Lesson 3 AP: Audit of Receivables - Problem A

Problem:

The following data were gathered during your audit:

Allowance for doubtful accounts, Jan 1, 20x1                                P 300,000
Provision for doubtful accounts during 20x1 (3% of 5M Sales)        150,000
Bad debts written off during 20x1                                                      187,500
Recovery of bad debts written off during 20x1                                    50,000
Estimated doubtful accounts per aging of accounts, Dec 31, 20x1    350,000
Accounts Receivable, Dec 31, 20x1                                                1,187,500

As per company policy, the allowance for doubtful accounts must be adjusted to equal the estimated amount required based on aging of accounts receivable.

Questions:
1. What is the correct doubtful accounts expense for the year 20x1?
2. What is the correct net book value of the receivables as of December 31, 20x1?

Solution:
1.
Allowance for doubtful accounts, Jan 1, 20x1                                P 300,000         begbal
Bad debts written off during 20x1                                                     (187,500)
Recovery of bad debts written off during 20x1                                    50,000
Unadjusted allowance for doubtful accounts, Dec 31, 20x1           P 162,500          
Estimated doubtful accounts per aging of accounts, Dec 31, 20x1   (350,000)        endbal
Doubtful accounts expense to be recognized                               P(187,500)       
 *It is easier to use a t-account.

    Allowance for doubtful accounts     
 Begbal                  |    Write-off
 Recovery              |
 Expense                |                              
 Endbal                 

2. Accounts Receivable                                                                  P 1,187,500
    Allowance for doubtful accounts                                                    (350,000)
    Net Book Value of Accounts Receivable                                        837,500