SECOND SET OF PROBLEMS PROBLEM NO. 1 You have been assigned to audit the financial statements of AYALA. MERCHANTS CORPORATION for the year 2015. The company is a'dealer of appliances and has several branches in Metro Manila. Its main office is located in Makati City. You were given by the company controller the unadjusted balances of the items to be included in the company’s statement of financial position and statement of income as of and for the year ended December 31, 2015. Audit findings are as follows: I. AUDIT OF CASH Acash count was conducted by your staff on January 7, 2016. The petty cash fund of P60,000 maintained by the company on an imprest basis relected a balance of P22,750. Unreplenished expenses totaled P37,250 of which P9,510 pertains to January 2016. You were furnished a copy of the company’s bank reconciliation statement with Chartered Bank as follows: Balance per bank P277,994 Add: Deposit in transit 248,836 Bank debit memos 712,750 Returned check 63,000 Less: Outstanding checks (174,580) Book error (72,000) Balance per books P1,056,000. Your review of the reconciliation statement disclosed the following: 1 Postdated checks totaling P107,400 were included as part of the deposit in transit. These represent collections from various customers whose accounts have been outstanding for less than three months. These checks were actually deposited on January 8, 2016, 2, Included in the deposit in transit is a check from a customer for P63,000 which was returned by the bank on December 27, 2015 for insufficiency of funds. This aceount has been outstanding for over six months. The check was replaced by the customer on January 15, 2016. 3. The bank debited the account of Ayala Merchants for P710,000 as payment of notes payable including interest of P10,000 due on December 26, 2015. This was not recorded as of year-end.4. A check was cleared by the bank as P30,900 but was recorded by the bookkeeper as P102,900. This was in payment of accounts payable. 5 Bank service charges totaling P2,750 were not recorded. Il. AUDIT OF ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS It is the company’s policy to provide allowance for doubtful accounts as follows: Less than 3 months P2,500,960 1% 3 to 6 months 843,200 5% Over 6 months 274,500 10% Total —-P3,618.660 An analysis of the accounts receivable schedule showed that several long outstanding accounts for more than a year totaling P152,460 should be written-off. Il, AUDIT OF MARKETABLE SECURITIES — TRADING The company's equity portfolio as of year-end showed the following: Total Market Value Shares Cost per Share Bacnotan Cement 7,000 P108.500 P16.00 Fil-Estate 10,000 195,000 19.75 Tonics 2,400 49,200. 24.00 La Tondena 2,000 67,000 26,00 Selecta 8.000 31,600 Ly Union Bank 1,600 50.880 27.50 P502,180 The securities are listed in the stock exchange. The company follows the fair value accounting. IV. AUDIT OF NOTES RECEIVABLE The note receivable amounting to P1,300,000 represents a loan granted to a subsidiary, This is covered by a promissory note with interest at 15% per annum dated November 1, 2015. No interest has been accrued on the note as of December 31, 2015. V. AUDIT OF PREPAYMENTS Prepaid expenses account consists of the following: Prepaid advertising P 640,000 Prepaid insurance 490,000 Prepaid rent 420,000Unused office supplies. 361,000 P1.911,000 Ayala Merchants renewed its contract with an advertising agency for the annual promotion as well as the regular advertisement of its products. It paid a total of P640,000, P100,000 of which is for the Christmas promotion while the balance is for the regular promotion and which will run for one year starting on August 1, 2015, Payment was made on July 20, 2015, and the total amount was reflected as prepaid advertising The company leases the main office and store in Makati City at a monthly rental of P140,000, On November 5, 2015, a check for P420,000 was issued in payment of three-month rental as per renewal contract which was effective on November I, 2015. Rental deposit remained at three months and is included under other assets. The company’s delivery equipment is insured with Fortune Insurance Corporation for a total coverage of P2.4 million, Total payment made on November 16, 2015 for the renewal amounted to P490,000 which covers the period from November 1, 2015 to November 1, 2016. No adjustment has been made as of December 31, 2015. To take advantage of volume discount ranging from 10% to 20%, the company buys office and store supplies on a bulk basis. The staff-in-charge bought supplies worth P220,000 on June 10, 2015 and included the same in their office supplies inventory. As at year-end, unused office supplies amount to P102,500, VL. AUDIT OF INVENTORIES, A physical count of inventories was conducted simultaneously in all stores on December 29 and 20, 2015. Your review of the list submitted by the accountant disclosed the following: 1 Some deliveries made in December 2015 have not been invoiced and recorded as of year-end. These items had a selling price of P146,940 with term of 15 days. The corresponding cost was already deducted from the ending inventory. 2. Goods on consignment to Ayala Merchants totaling P356,000 were included in the inventory list. 3. Some appliances worth P138,500 were recorded twice in the inventory list. 4. Goods costing P153,800 purchased and paid on December 26 was received on January 4, 2016. The goods were shipped by the supplier on December 28, FOB shipping, point. VIL AUDIT OF PROPERTY, PLANT AND EQUIPMENT Fe i eae ace SS ae a Ca ee:The company purchased additional equipment worth P268,000 on June 30, 2015. At the date of purchase, it incurred the following additional costs which were charged to repairs and maintenance account: Freight-in P30,400 Installation cost 13,000 Total P43.400 The above equipment has an estimated useful life of ten years and estimated salvage value of P20,000. Depreciation for the above equipment has been provided based on original cost. The company discarded some store equipment on October 1. 2015, realizing no salvage value. The cost of these equipment amounted to P165,520 with an accumulated depreciation of P138.620 as of December 31, 2015. Depreciation booked from October 1, 2015 to year-end was P10,480, No entry was made on the disposal of the property. VUL AUDIT OF ACCRUED EXPENSES Some expenses for December 2015 were recorded when paid in January 2016. These are as follows: Electric bills P73,400 Commission of sales agents 57,000. Telephone charges 42.500 Minor repair of delivery equipment 21,340 Water bills _18,760 Total P213,000 IX. AUDIT OF LIABILITIES Ayala Merchants obtained a one-year loan from Chartered Bank amounting to P2.6 million at an interest rate of 16% per annum on October I, 2015. Accrued interest on this loan was not taken up at year-end. X. OTHER AUDIT FINDINGS A review of the minutes of meeting showed that a 10% cash dividend was declared to shareholders of record as of December 15, 2015, payable on January 31, 2016, Ayala Merchants Corporation UNADJUSTED TRIAL BALANCE December 31, 2015 Debit Credit Petty cash fund P 60,000 Cash in bank 1,056,000 Trading securities 483,640 Accounts receivable ~ trade 3,618,660 Allowance for doubtful accounts P-110,360 Notes receivable 1.300.000Inventories 7,274,900 Prepaid advertising 640,000 Prepaid insuranee 490,000 Prepaid rent 420,000 Office supplies inventory 361,000 Furniture and fixtures 1,298,400 Delivery equipment 2,770,000 Accumulated depreciation 1,177,500 Other assets 548,000 Accounts payable — trade 2,356,320 Notes payable 3,300,000 Accrued expenses 169,040 Bonds payable 5,000,000 Discount on bonds payable 500,000 Ordinary share capital 3,400,000 Retained earnings 792,160 Sales 13,078,000 Cost of goods sold 8,034,000 Operating expenses 3,357,000 Other income 1,453,500 Other charges 625,280 P32.836,880 232,836,880 Based on the above information, determine the adjusted balances of the following: (Ignore tax implications.) I. Petty cash fund A. P37,250 B. P60,000 C. P22,75 0 D. P32,260 2. Cash in bank A, P522,650 B. P450,650 C. P10 56,000 D. P244,850 3. Trading securities A, P403,640 B. P502,180 C. P491 240 D. P472,700 4 Accounts receivable A. P3,936,000 B. P3,618,660 [a P 3,783,540 D. P3,613,140 5. Allowance for doubtful accounts AL P110,360 B. P152,640 c P130, 316 D. P88,217 6 Notes and interest receivable A P1,331,960 B. P 1,332,160 Cc P 1,332,500 D. P1,300,000 a Inventories AL P6,934,200 B. P7,274,900 Cc. P7,290,200, D. P6,780,400 8. Prepaid insurance AL P449,167 B. P408,333 Ce P490 ,000 D. P428,750 9: Prepaid rent AL P140,000 B. P 0 G P420,000 Dd. P280,000 10. Prepaid advertising A. P325.000 B. P640,000 C; P373 334 Db. P315,000 11. Office supplies inventory A, P258,500 =B, —~PII7,S00.—C,—sé 3G, 000 =D. P 102,500 12. Total current assets AL P14,0333,612 B. P13,523,866 Cc P13,677,666. dD. P13.537,666 13. Property, plant, and equipment A. P4,068400 B. —-P2,905,228 CP 3,946,280 D. — P3,902,880 14. Accumulated depreciation A P1,038,880 B. P 1,041,050 Ce P 1,177,500 D. P1,179,672 15. Accounts payable AL P2,525,360 B. P2,428,320 © P 2,597,360 D. P2,356,320 16. Interest payable A. P104,000 B. PL6178 Ge P4,00 0 D. P27,644 Mi Total current liabilities A. P6,803,798 Bz P6,103,798 & P 6,054,360 D. P5,603,798 18. Sales A. P13,068,440 B. P13,078,000 eG. P13,224,940 D. P12,339,500 19. Cost of goods sold A. P8,034,000 B. P8,236,200 Cc. P 8,018,700 D. P8,374,700. 20. Operating expenses,000 D. P428,750 9: Prepaid rent AL P140,000 B. P 0 G: P420,000 D. P280,000 10. Prepaid advertising A. P325,000 B. P640,000 ce P373 334 D. P315,000 iL. Office supplies inventory A, P258,500 B. PI17,500 Cc P361, 000 D. P 102,500 12. Total current assets A P14,0333,612 B. P13,523,866 Cy P13,677,666 dD. P13,537,666 13. Property, plant, and equipment A. P4,068,400 B. P2,905,228 G g 3,946,280 D. P3,902.880 14. Accumulated depreciation A. PI,038,880 B. P1,041,050 & P 1,177,500 D. P1,179,672 15. Accounts payable A, P2,525,360 B. P2,428,320 Cc. P 2,597,360 D. P2,356,320 16. Interest payable A. P104,000 B. P16.178 Gs P4,00 0 D. P27,644 17. Total current liabilities A. P6,803,798 B. P6,103.798 Cc P 6,054,360, D. P5,603,798 18. Sales AL P13,068.440 B. P13,078,000 Cc. P 13,224,940, D. P12,339,500 19. Cost of goods sold A. P8,034,000 B. P8,236,200 & Pp 8,018,700 D. P8,374,700 20. Operating expenses AL P4,296,514 B. P3,357,000 Cc Pp 4,341,514 D. P4.621,514 nnn 000000000:SECOND SET OF PROBLEMS PROBLEM 1 = AYALA MERCHANTS CORPORATION ADJUSTING JOURNAL ENRIES December 31, 2015 1. Operating expenses 27,740 Petty cash fund 27,740 (P37,250 — P9,510) 2. Accounts receivable (P107,400 + P63,000) 170,400 Notes payable — 700,000 Finance cost (Interest expense) 10,000 Other charges (Bank service charges) 2,750 Accounts payable 72,000 Cash in bank 811,150 St Allowance for doubtful accounts 152,640 Accounts receivable (write- off) 152,640 4, Other charges (Unrealized loss — Trading securities) 10,940 Trading securities 10,940 Bacnotan Cement (P16, 7,000) —P112,000 Fil-Estate (P19.75 x 10,000) 197,500 Tonics (P24 x 2,400) 57,600 La Tondena (P26 x 2,000) 52,000 Selecta (P1.20 x 8,000) 9,600 Union Bank (P27.50 x 1,600) 44,000 Total market value, Dec. 21, 2015 P472,700 Carrying value, Dec. 31, 2015 483,640 Unrealized loss - trading securities P 10,940 5: Interest receivable 32.500Other income (Interest income) 32,500 (P1,300,000 x 15% 2/12) 6. Operating expenses (Advertising expense) 325,000 Prepaid advertising 325,000 Christmas promotion — P 100,000 Regular promotion (P640,000 — P100,000 = P540,000 x 5/12) 225,000 Total P325,000 Te Operating expenses (Rent expense) 280,000 Prepaid rent 280,000 (P420,000 x 2/3 or P140,000 x 2) 8. Operating expenses (Insurance expense) 81,667 Prepaid insurance 81,667 (P490,000 x 2/12) 9. Operating expenses (Office — supplies expense) 258,500 Office supplies inventory 258,500 (P361,000 — P102,500) 10, Accounts receivable 146,940 Sales 146,940 ll. Cost of goods sold 356,000 Inventories 356,000 12; Cost of goods sold 138,500 Inventories 138,500 13. Inventories 153,800 Cost of goods sold 153,800 14. Delivery equipment 43.400 Operating expenses 43,400 15. Operating expenses (Depreciation expense) 2,170 Accumulated depreciation 2,170 (P43 400/10 x 6/12)16. Accumulated depreciation 10,480 Operating expenses (Depreciation expense) 10,480 17. Accumulated depreciation (P138,620 — P10,480) 128,140 Other charges (Loss) 37,380 Delivery equipment 165,520 18. Operating expenses 213,000 Accrued expenses 213,000 19, Finance cost (Interest expense) 104,000 Interest payable 104,000 (P2.6 million x 16% 3/12) 20. Retained earnings 540,000 Dividends payable 540,000 (P5,400,000 x 10%) 21, Operating expenses (Doubtful accounts expense) 130,317 Allowance for doubtful accounts 130,317 Required Per Books Adjustments — Per Audit % Allowance Lessthan3 months 2,500,960 ——P'146,940 107,400 —- P2,755,300 1 P27,553 3 to 6 months 843,200 843,200 5 42,160 Over 6 months 274,500 63,000 (152,460) 185,040 10 18.50: P3,618,660 3,783,540 88,217 Allowance before adjustment = (P110,360 — P152,460) P42.100 debit Required allowance 88,217 Adjustment —P130,317 1. D Petty cash fund Per books P60,000 avon a nee a LasD D Cc AJE 1 (27,740) Per audit P32,260 Cash in bank Per books P1,056,000 AJE 2 (811,150) Per audit P 244,850 Trading securities Perbooks — P483,640 AJE 4 _(10,940) Per audit P472,700 Accounts receivable Per books P3,618,660 AJE 2 170,400 3. (152,460) 10 146,940 Per audit P3.783,540 D Allowance for doubtful accounts Per books — P110,360 AJE 3 (152,460) 21 130,317 Per audit P88,217 c Notes and interest receivable Per books P1,300,000 AIE 5 32,500 Per audit P1,332,500 A Inventories Per books P7,274,900 AJE i (356,000) 12 (138,500) 13 153,800 Per audit P6,.934,200 B Prepaid insurance Per books P490,000 AJE 8 _(81,667) Per audit P408.333 A Prepaid rent Per books P420,000 AJE 7 (280,000) Per audit P140.00010. Ds Prepaid advertising Per books P640,000 AJE 6 (325,000) Per audit P315,000 I, D Office supplies inventory Per books P361,000 AJE 9 (258,500) Per audit P102.500 12. C Petty cash fund P 32,260 Cash in bank 244,850 Trading securities 472,700 Accounts receivable (P3,783,540 — P88,217) 3,695,323 Notes and interest receivable 1,332,500 Inventories 6,934,200 Prepaid insurance 408,333 Prepaid rent 140,000 Prepaid advertising 315,000 Office supplies inventory a iS Total current assets P13,677.666 13. C Property, plant, and equipment (PPE) Perbooks — P4,068,400. AJE 14 43,400 17 —(165,520) Per audit P3.946,280 14. B Accumulated depreciation Per books P1,177,500 AJE 15 2,170 16 (10,480) 17 _(128,140) Per audit P 1,041,050 15. B Accounts payable Per books P2,356,320 AJE 2 72,000 Per audit P2.428.320 16, A Interest payable Per books PO AJE 19 104,000 Mo sscaedlie pina nanA Interest payabie Perbooks PO AJE 19 104,000 Per audit P104,000 17. € — Accounts payable - trade P2,428,320 Notes payable —_ 2,600,000 Accrued expenses 382,040 Interest payable 104,000 Dividends payable 540,000 Total current liabilities 6,054,360 18. Cc Sales Per books P13,078,000 AJE 10 146,940 Per audit P13,224,940 19. C Cost of goods sold Per books P8,034,000 AJE i 356,000 12 138,500 13, _(153,800) Per audit P8,374,700 20. D Operating expenses Per books P3,357,000 AJE 1 27,740 6 325,000 7 280,000 8 81,667 9 258,500 14 (43,400) 152,170 16 (10,480) Per audit P4,621.514 PROBLEM 2 —- LUKAS COMPANY 21, A Sales returns and allowance 90,000 Accounts receivable 90,000 Inventory 72,000