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Applied Auditing Report (Audit of Receivables)
Applied Auditing Report (Audit of Receivables)
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,
2015. Your examination of sales transactions revealed among others the following:
As auditor of XYZ Manufacturing Company, what adjusting journal entries would you
recommend relative to the above findings?
130,000
Accounts receivable
130,000
To reverse the entry made to record
deliveries to consignees which are still unsold as of 12/31/15.
(2) Inventories, 12/31/15
100,000
13,000
Sales
13,000
6500
Accounts receivable
6500
1500
Inventories, 12/31/15
1500
2015
Revenues
P15,998
Net Income.
2,296
Statement of Financial Position
Current Assets:
Receivables , less allowance for uncollectible
2014
P17,154
3, 606
P 3,052
Footnotes
Provision for uncollectibles . P385
P355
Required:
Answer the following questions assuming that (a) Titanic uses the allowance
account to record bad debts (provision for uncollectible) 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 2015?
3. What was cash collected on receivables during 2015?
4. If the provision for uncollectible appeared in the statement of cash flows, where
would it be shown? Explain.
SOLUTION: ILLUSTRATIVE AUDIT CASE 10.3
Requirement (1) (Amount in P millions)
The estimated uncollectible accounts are decreasing as a percentage of revenue
s shown below:
Estimated bad debts:
____________2014___________2015_______
P355 / P 15988=
2.2%
P385 / P 17,154 =
2.0%
P 308
385
338
Net write-offs
P355
P 3,078
308
P3,386
Add Revenues
17154
Total
P20540
P 3052
338
P 3390
355
3745
P 16,795
Time Outstanding
Amount of Accounts
Probability of Collection
Receivable
Under 15 days
P 300, 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
Required:
As an auditor, you have determine
a.) The appropriate balance for the allowance for doubtful accounts on December
31, 2015.
b.) How accounts receivable would be presented on the statement of financial
position on December 31, 2015.
c.) The peso effect of the year-end bad debt adjustment on the pretax income for
2015.
SOLUTION: ILLUSTRATIVE AUDIT CASE 10.4
a.) The allowance for doubtful accounts should have a balance of P48,500 on
December 31, 2015.The supporting calculations are shown below:
Days account
outstanding
0-15
Amount
P300,000
Expected Percentage
Uncollectible
.02
Estimated
Uncollectible
P 6,000
16-30
200,000
.10
20,000
31-45
50,000
.20
10,000
46-60
30,000
.30
9,000
61-75
10,000
.35
3,500
P48500
The accounts which have been outstanding over 75 days (P10,000) and have zero
probability of collection would be written off immediately and not be considered
when determining the proper amount for the allowance for doubtful accounts.
b.) Accounts receivable
less: Allowance for doubtful accounts
Net accounts receivable
P590,000
48,500
P541,500
c.) The year end bad debt adjustment would decrease pretax P33,500 for 2015 as
shown below:
Estimated amount required in the allowance for doubtful accounts
500
P48,
15,000
P 33,500
5.) A 90-day note dated January 4, 2015, from Romeo Paz, president of Crome,P
8,000; no interest; not renewed; president confirmed.
6.). A 120-day note dated September 14, 2015, from the Samson Company,
P6,000; interest rate,16percent ; 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.