FAR EASTERN UNIVERSITY

INSTITUTEOF ACCOUNTS, BUSINESS AND FINANCE

Department of Accountancy & Internal Auditing

AUDITING PROBLEMS
First Semester AY 2017-2018
QUIZ 4 – AUDIT OF RECEIVABLES
Name Date
(Family Name) (First Name) (Middle Name) Section
Professo Day/Tim
r e
Stud. No. Score /56 items
Room Rating

ANSWER SHEET

Prob. Your Answer Here Prob. Question Your Answer Here

1 P 1,650,000 11 (1) P 0 or NONE
2 P 600,000 (2) P 1,000,000
3 A (3) P 50,000
4 B (4) P 950,000
5 C (5) P 0 or NONE
6 P 150,000 (6) P 0 or NONE
7 B
8 B 12 (1) P 0 or NONE
9 A (2) P 1,005,000
10 B (3) P 1,000,000
(4) P 1,000,000

NOTES:
Please be reminded of the following five (5) point deductions, if applicable in the circumstances:
a) For using abbreviation.
b) For using acronym.
c) For figures without single rule.
d) For figures without double rule.
e) For erasures not countersigned.
f) For using liquid papers.
g) For not having a heading (if part of the requirement)
h) For not using properly the money columns of the
i) worksheet or journals and ledgers
j) For using the back page of the worksheet.
k) For other inappropriate way of preparing working papers.
l) For poor presentation of working papers.
m) For not following instructions.

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Instructions (40 points): this is claimable also in cash before the actual
This is a combination of multiple choice questions and delivery of goods, this is treated as a receivable.
straight problem. In addition, this is a combination of  Cash advances to subsidiary must be
review of financial accounting for accounts receivable reclassified to Advances to Subsidiary and
and notes receivable, and applied auditing for the classified as non-current asset.
same accounts.  Claim from insurance entity is a non-trade
receivable and is expected to be collected within
For multiple choice questions, choose the correct the accounting period.
answer among the given choices. Supporting
computation is not necessary. Write the letter of your
choice on the answer sheet provided. Use CAPITAL Problem 2
LETTERS. Wishers provided the following data for the current
year:
For straight problems, write directly the needed or
required figures or amounts in the answer sheet Sales on account 3,600,000
provided. Supporting computation is not necessary. Notes received to settle accounts 400,000
Write legibly. Provision for doubtful accounts 90,000
Accounts receivables determined to
be worthless 20,000
Problem 1 Merchandise returned by customers 15,000
Dreamer Company presented to you the Collections received to settle 2,450,000
“Receivables” general ledger account at end of 2016 accounts
as shown below: Discounts permitted to be taken by
customers 45,000
Trade accounts receivable 775,000 Collections received in settlement of
Trade notes receivable 100,000 notes 150,000
Installment receivable, normally due 1
year to two years 300,000 Questions:
Customer’s credit balance due to What is the net realizable value of accounts
sales returns (30,000) receivable as of December 31, 2016?
Advance payments for purchases of
merchandise 150,000 SOLUTIONS:
Customer’s credit balance due to To solve the problem is to determine the journal
Advance payments (200,000) entries of the given transactions. All transactions that
Cash advances to subsidiary 400,000 will debit accounts receivable will increase the AR
Claim from insurance entity 15,000 balance, and any credit to accounts receivable will
Subscriptions receivables due in 60 decrease the AR balance. Since the question is the
days 300,000 NET REALIZABLE VALUE OF ACCOUNTS
Accrued interest receivable 10,000 RECEIVABLE, the transactions that will credit the
Total 2,000,000 Allowance for Doubtful Accounts will be considered
but the effect is decrease in Accounts Receivable
Questions: balance.
What is the amount to be presented as “Trade and
Other Receivables” under current assets of the Sales on account 3,600,000
statement of financial position at end of 2016? Notes received to settle accounts (400,000)
Provision for doubtful accounts
SOLUTION: (THIS IS ALLOWANCE FOR
Trade accounts receivable 775,000 DOUBTFUL ACCOUNTS) (90,000)
Trade notes receivable 100,000 Merchandise returned by customers (15,000)
Installment receivable, normally due 1 Collections received to settle
year to two years 300,000 accounts (2,450,000)
Advance payments for purchases of Discounts permitted to be taken by
merchandise 150,000 customers (45,000)
Claim from insurance entity 15,000 Net Realizable value of AR 600,000
Subscriptions receivables due in 60
days 300,000 NOTES:
Accrued interest receivable 10,000  Collections received in settlement of note will not
Total Trade and Other Receivables 1,650,000 affect accounts receivable because the journal
entry for this is Cash- debit and Notes
NOTES: Receivable – credit.
 Installment receivable, normally due 1 year to  Accounts receivable determined to be worthless
two years is a current asset. has no effect in net realizable value of accounts
 Customer’s credit balance due to sales returns is receivable because the journal entry for this is
Accounts Receivable- credit balance. This is a Allowance for Doubtful accounts – debit and
current liability and usually recorded as Accounts Receivable – credit. Therefore, it will
“Customer’s Credit Balances”. decrease the AR and decrease the ADA. Once
 Customer’s credit balance due to Advance ADA will decrease, the AR will increase. The
payments is Unearned Sales Revenue and net effect is zero.
classified as current liability.  Discounts permitted to be taken by customers
 Advance payments for purchases of will decrease the Accounts Receivable.
merchandise represents debit balance in
accounts payable. Upon payment, the entry
made is debit accounts payable and credit cash. Problem 3
Upon delivery of goods, the journal entry is debit
Purchases and credit Accounts Payable. Since

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At year-end, Aspiring Company reported accounts
receivable of P 8,200,000. Ana analysis of the The procedures to be applied is working back using
accounts receivable showed the following: the formula for cost of sales. Gross sales is equal to
cost of sales plus gross profit (or gross margin).
Gross sales consists of cash sales and credit sales.
Accounts Receivable known to be Therefore, credit sales is equal to gross sales less
worthless 100,000 cash sales.
Advance payment to creditors on
purchase orders 400,000 Accounts receivable, January 1 4,000,000
Advances to affiliated entities 1,000,000 Credit sales during the year
Customers’ accounts reporting credit (See below) 10,600,000
balances arising from sales returns (600,000) Accounts receivable collected (8,400,000)
Interest receivable on bonds 400,000 Accounts Receivable, December
Trade accounts receivable 3,500,000 31 (Letter B) 6,200,000
Subscription receivable due in 30
days 2,200,000 Supporting computation:
Trade installment receivable due 1 – Inventory, January 1 4,800,000
18 months including unearned Purchases 8,000,000
finance charges of P 50,000 850,000 Inventory, December 31 (4,400,000)
Trade accounts receivable from Cost of sales 8,400,000
officers, due currently 150,000 Add: Gross Margin on sales 4,200,000
Trade accounts receivable on which Gross sales during the year 12,600,000
post-dated checks are held and no Cash sales (2,000,000)
entries were made on receipt of Credit sales (Credit to AR) 10,600,000
checks 200,000

What is the correct balance of trade receivable?

Problem 5
a. P 4,650,000
Hopeful Company provided the following information
b. P 4,700,000
for the current year:
c. P 4,150,000
d. P 4,050,000
Allowance for doubtful accounts on
January 1, 2016 200,000
SOLUTION:
Credit sales 5,000,000
Trade accounts receivable 3,500,000
Accounts receivable deemed
Trade installment receivable due 1 –
worthless and written off 300,000
18 months including unearned
finance charges of P 50,000
(P 850,000 – P 50,000) 800,000 As a result of a review and aging of accounts
Trade accounts receivable from receivable, it had been determined that an allowance
officers, due currently 150,000 for doubtful accounts of P 400,000 is needed on
Trade accounts receivable on which December 31, 2016.
post-dated checks are held and no
entries were made on receipt of What amount should be recorded as doubtful
checks 200,000 accounts expense for the current year?
Correct Trade Receivable balance a. P 400,000
(Letter A) 4,650,000 b. P 300,000
c. P 500,000
d. P 700,000
Problem 4
Faith Company provided the following information SOLUTION:
relating to current operations: The solution below is based on T-account for
Allowance for Doubtful Accounts applying the working
Accounts receivable, January 1 4,000,000 back procedure.
Accounts receivable collected 8,400,000
Cash sales 2,000,000 Allowance for doubtful accounts on
Inventory, January 1 4,800,000 December 31, 2016 400,000
Inventory, December 31 4,400,000 Accounts receivable deemed
Purchases 8,000,000 worthless and written off 300,000
Gross Margin on sales 4,200,000 Allowance for doubtful accounts,
January 1, 2016 (200,000)
What is the balance of accounts receivable on Doubtful accounts expense for
December 31? 2016 (Letter C) 500,000
a. P 8,200,000
b. P 6,200,000 Alternative solution using T-account:
c. P 2,000,000 (Apply working back procedure to determine Doubtful
d. P 4,200,000 accounts expense)

SOLUTION: Allowance for Doubtful Accounts

This may be solved using T-account or the formula for
Accounts receivable (like the one used below). Credit Write-off 300,000 200,000 (beg. balance)
sales is missing which is part of debit to AR but this 500,000 (DA Expense)
can be computed by using the cost of sales formula
(see supporting computation below). 400,000 (ending bal.)

Gross margin on sales is the same as gross profit on

sales.

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Problem 6 should be reported as interest revenue for the year
Using the same information in problem 5 except that end December 31, 2017?
doubtful accounts at the end of 2016 is estimated to a. P 200,000
be 5% of credit sales, what is the balance of Accounts b. P 100,000
Receivable at December 31, 2016? c. P 250,000
SOLUTION: d. P 0
Allowance for doubtful accounts on
January 1, 2016 200,000 SOLUTION:
Accounts receivable deemed Face value of non-interest bearing
worthless and written off (300,000) note received 2,500,000
Doubtful accounts expense based on Normal selling price of the product
credit sales (5% x P 5,000,000) 250,000 sold in exchange of PN (2,300,000)
Allowance for Doubtful Accounts, Interest revenue included on
December 31, 2016 (Letter C) 150,000 notes (Letter A) 200,000

Problem 7
Paasa Corporation had net sales of P 8,000,000 Problem 10
during the current year. At year end before adjusting At the beginning of year, Hugot Company sold a piece
entries, the balances in selected accounts were of machinery with a list price of P 1,600,000 to Archer
accounts receivable P 2,000,000 debit and allowance Company which issued a non-interest bearing note of
for doubtful accounts P 20,000 debit. The entity P 1,700,000 due in one year. Hugot Company
estimated that 5% of accounts receivable will prove to normally sells this type of Machinery for 90% of list
be uncollectible. price. What amount should be recorded as interest
revenue for the year?
What is the net realizable value of accounts a. P 100,000
receivable at year – end? b. P 260,000
a. P 2,000,000 c. P 160,000
b. P 1,900,000 d. P 0
c. P 1,880,000
d. P 1,920,000 SOLUTION:
Face value of non-interest bearing
SOLUTION: note 1,700,000
Accounts Receivable, December 31, Normal selling price of machinery
2016 2,000,000 sold in exchange of PN
Allowance for Doubtful Accounts, (P 1,600,000 x 90%) (1,440,000)
December 31, 2016 Interest revenue for the year
(P 2,000,000 x 5%) (100,000) included on notes (Letter B) 260,000
Net Realizable Value of Accounts
Receivable, December 31,2016
(Letter B) 1,900,000
Problem 11
A P 1,000,000, 180-day note dated July 1 was
received from Bagsak Corporation by Pasado
Problem 8 Corporation. It was discounted without recourse on
Surely Pass Company has an 8% notes receivable August 30 at 15% discount rate. At maturity date, the
dated June 30, 2016, in the original amount of P note was dishonored by Bagsak Corporation.
1,500,000. Payments of P 500,000 in principal plus
accrued interest are due annually on July 1, 2017, Compute the following:
2018 and 2019. 1) Interest income at maturity of the note

On June 30, 2018, what amount should be reported SOLUTION:

as a current asset for accrued interest on notes I = PRT
receivable? I = P 1,000,000 x 0% x 180/360
a. P 120,000 I = ZERO
b. P 80,000
c. P 40,000 Notes:
d. P 0 This is a non-interest bearing note.

SOLUTION: 2) Maturity value of the note

I = PRT
I = P 1,000,000 x 8% x 1 year SOLUTION:
I = P 80,000 (Letter B) MV = P + I
MV = P 1,000,000 + 0
NOTES: MV = P 1,000,000
As of June 30, 2018, the outstanding principal of
notes receivable is P 1,000,000 (P 1,500,000 less Notes:
payment of P 500,000 for June 30, 2016 to June 30, The maturity value of non-interest bearing note is
2017). equal to its face value.

3) Discount
Problem 9
On June 30, 2017, Passing Mark Corporation SOLUTION:
accepted a customer’s P 2,500,000 non-interest D = MV x DR x DP
bearing six-month note in a sale transaction. The D = P 1,000,000 x 15% x (180 – 60)/360
product normally sells for P 2,300,000. What amount D = P 1,000,000 x 15% x 120/360

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 D = P 50,000 NOTES:
The journal entry is debit to Notes Receivable
Notes: Discounted at face value of notes and credit to
The discount period will start from discounting Notes Receivable (at face value of notes).
date to maturity date.
4) The amount to be debited to Notes Receivable
4) Proceeds from discounting Discounted account at the time the notes was
dishonored.
SOLUTION:
P = MV – D SOLUTION:
P = P 1,000,000 – P 50,000 P 1,000,000
P = P 950,000
NOTES:
The journal entry is debit to Notes Receivable
5) Interest income actually earned on discounting Discounted at face value of notes and credit to
date Notes Receivable (at face value of notes).

SOLUTION:
I = ZERO

NOTES:
This is because the note is a non-interest bearing
note.

6) Amount of Accounts Receivable to be debited at

the time of dishonor of notes by Bagsak
Corporation.

SOLUTION:
ZERO.

NOTES:
This is because the discounting is without
recourse.

Problem 12
Using the same information in Problem 11, except
that the discounting is with recourse. In addition, a
protest fee of P 5,000 was charged by the ban at the
time the note was dishonored.

Compute the following:

1) The amount to be credited to Notes Receivable
account upon discounting of notes.

SOLUTION:
ZERO.

NOTES:
If the discounting is with recourse, upon
discounting, the credit is to Notes Receivable
Discounted account and not to Notes
Receivable.

2) Amount of Accounts Receivable to be debited at

the time of dishonoring the notes by Bagsak
Corporation. (P 1,000,000)

SOLUTION:
P 1,005,000.

NOTES:
This is the sum of the maturity value of the note
(which is the loan principal) and protest fee.
Therefore, P 1,000,000 + P 5,000.

3) The amount to be credited to Notes Receivable

account at the time the notes was dishonored.

SOLUTION:
P 1,000,000