PRACTICE PROBLEMS You have been engaged to audit MASIPAG CORPORATION, a new client, for the year ended December 31, 2016. The company prepared the trial balance set forth below, as of December 31, 2016, the close of its second year of operations. Unadjusted Trial Balance Debit P 874,000 Credit Cash Marketable securities-Trading Accounts receivable Allowance for doubtful accounts Notes receivable Discount on notes receivable 382.000 1,040,000 P 11,250 600,000 Accounts receivable - others Inventory, December 31, 2016 1,551,500 Prepaid expenses 369,000 Long-term bond investment 738,300 Land and building 4,512,500 Accumulated depreciation - Building Equipment 1,674,000 Accumulated depreciation - Equipment Other assets 180,000 50,000 123 Accounts payable Bank loan payable Accrued expenses payable Other current liabilities Income taxes payable Estimated warranties Ordinary share capital Additional paid-in capital Retained earnings, December 31, 2015 Sales Cost of sales Operating expenses Other income Other expenses Provision for income tax 642,000 1,500,000 59,000 50,000 197,800 55,000 5,000,000 1,655,250 1,593,220 6,950,000 4,400,000 1,302,537 85,000 75,000 409,683 P17,978,520 P17,978.520 During the course of your audit, you obtained additional information relative to the accounts in the trial balance, as follows: CASH 1) In the audit of Cash, you found out that on December 28, 2016, Masipag recorded and wrote check payments to merchandise suppliers amounting to P500,000. A number of checks amounting to P200,000 were mailed on January 5, 2017. 2) On December 29, 2016, a customer's check for P10,000 was returned by the bank and marked "DAUD" (drawn against uncleared deposit). Corresponding entry was made by the client on January 3, 2017. 3) Verification of the other reconciling items in the bank reconciliation statement as of December 31, 2016 yielded the following findings: a) A bank debit memo dated December 15, 2016 for P412,500 representing payment of a six-month loan inclusive of interest of P12,500. b) Several bank deposits directly made by the customer in December, 2016 totaling P75,000. c) Bank charges for December, 2016 amounting to P1,500. d) Interest income on various savings account deposits, net of 20% withholding tax, P16,000. e) Undeposited collections from customers P35,000 received by the bank on January 2, 2017. 4) Included in the cash account is petty cash fund of P10,000. Among the fund items found during the January 2, 2017 count were: Currency and coins IOUS of employees dated December 29, 2016 Unreplenished vouchers for expenses dated December 30, 2016 Personal check of the Petty cash custodian dated January 5, 2017 Total MARKETABLE SECURITIES-TRADING P 3,000 2,000 2,000 3,000 P 10.000 5) Analysis of the Marketable Securities revealed the recording of the following transactions: 2016 Debit Credit January 15 Purchased 20,000 shares of Electro Company P500,000 July 15 Received cash dividend P 40,000 September 30 Received 2,000 shares November 30 dividend, market value per share was P27 (Note 1) Sold 4,400 shares for P30 per share 54,000 132.000 December 31 Balance 554,000 172,000 382,000 P554.000 P554,000 Note 1 Dividend income was credited for the same amount. Note 2 Market value per share of Electro Company as of December 31, 2016 was P31. ACCOUNTS RECEIVABLE 6) Analysis of accounting records revealed that all receivables are being recorded in a single account - Accounts Receivable. The entries to this account are summarized below: 125 Debits January 1 Balance after deducting credit balance of P20,000 Charge sales P 530,000 6,505,900 Charge for goods out on consignment (Note 1) 750,000 Refund to customers for January 1 credit balance 20,000 Claim against common carrier for shipping damages 30,000 IOUS from employees 5,000 Advances to suppliers 50,000 P7.890,900 Credits Collections from customers, including overpayment of P50,000 P6,500,000 Write offs 30,000 Merchandise returns and allowances 55,900 Collections from consignees 250,000 Collections on carrier claims 15,000 6,850,900 December 31, 2016 balance 1,040,000 P7.890.900 Note 1 Goods delivered to consignees were marked up at 25% of cost. Unsold goods in the possession of the consignees as of December 31, 2016 costing P400,000 were not included in the ending inventory. ALLOWANCE FOR DOUBTFUL ACCOUNTS Based on the analysis of the collectibility of the outstanding receivables of the company, this account should be adjusted to 7.5% of accounts receivable-trade. NOTES RECEIVABLE 7) On December 1, 2016, Masipag sold land in exchange for a P600,000 non-interest, 1 year promissory note. The 10% interest rate was the going market rate for similar notes. Masipag had paid P220,000 to acquire the land in 2012. The accountant made the following entry relative to this transaction: Notes receivable Land Other income-gain 600,000 220,000 380,000 126 INVENTORIES 8) You observed the physical inventory of goods in the warehouse on December 31, 2016 and were satisfied that it was properly taken. You found out that at December 31, 2016 the last receiving report (RR) used was 1063 and that no shipment had been made on any sales invoices (SI) with numbers larger than no. 968. Inventory on December 31, 2016 per client's list amounted to P1,551,500. You also obtained the following additional information: a) Included in the physical inventory were goods which had been purchased and received on RR no. 1060 but for which an invoice was not received until 2017. The cost was P60,000. b) A truckload of goods costing P25,000 en route to Masipag Company on December 31, 2016 was received on receiving report no. 1064. The material was shipped FOB shipping point. c) Goods exposed to rain while in transit and deemed unsalable were included in the physical inventory. Their invoice cost was P12,500 and freight charge of P3,500 had been paid on the goods and included in inventory. Claim has already been filed with the insurance company. d) Sales invoices nos. 969 and 970 for P13,000 dated December 31, 2016 were recorded in the sales book on the same date. PREPAID EXPENSES 9) Prepaid expenses consist of Prepaid insurance (Note 1) Office supplies unused (Note 2) Advance rental and deposit on lease (Note 3) Total P. 60,000 9,000 300,000 P 369,000 Note 1 In 2016, Masipag purchased two insurance policies covering a period of one year from the date the policy premium was paid for. Details follow: Motor Policy coverage of P1,000,000 taken on March 1, 2016 P 45,000 Inventory Policy coverage of P2,000,000 taken on June 1, 2016 15,000 P 60.000 Additional findings: a) Upon acquisition, the land was independently appraised at P1,150,000 and the building at P3,450,000. b) Company computes depreciation using the straight-line method. c) The building is expected to have a residual value of 10% of its cost basis at the end of its 20-year life. The building was placed in service on April 1, 2016. EQUIPMENT 12) Masipag Company acquired a used delivery truck for P543,500 on July 1, 2016. The following expenditures were made upon acquisition and debited likewise to Equipment account: New tires Body repair and paint Installation of special shelves One-year insurance premium P40,500 44,500 25,500 20,000 Management expected the truck to be of service for four years and to be driven a total of 80,000 kilometers. Expected salvage value is P100,000. Depreciation has not been provided on this truck and will be computed using service quantity-kilometers. The truck was driven 8,000 kilometers from August to December, 2016. ACCOUNTS PAYABLE 13) Accounts payable account includes deposits from customers amounting to P50,000. ESTIMATED WARRANTIES 14) Masipag has a one-year product warranty on selected items. The estimated warranty liability on sales made during 2015 and still outstanding as of December 31, 2015 amounted to P55,000. The warranty costs on sales made in 2016 are estimated at P145,000. The actual warranty costs incurred during 2016 are as follows: Warranty claims honored on 2015 sales Warranty claims honored on 2016 sales Total P 55,000 75,000 P 130,000 Note 2 Inventory of supplies as of December 31, 2016 revealed that P4.000 were still unused at year-end. Note 3 Masipag renewed the lease contract for 3 years with Realtors, Inc. subject to renewal every three years with a priority right to buy the property if the owner decides to sell it later on. The company paid a deposit equivalent to three months rental and advance rental for a year. The lease contract states a monthly rental of P20,000 and became effective July 1, 2016. LONG-TERM BOND INVESTMENT 10) On June 1, 2016, Masipag purchased as a long-term investment 800 of the P1,000 face value, 8% bonds of Universal Corporation for P738,300. The bonds were purchased to yield 10% interest. Interest is payable semiannually on December 1 and June 1. The bonds mature on June 1, 2021. Masipag uses the effective interest method of amortization. The only other entry made by the company relative to this investment was for the receipt of interest of P32,000 on December 1, 2016. LAND AND BUILDING 11) Masipag recently acquired a building and the surrounding land. The company's accountant established a single Land and Building account and has made the following entries: Land and Building 2016 January 3 Acquisition price Account P4,250,000 January 3 Prepayment of insurance on building (2 years) 55,000 March 7 April 1 Rnovation costs on building 425,000 Entertainment cost to familiarize the public with new facility opened that day 20,000 P4,750,000 December 31 Depreciation for 2016, computed by straight-line method with 20-year life 237,500 Balance P4,512,500 128 Upon payment of the above, the bookkeeper debited P130,000 to warranty expense. OTHER EXPENSES 15) During December 2016 a competitor company filed a suit against Masipag claiming P100,000 in damages. Masipag's legal counsel believes that an unfavorable outcome is very remote. Masipag however wanted to be conservative and decided to set up the loss and estimated liability of P50,000. This was included in the other current liabilities account. 16) The 33% effective tax was determined to be appropriate for calculating the provision for income taxes for the year ended December 31, 2016. Ignore computation of deferred portion of income taxes. REQUIRED: Prepare audited statement of financial position and statement of profit or loss and comprehensive income as of December 31, 2016