DE LA SALLE UNIVERSITY MANILA

RVR – COB DEPARTMENT OF ACCOUNTANCY

ACYAUDI Term 3 AY 2023 - 2024

AP Lecture 2 Prof. Francis H. Villamin

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AUDIT OF SALES AND RECEIVABLES

AUDIT OBJECTIVES:

1. EXISTENCE - to determine whether receivables actually exist and only sales and receivables
that should be recorded are recorded.
Audit Procedures:
a. Obtain a schedule of aged trade accounts receivable and notes
receivable and reconcile them to the general ledger.
b. Examine all aspects of a sample sales transaction to determine whether
the internal control procedures are being applied properly.
c. Trace some accounts from the accounts receivable master file to the
aged trial balance.

2. RIGHTS AND OBLIGATIONS - to determine whether receivables represent bona fide obligations
owed to the company as of balance sheet date.
Audit Procedures:
a. Confirm receivables on a test basis
b. Inspect notes on hand
c. Perform analytical review procedures to determine whether recorded
sales and receivables balances appear reasonable
d. Review the minutes of the board of directors for any indication of pledged
or factored accounts receivable.

3. COMPLETENESS - to determine that all transactions relative to receivables were recorded in

the proper accounting period.
Audit Procedure:
a. Test cutoff of sales, sales returns and cash receipts to determine
whether receivables are recorded in the proper accounting period.

4. VALUATION - to determine whether receivables are recorded at proper amounts in

accordance with PAS/PFRS; that is if its valuation approximates its net realizable value.
Audit Procedure:
a. Review collectibility of receivables and determine the adequacy of the
allowance for doubtful accounts.
b. Recalculate the interest income from the notes receivable
c. Discuss with the credit manager the likelihood of collecting older
accounts. Examine subsequent cash receipts and the credit file on older
accounts to evaluate whether receivables are collectible.

5. PRESENTATION AND DISCLOSURE - to determine whether receivables are properly presented

and classified in the balance sheet.
Audit Procedure:
a. Evaluate financial statement presentation and disclosure of receivables
by reviewing loan agreements in which receivables have been pledged
or assigned.

b. Also review the schedule of Accounts receivables for inclusion of

receivables from employees, officers, affiliated companies and related
parties, or for credit balances in customers’ accounts that may warrant
classification to current liabilities.

c. Obtain client representation regarding pledge, discount or assignment of

receivable and about receivables from officers, directors, affiliates or
other related parties.
AP Module 2 Audit of Sales and Receivables 2

DEFINITION:

Trade receivables refer to claims against others for money, goods or services arising from sale of
merchandise or money lent or the performance of services. Receivables are financial assets that
represent contractual rights to receive cash or another financial asset from another entity.

RECOGNITION:
Receivables are recognized when title to the goods passes to the buyer or when transfer of resources
takes place. The point at which title passes may vary with the terms of the sales.

MEASUREMENT:
PFRS 9 provides that when a financial asset is recognized initially, an entity shall measure it at fair value
plus transaction costs that are directly attributable to the acquisition.

a. Initial measurement
1. Short term receivables -at face value
2. Long-term interest-bearing receivables -at face value
3. Long term non interest-bearing receivables -at discounted amount (present value)

b. Subsequent measurement
PFRS 9 provides that loans and receivables shall be measured at amortized cost using the
effective interest method.

Amortized cost is the amount at which the receivable is measured initially minus principal
repayment, plus or minus the cumulative amortization of any difference between the initial
amount recognized and the principal maturity amount, minus reduction for impairment and
uncollectibility.

VALUATION:
1. Receivable are valued at their net realizable value or their expected cash value.

Determination of NRV requires estimation of uncollectible receivables, as such, an

allowance account should be set up for doubtful accounts and for any anticipated
adjustments which in the normal course of the business will reduce the amount
receivable.

Net realizable value - is the estimated amount of cash that will be collected or
realized from receivables.

2. Long term note receivables should be valued at an amount representing the discounted
value of the expected future cash receipts.

3. Receivable denominated in foreign currency should be translated to local currency at the

exchange rate on balance sheet date.

CLASSIFICATION:
As to Balance sheet classification
1. Current Assets vs. Non-Current
Current -trade receivables which are expected to be realized in cash within the
normal operating cycle or one year, whichever is longer.
-these are non-trade receivables which are expected to be realized in
cash within one year, regardless of the length of the operating cycle.

Non-current -these are non-trade receivables which are expected to be realized

beyond one year or those receivables which are not currently collectible.

As to Source or Origin
2. Trade vs. Non-trade
Trade receivable - refers to claims arising from credit sale of merchandise or services in
the ordinary course of the business. The usual type of trade receivables
are:
a. Accounts receivable - short term, unsecured and informal credit
arrangements (open accounts).
b. Notes receivable - evidenced by a formal instrument which is the
promissory note.
Non trade receivables - represent claims arising from sources other than the sale of
merchandise or services in the ordinary course of the business.
AP Module 2 Audit of Sales and Receivables 3

BALANCE SHEET PRESENTATION:

Receivables whether trade or non-trade which are currently collectible should be presented on the
balance sheet as one line item called Trade and Other receivables.
Non trade receivables which are not currently collectible are classified as non current assets and is
therefore presented as long-term investment or other non current assets whichever is appropriate.

CONTROLS OVER RECEIVABLES

1. Confirm payments with customers

Receivable collection can be particularly difficult when the sales staff has established
side agreements with customers that alter payment terms, especially when the sales staff
does not communicate these new terms to the collection department. One can discover
the existence of these deals by confirming payment terms at the time of invoice creation
with selected customers and reprimand those sales staff who have authorized special
terms without notifying anyone in the company.

2. Require approval of bad debts write off

Require management approval of all bad debt write offs.

3. Require approval of credits

Management approval should be required not only to detect the presence of false
credit claims, but also to spot patterns indicating some underlying problem requiring
correction such as inaccurate order picking in the warehouse, incorrect pricing of
quantities delivered or incorrect payment terms.

4. Match invoice quantities to the shipping log

It is useful to spot check the quantities invoiced to the quantities listed on the
shipping log. By doing so, one can detect fraud in the billing department caused by
shipping too many units, with accounting staff pocketing the difference when it arrives.

5. Verify invoice pricing

The billing department can commit fraud by issuing fake invoices to customers at
improperly high prices, and then pocketing the difference between the regular and
inflated prices when the customer check arrives. Having someone compare the pricing
on invoices to a standard price list before invoice are mailed can spot this issue.

OTHER ITEMS:

1. Methods of Receivable Confirmation

a. Positive confirmation
- used when individual account balances are relatively large.
- there is a reason to believe that there may be a substantial number of
accounts in dispute or with inaccuracies or irregularities.
- internal substantiating evidences are not adequate
- internal control system is weak
b. Negative confirmation
- internal control procedures regarding receivables are
considered effective.
- a large number of small balances are involved
- the auditor has no reason to believe that persons receiving the requests
are unlikely to give them consideration.

2. Trade discounts vs. Cash discounts

Trade discounts- this also known as volume discount or quantity discount. It is a
means of adjusting the list price for different buyers or varying quantities. Accounts
receivables should be recorded net of trade discounts.
Cash discounts - this is a reduction from the invoice price by reason or
prompt payment.

3. Customer’s credit balances - credit balances in Accounts receivables resulting from

overpayments, returns and allowances and advance payments from customer. This account should be
classified as current liabilities and must not be offset against the debit balances in other customers’
account.

3. Terms related to freight charges

a. FOB Destination - means that ownership to the merchandise is transferred
to the buyer only upon reaching the point of destination
or upon the buyer’s receipt of merchandise.
b. FOB Shipping point - means that ownership to the merchandise is transferred
to the buyer upon shipment thereof.
AP Module 2 Audit of Sales and Receivables 4

c. Freight collect - means that the freight charges on the merchandise

shipped is to be paid by the buyer.
d. Freight prepaid - means that the freight charges on the merchandise
shipped was already paid by the seller.

4. Accounting for bad debts expense

a. Allowance method - this requires the recognition of bad debt loss if the
accounts are doubtful of collection.
b. Direct write off method- this requires the recognition of bad debt
loss only when the account proved to be worthless or
uncollectible.

5. Methods of estimating bad debts expense

a). Percentage of sales (Income statement approach) - bad debts expense is
calculated by applying a percentage to credit sales for the period. This process results in an adjusting
entry that debits bad debts expense and credits allowance for doubtful accounts without regard to the
existing balance in the allowance account. A proper matching of cost and revenue is achieved because
bad debt loss is directly related to sales and reported in the year of sales
b). Percentage of Receivables (Balance sheet approach) - results in a more accurate
valuation of receivables on the balance sheet since this method attempts to value accounts receivables at
their future collectible amounts.
a. Composite percentage - a single rate is applied to Accounts receivable at the
end of the period to obtain the desired ending balance of the allowance. The amount of bad debts
expenses recognized is the difference between the existing balance in the allowance account and the
desired ending balance.
b. Aging - accounts receivable are classified by age and a different percentage is
applied to each age group. The allowance is then determined by multiplying the total of each
classification by the rate or percent of loss depending on the experience of the company for each
category.

6. NOTES RECEIVABLES
a. Definition -these are claims supported by formal promises to pay, which are in the form of
notes.
b. Recognition
1. Short term notes are generally recorded at face value because the interest
implicit in the maturity value is immaterial.
2. Long term notes should be recorded at present value.
a. Interest bearing notes - the PV of the note is the same as the face
amount of the note.
b. Non interest bearing notes
Present Value
note exchanged solely for cash equal to the amount of cash proceeds
note exchanged for property, goods Present value is according to the
ff. order of priority:
1. FMV of the property, goods or services
2. FMV of the note received
3. Discounted amount of note using
appropriate rate of interest.
The difference between the face amount of the note and its PV is recorded as discount or premium and
amortized to Interest income account over the life of the note using the effective interest method.

c. Valuation and reporting

1. Short term notes are reported at their net realizable value.
2. Long term notes are reported at present value.

7. ACCOUNTS AND NOTES RECEIVABLE FINANCING:

a. Pledging - receivables are used as collateral or security for a loan and not
reflected in the accounts although a disclosure should be made in the financial
statements either in a note or parenthetically.
b. Assignment - a more formal borrowing arrangement in which the receivables are
used as security. The assignor or borrower transfers its rights in some of its accounts
receivables to a lender or assignee in consideration for a loan
1. The loan is at a specified percentage of the face value of the collateral and interest and
service fees are charged to the assignor (borrower).
2. The debtors are occasionally notified to make payments to the assignee (lender) but
most assignments are not on a notification basis.
3. Assigned accounts are segregated from other accounts. The Notes payable should be
deducted from the balance of A/R assigned to determine the equity in assigned accounts
receivable.
AP Module 2 Audit of Sales and Receivables 5

c. Factoring - it is similar to a sale of receivables because it is generally on a without recourse-

notification basis. The factor or buyer assumes the risk of collectibility and generally handles the
billing and collection function. A gain or loss is recognized for the difference between the
proceeds received and the net carrying amount of the receivables factored.

d. Discounting - this is a sale of the note to a third party, usually a bank. The sales is usually on
a with recourse basis which means that upon the default of the debtor, the seller of the note
becomes liable for its maturity value. Proceeds from discounting is computed as follows:

1. Interest to maturity (P x R x T)
2. Maturity value (P + I)
3. Discount (MV x DR x DP)
4. Net Proceeds (MV - Discount)

If the face value of the note is > proceeds, the difference is interest expense.
If the face value of the note is < proceeds, the difference is interest income.

MULTIPLE CHOICE QUESTIONS

THEORY

1. A sales cutoff test of billings complements tests of

a. Sales returns.
b. Cash.
c. Accounts receivable.
d. Sales allowances.

2. An auditor should perform alternative procedures to substantiate the existence of accounts

receivable when
a. No reply to a positive confirmation request is received.
b. No reply to a negative confirmation request is received.
c. Collectibility of the receivables is in doubt.
d. Pledging of the receivables is probable.

3. In the confirmation of accounts receivable, the auditor would most likely

a. Confirm a sample of the inactive accounts.
b. Seek to obtain positive confirmations for at least 50 percent of the total dollar amount of the
receivables.
c. Confirm all receivables from agencies of the national government.
d. Send confirmation requests within one month of the fiscal year-end.

4. Auditors may use positive and/or negative forms of confirmation requests for accounts receivable.
An auditor most likely will use
a. The positive form to confirm all balances, regardless of size.
b. A combination of the two forms, with the positive form used for large balances and the
negative form for small balances.
c. A combination of the two forms, with the positive form used for trade receivables and the
negative form for other receivables.
d. The positive form when the control structure related to receivables are satisfactory, and the
negative form when controls are unsatisfactory.

5. An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger
control account, as of October 31, 2018. By this procedure, the auditor would be most likely to
learn which of the following?
a. An October invoice was improperly computed.
b. An October check from a customer was posted in error to the account of another customer
with a similar name.
c. An opening balance in a subsidiary ledger account was improperly carried forward from the
previous accounting period.
d. An account balance is past due and should be written off.

6. Which of the following is the best argument against the use of negative accounts receivable
confirmations?
a. The cost-per-response is excessively high.
b. There is no way of knowing if the intended recipients received them.
c. Recipients are likely to feel that in reality the confirmation is a subtle request for payment.
d. The inference drawn from receiving no reply may not be correct.
AP Module 2 Audit of Sales and Receivables 6

7. If accounts receivable turned over 7.1 times in 2024, as compared to only 5.6 times in 2023, it is
possible that there were
a. Unrecorded credit sales in 2024.
b. Unrecorded cash receipts in 2024.
c. More thorough credit investigations made by the company in late 2024.
d. Fictitious sales in 2024.

8. Which of the following would most likely be detected by an auditor's review of a client's sales
cutoff?
a. Unrecorded sales for the year.
b. Lapping of year-end accounts receivable.
c. Excessive sales discounts.
d. Unauthorized goods returned for credit.

9. The auditor should ordinarily mail confirmation requests to all banks with which the client has
conducted any business during the year, regardless of the year-end balance, since
a. The confirmation form also seeks information about indebtedness to the bank.
b. This procedure will detect kiting activities, which would otherwise not be detected.
c. The mailing of confirmation forms to all such banks is required by generally accepted auditing
standards.
d. This procedure relieves the auditor of any responsibility with respect to non-detection of
forged checks.

10. Once an auditor has determined that accounts receivable have increased due to slow collections in a
"tight money" environment, the auditor would be likely to
a. Increase the balance in the allowance for bad debts account.
b. Review the going-concern ramifications.
c. Review the credit and collection policy.
d. Expand tests of collectibility.

11. Which of the following audit procedures would be most appropriate to address the existence
assertion for sales?
a. Confirm receivables balances.
b. Perform analytical procedures.
c. Review collectibility.
d. Confirm cash deposits in banks.

12. Which of the following financial statement assertions is not addressed by the confirmation of
accounts receivable?
a. Existence.
b. Presentation and disclosure.
c. Rights.
d. Valuation.

13. Audit working papers often include a client-prepared, aged trial balance of accounts receivable as of
the balance sheet date. An aging is best used by the auditor to
a. Evaluate controls over credit sales.
b. Test the accuracy of recorded charge sales.
c. Estimate credit losses.
d. Verify the validity of the recorded receivables.

14. An entity's financial statements were misstated over a period of years due to large amounts of
revenue having been recorded in journal entries that involved debits and credits to an illogical
combination of accounts. The auditor could most likely have been alerted to this irregularity by
a. Scanning the general journal for unusual entries.
b. Performing cutoff tests at year-end.
c. Tracing a sample of journal entries to the general ledger.
d. Examining documents supporting sales returns and allowances recorded after year-end.

15. When auditing the allowance for uncollectible accounts, the least reliance should be placed on which
of the following?
a. The credit manager's opinion.
b. An aging of past due accounts.
c. Collection experience of the client's collection agency.
d. Ratios that show the past relationship of the allowance to net credit sales.

16. In determining the existence of accounts receivable, which of the following would the auditor consider
most reliable?
a. Documents that supports the accounts receivable balance.
b. Credits to accounts receivable from the cash receipts book after the close of business at year-
end.
c. Direct telephone communication between auditor and debtor.
d. Confirmation replies received directly from customers.
AP Module 2 Audit of Sales and Receivables 7

17. An auditor confirms a representative number of open accounts receivable as of December 31 and
investigates respondents' exceptions and comments. By this procedure, the auditor would most likely
to learn of which of the following?
a. One of the cashiers has been covering embezzlement by lapping.
b. One of the sales clerks has not been preparing charge slips for credit sales to family and friends.
c. One of the computer control clerks has been removing from the data file all sales invoices
applicable to his own account.
d. The credit manager has misappropriated remittances from customers whose accounts have been
written off.

18. Customers with substantial due balances have failed to reply after second requests had been mailed
to them directly. Which of the following audit procedures is most appropriate?
a. Examine shipping documents.
b. Review cash collections during the year being audited.
c. Intensify the study of internal controls for receivables.
d. Increase the balance in the accounts receivable allowance account.

19. The negative form of accounts receivable confirmation is not useful when
a. Internal control is considered to be effective.
b. A large number of small balances are involved.
c. The auditor has reason to believe that persons receiving the requests are likely to consider
them.
d. Individual account balances are relatively large.

20. Negative confirmation of accounts receivable is less effective than positive confirmation of
accounts receivable because
a. A majority of recipients are usually unwilling to respond objectively.
b. Some recipients may report incorrect balances that require extensive follow-up.
c. The auditor cannot infer that all nonrespondents have verified the account information.
d. Negative confirmations do not produce evidence that is statistically quantifiable.

Problem 1

Your audit disclosed that on December 31, 2024, the accounts receivable control account of Apollo
Company had a balance of P1,432,500. An analysis of the accounts receivable account showed the
following:

Accounts known to be worthless P18,750

Advance payments to suppliers on purchase orders 75,000
Advances to affiliated companies 187,500
Customers’ accounts reporting credit balances arising from sales return (112,500)
Interest receivable on bonds 75,000
Other trade accounts receivable – unassigned 375,000
Subscriptions receivable due in 30 days 412,500
Trade accounts receivable – assigned (Apollo Company’s equity in assigned
accounts is P75,000) 187,500
Trade installment receivable due 1-18 months, including unearned finance charges of
P15,000 165,000
Trade receivables from officers due currently 11,250
Trade accounts on which post-dated checks are held (no entries were made on
receipts of checks) 37,500
Total P1,432,500

Required: = 375,000 + 187,500 + (165,000 - 15,000) + 11,250 + 37,500

1. Trade accounts receivable balance as of December 31, 2024. = Php 761,250
2. Net current trade and other receivables balance as of December 31, 2024 = 761,250 + 75,000 + 75,000 + 412,500 = Php 1,323,750
3. How much will be presented under noncurrent asset as of December 31, 2024? = Php 187,500

Problem 2

You are engaged to perform an audit of the accounts of the Bali Corporation for the year ended
December 31, 2024 and have observed the taking of the physical inventory of the company on December
30, 2024. Only merchandise shipped by the Bali Corporation to customers up to and including December
30, 2024 have been eliminated from inventory.

The inventory as determined by physical inventory count has been recorded on the books by the
company’s controller. No perpetual inventory records are maintained. All sales are made on an FOB
shipping point basis. You are to assume that all purchase invoices have been correctly recorded.
a. COGS 20,000 f. A/R 60,000
Inventory 20,000 Sales 60,000

b. No adjustment g. No adjustment

c. No adjustment h. A/R 80,000

COGS 55,000
d. Sales 40,000 Sales 80,000
A/R 40,000 Inventory 55,000

e. Inventory 56,000
Sales 100,000
COGS 56,000
A/R 100,000
 AP Module 2 Audit of Sales and Receivables 8

The following lists of sales invoices are entered in the sales books for the months of December 2024 and
January 2025, respectively.
Cost of
Sales Invoice Amount Sales Invoice Date Merchandise Sold Date Shipped
December 2024
(a) P30,000 Dec. 21 P20,000 Dec. 31, 2023
(b) 20,000 Dec. 31 8,000 Nov. 3, 2023
(c) 10,000 Dec. 29 6,000 Dec. 30, 2023
(d) 40,000 Dec. 31 24,000 Jan 3, 2024
(e) 100,000 Dec. 30 56,000 Dec. 29, 2023
(shipped to consignee)
January 2025
(f) 60,000 Dec. 31 40,000 Dec. 30, 2023
(g) 40,000 Jan. 02 23,000 Jan. 02, 2024
(h) 80,000 Jan. 03 55,000 Dec. 31, 2023

Prepare the necessary adjusting journal entries at December 31, 2024 in connection with the foregoing
data.
************
Problem 3

From inception of operations to December 31, 2024, Carrie Corporation provided for uncollectible
accounts receivable under the allowance method: provisions were made monthly at 2% of credit sales;
bad debts written of 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. Carrie’s usual credit terms are net 30 days. balance per books = 130,000 + (9,000,000 x 2%) - 90,000 + 15,000 - 60,000 = Php 175,000
adjusted balance = 175,000 + 60,300 = Php 235,300
The balance in the Allowance for Doubtful Accounts was P130, 000 at January 1, 2024. During 2024,
credit sales totaled P9,000,000, interim provisions for doubtful accounts were made at 2% credit sales,
P90,000 of bad debts were written off, and recoveries of accounts previously written off amounted to
P15,000. Carrie Corp. installed a computer facility in November 2024 and an aging of accounts
receivable was prepared for the first time as of December 31, 2024.

A summary of the aging is as follows:

Classification by Balance in Estimated %
month of sale each category uncollectible
Nov – Dec P 1,140,000 2 = 22,800
Jul – Oct 600,000 10 = 60,000
Jan – Jun 400,000 25 = 100,000
Prior to 1/1/24 130,000 75 = 52,500
P 2,270,000 235,300 - 175,000 = Php 60,300
=========
Based on the review of collectibility of the account balances in the “prior to 1/1/24” aging category,
additional receivables totaling P60,000 were written off as of December 31, 2023. Effective with the year
ended December 31, 2024, Carrie Corp. 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.
doubtful accounts expense 60,300
Instructions: allowance for doubtful accounts 60,300

a. Prepare a schedule analyzing the changes in the Allowance for Doubtful Accounts for the year ended
December 31, 2024. Show supporting computations in good form.

Problem 4

Wrangler Co. began operations on January 1, 2024. On December 31, 2024, Wrangler provided for
uncollectible accounts based on 1% of annual credit sales. On January 1, 2025, Wrangler changed its
method of determining its allowance for uncollectible accounts by applying certain percentages to the
accounts receivable aging as follows:

Days past invoice date % deemed to be uncollectible

0-30 3,000,000 x 1 = 30,000
31-90 800,000 x 5 = 40,000
91-180 600,000 x 20 = 120,000
Over 180 250,000 x 80 = 200,000
390,000 - 80,000 = Php 310,000
AP Module 2 Audit of Sales and Receivables 9

The following additional information relates to the years ended December 31, 2025 and 2024:

2025 2024
Credit sales P 30,000,000 P 28,000,000
Collections 29,150,000 24,000,000
Accounts written off 270,000 None
Recovery of accounts previously written off 70,000 None

Days past invoice date at Dec. 31

0-30 P 3,000,000 P 2,500,000
31-90 800,000 900,000
91-180 600,000 450,000
Over 180 250,000 150,000

Instructions:

a. Prepare a schedule showing the calculation of the allowance for uncollectible accounts at December
31, 2024.

b. Prepare a schedule showing the computation of the provision for uncollectible accounts for the year
ended December 31, 2024.

Problem 5

In connection with the audit of the financial statements of Radiant Corporation, your audit senior
instructed you to examine the company’s accounts receivable.

Prior to any adjustments you were able to extract the following balances from Radiant’s trial balance as of
December 31, 2024:

Accounts receivable P1,327,500

Allowance for doubtful accounts 45,000

From the schedule of accounts receivable as of December 31, 2023, you determined that this account
includes the following:

Accounts with debit balances:

60 days old and below P715,500
61 to 90 days 351,600
Over 90 days 256,200 P1,323,300
Advances to officers 49,200
Accounts with credit balances (45,000)
Accounts receivable per GL P1,327,500

The credit balance in customer’s account represents collection from a customer whose account had been
written-off as uncollectible in 2024.

Accounts receivable for more than a year totaling P63,000 should be written off.

Confirmation replies received directly from customers disclosed the following exceptions:
Customer Customer’s Comments Audit Findings
A The goods sold on December 1 were The client failed to record credit memo no.
returned on December 16, 2024. 23 for P36,000. The merchandise was
included in the ending inventory at cost.
B We do not owe this amount *%#@ Investigation revealed that goods sold for
(bad word). We did not receive any P48,000 were shipped to Ronald on
merchandise from your company. December 29, 2024, terms FOB shipping
point. The goods were lost in transit and
the shipping company has acknowledged
its responsibility for the loss of the
merchandise.
C I am entitled to a 10% employee Anne is an employee of Radiant. Starting
discount. Your bill should be reduced November 2024, all company employees
by P3,600. were entitled to a special discount.
D We have not yet sold the goods. We Merchandise billed for P54,000 were
will remit the proceeds as soon as the consigned to Francis on December 30,
goods are sold. 2024. The goods cost P39,000.
E We do not owe you P60,000. We The sale of merchandise on December 18,
already paid our accounts as 2024 was paid by Henry on January 6,
evidenced by OR # 1234. 2025.
 AP Module 2 Audit of Sales and Receivables 10

F Reduce your bill by P4,500 This amount represents freight paid by the
customer for the merchandise shipped on
December 17, 2023, terms, FOB
destination-collect.

Based on your discussion with Radiant’s Credit Manager, you both agreed that an allowance for doubtful
accounts should be maintained using the following rates: Allowance for Doubtful Accounts
write-off 63,000 45,000 beginning
60 days old and below 617,400 x 1% = Php 6,174
adjustment 4,134 45,000 recovery
61 to 90 days 351,600 x 2% = Php 7,032
22,866 end
Over 90 days (256,200 - 63,000) x 5% = Php 9,660

Required: Based on the above and the result of your audit, answer the following:
1. The adjusted balance of accounts receivable in the 60 days and below category as of December 31,
2024 = 715,500 - (a) 36,000 - (c) 3,600 - (d) 54,000 - (f) 4,500 = Php 617,400
2. The adjusted balance of accounts receivable as of December 31, 2024 = 617,400 + 351,600 + (256,200 - 63,000) = Php 1,162,200
3. The adjusted allowance for doubtful accounts as of December 31, 2024 = 6,174 + 7,032 + 9,660 = Php 22,866
4. The entry to adjust the allowance for doubtful accounts
allowance for doubtful accounts 4,134
doubtful accounts expense / miscellaneous income 4,134
Problem 6

You are examining the financial statements of Robee Inc. for the year ended December 31, 2024. During
the audit of the accounts receivable and other related accounts, certain information was obtained.

The December 31, 2024 debit balance in the Accounts Receivable account is P1,970,000.
= 1,970,000 - 2,000 - 10,000 + 20,000 + 5,000 + 14,400 = Php 1,997,400
The only entries in the Bad Debts Expense account were: a credit for P3,240 on December 31, 2024,
because Alexis Company remitted in full for the accounts charged off October 31, 2023, and a debit on
December 31 for the amount of the credit to the Allowance for Doubtful Accounts.

The Allowance for Doubtful Accounts schedule is presented below:

DEBIT CREDIT BALANCE

01/01/24 P 36,580
10/31/24 Uncollectible; P 15,080 21,500
Alexis Co, P 3,240; = 3,240 + 8,200 + 5,640 = Php 17,080
Beta Co, P8,200; = 17,080 - 15,080 - Php 2,000
Cathy Co., P5,640
12/31/24 5% of P1,970,000 P 98,500 120,000
= 120,000 + 3,240 - 2,000 - 10,000 = Php 111,240

An aging schedule of the accounts receivable as of December 31, 2024 and the decision are shown in
the table below:
AGE Net Debit Balance Amount to which the Allowance is to be adjusted
after Adjustments and Corrections have been made
0-1 month P 932,400 + 20,000 1 percent = 9,524
1 -3 months 768,200 + 5.000 2 percent = 15,464
3- 6 months 221,800 3 percent = 6,654
over 6 months 60,000 - 10,000 Definitely uncollectible, P10,000; P20,000 is = 20,000 x 50% = 10,000
P1,982,400 1,997,400 Considered 50% uncollectible; the remainder is
= (50,000 - 20,000) x 20%
======== estimated to be 80% collectible. = 6,000

There is a credit balance in one account receivable (0-1 month) of P20,000; it represents an advance in a
sales contract. Also, there is a credit balance in one of the 1-3 months accounts receivable of P5,000 for
which merchandise will be accepted by the customer.

The ledger accounts have not been closed as of December 31, 2024. The Accounts Receivable control
account is not in agreement with the subsidiary ledger. The difference cannot be located, and the auditor
decides to adjust the control to the sum of the subsidiaries after the corrections are made.

Instructions:

From the information given, you are to prepare

a. Audit work papers for the accounts receivable and the allowance for doubtful accounts as of
December 31, 2024. A/R = Php 1,997,400
b. Proposed audit adjustments as of December 31, 2024. ADA = 111,240 - (9,524 + 15,464 + 6,654 + 10,000 + 6,000) = Php 63,598
doubtful accounts expense 3,240
allowance for doubtful accounts 3,240
********************

allowance for doubtful accounts 2,000 allowance for doubtful accounts 63,598
A/R 2,000 doubtful accounts expense 63,598

allowance for doubtful accounts 10,000

A/R 10,000

A/R 25,000
customer’s accounts with credit balances 25,000

A/R 14,400
miscellaneous income 14,400
 AP Module 2 Audit of Sales and Receivables 11

Problem 7

Presented below is information related to the Accounts Receivable accounts of Pearl, Inc. during the
current year 2024
1. An aging schedule of the accounts receivable as of December 31, 2024, is as follows:

Age Net Debit Balance % to be Applied after Correction Made

Under 60 days P 1,723,420 1% 17,234.2
61-90 days 1,364,900 + 48,400 = 1,413,300 3% 42,399
91-120 days 399,240* - 27,400 = 371,840 6% 22,310.4
Over 120 days 236,440 - 42,000 = 194,440 P42,000 definitely uncollectible; estimated 48,610
remainder uncollectible is 25% 130,553.6

* the P27,400 write-off of receivables is related to the 91-120 day category.

2. The Accounts Receivable control account has a debit balance of P3,724,000 on December 31, 2024.

3. Two entries were made in the Bad Debt Expense account during the year: (a) a debit on December
31 for the amount credited to Allowance for Doubtful Accounts, and (2) a credit for P27,400 on
November 3, 2024 because of a bankruptcy.

4. The Allowance for Doubtful Accounts is as follows for 2024: = 87,500 + 186,200 - 27,400 - 42,000 = Php 204,300

__________Allowance for Doubtful Accounts________________

Nov. 3 Uncollectible accounts │ Jan 1 Beg. Balance ……. P 87,500
Written off…….P27,400 │ Dec 31 5% of P3,724,000 186,200

5. A credit balance exists in the Accounts Receivable (61-90 days) of P48,400, which represents and
advance on a sales contract. bad debts expense 27,400
A/R 27,400
Instructions:
allowance for bad debts 42,000
A/R 42,000
Prepare the necessary adjusting entries as of December 31, 2024.
A/R 48,400
************** advances from customers 48,400

allowance for bad debts 73,746 (204,300 - 130,553.6)

Problem 8 bad debts expense 73,746

Cole Company sells office equipment and supplies to many organizations in the city and surrounding area
on credit terms of 2/10, n/30. In the past, over 75% of the credit customers have taken advantage of the
discount by paying within ten days of the invoice date.

The number of customers taking the full 30 days to pay has increased within the last year. Current
indications are that less than 60 % of the customers are now taking the discount. Bad debts as a
percentage of gross credit sales have risen from the 1.5% provided in past years to about 4% in the
current year.

The controller has responded to a request for more information on the deterioration in collections of
accounts receivable with the report reproduced below.

Cole Company
Finance Committee Report
Accounts Receivable Collections
May 31, 2024

The fact that some credit accounts will prove uncollectible is normal. Annual bad debt write-offs have
been 1.5% of gross credit sales over the past five years. During the last fiscal year, this percentage
increased to slightly less than 4%. The current Accounts Receivable balance is P12 million. The
condition of this balance in terms of age and probability of collection is as follows:

Proportion of Total Age Categories Probability of Collection

12,000,000 x 68% = 8,160,000 Not yet due 99% x 1% = 81,600
15% = 1,800,000 Less than 30 days past due 96.5% x 3.5% = 63,000
8% = 960,000 30 to 60 days past due 95% x 5% = 48,000
5% = 600,000 61 to 120 days past due 91% x 9% = 54,000
2.5% = 300,000 121 to 180 days past due 60% x 40% = 120,000
1.5% = 180,000 Over 180 days past due 10% x 90% = 162,000
528,600
AP Module 2 Audit of Sales and Receivables 12

The Allowance for Doubtful Accounts had a credit balance of P302,500 on June 1, 2024. Cole Company
has provided for a monthly bad debts expense accrual during the current fiscal year based on the
assumption that 4% of gross credit sales will be uncollectible. Total gross credit sales for the 2023-2024
fiscal year amounted to P30 million. Write-offs of bad accounts during the year totaled P1,087,500.
adjustments = 528,600 - [302,500 + (30,000,000 x 4%) - 1,087,500] = Php 113,600
Instructions:

(a) Prepare an accounts receivable aging schedule for Cole Company using the age categories
identified in the controller’s report showing
(1) The amount of accounts receivable outstanding for each age category and in total
(2) The estimated amount that is uncollectible for each category and in total

(b) Compute the amount of the year-end adjustment necessary to bring Allowance for Doubtful
Accounts to the balance indicated by the age analysis. Then prepare the necessary journal entry to
adjust the accounting records. doubtful accounts expense 113,600
allowance for doubtful accounts 113,600

*************

Problem 9

Notes Receivable: Classification and Interest Computation

The following long-term receivables were reported in the December 31, 2023 statement of financial
position of VIGOR Corporation:

Notes receivable from sale of land ₱ 3.000,000

Notes receivable from officer 800,000

The following transactions during 2024 and other information relate to the company’s long-term
receivables:

1. The notes receivable from sale of plant bears interest at 12% per annum. The note is payable in 3
annual installments of P1,000,000 plus interest on the unpaid balance every April 1. The initial
payment was made on April 1, 2024. = (3,000,000 - 1,000,000) - 1,000,000 = Php 1,000,000
2. The note receivable from officer is dated December 31, 2023 earns interest at 10% per annum, and
is due on December 31, 2026. The 2024 interest was received on December 31, 2024.
3. Vigor sold a piece of equipment to Stamina, Inc. on April 1, 2024 in exchange for a P400,000 non-
interest bearing note due April 1, 2026. The note had no ready market and there was no established
exchange price for the equipment. The prevailing interest rate for a note of this type at April 1, 2024
was 12%. The present value factor of P1 for two periods at 12%. The present value factor of 1 for
two periods at 12% is 0.797 = (400,000 x 0.797) + [(400,000 x 0.797) x 12% x 9/12] = Php 347,492
4. A tract of land was sold by Vigor to Vita, Inc. on July 1, 2024 for P2,000,000 under an installment
sale contract. Vita signed a 4-year 11% note for P1,400,000 on July 1, 2024, in addition to the down
payment of P600,000. The equal annual payments of principal and interest on the note will be
P451,250 payable on July1, 2025, 2026, 2027 and 2028. The land had an established cash price of
P2,000,000 and its cost to Vigor was P1,500,000. The collection of the installments on this note is
reasonably assured. = 1,400,000 - [451,250 - (1,400,000 x 11%)] = Php 1,102,750

Based on your audit, answer the following question:

1. The amount to be reported as noncurrent receivables in the statement of financial position at

December 31, 2024 is
a. P3,096,242
b. P3,067,550
c. P3,221,550
d. P3,250,242 = 1,000,000 + 800,000 + 347,492 + 1,102,750

2. The current portion of notes receivable on December 31, 2024 should be:
a. P1,451,250
b. P1,297,250 = (1) 1,000,000 + (4) [451,250 - (1,400,000 x 11%)]
c. P2,097,250
d. P2,297,250

3. The accrued interest receivable on December 31, 2024 should be

a. P257,000 = (1) [(3,000,000 - 1,000,000) x 12% x 9/12] + (4) (1,400,000 x 11% x 6/12)
b. P180,000
c. P285,692
d. P334,000
 AP Module 2 Audit of Sales and Receivables 13

4. On December 31, 2024, the unamortized discount on note receivable from sale of equipment should
be
a. P42,944
b. P109,892
c. P0
d. P52,508 = (3) [400,000 - (400,000 x 0.797)] - [(400,000 x 0.797) x 12% x 9/12]

5. The total interest income for the year ended December 31, 2024 should be
a. P427,000
b. P455,692 = (1) [(3,000,000 x 12% x 3/12) + (2,000,000 x 12% x 9/12)] + (800,000 x 10%) + (3) [(400,000 x 0.797) x 12% x 9/12]
c. P375,692 + (4) (1,400,000 x 11% x 6/12)
d. P532,692

*************

Problem 10

Impairment of Notes Receivable

Bass Corp. provided the following information regarding its Notes Receivable at December 31, 2021:

Note Gross carrying amount Lifetime expected 12-month expected Credit risk
credit losses credit losses assessment
A ₱3,000,000 ₱300,000 ₱50,000 Low credit risk
B 2,000,000 400,000 40,000 31 days past due
C 1,000,000 500,000 60,000 Credit-impaired

QUESTIONS:
Based on the given information, answer the following:

1. The loss allowance that the entity should recognize at December 31, 2021 is:
a. ₱ 590,000
b. ₱ 900,000
c. ₱ 950,000 = 50,000 + 400,000 + 500,000
d. ₱1,200,000

2. Assuming that the effective interest rate on all notes is 10%, the interest income to be recognized in
2022 profit or loss is
a. ₱480,000
b. ₱505,000
c. ₱550,000 = (3,000,000 x 10%) + (2,000,000 x 10%) + [(1,000,000 - 500,000) x 10%]
d. ₱600,000

************

stage description ECL recognized basis of interest

1 credit risk has not increased 12-month ECL gross CV

significantly since initial
recognition (low credit risk)
2 credit risk has increased lifetime ECL gross CV
significantly since initial
recognition
AC (gross CV
3 financial asset is credit- lifetime ECL
- allowance)
impaired

a financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future CFs of that
financial asset have occurred

evidence that a financial asset is credit-impaired include:

1. significant financial difficulty of the issuer or the borrower

2. a breach of contract, such as a default or past due event
3. lender/s of the borrower, for economic or contractual reasons relating to the borrower's financial difficulty, having granted to
the borrower a concession/s that the lender/s would not otherwise consider
4. it is becoming probable that the borrower will enter bankruptcy or other financial reorganization
5. disappearance of an active market for that financial asset because of financial difficulties
6. purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses