aHPC's Distributors

HPC has 10 leading theater chain owners all over the country. HPC and distributors share in box-
office receipts. Distributors are required to have cash deposits with HPC and to advance public relations and
publicity expenses. As of December 31, 2013, deposits from HPC's distributors follows; for “Melchora”, P 10
million and for “Walang Hanggan”, P 10 million also.

Under company policy, public relations and publicity expenses are chargeable to selling and
administrative expenses, since effectively, these are incurred to promote the image of the company and not
necessarily a particular movie.

The amount remitted to HPC, as producers's share for “Melchora” was net of refund of distributors
deposits of P10 million and net of HPC's share on public relation and publicity expenses totalling P 4.8
million. HPC failed to recognized these items in the books. During the year, however, HPC provided P 3
million as public relations and publicity expenses, with corresponding credit to accrued expenses and others.

Prepayment and Others

An analysis of this account as of December 31, 2013 includes the following (in thousands)
Research work expenses incurred
for “A woman's revolution” P 3,217
Props set for “Visitacion” 925
Expenses incurred for “Walang Hanggan”
Musical scoring 500
Editing 552
Color processing 1,250
Public relations and publicity 1,620
Advance payment for professional fees
(for actors, directors, etch)
“A woman's revolution” 2,000
Expenses incurred for reshooting some
portions of “Melchora” 3,080
Total P 13,162

The above items should have been closed to their proper accounts.

Accounts Receivables
Included in this account are receivables totalling P 10 million from various “fly by night” producers,
who rented HPC's production facilities during the 20 years of HPC's inactivity. Although these worthless
accounts have not been provided for in the books, management approved your recommendation to write-off
these accounts.

Related Party Transactions

Under a management contract, Galaxy Management Inc., a sister company provides management and
administrative services to HPC, for which HPC was charged P12 million for 2013. This is taken up as selling
and administrative expense in the books.

You have discussed your finding with management, who agreed with your audit adjustments and you
are now ready to prepare the audited financial statements.

HPC-Working Balance Sheet (WBS) Adjustments

December 31, 2013 (in thousands) Per Book Add (Deduct) Per Audit

Current Assets
 Cash P 3,547 3,547
Short Term Investment 9,000 9,000
Accounts Receivable 10,450 (10,000) 450
Motion Picture Inventories & Supplies 22,237 (909) 21,328
Prepayments & Others 13,883 (13,162) 721
59,117 (24,071) 35,046
Property, Plant & Equipment 81,322 208,500 289,822
Accumulated Depreciation 4,052 4,052 8,104
77,270 204,448 281,718
Investment and Rec'ble from Joint Venture 3,000
Joint Venture Funds -
Total Assets P 139,387
Current Liabilities
Accounts Payable P 10,271 10,271
Accrued Expenses & Others 6,234 (3,000) 3,234
Income Tax Payable 5,246
Deposit from Distributors 20,000 (10,000) 10,000
Current Portion-Long Term Debt 10,000 (5,000) 5,000
51,251
Long Term Debt 40,000 5,000 45,000
Joint Venture Contra account -
Shareholders' Equity
Authorized/Paid-up Capital 40,000 40,000
Revaluation Surplus- Land - 208,500 208,500
Retaine Earnings - End 7,636 7,636
47,636
Total Liabilties & Shareholders' Equity P 139,387

HPC-Working Profit and Loss (WPL) Adjustments

Year ended December 31, 2013 (in thousands) Per Book Add (Deduct) Per Audit

Revenues- Production Share P 90,913 14,800 105,713

Cost of Completed Movies & Sold –- 20,555 (20,555)
Gross Income 90,913 (5,755) 85,158
Selling & Admin. Expenses 24,258 632 23,626
Income from Operations 66,655 (5,123) 61,532
Other Income 1,450 1,450
 Net income before tax 68,105 (5,123) 62,982
Provision for income tax 17,729
Net Income 50,376
Deficit- Beg. Of the year 40,740
Retained Earnings -End P 7,636

Instructions:

Read the problem carefully and identify the audit adjustments from the information given. Ignore tax
effects, except for the 20% tax on interest income and the 35% income tax. Fill up your working balance
sheet and working profit and loss. Once you had done this, procee to answering questions.

Requirements:

1. Give the adjusting journal entries on December 31, 2013

2. For item No. 1 to 20, select the answer that the best corresponds to the audited balances as at December
31, 2013 of each of the following accounts, based on information given in the problem (in thousands).

A B C D
1. Cash – B 12.547 3,547 3,892 12,682
2. Short Term investment - A 9,000 9,315 9,394 0
3. Accounts Receivables – C 10,450 844 450 765
4. Motion Pictures inventories – A 21,328 30,341 16,111 22,237
5. Prepayments & Others - B 11,542 721 13,883 5,938
6. PPE -at cost – D 91,322 77,970 73,218 289,822
7. PPE- net – A 281,718 81,322 77,270 289,822
8. Accumulated Depr-2013 – B 4,052 8,104 0 11,254
9. Accounts Payable - A 10,271 13,271 4,505 1,271
10. Accrued Expenses & Others -A 3,234 12,239 4,505 15,234
11. Deposits from Distributors – D 5,200 15,200 20,000 10,000
12. Current Portion -long Term – D 14,000 19,000 10,000 5,000
13. Long-Term debt -A 45,000 40,000 49,000 54,000
14. Capital Stock Paid up -B 52,000 40,000 248,500 49,000
15. Revaluation Surplus-Land -C 281,718 210,000 208,500 289,822
16. Revenues- Prod. Share – C 100,913 95,173 105,713 90,913
17. Cost of Comp Movies & Sold – D 16,503 15,457 0 20,555
18. Selling & Admin Expenses – A 23,626 41,730 27,206 30,206
19. Other Income – B 1,765 1,450 1,844 1,056
20. Depicit(Retaine Earnings), End - C (2,013) 13,254 7,636 7,987
Item number 21 to 25 were noted in the audit of HPC, as indicated in the problem materials. These items will
be disposed of in either one of the following:

a. Address this in your audit report

b. Disclose this in the notes to financial statements
c. Include this in your letter of comments to management together with your recommendations.
d. Both a & b above

21. The company depreciates its property and equipment, on a straight line basis using estimated lives of
these assets ranging from 5 to 10 years. B

22. Land is stated at appraised values, as at December 31, 2013, as determined by an independent
appraiser. B

23. A portion of property and equipment is mortgaged to secure the company's long-term debt. B

24. There seems to be no systematic accumulation of charges pertaining to Motion Picture Inventories as
indicated by those charges to Prepayments and Others. Had this not been adjusted, the erroneous
charges would have led to an understatement of inventories and ultimately, to overstatement of the
reported income for the year. D

25. Under a management contract, HPC is charged P12 million in 2013 by a sister company for
management and administrative expenses. B

-End of Examination-

Accounts Receivable Written – off 10,000

Accounts Receivable 10,000
Expense 13,162
Prepayments & Others 13,162

Property, Plant and Equipment 208,500

Revaluation Surplus – Land 208,500

Public relations and publicity expenses 3,000

Accrued Expense & Others 3,000
Depreciation Expense 4,052
Accumulated Depreciation 4,052
Current Portion Long term Debt 5,000
Long term debt 5,000