COMPREHENSIVE PROBLEM 2

Balitao Merchandising, of Inday Balitao, is a sole proprietorship seeking a loan from PCI
Bank.  The bank requires Balitao to prepare a financial statement based on accrual basis. 
Balitao which is using the cash basis asked a friend to look for an accountant to convert his
financial statements.  The trial balance as of December 31, 2008 is as follows:
Debit Credit
Cash on hand and in banks P  2,600,000
Accounts receivable, 12/31/07 14,800,000
Allowance for doubtful accounts P  750,000
Merchandise inventory, 12/31/07 37,500,000
Equipment 59,750,000
Accumulated depreciation 9,000,000
Accounts payable, 12/31/07 16,300,000
Accrued bond interest payable, 1,500,000
12/31/07
Sss premiums withheld 1,200,000
First mortgage bond payable 30,000,000
Balitao, drawing 2,200,000
Balitao, capital, 12/31/07 68,870,000
Sales 158,000,000
Purchases 89,700,000
Salaries 48,200,000
Sss premiums 5,600,000
Insurance 3,600,000
Rent 12,000,000
Utilities 5,100,000
Doubtful accounts expense 70,000
Miscellaneous operating expenses 800,000
Loss due to typhoon 700,000
Bond interest expense 3,000,000
P  285,620,000 P  285,620,000

Your investigations revealed the following information:

1. The company has cash in bank amounting to P2,430,000.   Late in December 2008,
the bank returned a P80,000 check marked DAUD.  This check was cashed out of
cash receipts as an accommodation to a customer with the approval of
management.  No entry was made for the customer’s check since this was
redeposited and cleared by the bank on January 17, 2009.  The bank also charged
Balitao’s account for P15,000 as a service charge.
2. The allowance for doubtful accounts in the books of Balitao had a credit balance of
P680,000 at the close of calendar year 2007.  No accounts were written off during
the year but a provision for doubtful accounts of P750,000 was recorded.  The
provision was computed based on the recorded sales for the year.
3. You reviewed an aging schedule prepared by the client and discussed the collectiblity
of the accounts with the credit manager.  It was agreed that P65,000 due from
Captain Barbel Corporation should be written off as it has been outstanding for more
than a year.  After this write-off, the aging schedule shows a total estimated
uncollectible accounts of P870,000
 4. The amount due from customers as of December 31, 2008, before adjustments is
P18,200,000
5. The December 31, 2009 inventory is P42,700,000, based on physical count of goods
priced at cost.
6.  Report of the manager on the losses suffered by the company due to typhoon
Naning in November 2008:
Major repair of office and P  80,000
warehouse
Rehabilitation of machines 130,000
Damaged goods at the factory 490,000
Total P  700,000

As at December 31, 2008, management estimated that an amount between

P500,000 to P600,000 can be recovered from insurance.  On January 17, 2009,
Balitao actually received and recorded as other income the amount of P550,000 from
the insurance company, as payment of insurance claims.

7. On signing the new lease on September 30, 2008, Balitao paid P12,000,000
representing one year’s rent in advance for the lease ending September 30, 2009. 
The P8,400,000 annual rental under the old lease was paid on September 30, 2007
for the lease year ended September 30, 2008.
8. The first mortgage 10% bond payable with a par value of P30,000 matures in 10
years from July 1, 2007 with interest payable every July 1 and January 1.  The bonds
were sold at par value on July 1, 2007
9. On April 1, 2008, Balitao paid P3,600,000 to renew the comprehensive insurance
coverage for one year.  The premium was P2,400,000 on the old policy which
expired on April 1, 2008.
10. Unpaid purchase invoices amounted to P18,900,000 on December 31, 2008
11. Equipment no longer needed (cost P1,000,000; Accumulated Depreciation,
P850,000) was sold for P250,000 cash on January 4, 2008; the cash proceeds were
credited to the equipment account.  Equipment is depreciated at 15% a year, no
depreciation was taken up by the accountant.
12. Balitao received on sale on trial for 20 days on December 11, 2008 and equipment
worth P2,000,000 and issued a promissory note.  The equipment is still with the
client as of December 31, 2008.
13. The company has  a4 month time deposit amounting to P200,000 on December 31,
2008.  It earns interest of 15%.  The amount was value on December 30, 2008.  The
amount was included as part of cash.
14. Accrual expenses at December 31, 2008 and December 31, 2007 were as follows:
12/31/08 12/31/07
Accrued salaries 1,200,000 800,000
Accrued SSS premiums 950,000 720,000
Accrued utilities 820,000 650,000

You are required to apply procedures in converting the financial statements as

required by the bank.  Your answer must be one nearest to the correct answer.

1. The 2008 cash on hand and in banks will be

1. 2,505,000 b. 2,400,000 c. 2,385,000 d. 2,305,000
2. The 2008 accounts receivable will be
a. 18,200,000 b. 18,215,000 c. 18,135,000 d. 14,800,000

3. The allowance for doubtful accounts will have a 12/31/08 balance of

a. 680,000 b. 685,000 c. 870,000 d. 750,000

4. The 2008 net realizable value of accounts receivable will be

a. 17,515,000 b. 17,345,000 c. 17,385,000 d. 17,465,000

5. Prepaid rent will be shown in the 2008 balance sheet at

a. 6,300,000 b. 9,300,000 c. 3,000,000 d. 9,000,000

6. Prepaid insurance will be shown in the 2008 balance sheet at

a. 2,700,000 b. 900,000 c. 600,000 d. 2,400,000

7. The 2008 total repayments will be

a. 9,600,000 b. 9,900,000 c. 9,000,000 d. 600,000

8. The 2008 inventories will be

a. 37,500,000 b. 57,300,000 c. 47,200,000 d. 42,700,000

9. Equipment will be shown in the 2008 balance sheet at

a. 61,000,000 b. 59,750,000 c. 59,000,000 d. 60,750,000

10. The 2008 accumulated depreciation will be at

a. 9,000,000 b. 17,812,500 c. 17,000,000 d. 18,700,000

11. The 2008 accrued expenses payable will be

a. 2,020,000 b. 2,170,000 c. 2790,000 d. 2,970,000

12. The balance of Bilatao, Capital as of December 31, 2007, as adjusted:

a. 68,870,000 b. 73,600,000 c.  66,700,000 d. 75,770,000

13. The 2008 sales will be

a. 161,400,000 b. 158,000,000 c. 161,415,000 d.
162,800,000
14. The 2008 purchases will be
a. 89,700,000 b. 90,800,000 c. 92,300,000 d. 95,700,000

15. The 2008 salaries will be

a. 49,000,000 b. 48,600,000 c. 48,200,000 d. 48,000,000

16. The 2008 cost of sales

a. 129,800,000 b. 84,500,000 c. 85,400,000 d. 87,100,000

17. The SSS premiums that will be reported in the 2008 income statements 
a. 5,830,000 b. 5,600,000 c. 6,550,000 d. 5,110,000

18. The balance of bond interest payable as of 12/31/08

a. 3,000,000 b. 750,000 c. 1,500,000 d. 4,500,000

19. The 2008 doubtful accounts expense 

a. 255,000 b. 70,000 c. 185,000 d. 120,000

20. As a result of typhoon Naning, Balitao should be recognize a loss amounting to

a. 500,000 b. 150,000 c. 600,000 d. 550,000

21. The 2008 insurance expense

a. 2,700,000 b. 3,600,000 c. 2,400,000 d. 3,300,000

22. The 2008 rent expense will be

a. 8,400,000 b. 12,000,000 c. 9,300,000 d. 20,400,000

23. The 2008 depreciation expense will be

a. 8,850,000 b. 8,962,500 c. 9,112,500 d. 9,000,000

24. The balance of Balitao, Capital as of December 31, 2008

a. 68,870,000 b. 57,900,000 c. 62,430,000 d. 60,430,000