Audit Of Inventory

CHAPTER 5 – Audit of Inventory Exercises - Analysis of Transactions 1. Moneba Company bought merchandise on January 2, 2006 from Lynn Company costing P15,000; terms, less 20%, 20% down payment, balance 2/10, n/30. Two days after, P2,000 worth of merchandise was returned due to wrong specification. Moneba Company paid the account within the discount period. How much Moneba Company paid to Lynn Company? a. P 7,600 b. P 7,448 c. P 7,408 d. P 7,360 Answer - P 7,448 Buyer Purchases Cash Accounts Payable Accounts payable Purchases Accounts payable Purch. Disc. Cash

12,000 2,000 7,600

2,400 9,600 2,000 152 7,448

Seller Accounts Receivable Cash Sales Sales Accounts Receivable Cash Sales Discount Accounts Receivable

9,600 2,400 2,000 7,448 152

12,000 2,000 7,600

2. Merchandise shipped fob destination to customer was made on January 5, 2006 for P25,000. The customer issued P10,000 12% 30-day note and the balance 2/10, n/30 on January 10, 2006, the date the goods were received. The customer made a partial payment on January 15, 2006 for P5,000. Payment was made within the discount period. How much discount was granted? a. P 0 b. P 200 c. P 300 d. P 500 Answer - P 300 Buyer Jan . 5 No Entry Jan. 10 Purchases 25,000 Notes payable 10,000 Accounts pay. 15,000 Jan. 15 Accounts pay. 5,000 Cash 5,000 Date of Payment: Accounts pay. 10,000 Cash 9,700 Purchase discount 300 Discount : P15,000 x 2% = P300

Seller Jan. 5 No Entry Jan. 10 Notes Receivable 10,000 Accounts Receiv. 15,000 Sales 25,000 Jan 15 Cash 5,000 Accounts receiv. Cash Sales discount Accounts reciev.

9,700 300

5,000

10,000

3. On January 10, 2006, Lao Company sold merchandise on account fob destination to Febryan Co. for P20,000. Febryan Co. paid the freight cost of P1,500 to be deducted from its account. How much Febryan Company paid to Lao Company? a. P 21,500 b. P 20,000 c. P 19,600 d. P 18,500 Answer - P 18,500 Seller Accounts receivable Transportation expense Sales Cash Accounts receivable

18,500 1,500 18,500

20,000 18,500

Buyer Purchases Accounts payable Cash Accounts payable Cash

20,000 18,500

18,500 1,500 18,500

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4. Goods worth P12,000 was shipped on account (2/10, n/30) to Ibuyan Company on January 15, 2006 from Rubenil Company The term of the shipment was fob shipping point. Rubenil Company paid freight of P950. On January 12, 2006, P2,500 worth of merchandise was received by Rubenil Co. from Ibuyan Co. due to wrong specification. Ibuyan Company made a partial payment of P5,000. How much is the subsequent collection of Rubenil Company from Ibuyan Company assuming Ibuyan Company paid within the discount period? a. P 5,450 b. P 5,260 c. P 4,500 d. P 4,410 Answer- P 5,260 Buyer Seller Purchases 12,000 Accounts receivable Freight-in 950 Sales Accounts payable 12,950 Cash Account payable 2,500 Sales Purchases 2,500 Accounts receivable Accounts payable 5,000 Cash Cash 5,000 Accounts receivable Accounts payable 5,450 Cash Cash 5,260 Sales discount Purchase discount 190 Accounts receivable  Discount – P12,000 – P2,500 = P9,500 x 2% = P190

12,950 2,500 5,000 5,260 190

12,000 950 2,500 5,000 5,450

5. Gabutero Company purchased merchandise on account for P10,000 from Lilibeth Company with term shipping point. The freight cost was P1,500 and was paid by Gabutero Company Upon the arrival of the carrier, it found out that the merchandise got lost while in transit. The carrier company accepted the loss as their fault. How much is the subsequent collection of Lilibeth Company from Gabutero Company? a. P 11,500 b. P 10,000 c. P 8,500 d. P 0 Answer - P 10,000 Buyer Purchases Freight-in Accounts payable Cash Claims receivable Purchases Freight-in

10,000 1,500 11,500

10,000 1,500

Seller Accounts receivable Sales

10,000

10,000

10,000 1,500

6. Chan Company bought from Casas Company a second-hand machinery for the use of its plant for P50,000 A 50% down payment was made and balance 2/10, n/30. Freight cost was paid by Chan Company for P2,000. Casas Company acquired the machinery three years ago at P60,000 with 10 year life. (Straight-line method is use in computing Depreciation). Two days after purchase, Casas Company granted the request of Chan Company for a P5,000 price adjustments because of some defects of the machinery. Cash paid by Chan Company to Casas Company assuming the account was paid within the discount period is a. P 20,400 b. P 20,000 c. P 19,600 d. P 19,000 Answer - P 19,600 Buyer Machinery 50,000 Cash 25,000 Accounts payable – others 25,000 Machinery Cash

2

2,000

2,000

Seller Cash Accounts recei. – others Accum. depreciation Machinery Gain on sale

25,000 25,000 18,000

60,000 8,000

Accounts payable – others 5,000 Machinery 5,000 Accounts payable – others 20,000 Cash 20,000 If paid within the discount period: Accounts payable – others 20,000 Cash 19,600 Machienry 400

Gain on sale 5,000 Accounts recie. – others 5,000 Cash 20,000 Accounts recie – others 20,000 Cash 19,600 Gain on sale 400 Accounts payable – others 20,000

7. The Ariel Company purchased land and building at lump-sum price of P300,000 from Cherely Company on January 1, 2006. The land and building was purchased by Cherely Company 3 year ago at a total cost of P300,000. Based on the appraiser’s computation and analysis, the cost of the land is twice as much to that of the building. Ariel Company assume a five-year life of the building with no salvage cost. Two years later, Ariel Company sold the building at P80,000 to Jaan Company. Ariel Company will record gain or loss from the sale of the building to Jaan Company by a. Gain of P 20,000 b. Loss of P100,000 c. Neither gain nor loss d. Cannot be determined Answer - P 20,000 Buyer Land Building Cash Sale of Building: Cash Accum. depreciation Building Gain on sale

200,000 100,000

80,000 40,000

300,000

100,000 20,000

Seller Cash Land and building

300,000

Buyer Building Cash

80,000

300,000

80,000

Problem 1 Listed below are some items of inventory from Anecito Company that are in question during the audit. The company stores a substantial portion of the merchandise in a separate warehouse and transfer damaged goods to a special inventory account. 1. Items in receiving department returned by customer, no communication received from customer 2. Items ordered and in receiving department, invoice not yet received from supplier 3. Items counted in warehouse by the inventory crew 4. Invoice received for goods ordered, goods shipped but not received (Anecito Company pays freight) 5. Items, shipped today, fob destination, invoice mailed to customer 6. Items currently used for window displays 7. Items on counter for sale per inventory count [not in (3)] 8. Items in shipping department, invoice not mailed to customer 9. Items in receiving department, refused by Anecito because of Damage [(not in (3)] 10. Items shipped today, fob shipping point, invoice mailed to customer 11. Items included in warehouse count, damaged, not returnable 12. Items included in warehouse count, specifically crafted and

20,000 50,000 70,000 5,000 5,000 10,000 90,000 6,000 3,000 4,000 8,000

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segregated for shipment to customer in five days per sales contract, with return privilege.

18,000

Question: 1. If the recorded inventory in the balance sheet is P289,000, the year-end inventory will be overstated by: a. P 41,000 b. P 23,000 c. P 18,000 d. P 3,000 2. The following should be included from the inventory, except: a. Inventory shipped today, f.o.b. shipping point, invoice mailed to customer. b. Inventory counted in warehouse by the inventory crew. c. Inventory shipped today, f.o.b. destination, invoice mailed to customer. d. Inventory in warehouse count, specifically crafted and segregated for shipment to customer with return privilege. 3. The inventory per audit at year-end is: a. P 286,000 b. P 271,000

c. P 266,000

d. P 248,000

Solution 1. P 20,000 2. 50,000 3. 70,000 4. 5,000 (the fact that Anecito pays the freight, the term then is FOB shipping point) 5. 5,000 6. 10,000 7. 90,000 8. 6,000 9. – 10. – 11. ( 8,000) 12. 18,000 (this is still included in the inventory since the goods has a return privilege) P266,000 Answer: 1. b 2. a 3. c

Problem 2 In the event of your audit, you found the following information related to the inventories on December 31, 2006. a. An invoice for P90,000, FOB shipping point, was received on December 15, 2006. The receiving report indicates that the goods were received on December 18, 2006, but across the face of the report is the notation “Merchandise not of the same quality as ordered, returned for credit, December 19”. The merchandise was included in the inventory. b. Included in the physical count were inventories billed to customer FOB shipping point on December 31, 2006. These inventories had a cost of P28,000 and were billed at P35,000. The shipment was in loading dock waiting to be picked by the common carrier. c. Merchandise with an invoice cost of P50,000, received from a vendor at 5:00 pm on December 31, 2006, were recorded on a receiving report dated January 2, 2007. The goods were not included in the physical count, but invoice was included in accounts payable at December 31, 2006.

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d. Merchandise costing P15,000 to the company FOB shipping point on December 26, 2006. The purchase was recorded, but the merchandise was excluded from the ending inventory because it was not received until January 4, 2007. e. The inventory included 1000 units erroneously priced at P9.50 per unit. The correct cost was P10.00 per unit. The adjusting entries for: 1. Item letter “a” is; Debit a. Cost of sales 90,000 b. Inventory 90,000 c. Retained earnings 90,000 d. No adjustment

Credit Inventory Cost of Sales Inventory

90,000 90,000 90,000

2. Item letter “b” is: a. b. c. d.

Debit Cost of sales 28,000 Inventory 28,000 Cost of sales 35,000 No adjustment

Credit Inventory Cost of sales Inventory

28,000 28,000 35,000

3. Item letter “c” is; a. b. c. d.

Debit Inventory 50,000 Cost of sales 50,000 Inventory 50,000 No adjustment

Credit Cost of sales 50,000 Inventory 50,000 Retained earnings 50,000

4. Item letter “d” is: a. b. c. d.

Debit Cost of sales 15,000 Inventory 15,000 Inventory 15,000 No adjustment

Credit Inventory 15,000 Cost of sales 15,000 Retained earnings 15,000

5. Item letter “d” is: Debit a. b. c. d.

Cost of sales Inventory Cost of sales Inventory

Answer 1. a 2. d

3. a

500 500 10,000 10,000 4. b

Credit Inventory Cost of sales Inventory 10,000 Cost of sales 10,000

500 500

5. b

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Problem 3 You have observed the physical count of DEMI CORPORATION’s inventory taken on December 31, 2006. The following errors were discovered: a. Goods that cost P7,000 was sold for P8,500 on December 29, 2006. The order was shipped December 31, 2006 with terms fob destination. The merchandise was not included in the ending inventory. The sale was not recorded until January 4, 2007, the date when the customer made payment of the sold goods. b. On December 29, 2006, DEMI CORPORATION purchased merchandise costing P15,000 from a supplier. The order was shipped December 30, 2006 (terms FOB shipping point) and was still “in transit” on December 31, 2006. Since the invoice was received on December 31, the purchase was recorded in 2006. The merchandise was included in the inventory count. c. On January 4, 2007, goods that were included in the ending inventory at December 31, 2006, were returned to DEMI CORPORATION because the consignee had not been able to sell it. The cost of this merchandise was P9,500 with a selling price of P14,500. d. DEMI CORPORATION failed to make an entry for a purchase on account of P6,500 at the end of 2005, although it included this merchandise in the inventory count. The purchase was recorded when payment was made to the supplier in 2006. e. On January 6, 2007, DEMI CORPORATION received merchandise which had been shipped to them on December 31, 2006. The terms of the purchase were fob destination. Cost of the merchandise was P6,400. The purchase was not recorded until payment was made in January 2007 but the goods were included in the inventory as of December 31, 2006. f.

Goods with a selling price of P30,000 was shipped to Herald Company, a consignee, on December 29, 2005. Since this was shipped before the inventory count, the merchandise, which was billed 20% above cost, was excluded from the inventory count. Sales was not recorded until the inventory was received on January 5, 2006. Your further investigation revealed that 50% of these goods were sold in 2006 and the onhand at December 31, 2006 were not yet reported in 2006 inventory.

Questions: Based on the above information, answer the following: 1. What is the entry to adjust audit finding “a” at December 31, 2006? a. Accounts Receivable 8,500 c. Both A and B Sales 8,500 b. Inventory 7,000 d. Accounts Receivable 8,500 Retained Earnings 7,000 Retained Earnings 8,500 2. What is the entry to adjust audit finding number “b” at December 31, 2006? a. Inventory 15,000 c. Both A and B Retained Earnings 15,000 b. Retained Earnings 15,000 d. Neither A nor B Accounts Payable 15,000 3. DEMI CORPORATION should debit what account to adjust audit finding number “c” at December 31, 2006? a. Sales c. Retained Earnings b. Cost of Sales d. No adjustment is necessary

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4. In audit finding number “d”, choose the correct statement? a. The company is correct for not making an entry on the P6,500 purchase on account even though it is already included in the inventory count since no term of shipment is given. b. The company should reduced its purchases at December 31, 2006 since the purchases being paid in 2006 was the purchase for 2005. c. The company is correct in recording of purchases in year 2006 since this is the time when the company made payment on such. d. Inventory should be recorded at December 31, 2005 since the purchases were recorded on this year. 5. The entry to adjust audit finding number “e” at December 31, 2006 is: (assume the book is not close) a. Retained Earnings 6,400 c. Purchases 6,400 Inventory 6,400 Accounts Payable 6,400 b. Retained Earnings 6,400 d. Cost of sales 6,400 Accounts payable 6,400 Inventory 6,400 6. The entry to adjust audit finding number “f” at December 31, 2006 is: (assume the book is close) a. Inventory 25,000 c. Cost of sales 25,000 Accounts Receivable 25,000 Sales 25,000 Cost of sales 25,000 Retained Earnings 25,000 Sales 25,000 Accounts Receivable 25,000 b. Cost of sales 25,000 d. Retained Earnings 2,500 Sales 15,000 Inventory 12,500 Retained Earnings 25,000 Accounts Receivable 15,000 Accounts Receivable 15,000 Answer 1. b 2. d

3. d

4. b

5. a

6. d

Problem 4 The PRINCE COMPANY’S year-end inventory based on physical count conducted on December 31, 2006, amounted to P885,000. Your cut-off examination disclosed the following information”: 1. Included in the physical count were goods billed to customer FOB shipping point on December 31, 2006. These goods had a cost of P28,000 and were billed at P35,000. The shipment was on PRINCE’S loading dock waiting to be picked up by the common carrier. 2. Goods were in transit from a vendor to PRINCE on December 31, 2006. The invoice cost was P50,000 and the goods were shipped FOB Shipping on Dec. 29,2006. 3. Work in process inventory costing P20,000 was sent to an outside processor for plating on Dec. 30, 2006. 4. Goods returned by customers and held pending inspection in the returned goods area on Dec. 31, 2006, were not included in the physical count. On January 8, 2007, the goods costing P26,000 were inspected and returned to inventory. Credit memos totaling P40,000 were issued.

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5. Goods shipped to customer FOB destination on Dec. 26, 2006, were in transit at Dec. 31, 2006 and had a cost of P25,000. Upon notification of receipt by the customer on January 2, 2007, the company issued a sales invoice for P42,000. 6. Goods received from a vendor on Dec. 26, 2006, were included in the physical count. However the related P60,000 vendor invoice was not included in Accounts Payable as December 31, 2006, because the Accounts Payable copy of the receiving report was lost. 7. On January 3, 2007, a monthly freight bill in the amount of P4,000 was received. This was specifically related to merchandise purchased in Dec. 31, 2006. The freight charges were not included in either the inventory or in accounts payable at Dec. 31, 2006. Question: 1. Sales at year-end is overstated by: a. P 75,000 b. P 40,000

c. P 35,000

d. P 33,000

2. Purchases at year-end is understated by: a. P 110,000 b. P 84,000

c. P 64,000

d. P 60,000

3. Cost of sales at year-end is overstated by: a. P 46,000 b. P 21,000

c. P 11,000

d. P

4. The inventory per audit at year-end is: a. P 981,000 b. P 959,000

c. P 1,006,000

d. P 1,010,000

Solution 1. Sales 35,000 Accounts receivable 2. Inventory 50,000 Cost of sales Purchases 50,000 Accounts payable 3. Inventory 20,000 Cost of sales 4. Inventory 26,000 Cost of sales Sales 40,000 Accounts receivable 5. Inventory 25,000 Cost of sales 6. Purchases 60,000 Accounts payable 7. Inventory 4,000 Accounts payable Answer: 1. a 2. a 3. c 4. d

7,000

35,000 50,000 50,000 20,000 26,000 40,000 25,000 60,000 4,000

Problem 5 On January 1, 2007, Arcenith Corporation engaged an independent CPA to perform an audit for the year ended December 31, 2006. The company uses a periodic inventory system. The CPA did not observe the inventory count on December 31, 2006, as a result, a special examination was made of the inventory records. The financial statements prepared by the company (uncorrected) showed the following: ending inventory, P72,000; accounts receivable, P60,000; accounts payable, P30,000; sales, P400,000; net purchases, P160,000, and pretax income P51,000.

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The following data were found during the audit: 1. Merchandise received on January 2, 2007, costing P800 was recorded on December 31, 2006. An invoice on hand showed the shipment was made fob supplier’s warehouse on December 31, 2006. Because the merchandise was not on hand at December 31, 2006, it was not included in the inventory. 2. Merchandise that cost P18,000 was excluded from the inventory, and the related sale for P23,000 was recorded. The goods had been segregated in the warehouse for shipment; there was no contract for sale but a “tentative order by phone”. 3. Merchandise that cost P10,000 was out on consignment for Valentin Distributing Company and was excluded from the ending inventory. The merchandise was recorded as a sale P25,000 when shipped to Valentin on December 29, 2006. 4. A sealed packing case containing a product costing P900 was in Arcenith’s shipping room when the physical inventory was taken. It was included in the inventory because it was marked “Hold for customer’s shipping instructions.” Investigation revealed that the customer signed a purchase contract dated December 18, 2006, but that case was shipped and the customer billed on January 10, 2007. A sale for P1,500 was recorded on December 31, 2006. 5. A special item, fabricated to order for a customer, was finished and in the shipping room on December 31, 2006. The customer has inspected it and was satisfied. The customer was billed in full on that sale in the amount of P5,000. The item was included in inventory at cost, P1,000 because it was shipped on January 4, 2007. 6. Merchandise costing P15,600 was received on December 28, 2006. The goods were excluded from inventory, and a purchase was not recorded. The auditor located the related papers in the hands of the purchasing; they indicated, “On consignment from Roselyn Company”. 7. Merchandise costing P2,000 was received on January 8, 2007, and the related purchase invoice recorded January 9. The invoice showed the shipment was made on December 29, 2006, fob destination. The merchandise was excluded from the inventory. 8. Merchandise that cost P6,000 was excluded from the ending inventory and not recorded as a sale for P7,500 on December 31, 2006. The goods had been specifically segregated. According to the terms of the contract of sale, ownership will not pass until actual delivery. 9. Merchandise that cost P15,000 was included in the ending inventory. The related purchase has not been recorded. The goods had been shipped by the vendor fob destination, and the invoice was received on December 30, 2006. The goods was received on January 5, 2007. 10. Merchandise in transit that cost P7,000 was excluded from inventory because it was not on hand. The shipment from the vendor was fob shipping point. The purchase was recorded on December 29, 2006, when the invoice was received. 11. Merchandise in transit that cost P13,000 was excluded from inventory because it had not arrived. Although the invoice had arrived, the related purchase was not recorded by December 31, 2006. The merchandise shipped fob shipping point by the vendor.

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12. Merchandise that cost P8,000 was included in the ending inventory because it was on hand. The merchandise had been rejected because of incorrect specifications and was being held for return to the vendor. The merchandise was recorded as a purchase on December 26, 2006. Question: Based on your analysis and the information above, answer the following: 1. The adjusted balance of inventory at year-end is: a. P 101,900 b. P 102,000 c. P 102,800

d. P 120,400

2. The adjusted balance of accounts receivable at year-end is: a. P 10,500 b. P 12,000 c. P 35,000

d. P 37,000

3. The adjusted balance of accounts payable at year-end is: a. P 43,000 b. P 35,000 c. P 30,000

d. P 22,000

4. The adjusted balance of Sales at year-end is: a. P 377,000 b. P 352,000 c. P 350,500

d. P 347,000

5. The adjusted balance of Net Purchases at year-end is: a. P 152,000 b. P 165,000 c. P 173,000

d. P 181,000

6. The adjusted balance of Pre-tax income at year-end is: a. P 27,300 b. P 29,000 c. P 29,800

d. P 35,800

Solution

Unadj. bal.

Inventory end 72,000

Acnts. Receivable 60,000

Acnts. Payable 30,000

Sales 400,000

Net Purchases 160,000

Pretax ncome 51,000

Item 1

800

800

Item 2

18,000

18,000

Item 3

(23,000)

(23,000)

(23,000)

(25,000)

(25,000)

(25,000)

(1,500)

(1,500)

(1,500)

10,000

10,000

Item 4 Item 5

(1,000)

Item 6

-

-

-

-

-

(1,000)

Item 7

-

-

-

-

-

Item 8

6,000

6,000

Item 9

(15,000)

(15,000)

-

Item 10

7,000

7,000

Item 11

13,000

13,000

Item 12

(8,000)

Adjusted balance Answer: 1. c 2. a

10

3. b

13,000

13,000 (8,000)

8,000

165,000

27,300

(8,000)

-

-

(8,000)

102,800

10,500

35,000

4. c

(13,000)

5.b

6. a

350,500

Problem 6 Marlisa Company’s December 31, 2005 and December 31, 2006 inventory is P35,000 and P27,000, respectively. The beginning and ending inventories were determined by physical count of the goods on hand on those dates, and no reconciling items were considered. All purchases are f.o.b. shipping point. In the course of your examination of the inventory cutoff, both the beginning and ending of each year, you discover the following facts: Beginning of the year a. Invoices totaling P3,260 were entered in the voucher register on January, but the goods were received during December. b. December invoices totaling P4,100 were entered in the voucher register in December, but the goods were not received until January. End of the Year c. Invoices totaling P7,260 were entered in the voucher register in January but the goods were received in December. d. December invoices totaling P3,600 were entered in the voucher register in December, but the goods were not received until January. e. Invoices totaling P1,500 were entered in the voucher register in January, and the goods were received in January, but the invoices were dated December. Question: Based on your analysis and the information above, answer the following: 1. The adjusted balance of the Jan. 1, 2006 inventory is: a. P 35,000 b. P 35,840 c. P 39,100

d. P 59,100

2. How much is the adjusted balance of the Purchases account at December 31, 2006 assuming the amount of Purchases in the trial balance is P5,176,000? a. P 5,170,566 b. P 5,180,000 c. P 5,181,500 d. P 5,185,200 3. The corrected December 31, 2006 inventory is a. P 52,100 b. P 50,600 c. P 32,100

d. P 28,500

4. When auditing inventories, an auditor would least likely verify that a. All inventory owned by the client is on hand at the time of the count. b. The client has used properly inventory pricing. c. Damaged goods and obsolete items have been properly accounted for. d. The financial statement presentation of inventories is appropriate. Solution a. Retained earnings Purchases b. Beginning inventory Retained earnings c. Purchases Accounts payable d. Inventory Cost of sales e. Inventory Cost of sales Purchases Accounts payable Answer: 1. c 2. c 3. c

3,260 4,100 7,260 3,600 1,500 1,500 4. a

3,260 4,100 7,260 3,600 1,500 1,500

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Problem 7 During the 2006 audit of JONES Manufacturing Company’s year-end inventory, you found the following items. 

A packing case containing product costing P8,160 was standing in the shipping room when the physical inventory was taken. It was not included in the inventory because it was marked “Hold for shipping instructions.” The customer’s order was dated December 18, but the case was shipped and the customer billed on January 10, 2007.



Merchandise costing P6,250 was received on December 28, 2006, and the invoice was recorded. The invoice was marked “On Consignment.”



Merchandise received on January 6, 2007 costing P7,200 was entered in the purchase register on January 7. The invoice showed shipment made FOB shipping point on December 31, 2006.



A special machine, fabricated to order for a particular customer, was finished and in the shipping room on December 30. The customer was billed on that date and the machine was excluded from inventory although it was shipped January 2, 2007. The machine costs P25,000 and was sold for P45,000.



Merchandise costing P23,500 was received on January 3, 2007, and the related purchase invoice was recorded January 5. The invoice showed the shipment was made on December 29, 2006, FOB destination.



Merchandise costing P11,000 was sold on an installment basis on December 15 at P25,000. The customer took possession of the goods on that date. The merchandise was included in inventory because JONES still holds legal title. Historical experience suggests that full payment on the installment sales is received approximately 99% of the time.



Goods costing P15,000 were billed for P20,000 and delivered on December 20. The goods were included in inventory because the sale was accompanied by a repurchase agreement requiring JONES to buy back the inventory in February 2007.

Selected account balances before considering the effects of the above items are as follows: Accounts receivable Inventory Accounts payable Sales Gross profit Net income

P 185,000 114,500 67,200 942,400 287,990 84,680

Questions: 1. What is the adjusted accounts receivable balance at the end of the year? a. P 166,000 b. P 165,000 c. P 150,000 d. P 125,000 2. What is the adjusted inventory balance at the end of 2006? a. P 118,860 b. P 116,700 c. P 112,610

d. P 104,450

3. What is the adjusted balance of accounts payable at the end of the year? a. P 68,150 b. P 68,000 c. P 67,200 d. P 65,000

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4. The adjusted total sales in 2006 is a. P 962,400 b. P 925,600

c. P 925,000

d. P 922,400

5. The adjusted Cost of goods sold in 2006 is a. P 640,040 b. P 650,200

c. P 651,040

d. P 657,250

Solution 1. Inventory Cost of Sales 2. Accounts payable Purchases Cost of sales Inventory 3. Inventory Cost of sales Purchases Accounts payable 4. No adjustments 5. No adjustments 6. Cost of sales Inventory 7. Sales Accounts receivable Answer: 1. b 2. c 3. a 4. d

8,160 6,250 6,250 7,200 7,200

11,000 20,000

8,160 6,250 6,250 7,200 7,200

11,000 20,000

5. d

Problem 8 CHARMAINE COMPANY is a manufacturer of small tools. The following information was obtained from the company’s accounting records for the year ended December 31, 2006: Inventory at December 31, 2006 (based on physical count in Charmaine’s warehouse at cost on December 31, 2006) 1,870,000 Accounts payable at December 31, 2006 1,415,000 Net sales (sales less sales returns) 9,693,400 Your audit reveals the following information: 

The physical count included tools billed to a customer FOB shipping point on December 31, 2006. These tools cost P64,000 billed at P78,500. They were in the shipping area waiting to be picked up by the customer.



Goods shipped FOB shipping point by a vendor were in transit on December 31, 2006.These goods with invoice cost of P93.400 were shipped on December 29, 2006.



Work in process inventory costing P27,000 was sent to a job contractor for further processing.



Not included in the physical count were goods returned by customers on December 31, 2006. These goods costing P49,000 were inspected and returned to inventory on January 7, 2007. Credit memos for P67,800 were issued to the customers at that date.



In transit to a customer on December 31, 2006, were tools costing P17,740 shipped FOB destination on December 26, 2006. A sales invoice for P29,400 was issued on January 3, 2007, when Charmaine Company was notified by the customer that the tools had been received.

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

At exactly 5:00 pm on December 31, 2006, goods costing P31,200 were received from a vendor. These were recorded on a receiving report dated January 2, 2007. The related invoice was recorded on December 31, 2006, but the goods were not included in the physical count.



Included in the physical count were goods received from a vendor on December 27, 2006. However, the related invoice for P36,000 was not recorded because the accounting department’s copy of the receiving report was lost.



A monthly freight bill for P16,000 was received on January 3, 2007. It specifically related to merchandise bought in December 2006, one half of which was still in the inventory at December 31, 2006. The freight was not included in either the inventory or in accounts payable at December 31, 2006.

Question: Based on your analysis and the information above, answer the following: 1. The inventory at year-end is: a. Understated by P170,340 b. Understated by P162,340

c. Understated by P126,340 d. Understated by P82,140

2. The accounts payable at year-end is: a. Understated by P93,400 b. Understated by P106,200

c. Understated by P137,400 d. Understated by P145,400

3. The amount of sales at year-end is: a. Overstated by P67,800 b. Overstated by P38,400

c. Overstated by P29,400 d. Correctly stated

4. The adjusted balance of inventory at year-end is: a. P 1,952,140 b. P 1,996,340 c. P 2,032,340 5

d. P 2,040,340

The adjusted balance of accounts payable at year-end is: a. P 1,560,400 b. P 1,552,400 c. P 1,521,200

d. P 1,508,400

6. The adjusted balance of sales at year-end is: a. P 9,722,800 b. P 9,693,400 c. P 9,655,000

d. P 9,625,600

Solution Adjusting entry: Cost of sales Inventory Inventory Cost of sales Purchases Accounts payable Inventory Cost of sales Inventory Cost of sales Sales Accounts receivable Inventory Cost of sales Inventory Cost of sales

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64,000 93,400 93,400 27,000 49,000 67,800 17,740 31,200

64,000 93,400 93,400 27,000 49,000 67,800 17,740 31,200

Purchases Accounts payable Inventory Accounts payable Answer: 1. b 2. c 3. a 4. c

36,000 8,000 5. b

36,000 8,000 6. d

Problem 9 The Cruzada Company is a wholesale distributor of automotive replacement parts. amounts taken from Cruzada’s accounting records are as follows:

Initial

Inventory at December 31, 2006 (based on physical count of goods in warehouse on December 31, 2006); P1,250,000. Accounts payable at December 31, 2006: Dacalos Company 2% 10 days, net 30 Dano Company Net 30 De Lira Company Net 30 Dela Cruz Company Net 30 Deza Company Net 30 Encabo Company Net 30 Sales in 2006

265,000 210,000 300,000 225,000 -___ P 1,000,000 P 9,000,000

Additional information is as follows: a. Parts held on consigment from Dano Company to Cruzada Company, the consignee, amounting to P155,000, were included in the physical count of goods in Cruzada Company’s warehouse on December 31, 2006 and in accounts payable at December 31, 2006. b. P22,000 of parts which sere purchased from Deza Company and paid for in December 2006 were sold in the last week of 2006 and appropriately recorded as sales of P28,000. The parts were included in the physical count of goods in Cruzada’s warehouse on December 31, 2006, because the parts were on the loading dock waiting to be picked up by customers. c. Parts in transit on December 31, 2006, to customers, shipped f.o.b. shipping point, on December 28, 2006, amounted to P34,000. The customers received the parts on January 6, 2007. Sales of P40,000 to the customers for the parts were recorded by Cruzada Company on January 2, 2007. d. Retailers were holding P210,000 at cost (P250,000 at retail) of goods on consignment from Cruzada Company, the consignor, at their stores on December 31, 2006. e. Goods were in transit from Encabo Company to Cruzada Company on December 31, 2006. The cost of goods was P25,000 and they were shipped f.o.b. shipping point on December 29, 2006. f.

A quarterly freight bill in the amount of P2,000 specifically relating to merchandise purchases in December 2006, all of which was still in the inventory at December 31, 2006, was received on January 3, 2007. The freight bill was not included in either the inventory or in accounts payable at December 31, 2006.

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g. All of the purchases from Dacalos Company occurred during the last seven days of the year. These items have been recorded in accounts payable and accounted for in the physical inventory at cost before discount. Cruzada’s policy is to pay invoices in time to take advantage of all cash discounts, adjust inventory accordingly, and record accounts payable, net of cash discount. Questions: 1. The adjusted inventory is: a. P 1,326,700 b. P 1,304,700

c. P 1,276,000

d. P 1,270,700

2. The adjusted accounts payable is: a. P 864,700 b. P 866,700

c. P

872,000

d. P 1,017,700

3. The adjusted sales is: a. P 8,960,000

b. P 9,000,000

c. P 9,040,000

d. P 9,100,000

155,000

Accounts payable Purchases

155,000

Solution a. Cost of sales Inventory b. Cost of sales Inventory c. Accounts receivable Sales d. Inventory Cost of sales e. Inventory Accounts payable f. Inventory Accounts payable g. Accounts payable Inventory Answer: 1. b 2. b 3. c

22,000 40,000 210,000 25,000 2,000 5,300

155,000

155,000

22,000 40,000 210,000 25,000 2,000 5,300

Problem 10 Raffy Corporation reported income before income taxes as follows: 2005 2006

P525,000 630,000

The company uses the periodic inventory system. Ending inventories for 2005 and 2006 were properly recorded. The following additional information became available following an analysis of the inventories: (a) Merchandise with a gross invoice price of P7,500 was shipped FOB shipping point by a supplier on terms of 2/10, n/30 in 2005 and was recorded as a purchase by Raffy Corporation in 2005 when the invoice was received: however, the goods were not included in the ending inventory because they were not received until 2006. The company always takes advantage of the early payment discounts and accordingly, records its purchases using the net method. (b) Merchandise that cost P3,000 was purchased FOB shipping point by Raffy Corporation on December 31, 2005 and was shipped by the supplier that day. The merchandise was not included in the 2005 ending inventory and was not recorded as a purchase until 2006.

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(c) Merchandise costing P2,850 was shipped FOB shipping point to a customer in 2005 and not included in the ending inventory for 2005. The sale of P4,260 was recorded in 2006 when the invoice was sent. (d) Goods being held by Raffy Corporation on consignment from a supplier in the amount of P4,950 were included in the physical inventory for 2005. (e) Retailers were holding P6,750 of goods at cost (P9,000 at retail), on consignment from Raffy, at their stores on December 31, 2005. These goods were not included in the ending inventory of Raffy Corporation for 2005. Question: 1. How much is the correct income before taxes for 2005? a. P 643,410 b. P 616,590 c. P 538,410

d. P 511,590

2. How much is the correct income before taxes for 2006? a. P 643,410 b. P 616,590 c. P 538,410

d. P 511,590

3. The cost of sales at December 31, 2006 is understated by: a. P 12,150 b. P 9,750 c. P 9,150

d. P 6,750

4. The Retained earnings – beginning at December 31, 2006 is understated by: a. P 13,410 b. P 12,150 c. P 10,410 d. P 9,150 5. The beginning inventory (January 1, 2006) of Raffy Corporation is understated by: a. P 13,410 b. P 12,150 c. P 9,150 d. P 5,400 Solution a. Beginning inventory (COS) Retained earnings – beg

7,350

b.

Beginning inventory (COS) Retained earnings – beg

3,000

Retained earnings – beg Purchases (COS)

3,000

c.

Sales 4,260 Retained earnings – beg d. Retained earnings – beg 4,950 Beginning inventory (COS)4,950 e. Beginning inventory (COS) 6,750 Retained earnings – beg Answer: 1. c 2. b 3. c 4. a 5. b

7,350 3,000 3,000

Net income (a) (b) (c) (d) (e) Adjusted NI

2005 525,000 7,350 3,000 ( 3,000) 4,260 ( 4,950) 6,750 538,410

2006 630,000 ( 7,350) ( 3,000) 3,000 ( 4,260) 4,950 ( 6,750) 616,590

4,260

6,750

Problem 11 You audit of APAS COMPANY for the year 2006 disclosed the following: 1. The December 31 inventory was determined by a physical count on December 28 and based on such count, the inventory was recorded by: Inventory 1,400,000 Cost of sales 1,400,000 2. The 2006 ledger shows a sales balance of P20,000,000. 3. The company sells a mark-up of 20% based on sales. 4. The company recognizes sales upon passage of title to the customers. 5. All customers are within a four-day delivery area.

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The sales register for December, 2006 and January, 2007, showed the following details: December Register Invoice No. FOB Terms 300 Destination 301 Shipping point 302 Destination 303 Destination 304 Shipping point 305 Shipping point January Register Invoice No. 306 307 308 309 310

FOB Terms Destination Shipping point Destination Shipping point Shipping point

Date Shipped 12/30 12/30 12/23 12/24 01/02 12/29 Date Shipped 12/29 12/29 01/02 01/04 12/27

Questions 1. The Sales for December is over/(under) by: a. P 36,000 under b. P 36,000 over

Amount P 50,000 62,500 47,500 82,500 56,000 90,000 Amount 67,500 74,500 140,000 73,000 67,500

c. P 106,000 under d. P 106,000 over

2. The Inventory for December is over/(under) by: a. P 235,600 over c. P 245,412 under b. P 181,600 over d. P 245,412 over 3. The adjusted inventory at December 31, 2006 is: a. P 1,645,412 b. P 1,218,400 c. P 1,164,400

d. P 1,154,588

4. The adjusted sales at December 31, 2006 is: a. P 20,106,000 b. P 20,036,000 c. P 19,964,000

d. P 19,894,000

5. How much sales for the month of December 2006 were erroneously recorded in January 2007? a. P 282,000 b. P 272,500 c. P 198,000 d. P 142,000 6. How much sales for the month of January 2007 were erroneously recorded in December 2006? a. P 228,500 b. P 188,500 c. P 180,500 d. P 106,000 Solution For SI # 300 Sales 50,000 Accounts receivable 50,000 For SI # 301 Cost of sales 50,000 Inventory 50,000 P62,500 x 80% For SI # 304 Sales 56,000 Accounts receivable 56,000 For SI # 305 Cost of sales 72,000 Inventory 72,000 (P90,000

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For SI # 307 Accounts receivable Sales Cost of sales Inventory P74,500 x 80% For SI # 310 Accounts receivable Sales x 80%)

74,500 59,600

67,500

74,500 59,600

67,500

Unadjusted Sales (1) (3) (5) (7) Adjusted Sales

20,000,000 ( 50,000) ( 56,000) 74,500 67,500 20,036,000

Unadjusted inventory (2) (4) (6) (8) Adjusted inventory

1,400,000 ( 50,000) ( 72,000) ( 59,600) _________ 1,218,400

Sales for the month of December that 2006 were erroneously recorded in January 2007: Invoice # 307 74,500 Invoice # 310 67,500 Total 142,000 Sales for the month of January 2007 were erroneously recorded in December 2006: Invoice # 300 50,000 Invoice # 304 56,000 Total 106,000 Answer: 1. a 2. b 3. b 4. b 5. d 7. d

Problem 12 On December 15, 2006, under your observation, your client took a complete physical inventory and adjusted the financial perpetual inventory control accounts to agree with the physical inventory. As of December 31, 2006, you decided to accept the balance of the control account after examining transactions recorded in that account between December 15 and December 31, 2006. The audit was for the year ended December 31, 2006. In the course of conducting your examination of the sales cutoffs as of December 15 and December 31, 2006, you discovered the following items: Date Inventory Item Cost Price Sales Price Date Shipped Date Billed Control Credited A P 60,000 P 78,000 12-13-06 12-17-06 12-17-06 B 77,000 101,400 01-02-07 12-29-06 12-29-06 C 52,000 67,600 12-17-06 12-29-06 12-29-06 D 87,000 113,100 12-14-06 12-16-06 12-16-06 E 49,500 64,500 12-25-06 01-02-07 01-02-07 Question: Based on the information above and your analysis, answer the following 1. The inventory at year-end is over/(under) by: a. P 174,500 over c. P 114,500 over b. P 174,500 under d. P 114,500 under 2. The cost of sales at year-end is over/(under) by: a. P 174,500 over c. P 114,500 over b. P 174,500 under d. P 114,500 under 3. The sales at year-end is over/(under) by: a. P 36,900 over c. P 101,400 over b. P 36,900 under d. P 101,400 under

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4. The accounts receivable at year-end is over/(under) by: a. P 36,900 over c. P 101,400 over b. P 36,900 under d. P 101,400 under Solution AJEs as of December 31, 2002 Item A

B

C D E

Inventory Cost of Goods Sold This item was not included in the physical inventory and was credited to the Inventory account on 12.17.06; a physical inventory cutoff error.

Debit 60,000

Sales Inventory Accounts Receivable Cost of goods sold This item is a year-end sales cut-off error. Properly recorded; no AJE needed. Inventory Cost of goods sold (same as Item A) Accounts Receivable Cost of goods sold Sales Inventory This item is a year-end sales cut-off error.

Answer: 1. b 2. a

3. a

Credit 60,000

101,400 77,000 101,400 77,000 87,000 64,500 49,500

87,000

64,500 49,500

4. a

Problem 13 The following information was obtained from the balance sheet of LION INC.: Cash Notes receivable Inventory Accounts payable

Dec. 31, 2006 P706,600 0 ? ?

Dec. 31, 2005 P 200,000 50,000 399,750 150,000

All operating expenses are paid by Lion Inc. with cash and all purchases of inventory are made on account. Lion, Inc. sells only one product. All sales are cash sales which are made for P100 per unit. Lion. Inc., purchases 1,500 units of inventory per month and values its inventory using the periodic FIFO. The unit cost of inventory during January 2006 was P65.20 and increased P0.20 per month during the year. During 2006, payments to suppliers totaled P943,400 and operating expenses totaled P440,000. The ending inventory for 2005 was valued at P65.00 per unit. Question: Based on the information above and your analysis, answer the following 1. Recorded sale during 2006 is: a. P 1,840,000 b. P 1,890,000

c. P 2,090,000

d. P 2,140,000

2. Number of units sold during 2006 is: a. 21,400 b. P 20,900

c. 18,900

d. 18,400

20

3. The accounts payable balance at December 31, 2006 is: a. P 400,000 b. P 250,000 c. P 156,000

d. P 150,000

4. The January 1, 2006 inventory balance is: a. P 399,750 b. P 385,900

c. P 380,900

d. P 355,800

5. The amount of inventory at December 31, 2006 is: a. P 399,750 b. P 385,900 c. P 380,900

d. P 355,800

Solution Q1 & Q2 ____________________Cash______________________ Beg. bal.200,000 Payment to supplier 943,400 NR collect 50,000 Ope. expenses 440,000 Sales 1,840,000 Ending balance 706,600 Sales (P) – P1,840,000/P100 = P18,400 units Q3

_______________Accounts Payable_________________ Payment to supplier 943,400 Beg. bal. 156,000 Ending balance 400,000 Purchases 1,193,400 Jan. 1,500 x Feb. 1,500 x Mar 1,500 x Apr 1,500 x May 1,500 x Jun 1,500 x July 1,500 x Aug 1,500 x Sept 1,500 x Oct 1,500 x Nov 1,500 x Dec 1,500 x Total purchases

P65.20 = P 97,800 P65.40 = 98,100 P65.60 = 98,400 P65.80 = 98,700 P66.00 = 99,000 P66.20 = 99,300 P66.40 = 99,600 P66.60 = 99,900 P66.80 = 100,200 P67.00 = 100,500 P67.20 = 100,800 P67.40 = 101,100 1,193,400

P65.20 + P67.40 / 2 = P66.30 x 18,000 units Purchases 1,193,400

Q4

P399,750 / P65.00 = 6,150 units

Q5

6,150 beg. units + 18,000 purchased units – 18,400 sold units = 5,750 ending FIFO:

Total

1,500 1,500 1,500 1,250

x x x x

P67.40 P67.20 P67.00 P66.80

= P101,100 = 100,800 = 100,500 = 83,500 P 385,900

Problem 14 Kitkat Company operates a wholesale oil products company. Kitkat believes that an employee and a customer are conspiring to steal gasoline. The employee records sales to the customer not less than the amount actually placed in the customer’s tank truck. In order to confirm or refuse these suspicions, Kitkat has collected the following data for the past 10 working days. Quantity Cost per (gallons) unit (gal) Total Cost Inventory, September 1 220,000 P1.45 P 319,000 Purchases 1,560,000 1.45 2,262,000 Goods available for sale 1,780,000 2,581,000

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Kitkat had sales of P2,512,000 during this 10-day period. All sales were made at P1.60 per gallon. A physical inventory indicates that there are 192,000 gallons of gasoline in inventory at the close of business on September 10. Questions: 1. How much inventory should be present at the end of the 10-day period (in gallons)? a. 220,000 b. 210,000 c. 200,000 d. 192,000 2. What is the cost of missing inventory? a. P 304,500 b. P 40,600 Answer 1 b 2 c

c. P 26,100

b. P 0

1,780,000 – (2,512,000/1.60) = 210,000 gallons 210,000 – 192,000 = 18,000 x P1.45 = P26,100

Problem 15 You were assigned to audit the factory accounts of Modfood Manufacturing Corporation for the year ended December 31, 2006. The following data were gathered: Total manufacturing Cost Cost of Goods Manufactured Factory Overhead

P 900,000 800,000 75% of direct labor and 25% of total manufacturing cost

Beginning work-in-process inventory, January 1, was 60% of ending work-in-process inventory, December 31, 2006. Manufacturing costs for the year ended December 31, 2006 submitted to you by the factory accountant was as follows: Raw Materials Used Direct Labor Factory Overhead Total

P400,000 275,000 225,000 P900,000

Questions: 1. Assuming cost percentage relationships are stated are correct, what will be the adjustment on manufacturing cost at December 31, 2006? a. Debit: Raw materials used 25,000 Credit Direct labor 25,000 b. Debit: Direct labor 25,000 Credit Raw materials used 25,000 c. Debit: Raw materials used 50,000 Credit Direct labor 50,000 d. Debit: Direct labor 50,000 Credit Raw materials used 50,000 2. How much is the Work-in-process Inventory on December 31, 2006? a. P 200,000 c. P 250,000 b. P 225,000 d. P 275,000

22

Solution 1 b

1

c

Per books Raw Materials Used P400,000 Direct Labor 275,000 Factory Overhead 225,000 Total P900,000 (60% of WIP, end) + 900,000 – WIP,end = 800,000 WIP, end = 100,000/40% = P250,000

Per audit P375,000 300,000 225,000 P900,000

Difference P25,000 over P25,000 under ---

Problem 16 Following are portions of the ANTHONY CORPORATION’S SALES and PURCHASES account for the calendar year 2006: (All sales are mark-up at 30% based on sales price) SALES 12/31

Closing Entry

P 1,411,100

Sales Register 12/25 SI#876 12/27 877 12/29 879 12/31 880

P 1,411,100 Purchase Register 12/27 RR#545 12/28 547 12/29 548 12/30 549

P

P

740,000 15,000 7,500 10,000 20,000 792,500

P 1,230,000 15,000 25,500 55,000 85,600 P 1,411,100

PURCHASES 12/31 Closing Entry

P

P

792,500

_______ 792,500

You observed the physical inventory of goods in the warehouse on December 31, 2006 and were satisfied that it was properly taken. When performing sales and purchases cut-off tests, you found that at December 31, 2006, the last Receiving Report (RR) that had been used was No. 549 and that no shipments have been made on any Sales Invoices (SI) with number larger than No. 878. The following information were found: 1. Included in the warehouse physical inventory at December 31, 2006 were chemicals that had been purchased and received on Receiving Report No. 546 but for which an invoice was not received until 2007. Cost was P14,500. 2. In the warehouse at December 31, 2006, were goods that had been sold and paid for by the customer but which were not shipped out until 2007. They were all sold on Sales Invoice No. 876. 3. On the evening of December 31, 2006, there were two shipments on ANTHONY CORPORATION. First shipment was unloaded on January 3, 2007 and received on Receiving Report No. 548. The freight was paid by the vendor. The second shipment was loaded and sealed on December 31, 2006 but was not delivered until January 2, 2007. This order was sold on Sales Invoice No. 878, P20,000 and freight was paid by the buyer.

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4. Temporarily stranded on December 31, 2006, on a railroad sidings were two trucks of chemicals en route to the Nelson Neil Company. They were sold on Sales Invoice No. 879 and the term were fob destination. 5. En route to ANTHONY CORPORATION on December 31, 2006 was truckload of materials that was received on Receiving Report No. 550. The material was shipped fob destination. 6. Included in the physical inventory were chemicals exposed to rain while in transit and deemed unsalable. Their invoice cost was P5,500 and freight charges of P200 had been paid on the chemicals. This was recorded as purchases on 12/31/02 Questions: 1. The Sales at December 31, 2006 is: s. Overstated by P 70,000 b. Overstated by P 55,000

c. Overstated by P 155,600 d. Overstated by P 15,000

2. The adjusted Sales at December 31, 2006 is: a. P 1,396,100 b. P 1,356,100 c. P 1,341,100

d. P 1,255,500

3. The adjusted Purchases at December 31, 2006 is: a. P 797,000 b. P 796,800 c. P 791,500

d. P 782,500

4. The Purchases at December 31, 2006 is: a. Understated by P4,500 c. Overstated by P10,000 b. Overstated by P 1,000 d. Understated by P 4,300 5.The Inventory at December31, 2006 is: a. Understated by P 8,300 c. Overstated by P12,500 b. Understated by P 14,000 d. Understated by P 12,500 6. The Cost of Sales at December 31, 2006 is: a. Understated by P 17,000 c. Overstated by P1,200 b. Overstated by P 9,500 d. Understated by P12,500 Solution 1. Purchases Accounts payable SI # 546 2. Sales Advances from customers SI # 876 3. Accounts payable Purchases RR # 548 4. Inventory Cost of sales SI#878 - P20,000 x 70% 5. Sales Accounts receivable SI # 879 6. Claims Receivable Purchases Freight-in 7. Cost of sales 5,700 Inventory

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14,500 15,000 10,000 14,000 55,000 5,700

14,500 15,000 10,000 14,000 55,000 5,500 200 5,700

8.

Sales Accounts receivable SI # 880 Answer: 1. C 2. D 3. C 4. B

85,600

5. A

85,600 6. B

Problem 17 On April 15, 2007, a fire damaged the office and warehouse of KAREN MAE CORPORATION. The only accounting record save was the general ledger, from which the trial balance below was prepared. KAREN MAE CORPORATION TRIAL BALANCE March 31, 2007 Cash 200,000 Accounts receivable 400,000 Inventory, December 31, 2006 750,000 Land 350,000 Building and equipment 1,100,000 Accumulated depreciation 413,000 Other Assets 36,000 Accounts payable 237,000 Other expense accruals 102,000 Capital stock 1,000,000 Retained earnings 520,000 Sales 1,350,000 Purchases 520,000 Operating expenses 266,000 ________ 3,622,000 3,622,000 _______________________________________________________________ The following data and information have been gathered: 1. The fiscal year of the corporation ends on December 31. 2. An examination of the April bank statement and canceled checks revealed that checks written during the period April 1-15 totaled P130,000: P57,000 paid to accounts payable as of March 31, P34,000 for April merchandise shipments, and P39,000 paid for other expenses. Deposits during the same period amounted to P129,500, which consisted of receipts on account from customers with the exception of a P9,500 refund from a vendor for merchandise returned in April. 3. Correspondence with suppliers revealed unrecorded obligations at April 15 of P106,000 for April merchandise shipments, including P23,000 for shipments in transit on that date. 4. Customers acknowledge indebtedness of P360,000 at April 15, 2007. It was also estimated that customers owed another P80,000 that will never be acknowledge or recovered. Of the acknowledged indebtedness, P6,000 will probably be uncollectible. 5. The companies insuring the inventory agreed that the corporation’s fire loss claim should be based on the assumption that the overall gross profit ratio for the past two years was in effect during the current year. The corporation’s audited financial statements disclosed this information:

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Net Sales Net purchases Beginning inventory Ending inventory

Year Ended December 31 2006 2005 5,300,000 3,900,000 2,800,000 2,350,000 500,000 660,000 750,000 500,000

6. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The balance of the inventory was a total loss. Questions: 1. Cash balance at April 15, 2007 is: a. P 70,000 b. P 143,000

c. P 190,000

d. P 199,700

2. Accounts Receivable balance at April 15, 2007 is: a. P 350,500 b. P 360,000 c. P 400,000

d. P 440,000

3. Inventory at April 15, 2007 is: a. P 0 b. P 35,000

c. P 58,000

d. P 93,000

4. Accounts payable at April 15, 2007 is: a. P 106,000 b. P 180,000

c. P 276,500

d. P 286,000

5. Sales as of April 15, 2007 is: a. P 1,470,000 b. P 1,510,000

c. P 1,750,000

d. P 1,790,000

6. Net purchases as of April 15, 2007 is: a. P 544,500 b. P 593,500

c. P 627,500

d. P 650,500

7. Cost of Sales as of April 15, 2007 is: a. P 513,000 b. P 547,000

c. P 721,000

d. P 830,500

8. Estimated inventory as of April 15, 2007 is: a. P 570,000 b. P 575,500

c. P 679,500

d. P 830,500

9. Inventory loss at April 15, 2007 is: a. P 477,000 b. P 512,000

c. P 535,000

d. P 570,000

10. The Average Gross Profit for two years (2005 and 2006) is: a. 45% b. 55% c. 42.76%

d. 56.23%

Solution Computation of sales for the period Jan 1 - April 15, 2007 Sales up to March 31, 2007 Sales for the period April 1-15 Accounts Receivable, 4.15.07 Receipts from customers Less Accts. Receivable, 3.31.07 Total sales 1.

26

Computation of the amount of Inventory Fire Loss Inventory, December 31, 2006 Add purchases for the period Jan.1 to April 15 Purchases up to March 31, 2007

P1,350,000 P440,000 120,000 P560,000 400,000

160,000 P1,510,000 P750,000 P520,000

Payments for April mdse. Shipments Unrecorded obligations for April mdse, shipment Purchases returns Merchandise available for sale Less cost of goods sold (P1,510,000 sales x 55%) Estimated inventory on date of fire Less: Proceeds from sale of salvaged mdse. Shipments in transit Inventory fire loss Computation of average GP ratio: Net Sales Beginning Inventory Net purchases Available Ending Inventory Cost of goods sold Gross Profit Gross Profit rate

2005 P3,900,000 P660,000 2,350,000 P3,010,000 500,000 P2,510,000 P1,390,000

JOURNAL ENTRIES – APRIL 1-15 Accounts payable 57,000 Cash 57,000 Purchases 34,000 Cash 34,000 Operating expenses 39,000 Cash 39,000 Cash 129,500 Accounts receivable 120,000 Purchase returns 9,500 Accounts receivable 160,000 Sales 160,000 Purchases 106,000 Accounts payable 106,000 Allowance for bad debts 80,000 Accounts receivable 80,000 Operating expenses (bad debts) 86,000 Allow. for bad debts 86,000 (P80,000 + P6,000) 1. Cash balance at April 15, 2007 is: 2. Accounts Receivable balance at April 15, 2007 is: 3. Inventory at April 15, 2007 is: 4. Accounts payable at April 15, 2007 is: 5. Sales as of April 15, 2007 is: 6. Net purchases as of April 15, 2007 is: 7. Cost of Sales as of April 15, 2007 is: 8. Estimated inventory as of April 15, 2007 is: 9. Inventory loss at April 15, 2007 is: 10. The Average Gross Profit for two years (2005 and 2006) is:

34,000 106,000 (9,500)

P35,000 23,000

2006 P5,300,000 P500,000 2,800,000 P3,300,000 750,000 P2,550,000 P2,750,000

d. a. c. d. b. d. d. a. b. a.

650,500 P1,400,500 830,500 P570,000 58,000 P512,000

Total P9,200,000 P660,000 5,150,000 P5,010,000 750,000 P5,060,000 P4,140,000 45%

P 199,700 P 350,500 P 58,000 P 286,000 P1,510,000 P 650,500 P 830,500 P 570,000 P 512,000 45%

PROBLEM 18 The following accounts were included in the adjusted trial balance of Jeanina Company as of December 31, 2006: Cash Accounts receivable Merchandise Inventory Accounts payable Accrued expenses

P

240,800 563,500 1,512,500 1,050,250 107,750

During your audit, you noted that Jeanina held its cash book open after year-end. In addition, your audit reveled the following

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1. Receipts for January 2007 of P163,650 were recorded in the December 2006 cash receipts book. The receipts of P90,025 represents cash sales and P73,625 represents collections from customers, net of 5% cash discounts. 2. Payments to suppliers made on January 2007 of P93,100, on which discounts of P3,100 were taken, were included in the December 2006 check register. 3. Merchandise inventory is valued at P1,512,500 prior to any adjustments . The following information has been found relating to certain inventory transactions. a. Goods valued at P68,750 are on consignment with a customer. These goods are not included in the P1,512,500 inventory figure. b. Goods costing P54,375 were received from a vendor on January 4, 2007. The related invoice was received and recorded on January 6, 2007. The goods were shipped on December 31, 2006, terms FOB shipping point. c. Goods costing P159,375 were shipped on December 31, 2006, and were delivered to the customer on January3, 2007. The terms of the invoice were FOB shipping point. The goods were included in the 2006 ending inventory even though the sale was recorded in 2006. d. A P45,500 shipment of goods to a customer on December 30, terms FOB destination are not included in the year-end inventory. The goods cost P32,500 and were delivered to the customer on January 3, 2007. The sale was properly recorded in 2007. e. The invoice for goods costing P43,750 was received and recorded as a purchase on December 31, 2006. The related goods, shipped FOB destination were received on January 4, 2007, and thus were not included in the physical inventory. f.

Goods valued at P153,200 are on consignment from a vendor. These goods are not included in the physical inventory.

Questions Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2006. 1. Cash a. P 240,800

b. P 173,500

c. P 170,250

d. P 167,150

2. Accounts receivable a. P 727,150

b. P 641,000

c. P 637,125

d. P 563,500

3. Merchandise inventory a. P 1,520,000

b. P 1,508,750

c. P 1,465,000

d. P 1,252,500

4. Accounts payable a. P 1,197,725

b. P 1,153,975

c. P 1,150,875

d. P 1,143,250

5. Working capital a. P 1,158,800

b. P 1,058,275

c. P 1,055,175

d. P 1,000,800

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6. Current ratio a. 2.00 Solution 1. Accounts receivable Cash Sales discount Sales Cash 2. Cash Purchase discount Accounts payable 3.a Inventory Cost of sales 3.b Inventory Cost of sales Purchases Accounts payable 3.c Cost of sales Inventory 3.d Inventory Cost of sales 3.e Accounts payable Purchases Answer: 1. d 2. b 3. b 4. b

b. 2.01 77,500 90,025 90,000 3,100 68,750 54,375 54,375 159,375 32,500 43,750 5. c

c. 1.84

d. 1.83

73,625 3,875 90,025 93,100 68,750 54,375 54,375 159,375 32,500 43,750 6. c

PROBLEM 19 In conducting your audit of Ma. Angela Corporation, a company engaged in import and wholesale business, for the fiscal year ended June 30, 2006, you determined that its internal control system was good. Accordingly, you observed the physical inventory at an interim date, May 31, 2006 instead of at June 30, 2006. You obtained the following information from the company’s general ledger Sales for eleven months ended May 31, 2006 Sales for the fiscal year ended June 30, 2006 Purchases for eleven months ended May 31, 2006 (before audit adjestments0 Purchases for the fiscal year ended June 30, 2006 Inventory, July 1, 2005 Physical inventory, May 31, 2006

P1,344,000 1,536,000 1,080,000 1,280,000 140,000 220,000

Your audit disclosed the following additional information. (1) Shipments costing P12,000 were received in May and included in the physical inventory but recorded as June purchases. (2) Deposit of P4,000 made with vendor and charged to purchases in April 2006. Product was shipped in July 2006. (3) A shipment in June was damaged through the carelessness of the receiving department. This shipment was later sold in June at its costs of P16,000.

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Questions: In audit engagements in which interim physical inventories are observed, a frequently used auditing procedure is to test the reasonableness of the year-end inventory by the application of gross profit ratios. Based on the above and the result of your audit, you are to provide the answers to the following: 1. The gross profit ratio for eleven months ended May 31, 2006 is a. 20% b. 25% c. 30%

d. 35%

2. The cost of goods sold during the month of June, 23003 using the gross profit ratio method is a. P 132,000 b. P 148,000 c. P 144,000 d. P 160,000 3. The June 30, 2006 inventory using the gross profit method is a. P 260,000 b. P 264,000 c. P 268,000 Solution Q1 Beginning inventory Purchases – adjusted TGAS Ending inventory Cost of goods sold Sales COS Gross Profit

d. P 340,000

140,000 1,088,000 (P1,080,000 + P12,000 – P4,000) 1,228,000 220,000 1,008,000 1,344,000 1,008,000 336,000

25%

Q2 Sales for the fiscal year ended June 30, 2003 Sales for the eleven months ended May 31, 2003 Sales for the month of June 30, 2003 Less: Sales of goods at cost Sales with gross profit x Cost Rate Total Plus: Sale of goods at cost Total Cost of Goods Sold for June 2003 Q3 Ending inventory Purchases for the month of June Goods sold at cost Total Less: Cost of items sold in June Gross Profit

P 1,536,000 1,344,000 P 192,000 16,000 P 176,000 25% P 132,000 16,000 P 148,000

P 220,000 200,000 (P1,280,000 – P1,080,000) ( 16,000) P 404,000 144,000 (P192,000 x 75%) P 260,000

Problem 20 You are engaged to audit the Abam’z Company and its subsidiary, Yamas Company as of December 31, 2005. The Abam’z Company manufactures tires with it sells to its subsidiary at cost plus 30%. During the course of the audit, you discover that the balances of the inter-company accounts are not reconciled. Following is a copy of part of the inter-company ledger sheets: Date Dec. 26 27 28

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Reference Total Forwarded SI 903 SI 904 SI 905

Accounts Receivable from Yamas Amount Date Reference P180,000 7,600 4,000 6,200

Dec.26 29 31

Total Forwarded CR CR Balance

Amount P130,000 10,000 20,000 52,500

29 31

Date

SI 906 SI 908

Reference

Total Forwarded Dec. 26 CD 31 CD 31 RG 80 31 Balance

3,700 11,000 P 212,500

P 212,500

Accounts Payable to Abam’z Amount Date P140,000 20,000 28,000 4,100 16,700

Dec. 26 28 29 31 31

Reference Total Forwarded VR 1003-902 VR 1004-903 VR 1005-904 VR 1006-907 VR 1010-909

P 208,800

Amount P161,000 19,000 7,600 4,000 9,000 8,200 P 208,800

Legend for references: SI – Sales register and invoices number CR – Cash receipts book CD – Cash disbursements book VR – Voucher register, receiving report number, and Abam’z invoice number RG – Returned goods register and debit memo number A review of the inventory observation working papers discloses the following information: Observation at Abam’z Company on December 31, 2005: 1. Last shipment prior to the physical inventory was billed on Invoice number 908 dated December 31, 2005. 2. No returned merchandise was received from Yamas Company during the month of December 2005. Observation at Yamas Company on December 31, 2005: 1. The last shipment of merchandise returned to Abam’z in December 2005 was entered on debit memo number 80 dated December 31, 2005. 2. The last receiving report used in December 2005 was number 1007 dated December 31, 2005 for merchandise billed on Abam’z invoice number 905. Questions: 1. What is the total unrecorded purchases of Yamas as of December 31, 2005? a. P 29,900 b. P 20,900 c. P 14,700 d. P 11,000 2. What is the reconciled balance of the inter-company accounts at December 31, 2005? a. P 7,600 b. P 30,346 c. P 29,400 d. P 37,600 3. Abam’z Company’s inventory at December 31, 2005 should be increased by a. P 3,154 b. P 4,100 c. P 10,077 d. P 6,923 4. Yamas Company’s inventory at December 31, 2005 should be increased by a. P 29,400 b. P 4,100 c. P 11,000 d. P 14,700

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Solution:

Abam’z Company and Yamas Company Reconciliation of Inter-Company Accounts Abam’z Unadjusted balance 52,500 Abam’z shipments not recorded by Yamas SI # 905 SI # 906 SI # 908 SI # 907 – not recorded by Abam’z 9,000 SI # 909 – recorded by Yamas although there is no shipment made by Abam’z RG # 80 – not yet recorded by Abam’z (4,100) Remittance from Yamas not yet recorded by Abam’z ( 28,000) Adjusted balance 29,400 Inventory Adjustments December 31, 2005 Items to be added on inventory lists: Cost of returned goods in transit (4,100/130%) Cost of purchases in transit – SI # 906 SI # 908 Total addition to inventory

Adjusting Entry:

Book of Abam’z Accounts Receivable 9,000 Sales SI # 907 Sales Ret. & Allow. 4,100 Accounts Receivable Goods in transit from Yamas

9,000

4,100

Cash 28,000 Accounts Receivable 28,000 Cash in transit from Yamas

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Abam’z

Yamas 16,700 6,200 3,700 11,000 (8,200) ______ 29,400

Yamas

3,154 _____ 3,154

3,700 11,000 14,700

Book of Yamas Purchases 20,900 Accounts payable 20,900 SI # 905, 906, 908 Accounts payable 8,200 Purchases SI # 909

8,200