VI—4. You are examining the financial statements of Demo, Inc., for the year ended December 31. 2017. During the audit of the accounts receivable and other related accounts, certain information was obtained. From this information you are to prepare: a. Audit work papers for the accounts receivable and the allowance for doubtful accounts as of December 31, 2017. b. Proposed audit adjustments, The December 31, 2017 debi i ivable +2 it balan Recelv control account is P197,000, ice in the Accounts ‘Scanned with CamScannerUnit VI ‘The oly enc in the Bad Deis expense account were 1524 on December 1, 2017, bosause company A red inl or the devours charged off October 31 2017 and a et on December 31 for the amount of the credit to the Allowance for Doubtful Accounts. ‘The Allowance for Doubifal Accounts schedule is presented below: Balance January 1, 2017 Paes ‘October 21, 2017, Uncdllectible; 2.150 Co. A, P324; Co. B, P820; Co. C, S64 . P1508 December 31, 2017, 5% of P197,000. 9,850 12,000 ‘An aging schedule of the accouns receivable as of December 31, 2017 and the decision are shown in the table below. Amount to which the Allowance is 10 be Net Debit adjusted after Adjustments and Age Balance Corrections have been made ‘0-1 month 'P93,240 I percent 1-3 months 76820 2 percent 3-6 months. 22,180 3 percent fover6 months. 6,000 Definitely uncollectible, _P1,000; 2,000 is considered 50% uncollectible; the remainder is estimated to be 80% collectible. ‘There is a credit balance in oné account receivable (0-1 month) of 72,000; it represents an advance on a sales contract. Also, there is & ‘credit balance in one of'the 1-3 months account receivable of PS0O for ‘which merchandise will be accepted by the eustomer, The ledger accounts have not been closed as of December 31,2017, the ‘Accoeres Receivable control account is not in agreement with the Rinidiagy ldger, The difference cannot be located, and the audior sates 2 adjust the control to the sum of the subsidiaries after ‘corrections are made. 610 ‘Scanned with CamScannerSubstantive Audit of Ree ) ‘Solution: Demo se DEMOING, rement (8) Req jon eee a = Aoi DisTRIBy = Months Ow moe Se gm tk dd Pano Pree peay rime Pista agent Be ene ‘ioe 120) nema . Ser (a) Oem = Sm cs : ) torecanty oe ss = ame a0 nme ie © om = = (9) tot ” < a = = sy Badan ies : eet ia cae een : Pazea Prag Pum soon Allowrang EMO INC. Daa ety Aesoums Ae) Adee: © toca Tat eerg ta ne Q eomiecraeseatment ot covery 324.00 "0 adjust allowance “Collectibles VTittea off 00 mance to rennin stele Recount weer} Balance sadist "Stud balace (echedu enrerss (6359.80). 476420 ony ‘Scanned with CamScannerra nit VI Schedule 1: Computation of Required Allowance Adjusted Account Classification Tauat ‘0 month outstanding P 95,240 1-3 months outstanding 77,320 3-6 months outstanding 2180 over 6 months outstanding 5,000 Totals Bisazag Requirement (b) ‘Adjusting Journal Entries 12-31-17 (1) Bad Debts Allowance for Doubtful Accounts @) Allowance for Doubtful Accounts ‘Accounts Receivable @) Allowance for Doubtful Accounts ‘Accounts Receivable (Accounts Receivables ‘Advances from Customers (5) Accounts Receivable ‘Customers’ accounts with credit balances (©) Accounts Receivable Sales (Allowance for Doubtful Accounts Bad Debis Expense Bequired Allowance % Amount 1 P 952.40 2 1,546.40 3 665.40 2,000-50%% 1,000 P3,000-2% © _ 600 4764.20 32400 324.00 200.00 200.00 1,000.00 1,000-00 2,000.00 2,000.00 500.00 00.00 1,440.00 1440.00 635930 6359.80 ‘Scanned with CamScannerpie tc VI~ 8 Ling, Inc. had the followin c nha he folowing longterm receivable aesount alanees at Note receivable from sale of division Note reshable rom ocr "ono Transactions during 2017 and other informatic it i‘ tem estab wees allay maton ning 9 nes one 1, The P1,500,000 note receivable is dated May 1, 2016, bears interest at 9%, and represents the balance of the consideration reecived from the sale of Ling’s electronics division to Ally Company. Principal payments of P500,600 plus appropriate interest are due on May 1, 2017, 2018, and 2019. The fist principal and interest payment was made on May 1, 2017. Collection of the note installments is reasonably assured, 2, The P400,000 note receivable is dated December 31, 2014, bears interest at 8%, and is due on December 31, 2019. The note is due from Richard Cage, president of Ling, Inc.,.and is collaterized by 10,000 shares of Ling's ordinary shares. Interest is payable annually fon December 31, and all interest payments were paid on their due dates through December 31, 2017. The quoted market price of LLing’s ordinary share was P45 per share on December 31, 2017. 3. On April 1, 2017 Ling sold a patent to Nell Company in exchange for a P100,000 sion-interest-bearing note due on April 1, 2019. ‘There was no established exchange price for the patent, and the note hhad no ready market, The prevailing rate of interest for 9 note of this type at April 1, 2017 was 15%. ‘The present value of PI for two periods at 15% is 0.756. ‘The patent hada carrying value of P40,000 Mt January 1, 2017, and the amortization for the year ended December 31, 2017 would have been P8,000. The collection of the note receivabie from Nel is reasonably assured. 4. On July 1, 2017 Ling sold a parcel of land to Elaine Company for 200,000 under an installment sale contract. Elaine made a P60,000 teash down payment on July 1, 2017 and signed a 4-year, 16% note for the P140,000 balance. ‘The equal annual payments of principal and interest on the note will be 50,000, payable on July |, 2018 through July 1, 2021. “The land could have been oid at an ‘stablished cash price of P200,000: The eostof the land to Ling was 6-20 ‘Scanned with CamScannerSubstantive Audis oy p jae OM Of Roce, a Circumstances are such that the olh seal as note is reasonably assured, “ethno thy ln Required: 1 rear the longer receivables section of Ling's ba Dezember 31,2017, A the 4 2 Prepare a schedule showing the current portion of receivables and ncerued interest receivable that Would OB ter ‘ing's balance sheet at December 31, 2017, "PPear ig 3. Prepare schedule showing interest i income Teecivables and gains recognized on sale Of mses toy SUNT NO el ey ned Den (AICPA Adagi Solution: Ling, tne, Requirement (1) LING, Inc. ‘entre Resibles Sal of December 31,2017 Ialace — Me receiv, inline of Soop livition, due nual wae, 1, 2018, Jess current W ‘P 500,000 asad by 109g: de December 31, 2018, ote 400,000 Erie aa oe 105 BI ire, — a0 1 of pi installment 12a ‘Scanned with CamScannerRequirement (2) LING, INC. Selected Balance Sheet Balances December 31, 2017 Current portion of long-term receivables: ‘Note receivable from sale of division Installment contrat receivable Total Accrued interest receivable: ‘Note receivable from sae of division Installment contrac receivable Total ‘Requirement (3) LING, INC. Interest Income from Long-Term Receivables and Gains Recognized on Sale of Assets For the Year Ended December 31, 2017 Interest income: ‘Note receivable from sale of division [Note receivable from sale of patent Note receivable from officer Installment contract receivable from sale of land “Total iterest income for year ended 12/31/17 Gains recognized on sale of assets: Patent Land - ‘Total gains recognized for year ended 12/31/17 Explanation of amounts: 1} Longe-term Portion of 9% Note Receivable at 1231/17 Face amount, 5/1/16 ‘Lest: Installment received 5/1/17 Balance, 12/31/17 ‘Lest: Installment due 5/1/18 ‘Long-term portion, 12/31/17 6-22 - ‘Scanned with CamScanner * P500,000 [1] 27,600 [3] 527.600 P 60,000 (4) —11.200 {5} 27.200 105,000 (6), 8,305 [2], 32,000 [7], —11,200 [5] Biss.205 P 37,600 (8) — $0,000 [9] Ra7.600 1,500,000 71,000,000a amcrant, 4/1/17 Tee ped nr © 10.6%, {Pi0n.000 (P100,0000 x 0.756)] Bate, 47177 7 PA.409) ‘Ada: Interest cared to 1231/17 PF as.600 (75,600 x 15% x 9/12) Balanoe, 1223117 shtos {8} Long-term Portion of Installment Contract Receivabl ‘Sia alin pce m7 rat pain? Lest: Down payment, 71/17 200,009 Bale, 1231/17 es: Insalinent de 71/18 Pao (50,000 -(P140,000 x 16%) ‘em portion, 1/31/17 7 — 27.600), 1 Acct nts -NteResnbl, Ste of vis Eze Teterest scone fom Sto 12/31/19 AE 1231/17 (71,000,000 x 9% x 8/12) {5} Accrued Interest — P60, 00 Iter pe came 1201717 H0000 Te x 9 7 (6) Imerest income Note Buz» ‘cece fem a Sle ‘f Division, for 2017 1500000 x 9% x ary” terest Choma 1281/17 P 45,000 Interest income x 8/12) " Interest earecy tf Receivable, B105,000 1) Gain med U0 117 er for 2017 . 100,000 x g {ed eing ie Patent * 8%) P_ 32,000 iceeling ce P 100,000 cet ey * 0.736) aor) Less emer VI/17 75,600 Oana O05 Maing 40,000 2.000) __ 38,000 PR 37,600 823, ‘Scanned with CamScanner Substantive Audie ' earner Now heme tesrng Note, Net of Imputed lnterest at 12/31/17 y{9} Gain Recognized on Sale of Land Sale of price P 200,000 Less: Cost 130,000) Gain recognized 30.000 ‘VI-9. On January 1, 2016, Grande Company, a calendar-ycar firm, gave a loan to XYZ Enterprises amounting to P100,000 and received a two-year, 6%, 100,000 note. The note calls for annual interest to be ‘paid each December 31.. Grande collected the 2016 interest on schedule. At December 31, 2017, however, based on XYZ's recent financial problems, Grande expects thatthe 2017 interest will not be collected and that only P60,000 of the principal due December 31, 2017 will be collected, The P60,000 principal amount is expected to be collected in two equal installments on December 31, 2019 and December 31, 2021, Grande believes that 6% is the market’s assessment of the time value of ‘money. Required: 1. What entries should be made in the records of Grande Company on. December 31, 2017? 2. Assume that Grande Company cllets the expected payments from XYZ. What entries should be made on December 31, 2018; December 31,2019, December 31, 2020; and December 31, 021° Solution: Grande Company Requirement (1) PAS 39, paragraph 63 will be applied in this case. On December 31, 2017, Grande Company should record the 2017 accrued interest and the impairment: ‘Scanned with CamScanner‘Notes nest Receivable (0.06) (1 6,000 Tnterest Income . 6,099, 35537» AAU ERS embe ed owancs for ds in note va Sip + caring value of ote ad interest (100,000 +6000) 106,099, ‘Present value / New carrying value of note (discount rate — 6%) Dosen 123119 73900008900) ¥26,700 Dusen 123121 3,0000.79208) 23.763 _sp.ags Inpainnentwritedown Bsss37 Requirement 2) Ths etic with he coresponding computation follow: | —Eietive trterest Method ~ an.2018 —lifestive Interest Method Pee ein steve 3.028 Tree ncome (0.06) (30,463) aoa December 31, 2019 [ ‘Allowance fr detne in note value 3,209 Tate income (0.06) 60463 +3028) a8 Cash > . 30,000 Notes ecible civ Co po 30.000 ‘al —__ att for decline in Taterst income" Mlue 1,698" cag 25700 + 1600 1 Note recive 30,000 . ee 000 625 ‘Scanned with CamScannerUnit VI Allowance for decline in note value | ‘Notes receivable ‘ To close remaining balance in notes receivable and allowance 46.090 46,000 * At this point, the amortized cost of the notes receivable is zero. Allowance for Decline Notes Receivable . in Note Value 100,000 30,000 3,028 55,537 6,000 30,000 3,209 106,000 60,000 1,602 46,000 bal 1,698 Fe 9,537 55,537 46,000 ‘Scanned with CamScanner