REQUIREMENT: Statement of financial position You are given by the Controller, JVC Humabol, of Modular Generators the trial balance before adjustments dated December 31,

REQUIREMENT: Statement of financial position
You are given by the Controller, JVC Humabol, of Modular Generators the trial balance before adjustments dated December 31, 2022 only in the month of January, 2023. The company, organized under the provisions of the Corporation Law of the Philippines three years ago in the month of January, 2020, during the height of the power shutdown, is still experiencing brisk sales of generators and now concentrates marketing of the same in the outskirts of the main cities in the Philippines. The generators are better known in the market as “Light It.” In addition to giving warranties to cover against defects for every generator sold, the company also offers maintenance contract for the same after the warranty period has expired. It also accepts repairs of other brands of generators as well.
You noted the following information necessary to be able to prepare the adjustments during the course of your examination.
The company banks with Capitol Development Bank and prepares reconciliation of the bank and Book balances on a regular monthly basis. The December 31, 2022 reconciliation shows a balance per bank of Php 581,050, balance per books of Php 627,000, outstanding checks of Php 84,300, deposits in transit of Php 120,000, interest earned on the bank balance of Php 1,250, & service charges of Php 400. Included in the bank statement was a canceled check the company had failed to record. The check was in payment of an accounts payable. Further, the cash account includes an Php 80,000 sinking fund deposited with the bank for the retirement of bonds issued on a long-term basis.
An examination of customers’ accounts shows that accounts totaling Php 4,500 should be written off as uncollectible. In addition, it has been the policy of the company to set up an allowance account equivalent to 3% of the accounts receivable at the end of the period.
Modular Generators was in possession of generators on consignment basis from Digital, Inc. as of December 31, 2021. The Php 40,000 worth of generators was included in the ending inventory of 2021. However, the consigned generators were not recorded as purchases.
Modular generators shipped on December 24, 2021 a generator to Inter shipping Lines, Inc. on terms, FOB Destination. The generator was sold for Php 60,000, and it arrived January 28, 2022. The generators cost Php 40,000, the sale then being recorded in December of 2021 and excluded from the 2021 inventory as well.
Generators ordered December 16, 2022 costing Php 106,000 were shipped to Modular Generators on
December 30 on terms, FOB shipping point. The invoice was received December 30 and the purchase was recorded. However, the goods were not part of the December 31, 2022, physical count since it arrived only on January 5, 2023.
The notes receivable in the amount of Php 160,000 was received from Adventura Isla, a resort hotel. It was a 90-day, 15% note dated November 2, 2022. No interest has been accrued on the note as of December 31, 2022
Prepayments in the amount of Php 363,000 is broken down into Prepaid Insurance of Php 120,000, Office Supplies Unused of Php 18,000 and Advance Rental and Deposit on Lease of Php 225,000.
In the year 2022, Modular Generators purchased two insurance coverages, one for four (4) motor vehicles and the other one to cover the cost of the inventory of generators against fire. The face value of the motor policy is P2M while that of the inventory is P4M. The coverage for both is a period of one year counting from the date the policy premium was paid for. The motor policy coverage was taken August 31, 2022 for a premium of P90,000, while that of the inventory was taken last October 1, 2022 for a premium of P30,000.
To be able to save on transportation costs, the purchasing manager sees to it that office supplies are bought not from the regular bookstores but from the retailers of the same located in the Binondo’ areas of the City of Manila. They realized that this arrangement could lead to savings of around 25% to 30%. You asked for an inventory of the supplies as of December 31, 2022 and found out that P11,600 were still unused at year-end.
In the year 2022, the company renewed the lease contract, this time for 3 years with REALTORS, INC., subject to renewal every 3 years, with a priority right to buy the property in case the owner decides to sell later on. Management is expected to exercise the renewal option. A deposit equivalent to three months rental and advance rental for a year was given and the rest was in the form of postdated checks to cover the rental for the last two years of the lease contract. Despite a quite stiff arrangement, management of Modular Generators agreed due to the intensified development in the area requiring use of generators extensively as well as the store being located right in the heart of the commercial center in a Metro Manila Area. The lease contract states a monthly rental of Php 15,000, and became effective July 1, 2022.
The Investment and Funds section includes cash fund for future store expansion, organization costs and the cash surrender value of the life insurance policy taken on the life of its president, K.C. Luminaw. It was decided by the board of directors a few years earlier to take advantage of the liquidity position of the company be setting aside funds for the construction of the store site in the future. This amount has a total of Php 250,000. The president, the company being a closely held corporation, is an indispensable person, being the “think tank” of the generator business. The cash surrender value of the policy taken on the life of the president where the company is the sole beneficiary is 60,000. The organization cost was incurred at the inception of the company. The organization cost of Php 40,000 represents the balance of the amount chargeable to operations for the next 2 years counting from the start of the accounting period 2022.
The Property, Plant and Equipment includes land held for future store site, motor vehicles and equipment.
The piece of land to be used as future store site was bought several years back and is located in Santa Rosa, Laguna wherein industrial estates are rising one after the other. It was bought at a cost of P300,000, a price lower than the zonal valuation in the area.
The company was granted by the Bureau of Internal Revenue a permit to use depreciation methods other than the straight line method.
The Motor vehicles are being depredated under the production method of providing for depredation. They were purchased 3 days after the company was incorporated three years ago for Php 2M. Modular Generators has estimated that the trucks will be driven 450,000 kilometers by studying the kind of terrain the company services. The company further estimated that the motor vehicles shall have a salvage value of P200,000. Through December 31, 2022, the motor vehicles have a combined mileage as follows: Number of kilometers driven in 2022 – 110,000; 2021 – 105,000; 2020 – 95,000.
Two days after incorporation in 2020, Modular Generators acquired equipment to service all inventory items sold. Some items of equipment are used to check on the quality of the generators sold and others are used to repair defective generator sets. The equipment with a cost of Php 600,000 and an estimated salvage value of P40,000 has an estimated useful life of 7 years and depredation is computed based on sum-of-the-years digits method.
Modular Generators was paid a total of Php 80,000 by a handful of owners of generator sets who took advantage of the recently launched maintenance scheme of the company where a LIGHT IT customer is given free maintenance parts and services for a period of 1 year for free by just paying an annual retainer amount of Php 5,000. The amount of Php 80,000 was received September 30, 2022 and was initially recorded as Accounts Payable.
The expected cost of servicing the generators sold all of which carry a one-year warranty is estimated to be 3% of the sales for the year. On April 1, 2022, Modular Generators issued a P500,000 10-year, 12% bonds, at P515,000. Interest is paid annually every April 1 and uses the straight line method of amortization.
The Notes Payable resulted from the discounting arrangement signed by the president of Modular Generators of a P120,000, 90-day, non-interest bearing note with Philtrust Bank the last day of November, of 2022. Philtrust Bank charges a rate of 16% on the transaction. In January, 2022, Modular Generators remodeled the facade of the building they were leasing. These improvements totaled Php 150,000 and were all recorded in the expense account. The expected life of the improvement is six years.
Modular Generators, being a subsidiary of a conglomerate of companies, issued bonds in the year 2021. In February of 2022, the bonds were selling in the open market at a deep discount because the current market rate of interest was lower than the stated interest on the bonds. Modular Generators took advantage of the opportunity by buying the bonds and recognizing a gain on the early extinguishment of debt of Php 70,000. This gain was recorded as a reduction of operating expenses.
The other items include among others, damages amounting to Php 50,000 and gain from the insurance company settlement of Php 100,000. The Php 50,000 represents loss as a result of damages paid to a customer due to a lawsuit. This stemmed out of the “REPAIR WHILE YOU WAIT- policy of the company. The customer was injured while watching over the repair of the generator. Since that time customers are asked to wait in the customers’ lounge and not allowed inside the repair area.
The gain from insurance settlement of Php 100,000 resulted from an incident when some generator sets were damaged in a fire that occurred in the storage area. The proceeds of the fire policy were greater than the book value of the generators damaged. The event was both infrequent and unusual.
The statement of account for the month of December, 2022 from MERALCO was received on January 14, 2023 while the statement of account from MWSS was received on January 16,2023. Commissions for 2022 were paid in January of 2023. The amounts are Php 30,000, Php 3,000, and Php 117,000, respectively.

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