Department of Accountancy and Taxation

College of Arts and Sciences

San Beda College Manila

AY 2014 - 2015

COMPILATION OF REAL LIFE

COMPREHENSIV CASES
(For Use in Financial Accounting 1)

Submitted by:

Tristan F. Garcia

CASE 1: NATURE AND ACCOUNTING FOR RECEIVABLE FINANCING

1. Explain the meaning of with recourse basis

Two original parties are involved in making a promissory note, the maker (the
one liable to pay) and the payee (the one with the right to collect). If the payee wants to
obtain cash even before the maturity of the note he/she may discount the note at a bank
or any other financing company. The payee endorses the note, thus, making him/her an
endorser and the bank or any other financing company an endorsee. A note receivable
is said to be endorsed with recourse when the endorser agrees to pay the endorsee the
amount of the note in the instance that the maker dishonors it.

2. What are the conditions that must be met for a transfer of receivable to be accounted
for as a sale?
The three conditions are: (1) the entity has substantially transferred all the
rewards obtainable from the receivable; (2) the entity has retained substantially all risks;
and (3) the entity has lost control of the receivable.

3. Suggest alternative methods for companies to use their receivables to obtain

immediate cash.
Other financing options are: (a) pledging; (b) assignment; and (c) discounting.
The first one involves pledging a companys receivables as collateral in order to obtain a
loan from a bank or other lending institutions. This is a simple type of financing since it
requires no journal entry. A disclosure in the financial statement is already sufficient. The
second type of financing involves the transfer of the borrowers rights to some of its
accounts receivable to a lender called assignee in order to obtain a loan. It is a more
formal type of pledging; only that it assigns a specific receivable to be pledged. It can
either be assignment on a non-notification basis or assignment on a notification basis.

The last financing option, discounting, is the process of letting the payee obtain the cash
collectible from his/her receivable ahead of the maturity date. The note is exchanged for
the cash. However, the cash is not of the lower than the supposed maturity value.

4. What safety net is available to Paramount Finance Corporation if and when the
receivables proved to be uncollectible?
A factoring fee is considered as the safety net in Paramounts situation. It is a
commission that can be computed by multiplying a rate to the receivable

CASE 2: NATURE AND ACCOUNTING FOR UNCOLLECTIBLE RECEIVABLES

1. Write and explanation to the president to support your recommendation for the
company to use allowance method.
Under this method, bad debt expenses are recognized if the receivables are
doubtful of collection by using Allowance for Doubtful Accounts title. The allowance
method, first of all, conforms to the generally accepted accounting principles (GAAP) for
it exhibits the matching principle. Accounts receivable would be measured more
accurately for they will be determined at net realizable value.

2. How does the allowance method differ from the direct write off method?
Companies use the direct write-off method when they decide that there is 0%
chance of collecting the receivable. To write a debt off, companies debit the bad debt
expense account and credit the accounts receivable account. The allowance method,
on the other hand, estimates accounts that customers will not pay through the use of
past financial data. Companies don't immediately write off accounts, instead, they are
first recorded in the allowance for bad debts account.

3. If the company used a policy that is not generally acceptable, what will be its net
effect on the reported income of the current period and prior period?
Receivables may be become inaccurate since the company records expenses
and revenues in different periods. Also, the company can use it for its unjust advantage
through the manipulation of expense, because, again, the company records expenses
and revenue in different periods.

4. Given the situation in Number 3 and assuming that the reported incomes were
incorrect, how would you reflect the corrections in the book? Do you need to adjust the
previous reports already released by the company?
No adjustments during the prior period are possible since it has already been
recorded and reported. Changes, however, can still be done on the existing irregularities
by properly explaining them on the notes to financial statements.

5. If issued financial statements need to be adjusted, how will you explain to its readers
the impact of the situation on the previously issued report? Will it make the financial
reports unreliable?
It will be thoroughly explained in the notes to financial statements, properly
identifying its effects on other records. These corrective actions do not make the report
unreliable, in the contrary, it makes the data even more credible for it exhibits
appropriate accounting discipline (not covering up errors) and shows that the
accountant is very keen to such errors.

CASE 3: NATURE OF INVENTORY VALUATION METHODS

1. Is it appropriate for Abenson Corporation to use specific identification method for

accounting for inventories?
Yes I think it is proper for them to implement the specific identification for it will
record the cost of their inventories more accurately since each model of their
merchandise has many variations. It will not be hard since each unit has an
identification number.

2. What other inventory valuation methods would you recommend that will be
acceptable with the nature of business ABENSON CORPORATION is currently
engaged in?
The method left that is most appropriate is the FIFO method for it is second to
specific identification when it comes to measuring the cost reliably and is generally
accepted.

3. Comment on the procedure of the company of re routing the merchandise. How will
the extra freight be reported in the income statement?
The re-routing of merchandise would serve fully beneficial if the demand for the
product in Cebu is the same as it was in Manila. If the retailer in Cebu would only serve
as storage to avoid overstocking and later on, if its products be carried back to Manila
for sale, then that would only incur more expenses for the company. The extra freight
will be added to the cost of goods.

CASE 4: NATURE OF INVENTORY VALUATION METHODS

1. Why will bonuses be significantly affected?

Some companies give bonuses to its employees whenever company profits are
considerably high. A lowering in the ending inventory would increase the cost of goods
sold that in turn, will reduce profits. Bonuses will be affected (may not be given) if the
company will recognize the errors.

2. If the error is not discovered during the current year and is discovered by the auditors
during the following years audit, how will it be reported in the companys financial
statements?
The companys income will be understated since its beginning inventory is
overstated resulting from the errors effect last period.

3. Discuss the ethical dilemma that the controller faces.

The problem is whether the controller would choose to present the information
faithfully to comply to accounting principles and discipline or just choose to ignore the
error so that he/she and his/her fellow workers would enjoy bonuses and maintained
personal relationships. The dilemma is not basically about the money, it is choosing
between what is right yet difficult and what is theoretically wrong yet seemingly
beneficial for all.

CASE 5: NATURE OF INVENTORY VALUATION METHODS

1. Explain the generally accepted accounting principles relating to this issue.

Assets acquired for research and development, which are still of use for the
future, should be can be capitalized and depreciated over its useful life. It is stated,
however, that Abott will use the equipment only in specific project. This should be an
outright expense according to GAAP.

2. Assuming that the equipment was purchased at the beginning of 2014 and still to be
used somewhere else, how will it increase earnings as opposed to expensing the
equipment cost?
Earnings will be increased for future economic benefit can still flow from the
equipment to the company. It should be recorded at cost and depreciated over its useful
life.

3. Discuss the ethical dilemma that you as accountant are facing in insisting the proper
accounting for accounts as opposed to what the controller wants it to be.
My job as the accountant of the firm is to faithfully represent and interpret the
financial data of the company, even though they will involve negative implications upon
the firms profits. The proper representation of the information, which the controller does
not want, is theoretically right but can be practically destructive on my part since it can

cost me my job. But choosing integrity over personal gain is what we are taught as
accounting majors, so standing to present the true financial condition of the firm should
be my top priority as the accountant of Abbot.