1

3. Completeness - to determine that all transactions

relative to receivables were recorded in the proper
accounting period.
De La Salle University
Taft Avenue, Manila Audit Procedures:
REVAUDI a. Test cutoff of sales, sales returns and cash
receipts to determine whether receivables are
2 Term 2009-2010
nd
recorded in the proper accounting period.
b. Application of analytical procedures
Receivables
4. Valuation - to determine whether receivables are
1. Existence - to determine whether receivables actually recorded at proper amounts in accordance with
exist and only sales and receivables that should be PAS/PFRS; that is if its valuation approximates its net
recorded are recorded. realizable value.

Audit Procedures: Audit Procedure:

a. Obtain a schedule of aged trade accounts a. Review collectability of receivables and
receivable and notes receivable and reconcile determine the adequacy of the allowance for
them to the general ledger. doubtful accounts.
b. Examine all aspects of a sample sales b. Recalculate the interest income from the notes
transaction to determine whether the internal receivable
control procedures are being applied properly. c. Discuss with the credit manager the likelihood
c. Trace some accounts from the accounts of collecting older accounts. Examine
receivable master file to the aged trial balance. subsequent cash receipts and the credit file on
older accounts to evaluate whether receivables
2. Rights and Obligations - to determine whether are collectible.
receivables represent bona fide obligations owed to the d. Verify adequacy of the allowance for doubtful
company as of balance sheet date. accounts and verify the accuracy of the aged
trial balance.r34e
Audit Procedures:
a. Confirm receivables on a test basis 5. Presentation and Disclosure - to determine whether
b. Inspect notes on hand receivables are properly presented and classified in the
c. Perform analytical review procedures to balance sheet.
determine whether recorded sales and
receivables balances appear reasonable Audit Procedure:
d. Review the minutes of the board of directors for a. Evaluate financial statement presentation and
any indication of pledged or factored accounts disclosure of receivables by reviewing loan
receivable. agreements in which receivables have been
pledged or assigned.
 2

b. Also review the schedule of Accounts VALUATION:

receivables for inclusion of receivables from 1. Receivables are valued at their net realizable value or
employees, officers, affiliated companies and their expected cash value.
related parties, or for credit balances in Net realizable value -is the estimated amount
customers accounts that may warrant of cash that will
classification to current liabilities. be collected or realized from receivables.
c. Obtain client representation regarding pledge,
discount or assignment of receivable and about 2. Long term note receivables should be valued at an
receivables from officers, directors, affiliates or amount representing the discounted value of the
other related parties. expected future cash receipts.

DEFINITION: 3. Receivable denominated in foreign currency should be

PAS 39 defines loans and receivables as non derivative translated to local currency at the exchange rate on
financial assets with fixed or determinable payments balance sheet date.
that are not quoted in an active market.
CLASSIFICATION:
RECOGNITION: PAS 1 Presentation of Financial Statements Par
Receivables are recognized when title to the goods passes to 66 states An entity shall classify an asset as
the buyer or when transfer of resources take place. The point current when the entity expects to realize the
at which title passes may vary with the terms of the sales. asset or intends to sell or consume it in the
entitys normal operating cycle, or when the
MEASUREMENT: entity expects to realize the asset within twelve
PAS 39 par 43 provides that when a financial asset is months after the reporting period.
recognized initially, an entity shall measure it fair value
plus transaction costs that are directly attributable to As to Balance sheet classification
the acquisition. 1. Current Assets vs. Non Current
a. Initial measurement Current - trade receivables which are expected to be
1. Short term receivables realized in cash within the normal operating cycle or
-at face value one year, whichever is longer.
2. Long term interest bearing receivables
-at face value Non current - these are non trade receivables which
3. Long term non interest bearing receivables are expected to be realized beyond one year or those
-at discounted amount (present value) receivables which are not currently collectible.
b. Subsequent measurement
PAS 39, paragraph 46, provides that loans and BALANCE SHEET PRESENTATION:
receivables shall be measured at amortized cost Receivables whether trade or non-trade which are currently
using the effective interest method. collectible should be presented on the balance sheet as one
line item called Trade and Other receivables, however, the
 3

details of the total trade and other receivables shall be c. Freight collect - means that the freight
disclosed in the notes to the financial statements. charges on the merchandise shipped is to be
paid by the buyer.
Non trade receivables which are not currently collectible are d. Freight prepaid - means that the freight
classified as non current assets and is therefore presented as charges on the merchandise shipped was
long term investment or other non current assets whichever is already paid by the seller.
appropriate.
5. Accounting for bad debts expense
OTHER ITEMS: a. Allowance method - this requires the
1. Methods of Receivable Confirmation recognition of bad debt loss even if the
a. Positive confirmation accounts are only doubtful of collection.
A positive confirmation is a letter addressed to the
debtor, requesting the recipient to indicate directly b. Direct write off method - this requires the
on the letter whether the stated account balance is recognition of bad debt loss only when the
correct or incorrect and, if incorrect, by what account proved to be worthless or uncollectible.
amount.
6. Basis of estimating bad debts expense
b. Negative confirmation a). Percentage of sales (Income statement
A negative confirmation is a letter addressed to the approach)
debtor that requests a response only if the - bad debts expense is calculated by applying a
recipient disagrees with the amount of the stated percentage to credit sales for the period.
account balance.
b). Percentage of Receivables (Balance sheet
3. Customers credit balances - are credit balances in approach)
Accounts receivables resulting from overpayments, in using this method, the focus of attention is
returns and allowances and advance payments from on determining the ending balance in the
customers. This account should be classified as Allowance for doubtful accounts.
current liabilities and must not be offset against the
debit balances in other customers account. a. Composite percentage
- a single rate is applied to Accounts
4. Terms related to freight charges receivable at the end of the period to
a. FOB Destination - means that ownership to obtain the desired ending balance of the
the merchandise is transferred to the buyer allowance.
only upon reaching the point of destination or b. Aging
upon the buyers receipt of merchandise. - the allowance is then determined by
b. FOB Shipping point - means that ownership multiplying the total of each
to the merchandise is transferred to the buyer classification by the rate or percent of
upon shipment thereof. loss depending on the experience of the
company for each category.
 4

7. IMPAIRMENT
PAS 39 par 63 provides that if there is evidence b. Assignment - a more formal borrowing arrangement
that an impairment loss on loans and receivables in which the receivables are used as security . The
carried at amortized cost has been incurred, the assignor or borrower transfers its rights in some of its
amount of the loss is measured as the difference accounts receivables to a lender or assignee in
between the carrying amount of the loan and the consideration for a loan.
present value of estimated future cash flows
discounted at the original effective rate of the c. Factoring - it is similar to a sale of receivables to a
loan. financing institution known as a factor, because it is
generally on a without recourse-notification basis.
8. NOTES RECEIVABLES
d. Discounting - this is a sale of the note to a third
Definition - these are claims supported by formal
party, usually a bank.
promises to pay, which are in the form of notes.
Problem 1
. Recognition
You are engaged to perform an audit of the accounts of the
1. Short term notes are generally recorded at face
LOOP CO. for the year ended December 31, 2008 and have
value because the interest implicit in the
gathered the following information:
maturity value is immaterial.
1. The December 31, inventory was determined by a
2. Long term notes should be recorded at present
physical count on December 28 and the following
value.
entry was made to record the transaction:
a. Interest bearing notes - the PV of the
note is the same as the face amount of
Inventory 600,000
the note.
Income and expense summary 600,000
b. Non interest bearing notes
- Present Value
Merchandise shipped by the LOOP CO. to customers
.
up to and including December 28, 2008 has been
The difference between the face amount of the note
eliminated from inventory.
and its PV is recorded as discount or premium and
amortized to Interest income account over the life of
2. Sales for the year 2008 was reported at 800,000.
the note using the effective interest method.
3. GPR is 20% based on sales
4. All customers are within a 5 day delivery area
9. ACCOUNTS AND NOTES RECEIVABLE FINANCING:
5. Sales register for December 2008 and January 2009
a. Pledging - receivables are used as collateral or
shows the following:
security for a loan, thus the collection duties
remain the responsibility of the borrower. The
pledge accounts merely serve as security to the
lender giving assurance that sufficient assets
exist that will generate cash flows adequate in
amount and timing to repay the debt.
 5

December 01, 2008, a customer settled his account by issuing

a 12% six month note for P100,000.

On December 31, 2008, the accounts receivable included

P150,000 of past due accounts. After careful study, the
management estimated that the probable loss on past due
accounts was 20% and that in addition, 5% of the current
accounts may prove uncollectible.

Requirements:
1. What is the balance of the Accounts receivable on
December 31, 2008?
2. What is the balance of the Allowance for Doubtful
accounts before adjustment on December 31, 2008?
3. How much is the required allowance for doubtful
accounts on December 31, 2008?
4. How much increase in allowance for doubtful accounts
is required on December 31, 2008?
5. Adjusting entry to record the doubtful accounts
expense for 2008.
Requirement: Prepare the necessary adjusting journal
entries at December 31, 2008 to correct the following
Problem 3
accounts:
SETH CO. has the following data relating to accounts
a. Sales
receivable for the year ended December 31, 2008:
b. Inventories
Accounts receivables, January 01, 2008 P 540,000
Problem 2 Allowance for doubtful accounts, January 01, 2008 9,600
The financial statements of Jackie Company include the Cash received from customers during the year 1,330,000
following: Accounts written off during the year 8,800
Dec. 31, 2007 Dec. 31, 2008 Purchase of merchandise during the year 900,000
Accounts receivable 300,000 Inventory, January 01, 2008 200,000
Allowance for Doubtful Accounts 15,000 Inventory, December 31, 2008 150,000
Sales 2,500,000 Goods were sold at 50% above cost
Cash collected from customers 2,180,000 75% of sales were on account
Estimated bad debts 1% of credit sales
Terms, 2/10, 1/15, n/60)
Among the cash collections was the recovery of P5,000
receivable from a customers whose account had been written
off as worthless in 2007. During 2008 it was necessary to
write off uncollectible customers accounts of P25,000. On
 6

An analysis of cash received from customers during the year 1. What is the percentage to be used in computing the
revealed that the P705,600 was received from customers allowance for doubtful accounts on December 31,
availing the 10 day discount period; P396,000 from 2008?
customers availing the 15 day discount period; P2,400 2. How much is the provision for doubtful accounts for
represented recovery of accounts written off and the 2008?
balance was received from customers paying beyond the 3. What is the ledger balance of accounts receivable on
discount period. SETH CO.s year end balance of December 31, 2008.
Allowance for doubtful accounts was estimated to be 5% 4. What is the ledger balance of the Allowance for
of the outstanding accounts receivable as of December doubtful accounts after necessary adjustments on
31, 2008. December 31, 2008?

Requirements: Compute for the balances of the following as Problem 5

of December 31, 2008: The Accounts Receivable control account balance of JAMES
1. Accounts receivable COMPANY was P861,200 as of December 31, 2008. The
2. Bad debts expense subsidiary ledger accounts of the company are summarized
3. Net realizable value below. Credit terms are 60 days net.
CUSTOMER DATE DEBIT CREDIT BALANCE
Problem 4
1 May 31 20,000 20,000
Nicole Company sells directly to customers. On January 01, July 01 12,000 8,000
07 20,000 28,000
2008, the balance of the accounts receivable was P250,000 Sept 01 12,000 16,000
while Allowance for doubtful accounts was a credit of 25 32,000 48,000
P10,0000. The following data are made available to you by Nov 01 12,000 36,000
your client. Dec 10 12,000 48,000
CREDIT SALES WRITE OFF RECOVERIES
2 Aug 08 33.600 33,600
2005 550,000 13,000 1,000 Oct 04 33,600 -
2006 600,000 14,500 1,500 Nov 25 88,000 88,000
2007 750,000 15,000 2,000
2008 1,500,000 20,000 2,500 3-2month 6%Jan 01 480,000 480,000
Mar 01 484,800 (4,800)
2month 6%Dec 01 400,000 395,200
Doubtful accounts are provided for as a percentage of credit
sales. The accountant calculates the percentage annually by 4 Feb 03 40,000 40,000
using the experience of the three years prior to the current Aug 03 40,000 80,000
year. The formula is accounts written off less recoveries
5 Feb 10 120,000 120,000
expressed as a percentage of the credit sales for the period.
Apr 09 120,000 -
Cash receipts in 2008 from credit sales amounted to May 04 160,000 160,000
P1,307,500. July 02 160,000 -
Sept 06 211,120 211,120
Nov 25 8,880 220,000
Requirements:
6 July 17 20,000 20,000
 7

Aug 16 17,760 37,760 computer facility in November 2008 and an aging of accounts
Sept 30 30,000 67,760
receivable was prepared for the first time as of December 31,
Oct. 15 37,760 30,000
18 24,000 54,000 2008.
Dec 20 24,000 30,000

A summary of the aging is as follows:

The Allowance for Doubtful Accounts before audit has a credit CLASSIFICATION AMOUNT % OF COLLECTIBILITY
balance of P20,000. The Allowance for Doubtful Accounts is 01-30 days P 570,000 2%
to be adjusted to a balance determined as follows: 31-60 days 300,000 10%
61-90 days 200,000 25%
over 90 days 65,000 75%
Accounts not due 1/2 of 1%
Accounts 1-60 days past due 2% Based on the review of collectibility of the account balances in
Accounts 61-120 past due 5% the over 90 days category, additional receivables totaling
Accounts over 120 days past due 50% P30,000 was written off as of December 31, 2008. Effective
with the year ended December 31, 2008. Con Air Co. adopted
The provision is to be based only on the trade accounts. a new accounting method for estimating the allowance for
Except where payments are earmarked, the oldest items are doubtful accounts at the amount indicated by the year end
paid first. aging analysis of accounts receivable.
Requirements: Requirements:
1. Prepare a schedule for aging of accounts receivable. 1. Prepare and analysis of the Allowance account.
2. Adjusting journal entries. 2. Adjusting journal entry
3. How much is the net realizable value?
Problem 6
From inception of operations to December 31, 2008, Con Air Problem 7
Corporation provided for uncollectible accounts receivable You are examining the financial statements of Smart Inc. for
under the allowance method. Provisions were made monthly the year ended December 31, 2008. During the audit of the
at 2% of credit sales; bad debts written off were charged to the accounts receivable and other related accounts, certain
allowance account; recoveries of bad debts previously written information was obtained. From this information you are to
off were credited to the allowance account and no year end prepare audit adjustments and compute for the correct
adjustments to the allowance account were made. Con Air balances of the accounts receivable and the allowance for
Corp.s usual credit terms are net 30 days. doubtful accounts as of December 31, 2008.
The balance in the Allowance for Doubtful Accounts was The December 31, 2008 debit balance in the Accounts
P65,000 at January 01, 2008. During 2008 credit sales receivable control account is P98,500. The only entries in the
totaled P4,500,000, interim provisions for doubtful accounts Bad debts expense account were; a credit for P162 on
were made at 2% of credit sales, P45,000 of bad debts were December 01, 2008 because Company A remitted in full for
written off and recoveries of accounts previously written off the accounts charged off on October 31, 2008 and a debit
amounted to P7,500. Coin Air Corporation installed a
 8

balance on December 31 for the amount of the credit to the aging of the accounts receivable account.
Allowance for Doubtful accounts. 2. Adjusting journal entries
3. How much is the doubtful accounts expense to be
The Allowance for doubtful accounts schedule is presented
reported in the 2008 Income Statement?
below:

DEBIT CREDIT BALANCE

Problem 8
January 2008 1,829
October 31, 2008, Uncollectible: Atlantis Inc. sells computer parts and supplies to many
Company A P 162 organizations in the city and surrounding area on credit terms
Company B 410 of 2/10, n/30. In the past, over 75% of the credit customers
Company C 282 754 have taken advantage of the discount by paying within 10
December 31, 2008, 5% of A/R 4,925 6,000 days from the invoice date.

An aging schedule of the accounts receivable as of December The number of customers taking the full 30 days to pay has
31, 2008 and the decision are shown in the table below: increased within the last year. Current indications are that
less than 60% of the customers are now taking the discount.
AGE AMOUNT % OF UNCOLLECTIBILITY
0-1 month 46,620 1% The fact that some credit accounts will prove uncollectible is
1-3 months 38,410 2% normal. Annual bad debt write offs have been 1.5% of gross
3-6 months 11,090 3%
credit sales over the past five years. During the last fiscal
over 6 months 3,000 Definitely uncollectible,
P 500; P1,000 is considered year, this percentage increased to slightly less than 4%. The
50% uncollectible current Accounts Receivable balance is P600,000.
Balance is 80% collectible
The controller has responded to a request for more
There is a credit balance in one account receivable (0-1 information on the deterioration in collections of accounts
month) of P1,000. It represents an advance on a sales receivable with the report reproduced below.
contract. Also, there is a credit balance in one of the 1-3
months account receivable of P250 for which merchandise will Atlantis Inc.
be accepted by the customer. Accounts Receivable Collections
May 31, 2008
The ledger accounts have not been closed as of December 31, Proportion to Total Age Categories Probability of Collection
2008. The Accounts receivable control account is not in 68% Not yet due 99%
agreement with the subsidiary ledger. The difference cannot 15% Less than 30 days past due 96.50%
be located and the auditor decides to adjust the control to the 8% 30-60 days past due 95%
sum of the subsidiaries after corrections are made. 5% 61-120 days past due 91%
2.5% 121-180 days past due 60%
Requirements: 1.5% over 180 days past due 10%
1. Working paper that will show the adjustments and
 9

The Allowance for doubtful accounts had a credit balance of receivable (included in 61-120 days age group) were
P15,125 on June 01, 2007. Atlantis Inc. has provided for a factored without recourse for P27,000. Client
monthly bad debts expense accrual during the current fiscal recorded this transaction by debiting Cash and
year based on the assumption that 4% of gross credit sales crediting Notes Payable-Finance Company for P
will be uncollectible. Total gross credit sales for the 2007- 27,000.
2008 fiscal year amounted to P1.5 million. Write-offs of bad
accounts during the year totaled P54,375.
2. A cut off examination revealed that goods having a
Requirements: selling price of P4,000 were shipped to a customer
1. Prepare an aging schedule using the age categories as FOB Shipping Point on December 30, 2008, but the
given above showing: sale was recorded on January 5, 2009. The goods
a. Amount of accounts receivable outstanding for were not included in the December 31, 2008 inventory.
each age category and in total.
b. The estimated amount that is uncollectible for 3. Customers accounts were confirmed as of December
each category and in total. 31, 2008. The following replies to positive confirmation
request were received:
2. Compute the amount of the year end adjustment
necessary to bring the Allowance for Doubtful a. Confirmation No. 15 - Our account is fully
accounts to the balance indicated by the age analysis paid as evidenced by your OR No. 124 dated
and prepare the necessary adjusting entry to adjust December 28, 2008 in the amount of P3,000.
the accounting records.
Audit Findings: Customers ledger card
Problem 9
shows a balance of P500 as of December 31,
Your client furnished you with a schedule of Trade Accounts
2008. Remittance of P3,000 was in settlement
Receivable as of December 31, 2008. Reconciliation between
of Invoice No. 069 dated November 28, 2008 for
the general ledger control account and subsidiary ledger
P3,500. Goods were shipped FOB Destination,
balances shows the following:
terms n/30. Customer paid the freight charge
Per Subsidiary ledger:
of P500 and deducted this amount from the
Customers account with debit balances 358,000 remittance.
Customers account with credit balances ( 15,000) b. Confirmation No. 38 - We confirm the balance
Total 343,000
of P7,500. This represents selling price of
Advances to Officers (collectible in one year) 7,500
Stockholders subscription (no definite due date) 40,000
goods shipped to us on consignment. We shall
Advances to affiliated company 12,500 remit payment when the goods are sold less
Total per general ledger P 403,000 our 15% commission.

Your audit revealed the following: Audit Findings: Traced the shipment to
1. A review of the pertinent records showed that on clients consignment records. Goods were
December 19, 2008, P30,000 of trade accounts shipped to consignee on December 26, 2008.
 10

Consignee is entitled to 15% commission based Ace Co.-over one year past due P 1,250
on sales. Clients gross profit rate is 40% of Rodney Corp.-Bankrupt 2,000
selling price. Total P 3,250

Requirements:
1. Adjusting journal entries
2. Compute for the following:
ALLOWANCE FOR DOUBTFIUL ACCOUNTS Net realizable value
An analysis of the allowance for doubtful accounts in Required allowance
the general ledger shows: Doubtful accounts expense
Balance, January 01, 2008 P 36,000
Doubtful accounts expense 32,000 Problem 10
Recoveries 6,000
Accounts written off 36,500) You are engaged in your fifth annual examination of the
Balance December 31, 2008 P 37,500 financial statements of Ramos Corporation. Your examination
is for the year ended December 31, 2008. The client prepared
the following schedules of Trade Notes Receivables and
AUDIT NOTES: Interest Receivables for you at December 31, 2008. You have
After discussion with the credit manager, the following checked the opening balances to your prior years audit
aging summary was prepared by the client: working papers.
Your examination revealed the following information:
AGE BALANCE
Current-60 days P 195,000 Interest is computed on a 360 day basis. In computing the
61-120 days 108,000 interest, it is the Corporations
121-180 days 40,000 practice to exclude the first day of the notes term and to
Over 180 days 15,000 include the due date.
P 358,000
============ 1. The Marcos Companys 90 day note was discounted
on May 16 at 8% and the proceeds were credited to the
Based on the review of the accounts with the credit Trade Notes Receivable account. The note was paid at
manager, the following is a fair estimate of collectibility maturity.
for the purpose of establishing the required balance in
the Allowance for Doubtful accounts: 2. Aquino Industries became bankrupt on August 31 and
Age Group Probability of Collection the Corporation will recover P0.75 for every peso. The
Current-60 days 98% Corporation uses the direct write off method for
61-120 days 80% recording bad debts expenses. All of Ramos
121-180 days 50% Corporations Note Receivable provide for interest at
Over 180 days 20% the legal rate of 12% on the maturity value of a
Client agreed to write off accounts in the over 180 dishonored noted.
days age group consisting of:
 11

3. J. Ramos, President of Ramos Corporation confirmed Company for one of the P10,000 notes with accrued
that he owed the Corporation P18,750 and that he interest. The bookkeeper credited Accounts Receivable
expects to pay the note within six months. You are account for the amount of cash received.
satisfied that the note is collectible. 7.

4. Roxas Corporations 60 day note was discounted on

November 01 at 8% and the proceeds were credited to
the Trade Notes Receivable and Interest Receivable
accounts. On December 02, Ramos Corporation
received notice from the bank that Roxas Corporations
note was not paid at maturity and that it had been
charged against Ramos checking account by the bank
plus a protest fee equal to 10% of the maturity value.
Upon receiving the notice from the bank, the
bookkeeper recorded the note and accrued interest
thereon in the Trade Notes Receivable and Interest
Receivable accounts. Roxas Corporation paid Ramos
Corporation the full amount due in January 2009.

5. The Pelaez Inc. 90 day note was pledged as collateral

for P43,750, 60 day 6% loan from the Philippine
National Bank on December 01.

6. On November 1, the Corporation received four P10,000

90 day notes from Recto Company. On December 01,
the Corporation received payment from Recto
Ramos Corporation
TRADE NOTES RECEIVABLE AND RELATED INTERST RECEIVABLE

Interest Balance 2008

Maker Issue Date Terms Rate 12.31.07 Debits Credits Balance
Lawton Co. 04.01.07 One year 12% P75,000 P75,000 -
Marcos Co. 05.01.08 90 days after date - P 37,500 36,875 P 625
Aquino Ind. 07.01.08 60 days 12% 7,500 7,500
J Ramos 08.03.08 Demand 12% 18,750 18,750
Roxas Corp. 10.02.08 60 days after date 12% 62,500 62,500 -
68,875
68,875
Pelaez Inc, 11.01.08 90 days after date 8% 52,500 43,750 8,750
Recto Co. 11.01.08 90 days after date 12% 40,000 40,000
 12

_______ _______ _______ _______

P75,000 P287,625 P218,125 P 144,500

INTEREST RECEIVABLES
BALANCE BALANCE
12.31.07 DEBIT CREDIT 12.31.08
Lawton Co. P 6,750 P 2,250 P 9,000
Aquino Ind. 150 P 150
J. Ramos 500 500
Roxas Corp 1,250 825 425
Pelaez Inc. 700 700
Recto Co. 800 800
_________ ________ _______ ________
P 6,750 P 5,650 P 9,825 P 2,575

Requirement: Prepare the adjusting journal entries that you would suggest at December 31, 2008 for the above transaction.
Disregard income tax implications.

END