HOMEWORK#1

Problem A
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 P 185,000

Inventory 114,500
Accounts payable 67,200
Sales 942,400
Gross profit 287,990
Net income 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

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

Finals_Inventories_exercises Page 1
Problem B
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.

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 Credit
a. Cost of sales 90,000 Inventory 90,000
b. Inventory 90,000 Cost of Sales 90,000
c. Retained earnings 90,000 Inventory 90,000
d. No adjustment

2. Item letter “b” is:

Debit Credit
a. Cost of sales 28,000 Inventory 28,000
b. Inventory 28,000 Cost of sales 28,000
c. Cost of sales 35,000 Inventory 35,000
d. No adjustment

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
d. No adjustment

4. Item letter “d” is:

Debit Credit
a. Cost of sales 15,000 Inventory 15,000
b. Inventory 15,000 Cost of sales 15,000
c. Inventory 15,000 Retained earnings 15,000
d. No adjustment

5. Item letter “d” is:

Debit Credit
a. Cost of sales 500 Inventory 500
b. Inventory 500 Cost of sales 500
c. Cost of sales 10,000 Inventory 10,000
d. Inventory 10,000 Cost of sales 10,000

Finals_Inventories_exercises Page 2
CLASSROOM EXERCISES

Problem 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

Problem 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

Problem 3
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 20,000
2.Items ordered and in receiving department, invoice not yet
received from supplier 50,000
3.Items counted in warehouse by the inventory crew 70,000
4.Invoice received for goods ordered, goods shipped but not received
(Anecito Company pays freight) 5,000
5.Items, shipped today, fob destination, invoice mailed to customer 5,000
6.Items currently used for window displays 10,000
7.Items on counter for sale per inventory count [not in (3)] 90,000
8.Items in shipping department, invoice not mailed to customer 6,000
9.Items in receiving department, refused by Anecito because of
Damage [(not in (3)] 3,000
10. Items shipped today, fob shipping point, invoice mailed to customer 4,000
11. Items included in warehouse count, damaged, not returnable 8,000
12. Items included in warehouse count, specifically crafted and
segregated for shipment to customer in five days per sales
contract, with return privilege. 18,000

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

Finals_Inventories_exercises Page 3
Problem 4
The ABC Company reviewed its inventories and found the following items:

A. In the shipping room was a product costing P13,400 when the physical count was taken.
Because it was marked “Hold for shipping instructions,” it was not included in the count.
The customer order was dated December 15, but the product was shipped and the
customer billed on January 4, 2019.
B. On December 27, 2018, merchandise costing P11,648 was received and recorded. The
invoice accompanying the merchandise was marked on “consignment”.
C. The company received merchandise costing P4,625 on January 2, 2019. The invoice,
which was recorded on January 3, 2019, showed shipment was made under FOB shipping
point on December 31, 2018. The merchandise was not included in the inventory because
it was not on hand when the physical count was not taken.
D. A product costing P50,000, fabricated to order for a particular customer, was completed
and in the shipping room on December 31. Although it was shipped on January 5, 2019,
the customer was billed on December 31, 2018, and it was excluded from the inventory.
E. Merchandise costing P16,666 was received on January 5, 2019, and the related purchase
invoice was recorded January 6. The shipment of this merchandise was made on
December 31, 2018, FOB destination.
F. A product costing P150,000 was sold on an installment basis on December 10, 2018. It
was delivered to the customer on that date. The product was included in inventory
because ABC Co still holds legal title. The company experience suggests that full
payment on installment sales is reasonably assured.
G. An item costing P65,000 was sold and delivered to the customer on December 29, 2018.
The goods were included in the inventory because the sale was with a repurchase
agreement that requires ABC Co. to buy back the inventory on January 15, 2019.

What is the amount of inventory to be included as of December 31, 2018?

Problem 5
The following information is available for Creole Company for 2017

Net sales 2,000,000

Freight-in 45,000
Purchase discounts 25,000
Ending inventory 300,000

The gross margin is 40% of net sales. What is the cost of goods available for sale?
a. 1,700,000
b. 1,500,000
c. 1,200,000
d. 1,220,000

Finals_Inventories_exercises Page 4
Problem 6
Your client furnished you with the following data:

Merchandise inventory, January 1 P 60,000

Purchases, January 1 to October 31 415,000
Purchase returns and allowances 5,000
Transportation In 10,000
Sales, January 1 to October 31, at 35% above cost 540,000
Merchandise nit damaged by fire on October 31 42,000

Using the gross profit test, what was the estimated loss in inventory due to the fire?
a. 38,000
b. 60,000
c. 80,000
d. None of these

Problem 7
You have engaged to perform an audit of the accounts of Kamp Company for its first year of
operations ending December 31, 2011. You have observed the taking of the physical inventory of
the company on December 28, 2011. All sales are made on an FOB shipping point basis. An
excerpt of the company’s trial balance revealed the following information:

Accounts Receivable P 225,000

Inventory, physical count 127,500
Sales 2,543,000
Purchases 1,125,600

The following lists of sales invoice are entered in the sales books for the months of December
2011 and January 2012 respectively.

DECEMBER 2011
Selling Price SI Date Cost Date Shipped

1 3,000.00 December 21 2,000.00 December 31, 2011

2 7,000.00 December 28 6,100.00 December 28, 2011

3 2,000.00 December 31 800.00 January 3, 2012

4 1,000.00 December 29 600.00 December 30, 2011

5 14,500.00 November 7 8,200.00 December 01, 2011

6 4,000.00 December 31 2,400.00 January 3, 2012

December 28 (shipped
to consignee); unsold as
7 10,000.00 December 30 5,600.00 at December 31, 2011

Finals_Inventories_exercises Page 5
 JANUARY 2012

8 6,000.00 December 31 4,000.00 December 30, 2011

9 6,300.00 December 28 4,400.00 January 1, 2012

10 8,000.00 January 3, 2012 5,500.00 December 31, 2011

What are the adjusted balances of the following accounts:

A. Sales
B. Accounts Receivable
C. Inventories
D. Cost of Sales

Problem 8
You have been engaged to audit Ayala Company for the year ended December 31, 2011. The
company is engaged in the wholesale business and makes all sales at 30% gross profit based on
sales price.

Portion of the client’s sales and purchases accounts for the calendar year 2011 follow:

SALES
Date Reference Amount Date Reference Amount

12/31 Closing entry 4,313,000.00 Balance Forwarded 4,000,000.00

12/27 SI#706 60,000.00

12/28 SI#708 80,000.00

12/28 SI#709 50,000.00

12/31 SI#710 40,000.00

12/31 SI#711 45,000.00

12/31 SI#712 38,000.00

4,313,000.00 4,313,000.00

Finals_Inventories_exercises Page 6
 Purchases
Date Reference Amount Date Reference Amount
Balance
forwarded Closing entry 3,200,000.00 12/31 Closing entry 3,735,000.00

12/28 RR#903 100,000.00

12/30 RR#905 110,000.00

12/31 RR#906 150,000.00

12/31 RR#907 175,000.00

3,735,000.00 3,735,000.00

RR is Receiving report and SI is Sales Invoice.

You observed the physical inventory in the warehouse on December 31, 2011, and were satisfied
that it was properly taken. Per cut off test, the last receiving report used was No. 907 and the last
sales invoice with actual shipment of goods was No. 709.

The following additional information were gathered:

A. Included in the physical inventory were goods purchased and received on receiving report
No. 904 but the corresponding invoice document was received on January 3, 2012. Cost
was P90,000.
B. In the warehouse at December 31, 2011, were goods covered by the sales invoice No.
706. Since the customer has already advanced the payment for these goods, there were no
longer included in the physical inventory count.
C. The company uses the railroad facilities of PNR for its purchases or sales shipments. On
the evening of December 31, 2011, there were 3 cars still on the Ayala company siding:
a. Car No. 1 was unloaded on January 2, 2012, and received per receiving report No.
905
b. Car No. 2 was loaded and sealed on December 31, 2011and was switched off the
company’s siding on January 2, 2012. These goods were billed per sales invoice
No. 708
c. Car No. 3 was loaded and sealed on December 31, 2011 and was switched off the
company’s siding on January 2, 2012. The sales price was P120,000. This order
was covered by sales invoice No. 707.
D. The tracks were damaged in Quezon Province on December 31, 2011. In the train cars
were goods in transit to a customer in Bicol. The goods were billed on sales invoice No.
709 and the terms were FOB destination.
E. In transit to Ayala on December 31, 2011, were goods received per receiving report No.
910. The freight of P1,000 was properly deducted from the purchase price of P31,000.

Finals_Inventories_exercises Page 7
 F. Included in the physical inventory count were unsalable items because they were exposed
to rain while they were in transit to Ayala. The invoice cost for the goods which were
shipped FOB Seller was P10,000.
G. In transit to Ayala on December 31, 2011 were goods acknowledged per receiving report
No. 915. The freight of P2,500 was paid by the supplier. The supplier’s invoice shows a
total price of P37,500 inclusive of the freight charge

Required:

What are the adjusted balances of:

 Sales

 Purchases

Problem 9
Having been engaged as external auditor of Duhat Company on February 28, 2012, you were
unable to observe the taking of inventory on December 31, 2011, which was reported to amount
to P335,000. The following data, however, were gathered by you:

Inventory, December 31, 2010 320,000.00

Purchases during 2011 1,430,000.00

Purchase discount 15,000.00

Purchase allowances 5,000.00

Cash sales during 2011 350,000.00

Shipment received on December 26,2011 were not recorded as
purchases 10,000.00
Shipments made in 2011, under FOB Shipping Point were received
on January 2, 2012. These were recorded as 2011 purchases 25,000.00
Deposits made with suppliers, entered as purchases. Goods were not
received in 2011 20,000.00

2011 Collections on accounts receivable 1,790,000.00

Accounts receivable, January 1, 2011 250,000.00

Accounts receivable, December 31, 2011 300,000.00

Sales discounts 30,000.00

Sales returns, including P20,000 that was refunded to customers 50,000.00

Gross profit percentage on sales 40%

Finals_Inventories_exercises Page 8
The estimated inventory shortage at December 31, 2011 was:
a. 40,000
b. 50,000
c. 60,000
d. None of these

Problem 10

In your audit of the December 31, 2014 financial statements of Ivy Inc., you found the following
inventory related transactions:

A. Goods costing P100,000 are on consignment with a customer. These goods were invoiced
at normal profit margin which was 40% based on cost and was recorded as 2014 sales.
Being offsite on the count date which was on December 30, 2013, the goods were not
included in the physical count.
B. Goods costing P33,000 were delivered to Ivy Inc., on January 4, 2015. The invoice of
these goods were received and recorded on January 10, 2015. The invoice showed the
shipment was made on December 29, 2014, FOB Shipping point.
C. Goods costing P40,000 were shipped FOB shipping point on December 31, 2014, and
were received by the customer on January 2, 2015. Although sale was recorded in 2014,
these goods were included in the 2014 inventory.
D. Goods costing P16,000 were shipped to a customer on December 30. 2014, FOB
Destination. These goods were received by the customer on January 5, 2015 and were not
included in the physical count. The sale was properly recorded in 2015.
E. Good costing P22,00 shipped by a vendor under FOB Destination term, were received on
January 3, 2015. The related invoice however, were received on December 31, 2014, thus
was recorded as purchase in 2014.
F. Goods costing P50,000 were received from a vendor under consignment term. These
goods were included in the physical count. No purchase related to the inventory had been
recorded yet.
G. Ivy Inc., recorded as 2014 sale a P112,000 invoice for goods delivered to a customer on
December 31, 2014, FOB Destination. The goods were received by the customer on
January 5, 2015. Having been delivered after the count date, the goods were included in
the physical count.
Requirements:

1. What is the net adjustment to inventories as of December 31, 2014?

a. 59,000
b. 43,000
c. 50,000
d. 66,000
2. Assuming all sales are on account, what is the net adjustment to accounts receivable as of
December 31, 2014?
a. 260,000
b. 252,000
c. 140,000
d. 212,000

Finals_Inventories_exercises Page 9
 3. Assuming all purchases are on account, what is the net adjustment to accounts payable?
a. 22,000
b. 33,000
c. 11,000
d. 55,000
4. What is the effect of the errors to the 2014 net income?
a. 194,000
b. 220,000
c. 164,000
d. 204,000

Finals_Inventories_exercises Page 10