Far Eastern University

Institute of Accounts. Business and Finance

Department of Accountancy and Internal Auditing

INTERMEDIATE ACCOUNTING 1
RECEIVABLES
DO-IT-YOURSELF (PROBLEMS)

TABLE OF CONTENTS

M2.2E DIY - Problems (With Answer Key)

• Problem 2.2-1 Bad Debt Reporting
• Problem 2.2-2 Journal Entries - Comprehensive Accounts Receivable Problems
• Problem 2.2-3 Journal Entries - Notes Receivable
A. Various Notes Receivable Problems
B. Comprehensive Notes Receivable Problems
• Problem 2.2-4 Income Effects of Receivable Financing Transactions
• Problem 2.2-5 Loans Receivable

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 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

PROBLEM 2.2-1
Bad Debt Reporting

Presented below are series of unrelated situations:

1. In your audit of James Company the year 2020, you concluded that the allowance for doubtful accounts should
be adjusted to equal the estimated amount required based on aging of the accounts as of December 31. During
your audit, you were able to gather the following data:

Allowance for doubtful accounts, Jan 1, 2020 P600,000

Provision for doubtful accounts during 2020 (3% of 10M Sales) 300,000
Bad debts written-off in 2020 375,000
Recovery of bad debts written-off during 2020 100,000
Estimated doubtful accounts per aging of accounts on December 31, 2020 400,000
Accounts receivable, December 31, 2020 2,375,000

Based on the result of your audit, what is the correct doubtful accounts expense for the year 2020?

2. The balances of selected accounts taken from the December 31, 2019 statement of financial position of Ram Inc.
are as follows:

Accounts Receivable P 337,000

Allowance for Uncollectible Accounts 12,000

The following transactions affecting accounts receivable occurred during the year ended December 31, 2016:

Sales (all on account, terms: 2/10, 1/15, n/60) P 1,500,000

Cash Received from customers: 1,600,000
From customers paying within the 10-day discount period 882,000
From customers paying within the 15-day discount period 495,000
From recovery of accounts written off 3,000
From customers paying beyond the discount period ???
Accounts Receivable written off as worthless 11,000
Credit memoranda for sales returns 6,000

Based on assessment of the collectability of the accounts, impairment loss recognized on accounts receivable is
P 15,000.

What is the balance of Allowance for Doubtful Accounts at December 31, 2020?

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 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

3. The Financial Statements of Sherina Company reported the following selected accounts:

Accounts Receivable, January 1, 2020 1,200,000

Allowance for uncollectible accounts, January 1, 2020 60,000
Sales during 2020 10,000,000
Cash collected from customers 8,720,000

The cash collected from customers included a P 20,000 recovery from a customer whose account was written off
in prior year. On November 15, a customer settled his overdue account by issuing a 15%, 4-month note for P
400,000. During 2020, accounts of P 100,000 were written off as worthless.

Analysis of the accounts receivable at December 31, 2020 revealed that P 600,000 were considered past due.
Management’s estimate of probable loss on past due accounts is 20% and on current accounts at 5%.

What is the Amortized Cost/Net Realizable Value of the accounts receivable at December 31, 2020?

4. Xeres Company has estimated its bad debt expense by using 1% of net sales. However, the company is
contemplating aging its accounts receivable and using this as a basis for estimating its bad debts, as it is
believed that this will provide a better estimate of the uncollectible accounts. The following aging schedule was
prepared as of November 30 of the current year, the end of the fiscal year.

Age of Account Amount Percent Estimated to Be Uncollectible

Under 60 days P730,000 1
61-90 days 40,000 6
91-120 days 18,000 9
Over 120 days 72,000 25

Net sales for the year were P4,200,000. There is a debit balance of P14,000 in the allowance for uncollectible
accounts as of November 30 of the current year.

If Xeres estimates its bad debts by aging the accounts receivable, the adjusting entry to allowance for
uncollectible accounts made on November 30 of the current year will be for?

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 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

5. Using the same information in number (4) except that Xeres estimates its bad debts by continuing to use the
percentage of net sales, the balance in the allowance for uncollectible accounts after the adjusting entry is made
at November 30 of the current year will be?

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 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

PROBLEM 2.2-2
Journal Entries – Comprehensive Accounts Receivable Problems

Presented below are series of unrelated situations. Prepare the related journal entries to record the transactions.

1. Fiancee Company record sales credit to accounts receivable. However, at the end of the accounting, the entity
estimates the probable sales returns and records the same by means of an allowance account. The following
transactions occurred in summary form:

Sale of merchandise on account, 2/10, n/30 4,000,000

Collection within the discount period 1,470,000
Collection beyond the discount period 1,000,000
Sales return granted 100,000
Sales return estimated at the end of the year 40,000

SOLUTION:
No Transactions Account Names Debit Credit
.
1. Sale of merchandise on
account, 2/10, n/30

2. Collection within the

discount period

3. Collection beyond the

discount period

4. Sales return granted

5. Sales return estimated at

the end of the year

(Adapted from Intermediate Accounting Textbook)

2. The statement of financial position of Starsky Company at December 31, 2020, includes the following:

Notes Receivable 360,000

Accounts Receivable 1,821,000
Less: Allowance for Doubtful Accounts 173,000 2,008,000

Transactions in 2020 include the following:

a) Accounts Receivable of P 1,380,000 were collected including accounts of P 600,000 on which 2% sales
discounts were allowed.
b) P 53,000 was received in payment of an account which was written off the books as worthless in 2020.
(Hint: Reestablish the receivable account)
c) Customer accounts of P 175,000 were written off during the year.
d) At year-end the Allowance for Doubtful Accounts was estimated to need a balance of P 200,000. This
estimate is based on an analysis of aged accounts receivable.

SOLUTION:
No Transactions Account Names Debit Credit
.
1. Accounts Receivable of P
138,000 were collected
including accounts of P
600,000 on which 2%
sales discounts were
allowed.
2. P 53,000 was received in
payment of an account
which was written off the
books as worthless in
2020. (Hint: Reestablish
the receivable account)

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 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

No Transactions Account Names Debit Credit

.
3. Customer accounts of P
175,000 were written off
during the year.
4. At year-end the Allowance
for Doubtful Accounts was
estimated to need a
balance of P 200,000. This
estimate is based on an ADA, required balance
analysis of aged accounts ADA, unadjusted:
receivable. Unadjusted at 12/31/2020
Transaction No. 2
Transaction No 3
Doubtful Accounts Expense

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 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

PROBLEM 2.2-3
Journal Entries – Notes Receivable

Problem 2.2-3A (Various Notes Receivable Problems)

Presented below are series of unrelated situations.

1. On March 1, 2020, Jacobs Company sold goods to a customer. The customer signed a noninterest bearing
note requiring payment of P120,000 annually for seven years. The first payment was made on March 1, 2020.
The going rate of interest for this type of note at the date of issuance was 10%. How much should Jacobs
Company report as sales revenue in March 2020? (Round off present value factor to two decimal places)

2. On December 31, 2018, Richfellow Corp. borrowed from Bank of Manila, signing a 5-year non-interest-bearing
note for P100,000. The note was issued to yield 10% interest. Unfortunately, during 2020, Richfellow Corp.
began to experience financial difficulty. As a result, at December 31, 2020, Bank of Manila determined that it
was probable that it would receive back only P75,000 at maturity. The market rate of interest on loans of this
nature is now 11%. How much should be recognized by Bank of Manila as credit loss in 2020? (Round final
answer to the nearest peso.)

3. On January 1, 2018, Mead Co. exchanged equipment for a P200,000, noninterest bearing note due on January
1, 2021. The prevailing rate of interest for a note of this type at January 1, 2019 was 10%. The present value of
P1 at 10% for three periods is 0.75. What amount of interest revenue should be included in Mead’s 2020 income
statement?

4. GGWP Co. purchased from Quitter Co. a P20,000, 8%, 5-year note that required five equal annual year-end
payments of P5,009. The note was discounted to yield a 9% rate to GGWP. At the date of purchase, GGWP
recorded the note at its present value of P19,485. What should be the total interest revenue earned by GGWP
over the life of this note?

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 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

5. As of December 31, 2020, Sam Corporation had outstanding note receivable dated October 1, 2020 with face
amount of P745,000, tenor of 3 years, and nominal interest of 8% payable in arrears. Market rate of interest at
the date of issuance was 10%.

PV of 1 at 10% for 3 periods 0.7513

PV of ordinary annuity of 1 at 10% for 3 2.4869
periods

What amount of accrued interest receivable should Sam Corporation record as of December 31, 2020?

6. On January 1, 2014, Smaug Inc. sold an air-conditioning unit to Laketown Corp. with cash price of P800,000.
Laketown signed a noninterest bearing note to make equal payments to Smaug Inc. over 5 years starting
December 31, 2014. If market rate of interest is 12% as of January 1, 2014, how much annual payments will
Smaug Inc. receive based on the noninterest bearing note? (Round off PV factors up to four decimal places.)

7. On January 1, Panther Corporation received one-year 12% note receivable with a face value of P100,000 from
one of its customers. On October 1, Panther Corporation discounted the note to Peaceful Bank to meet some of
its maturing obligations. The bank’s rate in discounting the note is 14%. Assuming the transaction is treated as
conditional sale, what is the journal entry of Panther Corporation to record the discounting?

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 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

Problem 2.2-3B (Comprehensive Notes Receivable Problems)

(Adapted from Intermediate Accounting Textbook)
Braddock, Inc. had the following long-term receivable account balances at December 31, 2019:

Notes Receivable from sale of division 1,500,000

Notes receivable from officer 400,000

Transactions during 2020 and other information relating to Braddock’s long-term receivables were as follows:

1. The P 1,500,000 note receivable is date May 1, 2019, bear interest at 9%, and represents the balance of the
consideration received from the sale of Braddock’s electronics division in New York Company. Principal
payments of P 500,000 plus appropriate interest are due on May 1, 2020, 2021 and 20222. The first principal
and interest payment was made on May 1, 2020. Collection of the note installments is reasonably assured.
2. The P 400,000 note receivable is dated December 31, 2019, bears interest at 8%, and is due on December 31,
2012. The note is due from Sean May, president of Braddock, Inc. and is collateralized by 10,000 of Braddock’s
ordinary shares. Interest s payable annually on December 31, and all interest payments were paid on their due
dates through December 31, 2020. The quoted market price of Braddock’s ordinary shares was P 45 per share
on December 31, 2020.
3. On April 1, 2020, Braddock sold a patent to Pennsylvania Company for a P 100,000 zero-interest bearing note
due on April 1, 2022. There was no established exchange price for the patent, and the note had no ready market.
The prevailing interest rate for a not of this type at April 1, 2020 was 2%. The present value of P 1 for two periods
at 12% is 0.797 (use this factor). The patent had a carrying value of P 40,000 at January 1, 2020, and the
amortization for the year ended December 31, 2020, would have been P 8,000. The collection of the note
receivable from Pennsylvania is reasonably assured.
4. On July 1, 2020, Braddock sold a parcel of land to Splinter Company for P 200,000 under an installment sale
contract. Splinter made a P 60,000 cash down payment on July 1, 2020 and signed a 4-year 11% note for the P
140,000 balance. The equal annual payments of principal and interest on the note will be P 45,124 payable on
July 1, 2021, through July 1, 2024. The land could have been sold at an established cash price of P 200,000 The
cost of the land to Braddock was P 150,000. Circumstances are suck that the collection of the installments on the
note is reasonably assured.

Instructions:
a) Prepare the long-term receivables section of Braddock’s statement of financial position at December 31, 2020.
b) Prepare a schedule showing the current portion of the long-term receivables and accrued interest receivable that
would appear in Braddock’s statement of financial position at December 31, 2020.
c) Prepare a schedule showing interest revenue from the long-term receivables that would appear on Braddock’s
income statement for the year ended December 31, 2020.

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 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

PROBLEM 2.2-4
Income Effects of Receivable Financing Transactions

(Adapted from Intermediate Accounting Textbook)

Sandburg Company requires additional cash for its business. Sandburg has decided to use its accounts receivable to
raise additional cash and kas asked you determine the income statement effects of the following contemplated
transactions.

1. On July 1, 2020, Sandburg assigned P 400,000 of accounts receivable to Keller Finance Company.
Sandburg received an advance from Keller of 80% of the assigned accounts receivable less a commission
of 3% on the advance. Prior to December 31, 2020, Sandburg collected P 220,000 on the assigned
accounts receivable, and remitted P 232,720 to Keller, P 12,720 of which represented interest on the
advance from Keller.

2. On December 1, 2020, Sandburg sold P 300,000 of net accounts receivable to Wunsch Company for P
270,000. The receivables were sold outright on a without guarantee (recourse) basis.

3. On December 31, 2020, an advance of P 120,000 was received from First Bank by pledging P 160,000 of
Sandburg’s accounts receivable. Sandburg’s first payment to First Bank is due on January 30, 2021.

Instructions:
Prepare a schedule showing the income statement effects for the year ended December 31, 2020, as a result of the
above facts.

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 Far Eastern University
Institute of Accounts. Business and Finance
Department of Accountancy and Internal Auditing

PROBLEM 2.2-5
Loan Receivable

(Adapted from Intermediate Accounting Textbook)

On December 31, 2020, London Bank granted a P 5,000,000 loan to a borrower with 10% stated rate payable
annually and maturing in 5 years. The loan was discounted at the market interest rate of 12%.

Unfortunately, the financial condition of the borrower worsened because of the lower revenue.

On December 31, 2022, the bank determined that the borrower would pay back only P 3,000,000 of the principal at
maturity.

However, it was considered likely that interest would continue to be paid on the P 5,000,000 loan.

The present value of 1 at 12% is 0.57 for five periods and 0.71 for three periods.

The present value of an ordinary annuity of 1 at 12% is 3.60 for five periods and 2.40 for three periods.

QUESTIONS:
1. What is the amount of cash paid to the borrower on December 31, 2020?
2. What is the carrying amount of the loan receivable on December 31, 2022?
3. What is the impairment loss on loan receivable to be recognized for 2022?

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