Assignment-no.-3-audit-of-inventories

Assignment No. 3– Audit of Inventories Instruction: Write your solution in a piece of paper and write your name on top of it. Double rule your answer. We will check your assignment on Monday, November 23, 2020. 1. MABES Corporation, a manufacturer of small tools, provided the following information from its accounting records for the year ended December 31, 2019: Inventory at December 31, 2019 (based on physical count Of goods in MABES’ plant at cost on Dec. 31, 2019)

P 1,750,000

Accounts payable at December 31, 2019

1,200,000

Net sales (sales less sales returns)

8,500,000

Additional information is as follows: 1) Included in the physical count were tools billed to a customer FPB shipping point on December 31, 2019. These tools had a cost of P28,000 and had been billed at P35,000. The shipment was on MABES’s loading point on December 29, 2019. 2) Goods were in transit from a vendor to MABES on December 31, 2019. The invoice cost was P50,000, and the goods were shipped FOB Shipping point on December 29. 2019. 3)

Work-in process inventory costing P20,000 was sent to an outside processor for plating on December 30, 2019.

4) Tools returned by customers and held pending inspection in the returned goods area on December 31, 2019, were not included in the physical count. On January 8, 2020, the tools costing P26,000 were inspected and returned to inventory. Credit memos totalling P40,000 were issued t the customers on the same date. 5) Tools shipped to a customer FOB destination on December 26, 2019, were in transit at December 31, 2019, and had a cost of P25,000 Upon notification of receipt by the customer on January 2, 2020, MABES issued a sales invoice for P42,000. 6) Goods, with an invoice cost of P30,000, received from a vendor at 5:00 p.m on December 31, 2019, were recorded on a receiving report dated January 2, 2020. The goods were not included in the physical count, but the invoice was included in accounts payable at December 31, 2019. 7) Goods received from a vendor on December 26, 2019, were included in the physical count. However, the related P60,000 vendor invoice was not included in accounts payable at December 31, 2019, because the accounts payable copy of the receiving report was lost. 8) On January 3, 2020, a monthly freight bill in the amount of P4,000 was received. The bill specifically related to merchandise purchased in December 2020, one-half of which was still in the inventory at December 31, 2019. The freight charges were not included in either the inventory or in accounts payable at December 31, 2019.

Using the format below, prepare a schedule of adjustment as of December 31, 2019 to the initial amounts per MABES’s accounting records. Show separately the effect, if any, of each of the eight transactions on the December 31, 2019, amounts. If the transaction would have no effect on the initial amount shown, state NONE. (20 points) Inventory

Accounts Payable

Net Sales

P 1,750,000

P 1,200,000

P 8,500,000

(1)

0

0

(35,000)

(2)

50,000

50,000

0

(3)

20,000

0

0

(4)

26,000

0

(40,000)

(5)

25,000

0

0

(6)

30,000

0

0

(7)

0

60,000

0

(8)

2,000

4,000

0

Total Adjustments

153,000

114,000

(75,000)

Adjusted Amounts

P1,597,000

P1,086,000

P8,425,000

Initial amounts Adjustments:

2. On September 28, 2019, a fire destroyed the entire merchandise inventory of the Alfonso Corporation. The following information is available: Sales, January 1 – September 28 2019

P 540,000

Inventory, January 1, 2019

P 150,000

Merchandise purchases, January 1 – September 28, 2019 (including P60,000 of goods in transit on September 28, 2019, shipped FOB Shipping point) P 465,000 Markup percentage on cost

20%

What is the estimated inventory on September 28, 2019 immediately prior to the fire? (5 points) Beg. Inventory, 1/1/19 Purchases on Hand Cost of Goods Available for Sale Cost of Goods Sold Estimated Inventory

150,000 405,000 555,000 (450,000) 105,000

3. You observed the inventory count of the Solsons Company as of December 31, 2019. The client prepared the summary presented below and gave it to you for verification: Item

Quantity

Cost

Market

Amount

A

360 units

P 3.60/doz

P3.64/doz.

P 1,310.40

B

24 units

P 4.70 each

P 4.80 each

P 112.80

C

28 units

P 16.50 each

P 16.50 each

P 1,353.00

D

43 units

P 5.15 each

P 5.20 each

P 176.80

E

400 units

P 9.10 each

P8.10 each

P 3,640.00

F

70 dozens

P 2.00 each

P 2,00 each

P 140.00

G

95 grosses

P144/gross

P132/gross

P 13,780.00

Determine the following: A. Proper value of Item A. (2 points) 360/12*3.60 = 108.00 B. Proper value of Item E. (2 points) 400*8.10 = 3,240.00 C. Proper Value of Item C. (2 points) 28*16.50 = 462.00 D. Proper Value of the inventory as of December 31, 2019. (4 points) 108.00+112.80+462.00+221.45+3,240.00+1,680.00+12,540 = 18,364.25

4. Having been engaged as external auditor of Duhat Company on February 28, 2019, you were unable to observe the taking of inventory on December 31, 2019, which was reported to amount to P360,000. The following data, however, were gathered by you: Inventory, December 31, 2018

P 320,000

Purchases during 2019

P 1,410,000

Cash sales during 2019

P 350,000

Shipment received on December 26, 2019, included physical inventory but, not recorded as purchases P 10,000 Deposits made with suppliers, entered as purchases, goods were not received in 2019 Collections on accounts receivable, 2019

P 20,000 P 1,800,000

Accounts Receivable, January 1, 2019

P 250,000

Accounts Receivable, December 31, 2019

P 300,000

Gross Profit percentage on sales

40%

Determine how much is the estimated inventory shortage at December 31, 2019. (5 points) Sales Gross COGS

not

=

350,000 + 1,800,000 + Profit = 40% = 2,200,000 -

300,000 250,000 = on sale = 880,000 =

2,200,000 880,000 1,320,000

COGS that should be actually charged = Opening Inventory + Purchases + Goods received but recorded - Goods recorded but not yet received - Closing Inventory 320,000

+

1,410,000

+

10,000

-

20,000

-360,000

=

1,360,000

Inventory Shortage = 1,360,000 - 1,320,000 = 40,000 5. On May 31, 2019, a fire completely destroyed the work-in-process inventory of Adler Paints. Physical inventory figures were published as follows: Raw Materials Work-in-process Finished Goods

As of January 1, 2019 P15,000 P50,000 P70,000

As of May 31, 2019 P 30,000 P 60,000

Sales for the first five months of 2019 were P150,000. Raw materials purchased were P50,000. Freight on purchases was P5,000. Direct labor for the five months was P40,000. To determine the value of the lost inventory, the insurance adjusters have agreed to use an average gross profit rate of 32.5%. Assume that manufacturing overhead was 45% of direct labor cost. A. Compute the value of the goods manufactured and completed as of May 31, 2019. (5 points) Sales for the period 150,000 Less: Gross Profit 48,750 (150,000*32.5%) COGS 101,250 Add: Inventory, End 60,000 Less: Finished Goods, Beg. 70,000 Cost of Goods Manufactured 91,250 B. Compute the raw materials used during the first five months of 2019. (5 points) Raw Materials, Beg 15,000 Add: Purchases 50,000 Freight-In 5,000 Less: Raw Materials,End 30,000 Raw Materials Used 40,000

C. Compute the total value of goods put in process during the five-month period. (5 points) Raw Materials used 40,000 Direct Labor 40,000 Prime Cost 80,000 Manufacturing Overhead 18,000 (40,000*45%) Gross Works Cost 98,000 Work-in-Process, Beg 50,000 Value of Goods out in Process 148,000 D. Compute the value of the destroyed work-in-process inventory as determined by the insurance adjusters. (5 points) Value of goods put in process 148,000 Cost of goods manufactured (91,250) Value of destroyed work-in process 56,750

6. The owner of a trading company engaged your services as auditor. There is a discrepancy between the company’s income and the sales volume. The owner suspects that the staff is committing theft. You are to determine whether or not this is true. Your investigation revealed the following: 1) Physical inventory, taken December 31, 2019 under your observation, showed that cost was P26,500 and market value, P25,000. The inventory of January 1, 2019 showed cost of P39,000 and market value of P37,500. It is the firm’s practice to value inventory at “lower of cost or market”. Any loss between cost and market value is included in “Other Expenses.” 2) The average gross profit rate was 40% of net sales. 3) The Accounts Receivable as of January 1, 2019 were P13,500. During 2019, Accounts Receivable written off during the year amounted to P1,000. Accounts Receivable as of December 31, 2019 were P37,500. 4) Outstanding purchase invoices amounted to P50,000 at the end of 2019. At the beginning of 2019 they were P37,500. 5) Receipts from customers during 2019 amounted to P300,000. 6) Disbursements to merchandise creditors amounted to P200,000. Compute the following: A. Total Sales for 2019. (5 points) Receipts from customers Accounts Receivables (37,500+1,000-13,500) Total Sales

300,000 25,000 325,000

B. Total purchases for 2019. (5 points) Disbursements Outstanding Purchases Invoice Accounts Payable, Beg Total Purchases

200,000 50,000 (37,500) 212,500

C. Amount of inventory shortage, if any. (5 points) Inventory Add: Purchases GAFS COS (325,000*.60) Est. Inventory at Cost Inventory, Ending Estimated Inventory Shortage

39,000 212,500 251,500 (195,000) 56,500 (26,500) 30,000