Wizard Company, a calendar-year sole proprietorship, maintained its books on the cash basis

during the year

Wizard is in the process of negotiating a bank loan to finance the planned expansion of its
business. The bank is requesting 2006 financial statemeInventories 530,000 410,000
Land, building and equipment 660,000 680,000
Accumulated depreciation 185,000 210,000
Investment in S Company 750,000
Accounts payable and accrued expenses 670,000 544,000
Common stocks, P10 par 1,200,000 400,000
Additional paid in capital 140,000 80,000
Retained earnings, end 460,000 356,000nts prepared on the accrual basis of accounting from
Wizard. As Wizard’s external auditor, you were called upon to assist in preparing the financial
statements. The following information were obtained during the course of your engagement:

Wizard Company
Trial Balance
December 31, 2006

Debits Credits
Cash P448,000
Accounts receivable, 12/31/05 283,500
Inventory, 12/31/05 1,085,000
Furniture & Fixtures 2,068,500
Leasehold improvements 787,500
Accumulated depreciation, 12/31/05 P567,000
Accounts payable 297,500
Wizard, Drawings
Wizard, Capital, 12/31/05 2,180,500
Sales 11,427,500
Purchases 5,339,250
Salaries expense 3,045,000
Taxes and licenses 217,000
Insurance expense 152,250
Rent expense 598,500
Utilities expense 220,500
Living expenses 227,500 ______ ___
P14,472,500 P14,472,500

Additional information:
a. At December 31, 2006, amounts due from customers totaled P415,000.

b. Based on the analysis of the above receivables, P20,750 may prove uncollectible.

c. Unpaid invoices for the plant purchases totaled P533,750 and P297,500 at December 31,
2006 and December 31, 2005 respectively.
d. The inventory totaled P1,274,000 based on a physical count of the goods at December 31,
2006. The inventory was priced at cost, which approximates market value.

e. On May 1. 2006, Wizard paid P152,250 to renew its comprehensive insurance coverage
for one year. The premium on the previous policy, which expired on April 30, 2006, was
P136,500.

f. On January 2, 2006, Wizard entered into a twenty-year operating lease for the vacant lot
adjacent Wizard’s retail store used as a parking lot. As agreed in the lease, Wizard paved
and fenced in the lot at a cost of P787,500. The improvements were completed on April
1, 2006, and estimated to have a useful life of fifteen years. No provision for depreciation
has been recorded. Depreciation on furniture and fixtures was P210,000 for 2006.

g. Accrued expenses at December 31, 2006 and 2005 were as follows:

2006 2005
Taxes and licenses P33,750 P20,250
Utilities 36,000 24,750
P69,750 P45,000

h. Wizard is being sued for P4,000,000. The coverage under the comprehensive insurance
policy is limited to P2,500,000. Wizard’s attorney believes that an unfavorable outcome
is probable and that a reasonable estimate of the settlement is P3,000,000.

i. The salaries account includes P40,000 per month paid to the proprietor. Wizard also
receives P4,375 per week for living expenses.