INTERMEDIATE ACCOUNTING 1

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

1. The following data were taken from the records of Jerome Company for the year ended
December 31, 2023, its first year of operations:
Sales on account 15,000,000
Collections from customers (excluding collections from recoveries) 12,200,000
Doubtful accounts expense 300,000
Accounts written off 100,000
Sales returns 120,000
Sales allowance 30,000
Discounts taken by customers 20,000
Collections on accounts written off 80,000

What is the balance of accounts receivable on December 31, 2023?

a. 2,530,000
b. 2,450,000
c. 2,150,000
d. 2,500,000
Solution
15,000,000
(12,200,000)
(300,000)
(100,000)
(120,000)
(30,000)
(20,000)
(80,000).
2,150,000

2. Hanz Company uses the gross method of accounting for cash discounts. In one of its transactions
on December 28, 2023, Hanz sold merchandise with a list price of P5,000,000 to a client who
was given a trade discount of 20% and 10%. Credit terms given by Hanz were 5/10, n/30.

The goods were shipped FOB destination, freight collect. Total freight charge paid by the client
was P50,000. On December 30, 2023, the client returned damaged goods originally billed at
P300,000. Hanz estimates that the client will take advantage and avail of the cash discount
before the end of the 10-day discount period.

What is the net realizable value of this account receivable on December 31,
2023?
a. 3,135,000
b. 3,085,000
c. 3,420,000
d. 3,370,000

Solution
 5,000,000×.9 = 4,500,000×.8 =3,600,000
3.600.000-300,000 =3,300,000
3,300,000×5%= 165,000
3,300,000-165,000 = 3,135,000
3,135,000-50,000 =3,085,000

3. On January 1, 2023, the balance of accounts receivable of Cathy Company was P5,000,000 and
the allowance for doubtful accounts was P800,000. The following data were gathered:

Credit Sales Writeoffs Recoveries

2020 10,000,000 250,000 20,000
2021 14,000,000 400,000 30,000
2022 16,000,000 650,000 50,000
2023 25,000,000 1,100,000 150,000

Doubtful accounts are provided for as percentage of credit sales. The accountant calculates
the percentage annually by using the experience of the three years prior to the current year.
How much is the allowance for doubtful accounts on December 31, 2023?
a. 750,000
b. 450,000
c. 500,000
d. 600,000

4. Macdonald Company reported the following balances (after adjustment) at the end of 2023 and
2022.

12/31/2023 12/31/2022
Total accounts receivable P10,500,000 P9,600,000
Less: Allowance for doubtful accounts 600,000 150,000
Net realizable value 9,900,000 9,450,000

During 2023, Macdonald recognized doubtful accounts expense of 500,000 and collected
50,000 on accounts written off in previous years.
How much accounts receivable was written off by Macdonald during the
2023? a. 150,000
b. 200,000
c. 300,000
d. 100,000

5. Melissa Company operates in an industry that has a high rate of bad debts. On December 31,
2023, before the preparation of an aging schedule and any year-end adjustments, the balance
of Melissa’s Accounts Receivable account was P6,000,000 and the Allowance for Doubtful
Accounts had a balance of P500,000 on January 1, 2023.

There were P200,000 write-offs during the year, while P50,000 were recovered. The year-end
balance reported in the statement of financial position for the Allowance for Doubtful Accounts
will be based on the aging schedule shown below.

Probabilit
Days Account Outstanding Amount
y of
 Collection
Less than 16 days 2,000,000 95%
Between 16 and 50 days 1,500,000 90%
Between 51 and 100 days 1,200,000 85%
Between 101 and 200 days 600,000 80%
Between 201 and 365 days 400,000 70%
Over 365 days 300,000 60%

What is the doubtful accounts expense of Melissa Company for the year ended December 31,
2023?
a. 440,000
b. 500,000
c. 850,000
d. 290,000

6. Beatrice Company sells to wholesalers on terms of 5/15, net 30. Beatrice has no cash sales but
50% of customers take advantage of the discount. Beatrice uses the gross method of recording
sales. An analysis of accounts receivable on December 31, 2023, revealed the following:

Age_ Amount_ _Collectible_

0 – 15 days 6,000,000 100%
16 – 30 days 3,000,000 90%
Over 30 days 1,000,000 50%
In the December 31, 2023, statement of financial position, what amount should be reported as
net realizable value of the accounts receivable?
a. 9,200,000
b. 9,050,000
b. 9,450,000
c. 9,600,000

Solution
6,000,000×50%=3,000,000
3,000,000×5% =150,000
3,000,000 - 150,000= 2,850,000
3,000,000+2,850,000=5,850,000
3,000,000×90%=2,700,000
1,000,000×50%=500,000
5,850,000+2,700,000+500,000= 9,050,000
7. Effective with the year ended December 31, 2023, Vega Company adopted the aging of
accounts receivable method instead of the old percentage of sales method. Vega has practiced
providing interim provisions during the year by applying a certain percentage to credit sales. The
following data are available:

Allowance for doubtful accounts, January 1, 1,000,000

Provisions for doubtful accounts (5% of credit sales) 3,000,000
Accounts written off 300,000
Estimated uncollectible accounts per aging 12/31/2023 4,500,000
Accounts written off but recovered 100,000
 What is the 2023 year-end adjustment to doubtful accounts
expense?
a. 3,800,000
b. 2,200,000
c. 800,000
d. 700,000
8. Explore Company uses the allowance method of accounting for bad debts. The following
summary schedule was prepared from an aging of accounts receivable outstanding on
December 31 of the current year.

No. of Days Outstanding Amount Probability of Collection

0-30 days. P5,000,000 .98
31-60 days 2,000,000 .90
Over 60 days 1,000,000 .80

The following additional information is available for the current year:

Net credit sales for the year P50,000,000

Allowance for Doubtful Accounts:
Balance, January 1 450,000 (cr)
Balance before adjustment, December 31 20,000 (dr)

If Explore determines bad debt expense using the aging method, how much is the
doubtful accounts expense?
a. 480,000
b. 520,000
c. 750,000
d. 50,000

9. The following were abstracted from the records of Love Company:

Accounts receivable, December 31, 2022 P950,000

Allowance for bad debts (before adjustments), December 31, 2022 5,150
Sales, 2022 2,500,000
Sales discounts, 2022 70,000
Sales returns, 2022 30,000

Determine the bad debt expense and allowance for bad debts

Bad debts expense Allowance for bad debts

a. Bad debts based on 0.25% of net sales ? ?
b. Bad debts based on 1.25% of accounts receivable ? ?
c. Aging analysis; estimated uncollectible ? ?

10. Blade Company’s accounts receivable balance at January 1, 2022 was P1,820,000 net of
allowances totaling P165,000. During 2022, Blade Company reported sales of P6,400,000. 15% of
sales in 2022 were cash sales and the rest were on account under a 6/10, n/30 credit term. Sales
returns amounted to P95,000 for cash sales in which the customers were refunded and P120,000 for
credit sales.
 Total debit to cash during the year, P6,780,000, which includes recoveries of previously written-
off accounts totaling P145,000. 75% of the collections from its current customers were made within
the discount period. Receivables written-off in 2022, P90,000.

The gross accounts receivable of Blade Company at December 31, 2022 is

RECEIVABLE FINANCING
1. Luciana Company obtained a one-year loan of P8,000,000 from a bank on September 1, 2023.
The loan was discounted at 12%, meaning interest was deducted in advance from the loan.

The company signed a note and pledged all of its accounts receivable of P10,000,000 as
collateral for the loan.

What is the carrying amount of the note payable to be reported by Luciana in its December 31,
2023, statement of financial position?
a. 8,000,000
b. 7,360,000
c. 6,800,000
d. 7,040,000
Solution:
8,000,000×12% = 960,000 (discount)
From September to December (4 months)
960,000 × 4/12 = 320,000 (interest expense)
960,000 - 320,000 = 640,000 (remaining discount)
8,000,000 - 640,000 = 7,360,000

2. On December 1, 2023, Elmer Company assigned on a non-notification basis accounts

receivable of P5,000,000 to a bank in consideration for a loan of 60% of the accounts assigned
minus a 5% service fee on the accounts receivable of P5,000,000. Elmer signed a note for the
bank loan with an agreement to pay 1% interest per month on the outstanding balance of the
loan.

On December 31, 2023, Elmer collected assigned accounts of P2,500,000 less discount of
P200,000. Elmer remitted the net amount collected to the bank in partial payment for the loan.
The bank applied first the collection to the interest and the balance to the principal.

What amount should Elmer report as note payable in its December 31, 2023, statement of
financial position?
a. 730,000
b. 530,000
c. 700,000
d. 500,000

Solution
5,000,000×60% = 3,000,000 N/P
2,500,000-200,000= 2,300,000 Initial Payment
2,300,000-30,000 = 2,270,000 Interest Payment
3,000,000-2,270,000=730,000 N/P Balance
3. On January 1, 2023, Frost Corporation needed cash to meet current operating needs. Frost
factored some P5,000,000 of accounts receivable to Metropolitan Bank and Trust Company.
Frost maintains an allowance for doubtful accounts of 300,000 of this receivable balance. The
bank withheld 20% of the purchase price as protection against sales returns and allowances.
The factor or the buyer of the accounts receivable charged a 15% service fee.

What is the loss on this casual factoring transaction that will be recognized in the income
statement?
a. 450,000
b. 950,000
c. 750,000
d. 500,000

4. Browne Company factored P6,000,000 of accounts receivable to United Finance Company on

October 1, 2023. Control was surrendered by Browne. United Finance assessed a fee of 3%
and retains a holdback equal to 15% of the accounts receivable. In addition, United Finance
charged 12% interest on the carrying amount of the receivables on a weighted-average time to
maturity of the receivables of 40 days. There is no recourse obligation in the factoring
arrangement with.

How much is the net proceeds received by Browne

Company?
a. 4,840,000
b. 4,841,096
c. 5,100,000
d. 5,741,096
Solution
A/R 6,000,000
FH (900,000)
FF. (180,000)
In. (78904)
4,841,096

5. Lyka Company accepted from a customer P6,000,000 face amount, nine-month, 12% note
dated August 1, 2023. On September 1, 2023, Lyka discounted the note at Philippine Bank of
Commerce at a 15% discount rate.

What is the loss on discounting that Lyka will recognize on the

transaction?
a. 114,000
b. 174,000
c. 60,000
d. 160,000
 NOTES RECEIVABLE AND LOAN IMPAIRMENT LOSS

1. Morrison Company sold equipment on January 1, 2023, for P10,000,000. Morrison received a
cash down payment of P2,000,000 and a 4-year, 10% note for the balance.

The note is payable in equal annual payments of principal and interest of P2,523,767 payable
on December 31 of each year until the year 2026.

What is the total balance of the note receivable in Morrison’s December 31, 2024,
statement of financial position?
a. 6,276,233
b. 4,380,089
c. 5,476,233
d. 1,896,144

2. Martin Company borrowed from Commercial Bank under a 10-year loan in the amount of
P5,000,000 with a stated rate of 6%. Payments are due monthly, and are computed to be
P55,500. Commercial bank incurs P300,000 of direct loan origination costs and P100,000 of
indirect loan origination costs. In addition, Commercial Bank charges a 5-point nonrefundable
loan origination fee. Commercial Bank, the lender, has a carrying amount for the loan of
a. 5,300,000
b. 4,950,000
c. 5,050,000
d. 5,150,000

3. Berna Company is a dealer in equipment. On January 1, 2023, Berna Company sold an

equipment with a cost of P3,500,000 in exchange for a noninterest bearing note of P6,000,000
requiring a lump sum payment at the end of 5 years. The market interest for similar notes was
10%. The relevant present value factors are:

PV of 1 at 10% for 5 periods 0.621

PV of an ordinary annuity of 1 at 10% for 5 periods 3.791
PV of an annuity due of 1 at 10% for 5 periods 4.169

What is the carrying amount of the note receivable on December 31,

2024?
a. 3,726,000
b. 4,098,600
c. 4,508,460
d. 4,000,000
4. Ronaldo Company sold one of its machines on January 1, 2023, to Marron Company in
exchange for a noninterest bearing note requiring three equal annual payments of P1,000,000 or
a total of P3,000,000.

The machine had a carrying amount of P2,000,000 in Ronaldo’s books. The first payment is
due on December 31, 2023.

The market interest for similar notes was 12% and the relevant present value factors are:
 PV of a single payment at 12% for 3 periods .71
18
PV of an ordinary annuity of 1 at 12% for 3 periods 2.40
18
PV of an annuity due of 1 at 12% for 3 periods 2.69
01

In its December 31, 2023, statement of financial position, what is the net carrying amount
of the notes receivable?
a. 2,000,000
b. 797,198
c. 892,818
d. 1,690,016

5. Miller Bank loaned P5,000,000 to Brenda Company on January 1, 2021. The terms of the loan
require the principal payment of P5,000,000 to be made after 5 years on December 31, 2025,
and interest at 12% to be paid annually on December 31.

The first interest payment is due on December 31, 2021. Brenda Company made the required
interest payment during 2021.

However, during 2022 Brenda Company began to experience financial difficulties, which led to
the default of the 2022 required interest payment. Miller, however still accrued interest on
December 31, 2022.

Brenda again defaulted in its 2023 interest payment. On December 31, 2023, Miller did not
continue to accrue interest and determined that the remaining principal payment will be collected
but it is probable that the accrued interest in 2022 and all other interest payments including
within 2023 will not be paid.

The probable timing and amount of collections is determined as follows:

December 31, 2024 1,000,000

December 31, 2025 1,500,000
December 31, 2026 1,500,000
December 31, 2027 1,000,000

The present value at 12% is as follows

For one period 0.89

For two periods 0.80
For three periods 0.71
For four periods 0.64

1. What is the loan impairment loss on December 31, 2023?

a. 1,205,000
b. 2,405,000
c. 1,805,000
d. 1,550,000
 2. What is the interest revenue to be recognized in 2024?
a. 414,600
b. 600,000
c. 0
d. 455,400

3. What is the carrying amount of this loan on December 31, 2024?

a. 4,000,000
b. 3,250,400
c. 3,520,600
d. 3,020,800
6. Burnham Bank loaned P5,000,000 to Watson Company on January 1, 2020. The terms of the
loan require principal payments of P1,000,000 each year on December 31 for 5 years plus
interest at 8%. The first principal and interest payment is due on December 31, 2020. Watson
Company made the required payments during 2020 and 2021.

However, during 2022 Watson Company began to experience financial difficulties and was not
able to pay the next installment of principal and interest, this required Burnham to reassess the
collectibility of the loan.

On December 31, 2023, Burnham determined that the remaining principal payment will be
collected annually starting December 31, 2024, and only the collection of the 2022 accrued
interest will be collected with the collection of the last installment of the principal payment on
December 31, 2026.

Assume that Burnham accrued interest on December 31, 2022, but did not continue to accrue
interest because of its uncollectibility.

The present value of 1 at 8% is as follows:

For one period 0.93

For two periods 0.86
For three periods 0.79

What is the loan impairment loss recognized on December 31, 2023?

a. 660,000
b. 470,400
c. 530,400
d.0