Assignment No.

3– Audit of Inventories

Instruction: Write your solution in a piece of paper and write your name on top of it. Double rule your
answer. We will check your assignment on Monday, November 23, 2020.

1. MABES Corporation, a manufacturer of small tools, provided the following information from its
accounting records for the year ended December 31, 2019:

Inventory at December 31, 2019 (based on physical count

Of goods in MABES’ plant at cost on Dec. 31, 2019) P 1,750,000

Accounts payable at December 31, 2019 1,200,000

Net sales (sales less sales returns) 8,500,000

Additional information is as follows:

1) Included in the physical count were tools billed to a customer FPB shipping point on
December 31, 2019. These tools had a cost of P28,000 and had been billed at P35,000. The
shipment was on MABES’s loading point on December 29, 2019.

2) Goods were in transit from a vendor to MABES on December 31, 2019. The invoice cost was
P50,000, and the goods were shipped FOB Shipping point on December 29. 2019.

3) Work-in process inventory costing P20,000 was sent to an outside processor for plating on
December 30, 2019.

4) Tools returned by customers and held pending inspection in the returned goods area on
December 31, 2019, were not included in the physical count. On January 8, 2020, the tools
costing P26,000 were inspected and returned to inventory. Credit memos totalling P40,000
were issued t the customers on the same date.

5) Tools shipped to a customer FOB destination on December 26, 2019, were in transit at
December 31, 2019, and had a cost of P25,000 Upon notification of receipt by the customer
on January 2, 2020, MABES issued a sales invoice for P42,000.

6) Goods, with an invoice cost of P30,000, received from a vendor at 5:00 p.m on December
31, 2019, were recorded on a receiving report dated January 2, 2020. The goods were not
included in the physical count, but the invoice was included in accounts payable at
December 31, 2019.

7) Goods received from a vendor on December 26, 2019, were included in the physical count.
However, the related P60,000 vendor invoice was not included in accounts payable at
December 31, 2019, because the accounts payable copy of the receiving report was lost.

8) On January 3, 2020, a monthly freight bill in the amount of P4,000 was received. The bill
specifically related to merchandise purchased in December 2020, one-half of which was still
in the inventory at December 31, 2019. The freight charges were not included in either the
inventory or in accounts payable at December 31, 2019.
 Using the format below, prepare a schedule of adjustment as of December 31, 2019 to the initial
amounts per MABES’s accounting records. Show separately the effect, if any, of each of the eight
transactions on the December 31, 2019, amounts. If the transaction would have no effect on the initial
amount shown, state NONE. (20 points)

Inventory Accounts Payable Net Sales

Initial amounts P 1,750,000 P 1,200,000 P 8,500,000

Adjustments:

(1) 0 0 (35,000)
(2) 50,000 50,000 0

(3) 20,000 0 0
(4) 26,000 0 (40,000)

(5) 25,000 0 0
(6) 30,000 0 0

(7) 0 60,000 0
(8) 2,000 4,000 0

Total Adjustments 153,000 114,000 (75,000)

Adjusted Amounts P1,597,000 P1,086,000 P8,425,000

2. On September 28, 2019, a fire destroyed the entire merchandise inventory of the Alfonso
Corporation. The following information is available:

Sales, January 1 – September 28 2019 P 540,000

Inventory, January 1, 2019 P 150,000

Merchandise purchases, January 1 – September 28, 2019 (including P60,000 of goods in

transit on September 28, 2019, shipped FOB Shipping point) P 465,000

Markup percentage on cost 20%

What is the estimated inventory on September 28, 2019 immediately prior to the fire? (5 points)

Beg. Inventory, 1/1/19 150,000

Purchases on Hand 405,000
Cost of Goods Available for Sale 555,000
Cost of Goods Sold (450,000)
Estimated Inventory 105,000
 3. You observed the inventory count of the Solsons Company as of December 31, 2019. The client
prepared the summary presented below and gave it to you for verification:

Item Quantity Cost Market Amount

A 360 units P 3.60/doz P3.64/doz. P 1,310.40

B 24 units P 4.70 each P 4.80 each P 112.80

C 28 units P 16.50 each P 16.50 each P 1,353.00

D 43 units P 5.15 each P 5.20 each P 176.80

E 400 units P 9.10 each P8.10 each P 3,640.00

F 70 dozens P 2.00 each P 2,00 each P 140.00

G 95 grosses P144/gross P132/gross P 13,780.00

Determine the following:

A. Proper value of Item A. (2 points)

360/12*3.60 = 108.00

B. Proper value of Item E. (2 points)

400*8.10 = 3,240.00

C. Proper Value of Item C. (2 points)

28*16.50 = 462.00

D. Proper Value of the inventory as of December 31, 2019. (4 points)

108.00+112.80+462.00+221.45+3,240.00+1,680.00+12,540 = 18,364.25

4. Having been engaged as external auditor of Duhat Company on February 28, 2019, you were
unable to observe the taking of inventory on December 31, 2019, which was reported to
amount to P360,000. The following data, however, were gathered by you:

Inventory, December 31, 2018 P 320,000

Purchases during 2019 P 1,410,000

Cash sales during 2019 P 350,000

Shipment received on December 26, 2019, included physical inventory but, not recorded
as purchases P 10,000

Deposits made with suppliers, entered as purchases,

goods were not received in 2019 P 20,000

Collections on accounts receivable, 2019 P 1,800,000

 Accounts Receivable, January 1, 2019 P 250,000

Accounts Receivable, December 31, 2019 P 300,000

Gross Profit percentage on sales 40%

Determine how much is the estimated inventory shortage at December 31, 2019. (5 points)

Sales = 350,000 + 1,800,000 + 300,000 - 250,000 = 2,200,000

Gross Profit = 40% on sale = 880,000
COGS = 2,200,000 - 880,000 = 1,320,000

COGS that should be actually charged = Opening Inventory + Purchases + Goods received but
not recorded - Goods recorded but not yet received - Closing Inventory

320,000 + 1,410,000 + 10,000 - 20,000 -360,000 = 1,360,000

Inventory Shortage = 1,360,000 - 1,320,000 = 40,000

5. On May 31, 2019, a fire completely destroyed the work-in-process inventory of Adler Paints.
Physical inventory figures were published as follows:

As of January 1, 2019 As of May 31, 2019

Raw Materials P15,000 P 30,000
Work-in-process P50,000 -
Finished Goods P70,000 P 60,000

Sales for the first five months of 2019 were P150,000. Raw materials purchased were P50,000.
Freight on purchases was P5,000. Direct labor for the five months was P40,000. To determine the value
of the lost inventory, the insurance adjusters have agreed to use an average gross profit rate of 32.5%.
Assume that manufacturing overhead was 45% of direct labor cost.

A. Compute the value of the goods manufactured and completed as of May 31, 2019. (5
points)
Sales for the period 150,000
Less: Gross Profit 48,750
(150,000*32.5%)
COGS 101,250
Add: Inventory, End 60,000
Less: Finished Goods, Beg. 70,000
Cost of Goods Manufactured 91,250

B. Compute the raw materials used during the first five months of 2019. (5 points)
Raw Materials, Beg 15,000
Add: Purchases 50,000
Freight-In 5,000
Less: Raw Materials,End 30,000
Raw Materials Used 40,000
 C. Compute the total value of goods put in process during the five-month period. (5 points)
Raw Materials used 40,000
Direct Labor 40,000
Prime Cost 80,000
Manufacturing Overhead 18,000
(40,000*45%)
Gross Works Cost 98,000
Work-in-Process, Beg 50,000
Value of Goods out in
Process 148,000

D. Compute the value of the destroyed work-in-process inventory as determined by the

insurance adjusters. (5 points)
Value of goods put in process 148,000
Cost of goods manufactured (91,250)
Value of destroyed work-in process 56,750

6. The owner of a trading company engaged your services as auditor. There is a discrepancy
between the company’s income and the sales volume. The owner suspects that the staff is
committing theft. You are to determine whether or not this is true. Your investigation revealed
the following:

1) Physical inventory, taken December 31, 2019 under your observation, showed that cost was
P26,500 and market value, P25,000. The inventory of January 1, 2019 showed cost of
P39,000 and market value of P37,500. It is the firm’s practice to value inventory at “lower of
cost or market”. Any loss between cost and market value is included in “Other Expenses.”

2) The average gross profit rate was 40% of net sales.

3) The Accounts Receivable as of January 1, 2019 were P13,500. During 2019, Accounts
Receivable written off during the year amounted to P1,000. Accounts Receivable as of
December 31, 2019 were P37,500.

4) Outstanding purchase invoices amounted to P50,000 at the end of 2019. At the beginning of
2019 they were P37,500.

5) Receipts from customers during 2019 amounted to P300,000.

6) Disbursements to merchandise creditors amounted to P200,000.

Compute the following:

A. Total Sales for 2019. (5 points)

Receipts from customers 300,000
Accounts Receivables
(37,500+1,000-13,500) 25,000
Total Sales 325,000
B. Total purchases for 2019. (5 points)

Disbursements 200,000
Outstanding Purchases Invoice 50,000
Accounts Payable, Beg (37,500)
Total Purchases 212,500

C. Amount of inventory shortage, if any. (5 points)

Inventory 39,000
Add: Purchases 212,500
GAFS 251,500
COS (325,000*.60) (195,000)
Est. Inventory at Cost 56,500
Inventory, Ending (26,500)
Estimated Inventory Shortage 30,000