AUDITING PROBLEMS
OCAMPO/CABARLES
AP.1901-Audit of Inventories
OCTOBER 2015
The Use of Assertions in Obtaining Audit Evidence Assertions about classes of transactions and events for the
period under audit: (COCAC)
Completeness - all transactions and events that should have been recorded have been recorded.
Occurrence - transactions and events that have been recorded have occurred and pertain to the entity.
Classification - transactions and events have been recorded in the proper accounts.
Accuracy - amounts and other data relating to recorded transactions and events have been recorded appropriately. Cutoff - transactions and events have been recorded in the correct accounting period.
Assertions about account balances at the period end: (RECV)
Rights and obligations - the entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
Existence - assets, liabilities, and equity interests exist. Completeness - all assets, liabilities and equity interests that should have been recorded have been recorded. Valuation and allocation - assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.
Assertions about presentation and disclosure: (COCA) Completeness - all disclosures that should have been included in the financial statements have been included. Occurrence and rights and obligations - disclosed events, transactions, and other matters have occurred and pertain to the entity.
Classification and understandability - financial information is appropriately presented and described, and disclosures are clearly expressed.
Accuracy and valuation - financial and other information are disclosed fairly and at appropriate amounts.
INTERNAL CONTROL MEASURES 1. Authority and responsibility for controlling the
inventories should be centralized management and in one person.
2. There should be careful selection of inventory personnel and intensive training of such personnel in policies, objectives and system of inventory control. 3. Adequate physical facilities for handling and storage of
inventory should be provided.
4.
Adequate system of procedures, forms and reports related to the management of inventories should be developed and implemented.5. Quantitative controls through perpetual inventory records; book quantities verified with physical counts at least once a year and differences being investigated, promptly adjusted and reported to higher authority should be implemented.
6. Deliveries of materials, finished stock and merchandise should be made only upon specific authorizations emanating at authorized levels.
7. Slow-moving, obsolete and damaged stock should be identified and reported following periodic reviews of physical and book records by qualified employees. Valuation on the basis of approved cost-mark-down methods should be reviewed.
8. Safeguards against that action of the element and inaccuracies in recording receipts and issues should be adopted. Example – Maintaining adequate insurance coverage.
SUBSTANTIVE AUDIT OF INVENTORIES Inventory Balances
Existence: Recorded inventory exist
1. Before the client takes the physical inventory, review and approve the client’s written plan for taking it. 2. Observe the client personnel physically counting
inventory.
3. Confirm inventories on consignment and held in public warehouses.
Completeness: All inventory of the entity recorded
4. Obtain a copy of prenumbered inventory tags used by the client in taking inventory and reconcile the tags to the listing.
5. For selected items, trace from tags to listing.
6. Perform cutoff procedures. Obtain the receiving report number for the last shipment received prior to year-end and determine that the item is included in inventory. Also, identify the last shipping document and determine, based on shipping terms, whether the item was properly recorded in sales or inventory. 7. Perform analytical procedures.
Rights and obligations: Inventory is owned by the entity 8. Determine that consigned inventory has been excluded
from inventory and that inventory pledged has been properly disclosed. Examine confirmations from financial institutions and read minutes of the board of directors’ meetings.
Valuation and allocation: Recorded inventory is valued in accordance with GAAP
9. Considering the method the client uses for inventory valuation, examine invoices for inventory on hand or trace prior year’s inventory listing to verify cost. 10. For selected items, determine net realizable value
(NRV) of the inventory and apply the lower of cost or NRV.
11. Verify computations in the inventory listing. 12. Review the obsolescence of the inventory by:
a. being alert while observing inventory being taken for damaged, slow-moving, or scrap inventory. b. Scanning perpetual records for slow-moving items
and discussing their valuation with client.
Presentation and disclosure: Inventory is classified and disclosed in accordance with GAAP
13. Determine whether accounts are classified and disclosed in the financial statements in accordance with GAAP.
Purchases
Completeness: Purchases that occurred are recorded Trace a sequence of receiving reports to entries in the voucher register. Test cutoff. Account for a sequence of entries in the voucher register.
Occurrence: Recorded purchases are for items that were acquired
Examine underlying documents for authenticity and reasonableness. Scan voucher register for large or unusual items. Trace inventory purchased to perpetual records. Scan voucher register for duplicate payments. Classification: Purchase transactions have been recorded in the proper accounts
For a sample of entries in the purchases journal, verify the accuracy of account coding.
Accuracy (Valuation): Purchases are recorded at proper amounts
Recompute invoices and compare invoice price to purchase order.
Production
Completeness: All production transactions that occurred are recorded
Account for a sequence for production reports.
Occurrence: Recorded production transactions occurred For selected transactions, examine signed materials requisitions, approved labor tickets, and allocation of overhead.
Classification: Production transactions have been recorded in the proper accounts
For a sample of entries, verify the accuracy of account coding.
Accuracy (Valuation): Production transactions are recorded at proper amounts
Test cost records by tracing to underlying documents, such as bill of materials, labor tickets, authorized labor rates, and standard overhead rates. Review variances.
-PROBLEM NO. 1
You were engaged by Quezon Corporation for the audit of the company’s financial statements for the year ended December 31, 2015. The company is engaged in the wholesale business and makes all sales at 25% over cost. The following were gathered from the client’s accounting records:
S A L E S P U R C H A S E S
Date Ref. Amount Date Ref. Amount Balance
forwarded P5,200,000 Balanceforwarded P2,700,000 Dec.
27 SI No. 965 40,000 Dec.27 RR No. 1057 35,000 Dec.
28 SI No. 966 150,000 Dec.28 RR No. 1058 65,000 Dec.
28 SI No. 967 10,000 Dec.29 RR No. 1059 24,000 Dec.
31 SI No. 969 46,000 Dec.30 RR No. 1061 70,000 Dec.
31 SI No. 970 68,000 Dec.31 RR No. 1062 42,000 Dec.
31 SI No. 971 16,000 Dec.31 RR No. 1063 64,000 Dec.
31 Closingentry (5,530,000) Dec.31 Closingentry (3,000,000) P - P
-Note: SI = Sales Invoice RR = Receiving Report
Inventory P600,000
Accounts receivable 500,000
Accounts payable 400,000
You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was properly taken.
When performing sales and purchases cut-off tests, you found that at December 31, the last Receiving Report which had been used was No. 1063 and that no shipments had been made on any Sales Invoices whose number is larger than No. 968. You also obtained the following additional information:
a) Included in the warehouse physical inventory at December 31 were goods which had been purchased and received on Receiving Report No. 1060 but for which the invoice was not received until the following year. Cost was P18,000.
b) On the evening of December 31, there were two trucks in the company siding:
Truck No. CPA 123 was unloaded on January 2 of the following year and received on Receiving Report No. 1063. The freight was paid by the vendor.
Truck No. ILU 143 was loaded and sealed on December 31 but leave the company premises on January 2. This order was sold for P100,000 per Sales Invoice No. 968.
c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to Brooks Trading Corporation. Brooks received the goods, which were sold on Sales Invoice No. 966 terms FOB Destination, the next day.
d) Enroute to the client on December 31 was a truckload of goods, which was received on Receiving Report No. 1064. The goods were shipped FOB Destination, and freight of P2,000 was paid by the client. However, the freight was deducted from the purchase price of P800,000.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Sales for the year ended December 31, 2015
a. P5,250,000 c. P5,400,000
b. P5,150,000 d. P5,350,000
2. Purchases for the year ended December 31, 2015
a. P3,000,000 c. P3,018,000
b. P3,754,000 d. P3,818,000
3. Inventory as of December 31, 2015
a. P864,000 c. P968,000
b. P800,000 d. P814,000
4. Accounts receivable as of December 31, 2015
a. P350,000 c. P370,000
b. P220,000 d. P120,000
5. Accounts payable as of December 31, 2015
a. P418,000 c. P 400,000
b. P354,000 d. P1,218,000
PROBLEM NO. 2
During your audit of the Makati Corporation for the year ended December 31, 2015, you found the following information relating to certain inventory transactions from your observation of the client’s physical count and review of sales and purchases cutoff:
a.
Goods costing P180,000 were received from a vendor on January 3, 2016. The goods were not included in the physical count. The related invoice was received and recorded on December 30, 2015. The goods were shipped on December 31, 2015, terms FOB shipping point.b.
Goods costing P200,000, sold for P300,000, were shipped on December 31, 2015, and were received by the customer on January 2, 2016. The terms of the invoice were FOB shipping point. The goods were included in the ending inventory for 2015 and the sale was recorded in 2016.c.
The invoice for goods costing P150,000 was received and recorded as a purchase on December 31, 2015. The related goods, shipped FOB destination were received on January 2, 2016, but were included in the physical inventory as goods in transit.d.
A P600,000 shipment of goods to a customer on December 30, 2015, terms FOB destination, was recorded as a sale upon shipment. The goods, costing P400,000 and delivered to the customer on January 6, 2016, were not included in the 2015 ending inventory. e. Goods valued at P250,000 are on consignment from avendor. These goods are included in the physical inventory.
f. Goods valued at P160,000 are on consignment with a customer. These goods are not included in the physical inventory.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1.
The inventory as of December 31, 2015 is understated bya. P230,000 c. P140,000
2.
The cost of sales for the year ended December 31, 2015 is overstated bya. P290,000 c. P440,000
b. P110,000 d. P380,000
3.
The profit for the year ended December 31, 2015 is misstated bya. P190,000 over c. P140,000 under
b. P 10,000 over d. P290,000 under
4.
The working capital as of December 31, 2015 is misstated bya. P190,000 over c. P140,000 under
b. P 10,000 over d. P290,000 under
SOLUTION GUIDE
Over (Under)
Inventory COS Profit WC
a (180) 180 (180) (180) b 200 (200) (100) (100) c 150 - - -d (400) 400 200 200 e 250 (250) 250 250 f (160) 160 (160) (160) (140) 290 10 10 PROBLEM NO. 3
Your client, Mandaluyong Company, is an importer and wholesaler. Its merchandise is purchased from several suppliers and is warehoused until sold to customers. In conducting your audit for the year ended December 31, 2015, you were satisfied that the system of internal control was good. Accordingly, you observed the physical inventory at an interim date, November 30, 2015 instead of at year end. You obtained the following information from your client’s general ledger:
Inventory, January 1, 2015 P 1,312,500 Physical inventory, November 30, 2015 1,425,000 Sales for 11 months ended Nov. 30, 2015 12,600,000 Sales for the year ended Dec. 31, 2015 14,400,000 Purchases for 11 months ended Nov. 30,
2015 (before audit adjustments) 10,125,000 Purchases for the year ended Dec. 31,
2015 (before audit adjustments) 12,000,000 Your audit disclosed the following information:
a) Shipments received in November and included in the physical inventory but recorded as December
purchases. P 112,500
b) Shipments received in unsalable condition and excluded from physical inventory. Credit memos had not been received nor chargebacks to vendors been recorded:
Total at November 30, 2015 Total at December 31, 2015
(including the November unrecorded chargebacks)
15,000 22,500 c) Deposit made with vendor and charged
to purchases in October, 2015. Product was shipped in January,
2016. 30,000
d) Deposit made with vendor and charged to purchases in November, 2015. Product was shipped FOB
destination, on November 29, 2015 and was included in November 30, 2015 physical inventory as goods in
transit. 82,500
e) Through the carelessness of the receiving department shipment in early December 2015 was damaged by rain. This shipment was later sold in the last week of December at cost.
150,000
REQUIRED:
1.
Gross profit rate for 11 months ended November 30, 2015.2.
Cost of goods sold during the month of December 2015 using the gross profit method.3.
December 31, 2015 inventory using the gross profit method. SOLUTION GUIDE: Requirement No. 1 Sales, up to 11/30 P12,600,000 Less COS, up to 11/30: Inventory, 1/1 P 1,3,500 Net purchases, 11/30 10,110,000 TGAS 11,422,500 Inventory, 11/30 ( 1,342,500) 10,080,000 Gross profit P 2,520,000Computation of adjusted amounts: Inventory, 11/30 N.P.,11/30 (11 mos.) N.P.,12/31 (12 mos.) Unadjusted 1,425,000 10,125,000 12,000,000 a - 112,500 -b - ( 15,000) ( 22,500) c - ( 30,000) ( 30,000) d ( 82,500) ( 82,500) -e - - -Adjusted 1,342,500 10,110,000 11,947,500 Requirement No. 2 Sales, up to 12/31 P14,400,000 Less sales, up to 11/30 12,600,000 Sales - December 1,800,000 Sales without profit ( 150,000) Sales with profit 1,650,000 x Cost ratio .8
COS with profit 1,320,000
COS without profit 150,000
Total P 1,470,000
Requirement No. 3
Inventory, 1/1 P 1,312,500 Net purchases, 12/31 11,947,500
TGAS 13,260,000
Less cost of sales: With profit
[(14.4M -.15M)x.8] P11,400,000
Without profit 150,000 11,550,000 Estimated inventory, 12/31 P 1,710,000
PROBLEM NO. 4
On April 21, 2015, a fire damaged the office and warehouse of Muntinlupa Company. The only accounting record saved was the general ledger, from which the trial balance below was prepared.
Muntinlupa Company Trial Balance March 31, 2015 DEBIT CREDIT Cash P 180,000 Accounts receivable 400,000 Inventory, Dec. 31, 2014 750,000 Land 350,000 Building 1,100,000 Acc. depreciation P 413,000 Other assets 56,000 Accounts payable 237,000 Accrued expenses 180,000
Share capital, P100 par 1,000,000
Retained earnings 520,000
Sales 1,350,000
Purchases 520,000
Operating expenses 344,000 .
Totals P3,700,000 P3,700,000
The following data and information have been gathered: a. The company’s year-end is December 31.
b. An examination of the April bank statement and cancelled checks revealed that checks written during the period April 1 to 21 totaled P130,000: P57,000 paid to accounts payable as of March 31, P34,000 for April merchandise purchases, 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.
c.
Correspondence with suppliers revealed unpaid obligations at April 21 of P106,000 for April merchandise purchases, including P23,000 for shipments in transit on that date.d.
Customers acknowledged indebtedness of P360,000 at April 21. It was also estimated that customers owed another P80,000 that will never be acknowledged or recovered. Of the acknowledged indebtedness, P6,000 will probably be uncollectible.e. The insurance company agreed that the 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 company’s audited financial statements disclosed the following information: 2014 2013 Net sales P5,300,000 P3,900,000 Net purchases 2,800,000 2,350,000 Beginning inventory 500,000 660,000 Ending inventory 750,000 500,000 f. Inventory with a cost of P70,000 was salvaged and
sold for P35,000. The balance of the inventory was a total loss.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much is the adjusted balance of Accounts Payable as of April 21, 2015?
a. P286,000 c. P237,000
b. P106,000 d. P343,000
2. How much is the net purchases for the period January 1 to April 21, 2015?
a. P650,500 c. P660,000
b. P673,500 d. P683,000
3. How much is the adjusted balance of Accounts Receivable as of April 21, 2015?
a. P400,000 c. P360,000
b. P440,000 d. P354,000
4. How much is the sales for the period January 1 to April 21, 2015?
a. P1,430,000 c. P1,510,000
b. P1,519,500 d. P1,506,000
5. How much is the cost of sales for the period January 1 to April 21, 2015?
a. P786,500 c. P830,500
b. P835,725 d. P828,300
6. How much is the estimated inventory on April 21, 2015?
a. P570,000 c. P623,500
b. P587,775 d. P579,500
7. How much is the estimated inventory fire loss?
a. P579,500 c. P535,000
b. P477,000 d. P512,000
PROBLEM NO. 5
You are engaged in the regular annual examination of the accounts and records of Valenzuela Manufacturing Co. for the year ended December 31, 2015. To reduce the workload at year end, the company, upon your recommendation, took its annual physical inventory on November 30, 2015. You observed the taking of the inventory and made tests of the inventory count and the inventory records.
The company’s inventory account, which includes raw materials and work-in-process is on perpetual basis. Inventories are valued at cost, first-in, first-out method. There is no finished goods inventory.
The company’s physical inventory revealed that the book inventory of P1,695,960 was understated by P84,000. To avoid delay in completing its monthly financial statements, the company decided not to adjust the book inventory until year-end except for obsolete inventory items.
Your examination disclosed the following information regarding the November 30 inventory:
a. Pricing tests showed that the physical inventory was overstated by P61,600.
b. An understatement of the physical inventory by P4,200 due to errors in footings and extensions.
c.
Direct labor included in the inventory amounted to P280,000. Overhead was included at the rate of 200% of direct labor. You have ascertained that the amount of direct labor was correct and that the overhead rate was proper.d. The physical inventory included obsolete materials with a total cost of P7,000. During December, the obsolete materials were written off by a charge to cost of sales.
Your audit also disclosed the following information about the December 31 inventory:
a. Total debits to the following accounts during December were:
Cost of sales P1,920,800
Direct labor 338,800
Purchases 691,600
b. The cost of sales of P1,920,800 included direct labor of P386,400.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Adjusted amount of physical inventory at November 30
a. P1,715,560 c. P1,845,760
b. P1,631,560 d. P1,722,560
2. Adjusted amount of inventory at December 31
a. P1,509,760 c. P1,502,760
b. P1,516,760 d. P1,425,760
3. Cost of materials on hand, and materials included in work in process as of December 31
a. P819,560 c. P728,560
b. P812,560 d. P942,760
4. The amount of direct labor included in work in process as of December 31
a. P618,800 c. P338,800
b. P232,400 d. P386,400
5. The amount of factory overhead included in work in process as of December 31
a. P 772,800 c. P464,800
b. P1,237,600 d. P777,600
PROBLEM NO. 6
Select the best answer for each of the following:
1. Which of the following is not one of the independent auditor's objectives regarding the audit of inventories? a. Verifying that inventory counted is owned by the
client.
b. Verifying that the client has used proper inventory pricing.
c. Ascertaining the physical quantities of inventory on hand.
d. Verifying that all inventory owned by the client is on hand at the time of the count.
2. An auditor is most likely to inspect loan agreements under which an entity’s inventories are pledged to support management’s financial statement assertion of a. Existence or occurrence.
b. Completeness.
c. Presentation and disclosure. d. Valuation or allocation.
3. An auditor selected items for test counts while observing a client’s physical inventory. The auditor then traced the test counts to the client’s inventory listing. This procedure most likely obtained evidence concerning
a. Existence. c. Rights.
b. Completeness. d. Valuation.
4. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of control risk is high an auditor will probably
a. Apply gross profit tests to ascertain the reasonableness of the physical counts.
b. Increase the extent of tests of controls relevant to the inventory cycle.
c. Request the client to schedule the physical inventory count at the end of the year.
d. Insist that the client perform physical counts of inventory items several times during the year. 5. The physical count of inventory of a retailer was higher
than shown by the perpetual records. Which of the following could explain the difference?
a. Inventory item has been counted but the tags placed on the items had not been taken off the items and added to the inventory accumulation sheets.
b. Credit memos for several items returned by customers had not been recorded.
c. No journal entry had been made on the retailer’s books for several items returned to its suppliers. d. An item purchased “FOB shipping point” had not
arrived at the date of the inventory count and had not been reflected in the perpetual records.
6. Purchase cut-off procedures should be designed to test whether all inventory
a. Purchased and received before year-end was paid for.
b. Ordered before year-end was received.
c. Purchased and received before year-end was recorded.
d. Owned by the company is in the possession of the company at year-end.
7. The audit of year-end inventories should include steps to verify that the client’s purchases and sales cutoffs were adequate. These audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a
a. Sale in the subsequent period b. Purchase in the current period c. Sale in the current period
d. Purchase in the subsequent period
8. What form of analytical review might uncover the existence of obsolete merchandise?
a. Inventory turnover rates.
b. Decrease in the ratio of gross profit to sales. c. Ratio of inventory to accounts payable.
d. Comparison of inventory values to purchase invoices.
9. An auditor is most likely to learn of slow-moving inventory through
a. Inquiry of sales personnel b. Inquiry of warehouse personnel c. Physical observation of inventory d. Review of perpetual inventory records.
10. The auditor tests the quantity of materials charged to work in process by tracing these quantities to
a. Cost ledgers.
b. Perpetual inventory records. c. Receiving reports.
d. Material requisitions.
-DO-IT-YOURSELF (DIY) DRILL
PROBLEM NO. 1
Jay Roy Retailing Ltd is a food wholesaler that supplies independent grocery stores. The company operates a perpetual inventory system, with the first-in, first-out method used to assign costs to inventory items. Transactions and other related information regarding two of the items (baked beans and plain flour) carried by Jay Roy Ltd are given below for June 2015 the last month of the company's reporting period.
Baked beans Plain flour
Unit of packaging Case containing 25 x 410g cans Box containing 12 x 4kg bags Inventory @ 1 June 2015 35,000 cases @ P19.60 62,500 boxes @ P38.40 Purchases 1. 10 June: 20,000 cases @ P19.50 per
case
2. 19 June: 47,000 cases @ P19.70 per case
1. 3 June: 15,000 boxes @ P38.45 2. 15 June: 20,000 boxes @ P38.45 3. 29 June: 24,000 boxes @ P39.00 Purchase terms 2/10, n/30, FOB destination n/30, FOB destination
June sales 73,000 cases @ P28.50 95,000 boxes @ 40.00
Returns and allowances A customer returned 5,000 cases that had been shipped in error. The customer's account was credited for P142,500.
As June 15 purchase was unloaded, 1,000 boxes were discovered damaged. A credit of P38,450 was received by Jay Roy Retailing Ltd.
Physical count at 30 June
2015 32,600 cases on hand 1,500 boxes on hand
Explanation of variance No explanation found assumed stolen Boxes purchased on 29 June still in transit on 30 June
Net realizable value at 30
June 2015 P29.00 per case P38.50 per box
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The inventory of baked beans as of June 30, 2015 at cost, as adjusted is
a. P641,860 c. P642,360
b. P642,220 d. P641,360
2. The inventory of plain flour as of June 30, 2015 at cost, as adjusted is
a. P134,575 c. P57,675
b. P993,675 d. P57,725
3. The amount of inventory shortage is
a. P27,440 c. P168,560
b. P27,580 d. P 0
4. The total inventory to be recognized in the balance sheet as of June 30, 2015 is
a. P699,895 c. P 699,535
b. P700,035 d. P1,623,970
5. Which of the following is the best procedure for identifying shortages of specific items in an inventory of raw materials?
a. Compare the results of a physical inventory of raw materials with perpetual inventory records.
b. Compare inventory turnover rates with prevailing rates from previous years.
c. Estimates inventory quantities by using the gross profit method.
d. Review internal controls for the physical protection of inventories.
PROBLEM NO. 2
The Bolinao Company values its inventory at the lower of FIFO cost or net realizable value (NRV). The inventory accounts at December 31, 2014, had the following balances.
Raw materials P 650,000
Work in process 1,200,000
Finished goods 1,640,000
The following are some of the transactions that affected the inventory of the Bolinao Company during 2015.
Jan. 8 Bolinao purchased raw materials with a list price of P200,000 and was given a trade discount of 20% and 10%; terms 2/15, n/30. Bolinao values inventory at the net invoice price
Feb. 14 Bolinao repossessed an inventory item from a customer who was overdue in making payment. The unpaid balance on the sale is P15,200. The repossessed merchandise is to be refinished and placed on sale. It is expected that the item can be sold for P24,000 after estimated refinishing costs of P6,800. The normal profit for this item is considered to be P3,200.
Mar. 1 Refinishing costs of P6,400 were incurred on the repossessed item.
Apr. 3 The repossessed item was resold for P24,000 on account, 20% down.
Aug. 30 A sale on account was made of finished goods that have a list price of P59,200 and a cost P38,400. A reduction of P8,000 off the list price was granted as a trade-in allowance. The trade-in item is to be priced to sell at P6,400 as is. The normal profit on this type of inventory is 25% of the sales price.
QUESTIONS:
Based on the above and the result of your audit, answer the following: (Assume the client is using perpetual inventory system)
6. The entry on Jan. 8 will include a debit to Raw Materials Inventory of
a. P200,000 c. P141,120
b. P144,000 d. P196,000
7. The repossessed inventory on Feb. 14 is most likely to be valued at
a. P14,000 c. P17,200
b. P24,000 d. P14,400
a. Debit to Cash of P24,000.
b. Debit to Cost of Repossessed Goods Sold of P14,000.
c. Credit to Profit on Sale of Repossessed Inventory of P3,600.
d. Credit to Repossessed Inventory of P20,400. 9. The trade-in inventory on Aug. 30 is most likely to be
valued at
a. P8,000 c. P6,000
b. P4,800 d. P6,400
10. How much will be recorded as Sales on Aug. 30?
a. P51,200 c. P57,200
b. P56,000 d. P57,600
PROBLEM NO. 3
The cost goods sold section of the income statement prepared by your client for the year ended December 31 appears as follows:
Inventory, January 1
Purchases P 80,000 1,600,000 Cost of goods available for sale
Inventory, December 31
1,680,000
100,000 Cost of goods sold P1,580,000 Although the books have been closed, your working paper trial balance is prepared showing all accounts with activity during the year. This is the first time your firm has made an examination. The January 1 and December 31 inventories appearing above were determined by physical count of the goods on hand on those dates and no reconciling items were considered. All purchases are FOB shipping point.
In the course of your examination of the inventory cutoff, both at the beginning and end of the year, you discovered the following facts:
Beginning of the Year
1. Invoices totaling P25,000 were entered in the voucher register in January, but the goods were received during December.
2. December invoices totaling P13,200 were entered in the voucher register in December, but goods were not received until January.
End of the Year
3. Sales of P43,000 (cost of P12,900) were made on account on December 31 and goods delivered at that time, but all entries relating to the sales were made on January 2.
4. Invoices totaling P15,000 were entered in the voucher register in January, but the goods were received in December.
5. December invoices totaling P18,000 were entered in the voucher register in December, but the goods were not received until January.
6. Invoices totaling P12,000 were entered in the voucher register in January, and the goods were received in January, but the invoices were dated December. Based on the preceding information, determine the net working paper adjustment that should be made for each of the following accounts:
11. Retained earnings a. P13,200 credit c. P25,000 debit b. P11,800 debit d. P38,200 debit 12. Purchases a. P27,000 debit c. P25,000 credit b. P28,000 debit d. P2,000 debit 13. Beginning inventory a. P25,000 credit c. P13,200 debit b. P38,200 debit d. P11,800 debit 14. Accounts receivable a. P43,000 debit c. P30,000 debit b. P43,000 credit d. No adjustment 15. Sales a. P43,000 debit c. P30,000credit b. P43,000 credit d. No adjustment - end of AP.1901 -
