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    Cash and Receivables

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    Prima Facie
    Wizards Enterprises loaned $1,000,000 to Washington Inc. on January 1, 2004. The terms of the loan required principal payments of $200,000 per year for 5 years plus 8% interest. Washington made payments in 2005 and 2006 but then experienced financial difficulties. On December 31, 2006, Wizards determined the remaining principal would be collected but interest was unlikely. The present value of expected future cash flows as of December 31, 2006 was $556,640. The loan impairment for 2006 was $91,360. Assuming Wizards' assessment has not changed, the interest income for 2007 is $28,531.

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    Cash and Receivables

    Uploaded by

    Prima Facie
    332 views2 pages
    Wizards Enterprises loaned $1,000,000 to Washington Inc. on January 1, 2004. The terms of the loan required principal payments of $200,000 per year for 5 years plus 8% interest. Washington made payments in 2005 and 2006 but then experienced financial difficulties. On December 31, 2006, Wizards determined the remaining principal would be collected but interest was unlikely. The present value of expected future cash flows as of December 31, 2006 was $556,640. The loan impairment for 2006 was $91,360. Assuming Wizards' assessment has not changed, the interest income for 2007 is $28,531.

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    Wizards Enterprises loaned $1,000,000 to Washington Inc. on January 1, 2004. The terms of the loan required principal payments of $200,000 per year for 5 years plus 8% interest. Washington made payments in 2005 and 2006 but then experienced financial difficulties. On December 31, 2006, Wizards determined the remaining principal would be collected but interest was unlikely. The present value of expected future cash flows as of December 31, 2006 was $556,640. The loan impairment for 2006 was $91,360. Assuming Wizards' assessment has not changed, the interest income for 2007 is $28,531.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    332 views2 pages

    Cash and Receivables

    Uploaded by

    Prima Facie
    Wizards Enterprises loaned $1,000,000 to Washington Inc. on January 1, 2004. The terms of the loan required principal payments of $200,000 per year for 5 years plus 8% interest. Washington made payments in 2005 and 2006 but then experienced financial difficulties. On December 31, 2006, Wizards determined the remaining principal would be collected but interest was unlikely. The present value of expected future cash flows as of December 31, 2006 was $556,640. The loan impairment for 2006 was $91,360. Assuming Wizards' assessment has not changed, the interest income for 2007 is $28,531.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Wizards Enterprises loaned P1,000,000 to Washington Inc. on January 1, 2004.

    The
    terms of the loan require principal payments of P200,000 each year for 5 years plus
    interest at 8%. The first principal and interest payment is due on January 1, 2005.
    Washington made the required payments during 2005 and 2006. However, during 2006
    Washington began to experience financial difficulties, requiring Wizards to reassess the
    collectability of the loan. On December 31, 2006, Wizards determines that the remaining
    principal payments will be collected, but the collection of interest is unlikely. The
    prevailing
    interest rate for similar type of note as of December 31, 2006 is 10%.
    QUESTIONS:
    Based on the above and the result of your audit, answer the following:
    1. The present value of the expected future cash flows as of December 31, 2006 is
    P556,640
    2. The loan impairment for the year 2006 is
    P91,360
    3. How much is the interest income for the year 2007, assuming that Wizards'
    assessment of the collectability of the loan has not changed.
    P28,531

    For Problems 1,3 and 4, go to:


    Use ur dwcc account.

    https://drive.google.com/file/d/1eVQ9Lie4p9isirWtWfCZHpouOLBDF23P/view?usp=sharing

    THEORIES
    1. Which of the following statements would an auditor most likely to add to the negative form of confirmations of accounts
    receivable to encourage timely consideration by the recipient?
    a. “This is not a request for payment; remittances should not be sent to our auditors; in the enclosed envelope”
    b. “Report any difference on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your
    records.”
    c. “If you do not report any difference within 15 days, it will be assumed that this statement is correct.”
    d. “The following invoices have been selected for confirmation and represent amounts that are overdue.”

    2. Auditing standards define a confirmation as “the process of obtaining and evaluating a direct communication from a third
    party in response to a request for information about a particular item affecting financial statement assertions” Two assertions
    for which confirmation of accounts receivable balances provides primary evidence are
    a. Completeness and valuation c. Rights and obligations and existence
    b. Valuation and rights and obligations d. Existence and completeness

    3. Auditor may use positive or negative forms of confirmations requests for accounts receivable. An auditor most likely will use
    a. The positive form to confirm all balances regardless of the size.
    b. A combination of the two forms, with the positive form used for large balances and the negative for the 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 combined assessed level of inherent and control risk for assertions related to receivables is
    acceptably low, and the negative form when it is unacceptably high.

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


    a. Request confirmation of a sample of the inactive accounts
    b. Seek to obtain positive confirmations for at least 50% of the total dollar amount of the receivables.
    c. Require confirmation of all receivables from agencies of the federal government.
    d. Require that confirmation requests be sent within 1 month of the fiscal year-end.

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

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