OUR LADY OF THE PILLAR COLLEGE CAUAYAN

COLLEGE OF ACCOUNTANCY
AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1

MODULE 2:
AUDIT OF RECEIVABLES PART 2

Problem 9: Loans Receivable

Isabela Bank grants a 10 year loan to Cauayan Company in the amount of Php 1,500,000 with a stated interest
rate of 6%. Payments are due monthly and are computed to be Php 16,650. Isabela Bank incurs Php 40,000 of
direct loan origination cost and Php 20,000 of indirect loan origination cost. In addition, Isabela Bank charges
Cauayan Company 4 percent non-refundable loan origination fee.

Required:
1. What is the carrying amount of the loan receivable on the books of Isabela Bank, the lender?
2. What is the carrying amount of the loan payable on the books of Cauayan Company, the borrower?

Problem 10: Loan Impairment

On January 1, 2012, Melon Corp loaned Php 3,000,000 to Debtor Company. Under loan agreement, Debtor
Company is to make an annual principal payment of Php 600,000 for 5 years plus interest at 8%. The first
interest and principal payment is due on January 1, 2013. The required payments were made by debtor
company for 2013 and 2014. However during 2014, Debtor company began to face financial difficulties,
requiring Melon Corp. to reevaluate the collectability of the loan. On December 31, 2014, Melon Corp
determines that it will be able to collect the remaining principal, but it is unlikely that the interest will be
collected.

The following present value factors are taken from the table of present values
1 periods .92593
2 periods .85734
3 periods .79383

Required:
1. What is the present value of the expected future cash flows as of December 31, 2014?
2. What is the amount of loan impairment on December 31, 2014?
3. Assuming that Melon Corps assessment of the collectability of the loan has not changed

Problem 11: Notes Receivable

On January 1, 2019, MADALILANG Co. sells its equipment with a carrying value of Php 160,000. The company
receives a non-interest bearing note due in 3 years with face amount of Php 200,000. There is no established
market value for the equipment. The prevailing interest rate for a note of this type is 12%. The following are
the present value factors of 1 at 12%

Present value of 1 for 3 periods .71178

Present value of an ordinary annuity of 1 for 3 periods 2.40183

Required:
1. What is the gain or loss to be recognized on the sale of the equipment?

1|Page
Audit of Receivables
Discussion Notes of: Sherwin R. Magmanlac, CB, CPA

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 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1

2. What is the discount on note receivable on January 1, 2019?

3. What is the discount amortization at the end of the third year?

Problem 12: Discounting of Notes Receivable

During your audit of FOREVER Company for the year ended December 31, 2014, you find the following account

Notes Receivable
Date Debit Credit
Sept 1 Cornea, 20%, due in 3 months 80,000
Oct 1 Hunk Co., 24% due in 2 months 300,000
Oct 1 Discounted Cornea note at 25% 80,000
Nov 1 Valerie, 24% due in 13 months 600,000
Nov 30 Cellular Co., no interest, due in one year 500,000
Nov 30 Discounted Cellular note at 18% 500,000
Dec 1 Tictic, 18% due in 5 months 900,000
Dec 1 O Reyes, President, 12%, due in 3 months
(for cash loan given to O. Reyes) 1,200,000

All notes are trade notes unless otherwise specified. The Cornea note was paid on December 1as per
notification received from the bank. The Hunk Co. note was dishonored on the due date but the legal
department has assured management of its full collectability.

The company with concurrence, will treat the discounting as a conditional sale of note receivable.

Required:
1. At what amount on the current assets section of the December 31, 2014, statement of financial
position will the notes receivable-trade be carried.
2. What amount of loss on notes receivable discounting should be reported in the 2014 income
statement of the company?
3. Based on the ledger account presented, what amount of interest income should be accrued at
December 31, 2014?

Problem 13: Assignment of Receivables

On April 1, 2019 Sampaguita Corp assigned accounts receivable totaling Php 400,000 as collateral on a Php
300,000, 16% note from FWD Bank. The assignment was done on a nonnotification basis. In addition to the
interest on the note, the bank also receives a 2% service fee, deducted in advance on the Php 300,000 value of
the note.

Additional information as follows:

a. Collections of assigned accounts in April totaled Php 191,100, net of a 2% sales discount
b. On May 1, Sampaguita Corporation paid the bank the amount owed for April collections plus accrued
interest on Note to May 1
c. The remaining accounts were collected by Sampaguita Corporation during May except for Php 2,000
accounts written off as worthless.

2|Page
Audit of Receivables
Discussion Notes of: Sherwin R. Magmanlac, CB, CPA

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 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1

d. On June 1, Sampaguita Corporation paid the bank the remaining balance of the note plus accrued
interest.

Required:
Prepare the journal entries to record the above transactions on the books of Sampaguita Corporation.

Problem 14: Factoring of Receivables

On May 1 of the current year, Jean company factored Php 6,000,000 of accounts receivable without recourse
with Alex Finance Corporation on notification basis. Alex charged a factoring fee of 3% of the amount
receivables factored and withheld 5% of the receivables factored to cover sales return and allowances. In
addition, Alex Finance Company 15% interest computed on weighted average time to maturity of the
receivables of 54 days.

Required:
1. What is the amount that Jean Company will receive and record as cash
2. Assuming all receivables are collected, what is Jean Company’s cost of factoring the receivables would
be?

3|Page
Audit of Receivables
Discussion Notes of: Sherwin R. Magmanlac, CB, CPA

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