,000 B. 7,120 C. 7,360 D. 2,320 !

ANSWER: B, B Beginning balance (a) Sale on account (b) Recovery of written of receivables (c) Freight FOB shipping point, prepaid

Ending balance

Trade Receivable 480,000 2,400,000 2,560,000 4,800 --- 17,600 36,800 -

(a) (b) (c) (d) (e) (f)

Collection of accounts receivable Collection of recovery Write off of accounts receivable Discount taken by customers Sales actually returned Other form of payment

270,4000

!

(a) Write off of accounts receivable

Allowance for Doubtful Accounts 19,200 17,600 7,120 4,800 13,520

Beginning balance (c) Bad debt expense / provision (d) Recovery of write off 270,400 x 5% Ending balance

!

[(1,411,200/ 98%) x 2% + (792,000 / 99%) x 1%] = 36,800 ! !

5) Based on the information: Credit sales Collections on accounts receivable during the year Cash sales Unadjusted balance in Allowance for doubtful accounts Sales returns and allowances for credit sales Accounts receivable, beginning of the year

1,720,000 1,700,000 8,100,000 500 debit 40,000 140,000

If bad debts are estimated to be 1½ of ending accounts receivable, in the adjusting entry to recognize bad debts, you would debit bad debt expense for: A. 2,300 B. 1,900 C. 1,300 D. 1,800 ! ANSWER: A Beginning balance (a) Sale on account (b) Recovery of written of receivables (c) Freight FOB shipping point, prepaid

Ending balance !

(a) Write off of accounts receivable

Trade Receivable 140,000 1,720,000 1,700,000 -- --- --40,000

(a) (b) (c) (d) (e) (f)

Collection of accounts receivable Collection of recovery Write off of accounts receivable Discount taken by customers Sales actually returned Other form of payment

120,000 Allowance for Doubtful Accounts 500 -- 2,300 -1,800

Beginning balance (a) Bad debt expense / provision (b) Recovery of write off 120,000 x 1.5% Ending balance

!

! 6) Cristine Company revealed the following accounts in the unadjusted trial balance on December 31, 2020: Debit Credit Accounts receivable 5,000,000 Allowance for doubtful accounts 50,000 Net credit sales 20,000,000 The entity estimated that 3% of net credit sales will become uncollectible. What amount of allowance for doubtful accounts should be recognized on December 31, 2020? A. 600,000 B. 650,000 C. 550,000 D. 200,000 !

ANSWER: A

(a) Write off of accounts receivable

Allowance for Doubtful Accounts 50,000 -- 600,000 -550,000

Beginning balance (a) Bad debt expense / provision (b) Recovery of write off Ending balance

! !

7) On December 31, 2022, Sohee company estimated the allowance for doubtful accounts using the year-end accounts receivable. The following data for are available: Allowance for doubtful accounts, January 1, 2022 Provision for uncollectible accounts recorded during 2022 (2% on credit sales of P30,000,000) Uncollectible accounts written off Recovery of accounts previously written off Estimated uncollectible accounts per aging, December 31, 2022 What is the year-end adjustment to doubtful accounts expense? A. 120,000 B. 720,000 C. 900,000

D.

aging of 250,000 600,000 150,000 80,000 900,000

600,000

!

ANSWER: A (a) Write off of accounts receivable

250,000 150,000 720,000 80,000 900,000

Beginning balance (a) Bad debt expense / provision (b) Recovery of write off Ending balance

*600,000 – 720,000 = 120,000! !

Use the following information for the next two (2) questions: Pearl Company began operations on January 1, 2020. On December 31, 2020, Pearl provided for uncollectible accounts based on 1% of annual credit sales. On January 1, 2021, Pearl changed its method of determining its allowance for uncollectible accounts by applying certain percentage to the accounts receivable aging as follows: Days past invoice date Percent deemed to be uncollectible 0-30 1 31-90 5 91-180 20 Over 180 80 In addition, Pearl wrote off all accounts receivable that were over 1-year old. The following additional information relates to the year ended December 31, 2020 and 2021: 2021 2020 Credit sales 6,000,000 5,600,000 Collections 5,830,000 4,800,000 Accounts written off 54,000 none Recovery of accounts previously written off 14,000 none Days past invoice date @ 12/31 0-30 600,000 500,000 31-90 160,000 180,000 91-180 120,000 90,000 Over 180 50,000 30,000 8) What is the allowance for doubtful accounts on December 31, 2021? A. 60,000 B. 78,000 C. 58,300

D.

54,000

9) What is the provision for uncollectible accounts for the year ended December 31, 2021? A. 22,000 B. 62,000 C. 76,000

D.

78,000

!

ANSWER: B, B

!

Year 2020 Accounts receivable balance Bad debt rate Allowance, end

0-30 500,000 1% 5,000

31-90 180,000 5% 9,000

91-180 90,000 20% 18,000

Over 180 30,000 80% 24,000

Total 800,000

Year 2020 Accounts receivable balance Bad debt rate Allowance, end

0-30 600,000 1% 6,000

31-90 160,000 5% 8,000

91-180 120,000 20% 24,000

Over 180 50,000 80% 40,000

Total 930,000

(a) Write off of accounts receivable

Allowance for Doubtful Accounts 56,000 54,000 62,000 14,000 78,000

56,000

78,000

Beginning balance (a) Bad debt expense / provision (b) Recovery of write off Ending balance

Use the following information for the next two (2) questions: On January 1, 2017, Suba Company sold a transportation equipment with a historical cost of P1,000,000 and accumulated depreciation of P300,000 in exchange for cash of P100,000 and a noninterest bearing note receivable of P800,000 due on January 1, 2020. The prevailing rate of interest for this type of note is 12%. 10) How much is the interest income in 2017? A. 68,331 B. 76,532

C.

85,714

11) How much is the carrying amount of the receivable on December 31, 2018? A. 800,000 B. 569,424 C. 637,755

D.

96,000

D.

714,286

!

ANSWER: A, D Initial carrying amount FV 1/1/17 800,000 x .71178 Effective interest Interest income 2017

569,424 12% 68,331

Initial carrying amount FV 1/1/17 800,000 x .71178 Effective interest Effective interest Carrying amount 12/31/18

569,424 1.12 1.12 714,286

12) On January 1, 2022, Golden Company sold machinery with historical cost of P5,000,000 and accumulated depreciation of P1,900,000 in exchange for a 3-year, 3%, P3,000,000 note receivable. Principal is due on January 1, 2025 but interest is due annually every December 31. The prevailing interest rate for this type of note is 12%. How much is the carrying amount of the receivable on December 31, 2022? A. 2,159,324 B. 2,249,324 C. 2,543,685 D. 3,000,000 !

ANSWER: C Principal amount at present value 3,000,000 x .71178 Nominal amount at present value 3,000,000 x 3% x 2.40183 Total present value / fair value at 1/1/22 Effective interest Nominal interest Carrying amount at 12/31/22

2,135,341 216,165 2,351,506 1.12 (90,000) 2,543,687

Use the following information for the next three (3) questions: On January 1, 2020 Terrified Company sold a tract of land for P5,250,000 to Magic Company. Magic Company paid P1,250,000 down and signed a noninterest beaning note for the balance which is due on January 1, 2024. There was no established exchange price for the land and the note had no ready market. The prevailing interest rate for this type of the note was 12%. 13) How much is the interest income for the year 2021? A. 305,040 B. 341,646

C.

480,000

D.

382,642

14) How much is the carrying amount of the note on December 31, 2020? A. 4,000,000 B. 3,188,684 C. 2,847,040

D.

2,542,000

15) How much is the current portion of the note on December 31, 2020? A. 305,040 B. 341,645 C. 0

D.

2,847,040

!

ANSWER: D, B, C Initial carrying amount FV 1/1/20 4,000,000 x .71178 Effective interest Initial carrying amount FV 12/31/20 Effective interest Interest income

2,847,120 1.12 3,188,774 12% 382,642

Use the following information for the next three (3) questions: On January 1, 2022, Asawani Company sold transportation equipment with a historical cost of P20,000,000 and accumulated depreciation of P7,000,000 in exchange for cash of P500,000 and a noninterest-bearing note receivable of P8,000,000 due in 4 equal annual installments starting on December 31, 2022 and every December 31 thereafter. The prevailing rate of interest for this type of note is 12%. 16) How much is the interest income in 2022? A. 728,946 B. 678,334

C.

728,964

D.

704,236

17) How much is the current portion of the receivable on December 31, 2022? A. 1,271,036 B. 1,423,560 C. 3,380,102

D.

1,594,388

18) How much is the carrying amount of the receivable on December 31, 2023? A. 4,803,663 B. 3,380,102 C. 6,074,699

D.

6,000,000

ANSWER: A, B, A Initial carrying amount FV 1/1/22 2,000,000 x 3.037349 Effective interest Interest income

6,074,699 12% 728,963

Initial carrying amount FV 1/1/22 2,000,000 x 3.037349 Effective interest Principal payment Carrying amount at 12/31/22 Carrying amount at 12/31/23 (4,803,663 x 1.12) – 2,000,000 noncurrent portion at 12/31/22 Current portion residual

6,074,699 1.12 (2,000,000) 4,803,663 3,380,103 1,423,560

Use the following information for the next two (2) questions: On January 1, 2022, Hotel Company sold machinery with historical cost of P3,000,000 and accumulated depreciation of P900,000 in exchange for a 3-year, P2,100,000 noninterest bearing note receivable due in equal semi-annual payments every July 1 and December 31 starting on July 1, 2022. The prevailing rate of interest for this type of note is 10%. 19) How much is the interest income in 2022? A. 88,825 B. 177,649

C.

128,964

20) How much is the carrying amount of the receivable on December 31, 2022? A. 1,241,083 B. 982,378 C. 1,690,051

D.

164,591

D.

1,594,388

ANSWER: D, A Initial carrying amount FV 1/1/22 (2,100,000/ 6 semi annual) x 5.075692 Effective interest January to June Interest income Jan. to June

1,776,492 10% 6/12 88,824

Initial carrying amount FV 1/1/22 (2,100,000/ 6 semi annual) x 5.075692 Effective interest Principal payment 2,100,000 / 6 Carrying amount 6/30/22 Effective interest Jul. to Dec. Interest income Jul. to Dec Interest income Jan. to June Total interest income

1,776,492 1.05 (350,000) 1,515,317 10% 6/12 75,766 88,824 164,590

Carrying amount 6/30/22 Effective interest Principal payment 2,100,000 / 6 Carrying amount 12/31/22

1,515,317 1.05 (350,000) 1,241,083

!

Use the following information for the next two (2) questions: Hot Issue Company sold one of its machine on January 1, 2021 to Bubble Pop Company in exchange for non interest bearing note requiring five annual payments of P500,000 or a total of P2,500,000. The machine had a carrying amount of P1,750,000 in Hot Issue’s book. The first payment is due on December 31, 2021. The market interest for similar notes was 10% and the relevant present value factors are: Present value of a single payment at 10% for 5 periods 0.621 Present value of an ordinary annuity of 1 at 10% for 5 periods 3.791 Present value of an annuity due of 1 at 10% for 5 periods 4.170 21) How much is the gain or loss on sale of machine? A. 145,500 loss B. 145,500 gain

C.

750,000 gain

D.

750,000 loss

22) How much is the interest income for the year 2021? A. 250,000 B. 139,550

C.

379,100

D.

189,550

D.

2,085,050

23) How much is the carrying amount of the notes on December 31, 2021? A. 2,000,000 B. 1,585,050 C. 2,500,000 !

ANSWER: B, D, B Fair value of the note received 500,000 x 3.791 Carrying amount of machine sold Gain on sale

1,895,500 1,750,000 145,500

Fair value of the note received 500,000 x 3.791 CA Effective interest Interest income

1,895,500 10% 189,550

Fair value of the note received 500,000 x 3.791 Effective interest Principal payment Carrying amount at 12/31/21

1,895,500 1.10% (500,000) 1,585,050

!

24) On January 1, 2022, Lovestruck Company sold machinery costing P2,000,000 with accumulated depreciation of P950,000 in exchange for a 3-year, 3%, P900,000 note receivable. Principal is due in three equal annual installments. Interest on the outstanding principal balance are also due annually and are to be collected together with the periodic collections on the principal. The prevailing interest rate for this type of note is 12%. How much is the carrying amount of the receivable on December 31, 2022? A. 530,261 B. 1,000,562 C. 673,531 D. 789,361 !

ANSWER: A Present value of principal 900,000 x .71178 Present value of nominal 900,000 x 3% x .892857 600,000 x 3% x .797194 300,000 x 3% x .711780 Total present value / fair value at 1/1/22

640,602 24,107 14,349 6,406

!

25) On January 1, 2017, Hope Company sold machinery costing P3,000,000 with accumulated depreciation of P1,100,000 in exchange for a 3-year, P900,000 interest bearing note receivable due as follows: Date Amount of installment December 31, 2017 400,000 December 31, 2018 300,000 December 31, 2019 200,000 Total 900,000 The prevailing rate of interest for this type of note is 10%. How much is the carrying amount of the receivable on December 31, 2017? A. 467,354 B. 438,016 C. 376,345 D. 428,346 !

ANSWER: B December 31, 2017 400,000 December 31, 2018 300,000 December 31, 2019 200,000 Total present value Effective interest Principal payment Carrying amount 12/31/17

0.90909 0.82645 0.75132

363,636 247,935 150,263 761,834 1.10 (400,000) 438,018

!

! Use the following information for the next two (2) questions: On January 1, 2017, Stressed Company sold inventory costing P1,800,000 with a list price of P2,200,000 and a cash price of P2,000,000 in exchange for a P2,400,000 noninterest bearing note due on December 31, 2019. 26) How much is the initial measurement of the receivable? A. 1,800,000 B. 2,200,000

C.

2,000,000

D.

2,400,000

27) How much is the carrying amount of the receivable on December 31, 2017? A. 2,125,390 B. 2,135,341 C. 2,098,343

D.

2,000,000

!

ANSWER: B, C Initial measurement = (cash price – downpayment) Effective interest {1/([2,000,000 / 2,400,000) ^ 1/3]} – 1 Carrying amount 12/31/17

2,000,000 1.062695 2,125,390 !

28) On January 1, 2021, Fetty Bank extended a 12%, P1,000,000 loan to Wap, Inc. Principal is due on January 1, 2025 but interests are due annually every January 1. Fetty Bank incurred direct loan origination costs of P88,394 and indirect loan origination costs of P18,000. In addition, Fetty Bank charged Wap a 2.5-point nonrefundable loan origination fee. How much is the interest income in 2022? A. 104,974 B. 105,364 C. 106,339 D. 136,6...