PRACTICE PROBLEMS You are engaged to audit the financial statements of Bernadette Ann, Inc. for the year ended May 31, 2015. The unadjusted statement of financial position and statement of profit or loss and comprehensive income are presented below: Cash Bernadette Ann, Inc. Statement of Financial Position May 31, 2015 Accounts receivable Allowance for doubtful accounts Other receivables Inventories Prepaid interest Prepaid rent Investment in bonds Equipment Accumulated depreciation Other assets TOTAL Accounts payable and others Income tax payable Notes payable Current portion of long-term debt Long-term debt Ordinary shares Retained earnings TOTAL P 31,650,000 15,736,058 (1,315,288) 500,000 9,482,200 506,500 500,000 P 57,059,470 P 886,000 P 45,000,394 (22,500.197) P 22,500,197 500,000 P P 80,945,667 P 15,345,667 7,035,000 2,500,000 1,000,000 P 25,880,667 P 9,000,000 P 30,000,000 16,065,000 P 46,065,000 P 80.945,667 114 Bernadette Ann, Inc. Statement of Profit or Loss and Comprehensive Income For the Year Ended May 31, 2015 Net sales Cost of sales Gross income Operating expenses Income from operations Other charges Income before income tax Provision for income tax Net income after tax Retained earnings, beginning Retained earnings, end *At 35% tax rate. P 57,546,360 20,384,180 P 37,162,180 16,762,180 P 20,400,000 300,000 P 20,100,000 7,035,000* P 13,065,000 3,000,000 P 16,065,000 You are now in the process of reviewing the audit conducted by your staff and now concentrating on working papers where possible adjusting journal entries may be drafted to arrive at the adjusted balances as at May 31, 2015. The following are the working papers: CASH-BPI Bank Reconciliation May 31, 2015 Balance per bank statement P 31,292,680 Add (deduct) reconciling items: Deposit in transit (Note 1) 375,250 Outstanding checks (Note 2) ( 435,330) Note charged by the bank (Note 3) 167,400 Fund transfer from UCPB (Note 4) L 50,000) Balance per general ledger P 31,350,000 115 The top schedule for the cash account showed the following accounts with their unadjusted balances: Cash-BPI Cash-UCPB Cash - SBTC P 31,350,000 ( 450,000) 750,000 Balance per statement of financial position P31,650,000 Note I Inclusive of a customer's check in the amount of P75,000 dated April 25, 2015 which up to now is not yet deposited because it has been misplace. Note 2 Includes two checks totaling P57,418 which were among the items counted during the cash count conducted early morning of June 1, 2015. Note 3 This is the maturity value of a two-year note maturing on May 31, 2015. The note bears a 12% interest. Note 4 Upon cross-referencing this with the working paper showing the bank reconciliation with UCPB, whereby the bank balance was reconciled with the general ledger balance, you verified that the P50,000 was appropriately shown as an addition to the bank balance. Working Paper No. 1 Accounts Receivable Reconciliation Between Subsidiary Ledger and General Ledger Balances May 31, 2015 Balance per subsidiary ledger P 16,094,108 Add (deduct) reconciling items: Write-offs (see Working Paper No. 3) ( 750,430) Sales (Note 5) 245,000 Collections (Note 6) 147.380 Balance per general ledger The Company maintains a credit term of n/30. P 15.736,058 116 Note 5 The goods were in transit as at May 31, 2015, terms FOB shipping point. The Company recognized a gross profit of 25% on this sale. Note 6 This was collected from a customer by the Company's branch on May 31, 2015 on sales made on March 25, 2015 and was remitted to the Company on June 15, 2015. Collections from branches are charged to Cash - SBTC account. Working Paper No. 2 Allowance for Doubtful Accounts May 31, 2015 Balance June 1, 2014 Add (deduct) transactions during the year Write-offs of accounts aged 5 years Provision Balance, May 31, 2015 P 1,630,000 ( 750,430) 435,718 P 1,315.288 Based on the Company's past experience, an allowance should be set up based on the following rates: Aging Distribution Current Past Due: 1-30 31-60 61-90 Over 90 Total Per Subsidiary Ledger Percentage P 3,475,380 2 3,234,680 2,875,413 2,948,900 3,559.735 20 5058 10 15 P 16,094,105 Working Paper No. 3 117 Investment in Held-to-Maturity Bonds May 31, 2015 Balance, May 31, 2015 P 886,000 The Company acquired a 5-year, P1,000,000, 12%, payable January 1 and July 1 bonds on April 30, 2015 for P886,000. The bonds will mature on January 1, 2020. Working Paper No. 4 Repairs and Maintenance For the Year Ended May 31, 2015 September, 2014 October, 2014 February, 2015 April, 2015 Balance, May 31, 2015 P 70,000 15,000 5,000 60,000 P 150,000 The total repairs and maintenance is shown as part of the total operating expenses in the statement of profit or loss and comprehensive income. It is the policy of the Company to capitalize expenditures in excess of P50,000. For capitalization purposes, expenditures incurred within the first half of the year are deemed to have been incurred at the start of the year; and expenditures incurred within the last half of the year are deemed to have been incurred at the end of the year. All of the above repairs were made on the Company's equipment. The Company has already depreciated its equipment based on a ten-year life. Working Paper No. 5 REQUIRED: Questions 1 to 20 pertain to the adjusted balances of the different accounts that will be shown either in the statement of financial position or statement of profit or loss and comprehensive income. Select the amount that will best correspond to the final balances pertaining to the accounts indicated. 118 A B C D -cit 1. Total cash in bank 2. Accounts receivable 15,811,058 3. Allowance for doubtful accounts 1,542,879 1,673,065 32.262.398 31,612,398 32.112,398 31,662,398 15,663,678 15,588,678 14,913,248 1,478,318 1,324,134 4. Investment in bonds 846,000 Equipment 45,070,394 Accumulated depreciation 22.513,197 7. Accounts payable and others 15,403,085 8. Income tax payable 5,735,898 9. Notes payable 2,332,600 843,250 848,750 45,130,394 45,000,394 22,507,197 22,515,197 23,413,197 15,853,085 15,903,085 15,795,667 6,800,413 5,432,738 6,958,686 2,365,000 848,678 45,150,394 2,348,600 2,500,000 10. Retained earnings, beginning 2,967,600 2,893,800 3,000.000 2,983.800 11. Cost of sales 20,384,180 20,567,930 20,200,430 20,629.180 12. Operating expenses 16,926,771 15,348,221 14,289,387 16,936,771 13. Other charges 297,485 299,430 353,450 335,450 14. Cash - SBTC 602,620 0 750,000 897,380 15. Accounts receivable under the over 90 days old bracket 2.884,305 3,559,735 2,809,305 2,734,305 16. The required balance of allowance for the current age distribution only 69.508 17. Prepaid interest 538,900 64,608 490,300 74,408 522,700 72,209 506,500 18. Net sales 57,546,360 57,791,360 57,301,360 57,040,930 19. Inventories 9,359,700 9,482,200 9.604,700 9.504.300 20. Income from operations 20,235,409 20,400,000 20,385,419 19.987,958