Required:
1. Prepare the audit adjustments required in the problem. All peso amounts are to be rounded
off to the nearest thousands. Ignore tax effects except for the 35% provision for income tax.
2. Compute the final balances of each account on your WBS and WPL. Answer the multiple
choice questions.
AYALA MERCHANTS CORPORA TIQN
PROBLEM
You have been assigned to audit the financial statements of Ayala Merchants Corporation.for the
year 2020. 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
statement: of financial position and statement of comprehensive income. Audit findings are as
follows:
1. Audit of Cash
A cash count was conducted by your staff on January 7, 2021. The petty, cash fund of P10,000
maintained by the company on an imprest basis reflected a balance of P11 ,375. Unreplenished
expenses totaled P8,625 of which P14,755 pertains to January 2021.
You were furnished a copy of the company's bank reconciliation statement with Chartered Bank as
follows:
Balance per: bank P138,997
Add: Deposit in transit 124,418
Bank debit memos 356,375 .
Returned check 31,500
Less: Outstanding checks ( 87,290}
Book error (36,000)
Balance. per books P528,000
Your review of'the reconciliation statement disclosed the following:
1. Postdated checks totaling P53,700 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, 2021.
2. Included in the deposit in transit is a check from a customer for P31,500 which was returned
by the bank on December 2.7. 201 o for insufficiency of funds. This account has been outstanding
for over six months, The check was replaced by the customer on January 15.2021.
3. The bank debited the account of Ayala Merchants for P355,000 as payment of notes payable
including interest ofP5,000 due on December 26.2020. This was not recorded as of year-end.
4. A check was cleared by the bank as P15,450 . but was recorded by the bookkeeper as
P51,450. This was in payment of accounts payable.
5. Bank service charges totaling P1,375 were not recorded.
2. Audit oj Accounts Receivable and Allowances for Doubtful Accounts
It is the company's policy to provide allowance for doubtful accounts as follows: '
Less than 3 months P1,250,480 1%
3 to 6 months 421.600 5%
Over 6 months 137,250 10%
Total 1,809,330
An analysis of the accounts receivable schedule showed that several long outstanding accounts for
more than a year. totaling P76,230 should be written-off.
3. Audit of Marketable Securities – Trading
The company's equity portfolio as of' year-end showed the following:
No...of Market value
Issue shares Cost per share
Bacnotan Cement 3,500 P 54,250 P16.00
Fil-Estate 5,000 ' 97,500 19.75
lonics 1,200 24,600 24.00
La Tondena 1.000 33,500 26.00
Selecta 4,000 15,800 1.20
Union Bank 800 25,440 27.50
P251,090
The securities are listed in the stock exchange. The company follows the fair value accounting.
4. Audit of Notes Receivable
The note receivable amounting to P650,000 represents a loan granted to a subsidiary, This is
covered by a promissory note with interest at 15% per annum dated November ,·15, 2020, No
interest has been accrued on the note as of December 31. 2020.
5. Audit of Prepayments
Prepaid expenses account consists of the following:
Prepaid advertising P 320,000
Prepaid insurance ' 245,000
Prepaid rent 210,000
Unused office supplies 180,500
P955,500
Ayala Merchants renewed, its contract with an advertising; agency, for the annual promotion as well
as the regutar advertisement of its products. It paid a total P320,000, P50,000 of which is for the
Christmas promotion while the balance is for the regular and which will run for one year starting-en
August 1, 2020. ,
Payment was made on July 20,2020 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 P70,000. On
November 5, 2020, a check for P210,000 was issued in payment of three-month rental as per
renewal contract which was, effective on November 1; 2020. 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 P1.2 million. Total payment made on November 16, 2010 for the renewal amounted to-
P245,000 which covers the period from November 1, 2020 to November 1. 2021. No adjustment has
yet been made as of December 31, 2020.' ,
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 P110,000 on June 10, 2020 ...
and included the same in their office supplies inventory. As at year-end, unused office supplies
amount to P51,250.
6. Audit of Inventories
A physical count of inventories was conducted simultaneously in all stores on December 29 and 30,
2020. Your review of the list submitted by the accountant disclosed the following:
l) Some deliveries made on December 20JO have not been invoiced and recorded as of year-end.
These items had a selling price of P73,470 with a term of 15 days. The corresponding cost was
already deducted from the ending inventory.
2) Goods on consignment to Ayala Merchants totaling PI78,000 were included in the inventory list.
' ,
3) Some appliances worth P69,250 were recorded twice in the inventory list.
4) Goods costing P76,900 purchased arid paid on December 26 was-received on January 4, 2021.
The goods were shipped by the supplier on December 28, FOB shipping point.
7. Audit of Property, Plant and Equipment
The company purchased additional equipment worth P134,000 on June 30, 2020. At the date of
purchase, it incurred the following additional costs which were charged to repairs ana maintenance
account:
Freight-in P 15,200
Installation cost 6,500
Total P 21,700
The above equipment has an estimated useful life of ten years and estimated salvage value of
P10,000. Depreciation for the above equipment has been provided based on original cost. -" •
The company discarded some store equipment on October 1, 2020, realizing no salvage value. The
cost of these equipment amounted to P82,760 with an accumulated depreciation of P69,31 0 as of
December 31, 2020. Depreciation booked from October 1,2010 to year-end was P5,240. No entry
was made on the disposal of the property.
8. Audit of Accrued Expenses
Some expenses for December 2020 were paid in January 2021. These are as follows:
Electric bills P 36,700
Commission of sales agents 28,500
Telephone charges 21;250
Minor repair of delivery equipment 10,670
Water bills 9,380
Total P 106,500
9. Audit of Liabilities
Ayala Merchants obtained a one-year loan from Chartered Bank amounting to P1.3 million at an
interest of 16% per annum on October 16,2020. Accrued interest on this loan was not taken up at
year-end.
The company-also offered maintenance service contracts on an annual basis.
Cash receipts from such contracts amounted to P320,000, P75,000 of which is effective from May 1,
2010 to May 1, 2021 and the balances from September 1, 2020 to September 1, 2021. Said amount
was credited to unearned service income. No adjustment has yet been booked as of year-end.
On May 1,2020, Ayala Merchants issued a P2,500.000 face value bonds at 90. The bonds will
m3ture. in five years and pay interest at 12% per annum payable semi~annually on May 1 and
November 1.
10. Audit Findings
In October 2020, Ayala Merchants became involved in a tax dispute with the BIR pertaining to 2018
income. In December 2010. an amount of P250,000 was assessed against the company by the, BlR.
The Legal counsel of Ayala. Merchants Strongly feels that the said assessment will have to be paid
by the company. (Disregard effect on income tax)
"
, "
A review or the minutes of meeting showed that a 10% Cash dividend, was declared to
Shareholders of record as of December 15, 2020, payable on January 31, 2O21.
AYALA MERCHANTS CORPORATION
WORKING STATEMENT OF FINANCIAL POSITION
December 31. 2020
CURRENT ASSETS
Petty cash fund P 30.000
Cash 528,000
Marketable securities 251,090
Allowance for decline in value of securities ( 9,270)
Account receivable- Trade 1,809,330
Allowance fer doubtful accounts ( 55,180)
Notes receivable 650,000 ,
Interest receivable
Inventories 3.637,450
Prepayment:
Prepaid advertising 320,000
Prepaid insurance 245,000
Prepaid rent 210,000 '
Office supplies inventory 180,500
Total 955,500
Total Current Assets
PROPERTY, PLANT AND EQUIPMENT
Furniture and fixtures 649,200
Delivery equipment 1,385,000
Total 2,034,200. .
less: Accumulated depreciation· (588,750)
Net Book Value 1,445,450
Other Assets 274,000
TOTAL ASSETS 9,516,370
CURRENT LIABILITIES
Accounts payable - Trade 858,160
Notes payable 1,650,000
Accrued expenses. 84,520
Interest payable
Income tax payable 440,164
Dividends payable
Unearned service income: 320,000
Estimated liability for taxes
Total Current liabilities 3,352,844
LONG.-TERM LIABILITIES
Bonds payable 2,500,000
Discount on bonds payable (250,000)
Total Long Term Liabilities, 2,250,000
SHAREHOLDERS' EQUITY
Paid in capital 2,700,000
Retained earnings 1,213,526
Total Shareholders' Equity 3,913,526
TOTAL LIABIITIES & SHAREHOLDERS' EQUITY 9,516,370
AYALA MERCHANTS CORPORATION
WORKING PROFIT AND LOSS
Year Ended December 31,2020
Sales P 6,539,000
Cost of goods sold (4,017,000)
Gross profit 2,522.000
Operating expenses (1,678,500)
Income from operations 843,500
Other income 726,750
Other charges (312,640)
Income before taxes 1,251,610
Provision for income tax . ( 440,164)
Net Income 817,446
Retained earnings, beginning 396,080
Cash dividends
Retained earnings, end 1,213,5256
Allowance for doubtful accounts
a. 44,108
b. 55,180
c. 76,320
d. 65,158
Cash
a. P261,325
b. 225,325
c. 122,425·
d. 528,000
Adjusted COGS
a. 4,017,000
b. 4,118,100
c. 4,009,350
d. 4,187,350
Notes and Interest Receivable
a. 662,188
b. 662,288
c. 662,458
d. 650,000
Adjusted Inventories
a. 3,467.100
b. 3,637,450
c. 3,645,100
d. 3,645,100
NRV of Trading Securities
a. 241,820
b. 251,090
c. 245,620
d. 236,350
Adjusted Retained Earnings, end
a. 210,712
b. 1,213,526
c. 705,922
d. 435,922
Accounts receivable
a. 1,968,000
b. 1,809,330
c. 1,891,770
d. 1,806,570
Adjusted Prepaid Rent
a. 70,000
b. None
c. 210,000
d. 210,000
Petty cash
a. 18,625
b. 16,130
c. 16,130
d. 11,375
