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CHARMINE COMPANY You were engaged to audit the December 31, 2018 financial statements of Charmine Company. Audit findings follow: A. Audit of Petty Cash Fund 1. The count of petty cash fund of Charmine at 8:00 am on January 5, 2019 revealed the following: a. Currency and coins 8,000 Employees' checks encashed from the fund on December 29, 2018 (Audit note # 1): Dated December 29, 2018 500 Dated January 2, 2019 500 C. Petty cash vouchers for transportation expense: Dated December 29, 2018 1,000 Dated January 24, 2019 1,000 d. Contributions from employees for the fire victims (money found inside the envelope) 2,000 e. Advance for travel expense of two salesman given Dec.28, 2018 2,000 TOTAL 15.000 Audit notes: (1) Both check were verified to have been encashed with the bank by the Petty Cash Custodian on January 6, 2019. (2) Petty Cash fund at 15,000 is part of the cash account in the general ledger at year end B. Audit of Cash in Bank 1. The company's loan for 60,000 was approved and released by the bank on December 31, 2018. The loan will be paid in six equal quarterly payments. The bank erroneously credited the proceeds of this loan to another borrower's account. This did not appear as a reconciling item in the company's bank reconciliation as at December 31, 2018. The net proceeds of the loan was computed as follows: 2. The cut-off bank statement dated January 15, 2019 included a 5,000 check of the company dated December 19, 2018 for a 2018 operating expense. This was prepared and sent to the payee on January 3, 2011. The check appeared as one of the outstanding checks in the company's bank reconciliation as at December 31, 2018. 3. A check for 3,000 representing repayment of an employee's advances was received on December 26, 2018 but was not recorded until January 2, 2019 4. Interest earned on the bank balance for the fourth quarter of 2018 amounting to 70,000 was not recorded. This amount is net of 20% final tax 5. Post dated checks from customers totaling 80,000 for goods delivered on December 29, 2018 were included in the deposit in transit. These checks dated January 8, 2019 were deposited on their due date.C. Audit of Accounts Receivable and Allowance for Doubtful Accounts 1. A review of customers' ledger disclosed that a collection of 28,000 on November 15, 2018 for X Corporation was credited to the account of EX Corporation Advances from customers amounting to 100,000 were credited to Sales on December 16, 2018. The goods were delivered to the customers in January 2, 2019 3. Merchandise costing 100,000 were shipped to consignees on December 27, 2018 and recorded at their selling price of 120,000. They were excluded from the inventory list. 4. The client uses the allowance for doubtful account in recognizing uncollectible account receivable. The allowance is based upon 10% of adjusted accounts receivable - trade balance. Based on historical loss rate and adjusted for current observable data, it is estimated that 10% of the accounts receivable - trade will not be collected. D. Audit of inventories 1. The purchases cut-off examination revealed that a supplier shipped goods costing 40,000 at year-end, terms: FOB destination. The goods were received on January 6, 2019. 2. Inventories on the statement of financial position represent items which were on hand in the company's warehouse as at year-end. These inventories included items amounting to 300,000 held by the client on the consignment. No liability though was recorded upon receipt of these good. E. Audit of Investments 1. Analysis of the Investment in Mango Company shares classified as financial assets at FVPL revealed the following ledger entries: 2018 Debit Credit January 10 Purchased 10,500 shares 5,495,700 July 15 Share in net income of investee For the first half of 2018 150,000 September 30 Proceeds from the sale of 1,500 shares 300,000 December 31 Share in net income of investee for the Second half of 2018 154,300 2. Additional Information: a. The client purchased these shares as non-current investment. It recorded the broker's commission amounting to 20,000 to Other Charges b. The client received cash dividend of 52,500 on April 16, 2018 and credited this amount to other income. C. On August 30, 2018 the company received 1,500 shares representing share dividends d. The investee's net income for the first and second halves of 2018 were 1,000,000 and 1,175,619, respectively. e. Market Value per share of ordinary shares as of December 31, 2018 was 550. F. Audit of Prepaid Expenses 1. The company bought office and store supplies on various dates totaling 90,000 and booked them as expenses. As at year-end, unused supplies amounted to 23,762G. Audit of Equipment 1. Charming Company opened additional stores in nearby localities. To service more deliveries, two (2) units of Toyota Tamaraw FX were bought on installment basis on December 29, 2018. The installment price for the two units was 1,440,000 but the cash price was 1,200,000. The terms were 240,000 down payment and the balance payable in four equal quarterly installments. A non-interest-bearing promissory note was issued for the unpaid portion on December 31, 2018. The down payment of 240,000 was recorded as a debit to Equipment and a credit to Cash 2. Depreciation provisions for 2018 have been verified and found to have been overstated by 30,000 H. Review of disbursements from January 2 to 15, 2019 revealed the following: Telephone Bill for December 2018 13,762 Transportation expenses for January 2019 15,000 Dividends to shareholders declared on December 15, 2018 Paid on January 15, 2019 to shareholders of record On December 31, 2018 1,000,000 I. Audit of Financial Asset @ FV thru P&L revealed that their estimated market value as of December 31, 2018 amounted to 800,000 J. The retained earnings beginning balance amounted to 235,400. There were no addition or charges during the year The company's unaudited statement of financial position and statement of comprehensive income are as follows: CHARMINE COMPANY Statement of Financial Position December 31, 2018 Assets Petty Cash Fund 15,000 Cash in Bank 3,485,000 Financial Asset @ FVPL 890,000 Accounts Receivable - Trade 14,000,000 Allowance for Doubtful Accounts (1,400,000) Accounts Receivable - Others 500,000 Inventories 9,000,000 Prepaid Expenses 310,000 Investment in Mango Company 5,000,000 Land 3,000,000 Equipment 2,500,000 Accumulated Depreciation (1,500,000) Building 4,000,000 Accumulated Depreciation (1 000,000) Total Assets 38.800.000Liabilities and Shareholder's Equity Accounts Payable, Accruals and Others 1,650,000 Income Tax Payable 976,200 Notes Payable - Current 500,000 Notes Payable - Non-current 6,500,000 Ordinary Share Capital 25,000,000 Share Premium 2,500,000 Retained Earnings 1,923,800 Treasury Shares (250.000) Total Liabilities and Shareholders' Equity 38.800.000 CHARMINE COMPANY Statement of Income For the Year Ended December 31, 2018 Net Sales 10,250,000 Cost of Sales 7,175,000 Gross Profit 3,075,000 Operating Expenses 1,225,000 Operating Income 1,850,000 Other Charges (200,000) Other Income 800,000 Income before Income Tax 2,450,000 Provisions for income Tax 761,600 Income After Tax 1.688,400 REQUIREMENT: 1. Analyze the foregoing audit findings and make the necessary adjusting entries as of December 31, 2018. Adjusting Entries should be represented in working papers. Findings and adjusting entries should be arranged in order as presented below 2. Post the adjustments in working paper. Use the format presented below: 3. Compute final balances of each account on your working papers 4. Prepare Balance Sheet and Income Statement in Good Form (Do not use any other account not given in the unaudited financial statements) 5. Assume no other issues, except those discussed on the problem (Do not use any other account not given in the unaudited financial statements) The final output must consist of the following: 1. Cover Page Statement of Management responsibility 3. Independent Auditor's Report 4. Financial statements (Balance sheet, income statements and notes to financial statements. The company adopts full PFRS) 5. Working Papers consist of requirements number 1 and 2