ISAP BLUES - Audit of Receivables and Inventories

PROBLEM 1
Your audit of PATRICK COMPANY for the year 2018 disclosed the following:
1. The December 31 inventory was determined by a physical count on December 28 and based on such
count, the inventory was recorded by:
Inventory 1,400,000
Cost of sales 1,400,000
2. The 2018 ledger shows a sales balance of P20,000,000.
3. The company sells a mark-up of 20% based on sales.
4. The company recognizes sales upon passage of title to the customers.
5. All customers are within a four-day delivery area.

The sales register for December, 2018 and January, 2019, showed the following details:
December Register
Invoice No. FOB Terms Date Shipped Amount
300 Destination 12/30 50,000
301 Shipping point 12/30 62,500
302 Destination 12/23 47,500
303 Destination 12/24 82,500
304 Shipping point 01/02 56,000
305 Shipping point 12/29 90,000
January Register
Invoice No. FOB Terms Date Shipped Amount
306 Destination 12/29 67,500
307 Shipping point 12/29 74,500
308 Destination 01/02 140,000
309 Shipping point 01/04 73,000
310 Shipping point 12/27 67,500
Questions:
1. The Sales for December is over/under by:
A. P 36,000 under B. P 106,000 under C. P 36,000 over D. P 106,000 over
2. The Inventory for December is over/under by:
A. P 235,600 under B. P 181,600 under C. P 235,600 over D. P 181,600 over
3. The adjusted inventory at December 31, 2018 is:
A. P 1,645,412 B. P 1,218,400 C. P 1,635,600 D. P 1,164,400
4. The adjusted sales at December 31, 2018 is:
A. P 20,106,000 B. P 19,964,000 C. P 20,036,000 D. P 19,894,000
5. How much sales for the month of December 2018 were erroneously recorded in January 2019?
A. P 282,000 B. P 198,000 C. P 272,500 D. P 142,000
6. How much sales for the month of January 2019 were erroneously recorded in December 2018?
A. P 228,500 B. P 180,500 C. P 188,500 D. P 106,000

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 ISAP BLUES - Audit of Receivables and Inventories

PROBLEM 2
The PATRICK Company included the following in its notes receivable as of December 31, 2015:
Note receivable from sale of land P2,640,000
Note receivable from consultation 3,600,000
Note receivable from sale of equipment 4,800,000
The following transactions during 2015 and other information relate to the company’s notes receivable:
a) On January 1, 2015, PATRICK Company sold a tract of land to Triple X Company. The land, purchased 10 years
ago, was carried on PATRICK’s books at P1,500,000. PATRICK received a noninterest-bearing note for
P2,640,000 from Triple X. The note is due on December 31, 2016. There was no established exchange price for
the land. The prevailing interest rate for this note on January 1, 2015 was 10%.
b) On January 1, 2015, PATRICK Company received a 5%, P3,600,000 promissory note in exchange for the
consultation services rendered. The note will mature on December 31, 2017, with interest receivable every
December 31. The fair value of the services rendered is not readily determinable. The prevailing rate of
interest for a note of this type was 10% on January 1, 2015.
c) On January 1, 2015, PATRICK Company sold an old equipment with a carrying amount of P4,800,000, receiving
P7,200,000 note. The note bears an interest rate of 4% and is to be repaid in 3 annual installments of
P2,400,000 (plus interest on the outstanding balance). PATRICK received the first payment on December 31,
2015. There is no established market value for the equipment. The market interest rate for similar notes was
14% on January 1, 2015.
Note: Round off present value factors to four decimal places and final answers to the nearest hundred.
1. What amount of consultation fee revenue should be recognized in 2015?
A. P3,600,000 B. P2,705,000 C. P4,047,500 D. P3,152,500
2. What amount should be reported as gain on sale of equipment?
A. P994,800 B. P2,400,000 C. P1,162,700 D. P1,237,300
3. The amount to be reported as noncurrent notes receivable on December 31, 2015 is
A. P7,482,200 B. P6,037,300 C. P5,477,500 D. P7,877,600
4. The amount to be reported as current notes receivable on December 31, 2015 is
A. P4,800,000 B. P2,400,200 C. P4,404,900 D. P7,440,000
5. How much interest income should be recognized in 2015?
A. P974,200 B. P756,000 C. P1,378,700 D. P1,160,500

Page 2 of 8
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 ISAP BLUES - Audit of Receivables and Inventories

PROBLEM 3
You are a senior accountant on the staff of PATRICK & Associates, CPAs. You are conducting the annual audit of
Harry Corporation for calendar year 2007. You are now working on the audit of the accounts receivable and
related allowance for doubtful accounts.

ACCOUNTS RECEIVABLE – TRADE

Reconciliation between General Ledger Balance and
The Total of Subsidiary Ledger Balances
December 31, 2007
Total of subsidiary ledger balances 5,635,700
Undelivered sales based on sales orders received up
to December 31, 2007 per journal voucher No. 1962 2,732,900*
Goods consigned to Robinsons Appliance Center and others 3,260,700**
Collections received from Cebu and Davao branches
on January 2 based on official receipts dated December
31, 2007 for sales made on December 16, 2007, (1,092,800)***
Balance per general ledger P10,536,500

* Goods are physically segregated during inventory count. Sales invoices for these were issued on January 2 and
deliveries to customers were made on January 3, 2008.
**These goods were physically verified in customers’ stores. Under the terms of consignment, goods are billed to
customers, based upon their sales report.
***Subsequently deposited on January 3, 2008.
Customers are billed at 20% above cost. Term 30 days.

ALLOWANCE FOR DOUBTFUL TRADE RECEIVABLES

Analysis of Movement during the Year
December 31, 2007
Allowance, December 31, 2006 P1,020,000
Movement during the year
Provisions 3,425,625
Write-offs ( 4,164,370)
Allowance, December 31, 2007 P 281,255
1. Aging of accounts receivable – trade based on accounts receivable schedule as of December 31, 2007, before
considering any adjustments on the accounts:

Per Client Per Audit

Current P4,469,760 P4,067,320
31 – 60 days 267,320 402,440
61 – 90 days 455,440 267,320
91 days and over 443,180 898,620
P5,635,700 P5,635,700
2. A review of collectibility of each account disclosed the following:
a. A customer with an account balance of P568,000 classified as current in aging can no longer be located
by company lawyers. The customer’s check in payment of this account was returned by the bank on
May 15, 2007. He has no known assets and his liabilities to other creditors totaled to P7,000,000. The
other creditors have the same experience as the company.
b. The lawyers informed us that debtors with account balances totaling P790,450 (classified as 91 days
and over in the client’s aging) were already found worthless. They suggested that these accounts be
written off next year.
c. It is the companies’ policy to provide monthly for accounts doubtful of collection, based on aging
schedule as follows: 2% for current, 5% for 31 to 60 days, 10% for 61 to 90 days and 30% for 91 days
and over. Monthly write-offs are charged against the allowance. At the end of the year a review of
collectibility of each account is undertaken by the credit and collection manager, the lawyers together
with a representative of its external auditor.
3. The balance of allowance for doubtful accounts should be adequate to cover possible losses the company may
incur in cases of non-collection: that is the account balance at the end of the year should either be:

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 ISAP BLUES - Audit of Receivables and Inventories

a. Total amount arrived at as doubtful by applying the percentage of possible losses to the total
of the account age classification or
b. Total amount arrived at as doubtful based upon the results of the review of collectibility of
each account: whichever is the higher of (1) and (2) above.
Questions:
1. The gross amount of Trade Accounts Receivable to be reported in the audited balance sheet at December 31,
2007 is
A. 1,019,500 B. 3,752,450 C. 10,536,500 D. 9,178,050
2. The Allowance for Doubtful Accounts to be reported in the audited balance sheet at December 31, 2007 is
A. 138,795 B. 790,450 C. 568,000 D. 429,205
3. The Doubtful Accounts Expense to be reported in the audited income statement for year 2007 is
A. 4,502,820 B. 3,993,625 C. 4,216,075 D. 3,564,420
4. The Allowance for Doubtful Accounts based on the aging of receivables is
A. 140,625 B. 138,795 C. 568,000 D. 139,798

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Michael
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 ISAP BLUES - Audit of Receivables and Inventories

PROBLEM 4
The PATRICK Company is a wholesale distributor of automotive replacement parts.
Initial amounts taken from PATRICK’s accounting records are as follows:

Net income for the year ended December 31, 2007 P 2,172,000
Inventory at December 31, 2007 (based on Physical count of goods in PATRICK’s
warehouse on December 31, 2007) 1,250,000
Net purchases in 2007 3,215,000
Net sales in 2007 9,000,000

Vendor Terms Amount

B Company 2% 10 days, net 30 P 265,000
C Company Net 30 210,000
D Company Net 30 300,000
E Company Net 30 225,000
F Company Net 30 -
G Company Net 30 -
P1,000,000

Additional information is as follows:

 Parts held on consignment from C to PATRICK, the consignee, amounting to P155,000, were included in the
physical count of goods in PATRICK’s warehouse on December 31, 2007, and in accounts payable at
December 31, 2007.
 P22,000 of parts which were purchased from F and paid for in December 2007 were sold in the last week of
December 2007 for P28,000. PATRICK appropriately recorded the sale in December. The parts were
included in the physical count of goods in PATRICK’s’ warehouse on December 31, 2007, because the parts
were on the loading dock waiting to be picked up by customers.
 Parts in transit on December 31, 2007, to customers, shipped F.O.B. shipping point, on December 28, 2007,
amounted to P34,000. The customers received the parts on January 6, 2008. Sales of P40,000 to the
customers for the parts were recorded by PATRICK on January 2, 2008.
 Retailers were holding P210,000 at cost (P250,000 at retail), of goods on consignment from PATRICK, the
consignor, at their stores on December 31, 2007.
 Goods were in transit from G to PATRICK on December 31, 2007. The cost of the goods was P25,000, and
they were shipped F.O.B. shipping point on December 29, 2007.
 A quarterly freight bill in the amount of P2,000 specifically relating to merchandise purchases in December
2007, all of which was still in the inventory at December 31, 2007, was received on January 3, 2008. The
freight bill was not included in either the inventory or in accounts payable at December 31, 2007.
 All the purchases from B occurred during the last seven days of the year. These items have been recorded in
accounts payable and accounted for in the physical inventory at cost before discount. PATRICK’s policy is to
pay invoices in time to take advantage of all cash discounts, adjust inventory accordingly, and record
accounts payable, net of cash discounts.
1. Adjusted inventory balance at the end of 2007.
A. P1,326,700 B. P1,306,700 C. P1,304,700 D. P1,310,000
2. Adjusted balance of accounts payable at December 31, 2007.
A. P888,700 B. P866,700 C. P1,021,700 D. P872,000
3. Adjusted net purchases in 2007.
A. P3,081,700 B. P3,087,000 C. P3,079,000 D. P3,103,000
4. Adjusted net sales in 2007.
A. P9,000,000 B. P9,040,000 C. P8,960,000 D. P9,018,000
5. Adjusted net income in 2007.
A. P2,400,000 B. P3,422,000 C. P2,425,000 D. P2,403,000

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Michael
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 ISAP BLUES - Audit of Receivables and Inventories

PROBLEM 5
To substantiate the existence of the accounts receivable balances as at December 31, 2018 of BARONGOTS
COMPANY, you have decided to send confirmation requests to customers. Below is a summary of the confirmation
replies together with the exceptions and audit findings. Gross profit on sales is 20%. The company is under the
perpetual inventory method.
Name of Balance Comments
Customer Per Books From Customers Audit Findings
MARK P150,000 P90,000 was returned on December 30, Returned goods were
JOHN 2018. Correct balance as is P60,000. received December 31,
2018.
ROYCE P30,000 Your CM representing price adjustment The CM was taken up by
dated December 28, 2018 cancels this. BARONGOTS Company in
2019.
ALFORD P144,000 You have overpriced us by P150. Correct The complaint is valid.
price should be P300.
ALFREDO P112,500 We received the goods only on January 6, Term is shipping point.
2019. Shipped in 2018.
DAVE P135,000 Balance was offset by our December BARONGOTS Company
shipment of your raw materials. credited accounts payable
for P135,000 to record
purchases. JACQUES is a
supplier.

1. If the necessary adjusting journal entry is made regarding the case of MARK JOHN, the net income will
2. The effect on 2018 net income of BARONGOTS Company of its failure to record the CM involving transaction with
ROYCE:
3. The overstatement of receivable from ALFORD is
4. The accounts receivable from ALFREDO is
5. The adjusting entry to correct the receivable from DAVE is

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 ISAP BLUES - Audit of Receivables and Inventories

PROBLEM 6
You were engaged by PATRICK Corporation for the audit of the company’s financial statements for the year ended
December 31, 2018. The company is engaged in the wholesale business and makes all sales at 25% over cost.

The following were gathered from the client’s accounting records:

SALES PURCHASES
Date Ref. Amount Date Ref. Amount
Balance forwarded 5,200,000 Balance forwarded 2,700,000
Dec. 27 SI No. 965 40,000 Dec. 27 RR No. 1057 35,000
Dec. 28 SI No. 966 150,000 Dec. 28 RR No. 1058 65,000
Dec. 28 SI No. 967 10,000 Dec. 29 RR No. 1059 24,000
Dec. 31 SI No. 969 46,000 Dec. 30 RR No. 1061 70,000
Dec. 31 SI No. 970 68,000 Dec. 31 RR No. 1062 42,000
Dec. 31 SI No. 971 16,000 Dec. 31 RR No. 1063 64,000
Dec. 31 Closing entry (5,530,000) Dec. 31 Closing entry (3,000,000)
P - P -
Note: SI = Sales Invoice RR = Receiving Report

Inventory P600,000
Accounts receivable 500,000
Accounts payable 400,000

You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was
properly taken.

When performing sales and purchases cut-off tests, you found that at December 31, the last Receiving Report which
had been used was No. 1063 and that no shipments had been made on any Sales Invoices whose number is larger
than No. 968. You also obtained the following additional information:

a) Included in the warehouse physical inventory at December 31 were goods which had been purchased and
received on Receiving Report No. 1060 but for which the invoice was not received until the following year. Cost was
P18,000.
b) On the evening of December 31, there were two trucks in the company siding:
• Truck No. CPA 123 was unloaded on January 2 of the following year and received on Receiving Report No.
1063. The freight was paid by the vendor.
• Truck No. AKO 143 was loaded and sealed on December 31 but leave the company premises on January 2.
This order was sold for P100,000 per Sales Invoice No. 968.
c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to
KAHITMAHIRAP Corporation. KAHITMAHIRAP received the goods, which were sold on Sales Invoice No. 966 terms
FOB Seller, the next day.
d) Enroute to the client on December 31 was a truckload of goods, which was received on Receiving Report No.
1064. The goods were shipped FOB Destination, and freight of P2,000 was paid by the client. However, the freight
was deducted from the purchase price of P800,000.
QUESTIONS: Based on the above and the result of your audit, determine the following:
1. Sales for the year ended December 31, 2018
A. P5,250,000 B. P5,400,000 C. P5,150,000 D. P5,350,000
2. Purchases for the year ended December 31, 2018
A. P3,000,000 B. P3,018,000 C. P3,754,000 D. P3,818,000
3. Inventory as of December 31, 2018
A. P864,000 B. P744,000 C. P800,000 D. P814,000
4. Accounts receivable as of December 31, 2018
A. P350,000 B. P370,000 C. P220,000 D. P120,000
5. Accounts payable as of December 31, 2018
A. P418,000 B. P 400,000 C. P354,000 D. P1,218,000

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 ISAP BLUES - Audit of Receivables and Inventories

PROBLEM 7
On January 1, 2018, PATRICK Company sold land that originally cost P400,000 to PATRICKS Company. As payment,
PATRICKS gave PATRICK Company a P600,000 note. The note bears an interest rate of 4% and is to be repaid in
three annual installments of P200,000 (plus interest on the outstanding balance). The first payment is due on
December 31, 2018. The market price of the land is not reliably determinable. The prevailing rate of interest for
notes of this type is 14% on January 1, 2018 and 15% on December 31, 2018. PATRICK made the following journal
entries in relation to the sale of land and the related note receivable:

January 1, 2018
Notes receivable P600,000;
Land P400,000;
Gain on sale of land P200,000

December 31, 2018

Cash P224,000
Notes receivable P200,000
Interest income 24,000

PATRICK reported the notes receivable in its statement of financial position at December 31, 2018 as part of trade
and other receivables.
QUESTIONS: Based on the above and the result of your audit, answer the following:
1. The correct gain on sale of land is
A. P103,105 B. P120,061 C. P 94,868 D. P200,000
2. The correct interest income for 2018 is
A. P74,230 B. P70,435 C. P72,809 D. P24,000
3. Profit for 2018 is overstated by
A. P50,460 B. P54,902 C. P31,130 D. P 0
4. The correct carrying amount of the notes receivable at December 31, 2018 is
A. P400,000 B. P368,870 C. P345,098 D. P349,540
5. The entity’s working capital at December 31, 2018 is overstated by
A. P235,765 B. P182,476 C. P232,936 D. P 0

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