IRA SHALINI M.

YBAÑEZ September 14, 2021

BSA – 3B Auditing Problems (Activity 3)

Activity 1. You have been asked to audit the records of XYZ Manufacturing Company, a small
manufacturer of precision tools and machines, for the year-ended December 31, 2020. Your
examination of sales transactions revealed among others the following:
1. Some machines have been shipped on consignment to XYZ’s regular dealers. These transactions
have been recorded as ordinary sales and billed as such. As of December 31, 2020 the machines
billed and in the hands of consignees amounted to P130,000. Sales price was determined by
adding 30% to cost.
2. On December 30, 2020, two machines were shipped to a customer on FOB shipping point basis.
The sale was entered in the records on January 5, 2021 when cash was received in the amount
of P13,000.

As auditor of XYZ Manufacturing Company, what adjusting journal entries would you recommend
relative to the above findings?

Activity 2. Excerpts from Titanic 2020 Annual Report is listed below. Titanic is the parent company of
five pharmaceutical companies in the Southeast Asia Region.

Income Statement 2010 2009

Revenues 17,154,000,000 15,998,000,000
Net income 3,606,000,000 2,296,000,000

Balance Sheet
Current assets:
Receivables, less allowance for 3,052,000,000 3,078,000,000
uncollectibles of P338,000,000 and
308,000,000, respectively

Footnotes
Provision for uncollectibles 385,000,000 355,000,000

Requirement:
Answer the following questions assuming that (a) Titanic uses the allowance account to record bad
debts (provision for uncollectibles) and (b) all revenues are credit sales.
1. Are estimated uncollectible accounts increasing or decreasing as a percentage of revenues?
2. What amount of write-offs of accounts receivable were recorded during 2020?
3. What was cash collected on receivables during 2020?
Activity 3. You have been appointed external auditor of Orange Corporation. Orange Corporation
operates in an industry that has a high rate of bad debts. On December 31, 2020, before any year-end
adjustments, Orange’s Accounts Receivable balance was P600,000 and its Allowance for Doubtful
Accounts balance was P25,000. The year-end balance reported in the statement of financial position for
the Allowance for Doubtful Accounts will be based on the aging schedule shown as follows:

Time Outstanding Amount of Accounts Receivable Probability of Collection

Under 15 days P300,000 .98
16-30 days 200,000 .90
31-45 days 50,000 .80
46-60 days 30,000 .70
61-75 days 10,000 .65
Over 75 days 10,000 .00

Requirement:
As an auditor, you have to determine:
1. The appropriate balance for the Allowance for Doubtful Accounts on December 31, 2020.
2. How accounts receivable would be presented on the balance sheet on December 31, 2020.
3. The peso effect of the year-end bad debt adjustment on the pre-tax income for 2020.

Activity 4. During the course of the audit of the financial statements of Crome, Inc., for the year ended
December 31, 2020, you examined the notes receivable represented by the following items:
1. A four-month note dated November 30, 2020, from the Aeon Company, P10,000; interest rate,
16 percent; discounted on November 30, 2020 at 16 percent.
2. A draft drawn payable 30 days after date for P45,000 by the Benton Company on the Dodge
Company in favor of the Gerrard Company, endorsed to Crome, Inc., on December 2, 2020 and
accepted on December 4, 2020.
3. A 90-day note dated November 1, 2020, from J.C. Cruz of P25,000;interest at 16 percent; the
note is for subscriptions to 250 preference shares of Crome,Inc. at P100 per share.
4. A 60-day note date May 3, 2020, from the National Investment Company, P30,000; interest rate,
16 percent; dishonored at maturity; judgment obtained on October 10, 2020. Collection
doubtful (No interest after maturity).
5. A 90-day note dated January 4, 2020 from Romeo Paz, President of Crome, P8,000; no interest;
not renewed;President confirmed.
6. A 120-day note dated September 14, 2020, from the Samson Company, P6,000;interest rate, 16
percent; note is held by bank as collateral.

When the company discounted a note, Interest Expense was debited for the discount cost and Interest
Income was credited for the revenue.

Requirement:
From the information presented, prepare the following:
1. Working papers for the Notes receivable as of December 31, 2020.
2. All necessary audit adjustments, including entries for interest accrued and prepaid.
3. Balance sheet presentation of the notes receivable as of December 31, 2020.
Activity 5. The following information are available from the records of Stardust Corporation, Accounts
Receivable, Subsidiary Ledger:

ABC Corporation
DATE DEBIT DATE CREDIT
9/03/2020 378 10/08/2020 378
10/20/2020 345 11/18/2020 345
11/01/2020 271 12/01/2020 271
11/25/2020 846

DEF Company
DATE DEBIT DATE CREDIT
7/29/2020 398 09/16/2020 300
08/06/2020 280

GHI Incorporated
DATE DEBIT DATE CREDIT
08/01/2020 898 09/02/2020 898
09/14/2020 714 12/15/2020 500
10/18/2020 1,206

JKL Trading
DATE DEBIT DATE CREDIT
09/16/2020 413 10/15/2020 200
09/20/2020 216 10/30/2020 200
10/29/2020 1,105 11/30/2020 200
11/30/2020 904

MNO Supply
DATE DEBIT DATE CREDIT
07/05/2020 660 08/07/2020 660
08/15/2020 1,020 10/15/2020 1,020

PQR Dealers
DATE DEBIT DATE CREDIT
08/02/2020 247 09/16/2020 100
09/17/2020 22

STU Corp. (Subsidiary Co.)

 DATE DEBIT DATE CREDIT
12/31/2020 5,000 (advances)

XYZ Co.
DATE DEBIT DATE CREDIT
12/10/2020 500 12/12/2020 500
12/15/2020 100
(Allowance)

Data from the allowance account of the company as it appeared on December 31, 2020 are presented
below:

Allowance for doubtful accounts

DATE DEBIT DATE CREDIT
05/06/2020 125 01/01/2020 566
08/11/2020 401
12/20/2020 80

Requirement:
1. Prepare an aging working paper as of December 31, 2020 making use of the following
categories: not due, past due less than 2 months and past due more than 2 months. Accounts
are considered past due 60 days after date of sale.

The company establishes an allowance account for uncollectible receivables equal to:
10% of accounts less than 2 months past due.
30% of accounts more than 2 months past due.

The rates are based on historical bad debts adjusted for current observable data on collectability
of Accounts Receivable.
2. Determine the adjusted balance of Accounts Receivable and Allowance for Doubtful Accounts as
of December 31, 2020.
3. Prepare the adjusting journal entries.

Activity 6. As the manager of the accounts receivable department for Katrin Leather Goods, Ltd., you
recently noticed that Simmy Santos, your accounts receivable clerk who is paid P12,000 per month, has
been wearing usually tasteful and expensive clothing. This is Katrin’s first year in business. This morning,
Santos drove up to work in a brand new Vios.

Naturally suspicious by nature, you decide to test the accuracy of the accounts receivable balance of
P1,320,000 as shown in the ledger. The following information is available for your first year (precisely 9
months ended September 30, 2020) in business.
Collections from customers P1,980,000
Merchandise purchased 3,600,000
Ending merchandise inventory 900,000
Goods are marked to sell at 40% above cost.
Requirement:
Assuming all sales were made on account, compute the ending accounts receivable balance that should
appear in the ledger, noting any apparent shortage. Then, draft a memo dated October 3, 2020, to Jay
Corales, the branch manager, explaining the facts in this situation. Remember that this problem is
serious, and you do not want to make hasty accusations.