AP 5906q Receivables

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CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
AUDITING PROBLEMS
AUDIT OF RECEIVABLES – QUIZZERS
PROBLEM NO. 1
During your examination of the 2005 financial statements of the Yesterday Company you
find that the company does not provide allowance for doubtful accounts ever since it
started operations in 2001. The company’s practice is to directly write-off as expense
doubtful accounts and credit recoveries to income. The company’s contracts are generally
for two years.
Upon your recommendation, the company agreed to change its accounts for 2005 to give
effect to doubtful treatment on the allowance basis. The allowance is to be based on a
percentage of sales which is derived from the experience of prior years. Statistics for 2001
to 2005 are shown as follows:
Year of Sale 2001 2002 2003 2004 2005
Charge Sales P600,000 P1,500,000 P1,800,000 P1,950,000 P1,650,000
Accounts Written off &

Year of Sale
2001 3,300
2002 9,000 6,000
2003 3,000 24,000 7,800
2004 7,200 27,000 9,000
2005 16,200 30,000 8,400
Recoveries & Year of Sale
2001
2002 600
2003 2,400
2004 3,000
2005 3,600
Accounts receivable at December 31, 2005 were as follows:

From 2004 sales P90,000
From 2005 sales 810,000
Total P900,000
REQUIRED:
Based on the above and the result of your audit, you are to provide the answers to the
following:
1. The average percentage of net doubtful accounts to charge sales that should be used
in setting up the 2005 allowance is
a. 2.05% b. 2.50% c. 1.90% d. 1.77%
2. How much is the doubtful accounts expense for 2005?
a. P32,850 b. P54,600 c. P43,800 d. P41,250
3. The doubtful accounts expense for 2005 is over(under) stated by
a. P13,350 b. P55,950 c. (P32,850) d. (P41,250)
4. The net realizable value of accounts receivable that should be presented on the
December 31, 2005 balance sheet is
a. P831,600 b. P853,800 c. P868,650 d. P810,000
SUGGESTED ANSWERS: B, D, A, B
AP-5906Q
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PROBLEM NO. 2
Your audit client, Help Corporation, provided for uncollectible accounts receivable under
the allowance method since the start of its operations to December 31, 2005. Provisions
were made monthly at 2 percent of credit sales; bad debts written off were charged to the
allowance account; recoveries of bad debts previously written off were credited to the
allowance account; and no year-end adjustments to the allowance account were made.
Help's usual credit terms are net 30 days.
The credit balance in the allowance for doubtful accounts was P260,000 at January 1,
2005. During 2005, credit sales totaled P18,000,000, interim provisions for doubtful
accounts were made at 2 percent of credit sales, P180,000 of bad debts were written off,
and recoveries of accounts previously written off amounted to P30,000. Help installed a
computer system in November 2005 and an aging of accounts receivable was prepared for
the first time as of December 31, 2005. A summary of the aging is as follows:
Balance in Estimated %
Classifications by Month of Sale Each Category Uncollectible
November-December 2005 P2,280,000 2%
July-October 2005 1,200,000 15%
January-June 2005 800,000 25%
Prior to January 1, 2005 260,000 80%
Based on the review of collectibility of the account balances in the "prior to January 1,
2005" aging category, additional receivables totaling P120,000 were written off as of
December 31, 2005. Effective with the year ended December 31, 2005, Help adopted a
new accounting method for estimating the allowance for doubtful accounts at the amount
indicated by the year-end aging analysis of accounts receivable.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much is the adjusted balance of the allowance for doubtful accounts as of
December 31, 2005?
a. P537,600 b. P350,000 c. P633,600 d. P753,600
2. How much is the doubtful accounts for the year 2005?
a. P427,600 b. P577,600 c. P547,600 d. P457,600
3. The recorded allowance for doubtful accounts should be increased by
a. P283,600 b. P187,600 c. P67,600 d. P0
SUGGESTED ANSWERS: A, C, B
PROBLEM NO. 3
Don’t Let Me Down, Inc. estimates its doubtful accounts by aging its accounts receivable.
The aging schedule of accounts receivable at December 31, 2005 is presented below:
Age of accounts Amount
0 – 30 days P1,264,800
31 – 60 days 691,500
61 – 90 days 288,600
91 – 120 days 114,975
over 120 days 59,100
P2,418,975
Don’t Let Me Down, Inc.’s uncollectible accounts experience for the past 5 years are
summarized in the following schedule:
AP-5906Q
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A/R Balance 0 – 30 31 – 60 61 – 90 91 – 120 Over120

Year Dec. 31 Days Days Days Days Days
2004 P1,968,750 0.3% 1.8% 12% 38% 65%
2003 1,500,000 0.5% 1.6% 11% 41% 70%
2002 697,500 0.2% 1.5% 9% 50% 69%
2001 1,224,000 0.4% 1.7% 10.2% 47% 81%
2000 1,865,500 0.9% 2.0% 9.7% 33% 95%
The balance of the allowance for doubtful accounts at December 31, 2005 (before
adjustment) is P126,750.
QUESTIONS:
Based on the foregoing, answer the following:
1. How much is the adjusted balance of the allowance for doubtful accounts as of
December 31, 2005?
a. P126,750 b. P13,894 c. P140,644 d. P630,675
2. The necessary adjusting journal entry to adjust the allowance for doubtful accounts
as of December 31, 2005 would include:
a. No adjusting journal entry is necessary.
b. A debit to retained earnings of P13,894.
c. A debit to doubtful accounts expense P140,644.
d. A credit to allowance for doubtful accounts of P13,894.
SUGGESTED ANSWERS: C, D
PROBLEM NO. 4
The following were noted during your audit of the I Should Have Known Better Corp. for
the calendar year 2005:
Notes Receivable
Date Particulars Debit Credit
Sept. 1 Michelle, 21%, due in 3 months P320,000
1 Discounted Michelle note P320,000
Oct. 1 Mabelle Co., 24%, due in 2 months 1,200,000
Nov. 1 Eleanor, 24%, due in 13 months 2,400,000
30 Rigby Co., no interest, due in one year 2,000,000
30 Discounted Rigby Co. note 2,000,000
Dec. 1 Sgt. Pepper, 18%, due in 5 months 3,600,000
1 Ms. Anna, President, 12%, due in 3 months
(For cash loan given to Ms. Anna) 4,800,000
All notes are trade notes receivable unless otherwise specified. The Michelle note was
paid on December 1 as per notification received from the bank. The Mabelle Co. note was
dishonored on the due date but the legal department has assured management of its full
collectibility.
The Corporation, with your concurrence, will not use the Notes Receivable Discounted
account but will merely note on the face of the balance sheet the amount of notes
receivable discounted but still outstanding.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. At what amount on the current assets section of the balance sheet as of December
31, 2005 will Notes Receivable-trade be carried?
a. P3,600,000 b. P7,200,000 c. P6,000,000 d. P8,000,000
2. How much is the accrued interest income as of December 31, 2005?
a. P150,000 b. P270,000 c. P198,000 d. P222,000
SUGGESTED ANSWERS: C, B
– End of AP-5906Q –
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Page 1 of 3

CPA REVIEW SCHOOL OF THE PHILIPPINES

Accounts Written off &

Accounts receivable at December 31, 2005 were as follows:

A/R Balance 0 – 30 31 – 60 61 – 90 91 – 120 Over120

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