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Audit of Receivables
Lecture Notes & Activities
Receivables
- Represents collectibles from customers and others, most frequently arising from sales of merchandise, claims for
money lent or from performance of services.
Trade receivables- refers to claims arising from sales of merchandise or performance of services in the ordinary
course of business operations.
Nontrade receivables – represents claims arising from sources other than the sale of merchandise or performance
of services in the ordinary course of business operations.

Confirmation of Account Receivables

-It involves requesting customers to inform the auditor whether the balances due them appearing in the client’s
records are correct.
Two types:
Positive– is used if the internal controls over receivables are weak; the individual balances are large; accounts are
in dispute; auditor suspects the possibility of irregularities involving accounts receivable; and the auditor may
ignore the confirmation request. Two methods: (1) request the respondent to indicate whether s/he agrees with
the information in the request; (2) the receivable amount is not included on the request and ask the respondent
to fill in the information (“blank positive form”).* the use of blank positive form may result in a lower response
rate, but may decrease the risk that respondents sign and return the confirmation without verifying the
information.

Negative – a confirmation procedure wherein the customer is requested to communicate with the auditor only
when he does not agree with the balance as shown in the client’s records. Under this type of confirmation, when
no response is received from the customer, the balance is assumed to have been confirmed. It is used if internal
controls over receivables are strong; the individual balances are small and the auditor believes that the customer
may ignore the confirmation request.

Elements of satisfactory confirmation procedures

1. The confirmation should be signed by the client’s officer.
2. Exceptions or complaints expressed by the customers are verified by the auditor and discussed it with appropriate
officer of the company.
3. The mailing of the request is made under the control and supervision of the auditor.
4. The customer’s replies returned by the post office are received directly by the auditor without any possible
tampering by the client management or staff.
5. The auditor has a freehand in selecting the customer’s accounts to be confirmed.

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.

4. 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.
c. Freight collect - means that the freight charges on the merchandise shipped is to be paid by the
buyer.
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d. Freight prepaid - means that the freight charges on the merchandise shipped was already paid
by the seller.

5. 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.

6. 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.

7. 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.
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 collectivity 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)
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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.

Entries:
Cash XX
Interest expense (balancing figure) XX
NR discounted XX
Interest income (balancing figure) XX
(the balance of the undiscounted note will be included in the “trade and other receivables presented as current asset,
then the NR discounted will be disclosed in the note to financial statements)

If the customer paid the note, the pertinent entry would be:
NR discounted XX
NR XX
OR
If the note is DISHONORED, the pertinent entry would be:
AR (maturity value plus protest fee and other bank charges) XX
Cash XX
Then, to cancel the contingent liability
NR discounted XX
NR XX

Discounting without recourse Discounting with recourse

-endorser avoids future liability even if the maker -the endorser shall pay the endorsee if the maker
refuses to pay the endorsee on the date of maturity dishonors the note. This is the contingent or
secondary liability of the endorsee
a. Conditional sale recognizing contingent liability
b. Secured borrowing
Discounting without recourse Discounting with recourse
a. Conditional sale recognizing
contingent liability
b. Secured borrowing
Conditional sale recognizing
contingent liability
Cash XX Cash XX
Loss on NR discounting XX Loss on NR discounting XX
Note receivable XX Note receivable discounted XX
Interest income (actual interest XX Interest income (actual interest XX
earned on the date of discounting) earned on the date of discounting)
If note is paid by the maker
Note receivable discounted XX
Note receivable XX
Secured borrowing
Cash XX
Interest expense* XX
Liability for NR discounted XX
Interest income (actual interest XX
earned on the date of discounting)
If note is paid by the maker
Liability for NR discounted XX
Note receivable XX
If note is DISHONORED
NR dishonored (or AR) XX
Cash (MV plus protest fee and other XX
bank charges)

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FACTORING OF ACCOUNTS RECEIVABLE

Gross amount of Accounts receivable XX
Less finance charges XX
Interest expense (if any) XX XX
Net selling price XX
Less factor’s holdback XX
Cash received XX

(a)Gross amount of Accounts receivable XX

(b)Less finance charges XX
©Interest expense (if any) XX XX
(d)Net selling price XX
€Less recourse obligation (if any) XX
(f)Net proceeds XX
(g)Less book value of AR
(h)Gross amount of AR XX
(i)Less AFDA XX XX
(j)Gain or loss on sale XX; gain if f>j; loss if f>j

Audit procedures
Assertions Objectives Procedures
1. Presentation and To determine that receivables are -review disclosures for compliance with GAAP
disclosures properly presented and classified in -inquire about pledging and discounting
the balance sheet. -review loan agreements for pledging, factoring
and other receivables (from officers, directors,
affiliates, etc.)
2. Existence/ To determine that receivable exist -confirmation; inspect notes; vouch
Occurrence and represent bona fide obligations -obtain schedule of aged trade accounts
owed to the company as of the B/S receivables and notes receivable and reconcile to
date. ledgers.
3. Rights and To determine that receivable exist -Review cutoffs
obligations and represent bona fide obligations -Inquire about factoring of receivables
owed to the company as of the B/S
date.
4. Completeness To determine that all transactions -test cutoff sales
relative to receivables have been
recorded in the proper accounting
period.
5. Valuation or To determine that receivables are -foot subsidiary ledger
allocation recorded and presented at proper -reconcile subsidiary ledger to general ledger
amounts in accordance with -examine subsequent cash receipts
PAS/PFRS. -age receivable to test adequacy of allowance
-recalculate the interest income from notes
-discuss adequacy of allowance for doubtful
accounts with management and compare to
historical data

Accounts receivable Allowance for doubtful accounts

beg. balance xxx collections xxx beg. balance xxx beg. balance xxx
credit sales xxx recoveries xxx Write offxxx recoveries xxx
recoveries xxx write off xxx Bad debts exp. xxx
sales discount xxx XXX XXX
sales return xxx
end. Balance xxx
XXX XXX

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Problem 1:
OTTO OTTO Co. sells new parts to auto dealers. Company policy requires that a pre-numbered 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, 2020, was recorded on document 3167. Shipments are billed in the
order that the billing clerk receives the shipping documents.

For late December 31, 2020 and early January 2021, Shipping Documents are billed on sales invoices as follows:

Shipping Sales
Document No. Invoice No.
3163 5332
3164 5326
3165 5327
3166 5330
3167 5331
3168 5328
3169 5329
3170 5333
3171 5335
3172 5334

The December 2020 and January 2021 sales journal have the following information included:

SALES JOURNAL-DECEMBER 2020 SALES JOURNAL- JANUARY 2021

Day Sales Amount Day of Sales Amount
of
Month Invoice No. of Sale Month Invoice No. of Sale
30 5326 P 72,611 1 5332 P 264,131
30 5329 191,430 1 5331 10,639
31 5327 41,983 1 5333 85, 206
31 5328 62,022 2 5335 125,050
31 5330 4,774 2 5334 64,658

1. What is the net overstatement (understatement) of Daffodil’s sale for the year ended December 31, 2020?
A. P21,318 B. P253,452 C. (P253,452) D. (P 21,318 )

2. What adjusting entry is necessary to correct Daffodil’s financial statements for the year ended December 31,
2020?
A. Accounts Receivable 21,318
Sales 21,318
B. Accounts Receivable 253,452
Sales 253,452
C. Sales 21,318
Accounts Receivable 21,318
D. Sales 253,452
Accounts Receivable 253,452

3. Cutoff test designed to detect credit sales made before the end of the year that have been recorded in the
subsequent year provide assurance about management’s assertion of
A. Rights and Obligation
B. Completeness
C. Existence
D. Valuation and Allocation

4. Tracing shipping documents to prenumbered sales invoices provides evidence that

A. No duplicate shipments or billings occurred
B. Shipments to customers were properly invoiced
C. All goods ordered by customers were shipped.
D. All prenumbered sales invoices were accounted for

5. An author most likely would review an entity’s periodic accounting for the numerical sequence of shipping
documents and invoices to support management’s financial statement assertion of
A. Existence
B. Rights and Obligations
C. Valuation and allocation
D. Completeness

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Problem 2:
The January 1, 2021 balance sheet of BAGO Company shows the following balances:
Debit Credit
Accounts receivable P 2,000,000
Allowance for doubtful accounts P 10,000

Additional information:
On February 1, 2021, BAGO Company factored receivables with a carrying amount of P200,000 to BOWEK Company.
BOWEK Company assesses a finance charge of 3% of the receivables and retains 5% of the receivables.

On March 1, 2021, the company received a P400,000, 6-month, 12% interest bearing note from a customer. On July 1,
2021, BAGO discounted the note at 15%. At maturity date, the note was dishonored and the bank charged a P2,500
protest fee.

Relative to this transaction, you are to determine the answer of the following:
1. Assume that BAGO factors the accounts receivables on a without recourse basis. The loss to reported is
a. P0 c. P10,000
b. P6,000 d. P16,000
2. Assume that BAGO factors the accounts receivables on a recourse basis. The recourse obligation has a fair value
of P1,000. The loss to be reported is
a. P6,000 c. P10,000
b. P7,000 d. P17,000
3. What amount of cash did BAGO receive from the bank on July 1?
a. P402,800 c. P400,000
b. P413,400 d. P424,000
4. What amount of contingent liability will BAGO disclose in its financial statements on June 1?
a. P381,100 c. P400,000
b. P412,000 d. P424,000
5. What amount would BAGO Co. debit to Notes Receivable Dishonored?
a. P383,600 c. P402,500
b. P414,500 d. P426,500

Question No. 1 Loss is equal to the finance charge (3% x 200,000) P 6,000

Question No. 2 Finance charge P 6,000

Add estimate liability for recourse obligation 1,000
Loss on factoring P 7,000
Question No. 3 Net proceeds = Mat Value – discount
Maturity value = P400,000 + (P400,000 x 12% x 6/12)
= P424,000
Net proceeds = P424,000 – (P424,000 x 15% x 2/12)
= P413,400
Question No. 4 NR discounted (contingent liability) is equal to the face value of P400,000.
Question No. 5 Maturity value P 424,000
Add: Other charges 2,500
Amount to be debited to NR dishonored P 426,500

SUMMARY OF ANSWERS: 1)B; 2)B; 3)B; 4)C; 5)D

PROBLEM NO. 3
Your audit disclosed that on December 31, 2020, the accounts receivable control account of Alilem Company had a
balance of P2,865,000. An analysis of the accounts receivable showed the following:
Accounts known to be worthless P37,500
Advance payments to creditors on purchase orders 150,000
Advances to affiliated companies 375,000
Customers’ accounts reporting credit balances arising from sales return (225,000)
Interest receivable on bonds 150,000
Other trade accounts receivable-unassigned 750,000
Subscription receivable due in 30 days 825,000
Trade accounts receivable-assigned (Alilem Company’s equity in assigned
accounts is P150,000) 375,000
Trade installment receivable due 1-18 months, including unearned
finance charges of P30,000 330,000
Trade receivables due from officers due currently 22,500
Trade accounts on which post-dated checks are held (no entries were
made on receipts of checks) 75,000
Total 2,865,000

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QUESTIONS:
Based on the data, determined the adjusted trial balance of the following:
1. The trade accounts receivable as of December 31, 2020 is
a. 1,147,500 b. 1,522,500 c. 1,485,000 d. 1,447,500

2. The net current trade and other receivables as of December 31, 2020 is
a. 2,647,500 b. 2,610,000 c. 2,272,500 d. 1,822,500
3. How much of the foregoing will be presented under noncurrent assets as of December 31, 2020?
a. 1,200,000 b. 375,000 c. 525,000 d. 0

PROBLEM NO. 4
Presented below are a series of unrelated situations. Answer the following questions relating to each of the independent
situations as requested.
1. Lucky Company’s unadjusted trial balance at December 31, 2020, included the following accounts:
Debit Credit
Accounts receivable 1,000,000
Allowance for doubtful accounts 40,000
Sales 15,000,000
Sales returns and allowances 700,000
Lucky Company estimates its bad debt expense to be 1 ½ % net of sales.
Determine its bad debt expense for 2020.
a. 214,500 b. 225,000 c. 254,500 d. 55,000

2. An analysis and aging of Blessed Corp. accounts receivable at December 31, 2020, disclosed the following:
Amounts estimated to be uncollectible 1,800,000
Accounts receivable 17,500,000
Allowance for doubtful accounts (per books) 1,250,000

What is the net realizable value of Blessed’s receivables at December 31, 2020?
a. 15,700,000 b. 16,250,000 c. 17,500,000 d. 14,450,000

3. Fortunate Company provides for doubtful accounts based 3% of credit sales.

The following data are available for 2020.
Credit sales during 2020 21,000,000
Allowance for doubtful accounts 1/1/20 170,000
Collection of accounts written off in prior years (customers credit was reestablish) 80,000
Customers accounts written off as uncollectible during 2020 300,000

What is the balance in allowance for doubtful accounts at December 31, 2020?
a. 580,000 b. 630,000 c. 500,000 d. 420,000

4. At the end of its first year of operations, December 31, 2020, Happy, Inc. reported the following information:
Accounts receivable, net of allowance for doubtful accounts 9,500,000
Customers accounts written off as uncollectible during 2020 2240,000
Bad debts expense for 2020 840,000
What should be the balance in the accounts receivable at December 31, 2020, before subtracting the allowance for
doubtful accounts?
a. 10,100,000 b. 9,470,000 c. 10,340,000 d. 10,580,000
5. The following accounts were taken from Chapel Inc.’s balance sheet at December 31, 2020.
Debit Credit
Accounts receivable 4,100,000
Allowance for doubtful accounts 100,000
Net credit sales 7,500,000
If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be reported for 2020.
a. 223,000 b. 123,000 c. 23,000 d. 225,000

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PROBLEM NO. 5
Unless otherwise identified, the notes receivable of the HELP COMPANY on December 31, 2020, were trade notes
receivable. On this date of the balance of account, P3,036,915, consisted of the following note all received during the
calendar year under audit:

Maker Date Term Rate Amount Remarks

A Oct. 1 6 mos. 18% 57,416 Four notes to settle past due account. Current
Company Oct. 1 12 mos. 18% 100,000 billings are on a 10 – day credit basis.
Oct. 1 18 mos. 18% 100,000
Oct. 1 24 mos. 18% 100,000

B July 1 36 mos. 18% 500,000 This note is for a cash loan made to this customer.
Company No interest has been collected to date.

C Oct. 1 4 mos. 15% 251,636 all interest collected on Oct. 1

Company
Mr. Feb. 1 Demand 18% 1,000,000 Loan approved in minute’s book, Jan.20. On Aug.
Postman this note was pledged as collateral for a bank loan
P500,000.
D Nov. 1 12 mos. 15% 546,387 Interest payable at maturity
Company
E, Inc Dec. 90 days 18% 381,476 Interest payable at maturity
10

All of the above notes are considered good except that A Company which is somewhat doubtful. An allowance of 25%
should be established against the notes receivable of this company.

Questions:
Based on the above and the result of your audit, compute the following:
1. Adjusted balance of trade notes receivable as of December 31, 2020
a. 1,536,915 b. 1,179,499 c. 2,036,915 d. 927,863

2. Interest income for the year ended December 31, 2020

a. 243,747 b. 253,183 c. 208,183 d. 43,183

3. Accrued interest income as of December 31, 2020

a. 253,183 b. 78,747 c. 243,747 d. 198,747

4. Net realizable value of trade notes receivable as of December 31, 2020

a. 1,090,145 b. 1,947,561 c. 838,509 d. 1,447,561

PROBLEM NO. 6
Maxwell Company’s accounts receivable subsidiary ledger reveals the following information:
Account balances Invoice
Customer 12/31/2020 amount Dates
Rose, Inc 87,950 35,000 12/6/2020
52,950 11/26/2020
Gery, Inc 52,300 30,000 9/27/2020
22,300 8/20/2020
Ram, Inc 50,000 50,000 12/8/2020
Ria, Co 84,359 26,500 10/25/2020
57,850 11/17/2020
Mar, Co 79,000 48,000 10/9/2020
31,000 12/12/2020
Sun, Co 43,500 43,500 9/12/2020
West, Co 15,000 15,000 7/25/2020

Maxwell Company’s receivable collection experience indicates that, on the average, losses have occurred as follows:
Age of Accounts Uncollectible percentage
0-30 days 1%
31-60 days 1.5%
60-90 days 4%
91-120 days 10%
121 days and over 60%

The allowance for doubtful accounts credit balance on December 31, 2020, was P22,450 before adjustment. The account
of West Co. has been determined to be indefinitely uncollectible.
Questions:
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Based on the above data, compute for the following:

1. The total accounts receivable
a. 397,100 b. 412,100 c. 372,368 d. 387,368
2. The balance of accounts receivable under the “0-30” days category.
a. 85,000 b. 106,000 c. 116,000 d. 108,000
3. The balance of accounts receivable under the “61-90” days category.
a. 118,000 b. 125,800 c. 104,500 d. 110,800 74,500
4. The allowance for doubtful accounts as of December 31, 2020.
a. 24,228 b. 24,732 c. 26,532 d. 17,282
5. The doubtful account expense for the year 2020.
a. 24,228 b. 24,732 c. 19,082 d. 17,282

PROBLEM NO. 7
During your examination of the 2020 financial statements of Jekjek Company, you found out that the company does not
provide allowance for doubtful accounts ever since it started operations in 2016. The company’s practice is to directly
write off as expense doubtful accounts and credit recoveries to income. The company’s contracts are generally for two
years:

The company, upon your recommendation, agreed to change its accounts for 2020 to give effect to doubtful treatment on
the allowance basis. The allowance is to be based on a percentage of sales which is derived from the experience of prior
years. Statistics for 2016 to 2020 are shown as follows:
Year of sale 2016 2017 2018 2019 2020
Charge sales 600,000 1,500,000 1,800,000 1,950,000 1,650,000

Accounts written off

& year of sale
2016 3,300
2017 9,000 6,000
2018 3,000 24,000 7,800
2019 7,200 27,000 9,000
2020 16,200 30,000 8,400

Recoveries &
Year of sale
2016
2017 600
2018 2,400
2019 3,000
2020 3,600
Accounts receivable at December 31, 2020 were as follows:
2020 sales P90,000
2021 sales 810,000
Based on the foregoing information:
1. The average percentage of net doubtful accounts to charge sales that should be used in setting up the 2020
allowance is:
a. 2.05% b. 2.5% c. 1.9% d. 1.77%
2. How much is the doubtful accounts expense for 2020?
a. 32,750 b. 54,600 c. 43,800 d. 41,250
3. The doubtful accounts expense for 2020 is over(under)stated by:
a. 13,250 b. 55,950 c. (32,500) d. (41,250)
4. The allowance for doubtful accounts end of 2020 is:
a. 68,400 b. 46,200 c. 31,350 d. 90,000

PROBLEM NO. 8
The balance sheet of COMPETENCE Corporation reported the following long-term receivables as of December 31, 2019:
Notes receivable from sale of Plant 7,500,000
Notes receivable from officer 2,000,000
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 receivables:
a. The note receivable from sale of plant bears interest at 9% per annum. The note is payable in three equal annual
installments of P2,500,000 plus interest on the unpaid balance every May 1. The initial principal and interest
payment was made on May 1, 2020.
b. The note receivable from officer is dated December 31, 2019, earns interest at 8% per annum, and is due on
December 31, 2022. The 2020 interest was received on December 31, 2020.
c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2020, in exchange for a P1,000,000 noninterest
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, 2020, was 10%. The equipment had a
carrying amount of P380,000 on April 1, 2020.

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d. A tract of land was sold by the corporation to No Co. on July 1, 2020 for P4,000,000 under an installment sale
contract. No Co. signed a 4-year 10% note for P2,800,000 on July 1, 2020, in addition to the down payment of
P1,200,000. The equal annual payments of the principal and interest on the note will be P883,320 payable on July 1,
2021, 2022, 2023 and 2024. 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 reasonable assured.

QUESTIONS:
1. Noncurrent receivables as of December 31, 2020
a. 7,584,630 b. 7,724,630 c. 5,084,630 d. 7,522,680
2. Current portion of the long-term receivables as of December 31, 2020
a. 2,500,000 b. 3,103,320 c. 3,243,320 d. 0
3. Accrued interest receivable as of December 31, 2020
a. 300,000 b. 140,000 c. 440,000 d. 903,320
4. Interest income for the year 2020
a. 746,950 b. 1,026,950 c. 791,116 d. 886,950
5. Total gain to be recognized on the sale of equipment and land
a. 1,000,000 b. 446,000 c. 1,446,000 d. 554,000

PROBLEM NO. 9
Sigay Bank granted a loan to a borrower in the amount of P5,000,000 on January 1, 2020. The interest rate on the loan
is 10% payable annually starting December 31, 2020. The loan matures in five years on December 31, 2024. Sigay Bank
incurs P39,400 of direct loan origination cost and P10,000 of indirect loan origination cost. In addition, Sigay Bank
charges the borrower an 8-point nonrefundable origination fee.

QUESTIONS:
Based on the above and result of your audit, answer the following: (round off present value factors to four decimal
places)
1. The carrying amount of the loan as of January 1, 2020 is
a. 5,000,000 b. 4,639,400 c. 5,039,400 d. 4,649,400
2. The effective interest rate of the loan is
a. 10% b. 11.94% c. 12% d. 9.8%
3. The interest income to be recognized in 2020 is
a. 500,000 b. 555,138 c. 493,861 d. 556,728
4. The carrying amount of the loan as of December 31, 2020 is
a. 5,000,000 b. 4,696,128 c. 5,033,261 d. 4,704,538

PROBLEM NO. 10
On January 1, 2020 Batac Company loaned Badoc Company amounting to P2,000,000 and received a two-year, 6%,
P2,000,000 note. The note calls for the annual interest to be paid every December 31. Batac collected the 2020 interest
on schedule. However, on December 31, 2021, based on the Badoc’s recent financial difficulties, Batac’s expects that the
2021 interest, which was reported in the books, will not be collected and that only P1,200,000 of the principal will be
recovered. The P1,200,000 principal amount is expected to be collected in two equal annual installments on December
31, 2023 and December 31, 2025.

QUESTIONS:
Based on the above and result of your audit, answer the following: (round off present value factors to four decimal
places)
1. The present value of the expected future cash flows as of December 31, 2021 is
2. The loan impairment loss is 2021 is
3. How much is the interest income for the year 2022?
4. Carrying amount of the loan as of December 31, 2024 is

end

Audit of receivables/rhivz_amz