between tax and financial reporting income tax payable would have increased by

# Between tax and financial reporting income tax

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between tax and financial reporting, income tax payable would haveincreased by P0.40 (P105 million) or P42 million, and retained earningswould be greater by P63 million. This example illustrates the material effectestimated bad debts can have on reported earnings and total assets.(b)Under the allowance method, failure to write off an account has no effect onearnings (assuming a sufficient balance exists in the allowance account), orany net balances in the statement of financial position. Only the componentsof net accounts receivable would be affected. Both gross accounts receivableand the allowance for doubtful accounts would be overstated P0.6 million.Requirement (2)1998Beginning allowance balanceP183Bad debt expense105Ending allowance balance(212)Write-offs of accountsP 76Requirement (3)(a)The ratio of bad debt expense to operating revenue for the two years is: 2015,P105/P3,729 = 2.8%; 2014, P81/P3,534 = 2.3%. This ratio appears relativelystable although is increasing.(b)The composite rate of uncollectible accounts as a percentage of grossaccounts receivable = ending allowance balance/ending accounts receivable.The ratio for 2015 is P212 / (P951 + P212) = 18.2%, and for 2014 is P183 /(P972 + P183) = 15.8%. This ratio is less stable and also is increasing.(c)Bad debt expense is considerably higher than the write-offs in 2015. The firmhas experienced an increase in expected write-offs. Apparently the firmexpects an increase in bad debts, which is partially an estimate of futurewrite-offs.10-18.Rain Company
Substantive Tests of Receivables and Sales 10-19Requirement (1)Present value of the note:P150,000 x (PV1, 12%, 3) (0.71178) = P106,767Requirement (2)Correction and Collection Schedule:Note ReceivableDateExplanation and Interest RevenueChangeBalance1-1-2014Recorded originally at face amountP150,00012-31-2014Correction to restate to presentvalueP43,233106,76712-31-2014To accrue interest, P106,767 x 12%= P12,812+12,812119,57912-31-2015To accrue interest, P119,579 x 12%= P14,349+14,349133,92812-31-2016To accrue interest, P133,928 x 12%= P16,072*+16,072150,00012-31-2016Collection on face amount, debitCash150,0000* Rounded.10-19.1.d.The Josefina note is a short-term note and is reported at face valuealthough the note can be recorded at present value. The Nicole note isreported at present value: [(P20,000 + 5(0.3) (P20,000)] (PV1, 8%, 5) =P23,000 (0.68058) = P15,6532.c.The annual payment is computed as: P10,000 (PVA, 8%, 5) = P10,000 /3.99271 = P2,505.Discounting this stream of payments at 9% yields cash proceeds of:P2,505 (PVA, 9%, 5) = P2,505 (3.88965) = P9,744.Total interest equals total payments less proceeds = 5 (P2,505) – P9,744= P2,781.3.b.Interest receivable is recorded for one month.4.c.Maturity value.....................................................................P100,000Discount P100,000 (0.10) (6/12).........................................(5,000)Proceeds...............................................................................P 95,00010-20.Luce Company
10-20 Solutions Manual to Accompany Applied Auditing, 2014 Edition(1)AJE:Sales returns and allowances30,000Inventory 12.31.1524,000Accounts receivable30,000Cost of sales24,000Income will decrease by P6,000 ifthe above AJE is made.Ans.(c)(2)AJE:Sales10,000Accounts receivable10,000Income was overstated by P10,000Ans.(a)(3)Actual number of units sold to Mr. Lazo was 320. P48,000P150Ans.(b)(4)Correct receivable fromMr. Lazo :320 x P100 P 32,000Per client 48,000Overstatement P 16,000Ans.(d)(5)Accounts receivable from Mr. Sia is correctly stated because the goods areconsidered sold in 2015.

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