You have completed the audit of the December 31, 2019 financial statements of La Casa Vieja, Inc. (LCV) in March, 2020. Based on your discussions with client's management, they have no objections in the audit adjustments that are required to present the financial statements under generally accepted accounting principles. The following are your audit memos.

1. Company Background:
2. LCV is in trading antique pieces like jars of Ming and Song Dynasties, potteries, porcelains, Mirano glasses, old coins of Spanish, Mexican and Chinese origin, old santos, icons, paintings and Spanish helmets and swords, etc. Each piece has its own history, as if a reconstruction of life in a given era. These pieces were among those found in sunken galleons or excavated or simply transferred from one generation to the other.
3. Buying antiques requires special skills in detecting reproduction items from the original ones, and special knowledge of archeological and marine discoveries and the history of these pieces. Rare and century old pieces command substantially high prices. Its customers, though, are limited to those who are super rich. In LCV's case, buying and selling activities are on negotiated prices, covered by contracts and are approved by the Board of Directors. Security, insurance premiums, research work, brochures, representation and entertainment, and professional fees are the major expenses.
4. Victor Gonzales started LCV on January 1, 2019, with his inherited antique collections valued by an independent antique specialist at P300,000 in December, 2018, as his equity participation to the paid up capital of P500,000. These inherited pieces were acquired by his grandmother prior and up to 1958 at a total acquisition cost of P2,450.
5. 
   
6. Choosing Cebu as its purchasing power, LCV in January, 2019 acquired a 25% equity in Artes de Cebu for P20,000. At that time, Artes de Cebu had a book value of P60,000. Upon acquisition, Victor became its President and Chairman of the Board. Victor believes that goodwill, if any, would have an estimated life of 10 years. Artes de Cebu's reported audited net income for the year ended December 31, 2019 was P3,200; a 10% improvement over last year but Victor intends to improve this further in the future.

1. Antiques for Sale

a. These inventory items are valued in the books at P709,197 more than cost, following the same

method of valuation applied by Victor on his inherited antique collections. The same independent antique specialist was engaged by LCV. The specialist also reported that there was no reproduction item in the inventory. Cost consists of the following:

Acquisition cost 525,723

Freight and insurance 6,750

imputed interest charge 32,000

Total recorded cost P564,473

Interest is charged to year-end inventories with a credit to interest income at 24% a year, average turnover, 3 months.

b. The year-end inventory count reconciliation with general ledger disclosed the following (valuation at acquisition cost plus freight and insurance, at specific identification method).

Per inventory count 546,442

Cost adjustment on the Magsingal altar - see audit memo No. 7 (b) (11,428)

One piece antique jar paid out of Purchasing Fund in

December, 2019 - see audit memo No. 3 (b) (2,541)

Per General Ledger 532,473

3. Cash - This consists of the following:

Cash in banks 10,526

Office petty cash fund (last replenished 12/31/19) 200

Purchasing fund (last replenished 11/30/19) 5,300

Per General Ledger 16,026

a. Major December 31, 2019 bank reconciling items:

November and December, 2019 issued checks cleared by bank in January, 2020 2625

December, 2019 bank credit memo for LCV account as transfer from Iloilo Antique Shop,

customer, as part payment of account balance 1440

January 3 replenishment of Purchasing Fund includes December purchase of one antique jar 2,541

1. Accounts Receivable

a. December 31 subsidiary ledger balances total P6,747

b. No reporting difference by customers except

Iloilo Antique Shop:

Per Iloilo record 550

Per LCV's record 1990

LCV is over (audit memo No. 3a) 1440

5. Dividend Receivable - This represents accrual of the total dividend declared by Artes de Cebu on December 28,2019, payable to stockholders of record as of that date.

6. Investments - This consists of the following:

Short-term marketable equity security, at market, 3/31/20 P532,725

At cost, 12/31/19 P526,325

At market, 12/31/19 520,342

25% equity in Artes de Cebu, 20,000

at cost Per General Ledger P552,725

See related discussions in audit memo Nos. 5 and 1 (d).

Property and Equipment

a. LCV office and display center is located in New Manila. It is an old house, reconstructed without any change in architectural design for P10,000. Property area is about 2,000 sq. m. This office, including land, office machines, furniture and fixtures, transportation equipment, has carrying value of P38,763 net of P3,800 depreciation. Land, as appraised by independent appraiser, is valued here at P2,500 over cost at December 31, 2019.

B. Included in this account is a lot purchased from Victor Gonzales, located in Magsingal, Ilocos Sur, for P11,428. This was bought in July 1, 2019 on installment basis; P3,428 cash down payment and the balance, in equal quarterly payments of principal and accruing quarterly interest at 24% per annum starting October 1, 2019. LCV used this lot as part payment of an altar piece of the Magsingal church for a total consideration of P13,428; of which P2,000 was paid in cash and recorded as Antiques for Sale. Under a three-party agreement among the Parish Council and church officials, Victor Gonzales, and LCV, the land title is transferable to the Parish Church upon completion of LCV's obligation. However, the church is allowed by the agreement to convert this land immediately to a memorial park. Victor and his heirs guaranteed the ultimate transfer of title. Additionally, Victor's family made a cash donation of P2,000 as start up capital for the development of the memorial park.

c. Based on the quarterly payment schedule of principal and accruing interest, LCV recorded a liability in the amount of P10,160 to Due to Stockholder; the same account was debited for P1,480 (including interest) for LCV's first payment on October 1,2019.

Pending Legal Case

As at December 31,2019, LCV's lawyers reported no significant pending legal cases, except for one case which was resolved on an out-of-court settlement in March, 2020. One Roberto Reyes filed a case against LCV claiming recovery of a Ming Dynasty jar for P16,000 citing the contract of sale entered into between the Reyes family and LCV in November, 2019 as null and void, considering that LCV failed to establish the rightful ownership of the jar prior to entering into the contract. Although LCV and its lawyer believed that LCV's position is strong, LCV's Board decided a compromise settlement of P8,000 to Robert Reyes himself, to protect LCV's name and to avoid incurrence of additional legal expenses. In March, 2020 Roberto Reyes accepted the compromise settlement. LCV recorded the transaction in March as additional charge to Antiques for Sale. The jar was actually sold to a customer by LCV in December, 2019 for P24,000.

Notes: 1.

Excess of fair market or appraised value of assets over cost is in the following:

Antiques for sale 709,197

Investments 6,400

Property and Equipment - Land 2500

718,097

2.Adjustments to income relating to Investments are nontaxable or non-tax deductible Ignore these items in income tax provision computation.

items.

Requirements:

1. Complete the schedule provided
2. Provide all the necessary adjusting entries with cross reference to the schedule
3. What is pervasively wrong in LCV's financial reporting that needs to be communicated with the client.
4. Cite specific examples

Answer rating: 100% (QA)

Schedule 1 Antiques for Sale Adjusting Entry Debit Antiques for Sale 709197 Credit Accumulated Amortization 709197 2 Cash Adjusting Entry Debit Office Petty Cash Fund 200 Credit Cash 200 Debit Purchas... View the full answer