AC324 Ayala PDF

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AYALA MERCHANTS CORPORATIONProblemYou have been assigned to audit the financial statements of Ayala Merchants Corporation for theyear 2017. The company is a dealer of appliances and has several branches in metro manila. Itsmain office is located in Makati City. You were given by the company controll...

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AYALA MERCHANTS CORPORATION

Problem You have been assigned to audit the financial statements of Ayala Merchants Corporation for the year 2017. 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: I. Audit of Cash A cash count was conducted by your staff on January 7, 2018. The petty cash fund of P30, 000 maintained by the company on an imprest basis reflected a balance of {11,375. Unreplenished expenses totaled P18, 625 of which P4, 755 pertains to January 2018.

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

528,000

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 collection from various customers whose accounts have been outstanding for less than three months. These checks were actually deposited on January 8, 2018 2. Included in the deposit in transit is a check from a customer for P31,500 which was returned by the bank on December 27,2017 for insufficiency of funds. This account has

been outstanding for over six months. The check was replaced by the customer on January 15, 2018. 3. The bank debited the account of Ayala Merchants for P355,000 as payment of notes payable including interest of P5,000 due on December 26, 201. 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.

II. 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

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. III. Audit of Marketable Securities – Trading The company’s equity portfolio as of year-end showed the following: No. of Issue

Market Value Shares

Cost

Per share

Bacnotan Cement

3,500

P54,250

P16

Fil-Estate

5,000

97,500

19.75

Ionics

1,200

24,600

24

La Tondena

1,000

33,500

26

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. IV. Audit of Notes Receivables The notes 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, 2017. No interest has been accrued on the note as of December 31, 2017. V. Audit of Prepayments

Prepaid expenses account consist of the following: Prepaid advertising

P320,000

Prepaid insurance

245,000

Prepaid rent

210,000

Unused office supplies

180,000 955,000

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 P320, 000, 50,000 of which is for the Christmas promotion while the balance is for the regular and which will run for one year starting on August 1, 2017. Payment was made on July 20, 2017 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 70,000. On November 5, 2017, a check for 210,000 was issued in payment of three-month rental as per renewal contract which was effective on November 1, 2017. 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 P 1.2 million. Total payment made on November 16, 2017 for the renewal amounted to 245,000 which covers the period from November 1, 2017 to November 1, 2018. No adjustment has yet been made as of December 31, 2017.

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 P 110,000 on June 10, 2017 and included the same in their office supplies inventory. As at year-end, unused office supplies amount to P 51,250. VI. Audit of Inventories A physical count of inventories was conducted simultaneously in all stores on December 29 and 30, 2017. Your review of the list submitted by the accountant disclosed the following: 1. Some deliveries made on December 2017 have not been invoiced and recorded as of year-end. These items had a selling price of P 73, 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 P 178,000 were ending inventory list. 3. Some appliances worth P69, 250 were recorded twice in the inventory list. 4. Goods costing P76, 900 purchased and paid on December 26 was received on January 4, 2018. The goods were shipped by the supplier on December 28, FOB shipping point. VII. Audit of Property, Plant and Equipment The company purchased additional equipment worth P134, 000 on June 30, were charged to repairs and maintenance account: Freight-in P15, 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, 2017, realizing no salvage value. The cost of these equipment amounted to P 82, 760 with an accumulated depreciation of P69, 310 as of December 31, 2017. Depreciation booked from October 1, 2017 to year-end was P5, 240. No entry was made on the disposal of the property. VIII. Audit of Accrued Expenses Some expenses for December 2017 were paid in January 2018. 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

IX. Audit of Liabilities

Ayala Merchants obtained a one-year loan from Chartered Bank amounting to P 1.3 million at an interest of 16% per annum on October 16, 2017. Accrued interest on this loan was not taken up at year-end. The company also offered maintenance service contracts on annual basis. Cash receipts from such contracts amounted to ₱ 320,000, ₱ 75,000 of which is effective from May 1, 2017 to May 1, 2018 and the balance is from September 1, 2017 to September 1, 2018. Saud amount was credited to unearned service income. No adjustment has yet been booked as of year-end. On May 1, 2017, Ayala Merchants issued a ₱ 2,500,000 face value bonds at 90. The bonds will mature in five years and pay interest at 12% per annum payable semi-annually on May 1 and November 1. X. Other Audit Findings In October 2017, Ayala Merchants became involved in a tax dispute with the BIR pertaining to 2015 income tax. In December 2017, an amount of ₱ 250,000 was assessed against the company by the BIR. 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 of the minutes of meeting showed that a 10%cash dividend was declared to shareholders of record as of December 15, 2017, payable on January 31, 2018. AYALA MERCHANTS CORPORATION WORKING STATEMENT OF FINANCIAL POSITION December 31, 2017 PER BOOKS CURRENT ASSETS Petty Cash Trade Cash Marketable Securities Allowance for decline in value of securities Accounts Receivable – Trade Allowance for Doubtful Accounts Notes Receivable Interest Receivable Inventories Prepayments: Prepaid Advertising Prepaid Insurance Prepaid Rent Other Supplies Inventory Total

₱ 30,000 528,000 251,090 ( 9,270) 1,809,330 ( 55,180) 650,000 -3,637,450 320,000 245,000 210,000 180,500 955,500

AUDIT ADJUSTMENTS

FINAL BALANCE

Total Current Assets

7,796,920

PROPERTY, PLANT AND EQUIPMENT Furniture and fixtures Delivery equipment Total Less: Accumulated depreciation Net Book-Value Other Assets TOTAL ASSETS CURRENT LIABILITIES Accounts payable - Trade Notes payable Accrued expenses Interest payable Income tax payable Dividends payable Unearned service income Estimated liability for taxes Total Current Liabilities LONG-TERM LIABILITIES Bonds Payable Discounts on bonds payable Total Long Term Liabilities SHAREHOLDER’S EQUITY Paid-in capital Retained earnings Total Shareholders’ Equity TOTAL LIABILITIES & SHAREHOLDERS EQUITY

649,200 1,385,000 2,034,200 (588,750) 1,445,450 _274,000 P 9,516.370 P 858,160 1,650,000 84,520 -440,164 -320,000 --_ 3,352,844 2,500,000 (250,000) 2,250,000 2,700,000 1,213,526 3,913,526 P 9,516,370

AYALA MERCHANTS CORPORATION WORKING PROFIT AND LOSS Year Ended December 31, 2017 PER AUDIT ADJUSTED BOOKS ADJUSTMENTS_ BALANCE__ 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 Changes (312,640) Income before taxes 1,257,610 Provision for income tax (440,154) Net income 817,446 Retained earnings, beginning 396,080 Cash dividends --____ Retained earnings, end P 1,213,526

A

B

C

D

1.Petty Cash

P18,625

P16,130

P30,000

P11,375

2.Cash

261,325

225,325

122,425

528,000

3.Net realizable value of marketable securities

241,820

251,090

245,620

236,350

4.Accounts Receivable

1,968,000

1,809,330

1,891,770

1,806,570

5.Allowance for doubtful accounts 44,108

55,180

76,320

65,158

6.Notes and interest receivable

662,188

662,288

662,458

650,000

7.Inventories

3,647,100

3,637,450

3,645,100

3,390,000

8.Prepaid Insurance

224,583

204,166

245,000

214,375

9.Prepaid rent

70,000

none

210,000

140,000

10.Prepaid advertising

162,500

320,000

186,667

157,500

11.Office supplies inventory

129,250

58,750

180,500

51,250

12.Total prepayments

487,916

552,916

482,916

955,500

13.Total current assets

7,013,041

6,758,141

6,835,041

6,765,041

14.Property, plant & equipment

2,034,200

1,452,614

1,973,140

1,951,440

15. Accumulated depreciation

519,440

520,526

588,750

589,836

16.Accounts Payable

942,680

894,160

978,680

858,160

17.Notes Payable

1,393,911

1,650,000

1,300,000

350,000

18. Interest Payable

93,911

50,000

43,911

55,733

19.Income Tax Payable

440,164

260,171

180,187

204,906

20.Accrued Expenses

84,520

284,931

191,020

106,500

21.Unearned Service Income

320,000

188,333

131,667

213,333

22.Dividends Payable

405,000

270,000

540,000

None

23.Total current liabilities

3,742,330

3,392,330

3,367,611

3,142,330

24.Carrying value of bonds payable

2,500,000

2,283,333

2,466,667

2,250,000

25.Retained Earnings

210,712

1,213,526

705,992

435,922

26.Sales

6,534,220

6,612,470

6,539,000

6,649,750

27.Cost of goods sold

4,017,000

4,118,100

4,009,350

4,187,350

28. Gross profit

2,335,870

2,425,120

2,460,400

2,552,000

29. Operating expenses

2,148,258

2,310,758

1,678,500

2,170,758

30.Income from operations

843,500

182,112

211,242

114,362

31. Other income

858,417

726,750

739,208

870,875

32. Other charges

470,419

420,419

312,640

437,086

33. Income before taxes

514,818

743,347

1,257,610

757,019

34. Net Income

309,912

334,632

483,176

817,446

35. Retained Earnings, beginning

396,080

146,080

250,000

185,992

Solution: Illustrative Audit case 23.2 A. AUDIT ADJUSTMENTS 1.

2.

3.

4.

5.

Operating Expenses Petty Cash Fund

13, 870

Accounts Receivable Cash

53, 700

Accounts Receivable Cash

31,500

Notes Payable Other Changes Cash

350,000 5,000

13, 870

53,700 31, 500

355,000

Cash

36,000 Accounts Payable

6.

7.

8.

36,000

Other Charges Cash

Allowance for Doubtful Accounts Accounts Receivable

1,375 1,375

76,230 76,230

Other Charges 5,470 Allowance for Decline in Value of Securities 5,470 Bacnotan Cement Fil-Estate Ionics La Tondeña Selecta Union Bank

3,500 x P16.00 5,000 x 19.75 1,200 x 24.00 1,000 x 26.00 4,000 x 1.20 = 800 x 27.50

= = = =

P 56,000 98,750 28,800 26,000 4,800 = 22,000

Total Market Value

P236,350

Total Cost Total Market Value

P251,090 (236,350)

Required Balance Balance per Books

14,740 ( 9,270)

Adjustment

P

5,470

9.

Interest Receivable Other Income (P650,000 x 15% x 46/360)

10. Operating Expenses Prepaid Advertising Christmas Promotion Regular Promotion (320,000 – P50, 000) X 5/12 =

12, 458 12, 458 P162, 500 P162, 500 P 50,000 112, 500 P 162, 500

11. Operating Expenses Prepaid Rent (P70,000 X 2)

P140,000

12. Operating Expenses (P245, 000 x 2/12) Prepaid Insurance

P40,833

13. Operating Expenses Office Supplies Inventory (P180, 500 – P51,250)

P129,250

14. Accounts Receivable Sales

P73,470

15. Cost of Goods sold Inventories

P178,000

16. Cost of Goods sold Inventories

P69,250

17. Inventories Cost of Goods sold

P76,900

18. Delivery Equipment Operating Expenses

P21,700

P140,000

P40,833 P129,250

P73,470 P178,000

P69,250 P76,900 P21,700

19. Operating Expenses Accumulated Depreciation (P21,700/10 yrs.) x 6/12)

P1,085

20. Accumulated Depreciation Other Charges Delivery Equipment

P64,070 P18,690

21. Accumulated Depreciation Operating Expenses

P5,240

22. Operating Expenses

P1,085

P82,760 P5,240 P106,500

Accrued Expenses

P106,500

23. Other Charges Interest Payable (1,300,000 x16%x76/360)

24. Unearned Service Income Other Income

P43,911 P82,760

131,667 131,667

P75,000 x 8/12 = P50,000 P245,000 x 4/12 = 81,667 P131,667 25. Other Charges 50,000 Interest Payable (P2,500,000 x 12% x 2/12)

50,000

26. Other Charges 33,333 Discount on Bonds Payable (P250,000/5yrs) x 8/12

33,333

27. Retained Earnings Estimated Liability for Income Tax

250,000 250,000

28. Retained Earnings Dividend Payable (P2,700,000 x 10%)

270,000

29. Operating Expenses Allowance for Doubtful Accounts

270,000 65,158 65,158

Accounts Receivable

Required Allowance

Per Books

Adjustment

As Adjusted

%

Amount

Less than 3 months 3 to 6 months Over 6 months

P1,250,480 (+P53,700 + P73,470) = 421,600 = 137,250 = P1,809,330

P1,377,650 421,600 92.520 P1,891,770

1% 5% 10%

P13,776 21,080 9,252 P44,108

Allowance for Doubtful Accounts: Balance, per books P55,180 Accounts Written-off (76,230) Debit Balance P21,050

Required Balance 44,108 Doubtful Accounts Expense P65,158 30. Income Tax Payable Provision for Income Tax

259,977 259,977

Provision for Income Tax, Per Audit Provision for Income Tax, Per Books

P180,187 440.164 P259,997

B. ANSWER TO THE MULTIPLE CHOICE QUESTION

ACCOUNT 1.Petty Cash Fund 2.Cash 3.Net Realizable Value Of Marketable Securities

ADJUSTED BALANCE P 16,130 122,425

B C

236,350

D

4.Accounts Receivable

1,891,770

C

5.Alowance for Doubtful Accounts

44, 1408

A

6.Notes and Interest Receivable

662, 458

C

7.Inventories

3,267,100

A

8.Prepaid Insurance

204,166

B

9.Prepaid rent

70,000

A

10. Prepaid Advertising

157,500

D

11.Office Supplies Inventory

51,250

D

12.Total Prepayments

482,916

C

13.Total Current Assets

6,835,041

C

14.Property Plant and Equipment

1,973,140

C

15.Accumulated Depreciation

520,526

B

16.Accounts Payable

89...