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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. 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
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.
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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.
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.
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3. Item letter c is;
Debit Credit
a. Inventory 50,000 Cost of sales 50,000
b. Cost of sales 50,000 Inventory 50,000
c. Inventory 50,000 Retained earnings 50,000
e d. No adjustment
Answer -
1. a 2. d 3. a 4. b 5. b
Problem 3
You have observed the physical count of DEMI CORPORATIONs 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.
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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 on-hand at December 31, 2006
were not yet reported in 2006 inventory.
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
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
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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 COMPANYS 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 PRINCES 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.
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.
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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
Solution
1. Sales 35,000
Accounts receivable 35,000
2. Inventory 50,000
Cost of sales 50,000
Purchases 50,000
Accounts payable 50,000
3. Inventory 20,000
Cost of sales 20,000
4. Inventory 26,000
Cost of sales 26,000
Sales 40,000
Accounts receivable 40,000
5. Inventory 25,000
Cost of sales 25,000
6. Purchases 60,000
Accounts payable 60,000
7. Inventory 4,000
Accounts payable 4,000
Answer:
1. a 2. a 3. c 4. d
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.
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 suppliers warehouse on
December 31, 2006. Because the merchandise was not on hand at December 31, 2006, it
was not included in the inventory.
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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 Arceniths shipping room
when the physical inventory was taken. It was included in the inventory because it was
marked Hold for customers 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.
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.
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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
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1. c 2. a 3. b 4. c 5.b 6. a
Problem 6
Marlisa Companys 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 cut-off, both the
beginning and ending of each year, you discover the following facts:
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.
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:
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
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Solution
a. Retained earnings 3,260
Purchases 3,260
b. Beginning inventory 4,100
Retained earnings 4,100
c. Purchases 7,260
Accounts payable 7,260
d. Inventory 3,600
Cost of sales 3,600
e. Inventory 1,500
Cost of sales 1,500
Purchases 1,500
Accounts payable 1,500
Answer: 1. c 2. c 3. c 4. a
Problem 7
During the 2006 audit of JONES Manufacturing Companys 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 customers 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.
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.
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Selected account balances before considering the effects of the above items are as follows:
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
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
Solution
1. Inventory 8,160
Cost of Sales 8,160
2. Accounts payable 6,250
Purchases 6,250
Cost of sales 6,250
Inventory 6,250
3. Inventory 7,200
Cost of sales 7,200
Purchases 7,200
Accounts payable 7,200
4. No adjustments
5. No adjustments
6. Cost of sales 11,000
Inventory 11,000
7. Sales 20,000
Accounts receivable 20,000
Answer:
1. b 2. c 3. a 4. d 5. d
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Problem 8
CHARMAINE COMPANY is a manufacturer of small tools. The following information was
obtained from the companys accounting records for the year ended December 31, 2006:
Inventory at December 31, 2006 (based on
physical count in Charmaines 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
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.
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 departments copy of the receiving report was lost.
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Question:
Based on your analysis and the information above, answer the following:
Solution
Adjusting entry:
Cost of sales 64,000
Inventory 64,000
Inventory 93,400
Cost of sales 93,400
Purchases 93,400
Accounts payable 93,400
Inventory 27,000
Cost of sales 27,000
Inventory 49,000
Cost of sales 49,000
Sales 67,800
Accounts receivable 67,800
Inventory 17,740
Cost of sales 17,740
Inventory 31,200
Cost of sales 31,200
Purchases 36,000
Accounts payable 36,000
Inventory 8,000
Accounts payable 8,000
Answer:
1. b 2. c 3. a 4. c 5. b 6. d
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Problem 9
The Cruzada Company is a wholesale distributor of automotive replacement parts. Initial
amounts taken from Cruzadas accounting records are as follows:
Inventory at December 31, 2006 (based on physical count of goods in warehouse on December
31, 2006); P1,250,000.
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 Companys
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 Cruzadas 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. Cruzadas 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
Solution
a. Cost of sales 155,000 Accounts payable 155,000
Inventory 155,000 Purchases 155,000
b. Cost of sales 22,000
Inventory 22,000
c. Accounts receivable 40,000
Sales 40,000
d. Inventory 210,000
Cost of sales 210,000
e. Inventory 25,000
Accounts payable 25,000
f. Inventory 2,000
Accounts payable 2,000
g. Accounts payable 5,300
Inventory 5,300
Answer:
1. b 2. b 3. c
Problem 10
Raffy Corporation reported income before income taxes as follows:
2005 P525,000
2006 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.
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(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.
(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
Solution
a. Beginning inventory (COS) 7,350 2005 2006
Retained earnings beg 7,350 Net income 525,000 630,000
(a) 7,350 ( 7,350)
b. Beginning inventory (COS) 3,000 (b) 3,000 ( 3,000)
Retained earnings beg 3,000 ( 3,000) 3,000
(c) 4,260 ( 4,260)
Retained earnings beg 3,000 (d) ( 4,950) 4,950
Purchases (COS) 3,000 (e) 6,750 ( 6,750)
Adjusted NI 538,410 616,590
c. Sales 4,260
Retained earnings beg 4,260
d. Retained earnings beg 4,950
Beginning inventory (COS) 4,950
e. Beginning inventory (COS) 6,750
Retained earnings beg 6,750
Answer:
1. c 2. b 3. c 4. a 5. b
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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.
The sales register for December, 2006 and January, 2007, showed the following details:
December Register
Invoice No. FOB Terms Date Shipped Amount
300 Destination 12/30 P 50,000
301 Shipping point 12/30 62,500
302 Destination 12/23 47,500
303 Destination 12/24 82,500
304 Shipping point 01/02 56,000
305 Shipping point 12/29 90,000
January Register
Invoice No. FOB Terms Date Shipped Amount
306 Destination 12/29 67,500
307 Shipping point 12/29 74,500
308 Destination 01/02 140,000
309 Shipping point 01/04 73,000
310 Shipping point 12/27 67,500
Questions
1. The Sales for December is over/(under) by:
a. P 36,000 under c. P 106,000 under
b. P 36,000 over d. P 106,000 over
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
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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 For SI # 307
Sales 50,000 Accounts receivable 74,500
Accounts receivable 50,000 Sales 74,500
For SI # 301 Cost of sales 59,600
Cost of sales 50,000 Inventory 59,600
Inventory 50,000 P74,500 x 80%
P62,500 x 80%
For SI # 304 For SI # 310
Sales 56,000 Accounts receivable 67,500
Accounts receivable 56,000 Sales 67,500
For SI # 305
Cost of sales 72,000
Inventory 72,000 (P90,000 x 80%)
Unadjusted Sales 20,000,000 Unadjusted inventory 1,400,000
(1) ( 50,000) (2) ( 50,000)
(3) ( 56,000) (4) ( 72,000)
(5) 74,500 (6) ( 59,600)
(7) 67,500 (8) _________
Adjusted Sales 20,036,000 Adjusted inventory 1,218,400
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
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Question:
Based on the information above and your analysis, answer the following
Solution
B Sales 101,400
Inventory 77,000
Accounts Receivable 101,400
Cost of goods sold 77,000
This item is a year-end sales cut-off error.
C Properly recorded; no AJE needed.
D Inventory 87,000
Cost of goods sold 87,000
(same as Item A)
E Accounts Receivable 64,500
Cost of goods sold 49,500
Sales 64,500
Inventory 49,500
This item is a year-end sales cut-off error.
Answer:
1. b 2. a 3. a 4. a
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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 customers 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
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
Answer
1 b 1,780,000 (2,512,000/1.60) = 210,000 gallons
2 c 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:
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:
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
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c. Debit: Raw materials used 50,000
Credit Direct labor 50,000
d. Debit: Direct labor 50,000
Credit Raw materials used 50,000
Solution
1 b Per books Per audit Difference
Raw Materials Used P400,000 P375,000 P25,000 over
Direct Labor 275,000 300,000 P25,000 under
Factory Overhead 225,000 225,000 ---
Total P900,000 P900,000
1 c (60% of WIP, end) + 900,000 WIP,end = 800,000
WIP, end = 100,000/40% = P250,000
Problem 16
Following are portions of the ANTHONY CORPORATIONS 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 P 1,230,000
12/25 SI#876 15,000
12/27 877 25,500
12/29 879 55,000
12/31 880 85,600
P 1,411,100 P 1,411,100
PURCHASES
Purchase Register P 740,000 12/31 Closing Entry P 792,500
12/27 RR#545 15,000
12/28 547 7,500
12/29 548 10,000
12/30 549 20,000 _______
P 792,500 P 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.
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.
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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.
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.
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 c. Overstated by P 155,600
b. Overstated by P 55,000 d. Overstated by P 15,000
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Solution
1. Purchases 14,500
Accounts payable 14,500
SI # 546
2. Sales 15,000
Advances from customers 15,000
SI # 876
3. Accounts payable 10,000
Purchases 10,000
RR # 548
4. Inventory 14,000
Cost of sales 14,000
SI#878 - P20,000 x 70%
5. Sales 55,000
Accounts receivable 55,000
SI # 879
6. Claims Receivable 5,700
Purchases 5,500
Freight-in 200
7. Cost of sales 5,700
Inventory 5,700
8. Sales 85,600
Accounts receivable 85,600
SI # 880
Answer:
1. C 2. D 3. C 4. B 5. A 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
_______________________________________________________________
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The following data and information have been gathered:
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.
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 corporations 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 corporations audited financial statements disclosed this
information:
Year Ended December 31
2006 2005
Net Sales 5,300,000 3,900,000
Net purchases 2,800,000 2,350,000
Beginning inventory 500,000 660,000
Ending inventory 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
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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
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 P1,350,000
Sales for the period April 1-15
Accounts Receivable, 4.15.07 P440,000
Receipts from customers 120,000
P560,000
Less Accts. Receivable, 3.31.07 400,000 160,000
Total sales P1,510,000
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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: d. P 199,700
2. Accounts Receivable balance at April 15, 2007 is: a. P 350,500
3. Inventory at April 15, 2007 is: c. P 58,000
4. Accounts payable at April 15, 2007 is: d. P 286,000
5. Sales as of April 15, 2007 is: b. P1,510,000
6. Net purchases as of April 15, 2007 is: d. P 650,500
7. Cost of Sales as of April 15, 2007 is: d. P 830,500
8. Estimated inventory as of April 15, 2007 is: a. P 570,000
9. Inventory loss at April 15, 2007 is: b. P 512,000
10. The Average Gross Profit for two years (2005 and 2006) is: a. 45%
PROBLEM 18
The following accounts were included in the adjusted trial balance of Jeanina Company as of
December 31, 2006:
Cash P 240,800
Accounts receivable 563,500
Merchandise Inventory 1,512,500
Accounts payable 1,050,250
Accrued expenses 107,750
During your audit, you noted that Jeanina held its cash book open after year-end. In addition,
your audit reveled the following
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.
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.
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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.
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
6. Current ratio
a. 2.00 b. 2.01 c. 1.84 d. 1.83
Answer: 1. d 2. b 3. b 4. b 5. c 6. c
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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 companys general ledger
(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.
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 d. P 340,000
Sales 1,344,000
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COS 1,008,000
Gross Profit 336,000 25%
Q2 Sales for the fiscal year ended June 30, 2003 P 1,536,000
Sales for the eleven months ended May 31, 2003 1,344,000
Sales for the month of June 30, 2003 P 192,000
Less: Sales of goods at cost 16,000
Sales with gross profit P 176,000
x Cost Rate 25%
Total P 132,000
Plus: Sale of goods at cost 16,000
Total Cost of Goods Sold for June 2003 P 148,000
Problem 20
You are engaged to audit the Abamz Company and its subsidiary, Yamas Company as of December 31,
2005. The Abamz 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:
A review of the inventory observation working papers discloses the following information:
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2. No returned merchandise was received from Yamas Company during the month of December 2005.
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
Solution:
Abamz Company and Yamas Company
Reconciliation of Inter-Company Accounts
Abamz Yamas
Unadjusted balance 52,500 16,700
Abamz shipments not recorded by Yamas
SI # 905 6,200
SI # 906 3,700
SI # 908 11,000
SI # 907 not recorded by Abamz 9,000
SI # 909 recorded by Yamas although
there is no shipment made by Abamz (8,200)
RG # 80 not yet recorded by Abamz (4,100)
Remittance from Yamas not yet recorded by
Abamz ( 28,000) ______
Adjusted balance 29,400 29,400
Inventory Adjustments
December 31, 2005
Abamz Yamas
Items to be added on inventory lists:
Cost of returned goods in transit
(4,100/130%) 3,154
Cost of purchases in transit
SI # 906 3,700
SI # 908 _____ 11,000
Total addition to inventory 3,154 14,700
Adjusting Entry:
Book of Abamz Book of Yamas
Accounts Receivable 9,000 Purchases 20,900
Sales 9,000 Accounts payable 20,900
SI # 907 SI # 905, 906, 908
Cash 28,000
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Accounts Receivable 28,000
Cash in transit from Yamas
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