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De La Salle Lipa

Applied Auditing
Revenue Cycle

Case 1: Audit of Accounts Receivable and Related Accounts

You are assigned to audit Joanna Co. for the year ending December 31, 2018. The accounts
receivable were circularized as at December 31, 2018 and the following exceptions / replies
have not been disposed of at the date of your examination.

Cus. Balance Customer’s Comments Audit Findings

A P 6,000 Balance was paid Joanna received mailed check on January


December 29, 2018. 5, 2019.

B 14,800 Balance was offset by our Joanna credited accounts payable for
December 10 shipment of P14,800 to record purchase of tires.
tires.

C 32,400 The above balance has The payment was credited to customer D.
been paid.

D 20,000 Our records show a bigger A new confirmation was mailed.


balance, please check.

E 47,400 We do not owe Joanna The shipment costing P32,600 was made
anything as the goods on December 29, 2018 and the goods
were received January were not included in recording the
FOB destination. December 31, 2018 inventory summary.

F 30,000 Our deposit of P90,000 Joanna had previously credited the


should cover this balance. deposit to sales.

G 13,000 We never received these The shipment was erroneously made to


goods. another customer and the goods costing
P10,200 are now on its way to customer
G. The shipment, FOB Shipping Point,
was made December 31, 2018.

H 20,000 We are rejecting the price, Joanna’s clerk erroneously computed the
which is too much. unit price at P200. The correct pricing
should have been at P120 per unit.

I 36,000 Amount is okay. Since Goods cost P24,000 and were not
this is on consignment, we included in Joanna’s inventory.
will remit payment upon
selling the goods.

J 1,200 CM No. 888 cancels this The CM dated November 30, 2016 was
balance. recorded by Joanna in January 5, 2019.
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The following are the unadjusted balances as of December 31, 2018:
Accounts receivable P 200,000
Merchandise Inventory 300,000
Net Sales 1,000,000
Cost of Sales 600,00

Requirements:
1. How much is the adjusted Accounts Receivable on December 31, 2018?
2. How much is the adjusted Merchandise Inventory on December 31, 2018?
3. How much is the adjusted Net Sales for the year ending December 31, 2018?
4. How much is the adjusted Cost of Sales for the year ending December 31, 2018?
5. How many units were sold to Customer H?
6. What are the adjusting entries on December 31, 2018?

Case 2: Audit of Accounts Receivable and Related Accounts

In connection with the audit of the financial statements of Praktis 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 Praktis’ trial balance as of December 31,
2018.
Accounts Receivable P 442,500
Allowance for Doubtful Accounts 15,000

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

Accounts with debit balances:


60 days old and below P 238,500
61 to 90 days 117,200
Over 90 days 85,400 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 Customer’s Comments Audit Findings

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

Robert We do not owe this amount Investigation revealed that goods sold for P16,000
*%#@ (bad word). We did not were shipped to Robert on December 29, 2018,

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receive any merchandise from terms FOB Shipping Point. The goods were lost in
your company. transit and the shipping company has acknowledged
its responsibility for the loss of the merchandise.

Anne I am entitled to a 10% Anne is an employee of Praktis. Starting November


employee discount. Your bill 2018, all company employees were entitled to a
should be reduced by P1,200. special discount.

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

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

Carla 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.

Based on your discussion with Praktis’ credit manager, you both agreed that an allowance for
doubtful accounts should be maintained using the following rates:
60 days old and below 1%
61 to 90 days 2%
Over 90 days 5%

Requirements:
1. Adjusting entries as of December 31, 2018
2. Compute for the adjusted balances of Accounts Receivables and of Allowance for
Doubtful Accounts

Case 3: Computation of Adjusted Accounts Receivables

In the audit of Beatles Company, the auditor had an appreciation of the following schedule and
noted some comments for possible adjustments:

Beatles Company
Accounts Receivable Schedule
December 31, 2018

Customer Balance Current Past Due


Love M. Do P 92,000 P - P 92,000
Strawberry Fields 420,000 248,000 172,000
This Boy Company 350,000 92,000 258,000
Girl Corporation 374,000 212,000 162,000
Ticket to Ride Transport Corp. 160,000 - 160,000
Let It Be Corp. 124,000 60,000 64,000
Hey Jude 4,000 4,000 -
Get Back Company 256,000 80,000 176,000

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Yesterday Corp. 240,000 240,000 -
Totals P 2,020,000 P 936,000 P 1,084,000

The Accounts Receivable control account balance was determined to be P2,020,000.

The external auditor submitted the following audit comments for possible adjustments:

Love M. Do Merchandise found defective; returned by customer on October 31,


2018 for credit, but the credit memo was issued by Beatles only on
January 15, 2019.

Strawberry Fields Account is good but usually pays late.

This Boy Company Merchandise worth P160,000 was destroyed while in transit on May 31,
2018 terms FOB Destination. The carrier was billed on June 15, 2018
(See Ticket To Ride Corp. and Yesterday Corp.)

Girl Corporation Customer billed twice in error for P40,000. Balance is collectible.

Ticket to Ride Corp. Collected in full on January 31, 2019.

Let It Be Corp. Paid in full on December 30, 2018 but not recorded. Collections were
deposited on January 2, 2019.

Hey Jude Received account confirmation from customer for P44,000.


Investigation revealed an erroneous credit for P40,000 (see Get Back
Company).

Get Back Company Neglected to post P40,000 credit to customer’s account.

Yesterday Corp. Customer wants to know reason for receipt of P160,000 credit memo as
their accounts payable balance was P400,000.

Requirements:
1. Adjusting entries as of December 31, 2018.
2. Adjusted balance of Accounts Receivable-Trade as of December 31, 2018.

Case 4: Audit of Accounts Receivable and Related Accounts

In connection with your examination of the financial statements of Ringo, 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:
Net Debit % to be applied after
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Age Balance corrections have been made
60 days and under P 387,800 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.
P 837,900

 The Allowance for Uncollectible Accounts schedule is presented below:

Debit Credit Balance


January 1, 2018 P 19,700
November 30, 2018 P 6,100 13,600
December 31, 2018 (P837,900 x 5%) P 41,895 55,495

 Entries made to Uncollectible Accounts Expense account were:


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

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

Requirements:
1. Determine the following as of and for the year ended December 31, 2018:
a. Accounts Receivable
b. Allowance for Uncollectible Accounts
c. Uncollectible Accounts Expense

2. Adjusting entries as of December 31, 2018

Case 5: Audit of Allowance for Doubtful Accounts

Professional Company produces paints and related products for sale to the construction
industry throughout Metro Manila. While sales have remained relatively stable despite a
decline in the amount of new construction, there has been a noticeable change in the
timeliness with which the company’s customers are paying their bills.

The company sells its products on payment terms of 2/10, n/30. In the past, over 75% of the
credit customers have taken advantage of the discount by paying within 10 days of the invoice
date. During the year ended December 31, 2018, the number of customers taking the full 30
days to pay has increased. Current indicators are that less then 60% of the customers are
now taking the discount. Uncollectible accounts as a percentage of total credit sales have
risen from the 1.5% provided in the past years to 4% in the current year.

In response to your request for more information on the deterioration of accounts receivable
collections, the company’s controlled has prepared the following report.

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Professional Company
Accounts Receivable Collections
December 31, 2018

The fact that some credit accounts will prove uncollectible is normal, and annual bad
dept write-offs had been 1.5% of total credit sales for many years. However, during
the year 2018, this percentage increased to 4%. The accounts receivable balance
is P1,500,000 and the conditions of this balance in terms of age and probability of
collection is shown below:

Proportion Age of Accounts Collectible


64% 1 – 10 days 99.0%
18% 11 – 30 days 97.5%
8% Past due 31 – 60 days 95.0%
5% Past due 61 – 120 days 80.0%
3% Past due 121 – 180 days 65.0%
2% Past due over 180 days 20.0%

At the beginning of the year, the Allowance for Doubtful Accounts had a credit
balance of P27,300. The Company has provided for a monthly bad debt expense
accrual during the year based on the assumption that 4% of the total credit sales will
be uncollectible. Total credit sales for the year 2018 amounted to P8,000,000 and
write-offs of uncollectible accounts during the year totaled P292,500.

Requirements:
1. The necessary adjusting journal entries to adjust the Allowance for Doubtful Accounts as
of December 31, 2018
2. Adjusted balance of Allowance for Doubtful Accounts as of December 31, 2018

Case 6: Analysis of Notes Receivable and Related Accounts

The statement of financial position of Santiago Corporation reported the following long-term
receivables as of December 31, 2019:

Note receivable from sale of plant P 9,000,000


Note receivable from officer 2,400,000

In connection with your audit, you were able to gather the following transactions during 2020
and other information pertaining to the company’s long-term receivable.

a. The note receivable from sale of plant bears interest at 12% per annum. The note is
payable in 3 annual installments of P3,000,000 plus interest on the unpaid balance every
April 1. The initial principal and interest payment were made on April 1, 2020.

b. The note receivable from officer is dated December 31, 2019, earns interest at 10% per
annum, and is due on December 31, 2022. The 2020 interest was received on December
31, 2020.

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c. The corporation sold a piece of equipment to Jaime, Inc. on April 1, 2020, in exchange for
an P1,200,000 non-interest bearing note due on April 1, 2022. 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, 202, was 12%. The present value factor for
tow periods at 12% is 0.797 while the present value factor of ordinary annuity of 1 for two
periods at 12% is 1.690.

d. A tract of land was sold by the corporation to Nolan Co. on July 1, 2020, for P6,000,000
under an installment sale contract. No. Co. signed a 4-year 11% note for P4,200,000 on
July 1, 2020, in addition to the down payment of P1,800,000. The equal annual payments
of principal and interest on the note will be P1,353,750 payable on July 1, 2021, 2022,
2023, and 2024. The land had an established cash price of P6,000,000 and its cost to the
corporation was P4,500,000. The collection of the installments on this note is reasonably
assured.

Requirement:
1. How much is the non-current notes receivable as of December 31, 2020?
2. How much is the current portion of long-term notes receivable as of December 31, 2020?
3. How much is the accrued interest receivable as of December 31, 2020?
4. How much is the interest income for the year 2020?

Case 7: Analysis of Notes Receivable and Related Accounts

The Vigan Company included the following in its note receivable as of December 31, 2020:
Note receivable from sale of land P 880,000
Note receivable from consultation 1,200,000
Note receivable from sale of equipment 1,600,000

In connection with your audit, you were able to gather the following transactions during 2020
and other information pertaining to the company’s note receivable:

a. On January 1, 2020, Vigan Company sold a tract of land. The land, purchased 10 years ago,
was carried on Vigan Company’s books at a value of P500,000. Vigan received a
noninterest-bearing note for P880,000. The note is due on December 31, 2021. There is no
readily available market for the land, but the current market rate of interest for comparable
notes is 10%.

b. On January 1, 2020, Vigan Company finished consultation services and accepted in


exchange a promissory note with a face value of P1,200,000, a due date of December 31,
2022, and a stated rate of 5%, with interest receivable at the end of each year. The fair value
of the services is not readily determinable and the note is not readily marketable. Under the
circumstances, the note is considered to have an appropriate imputed rate of interest of 10%.

c. On January 1, 2020, Vigan Company sold equipment with a carrying amount of P1,600,000
to X Company. As payment, X gave Vigan Company a P2,400,000 note. The note bears an
interest rate of 4% and is to be repaid in three annual installments of P800,000 (plus interest
on the outstanding balance). The first payment was received on December 31, 2020. The
market price of the equipment is not reliably determinable. The prevailing rate of interest for
notes of this type is 14%.

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Requirements:
1. How much is the consultation service fee revenue that should be recognized in 2020?
2. How much is the gain on sale of equipment that should be recognized in 2020?
3. How much is the noncurrent notes receivable as of December 31, 2020?
4. How much is the current portion of long-term notes receivable as of December 31, 2020?
5. How much is the interest income to be recognized in 2020?