Audit of Inventories - Roque 2018

Problem 3-1
The TILL Corporation has adjusted and closed its books at the end of 2018. The company arrives at its inventory position by a physical count
taken on December 31 of each year. In March 2019, the following errors were discovered:
a. Merchandise that cost P7,500 was sold for P10,200 on December 30, 2018. The order was shipped December 31, 2018, with terms FOB
shipping point. The merchandise was not included in the ending inventory. The sale was recorded on January 15, 2019, when the customer
made payment on the sale.
b. On January 2, 2019, Till Corporation received merchandise that had been shipped to it on December 31, 2018. The terms of the purchase
were FOB shipping point. Cost of the merchandise was P5,250. The purchase was recorded and the goods included in the inventory on January
2, 2019.
c. On January 8, 2019, merchandise that had been included in the ending inventory was returned to Till because the consignee had not been
able to sell it. The cost of this merchandise was P3,600 with a selling price of P5,400.
d. Merchandise costing P2,250, located in a separate warehouse, was overlooked and excluded from the 2018 inventory count.
e. On December 27, 2018 Till Corporation purchased merchandise costing P3,525 from a supplier. The order was shipped December 28 (terms
FOB destination) and was still “in transit” on December 31. Because the invoice was received on December 31, the purchase was recorded in
2018. The merchandise was not included in the inventory count.
f. The corporation failed to make an entry for purchase on account of P2,505 at the end of 2018, although it included this merchandise in the
inventory count. The purchase was recorded when payment was made to the supplier in 2019.
g. The corporation included in its 2018 ending inventory merchandise with a cost of P4,050. This merchandise had been custom built and was
being held according to the customer’s written request until the customer could come and pick up the merchandise. The sale, P5,475 was
recorded in 2019.
Required:
Give the entry in 2019 (2018 books are closed) to correct each error. Assume that the errors were made during 2019, all amounts are material,
and the periodic inventory is used.
Solution 3-1
a. Sales 10,200
Retained Earnings 10,200
b. Merchandise inventory 5,250

Purchases 5,250
c. No entry necessary. Consigned goods should be included in the consignor’s (Till’s) inventory.
d. Merchandise inventory 2,250

Retained earnings 2,250
e. Purchases 3,525
f. Retained earnings 2,505

Purchases 2,505
g. Sales 5,475
Merchandise inventory 4,050
Problem 3-2
WALLNUT Co. asks you to review its December 31, 2018, inventory values and prepare the necessary adjustments to the books. The
following information is given to you.
1. Wallnut uses the periodic method of recording inventory. A physical count reveals P704,670 of inventory on hand at December 31, 2018.
2. Not included in the physical count of inventory is P31,260 of merchandise purchased on December 15 from Benggay. This merchandise
was shipped f.o.b. shipping point on December 29 and arrived in January. The invoice arrived and was recorded on December 31.
3. Included in inventory is merchandise sold to Bubbly on December 30, f.o.b. destination. This merchandise was shipped after it was counted.
The invoice was prepared and recorded as a sale on account for P38,400 on December 31. The merchandise cost P22,050, and Bubbly
received it on January 3.
4. Included in inventory was merchandise received from Doodle on December 31 with an invoice price of P46,890. The merchandise was
shipped f.o.b. destination. The invoice, which has not yet arrived, has not been recorded.
5. Not included in inventory is P 25,620 of merchandise purchased from Maundy Company. This merchandise was received on December 31
after the inventory had been counted. The invoice was received and recorded on December 30.
6. Included in inventory was P31,314 of inventory held by Wallnut on consignment from Jaka Corporation.
7. Included in inventory is merchandise sold to Simson fob shipping point. This merchandise was shipped after it counted. The invoice was
prepared and recorded as a sale for P56,700 on December 31. The cost of this merchandiseP34,560, and Simson received the merchandise on
January 5.
8. Excluded from inventory was a carton labeled "Please accept for credit." This carton contains merchandise costing P4,500 which had
been sold to a customer for P 7,800. No entry had been made to the books to reflect the return, but none of the returned merchandise seemed
damaged.
Required:
a. Compute the correct inventory balance for Wallnut at December 31, 2018.
b. Prepare any correcting entries to adjust inventory and related accounts to their proper amounts at December 31, 2018. Assume the books
have not been closed.
Solution 3-2
a. Inventory per count 704,670

Transaction 2 31,260
3 -
4 -
5 25,620
6 (31,314)
7 (34,560)
8 4,500
Inventory as corrected P700,176
b. ADJUSTING JOURNAL ENTRIES

December 31, 2018
Transaction 3
Sales 38,400
Accounts Receivable 38,400
Transaction 4
Purchases 46,890
Accounts Payable 46,890
Transaction 8
Sales Return and allowances 7,800
Accounts receivable 7,800
Problem 3-3
In testing the sales cut-off for the BIG LOVE COMPANY in connection with an audit for the year ended October 31, 2018, you find the
following information.
A physical inventory was taken as of the close of business on October 31, 2018. All customers are within a three-day delivery area of the
company's plant. The unadjusted balances of Sales and Inventories are P7,500,000 and P330,000, respectively.
Invoice Date Date

Number FOB Terms Shipped Recorded Sales Cost
6671 Destination Oct. 20 Oct. 31 P3,000 P2,700
6672 Shipping point Oct. 31 Nov. 2 7,500 6,000
6673 Shipping point Oct. 25 Oct. 31 5,400 3,600
6674 Destination Oct. 31 Oct. 29 12,600 9,300
6675 Destination Oct. 31 Nov. 2 27,600 24,000
6676 Shipping point Nov. 2 Oct. 23 19,500 15,300
6677 Shipping point Nov. 5 Nov. 6 22,500 17,400
6678 Destination Oct. 25 Nov. 3 11,700 6,000
6679 Shipping point Nov. 4 Oct. 31 25,800 24,600
6680 Destination Nov. 5 Nov. 2 15,000 12,000
Based on the foregoing information, compute the October 31, 2018 adjusted balances of the following accounts:
1. Sales
A. P7,461,300 C. P7,499,600
B. P7,455,900 D. P4, 487,100
2. Inventories
A. P354,000 C. P348,000
B. P363,300 D. P357,300
Solutions 3-3
Unadjusted balances P7,500,000 P330,000
Invoice No. 6672 7,500 -
6674 (12,600) (9,300)
6675 - 24,000
6676 (19,500) -
6678 11,700 -
6679 (25,800) -__
Adjusted balances P7,461,300 P363,300
1. Sales P7,461,300
Answer: A
2. Inventories P363,300
Answer: B
Problem 3-4
You are conducting a financial statement audit of the BEVERLY HILLS CORP. for the year ended December 31, 2018. You have observed
the taking of physical inventory and have noted that all merchandise actually received up to the close of business on December 28, 2018, has
been recorded on the inventory sheets. The total invoice cost of the items included in the physical count is P300,000.
The following purchase invoices have been recorded in the Purchases Journal as follows:
December 2018
Invoice Invoice Date
Number Amount Date FOB Term Received
251 PI0,248 Dec. 23 Destination Dec. 24
252 8,136 Dec. 23 Destination Dec. 29
253 3,123 Dec. 26 Shipping point Dec. 30
254 12,600 Dec. 26 Shipping point Jan. 5
255 13,833 Jan. 2 Destination Dec. 31
256 6,309 Dec. 31 Destination Jan. 4
258 21,162 Jan. 8 Shipping point Jan. 2
January 2019
261 P3,672 Dec. 28 Destination Jan. 4
264 14,700 Jan. 2 Shipping point Jan. 5
265 41,400 Dec. 28 Shipping point Jan. 4
266 17,877 Dec. 30 Destination Jan. 6
Required:
1.Auditor's adjusting entries, if any, required by the above information.
2.Show the detailed composition of the value of the inventory to be used on the financial statements. Transportation-in charges on purchases
averaged 6% during the year and are to be included in the inventory valuation.
Solution 3-4
1. ADJUSTING ENTRIES
December 31, 2018
a. Accounts payable 27,471

Purchases 27,471
Invoice no. 256 P6,309

258 21,162
Total 27,271
b. Purchases 70,503
Accounts Payable 70,503
Invoice no. 262 P11,391

263 17,712
264 41,400
Total P70,503
c. Freight- in 3,240
Estimated freight- in payable 3,240
In transit
Invoice no. 254 12,600
265 41,400
Total 54,000
Average freight in x6%
3,240
2. Balance per client at invoice cost P300,000
Add: Invoice No. 252 P8,136
253 3,123
254 12,600
255 13,833
263 17,712
265 41,400 96,804
Corrected inventory at invoice cost P396,804
Add: Average freight - in (6% x P396,804) 23,808
Adjusted inventory P420,612
Problem 3-5
The GOAT COMPANY reviewed its inventories and found the following items:
1. In the shipping room was a product costing P 13,400 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.
2. On December 27, 2018, merchandise costing P 11,648 was received and recorded. The invoice accompanying the merchandise was
marked "on consignment."
3. The company received merchandise costing P4,625 on January 2' 2 019. 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 taken.
4. A product, fabricated to order for a particular customer, 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.
5. 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.
6. A product costing P 150,000 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 Goat still holds legal title. The company's experience suggests that full payment on installment
sales is reasonably assured.
7. 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 Goat to buy back the inventory on January 15, 2019.
Indicate which of the above items are to be included in the inventory balance at December 31, 2018. State your reasons for the treatment you
suggest.
Solution 3-5
1. Included - Merchandise, except "special orders", should be included in the inventory until shipped.
2. Excluded - Goat Company does not possess legal title because the merchandise was received on a consignment basis.
3. Included - Because the purchase was made under FOB shipping point term, the merchandise should be included in the inventory on the
shipping date.
4. Excluded - A product that is manufactured for a particular customer (special order) is considered sold upon its completion.
5, Excluded - The merchandise was purchased under FOB destination term and was not received until January 5, 2019.
6. Excluded - The sale is recognized even though legal title has not passed.
7, Included - This is actually a loan transaction with the inventory as collateral.
PROB 6
The management of PIG, INC. has engaged you to assist in the preparation of year-end (December 31) financial statements. You are told that
on November 30, the correct inventory level was 145,730
units. During the month of December, sales totaled 138,630 units including 40,000 units shipped on consignment to AA Corp. A letter
received from AA indicates that as of December 31, it has sold 15,200 units and was still trying to sell the remainder.
A review of the December purchase orders to various suppliers shows the following:
PURCHASE INVOICE DATE QUANTITY IN DATE SHIPPED DATE TERMS

ORDER DATE UNITS RECEIVED
12/31/18 01/02/19 4,200 01/02/19 01/05/19 FOB
Destination
12/05/18 01/02/19 3,600 12/17/18 12/22/18 FOB
Destination
12/06/18 01/03/19 7,900 01/05/19 01/07/19 FOB
Shipping
point
12/18/18 12/20/18 8,000 12/29/18 01/02/19 FOB
Shipping
point
12/22/18 01/05/19 4,600 01/04/19 01/06/19 FOB
Destination
12/27/18 01/07/19 3,500 01/05/19 01/07/19 FOB
Destination
1. Goods purchased during December C. 19,500 totaledunits
A. 11,600 unitsD. 8,000 units
B. 15,800 units
2. How many units were sold during C. December?98,630 units
A. 138,630 units
D. 153,830 units
B. 113,830 units
3. How many units should be included in Pig, Inc.'s inventory at December 31, 2018?
A. 18,700 unitsC. 43,500 units
B. 39,900 unitsD. 47,700 units
4. Purchase cutoffprocedures 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.
5. The audit of year-end physical inventories should include steps to verify that the client's purchases and sales cutoffs were adequate• The*
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 return in the subsequent period.
SOLUTION 3-6
Inventory Quantity, Nov. 30 145,730
Add: December purchases
PO DATE:
12.05.18 Purchase under FOB Destination
term; received 12.22.18 3,600
12.18.18 Purchased under FOB Shipping point
term; shipped 12.29.18 8,000 11,600
Units available for sale 157,330
Less: Unit sold in December:
Consignment sales 15,200

Other sales (138,600-40,000) 98,630 113,830
Inventory quality, Dec. 31 43,500
1. Goods purchased in December

Answer: A
2. Goods sold in December
Answer: B
3. Inventory Quantity
Answer: C
4. Purchased ans received before year end was recorded
Answer: C
PROB 7
The following audited balanced pertain to OWL COMPANY
ACCOUNTS PAYABLE:
January 1, 2018 P286,924
December 31, 2018 737,824
INVENTORY BALANCE:
January 1, 2018 815,386
December 31, 2018 488,874
COST OF GOODS SOLD-2018 1,859,082
How much was paid by Owl company to its suppliers in 2018?
A. 2,636,494
B. 1,081,670
C. 1,734,694
D. 1,983,470
SOLUTION:
COST OF GOODS SOLD-2018 P1,859,082

Add: Inventory, Dec. 31, 2018 488,874
Goods available for sale 2,347,956
Less: Inventory, Jan. 1, 2018 815,386
Purchases 1,532,570
Add: Accounts payable, Jan. 286,924
1,2018
Total 1,819,494
Less: Accounts payable, 737,824
December 31, 2018
Amount paid to suppliers in P1,081,670 (B)
2018
PROBLEM 8
The following information was provided by the bookkeeper of COW, INC.
1. Sales for the month of June totalled 286,000 units

2. The following purchases was made on June:
Date: Quantity Unit Cost
June 4 50,000 P13
8 62,500 12.50
11 75,000 12
24 70,000 12.40
3. There were 108,500 units on hand on June 1 with a total cost of P1,450,000
COW Inc. uses a periodic FIFO costing system. The company’s gross profit for June was P2,058,750.
1. How many units were on hand on June 30?

A. 80,000
B. 177,500
C. 20,500
D. 149,000
2. What is the FIFO cost of the company’s inventory on June 30?
A. P1,025,000
B. P1,016,230
C. P988,000
D. P1,069,124
3. What is the total cost of good sold in June?
A. 3,632,200
B. 3,617,900
C. 3,580,126
D. 3,661,250
4. The 286,000 sold in June had a unit selling price of?
A. P20
B. P13
C. P12.70
D. P7.20
5. An essential procedural control to ensure the accuracy of the recorded inventory quantity is?
A. Performing a gross profit test
B. Testing inventory extensions
C. Calculating unit cost and valuing obsolete or damaged inventory items in accordance with inventory policy.
D. Establishing a cutoff for goods received and shipped.
SOLUTION
Inventory quantity, June 1 108,500

Add: Units purchased during 257,500
June
Less: Units sold during June 286,000
Inventory quantity, June 30 80,000 (A)
FIFO COST OF JUNE 30 INVENTORY:
From Quantity Unit cost Amount

June 24 purchase 70,000 P12.40 P868,000
June 11 purchase 10,000 12 120,000
80,000 P988,000 ©
COMPOSITION OF JUNE COST OF GOODS SOLD
From Quantity Unit cost Amount

Beginning 108,500 P1,450,000
inventory
June 4 purchase 50,000 P13 650,000
8 purchase 62,500 12.50 781,250
11 purchase 65,000 12 780,000
(SQUEEZE)
286,000 P3,661,250 (D)
Gross profit P2,058,750

Add: COGS 3,661,250
Sales P5,720,000
Divide by units sold 286,000
Sales price per unit P20 (A)
Establishing a proper cutoff for goods received and shipped will ensure that only goods owned by the client are included in the inventory (A)
PROBLEM 9
In your audit cf the December 31, 2018, financial statements of CHICKEN, INC., you found the following inventory-related transactions
a. Goods costing P50,000 are on consignment with a customer. These goods were not included in the physical count on
December 31, 2018.
b. Goods costing P16,500 were delivered to Chicken, Inc. on January 4, 2019. The invoice for these goods was received and
recorded on January 10, 2019. The invoice showed the shipment was made on December 29, 2018, FOB shipping point.
c. Goods costing P21,640 were shipped FOB shipping point on December 31, 2018, and were received by the customer on
January 2, 2019. Although the sale was recorded in 2016, these
goods were included in the 2018 ending inventory.
d. Goods costing P8,640 were shipped to a customer on December 31, 2018, FOB destination. These goods were delivered
to the customer on January 5, 2019, and were not included in the inventory. The sale was properly taken up in 2019.
e. Goods costing P8,600 shipped by a vendor under FOB destination term, were received on January 3, 2019, and thus were
not included in the physical inventory. Because the related invoice was received on December 31, 2018, this shipment
was recorded as a purchase in 2018.
f. Goods valued at P51,000 were received from a vendor under consignment term. These goods were included in the
physical count.
g. Chicken, Inc. recorded asa 2016 sale a P64,300 shipment of goods to a customer on December 31, 2018, FOB
destination. This shipment of goods costing P37,500 was received by the customer on January 5, 2019, and was not
included in the ending inventory figure.
Prior to any adjustments, Chicken, Inc.'s ending inventory is valued at P445,000 and the reported net income for the year is P1,648,000
1. Chicken's December 31, 2018, inventory should be increased by
A. P8,OOO C. P66,OOO
B. P40,OOO D. P61,640
2. Which of the errors described in "a to g" will not affect the company's net income for 2018?
A. Item a C. Item e
B. Item g D. Item b
3. What is Chicken's adjusted net income for the year 2018?
A.
B.
C.
D.
4. Purchase cutoff procedures test the cutoff and completeness assertions. A company should include goods in its
inventory if it
A. Has sold the goods.
B.Holds legal title to the goods.
C. Hasphysical possession of the goods.
D. Has paid for the goods.
5. When title to merchandise in transit has passed to the audit client, the auditor engaged in the performance of a
purchase cutoff will encounter the greatest difficulty in gaining assurance with respect to the
A. Quantity C. Price
B. Quality D. Terms
SOLUTION
Inventory December 31, 2018 2018 NET INCOME

Per client P445,000 P1,648,000
a. Goods on consignment 50,000 50,000
with a customer
b. Goods purchased FOB 16,500 -
shipping point
c. Goods sold FOB shipping (21,640) (21,640)
point
d. Goods sold FOB 8,640 8,640
destination
e. Goods purchased FOB - 8,600
destination
f. Goods received on (51,000) (51,000)
consignment
g. Goods sold FOB 37,500 26,800
destination
Per audit P485,000 P1,615,800
Answer: B
Inventory per audit P485,000

Inventory per client 445,000
Adjustment-increase 40,000
In item b, the goods were purchased under FOB Shipping point term and they were shipped on December 29, 2018. The company’s failure
to record the purchase in 2018 will overstate the income by P16,500. However since the goods were not included in the year end physical
count, the client’s inventory is understated and the company’s bet income will be understated by P16,500. Hence, the combined effect on
2016 net income is nil. Answer: D
Adjusted net income for 2018
P1,615,800 Asnwer: C
Holds legal title to the goods. Answer: D
Quality. Answer: B
Problem 10
You are engaged in an audit of the KURATSO CO. for the year ended
December 31, 2018. To reduce the workload at year-end, the company took its annual physical inventory under your observation on
November 30, 2018.
The companys inventory account, which includes raw materials and work in process, is on a perpetual basis and it uses the first-in, first out
method of pricing. It has no finished goods inventory.
The company's physical inventory revealed that the book inventory of P 181,710 was understated by P9,000. To avoid distorting the interim
financial statements, the company decided not to adjust the book inventory until year-end except for obsolete inventory items.
Your audit revealed this information about the November 30 inventory:
a. Pricing tests showed that the physical inventory was overpriced by P6,600.
b. Footing and extension errors resulted in a P450 understatement of the physical inventory
c. Direct labor included in the physical inventory amounted to P30,OOO. Overhead was included at the rate of 200% of
direct labor.
d. You determined that the amount of direct labor was correct and the overhead rate was proper. The inventory included
obsolete materials recorded at P750. During December, these materials were removed from the inventory account by a
charge to cost of sales. Your audit also disclosed the following information about the December 31, 2018, inventory.
e. Total debits to certain accounts during December are:
Purchases P74,100
Direct labor 36,300
Manufacturing overhead expense 75,600
Cost of sales 205,800
f. The cost of sales of P205,800 included direct labor of P41,400.
g. Normal scrap loss on established product lines is negligible. However, a special order started and completed during December had
excessive scrap loss of P2,400, which was charged to Manufacturing overhead expense.
1. What is the inventory per physical count on November 30, 2018?

a. P183,810
b. P190,710
c. P172,710
d. P181,710
2. What is the correct amount of physical inventory at November 30, 2018
a. P183,810
b. P190,710
c. P165,810
d. P184,560
Assume the correct amount of the inventory on November 30, 2018 was P173,100
3. What is the material inventory at December 31,2018?
a. P74,700
b. P76,350
c. P73,950
d. P78,750
4. What is the amount of direct labor cost included in the December 31, 2018 inventory?
a. P30,000
b. 24,900
c. P66,300
d. P41,400
5. What is the correct inventory at December 31, 2018?
a. P148,650
b. P198,150
c. 149,400
d. P151,050
Solution:
1. Inventory per books, Nov. 30, 2018 P181,710
Understatement of book inventory 9,000
Inventory per physical count, Nov 30 P190,720
2. Inventory per physical count, Nov 30 P190,710

Pricing errors. 6,600
Footing and extension errors. 450
Obsolete materials. (750)
Corrected physical inventory, Nov 30. P183,810
3. Assumed correct physical inv. Nov 30. P173,000

Direct labor included. (30,000)
Overhead included (200% x P30,000). (60,000)
Materials inv. Nov 30. 83,100
Purchases. 74,100
Total materials available. 157,200
Cost of sales. P205,800
Direct labor cost(41,400)
Overhead included(82,800)
Obsolete items. (750. (80,850)
Scrap loss in new product. (2,400)
Materials inv. Dec 30. P73,950
4. Direct labor inventory, Nov 30. P30,000

Direct labor cost incurred in Dec. 36,000
Total. 66,300
Charges to cost of sales in Dec. (41,400)
Direct labor in inv Dec 31. P24,900
5. Materials inventory Dec 31. P73,950

Direct labor cost. 24,900
Overhead(200% x P24,900). 49,800
Inventory Dec 30. P148,650
PROBLEM 3-1 1
Inventory Valuation:
Lower of Cost or Net Realizable Value
ZEBRA MUSIKAHAN CO. sells musical instruments. In your audit of
the company's financial statements for the year ended December
31, 2018, you have gathered the following data concerning
inventory.
At December 31, 2017, the balance in Zebra's Inventory account

was P502,000, and the Allowance for Inventory Writedown had a
balance ofP32,000. The relevant inventory cost and market data at
December 31, 2018, are summarized in the schedule below.
Replacement Sales Net Realizable Normal
Guitars P 89,000 P 86,000 P 91,500 P 87,000 P 6,400

Xylophones 94,000 92,000 93,000 85,000 7,440
Trumpets 125,000 135,000 129,000 111,000 11,610
Violins 194.000 114.000 205.000 197.000
20.500
Total P502.ooo P427.OOQ P51ß.50Q f)45.95Q
Cost Price yalue Profit
1. What is the proper balance in the Allowance for Inventory Writedown

at December 31, 2018?
B. P22,OOO D. P25,OOO
2. The adjusting entry on December 31, 2018, to arrive at the proper

allowance balance should be
A
Allowance for inventory writedown 7,000
Gain on inventory recovery 7,000
B. Loss on inventory writedown 7,000
C. Allowance for inventory writedown 3,000
Gain on inventory recovery
3,000
D. Loss on inventory writedown
43,000
SOLUTION 3-1 1
1. Lower of
Cost or
NRV
Guitars P 89,000 P 87,000 P87,OOO
Xylophones 94,000 85,000 85,000
Trumpets 125,000 111,000 111,000
Violins 194,000 197 000 194 000
Total p502.ooo P480.ooo "77.000
* NRV (net realizable value) = estimated sales pnce• — estimated cost of
completion and cost to sell.
Required allowance for inventory writedown on

December 31, 2018 (P502,OOO - P477,OOO)
Inventories are usually written down to net realizable value on an item by
item basis. The practice of valuing inventories at the lower of cost or net
realizable value is consistent with the view that assets should not be carried
in excess of amounts expected to be realized from their sale or use.
Answer: D
2. Allowance for inventory writedown 7,000

Gain on inventory recovery 7,000
Required allowance (see no. 1) P25,000
Allowance balance 32,000
Decrease in allowance (p7.000)
Under PAS 2, a new assessment of net realizable value is made in each

subsequent period. If the circumstances that caused the writedown no
longer exist or if there has been a positive change in circumstances, the
previous writedown is reversed. The reversal is limited to the previous
writedown and the new carrying amount is the lower of the cost and the
revised net realizable value.
Answer: A
PROBLEM 3-12
MALOX Specialty Company manufactures three models of gear

shift components for bicycles that are sold to bicycle manufacturers
retailers, and catalog outlets. Since its inception, Malox has used
normal absorption costing and has assumed a first-in, first-out cost
flow in its perpetual inventory system. The balances of the inventory
accounts at the end of Malox's fiscal year, November 30, 2018, are
shown below. The inventories are stated at cost before any year-end
adjustments.
Finished Goods P1,941,000
Work in Process 337,500
Raw Materials 792,000
Factory Supplies 207,000
The following information relates to Malox's inventory and

operations.
1. The finished goods inventory consists of the items analyzed

below.
Down tube shifter
Standard model P202,500 P201,OOO
Click adjustment model 283,500 267,000
Deluxe model 324 000 330.000
Total down tube shifters 810.000 798.000
Bar end shifter

Standard model 249,000 270,150
Click adjustment model 297.000 292.650
Total bar end shifters 546.000 562.800
Head tube shifter

Standard model 234,000 232,950
Finished
Click adjustment model 351.000 357.900
Total head tube shifters 585.000 590.850
Total finished goods Pl.941.000 951.650
2. One-half of the head tube shifter finished goods inventory is held by
catalog outlets on consignment.
3. Three-quarters of the bar end shifter finished goods inventory had
been pledged as collateral for a bank loan.
4. One-half of the raw materials balance represents derailleurs acquired

at a contracted price 20 percent above the net realizable value. The net
realizable value of the rest of the raw materials is P382,200.
5. The total net realizable value of the work in process inventory is
P326,100.
6. Included in the cost of factory supplies are obsolete items with
historical cost of P 12,600. The net realizable value of the remaining
factory supplies is P197,700.
7. Malox applies the lower of cost or net realizable value method to each
of the three types ofshifters in finished goods inventory. For each of
the other three inventory accounts, Malox applies the lower of cost or
net realizable value method to the total of each inventory account.
8. Consider all amounts presented above to be material in relation to
Malox's financial statements taken as a whole.
Based on the preceding information, determine the proper values of the
following on November 30, 2018.
1. Finished goods inventory

c.
D.
2. Work in process inventory
A. P324,900 c. P326,100
B. P337,500 D. P313,500
3. Raw materials inventory

A. P792,OOO c. P726,OOO
B. P682,200D. P712,200
4. Factory supplies
A. P194,400c. P185,100
D. P207,OOO
5. Which of the following best describes the PAS 2 requirement for
applying the same cost formula to all inventories? A. When they
are purchased from different suppliers.
B. When they are purchased from the same geographic region.
C. When they are similar in nature or use.
D. When they sell for the same price.
SOUTION 3-12
Finished Work in Raw Factory

Goods Process Materials Supplies
P798,OOO
Down tube shifters at NRV 546,000
Bar end shifters at cost 585,000
Head tube shifters at cost
Work-in-process at NRV P326,lOO
P330,OOO I
Derailleurs at NRV
382,200
Remaining items at NRV
Supplies at cost P194 4002
Totals PI .929.000 P326.lOO P712,200 p 194.400
I
P792,OOO x 1/2 = P396,OOO; P396,OOO/1.2 = P.330,000
2
P207,OOO - P12,600 = pi 94.400
1. Finished goods inventory P929,000

Answer: B
2. Work in process inventory P326,100
Answer: C
3. Raw materials inventory P712,200
Answer: D
4. Factory supplies
Answer: A
5. When they are similar in nature or use.
Answer: C
Problem 3-13
FIFO Costing Method
GAVIAL, INC. sells electric stoves. It uses the perpetual inventory
system and allocates cost to inventory on a first-in, first-out basis. The
company's reporting date is December 31. At December 1, 2018,
inventory on hand consisted of 350 stoves at P820 each and 43 stoves at
P850 each. During the month ended December 31, 2018, the following
inventory transactions occurred (all purchase and sales transactions are
on credit):
2018
Dec. 1 Sold 300 stoves for P 1,200 each.
3 Five stoves were returned by customers. They had originally
cost P820 each and were sold for P 1,200 each.
9 Purchased 55 stoves at P910 each. 10
Purchased 76 stoves at P960 each.
15 Sold 86 stoves for P 1,350 each.
17 Returned one damaged stove to the supplier. This stove had
been purchased on December 9.
22 Sold 60 stoves for PI,250 each
26 Purchased 72 stoves at P980 each.
1. What is the FIFO cost ofGavial's inventory on December 31, 2018?

A. P148,930 C. P133,607
B. P148,980 D. P126,280
2. What is the cost of goods sold in December 2018?

A. P367,230 C. P366,320
B. P371,330 D. P389,930
3. What is Gavial's gross profit in December 2018?

A. P173,770 C. P177,870
B.. P155,170 D. P183,870
4. PAS 2 requires inventories to be measured at the lower of cost
and net realizable value. Which of the following are possible
reasons why the net realizable value of the stoves on hand at
December 31, 2016, may be below their cost? I. Inventories
are damaged.
Il. Inventories are wholly or partially obsolete.
Ill. Selling prices have declined below cost.
A. I and Il only C. I and Ill only
B. Il and Ill only D. 1, Il, and Ill
5. If the net realizable value of Gavial's inventory on December

31,
2018, falls to P920, the inventory value should be reduced by
A. P7,300
B. P7,250 D. P O
SOLUTION 3-13
PURCHASES COST OF GOODS SOLD BALANCE
No. of Unit Total No. of Unit Total No. of Unit Total Date
Details Cps! Cost Units CLt cos!
Dec. 1 Beg. balance 350
P820
P287.OOO
43 850
36550
Sales 300 P820 P246,OOO 50 820 41,000 43 850 36 550
3 Sales return 820 (4,100)
55 820 45,100
43850
36 550
9 Purchases 55 P910
P50,050 55 910 45,100
43
850 36
,550
55
910 50
050
10
Purchases 76 960 72,960 55 91045,100
43
850 36
,550
55
910 50
,050
76
960 7
2.960
15 Sales 55
820 45.100 12 850 10,200
PROBLEM 3-14
FIFO Costing Method
The following information was obtained from the statement
of
financial position of LION, INC.:
December 31, 2018 Dec. 31.2017
Cash P706,600 P200,OOO
Notes receivable 50,000
Inventory 399,750
Accounts payable 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 periodic
FIFO. The unit cost of inventory during January 2018 was
P65.20 and increased PO.20 per month during the year.
During 2018, payments to suppliers totaled P943,400 and
operating expenses totaled P440,000. The ending inventory
for 2017 was valued at P65.00 per unit.
Based on the preceding information, determine thefollowing:
1. Number of units sold during 2018

A. 18,900 c. 16,000
B. 18,400 D. 21,400
2. Total cost of purchases during 2018

3. Accounts payable balance at December 31, 2018
A. P793,400 C. P400,OOO
B. P393,400 D. P419,800
4. Inventory quantity at December 31, 2018

A. 5,750 c. 5,250
B. 6,550 D. 8,150
5. FIFO cost of inventory on December 31, 2018

A. P352,500 C. P385,900 B. P439,230 D. P425,830
SOLUTION 3-14
1. Cash balance, Jan. 1, 2018 P 200,000
Add: Sales (SQUEEZE)
Collection of notes receivable
Total
Less: Cash paid for operating expenses p440,OOO
Cash paid on accounts payable 943.400 1 383
400
Cash balance, Dec. 31, 2018 p 706.600
Sales during 2018

Divide by sales price per unit + PIOO
Number of units sold 18-400 units
Answer: B
2. Computation of total purchases during 2018
Month Unit Cost Quantity Total Cost
January P65.20 1,500 P97,800
February 65.40 1,500 98,100
March 65.60 1,500 98,400
April 65.80 1,500 98,700
May 66.00 1,500 99,000
June 66.20 1,500 99,300
July 66.40 1,500 99,600
August 66.60 1,500 99,900
September 66.80 1,500 100,200
October 67.00 1,500 100,500
November 67.20 1,500 100,800
December 67.40 1.500 101.100
Total 18.000 1,193.400 *
* Alternative method:
P65.20 + P67.40 x
(1,500 units x12) 2
P66.30 x 18,000 units =
P193.400 Answer: D
3. Accounts payable, Jan. 1, 2018 P
150,000
Add: Purchases (see no. 2) 1 193
Total 400
Less: Cash paid on accounts payable 9431400
Accounts payable, Dec. 31, 2018 p 400.000
Answer: C
4. Inventory quantity, Jan. 1, 2018 (P399,750 / P65) 6,150
Add: Purchases (see no. 2) 18,000
Less: Units sold (see no. 1) 18 400
Inventory quantity, Dec. 31, 2018
* Answer: A
5. Computation of inventory FIFO cost at December 31,
Unit Cost Total-CQ$

December purchase 1,500 P67.40 PIOI,IOO
November purchase 1,500 67.20 100,800
October purchase 1,500 67.00 100,500
September purchase (SQUEEZE) 1 250 66.80 83.500
2018
5.750 P385.900
Answer: C
PROBLEM 3-15
Perpetual Inventory System
Your client took a complete physical inventory under your

observation as of December 15 and adjusted the inventory control
account (perpetual inventory method) to agree with the physical
inventory. You have decided to accept the balance of the control
account as of December 31, after reflecting transactions recorded
therein from December 16 to December 31, in connection with your
financial statement audit for the year ended December 31.
Your examination of the sales cut-off as of December 15 and

December 31 revealed the following items not previously considered.
D ATE
Credited to
~ Sales f[i~e ShitH:!ed Billed InventQlY CQotrQI
P5,650 P7,200 12/14 12/17 12/17
2,430 4,650 12/13 12/20 12/13
6,870 9,200 01/03 ,12/31 12/31
1. What adjusting journal entries, if any, would you make for each of
these items?
\
2. Periodic or cycle counts of selected inventory items are made at

various times during the year rather than a single inventory count
at year-end. Which of the following is necessary if the auditor
plans to observe inventories at interim dates?
A. Complete recounts by independent teams are performed.
B. Perpetual inventory records are maintained.
C. Unit cost records are integrated with production accounting
records.
D. Inventory balances are rarely at low level.
3. If the perpetual inventory records show lower
quantities of inventory than the physical count, an
explanation of the difference might be unrecorded
A. Sales C. Purchases
B. Sales discounts D. Purchase discounts
4. 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 items had 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.
5. 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
SOLUTION 3
2. Sales 9,200
Accounts receivable 9,200
To reverse sale recorded 12/31 but
not shipped until 1/2.
3. Inventory 6,870
Cost of sales 6,870
To reverse cost of sale recorded 12/31 but
not shipped until 1/2.
-No adjusting entry is needed for the item shipped on December
13
because the entries to take up the sale and cost of sale were
appropriately made in the current year.
2. Perpetual inventory records are maintained.

Answer: B
3. Purchases
Answer: C
4. Credit memos for several items retumed by customers had not

been recorded.
Answer: B
5. Review of perpetual inventory records.

. Answer: 0 ..
PROBLEM 3-16
Correcting Inventory Errors: Perpetual Inventory System
CAIMAN, INC. uses a perpetual inventory system and reports inventory at the lower of FIFO cost or net realizable
value. Caiman's inventory control account balance at June 30, 2018, was P442,040. A physical count conducted on
that day found inventory on hand worth P440,400. Net realizable value for each inventory item held for sale
exceeded cost. An investigation of the discrepancy disclosed the following:
1. Goods worth P 13,200 held on consignment for Bugok Co. had been included in the physical count.
2. Goods costing P2,400 were purchased on credit from Amor Co. on June 27; 2018, on F()B shipping point terms.
The goods were shipped on June 28, 2018, but, as they had not arrived by June 30, 2016, were not included in the
physical count. The purchase invoice was received and processed on June 30, 2016.
3. Goods costing P4,800 were sold on credit to Acero Co. for P7,800 on June 28, 2018, on FOB destination terms.
The goods were still in transit on June 30, 2018. The sales invoice was processed and recorded on June 29, 2018.
4. Goods costing P5,460 were purchased on credit (FOB destination) from San Miguel Co. on June 28, 2018. The
goods were received on June 29, 2018, and included in the physical count. The purchase invoice was received on
July 2, 2018.
5. On June 30, 2018, Caiman sold goods costing P 12,600 on credit (FOB shipping point) terms to Pisaro Corp. for P
19,200. The goods were dispatched from the warehouse on June 30, 2018, but the sales invoice had not been
processed at that date.
6. Damaged inventory items valued at P5,300 were discovered during the physical count. These items were still
recorded on June 30, 2018, but were omitted from the physical count records pending their write-off.
1. What is the adjusted inventory balance on June 30, 2018?

A, P424,800 C. P445,000
B. P421,200 D. P434,400
2. What adjustment should be made to Caiman's sales revenue for the year ended June 30, 2018?
A. Net increase of PI 1,400
B. Net decrease of P 11,400
C. Increase of P 19,200
D. Decrease ofP7,800
3. Caiman's accounts payable at June 30, 2018, should be

A. Decreased by P5,460 B. Increased by P5,460
C. Decreased by P5,300 D. Increased by P 160
4. The "unlocated difference" between the perpetual balance and the physical count amounts to
A. P5,300 C. PI,640
B. P160 D. P0
5. The entry to correct the error described in item no. 2 is

A. Purchases 2,400
B. Inventory 2,400
C. Inventory 2,400
Cost of sales2,400
D. No adjusting entry is necessary.
SOLUTION 3-16
1.
Perpetual Physical
Inventory Count_
Unadjusted Balances P442,040 P440,000
Good held on consignment
Incorrectly counted (13,200)
Good in Transit, purchased
FOB shipping point 2,400
Sale incorrectly recorded
FOB destination 4,800 4,800
Unrecorded purchase 5,460
Unrecorded sale (12,600)
Damaged inventory (5,300)
Adjusted balances P434.400 P434,400
Answer: D
2. Item no. 3 sale recorded in error (P7,800)
Item no. 5 unrecorded sale _19,200__
Net adjustment — increase in sales P11,400
Answer: A
3. Item no. 4 — unrecorded purchase P5,460
Answer: B
4. There is no unlocated difference.
(please refer to the reconciliation in no. 1)
Answer: D
5. The purchase was properly recorded on June 30, 2018. Hence, no adjusting entry is necessary.
Answer: D
PROBLEM 3-17
You are engaged in an audit of the financial statements of the CARABAO COMPANY for the year ended October
31, 2018, and have observed the physical inventory count on that date.
All merchandise received up to and including October 30, 2018, has been included in the physical count. The
following list of invoices is for purchases of merchandise and are entered in the purchases journal for the months of
October and November 2018, respectively:
Date Date Merchandise

Amount FOB of Invoice Received
OCTOBER 2018
P 7,200 Destination October 19 October 21
4,400 Destination October 20 October 22
9,250 Shipping point October 20 October 30
3,900 Destination October 25 November 3
2,500 Destination November 4 October 29
NOVEMBER 2018
P 2,000 Destination October 29 November 4
7,220 Shipping point November 2 October 30
12,820 Shipping point October 23 November 3
14,200 Shipping point October 23 November 3
15,000 Destination October 27 November 3
No perpetual inventory records are maintained, and the physical Inventory count is to be used as a basis for the
financial statements.
1. What adjusting entry is necessary for the October 25 invoice?

A. Accounts payable 3,900
Purchases 3,900
B. Purchases 3,900
C. Inventory, ending 3,900
Cost of sales 3,900
2. What adjusting entry is necessary for the month of November 4 invoice?

A. Purchases 2,500
B. Accounts payable 2,500
Purchases 2,500
C. Cost of sales 2,500
Inventory, ending 2,500
3. The journal entry to adjust the purchases account should include a

A. Debit to purchases of P45,510
B. Credit to purchases of P3,900
C. Net debit to purchases of P 41,610
D. Net credit to purchases of P 41,610
4. The net adjustment to accounts payable is

A. P3,900 increase C. P41,610 increase
B. P3,900 decrease D. P41,610 decrease
5. Carabao's October 31 physical inventory should be increased by
A. P31,870 C. 45,510
B. P41,610 D. P73,480
SOLUTION 3-17
1. ADJUSTING JOURNAL ENTRIES

a. Accounts Payable 3,900
Purchases 3,900
To reverse entry made for
October 25 invoice
b. Purchases 45,510
To set up liability for the
following invoices at October 31,
Invoice Date Amount

October 30 P 4,850 October 27
6,420 November 2 7220
October 23 12,820 October 23
14 200 P45,510
Answer: A
2. No adjusting entry is necessary for the November 4 invoice.
Answer: D
3. Net debit to purchases of P41,610 (P45,510 - P3,900).
Answer: C
4. Net adjustment to accounts payable — P41,610 increase.
Answer: C
5. The physical inventory at October 31 should be increased by P31,870
Invoice Date Amount

October 30 P 4,850 October 23
12,820
October 23 14,200
P31,870
Answer: A
18
SEAL WHOLESALER wholesales food products to independent grocery stores. The company uses the perpetual
inventory system and assigns cost to inventory on a first-in, first-out basis. Transactions and other related
information regarding two of the items (baked beans and plain flour) carried by Seal are given below for December
2018, the last month of the company’s reporting period.
1. What is the cost of Baked Beans inventory that was assumed
stolen?
A. P2,744 C. P2,730
B. P4,060 D. P2,758
2. What is the cost of Plain Flour inventory on December 31, 2018?
A. P5,850 C. P5,767
B. P5,760 D. P5,775
3. What is the total cost of Seal's inventory (Baked Beans and Plain Flour) on December 31, 2018?
A. P69,989 C. P77,301
B. P72,747 D. P100,315
4. PAS 2 requires inventory to be stated at the lower of cost and
A. fair value C. nominal value
B. net realizable value D. net selling price
5. What amount of loss on decline in value of inventory should be recognized by Seal at the end of its reporting
period?
A. P38,236 C. P30,326
B. P7,910 D. P 0
SOLUTION 3-18
1. Inventory of Baked Beans, Dec. 1 350

Purchases (200 + 470) 670
Sales (730)
Sales returns 50
Perpetual balance 340
Physical count 326
Assumed stolen inventory 14
Multiply by unit cost (from Dec. 19 purchase) 197
Cost of assumed stolen inventory P 2,758
Answer: D
2. Cost of Plain Flour inventory,. Dec. 31, 2018

(15 boxes per count x P384.50*) P 5,767
* from Dec. 15 purchase
Answer: C
3.Baked Beans (326 cans x P197) P64,222

Plain Flour (15 boxes x P384.50) 5,767
Total FIFO cost P69.989
Answer: A
4. Inventories should be stated at the lower of cost and net realizable value.
Answer: B
5. Qty Cost NRV Lower

Baked Beans 326 P64,222 P94,540 Cost
Plain Flour 15 5,767 5,775 Cost
Answer: D
PROBLEM 3-19
Correcting Inventory Turnover and Average Days to Sell Inventory
The following information was taken from the audited financial statements of HORSE CO.:
Inventories:
December 31, 2018 P791,000
December 31, 201 744,000
December 31, 2016 720,800
2018 2017
Sales P10,832,000 P10,053,000
Cost of goods sold 4,482,000 4,246,000
Net profit 952,800 734,800
Based on the preceding information, compute for the following:
1. 2017 inventory turnover
A. 5.80 times C. 5.71 times
B. 5.89 times D. 6.12 times
2. 2018 inventory turnover
A. 5.67 times C. 5.84 times
B. 5.53 times D. 6.02 times
3. 2017 average days to sell inventory
A. 63.9 C. 62
B. 59.6 D. 62.9
4. 2018 average days to sell inventory
A. 64.4 C. 60.6
B. 62.5 D. 66
SOLUTION 3-19
1. Inventory turnover = Cost of goods sold ÷ Average inventory
2017 inventory turnover = P4,246,000 ÷ P732,400 *= 5.80 times
* P720,800 + P744,000 = P 1,464,800÷ 2
Answer: A
2. 2018 inventory turnover = P4,482,000÷ P767,500*=- 5.:84 times
* P744,000 + P791,000= P 1,535,000

Answer: C
3, Average days to sell inventory = 365 days + Inventory turnover
2017 average days to sell inventory = 365 days ÷5.80 = 62.9 days
Answer: D
4. 2018 average days to sell inventory = 365 days ÷ 5 84= 62. 5 days
Answer: B
PROBLEM 3-20
Correcting Inventory Errors
MONKEY CO.'s annual net income for the period 2014-2018 is as follows:
Year Net income (loss)
2014 P150,000
2015 340,000
2016 645,000
2017 (100,000)
2018 250,000
A review of the company's records reveals the following inventory errors:
2014 P 3,000 overstatement, end of year
2015 6,000 understatement, end of year
1. What is the adjusted net income in 2014?
4. What is the adjusted net loss in 2017?
A. P89,500 C. PIOO,OOO
B. P101,500 D. P95,500
A. P250,OOO C. P243,500
B. P234,500 D. P256,500
SOLUTION 3-20
2014 2015 2016 2017 2018
Unadjusted net income
(loss) P150,000 P340,000 P645,00 (100,000) 250,000
2014 ending inventory
Overstatement (3,000) 3,000
Understatement 6,000 (6,000)
Understatement 4,500 (4,500)

Understatement 11 000
Adjusted net income
(loss) P147 000 P349,000 P 639,000 P(95.500) P256,500
Adjusted net income (loss) in:
1. 2014 P147 000
Answer: D
2. 2015 P349,000
Answer.' C
3. 2016 P 639,000
Answer: C
4. 2017 P(95.500)
Answer: D
4. 2018 P256,500
Answer: D
PROBLEM 3-21
The SNAKE, INC. reported income before taxes of P842,650 for 2018 and P965,350 for 2019. The company takes
its annual physical count of inventory every December 31. Your audit revealed the following information:
a. The price used for 1,500 units included in the 2018 ending inventory was P 109. The correct cost was P 190 per
unit.
b. Goods costing P23,600 were received from a vendor on January 5, 2019. The shipment was made on December
26, 2018, under FOB shipping point term. The purchase was recorded in 2018 but the shipment was not included in
the 2018 ending inventory.
c. Merchandise costing P64,750 was sold. to a customer on December 29, 2018. Snake was asked by the customer to
keep the merchandise until January 3, 2019, when the customer would come and pick it up. Although the sale was
properly recorded in 2018, the merchandise was included in the ending inventory.
d. A supplier sold merchandise valued at P 14,000 to Snake, Inc.
The merchandise was shipped FOB shipping point on December 29, 2018, and was received by Snake on December
31, 2018. The purchase was recorded in 2019 and the merchandise was not included in the 2018 ending inventory.
1. What is the adjusted income before taxes for the year ended December 31, 2018?
A. P809,500 C. P875,800
B. P632,800 D. P923,000
2. What is the adjusted income before taxes for the year ended December 31, 2019?
A. P877,000
C. P885,000
B. P932,200
D. P843,850
2018 2019
Reported 'income before taxes P842,650 P965,350
Adjustments:
a. Transposition error in unit cost
(P190 - P109 = P81 x 1,500) 121,500 (121,500)
b. Goods purchased FOB shipping point 23,600 (23,600)
c. Goods sold in 2018 (64,750) 64,750

d. Goods purchased FOB shipping point _-__ -
Adjusted income before taxes P923,000 P885,000
1. Adjusted income before taxes in 2018 P923,000
Answer: D
2. Adjusted income before taxes in 2019 P885,000
Answer: C
PROBLEM 3-22
Correcting Physical Inventory Count
In your audit of the RABBIT, INC., you find that a physical inventory count on December 31, 2018, showed
merchandise costing P463,000 was on hand at that date. Your examination reveals the following items were all
excluded from the inventory per count.
1. Merchandise of P20,000 which is held on consignment.
2. Goods costing P39,500 that were shipped FOB shipping point on December 31, 2018. These goods were
delivered to the customer on January 6, 2019.
3. Goods costing P 16,800 that were shipped FOB destination to a customer on December 29, 2018. The customer
received these goods on January 2, 2019.
4. Merchandise costing P 76,150 shipped by a seller FOB destination on December 28, 2018, and received by
Rabbit, Inc. on January 3, 2019.
5. Goods costing P 16,500 shipped by a vendor FOB seller on December 31, 2018, and received by Rabbit, Inc. on
January 4, 2019.
What is the amount that should appear on Rabbit, Inc.'s statement of financial position as inventory at December 31,
2018?
A. P539,000 C. P535,800
B. P519,000 D. P496,300
SOLUTION 3-22
Inventory per physical count P463,OOO
Add: (3) Goods sold FOB destination P16,800
(5) Goods purchased FOB seller 1 6 500 33,300

Adjusted inventory P496,300
Answer: D
PROBLEM 3-23
BIRD COMPANY is a manufacturer of small tools. The following information was obtained from the company's
accounting records for the year ended December 31, 2018:
Inventory at December 31, 2018 (based on physical
count in Bird's warehouse at cost on December 31, 2018) P1,870,000
Accounts payable at December 31, 2018 1,415,000
Net sales (sales less sales returns) 9,693,400
Your audit reveals the following information:
1. The physical count included tools billed to a customer FOB shipping point on December 31, 2018. These tools
cost P64,000 and were billed at P 78,500. They were in the shipping area waiting to be picked up by the customer.
2. Goods shipped FOB shipping point by a vendor were in transit on December 31, 2018. These goods with invoice
cost of P93,000 were shipped on December 29, 2018.
3. Work in process inventory costing P27,000 was sent to a job contractor for further processing.
4. Not included in the physical count were goods returned by customers on December 31, 2018. These goods costing
P49,000 were inspected and returned to inventory on January 7, 2019. Credit memos for P67,800 were issued to the
customers at that date.
5. In transit to a customer on December 31, 2018, were tools costing P 17,000 shipped FOB shipping point on
December 26, 2018. A sales invoice for P29,400 was issued on January 3, 2019, when Bird Company was notified
by the customer that the tools had been received.
6. At exactly 5:00 pm on December 31, 2018, goods costing P31,200 were received from a vendor. These were
recorded on a receiving report dated January 2, 2019. The related invoice was recorded on December 31, 2018, but
the goods were not included in the physical count.
7. Included in the physical count were goods received from a vendor on December 27, 2018. However, the related
invoice for P36,OOO was not recorded because the accounting departments copy of the receiving report was lost.
8. A monthly freight bill for P32,000 was received on January 3, 2019. It specifically related to merchandise bought
in December 2018, one-half of which was still in the inventory at December 31, 2018. The freight was not included
in either the inventory or in accounts payable at December 31, 2018.
1. Bird's December 31, 2018, inventory should be increased by
A. P216,200 C. P252,200
B. P233,200 D. P123,200
2. Bird's accounts payable balance at December 31, 2018, should be increased by
A. P68,000 C. P125,000
B. P145,000 D. P161,000
3. The amount of net sales to be reported on Bird's income statement for the year ended December 31, 2018, should
be
A. P9,547,000 C. P9,591,000
B. P9,576,000 D. P9,595,300
4. Bird's statement of financial position at December 31, 2018, accounts payable of
A. P1,576,000 C. P1,540,000
B. P1,483,000 D. P1,431,000
5. The amount of inventory to be reported on Bird's December 31, 2018 statement of financial position should be
A. P2,103,200 C. P2,122,200
B. P2,806,200 D. P1,993,200
Accounts
Inventory Payable__ Net Sales
Unadjusted balances P1,870,000 P1,415,000 P9,693,400
Adjustments:
1. (78,500)
2. 93,000 93,000
3. 27,000
4. 49,000 (67,800)
5. 29,400
6. 31,200
7. 36,000
8. 16 000 32 000
Adjusted balances P2,086,200 P 1,576,000 P9.576.500
1. Inventory per audit P2,086,200
Inventory per count P1,870,000
Net adjustment — increase P 216.200
Answer: A
2. Accounts payable per audit 1,576,000
Accounts payable per books 1 415 000
Net adjustment — increase P 161.000
Answer: D
3. Net sales for the year ended December 31, 2018 P9.576.500
Answer: B
4. Accounts Payable, December 31, 2018 Pl.576.000
Answer: A
5. Inventory, December 31, 2018 P2,086,200
Answer: B
PROBLEM 3-24
The cost of goods sold section of the income statement prepared by your client for the year ended December 31
appears as follows:
Inventory, January 1 P 80,000
Purchases 1,600.000
Cost of goods available for sale P1,680,000

Inventory, December 31 100.000
Cost of goods sold P 1,580,000
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 P 25,000 were entered in the voucher register in January, but the goods were received during
December.
2. December invoices totaling P 13,200 were entered in the voucher register in December, but the goods were not
received until
End of the Year
3. Sales of P43,000 (cost of P 12,900) were made on account on December 31 and the goods delivered at that time,
but all entries relating to the sales were made on January 2.
4. Invoices totaling P 15,000 were entered in the voucher register jn January, but the goods were received in
December.
5. December invoices totaling P 18,000 were entered in the voucher register in December, but the goods were not
received until January.
6. Invoices totaling P 12,000 were entered in the voucher register in January, and the goods were received in
January, but the invoices were dated December.
1. What working paper adjustment should be made at the end of the current year for item no. 1?
A. Purchases 25,000
B. Retained earnings 25,000
Purchases 25,000
C. Inventory, beginning 25,000
Purchases 25,000
D. No adjusting entry is necessary
2. The working paper adjustment to correct the error described in item no. 3 should include a debit to
A. Accounts receivable of P43,000
B. sales of P43,000
C. Inventory of P 12,900
D. Retained earnings of P30,100
3. The company s statement of financial position as of the end of the current year should show inventory of
A. P130,000 C. P93,200
B. P100,000 D. P117,100
4. What is the net adjustment to purchases of the current year?
A. P27,000 increase C. P2,OOO increase
B. P25,OOO decrease D. P2,OOO decrease
5. The Cost of goods sold for the current year is
A. P1,561,200 C. P1,580,000
B. P1,553,200 D. P1,565,200
SOLUTION 3-24
SUMMARY OF WORKING PAPER ADJUSTMENT
_______________________Debit Credit__________________________
Retained Beginning Accounts Accounts Ending
No. Earnings Purchases Inventory Receivable Sales Payable Inventory
1 P25,000 (25,000) - - - - -
2 (P13,200) - P13,200 - - - -
3 P43,000 (P43,000)
4 15,000 (15,000)
5 P18,000
6 12 000 __ ______ _______ (12 000) 12 000
Pll,800 P 2,000 P13,200 P43,000 (P43,000) (27,000) 30.000
1. Retained earnings 25,000
Purchases 25,000
Answer: B
2. Accounts receivable 43,000
Sales 43,000
Answer: A
3. Inventory per client-prepared income statement P100,000
Add: Item no. 5 P18,000
Item no. 6 12,000 30,000
Adjusted inventory, December 31 P130,000
Answer: A
4. Net adjustment to purchases - increase P 2,000
Answer: C
5. Inventory, Jan. 1 (P80,000 + P13,200) P 93,200
Add: Purchases (1,600,000 + 2,000) 1,602,000
Cost of goods available for sale 1,695,200
Less: Inventory, Dec. 31 (PIOO,OOO + P30,OOO) 130,000
Cost of goods sold P1,565,200
Answer: D
PROBLEM 3-25
CHEETAH CORPORATION is a wholesale distributor of kitchen utensils. Unadjusted balances obtained from
Cheetah's accounting records are as follows:
Inventory (based on physical count of goods
in Cheetah's warehouse at December 31) P432,000
Accounts payable, December 31:
Vendor Terms Amount
Zonrox, Inc. Net 30 P36,000
Yeba Corp. Net 30 28,000
Xak, Inc. Net 30 83,000
Wais Co. Net 30 -
Velma, Inc. Net 30 - P147,000
Sales P2,600,000
The following additional information was also obtained:
1. Goods held on consignment from Zonrox, Inc., the consignor, valued at P 13,000 were included in the physical
count of goods in Cheetah's warehouse at December 31, and in Accounts Payable balance as of December 31, 2018.
2. Goods costing P26,400 that were purchased from Wais Co. and paid for in December were sold in the last week
of the current year. The sale was properly recorded at P58,000 in December. Because the goods were in the shipping
area of Cheetah's warehouse to be picked up by the customer, they were included in the physical count at December
31.
3. Retailers were holding goods costing P25,000 (retail price is P35,700) shipped by Cheetah under consignment
term.
4, Goods were in transit from Velma, Inc. to Cheetah on December 31. The cost of these goods was P23,500, and
they were shipped FOB shipping point on December 28.
Based on the preceding information, compute the adjusted balances of the following:
1. Inventory
A. P417,600 C. P467,500
B. P416,100 D. P441,100
2. Accounts payable
A. P134,OOO C. P157,500
B. P136,500 D. P170,500
3. Sales
A. P2,6000,000 C. P2,564,300
B. P2,635,700 D. P2,625,000
SOLUTION 3-25
Accounts
Inventory Payable Sales
Unadjusted Balances P432,000 P147,000 P2,600,00
Item no. 1 (13,000) (13,000)
2 (26,400)
3 25,000
4 23,500 23,500 ________
Adjusted Balances P441.100 P157,500 P2,600,000
1. Inventory P441,100
Answer: D
2. Accounts payableP157,500
Answer: C
3. Sales P2,600,000
Answer: A
PROBLEM 3-26
You have been engaged to audit the financial statements of CAMEL CORP. for the year ended December 31, 2018.
The company is engaged in the wholesale chemical business and makes all sales at 30% above cost.
Shown below are portions of the companys Sales and Purchases ledger accounts:
SALES
Date Reference Amount
12/31 Closing entry P 1,221,027
____
P 1,221,027
(SI = Sales Invoice)
Date Reference Amount
Balance forwarded P946,720

12/28 Sl No. 835 25,680
12/28 Sl No. 836 14,196
12/28 Sl No. 837 11,439
12/31 Sl No. 839 65,436
12/31 Sl No. 840 81,122
12/31 No. 841 76,434
P 1,221,027
PURCHASES
Date Reference Amount Date Reference Amount
Balance forwarded P418,600 12/31 Closing entry P 509,025

12/28 RR No. 949 14,500
12/30 RR No. 951 26,700
12/31 RR No. 952 34,550
12/31 RR No. 953 14,675__ ____
P 1,221,027
P 509,025__
(RR= Receiving Report)
Camel Corp. conducted its annual physical inventory at December 31, 2018. You observed the physical count
and were satisfied that it was properly taken.
When performing a sales and purchases cutoff test, you found the following:
a. All receiving reports and sales invoices are prepared in strict numerical sequence.
b. The last receiving report number used in calendar year 2018 is RR No. 953.
c. The sales invoice number corresponding to the last shipment made in 2018 is No. 838.
You also obtained the following additional information:
1. Included in the physical count at December 31 were chemicals costing P25,000 that have been purchased and
received on RR Nov 950. As of December 31, 2018, no vendor invoice has been received for these chemicals.
2. There were goods located in the shipping area of Camel Corp. on December 31, 2018, but were not included in
the physical count,
These, had been sold to XYZ Co. who had already paid for the goods. The goods were picked up by XYZ Co.'s
truck on January 3, 2019. The sale was recorded on SI No. 835.
3. At the close of business on December 31, 2018, there were two box- cars standing on Camel Corp.'s siding:
(a) Boxcar 14344AA was unloaded on January 2, 2019. The receiving report for this merchandise is RR No. 953.
The freight was paid by the vendor.
(b) Boxcar 021261JR was loaded and sealed on December 31,
2018. The car was taken from Camel Corp.'s siding on January 2, 2019. 'It contained a shipment of goods to ABC
Co. and was covered by SI No. 838. The sales price for this order was P65,000, and transportation charges were
to be paid by ABC co.
4. Temporarily stranded on a distant railroad siding at December 31, 2018, was a boxcar of chemicals en route to
DEF Company. This was covered by SI No. 836. The terms of this shipment were FOB destination.
5. Goods in transit from a vendor at December 31, 2018, were received on RR No. 954. The terms of this
shipment were FOB destination. Freight charges of P 1,500 were paid by Camel Corp. However, this P 1,500
freight charge was deducted from the purchase price of P 16,800.
Determine the net adjustment to be made at December 31, 2018, for each of the following accounts
1. Sales
A. P222,992 debit C. 171,752 debit
B. P237,188 debit D. 206,796 debit
2. Accounts receivable
A. P208,796 credit C. P237,188 credit
B. P222,992 credit D. P171,752 credit
3. Cost of sales
A. P50,595 credit C. P39,675 credit
B. P75,595 credit D. P25,OOO debit
4. Accounts payable
A. P39,675 credit C. P25,OOO debit
B. P39,675 debit D. P25,OOO credit

5. Inventory
A. P60,920 debit C. P75,595 debit
B. P50,OOO debit D. P64,675 debit

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Problem 3-1

b. Merchandise inventory 5,250

d. Merchandise inventory 2,250

f. Retained earnings 2,505

a. Inventory per count 704,670

b. ADJUSTING JOURNAL ENTRIES

Invoice Date Date

a. Accounts payable 27,471

Invoice no. 256 P6,309

Invoice no. 262 P11,391

7, Included - This is actually a loan transaction with the inventory as collateral.

PURCHASE INVOICE DATE QUANTITY IN DATE SHIPPED DATE TERMS

1. Goods purchased during December C. 19,500 totaledunits

A. 11,600 unitsD. 8,000 units

2. How many units were sold during C. December?98,630 units

A. 18,700 unitsC. 43,500 units

B. 39,900 unitsD. 47,700 units

4. Purchase cutoffprocedures 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.

A. Sale in the subsequent period.

B. Purchase in the current period.

C. Sale in the current period.

D. Purchase return in the subsequent period.

Inventory Quantity, Nov. 30 145,730

Add: December purchases

12.05.18 Purchase under FOB Destination

term; received 12.22.18 3,600

12.18.18 Purchased under FOB Shipping point

term; shipped 12.29.18 8,000 11,600

Units available for sale 157,330

Less: Unit sold in December:

Consignment sales 15,200

Inventory quality, Dec. 31 43,500

1. Goods purchased in December

The following audited balanced pertain to OWL COMPANY

How much was paid by Owl company to its suppliers in 2018?

COST OF GOODS SOLD-2018 P1,859,082

The following information was provided by the bookkeeper of COW, INC.

1. Sales for the month of June totalled 286,000 units

1. How many units were on hand on June 30?

Inventory quantity, June 1 108,500

FIFO COST OF JUNE 30 INVENTORY:

From Quantity Unit cost Amount

COMPOSITION OF JUNE COST OF GOODS SOLD

From Quantity Unit cost Amount

Gross profit P2,058,750

1. Chicken's December 31, 2018, inventory should be increased by

3. What is Chicken's adjusted net income for the year 2018?

Inventory December 31, 2018 2018 NET INCOME

Inventory per audit P485,000

Adjusted net income for 2018

Holds legal title to the goods. Answer: D

Your audit revealed this information about the November 30 inventory:

Manufacturing overhead expense 75,600

Cost of sales 205,800

f. The cost of sales of P205,800 included direct labor of P41,400.

1. What is the inventory per physical count on November 30, 2018?

2. Inventory per physical count, Nov 30 P190,710

3. Assumed correct physical inv. Nov 30. P173,000

4. Direct labor inventory, Nov 30. P30,000

5. Materials inventory Dec 31. P73,950