FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE

AUD-03 AUDIT OF RECEIVABLES

Problem No. 1
On December 31, 2018 the accounts receivables control account of Latte Co. had a balance of P208,150. An analysis of
the accounts receivable account showed the following:

Trade receivables – assigned P17,250

Payments to suppliers on advance orders placed 11,500
Advances to affiliated companies 28,750
Customers’ accounts reporting credit balances arising from over payment (17,250)
Interest receivables on notes 11,500
Accounts known to be uncollectible 2,875
Other trade receivables – unassigned 57,500
Trade receivables from treasurer, due currently 1,725
Subscription receivables for ordinary shares due in 30 days 63,250
Trade installments receivables due 1-18 months (including unearned finance charges, P2,000) 25,300
Trade accounts on which post-dated checks are held (no entries were made on receipts of checks) 5,750
Total P208,150

Requirements:
a. Determine the amount of trade accounts receivables of Latte Co. as of December 31, 2018.
b. Determine the trade and other receivables to be reported on the entity’s December 31, 2018 statement of financial
position.

Problem No. 2
Raspberry Merchandise Inc.’s year end is December 31, 2018. Company policy requires that a prenumbered shipping
document be issued for each sale. At the time of pick up or shipment, the shipping clerk writes the date on the shipping
document. The last shipment made in the year ended December 31, 2018, was recorded on document 457. Shipments
are billed in the order that the billing clerk receives the shipping documents.

For late December 2018 and early January 2019, shipping documents are billed on sales invoices as follows:

Shipping Document No. Sales Invoice No.

453 1112
454 1106
455 1107
456 1110
457 1111
458 1108
459 1109
460 1113
461 1115
462 1114

The December 2018 and January 2019 sales journal have the following information included:

Sales Journal – December 2018

Day of Month Sales Invoice No. Amount of sale

30 1106 P80,504
30 1109 178,510
31 1107 38,990
31 1108 64,197
31 1110 5,132

Page 1 of 6
AUD-03. Audit of Receivables

Sales Journal – January 2019

Day of Month Sales Invoice No. Amount of sale

1 1112 P259,647
1 1111 11,543
1 1113 84,908
2 1115 127,113
2 1114 63,286

Requirements:
a. What is the net overstatement (understatement) of Raspberry Merchandising Inc.’s sales for the year ended
December 31, 2018?
b. What adjusting entry is necessary to correct Raspberry Merchandising Inc.’s financial statements for the year ended
December 31, 2018?

Problem No. 3

The December 31, 2017 statement of financial position of Mocha Company included the following information:

Notes receivable P 598,000

Less: NR discounted (380,000) P 218,000

Accounts receivable P2,240,000

Less: Allow. for D.A. ( 141,000) 2,099,000
Total receivables P2,317,000

The following transactions occurred during 2018:

1. Sales on account P8,812,000

2. Collections on accounts 8,410,000
3. Accounts receivable written off as uncollectible 138,000
4. Notes receivable collected 290,000
5. Customer notes received in payment of accounts receivable 740,000
6. Notes receivable discounted paid at maturity 360,000
7. Notes receivable discounted defaulted, including interest of P200 and a P100 fee. This
amount is expected to be collected in 2019 20,300
8. Proceeds from customer notes discounted (face value P450,000, accrued interest income,
P2,000) 448,500
9. Collections on accounts previously written off 5,000
10. Sales returns and allowances 20,000
11. Required allowance for doubtful accounts based on impairment assessment at year end 12,000

Requirements:

Based on the above and the result of your audit, answer the following:

1. The loss from discounting of notes receivable is?

2. The adjusted balance of Accounts Receivable as of December 31, 2018 is?
3. The adjusted balance of Notes Receivable as of December 31, 2018 is?
4. The amount to be reported as trade and other receivables in the entity’s statement of financial position as of
December 31, 2018 is?

5. When designing audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently
to the general ledger is done to satisfy what assertion?
a. Valuation c. Completeness
b. Cutoff d. Classification

Page 2 of 6
AUD-03. Audit of Receivables

Problem No. 4

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

From the schedule of accounts receivable as of December 31, 2018, you determined that this account includes the
following:

Accounts with debit balances P 441,100

Advances to officers 16,400
Accounts with credit balance (15,000)
Accounts receivable per GL P 442,500

The credit balance in customer’s account represents collection from a customer whose account had been written-off as
uncollectible in 2017.

Accounts receivable for more than a year totaling P21,000 should be written off.

Confirmation replies received directly from customers disclosed the following exceptions:

Customer’s Comments
Customer Audit Findings
Hannah The goods sold on December 1 were returned on December The client failed to record credit memo no.
16, 2018. 23 for P12,000. The merchandise was
included in the ending inventory at cost.

Jen We do not owe this amount *%#@ (bad word). We did not Investigation revealed that goods sold for
receive any merchandise from your company. P16,000 were shipped to Jen on December
29, 2018, terms FOB shipping point. The
goods were lost in transit and the shipping
company has acknowledged its
responsibility for the loss of the
merchandise.

Krystal I am entitled to a 10% employee discount. Your bill should Krystal is an employee of Vanilla. Starting
be reduced by P1,200. November 2018, all company employees
were entitled to a special discount.

Monique We have not yet sold the goods. We will remit the proceeds Merchandise billed for P18,000 were
as soon as the goods are sold. consigned to Monique on December 30,
2018. The goods cost P13,000.

Hans We do not owe you P20,000. We already paid our accounts The sale of merchandise on December 18,
as evidenced by OR # 1234. 2018 was paid by Hans on January 6, 2019.

Jerus Reduce your bill by P1,500 This amount represents freight paid by the
customer for the merchandise shipped on
December 17, 2018, terms, FOB destination-
collect.

Requirements:

1. Adjusting entries as of December 31, 2018.

2. Adjusted balance of Accounts Receivable as of December 31, 2018.

3. Confirmation, which is a specific type of inquiry, is the process of obtaining a representation of information or of an
existing condition directly from a third party. Two assertions for which confirmation of accounts receivable balances
provides primary evidence are
a. Completeness and valuation
b. Rights and obligations and existence
Page 3 of 6
AUD-03. Audit of Receivables
c. Valuation and rights and obligations
d. Existence and completeness

4. The negative request form of accounts receivable confirmation may be used when the
Combined Assessed Level Of Inherent
and Control Risk Is
Number of Small Consideration by the
Balances is Recipient is
a. Low Many Likely
b. Low Few Unlikely
c. High Few Likely
d. High Many Likely

5. Which of the following procedures would an auditor most likely perform for year-end accounts receivable
confirmations when the auditor did not receive replies to second requests?
a. Review the cash receipts journal for the month prior to year-end.
b. Intensify the study of internal control concerning the revenue cycle.
c. Increase the assessed level of detection risk for the existence assertion
d. Inspect the shipping records documenting the merchandise sold to the debtors.

6. If management refuses to allow the auditor to send a confirmation request, the auditor shall:
a. Inquire as to management’s reasons for the refusal, and seek audit evidence as to their validity and
reasonableness.
b. Evaluate the implications of management’s refusal on the auditor’s assessment of the relevant risks of material
misstatement, including the risk of fraud, and on the nature, timing and extent of other audit procedures.
c. Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
d. All of these.

Problem No. 5

In connection with your examination of the financial statements of Hazelnut, Inc. for the year ended December 31, 2018,
you were able to obtain certain information during your audit of the accounts receivable and related accounts.

• The December 31, 2018 balance in the Accounts Receivable control account is P837,900.

• An aging schedule of the accounts receivable as of December 31, 2018 is presented below:

Age Net debit Percentage to be applied after corrections have

balance been made
60 days & under P387,800 1 percent
61 to 90 days 307,100 2 percent
91 to 120 days 89,800 5 percent
Over 120 days 53,200 Definitely uncollectible, P9,000; the remainder is
estimated to be 25% uncollectible.
P837,900

• The Allowance for Doubtful Accounts schedule is presented below:

Debit Credit Balance

January 1, 2018 P19,700
November 30, 2018 P6,100 13,600
December 31, 2018 (P837,900 x 5%)
P41,895 P55,495

• Entries made in the Doubtful Accounts Expense account were:

1. A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts.
2. A credit for P6,100 on November 30, 2018, and a debit to Allowance for Doubtful Accounts because of a
bankruptcy. The related sales took place on October 1, 2018.

• There is a credit balance in one account receivable (61 to 90 days) of P11,000; it represents an advance on a sales

Page 4 of 6
AUD-03. Audit of Receivables
contract.

Requirements:

Based on the above and the result of your audit, answer the following:

1. How much is the adjusted balance of Accounts Receivable as of December 31, 2018?
2. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31, 2018?
3. How much is the Doubtful Accounts expense for the year 2018?
4. How much is the net adjustment to the Doubtful Accounts expense account?

5. All of the following are examples of substantive tests to verify valuation of net accounts receivable except the
a. Re-computation of the allowance for bad debts.
b. Inspection of the aging schedule and credit records of past due accounts.
c. Comparison of the allowance for bad debts with past records.
d. Inspection of accounts for current versus non-current status in the statement of financial position.

Problem No. 6

The balance sheet of Strawberry Corporation reported the following long-term receivables as of December 31, 2017:

Note receivable from sale of plant P6,000,000

Note receivable from officer 1,600,000

In connection with your audit, you were able to gather the following transactions during 2018 and other information
pertaining to the company’s long-term receivables:

a. The note receivable from sale of plant bears interest at 12% per annum. The note is payable in 3 annual installments
of P2,000,000 plus interest on the unpaid balance every April 1. The initial principal and interest payment was made
on April 1, 2018.

b. The note receivable from officer is dated December 31, 2017, earns interest at 10% per annum, and is due on
December 31, 2020. The 2018 interest was received on December 31, 2018.

c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2018, in exchange for an P800,000 non-interest
bearing note due on April 1, 2020. 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, 2018, was 12%. The present value factor
of 1 for two periods at 12% is 0.797.

d. A tract of land was sold by the corporation to No Co. on July 1, 2018, for P4,000,000 under an installment sale contract.
No Co. signed a 4-year 11% note for P2,800,000 on July 1, 2018, in addition to the down payment of P1,200,000. The
equal annual payments of principal and interest on the note will be P902,500 payable on July 1, 2019, 2020, 2021, and
2022. The land had an established cash price of P4,000,000, and its cost to the corporation was P3,000,000. The
collection of the installments on this note is reasonably assured.

Requirements:

Based on the above and the result of your audit, determine the following:

1. Noncurrent receivables as of December 31, 2018?

2. Current portion of long-term receivables as of December 31, 2018?
3. Interest income for the year 2018?
4. Accrued interest receivable as of December 31, 2018?

5. Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?
a. Notes receivable and interest income.
b. Accrued interest receivable and accrued interest payable.
c. Notes payable and notes receivable.
d. Interest income and interest expense.

Page 5 of 6
AUD-03. Audit of Receivables

Problem No. 7

On January 1, 2018, Caramel Company sold land that originally cost P400,000 to Buyer Company. As payment, Buyer gave
Caramel Company a P600,000 note. The note bears an interest rate of 4% and is to be repaid in three annual installments
of P200,000 (plus interest on the outstanding balance). The first payment is due on December 31, 2018. The market price
of the land is not reliably determinable. The prevailing rate of interest for notes of this type is 14% on January 1, 2018 and
15% on December 31, 2018.

Caramel made the following journal entries in relation to the sale of land and the related note receivable:

January 1, 2018

Notes receivable P600,000

Land P400,000
Gain on sale of land 200,000

December 31, 2018

Cash P224,000
Notes receivable P200,000
Interest income 24,000

Caramel reported the notes receivable in its statement of financial position at December 31, 2018 as part of trade and
other receivables.

Requirements:

Based on the above and the result of your audit, answer the following:

1. The correct gain on sale of land is?

2. The correct interest income for 2018 is?
3. Profit for 2018 is overstated by?
4. The correct carrying amount of the notes receivable at December 31, 2018 is?
5. The entity’s working capital at December 31, 2018 is overstated by?

***End of Material***

Page 6 of 6