AUDIT OF RECEIVABLES

Receivables are financial assets that represent a contractual right to receive cash or another
financial asset from another entity.

Trade receivables refer to claims arising from sale of merchandise or services in the ordinary
course of business. This includes Accounts Receivable and Notes Receivable.

Accounts Receivables are open accounts arising from the sale of goods and services in the
ordinary course of business and not supported by promissory notes.

Other names of accounts receivable are customer’s accounts, trade debtors, and trade accounts
receivable.

Notes Receivables are those supported by formal promises to pay in the form of notes.

Nontrade receivables represent claims arising from sources other than the sale of merchandise or
services in the ordinary course of business.

CLASSIFICATION

Trade receivables which are expected to be realized in cash within the normal operating
cycle or one year, whichever is longer, are classified as current assets.

Nontrade receivables which are expected to be realized in cash within one year, the length
of the operating cycle notwithstanding, are classified as current assets.

Customers’ credit balances are credit balances in accounts receivable resulting from
overpayments, returns and allowances, and advance payments from customers.

These credit balances are classified as current liabilities and are not offset against the debit
balances in other customers’ accounts, except when the same is not material in which case only
the net accounts receivable may be presented.

Initial Measurement of Accounts Receivable

PFRS 9 provides that a financial asset shall be recognized initially at fair value plus
transaction costs that are directly attributable to the acquisition.

Subsequent measurement
After initial recognition, accounts receivable shall be measured at amortized cost.
Amortized Cost – is usually the net realizable value of AR.

Methods of estimating doubtful accounts

There are three methods of estimating doubtful accounts, namely:

1. Aging the accounts receivable or “statement of financial position approach”

2. Percent of accounts receivable or also statement of financial position approach
3. Percent of sales or “income statement approach”

Negotiable promissory note is an unconditional promise in writing made by one person to

another maker, signed by the maker, engaging to pay on demand or at a fixed determinable future
time a sum certain in money to order or to bearer.
Dishonored notes – when a promissory note matures and is not paid, it is said to be dishonored.

Initial Measurement of notes receivable

Notes Receivables shall be measured initially at present value.

Present Value – is the sum of all future cash flows discounted using the prevailing market
rate of interest for similar notes.
However, short-term notes receivable shall be measured at face value.

The initial measurement of long-term notes will depend on whether the notes are
interest-bearing or non-interest bearing.

Interest-bearing notes receivable

Interest-bearing long-term notes are measured at face value which is actually the
present value upon issuance.

Noninterest-bearing notes receivable

Noninterest-bearing long term notes are measured at present value which is the
discounted value of the future cash flows using the effective interest rate.

Subsequent measurement

Long-term notes receivable shall be measured at amortized cost using the effective
interest method.

Loans Receivable is a financial asset arising from a loan granted by a bank or other financial
institution to a borrower or client.

Initial measurement of loan receivable – fair value plus transaction costs that are directly
attributable to the acquisition of the financial asset.

The fair value of the loan receivable at initial recognition is normally the transaction price,
meaning, the amount of the loan granted.

Transaction costs that are directly attributable to the loan receivable include direct
origination costs.

Direct origination costs should be included in the initial measurement of the loan
receivable.

However, indirect origination costs should be treated as outright expense.

Subsequent Measurement of loan receivable- Amortized cost using the effective interest
method.

Receivable Financing is the financial flexibility or capability of an entity to raise money out of its
receivables.

Forms of receivable financing

a. Pledge of accounts receivable

b. Assignment of accounts receivable
 c. Factoring of accounts receivable
d. Discounting of notes receivable

PROBLEMS

Problem 1:

The following information is based on a first audit of EMMA COMPANY. The client has not
prepared financial statements for 2017, 2018, or 2019. During these years, no accounts have been
written off as uncollectible, and the rate of gross income on sales has remained constant for each
of the three years.

Prior to January 1, 2017, the client used the accrual method of accounting. From January 1, 2017
to December 31, 2019, only cash receipts and disbursements records were maintained. When
sales on account were made, they were entered in the subsidiary accounts receivable ledger. No
general ledger postings have been made in December 31, 2016

As a result of your examination, the correct data shown in the table below are available:

Accounts receivable balances: 12/31/16 12/31/19

Less than one year old P15,400 P28,200
One to two years old 1,200 1,800
Two to three years old 800
Over three years old 2,200
Total accounts receivable P16,600 P33,000

Inventories P11,600 P18,800

Accounts payable for inventory purchased P5,000 P11,000

Cash received on accounts receivable in:

2017 2018 2019
Applied to:
Current year collections P148,800 P161,800 P208,800
Accounts of the prior year 13,400 15,000 16,800
Accounts of two years prior 600 400 2,000
Total P162,800 P177,200 P227,600

Cash sales P17,000 P26,000 P31,200

Cash disbursements for

Inventory purchased P125,000 P141,200 P173,800

1. The company’s sales revenue for the three-year period amounted for 2018?
A. P658,200 B. P74,200 C. P625,400 D. P415,300

2. What is the company’s total sales revenue for 2018?

A. P206,400 B. P183,600 C. P268,200 D. P180,400

3. The aggregate amount of purchases for three-year period is

A. P131,000 B. P440,000 C. P434,000 D. P446,000
4. What is the company’s gross profit ratio for each of the three-year period?
A. 33.33% B. 28.35% C. 35.16% D. 31.15%

5. What is the company’s gross profit for each of the three-year period?
2017 2018 2019

A. P 60,933 P 68,200 P 80,000

B. 55,533 60,133 79,000
C. 122,400 137,600 178.800
D. 61,200 68,800 89,400

Problem 2

You are examining the financial statements of CAMILA COMPANY for the year ended December
31, 2019. Your audit of the accounts receivable and other related accounts disclosed the following
information:
1. The December 31, 2019, balance in the Accounts Receivable control account is P788,000.

2. The only entries in the Bad Debts Expense account were:

a. A credit for P1,296 on December 1, 2019, because customer A remitted in full for the account
charged off October 31, 2019.
b. A debit on December 31 for the amount of the credit to Allowance for Bad Debts.

3. The Allowance for Bad Debts account is presented below.

Date Particulars Debit Credit Balance

Jan. 1 Balance P15,250
Oct. 31 Uncollectible:
Dec. 31 Customer A P1,296
B 3,280 9,218
C 2,256 P6,032 P23,640 32,858
3% of P788,000

4. An aging schedule of the accounts receivable as of December 31, 2019, and the decisions are as
shown below:
Amount to which the allowance
Net Debit is to be adjusted after adjustments
AGE Balance and corrections have been made
0-1 month P372,960 1%
1-3 months 307,280 2%
3-6 months 88,720 3%
Over 6 months 24,000 Definitely uncollectible, P4,000;
P8,000 is considered to be 50%
uncollectible; the remainder is
estimated to be 80% collectible
P792,960
5. There is a credit balance in one account receivable (0-1 month) of P8,000; it represents an
advance on a sales contract; also there is a credit balance in one of the 1-3 months accounts
receivable of P2,000 for which merchandise will be accepted by the customer.

6. The Accounts Receivable control account is not in agreement with the subsidiary ledger. The
differences cannot be located, and the company's accountant decides to adjust the control to the
sum of the subsidiaries after corrections are made.

1. The adjustment to correct the entry made on December 1, 2019, is

A. Bad debts expense 1,296

Accounts receivable 1,296
B. Bad debts expense 1,296
Allowance for bad debts 1,296
C. Accounts receivable 1,296
Allowance for bad debts 1,296
D. No adjusting entry is necessary.

2. The required allowance balance (per aging) on December 31, 2019, is

A. P29,354 C. P19,858
B. P19,058 D. P32,858

3. The net realizable value of Camila’s accounts receivable on December 31, 2019, amounts to
A. P779,902 C. P793,200
B. P774,142 D. P788,664

4. Camila Should report bad debt expense for 2019 of

A. P13,344 C. P10,296
B. P22,344 D. P33,936

5. What entry is necessary to adjust the allowance account at December 31, 2019?
A. Bad debts expense 10,296
Allowance for bad debts 10,296
B. Bad debts expense 13,800
Allowance for bad debts 13,800
C. Allowance for bad debts 10,296
Bad debts expense 10,296
D. Allowance for bad debts 13,800
Bad debts Expense 13,800

Problem 3:

Luna, Inc had the following long-term receivable account balances at December 31, 2018
Note receivable from sale of division P1,500,000
Note receivable from officer 400,000

Transactions during 2019 and other information relating to Luna’s long-term receivables were as
follows.
1. The P1,500,000 note receivable is dated May 1 2018, bears interest at 9% , and represents the
balance of the consideration received from the sale of Luna's electronics division to York
Company. Principal payments of P500,000 plus appropriate interest are due on May 1, 2019,
2020, and 2021. The first principal and interest payment was made on May 1, 2019. Collection of
the note instalments is reasonably assured.

2. The P400,000 note receivable is dated December 31, 2018, Bears interest at 8%, and is due on
December 31, 2021. The note is due from May Rox, president of Luna Inc and is collateralized by
10,000 shares of Luna's ordinary shares. Interest is payable annually on December 31, and all
interest payments were paid on their due dates through December 31, 2019. The quoted market
price of Luna's ordinary shares was P45 per share on December 31, 2019.

3. On April 1, 2019. Luna sold a patent to Pen Company in exchange for a P100,000 zero interest-
bearing note due on April 1, 2021. There was no established exchange price for the patent, and
the note had no ready market. The prevailing rate of interest for a note of this type at April 1,
2019, was 12%. The present value of P1 for two periods at 12% is 0.797 (use this factor). The
patent had a carrying value of P40.000 at January 1, 2019, and the amortization for the year
ended December 31, 2019 would have been P8,000. The collection of the note receivable from
Pen is reasonably assured.

4 .On July 1, 2019. Luna sold a parcel of land to Sprinter Company for P200.000 under an
instalment sale contract. Sprinter made a P60.000 cash down payment on July 1, 2019, and signed
a 4-year 11% note for the P140.000 balance. The equal annual payments of principal and interest
on the note will be P45,125 payable on July 1, 2020, through July 1, 2023. The land could have
been sold at an established cash price of P200,000. The cost of the land to Luna was P150,000.
Circumstances are such that the collection of the instalments on the note is reasonably assured.

Based on the preceding information, calculate the following:

1. Accrued interest receivable on December 31, 2019

a. P75,400 b. P99,700 c. P67,700 d. P97,700

2. Carrying value on December 31,2019, of the zero-interest-bearing note form sale of patent
a. P79,700 b. P72,527 c. P92,827 d. P86,873

3. Interest income for the year ended December 31, 2019

a. P151,873 b. P137,527 c. P154,264 d. P159,573

4. Current portion of long-term receivables on December 31, 2019

a. P537,425 b. P529,725 c. P545,125 d. P640,000

5. Total long-term receivables on December 31,2019

a. P1,103,102 b. 1,097,148 c. P1,081,748 d. P1,087,702

Problem 4:
The December 31, 2017, statement of financial position of the JADINE COMPANY included the
following information:
Accounts Receivable P672,000
Less: Allowance for credit loss (42,300) P629,700
Notes Receivable* 65,400
Total Receivables 695,100

*The company is contingently liable for discounted notes receivable of P114,000.

During the year ending December 31, 2018, the following transactions occurred:

1. Sales on credit P2,623,800

2. Collections of accounts receivable 2,523,000
3. Accounts receivable written off as uncollectible 41,400
4. Notes receivable collected 87,000
5. Customer notes received in payment of accounts 216,000
6. Notes receivable discounted that were paid at maturity 108,000
7. Notes receivable discounted that were defaulted, including
interest of P60 and a P15 fee. This amount is expected to be
collected during 2019. 6,075
8. Proceeds from customer notes discounted with recourse
(principal P135,000,accrued interest, P600) 135,225
9. Collections of accounts previously written off 1,500
10. Sales returns and allowances (on credit sales) 6,000
11. Increase in allowance for credit loss 39,357

Based on the preceding information, determine the balances of the following accounts at
December 31, 2018.

1. Accounts Receivable
a. P473,718 c. P513,975
b. P509,400 d. P515,475
2. Allowance for Credit Loss
a. P39,357 c. P40,857
b. P40,800 d. P41,757
3. Notes Receivable
a. P59,400 c. P200,400
b. P194,400 d. P329,400
4. Notes Receivable discounted
a. P114,000 c. P129,000
b. P120,000 d. P135,000

Problem 5
CALACHUCHI CORP’s accounts receivable subsidiary ledger shows the following information:
ACCOUNTS BALANCE INVOICE
CUSTOMER DEC, 31, 2018 DATE AMOUNT
Aruy, Inc. P35,180 12/06/18 P14,000
11/29/18 21,180
Naku Co. P20,920 09/27/18 12,000
08/20/18 8,920
Syak Corp. P30,600 12/08/18 20,000
10/25/18 10,600
Trip Co. P45,140 11/17/18 23,140
10/09/18 22,000
Uy Co. P31,600 12/12/18 19,200
12/02/18 12,400
Xak Corp. P17,400 09/12/18 17,400

The lifetime expected credit loss rates below are based on Calachuchi Corp’s receivable collection
experience, adjusted for forward-looking estimates.

Age of Accounts Rate

0 – 30 days 1%
31-60 days 1.5 %
61 – 90 days 3%
91-120 days 10 %
Over 120 days 50%

The allowance for credit loss account had a debit balance of P5,500 on December 31, 2018, before
adjustment.

1. The company’s accounts receivable under “61-90 days” category should be

2. The company’s account receivable under the “90-120 days” category should be
3. The allowance for credit loss to be reported in the statement of financial position at Dec.
31, 2018 is?
4. What entry should be made on Dec. 31, 2018, to adjust the allowance for credit loss
account?
5. What is the net realizable value of accounts receivable at Dec. 31 2018?