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III AUDIT OF INVENTORIES

SUMMARY OF PROBLEMS
PROBLEM NO. 1 Computation of adjusted inventory
PROBLEM NO. 2 Computation of adjusted inventory and related accounts
(including preparation of adjusting entries)
PROBLEM NO. 3 Computation of adjusted inventory and related accounts
(including preparation of adjusting entries)
PROBLEM NO. 4 Effect of inventory errors on SFP and SCI items
(including preparation of adjusting entries)
PROBLEM NO. 5 Effect of inventory errors on SFP and SCI items
(including preparation of adjusting entries)
PROBLEM NO. 6 Cost flow assumptions
PROBLEM NO. 7 Measurement of inventory and inventory shortage
PROBLEM NO. 8 Write down of inventory to net realizable value
PROBLEM NO. 9 Inventory estimation
PROBLEM NO. 10 Inventory estimation
PROBLEM NO. 11 Roll-forward analysis
PROBLEM NO. 12 - Theory

PROBLEM NO. 1 - Ovation Company


Unadjusted inventory
Add (deduct) adjustments:
b) Goods in-transit purchased FOB shipping - not included
c) Goods in-transit sold FOB destination - included
d) Goods purchased and received already - included
e) Goods purchased and received already - not included
f) Goods held on consignment - included
g) Goods in-transit sold FOB shipping point - included
e) Goods returned by customers, received already - not includ
Adjusted inventory

2,348,900
134,200
85,400
(104,380)
(105,200)
15,000
2,373,920

PROBLEM NO. 2 - Bulls Company


Requirement No. 1
Inventory
Unadjusted balances
Add (deduct) adjustments:
a - Goods held on consignment
b - Goods out on consignment
c - Unshipped goods, erroneously billed
d - Goods with constructive delivery
e - Goods purchased FOB shipping poi
f - WIP sent to outside processor
g - Goods returned by customers
h - Goods sold FOB destination
i - Goods excluded from physical count
j - Unrecorded purchases
k - Unrecorded freight-in
Adjusted balances

Accts. Payable

980,000

586,000

10,048,000

(9,000)
50,000
(15,000)
71,000
30,000
32,000
21,000
27,000
3,000
1,190,000

(9,000)
71,000
56,000
6,000
710,000

(40,000)
(47,000)
-

Requirement No. 2
a) Accounts payable
Inventory

Sales, net

9,000
9,000

b) Inventory
P/L summary (Cost of sales)

50,000

c) Sales
Acccounts receivable

40,000

d) P/L summary (Cost of sales)


Inventory

15,000

e) Inventory
Accounts payable

71,000

f) Inventory
P/L summary (Cost of sales)

30,000

g) Inventory
P/L summary (Cost of sales)
Sales returns
Acccounts receivable

32,000

h) Inventory
P/L summary (Cost of sales)

21,000

i) Inventory
P/L summary (Cost of sales)

27,000

j) P/L summary (Cost of sales)


Accounts payable

56,000

50,000

40,000

15,000

71,000

30,000

32,000
47,000
47,000

21,000

27,000

56,000

9,961,000

k) Inventory
P/L summary (Cost of sales)
Accounts payable

3,000
3,000
6,000

PROBLEM NO. 3 - Quezon Corporation

Sales

Per books
5,530,000

Accounts receivable

500,000

Inventory

600,000

Accounts payable
Purchases

400,000
3,000,000

1
5
1
5
3
4
6
2
2

Adjustments
Inc.(Dec.)
(130,000)
(150,000)
(130,000)
(150,000)
64,000
80,000
120,000
18,000
18,000

Per audit
5,250,000
220,000
864,000

418,000
3,018,000

Note : Prepare "T" accounts then post identified adjustments.


Adjusting entries
1 Sales (P46,000+P68,000+P16,000)
130,000
Accounts receivable
130,000
To adjust unshipped goods recorded as sales (SI No. 969, 970 and 971)
2 Purchases
Accounts payable
To take up unrecorded purchases (RR No. 1060)

18,000

3 Inventory
P/L summary (Cost of sales)
To take up goods under RR No. 1063

64,000

4 Inventory (P100,000/1.25)
P/L summary (Cost of sales)
To take up unshipped goods under SI No. 968

80,000

18,000

64,000

80,000

5 Sales
Accounts receivable
To reverse enrty made to record SI No. 966

150,000

6 Inventory (P150,000/1.25)
P/L summary (Cost of sales)
To take up goods under SI No. 966

120,000

150,000

120,000

PROBLEM NO. 4 - Makati Corporation

a
b
c
d
e
f

Sales
Purchases
Inventory
COS
Effect on Profit Effect on WC
over (under) over (under) over (under) over (under) over (under)
over (under)
(180,000)
180,000
(180,000)
(180,000)
(300,000)
200,000
(200,000)
(100,000)
(100,000)
150,000
150,000
600,000
(400,000)
400,000
200,000
200,000
250,000
(250,000)
250,000
250,000
(160,000)
160,000
(160,000)
(160,000)
300,000

150,000

(140,000)

290,000

Requirement No. 2
a) Inventory
Cost of sales

180,000

b) Accounts receivable
Sales
Cost of sales
Inventory

300,000

c) Accounts payable
Inventory

150,000

d) Sales
Accounts receivable
Inventory
Cost of sales

600,000

e) Cost of sales
Inventory

250,000

f) Inventory
Cost of sales

160,000

180,000

300,000
200,000
200,000

150,000

600,000
400,000
400,000

250,000

160,000

10,000

10,000

PROBLEM NO. 5 - Oh! Darling Corporation


Adjusting journal entries
a)
b)
c)
d)
e)

f)
g)
h)

Cost of sales
Inventory
None
None
Sales
Accounts receivable
Sales
Accounts receivable
Inventory
Cost of sales
Accounts receivable
Sales
None
Accounts receivable
Sales
Cost of sales
Inventory

100,000
100,000

Inventory
Sales
COS
Profit
AR
WC
over (under) over (under) over (under) over (under) over (under) over (under)
(100,000)
100,000
100,000
100,000

200,000

200,000

200,000

500,000

500,000

200,000
500,000
500,000
280,000

200,000

200,000

500,000

500,000
(280,000)

(300,000)

(300,000)

(600,000)

(600,000)

(280,000)
280,000

280,000

(280,000)

300,000
300,000

(300,000)

(300,000)

600,000

(600,000)

(600,000)
475,000

600,000
475,000

(475,000)
475,000

475,000
295,000

475,000
(200,000)

(295,000)

95,000

(200,000)

95,000

PROBLEM NO. 6 - Orang Dampuan Co.


Dec. 1
Dec. 2
Dec. 3
Dec. 9
Dec. 13
Dec. 15
Dec. 16
Dec. 22
Dec. 26

Units UC
350 820
43 850
(300)
5
55 910
76 960
(86)
(1) 910
(60)
72 980
154

TC
###
36,550

50,050
72,960
(910)
70,560
###

FIFO
Composition of inventory, 12/31
Date
Units UC
TC
Dec. 26
72 980 70,560
Dec. 10
76 960 72,960
Dec. 9
6 910
5,460
Total
154
###
Inventory, 12/1
Net Purchases
Total goods available fo
Inventory, 12/31
Cost of sales

###
###
###
###
###

Moving average

Date

Purchased
Units UC
TC

Units

COS
UC

TC

Dec. 1

Dec. 2
Dec. 3
Dec. 9

55

910

50,050

Dec. 13

76

960

72,960

Dec. 15
Dec. 16
Dec. 22
Dec. 26

300
(5)

(1)
72

910
980

823
823

246,900
(4,115)

86

890

76,540

60

890

53,400

(910)
70,560
###

372,725

Units

Balance
UC

TC

350
43
393
93
98
98
55
153
153

820
850
823
823
823
823
910
855
855

287,000
36,550
323,550
76,650
80,765
80,765
50,050
130,815
130,815

76
229
143
142
82
82
72
154

960
890
890
890
890
890
980
932

72,960
203,775
127,235
126,325
72,925
72,925
70,560
143,485

PROBLEM NO. 7 - Jay Roy Retailing Ltd


Requirement No. 1
Baked beans
Balance, June 1
Purchase 10 June
Purchase 19 June
Sales (73,000 cases)

Sales returns
Perpetual balance
Inventory shortage (squeeze)
Physical count
Plain flour
Balance, June 1
Purchase 03 June
Purchase 15 June
Purchase 29 June
Sales (95,000 boxes)

Perpetual balance
Damaged goods
Goods in transit
Physical count

Quantity
35,000
20,000
47,000
(35,000)
(20,000)
(18,000)
5,000
34,000
(1,400)
32,600

Price
19.60
19.50
19.70
19.60
19.50
19.70
19.70
19.70
19.70
19.70

Amount
686,000
390,000
925,900
(686,000)
(390,000)
(354,600)
98,500
669,800
(27,580)
642,220

Quantity
62,500
15,000
20,000
24,000
(62,500)
(15,000)
(17,500)
26,500
(1,000)
(24,000)
1,500

Price
38.40
38.45
38.45
39.00
38.40
38.45
38.45
38.45
38.45
39.00
38.45

Amount
2,400,000
576,750
769,000
936,000
(2,400,000)
(576,750)
(672,875)
1,032,125
(38,450)
(936,000)
57,675

Cost
642,220
57,675

NRV
945,400
57,750

LCN
642,220
57,675
699,895

Requirement No. 2
Baked beans
Plain flour
Total

Quantity
32,600
1,500

PROBLEM NO. 8 - Bangar Sales Company


Computation of units on hand, 7/31:
C
P
Inventory, 7/1
50,000
30,000
70,000
45,000
Purchases, 7/1-15
30,000
Purchases, 7/16-31
150,000
75,000
TGAS
(105,000) (50,000)
Sales
Inventory, 7/31
45,000
25,000

A
65,000
30,000
95,000
(45,000)
50,000

Requirement No. 1

Item

Units in
Ending
Inventory
(FIFO)

Unit cost

Total cost

Est. Selling Est. Cost to


Price (a)
Sell (b)

NRV

LCN

Inventory Allowanc
Total NRV at LCN
e

Product C

30,000
15,000
45,000

8.00
6.50

240,000
97,500
337,500

7.20
7.20

0.72
0.72

6.48
6.48

6.48
6.48

194,400
97,200
291,600

194,400
97,200
291,600

45,600
300
45,900

Product P

25,000

10.50

262,500

9.90

0.99

8.91

8.91

222,750

222,750

39,750

Product A

30,000
20,000
50,000

1.25
0.90

37,500
18,000
55,500

1.80
1.80

0.18
0.18

1.62
1.62

1.25
0.90

48,600
32,400
81,000

37,500
18,000
55,500

595,350

569,850

655,500
(a) Existing selling price x .9
(b) Amount in letter (a) x .1

Requirement No. 2
Item

Total cost

Inventory
at LCN

Allowance
(a)

337,500
262,500
55,500
655,500

291,600
222,750
55,500
569,850

45,900
39,750
85,650

Product C
Product P
Product A

(a) Inventory at cost - Inventory at LCN


Required allowance, 7/31
Recorded allowance, 7/1
Loss on inventory writedown

85,650
(3,000)
82,650

Requirement No. 3
Inventory, 7/1 (at cost)
Purchases:
Product C [(70,000 units x P6.50)+(30,000 units x P8)
Product P (45,000 units x P10.50)
Product A (30,000 units x P1.25)
Total goods available for sale
Inventory, 7/31 (at cost)
Cost of sales before loss on inventory writedown
Loss on inventory writedown
Cost of sales including loss on inventory writedown

658,500
695,000
472,500
37,500

1,205,000
1,863,500
(655,500)
1,208,000
82,650
1,290,650

Alternative computation:
Inventory, 7/1 (at LCN) (P658,500 - P3,000)
Purchases:
Product C [(70,000 units x P6.50)+(30,000 units x P8)
Product P (45,000 units x P10.50)
Product A (30,000 units x P1.25)

655,500
695,000
472,500
37,500

1,205,000

85,650

Total goods available for sale


Inventory, 7/31 (at LCN)
Cost of sales including loss on inventory writedown

1,860,500
(569,850)
1,290,650

PROBLEM NO. 9 - Mandaluyong Company


Computation of adjusted balances:
Inventory
Nov. 30
Unadjusted balances
Add (deduct) adjustments:
a
b
c
d
e

Purchases
Purchases
Up to Nov. 30 Up to Dec. 31

1,425,000

10,125,000

12,000,000

(82,500)
-

112,500
(15,000)
(30,000)
###
###

(22,500)
(30,000)
-

1,342,500

10,110,000

11,947,500

Inventory, January 1
Add - Net purchases up to Nov. 30
Total goods available for sale
Less - Inventory, Nov. 30
Cost of sales for 11 months

1,312,500
10,110,000
11,422,500
1,342,500
10,080,000

Sales for 11 months ended Nov. 30


Cost of sales for 11 months ended Nov. 30
Gross profit
Divide by sales for 11 months ended Nov. 30
Gross profit rate for 11 months ended Nov. 30

12,600,000
(10,080,000)
2,520,000
12,600,000
20.00%

Computation of inventory, 12/31


Inventory, January 1
Add - Purchases for the year ended Dec. 31
Total goods available for sale
Less - Cost of sales
Cost of sales with profit [(14,400,000 - 150,000) x 8
Cost of sales without profit
Estimated inventory, December 31

1,312,500
11,947,500
13,260,000
11,400,000
150,000

11,550,000
1,710,000

PROBLEM NO. 10 - Muntinlupa Company


Inventory, December 31, 2011
Add purchases for the period Jan. 1 to April 21
Purchases up to March 31, 2012
Payments for April purchases
Unrecorded obligations for April purchases
Purchase returns
Total goods available for sale
Less cost of sales (see computation below)
Estimated inventory on the date of fire
Less: Proceeds from sale of salvaged merchandis
Shipments in transit
Inventory fire loss
Computation of cost of sales:
Sales up to March 31, 2012
Sales for the period April 1 to 21
Accounts receivable, 4.21.12
Accounts receivable for write-off
Receipts from customers (P129,500 - P9,500)
Total
Less Accounts receivable, 3.31.12
Total sales
x cost ratio (see computation below)
Cost of sales
Computation of cost ratio:
Inventory, 1/1/10
Net purchases (2010 and 2011)
Inventory, 12/31/11
Cost of sales (2010 and 2011)
/ Net sales (2010 and 2011)
Overall cost ratio

750,000
520,000
34,000
106,000
(9,500)

35,000
23,000

650,500
1,400,500
830,500
570,000
58,000
512,000

1,350,000
360,000
80,000
120,000
560,000
400,000

160,000
1,510,000
0.55
830,500

660,000
5,150,000
(750,000)
5,060,000
9,200,000
0.55

PROBLEM NO. 11 - Valenzuela Manufacturing Co.


Requirement No. 1
Inventory per books, 11/30
Add understatement of booked inventory
Physical inventory,11/30, per client
Add (deduct) adjustments
Overstatement due to pricing errors
Understatement due to footing and extension errors
Obsolete materials
Inventory per physical count, as adjusted

1,695,960
84,000
1,779,960
(61,600)
4,200
(7,000)
1,715,560

Requirement No. 2
Adjusted balance of inventory, 11/30
Purchases
Direct labor
Factory overhead (200% of direct labor)
Total
Less cost of sales:
Per books
Obsolete materials written off through COS
Inventory, 12/31

1,715,560
691,600
338,800
677,600
3,423,560
1,920,800
(7,000)

Requirement No. 3
Inventory, 11/30 (see no. 1)
Direct labor
Factory overhead (200% of direct labor)
Raw materials, 11/30
Purchases
Total
Less: Materials included in cost of sales
Adjusted cost of sales (see no. 2)
1,913,800
Direct labor
(386,400)
Factory overhead
(772,800)
Cost of materials on hand and materials included in WIP
Labor cost in the WIP:
Labor included in 11/30 inventory
280,000
Labor incurred in December
338,800
Total
618,800
Labor included in COS
(386,400)
Applied factory overhead (200% of direct labor)
Total, as shown in no.2

1,913,800
1,509,760

1,715,560
(280,000)
(560,000)
875,560
691,600
1,567,160

754,600
812,560

232,400
464,800
1,509,760

PROBLEM NO. 12 - Theory


1
2
3
4
5
6
7
8
9
10
11
12

D
A
B
B
C
C
B
D
C
C
C
A