Audit of allowance for doubtful accounts

Professional company produces paints and revealed products for sale to the construction industry
throughout Metro Manila. While sales have remained relatively stable despite a decline in the
amount of new construction, there has been a noticeable change in the timeliness with which the
company’s customers are paying their bills.

The company sells its products on payment terms of 2/10, n/30. In the past, over 75 percent of
the credit customers have taken advantage of the discount by paying within 10 days of the
invoice date. During the year ended December 31, 2015, the number of customers taking the full
30 days to pay has increased. Current indications are that less than 60% of the customers are now
taking the discount. Uncollectible accounts as a percentage of total credit sales have risen from
the 1.5% provided in the past years to 4% in the current year.

In response to your request for more information on the deterioration of accounts receivable
collections, the company’s controller has prepared the following report:

Professional Company
Accounts Receivable Collections
December 31, 2015
The fact that some credit accounts will prove uncollectible is normal, and annual bad debt write-
offs had been 1.5% of total credit sales for many years. However, during the year 2015, this
percentage increased to 4%. The accounts receivable balance is P1,500,000, and the condition of
this balance in terms of age and probability is shown below:

Proportion to total Age of Accounts Probability of collection

64% 1-10 days 99.0%

18% 11-30 days 97.5%
8% Past due 31-60 days 95.0%
5% Past due 61-120 80.0%
3% Past due 121-180 65.0%
2% Past due over 180 days 20.0%

At the beginning of the year, the Allowance for Doubtful Accounts had a credit balance of
P27,300. The company has provided for a monthly bad debt expense accrual during the year
based on the assumption that 4% of total credit sales will be uncollectible. Total credit sales for
the year 2015 amounted to P8,000,000, and write-offs of uncollectible accounts during the year
totaled P292,500.
REQUIRED:
1. Adjusted balance of the allowance for doubtful accounts as of December 31, 2015.
 2. The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of
December 31, 2015.

SOLUTION:

Requirement
No.1
Aging Allowan
Category ratio AR Balance Rate ce
1 – 10 days 9,60
64% 960,000 1.00% 0
11 – 30 days 6,75
18% 270,000 2.50% 0
31 – 60 days 6,00
8% 120,000 5.00% 0
61 – 120 20.00 15,00
days 5% 75,000 % 0
121 – 180 35.00 15,75
days 3% 45,000 % 0
over 180 80.00 24,00
days 2% 30,000 % 0
77,10
100% 1,500,000 0

Requirement
No.2
Doubtful accounts 22,30
expense 0 *
22,30
Allowance for doubtful accounts 0

27,30
Allowance for doubtful accounts, 1/1 0
320,00
Add provisions (P8,000,000 x 4%) 0
347,30
Total 0
292,50
Less accounts written-off 0
Balance before 54,80
adjustment 0
Required allowance (see 77,10
no. 1) 0
Additional required allowance for doubtful 22,30
 accounts 0

PROBLEM NO. 5 – Analysis of accounts receivable and related accounts

The poster Co. sells direct to retail customers and also to wholesalers. Accounts receivable and
an allowance for bad debts are maintained separately for each division. On January 1, 2015 the
balance of the retail accounts receivable was P209,000 while the bad debts with respect to retail
customers was a credit of P7,600.
The following summary pertains only to retail sales since 2012:
Credit Sales Bad Debts Written Off Bad Debts Recoveries
2012 P1,110,000 P26,000 P2,150
2013 1,225,000 29,500 3,750
2014 1,465,000 30,000 3,600
2015 1,500,000 31,000 4,200

Bad debts are provided for as a percentage of credit sales. The accountant calculates the
percentage annually by using the experience of the three years prior to the current year. The
formula is bad debts written off less recoveries expressed as a percentage of the credit sales for
the same period. Cash receipts in 2015 from credit sales to retail customers was P1,380,000.
REQUIRED:
Determine the following:
1. Adjusted accounts receivable as of December 31, 2015
2. Adjusted allowance for doubtful accounts as of December 31, 2015

SOLUTION:

Requirement No. 1
209,0
Accounts receivable, 1/1/12 00
1,500,0
Credit sales for 2012 00
(1,380,2
Collections during 2012 00)
(31,0
Accounts written off - 2012 00)
Accounts receivable, 297,8
12/31/12 00

Requirement No. 2
 7,60
Allowance for doubtful accounts, 1/1/12 0
30,00
Doubtful accounts expense - 2012 (see computation below) 0
(31,0
Accounts written off - 2012 00)
4,20
Recovery of accounts written off – 2012 0
10,80
Allowance for doubtful accounts, 12/31/12 0

Computation of doubtful accounts expense - 2012:

30,00
Doubtful accounts expense for 2012 (P1,500,000 x 2%) 0

Computation of bad debt

rate:
Year Credit sales AR writen-off Recoveries Net
23,85
2009 1,110,000 26,000 2,150 0
3, 25,75
2010 1,225,000 29,500 750 0
3, 26,40
2011 1,465,000 30,000 600 0
9, 76,00
3,800,000 85,500 500 0

76,00
Net accounts written off (2009 to 2011) 0
3,800,0
Divide by credit sales (2009 to 2011) 00

Percentage of uncollectible accounts to charge sales 2.00%