Dianna P.

Pastrana

Easy

1. COCONUT CO. estimates its bad debt expense to be 3% of net sales. The company’s
unadjusted trial balance at December 31, 2016, included the following accounts:

Debit Credit
Allowance for bad debts P8,000
Sales 2,600,000
Sales returns and allowances P45,000

What is the company’s bad debt expense for 2016?

(CPA Examination Reviewer: AUDITING PROBLEMS 2016-2017 Ed. By Gerardo S. Roque,

Problem 2-8, page 154)

2. Jay Company provided the following data relating to accounts receivable for the current year:

Accounts receivable, January 1 650,000

Credit Sales 2,700,000
Sales returns 75,000
Accounts written off 40,000
Collections from customers 2,150,000
Estimated future sales returns at December 31 50,000
Estimated uncollectible accounts at 12/31 per aging 110,000

What amount should be reported as net realizable value of accounts receivable on December
31?

(Practical Financial Accounting Volume 1 by Conrado Valix and Christian Aris Valix, Problem 18-
2, page 211)

3. Ladd Company provided the following data for the current year:
Allowance for doubtful accounts- January 1 180,000
Sales 9,500,000
Sales returns and allowances 800,000
Sales discounts 200,000
Accounts written off as uncollectible 200,000

The entity provided for doubtful accounts expense at the rate of 3% of net sales.

What is the allowance for doubtful accounts at year-end?

(Practical Financial Accounting Volume 1 by Conrado Valix and Christian Aris Valix, Problem 19-
11, page 231)

Moderate
On January 1, 2014, MELON CORP. loaned P3,000,000 to Debtor Company. Under the loan agreement,
Debtor Company is to make an annual principal payment of P600,000 for 5 years plus interest at 8%. The
first principal and interest payment is due on January 1, 2015. The required payments were made by
Debtor Company for 2015 and 2016. However, during 2016, Debtor Company began to face financial
difficulties, requiring Melon Corp. to reevaluate the collectability of the loan. On December 31,206, Melon
Corp. determines that it will be able to collect the remaining principal, but is unlikely that the interest will
be collected.

The following present value factors are taken from the table of the present values:

Present value of 1 at 8% for:

1 period 0.92593

2 periods 0.85734

3 periods 0,79383

1. What is the present value of the expected future cash flows as of December 31, 2016?
2. What is the amount of loan impairment on December 31, 2016?
3. Assuming that Melon Corp.’s assessment of the collectability of the loan has not changed, what
amount of interest income should be recognized for 2017?

(CPA Examination Reviewer: AUDITING PROBLEMS 2016-2017 Ed. By Gerardo S. Roque, Problem 2-
23, page 195)

Difficult

Problem 1: On January 2, 2016, a tract of land that originally cost P800,000 was sold by Vietnam Rose
Company. The company received a P1,200,000 note as payment. It bears interest rate of 4% and is
payable in 3 annual installments of P400,000 plus interest on the outstanding balance. The prevailing rate
of interest for a note of this type is 10%.

The present value table shows the following present value factors of 1 at 10%:

Present value factor of 1 for 3 periods 0.75132

Present value factor of 1 for 2 periods 0.82645
Present value factor of 1 for 1 period 0.90909
Present value of an ordinary annuity
Of 1 for 3 periods 2.48685

1. What amount of gain on sale of land should be recognized on January 2, 2016?

(CPA Examination Reviewer: AUDITING PROBLEMS 2016-2017 Ed. By Gerardo S. Roque, Problem 2-
20, page 189)
Problem 2: YOKOHANA BANK loaned P5,500,000 to Bargain Company on January 1, 2016. The initial
loan repayment terms include a 10% interest rate plus annual principal payments of P1,100,000 on
January 1 each year. Bargain made the required interest payment in 2016 but did not make the
P1,100,000 principal payment nor the P550,000 interest payment for 2017. Yokohana is preparing its
annual financial statements on December 31, 2017. Bargain is having financial difficulty, and Yokohana
has concluded that the loan is impaired.

Analysis of Bargain’s financial condition on December 31,2017, indicates the principal payments will be
collected, but the collection of interest is unlikely. Yokohana did not accrue the interest on December 31,
2017.

The projected cash flows are:

December 31, 2018 P1,750,000

December 31, 2019 2,000,000
December 31, 2020 1,750,000
5,500,000

2. What is the loan impairment loss on December 31, 2017?

3. What is the interest income to be reported by Yokohana Bank in 2018?

(CPA Examination Reviewer: AUDITING PROBLEMS 2016-2017 Ed. By Gerardo S. Roque, Problem 2-
22, page 193)