ARC 416-APPLIED AUDITING J.E.

SAPARIYA
HOMEWORK DEC. 26, 2018
SOLVE THE CASE AND WRITE YOUR SOLUTIONS IN A WHOLE SHEET OF PAPER.

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 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, 2017. 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 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 2018.

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, 2018.

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, 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 P710,000 as payment of notes
payable including interest of P10,000 due on December 26, 2017. 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.

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 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.
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III. 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
Ionics 2,400 49,200 24.00
La Tondena 2,000 67,000 26.00
Selecta 8,000 31,600 1.20
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, 2017.
No interest has been accrued on the note as of December 31, 2017.

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, 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 P140,000.
On November 5, 2017, a check for P420,000 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 P2.4 million. Total payment made on November 16, 2017 for the renewal
amounted to P490,000 which covers the period from November 1, 2017 to November 1, 2018.
No adjustment has 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 P220,000 on
June 10, 2017 and included the same in their office supplies inventory. As at year-end, unused
office supplies amount to P102,500.
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VI. AUDIT OF INVENTORIES

A physical count of inventories was conducted simultaneously in all stores on December 29

and 20, 2017. Your review of the list submitted by the accountant disclosed the following:
1. Some deliveries made in December 2017 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, 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 P268,000 on June 30, 2017. 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, 2017, realizing no salvage value.
The cost of these equipment amounted to P165,520 with an accumulated depreciation of
P138,620 on December 31, 2017. Depreciation booked from October 1, 2017 to year-end
was P10,480. No entry was made on the disposal of the property.

VIII. AUDIT OF ACCRUED EXPENSES

Some expenses for December 2017 were recorded when paid in January 2018 which included
the following:
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 1, 2017. Accrued interest on this loan was not
taken up at year-end.
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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, 2017, payable on January 31, 2018.

Ayala Merchants Corporation

UNADJUSTED TRIAL BALANCE
December 31, 2017

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 insurance 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 5,400,000
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 P32,836,880

Determine the adjusted balances of the following: (Ignore tax implications)

1. Petty cash fund
A. P37,250 B. P60,000 C. P22,750 D. P32,260

2. Cash in bank
A. P522,650 B. P450,650 C. P1,056,000 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 C. P3,783,540 D. P3,613,140

5. Allowance for doubtful accounts

A. P110,360 B. P152,640 C. P130,316 D. P88,217
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6. Notes and interest receivable

A. P1,331,960 B. P1,332,160 C. P1,332,500 D. P1,300,000

7. Inventories
A. P6,934,200 B. P7,274,900 C. P7,290,200 D. P6,780,400

8. Prepaid insurance
A. P449,167 B. P408,333 C. P490,000 D. P428,750

9. Prepaid rent
A. P140,000 B. P 0 C. P420,000 D. P280,000

10. Prepaid advertising

A. P325,000 B. P640,000 C. P373,334 D. P315,000

11. Office supplies inventory

A. P258,500 B. P117,500 C. P361,000 D. P102,500

12. Total current assets

A. P14,0333,612 B. P13,523,866 C. P13,677,666 D. P13,537,666

13. Property, plant, and equipment

A. P4,068,400 B. P2,905,228 C. P3,946,280 D. P3,902,880

14. Accumulated depreciation

A. P1,038,880 B. P1,041,050 C. P1,177,500 D. P1,179,672

15. Accounts payable

A. P2,525,360 B. P2,428,320 C. P2,597,360 D. P2,356,320

16. Interest payable

A. P104,000 B. P16,178 C. P4,000 D. P27,644

17. Total current liabilities

A. P6,803,798 B. P6,103,798 C. P6,054,360 D. P5,603,798

18. Sales
A. P13,068,440 B. P13,078,000 C. P13,224,940 D. P12,339,500

19. Cost of goods sold

A. P8,034,000 B. P8,236,200 C. P8,018,700 D. P8,374,700

20. Operating expenses

A. P4,296,514 B. P3,357,000 C. P4,341,514 D. P4,621,514

END