AUDIT OF

RECEIVABLES
 Methods of estimating doubtful accounts

Result

Aging of Accounts Receivable Required Allowance for Credit Loss

Percent of Accounts Receivable Required Allowance for Credit Loss

Percent of Sales Bad Debt Expense

(Expected Credit Loss)
 Accounts Allowance for Notes Notes Receivable
Receivable Credit Loss Receivable Discounted
Jan 1. 672,000 42,300 179,400 114,400
1 2,623,800
2 (2,523,000)
3 (41,400) (41,400)
4 (87,000)
5 (216,000) 216,000
6 (108,000) (108,000)
7 6,075 (6,000) (6,000)
8 135,000
9 1,500 1,500
(1,500)
10 (6,000)

11 39,357
_________ _________ _________ _________
Dec. 31 515,475 41,757 194,400 135,000
 Gross Carrying Expected Credit Loss
Amount Default Rate Allowance
Current 7,500,000 0.15% 11,250
1-30 Days 3,750,000 0.80% 30,000
31-60 Days 2,000,000 1.80% 36,000
61-90 1,250,000 3.30% 41,250
More than 90 Days 500,000 5.30% 26,500
145,000
Gross Carrying Expected Credit Loss
Amount Default Rate Allowance
Current 8,000,000 0.25% 20,000
1-30 Days 4,000,000 0.90% 36,000
31-60 Days 2,500,000 1.90% 47,500
61-90 1,750,000 3.50% 61,250
More than 90 Days 750,000 5.50% 41,250
Adjustment for 2019 206,000
Required Allowance for Credit Loss 206,000
Beginning Allowance for Credit Loss (145,000)
Expected Credit Loss 61,000

Entry: Expected Credit Loss 61,000

Allowance for Credit Loss 61,000
Accounts Receivable per general ledger 505,000
AA CO (23,000)
BB CO -
CC CO (40,000)
DD CO (10,000)
EE CO -
FF CO (31,000)
GG CO 10,000
HH CO (10,000)
II CO 40,000
_________
Adjusted Balance 441,000
Invoice Number No. Amount
5329 191,430 Overstatement
5328 62,022 Overstatement
5332 264,131 Understatement
5331 10,639
_______________ Understatement

Net Understatement 21,318

Entry Accounts Receivable 21,318

Sales 21,318

3. B
4. B
5. D
1. Merchandise Purchase 450,000
Less: End, Inventory (123,000)
Cost of Goods Sold 327,000
X Sales Ratio X 130%
Sales 425,100
Less: Collections (150,000)
Accounts Receivable, end275,100
2. First year of operations
Expected Credit Loss will be equal to Allowance for
Credit Loss
Accounts Receivable ~1,130,600~
Less: AFCL 235,600
Accounts Receivable, Net 895,000

Allowance for Credit Loss Unadj. 271,000

Less: Write-off (35,400)
Allowance for Credit Loss Adj, 235,600
3. Accounts Receivable 460,000
Less: AFCL (95,000)
Accounts Receivable, Net365,000
 4.

Accounts Receivable Turnover

= Net Sales_____
Avg. AR, net

6.5 = 2,600,000
(460,000+X)/2

2,600,000/6.5= 400,000
Accounts Receivable ~360,000~ 400,000 x 2= 800,000
Less: AFCL (20,000) 800,000-460,000= 340,000
AR, Net Dec. 31, 2018 340,000 AR, Net Dec. 31, 2018= 340,000
 Required Allowance 9,699
Debit Bal of AFCL (5,500)
Increase in Allowance 15,199
Entry
Expected Credit Loss 15,199
Allowance for Credit Loss 15,199

5. Accounts Receivable 180,840

Gross Carrying Expected Credit Loss Less: AFCL 9,699
Amount Default Rate Allowance
AR, Net 171,141
1-30 Days 65,600 1% 656
31-60 Days 44,320 1.5% 665
61-90 32,600 3.0% 978
91-120 29,400 10% 2,940
Over 120 Days 8,920 50% 4,460
Total 9,699
 Gross Carrying Expected Allowance for
Amount Default Rate Credit Loss
0-30 Days 843,200 .46% 3,878.72
31-60 Days 461,000 1.72% 7,929.20
61-90 192,400 10.38% 19,971.12
91-120 76,650 41.80% 32,039.70
Over 120 Days 39,400 76.00% 29,944.00
93,762.74
Accounts Receivable 1,612,650 Required Allowance 93,763
Less: AFCL (93,763)
AFCL unadjusted 84,500
AR, Net 1,518,887 Increase in allowance 9,263
Entry Expected Credit Loss 9,263
Allowance for Credit Loss 9,263
1. No effect on Total Assets and Net Income Accounts Receivable
(1,500,000-20,000) 1,480,000
Less: AFCL (102,300)
___________
2. Credit Sales
(4,000,000-400,000) 3,600,000 AR, Net 1,377,700
Less: Sales Discount (250,000) 5. D
Sales Return & Allowances (350,000)
Net Credit Sales 3,000,000
X Bad Debt Rate x 1.5%___
Expected Credit Loss 45,000
Expected Allowance for
Account Balance Default Rate Credit Loss
Less than 60 days 780,000 1% 7,800
61-90 230,000 5% 11,500
91-120 420,000 15% 63,000
Over 120 Days 50,000 40% 20,000
Required Allowance 102,300
Allowance Balance (33,000-20,000 +45,000) 58,000
__________
Increase in Allowance 44,300
1. Accounts Receivable, Dec. 31, 2018
AR, Jan 1, 2018 1,800,000
Sales 15,000,000
Collections for the year
(13,080,000- 30,000) (13,050,000)
Write-off (150,000)
Notes to settle AR (600,000)
AR, Dec. 31, 2018 3,000,000

2. Allowance for Credit loss before adjustments on Dec. 31, 2018

AFCL, Jan. 1, 2018 90,000
Recovery 30,000
Write-off (150,000)
AFCL, Dec. 31 (Debit) (30,000)
3. Required AFCL on Dec. 31, 2018
Past Due Accounts 900,000 x 20% 180,000
Current Accounts (3M-900k) x 5% 105,000
_________
Required AFCL on Dec. 31, 2018 285,000

4. Increase in AFCL
Balance before Adjustment (30,000)
Required AFCL on Dec. 31, 2018 285,000
Increase in Allowance 315,000

5. Entry
Expected Credit Loss 315,000
Allowance for Credit Loss 315,000
1. AFCL on Dec. 31, 2018 before adjustments 3. Expected Credit Loss for 2018
AFCL. Jan 1, 2018 143,000
Interim Provision for credit loss 300,000
Interim Provision for credit loss
Increase in Allowance 283,200
(15,000,000 x 2%) 300,000
Total Expected Credit Loss 583,200
Write-off (140,000)
Recoveries 43,000 4. Accounts Rec., Dec 31,2018
Write-off (120,000)
__________ (4,600,000-120,000) 4,480,000
226,000 Less: AFCL, Dec 31, 2018 (509,200)
Net AR, Dec. 31, 2018 3,970,800
2. Year-end Adjustment
5. Valuation and Allocation
Schedule of Aging of Receivables
Expected Allowance for
Classification Balance Default Rate Credit Loss Entry
Nov-Dec 2018 2,160,000 2% 43,200 Expected Credit Loss 283,200
July-Oct 2018 1,300,000 10% 130,000 AFCL 283,200
Jan-June 2018 840,000 25% 210,000
Prior to Jan, 2018 180,000 70% 126,000
Required Allowance, Dec. 31, 2018 509,200
Balance before adjustment 226,000
Increase in Allowance 283,200
1, Adjusting Entry for error on Dec. 1, 2018
Entry Made Adjusting Entry
Cash 1,296 Expected Credit Loss 1,296
Expected Credit Loss 1,296
AFCL 1,296
Should be Entries
AR 1,296
AFCL 1,296

Cash 1,296
AR 1,296

2.
Adjusted Rate Required Allowance
Age Balance Adjustments Balance
0-1 month 372,960 8,000 380,960 1% 3,810
1-3 months 307,280 2,000 309,280 2% 6,186
3-6 months 88,720 88,720 3% 2,662
Over 6 months 24,000 (4,000) 8,000 50% 4,000
12,000 20% 2,400
Required Allowance for Credit Loss 19,058
3. Net Realizable Value of AR Dec. 31,2018
Control Account Subsidiary Ledgers
Unadjusted Balances 788,000 792,960
Error on Oct. 31 (6,832-6,032) (800)
Write of Uncollectible
Over 6 months period (4,000) (4,000)

Customers Credit Balance 10,000

_________ 10,000
_________
Corrected Balance 793,200 798,960
Unallocated Difference
(798,960-793,200) 5,760 _________
_________
Adjusted Balance 798,960 798,960
Required Allowance for Credit Loss (19,058)
Net Realizable Value of AR Dec. 31,2018 779,902
 4 and 5
AFCL before adjustment, Dec. 31
Balancer per books 32,858
Recovery 1,296
Total Expected Credit Loss for 2018
Error on Oct. 31 (800)
Expected Credit Loss recorded 23,640
Unrecorded Write-off (4,000) Decrease in Allowance (10,296)
AFCL before adjustment 29,354 Corrected Expected Loss for 2018 13,344
Required AFCL 19,058
Decrease in Allowance (10,296)

Entry
Allowance for Credit Loss 10,296
Expected Credit Loss 10,296
1. Total sales for the 3 year period Computing for Cost Goods Sold to get the Gross Profit Rate
Purchases
AR, Beg 16,600
+ Sales ~584,000~ AP, beg 5,000
- Collection (567,600) +Purchases ~446,000~
AR, End 33,000 -Payments (440,000)
AP, end 11,000
Total Credit Sales 584,000
Total Cash Sales 74,200 Sales 658,200
Total Sales 658,200 COGS
Inventory, beg 11,600
Purchases 446,000
TGAS 457,600
Less: Invty, end (18,800) 438,800
Gross Profit 219,400
Gross Profit Ratio= 219,400
= = 33 1/3%
658,200
Gross profit for each year
2016 2017 2018 Total
Cash Sales 17,000 26,000 31,200 74,200

Collections in:
2016 148,800 0 148,800
2017 15,000 161,800 176,800
2018 2,000 16,800 208,800 227,600
A/R, Dec 31 800 1,800 28,200 30,800
__________
__________ __________ __________
Total Sales 183,600 206,400 268,200 658,200
X GPR X 33 1/3% X 33 1/3% X 33 1/3% X 33 1/3%
__________ __________ __________ __________
Gross Profit 61,200 68,800 89,400 219,400
1. Adjusted balance on 1 to 6 months AR 4. Allowance for Credit Loss balance
Unadjusted Balances 184,000 Period Adj. Bal Rate Required Allowance
Error- Credit to DD Co. __________
(7,000) Under 1 mo 180,000 1% 1,800
Adjusted Balances 1-6 mos 177,000 2% 3,540
177,000
Over 6 mos
Doubtful 12,000 50% 6,000
2. Adjusted balance on over 6months AR Good but slow 40,000 10% __________
4,000
Unadjusted Balances 76,000 Total Required Allowance 15,340
Write-off (24,000)
__________
Adjusted Balances 52,000 5. Entry to adjust AFCL
Allowance Balance
3. Adjusted balance of AR on Dec. 31, 2018 Beg, 10,000
Adj. bal.1 to 6 mos AR 177,000 Prov. 24,000
W/O (8,000)
Adj. bal. over mos AR 52,000
W/O __________
(24,000) 2,000
Adj. bal. under 1 mo. 180,000
__________ Required Allowance 15,340
Adjusted Balance 409,000 Increase in Allowance 13,340
Entry: Expected Credit Loss 13,340
Allowance for Credit Loss 13,340
 3. Net, AR Dec. 31
Accounts Receivable 3,000,000
Less: AFCL (154,200)
Net, AR Dec. 31 2,845,800

2. Entry 4. Correct Expected Credit Loss

AFCL, Jan 1 54,600 Expected Credit loss recorded 640,000
Add: Expected Credit loss 640,000 Add: Adjusting Entry 44,600
Less: Write-off (585,000) Corrected Expected Credit Loss 684,700
___________
Allowance before adj. 109,600
Required Allowance 154,200
___________
5. Total Credit sales
Increase in Allowance 44,600
640,000/ 4%
Entry:
Expected Credit Loss 44,600 = 16,000,000
AFCL 44,600
Forms of Accounts Receivable Financing
Accounting Treatment

A. Pledge of Accounts Receivable No entry, necessary. Disclosure to Notes to FS is sufficient

B. Assignment of Accounts Receivable

1. Nonnotification Basis The assignor continues to collect the Receivable
Normal Entries for collection, just substitute Accounts
Receivable with Accounts Receivable-assigned
2. Notification Basis The assignee will continue to collect the Receivable
Entries are only made upon notice from the assignee

C. Factoring of Accounts Receivable Factoring transfer actual ownership of the receivable

to the factor
Entries to made are only the factoring and the subsequent
adjustments to the Factor’s Holdback
1. Net, AR 260,000
Less: Cash Proceeds 230,000
Loss on Factoring 30,000
Entry
Cash 207,000 (230,000x90%)
Rec. fr. Factor 23,000 (230,000x10%)
Loss on Factoring 30,000
AFCL 40,000
Accounts Receivable 300,000
2. Journal Entries
April 1 Accounts Receivable-assigned 400,000
Accounts Receivable 400,000
Cash 294,000
Finance Charge 6,000
Notes Payable 300,000

A Cash 191,100
Sales Discount 3,900
Accounts Receivable- assigned 195,000
(191,100/98%)

B Notes Payable 195,000

Interest Expense 4,000 (300,000 x 16% x 1/12)
Cash 199,000
C Allowance for Credit Loss 2,000
Accounts Receivable-assigned 2,000

Cash 203,000
Accounts Receivable-assigned 203,000
(400,000-195,000-2,000)

D Notes Payable 105,000

Interest Expense 1,400 (105,000 x 16% x 1/12)
Cash 106,400
 Poor Inc.’s Books Rosal’s Books
Jan 3 Cash 750,000 Accounts Receivable factored 1,000,000
Rec. fr Factor 100,000 Commission Income 150,000
Comm. Exp. 150,000 Client Retainer 100,000
Accounts Receivable 1,000,000 Cash 750,000

Jan 31 Cash 80,000 Cash 800,000

Rec. fr Factor 80,000 Accounts Receivable factored 800,000

Client Retainer 80,000

Cash 80,000

Bad Debt Expense 50,000

Allowance for Bad Debts 50,000
 1. NR-Trade
Valerie NR 600,000
Tictic NR 900,000
Total NR-Trade 1,500,000

2. Loss on Discounting
Principal 80,000
Total Interest 4,000 (80,000 x 20% x 3/12)
Maturity Value 84,000
Discount (3,500) (84,500 x 25% x 2/12)
Net Proceeds 80,500
Carrying Amount of Note Rec.
Accrued Interest 1,333 (80,000 x 20% x 1/12)
Discount Formula Principal 80,000
= Maturity Value x Discount Rate
x Time Remaining Total Carrying Amount 81,333
Loss on Discounting of Cornea Note 833
Principal/Maturity Value 500,000
Discount (90,000) (500,000 x 18% x 1)
Net Proceeds 410,000
Carrying Amount 500,000
Loss on Discounting- Cellular Note 90,000
Loss on Discounting of Cornea Note 833
Loss on Discounting- Cellular Note 90,000
Total Loss 90,833

3. Total Accrued Interest Receivable

Hunk (300,000 x 24% x 3/12) 18,000
Valerie (600,000 x 24% x 2/12) 24,000
Tictic (900,000 x 18%x1/12) 13,500
O. Reyes (1,200,000 x 12% x 1/12) 12,000
Total Accrued Interest Receivable 67,500
1.