Audit of Inventory

Exercises - Analysis of Transactions

1. Deskbot 001 Company bought merchandise on January 2, 2016 from Deskbot 002
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.
Deskbot 001 Company paid the account within the discount period. How much Deskbot
001 Company paid to Deskbot 002 Company?

2. Merchandise shipped fob destination to customer was made on January 5, 2016 for
P25,000. The customer issued P10,000 12% 30-day note and the balance 2/10, n/30
on January 10, 2016, the date the goods were received. The customer made a partial
payment on January 15, 2016 for P5,000. Payment was made within the discount
period. How much discount was granted?

3. On January 10, 2016, Absolute Zero Company sold merchandise on account fob
destination to Ice7 Co. for P20,000. Ice7 Co. paid the freight cost of P1,500 to be
deducted from its account. How much Ice7 Company paid to Absolute Zero Company?

4. Goods worth P12,000 was shipped on account (2/10, n/30) to Igknight Company on
January 15, 2016 from Heroic Champion Company The term of the shipment was fob
shipping point. Heroic Champion Company paid freight of P950. On January 12, 2016,
P2,500 worth of merchandise was received by Heroic Champion Co. from Igknight Co.
due to wrong specification. Igknight Company made a partial payment of P5,000. How
much is the subsequent collection of Heroic Champion Company from Igknight Company
assuming Igknight Company paid within the discount period?

5. Plasma Company purchased merchandise on account for P10,000 from Jovian Company
with term shipping point. The freight cost was P1,500 and was paid by Plasma Company
Upon the arrival of the carrier, it found out that the merchandise got lost while in transit.
The carrier company accepted the loss as their fault. How much is the subsequent
collection of Jovian Company from Plasma Company?

6. Photon Company bought from Ghostrick Company a second-hand machinery for the use
of its plant for P50,000 A 50% down payment was made and balance 2/10, n/30.
Freight cost was paid by Photon Company for P2,000. Ghostrick Company acquired the
machinery three years ago at P60,000 with 10 year life. (Straight-line method is use in
computing Depreciation). Two days after purchase, Ghostrick Company granted the
request of Photon Company for a P5,000 price adjustments because of some defects of
the machinery. Cash paid by Photon Company to Ghostrick Company assuming the
account was paid within the discount period is

7. The Chaos Company purchased land and building at lump-sum price of P300,000 from
Laval Company on January 1, 2016. The land and building was purchased by Laval
Company 3 year ago at a total cost of P300,000. Based on the appraiser’s computation
and analysis, the cost of the land is twice as much to that of the building. Chaos
Company assume a five-year life of the building with no salvage cost. Two years later,
Chaos Company sold the building at P80,000 to Jaan Company.

Chaos Company will record gain or loss from the sale of the building to Jaan Company
by

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Problem 1
Listed below are some items of inventory from Castel 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
(Castel 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 Castel 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

Question:
1. If the recorded inventory in the balance sheet is P289,000, the year-end inventory will
be overstated by:

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:

Problem 2
In the event of your audit, you found the following information related to the inventories on
December 31, 2016.

a. An invoice for P90,000, FOB shipping point, was received on December 15, 2016. The
receiving report indicates that the goods were received on December 18, 2016, 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, 2016. 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.

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c. Merchandise with an invoice cost of P50,000, received from a vendor at 5:00 pm on
December 31, 2016, were recorded on a receiving report dated January 2, 2017. The
goods were not included in the physical count, but invoice was included in accounts
payable at December 31, 2016.

d. Merchandise costing P15,000 to the company FOB shipping point on December 26,
2016. The purchase was recorded, but the merchandise was excluded from the ending
inventory because it was not received until January 4, 2017.

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

Problem 3
You have observed the physical count of CHRONOMALY CORPORATION’s inventory taken on
December 31, 2016. The following errors were discovered:

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a. Goods that cost P7,000 was sold for P8,500 on December 29, 2016. The order was
shipped December 31, 2016 with terms fob destination. The merchandise was not
included in the ending inventory. The sale was not recorded until January 4, 2017, the
date when the customer made payment of the sold goods.

b. On December 29, 2016, CHRONOMALY CORPORATION purchased merchandise costing

P15,000 from a supplier. The order was shipped December 30, 2016 (terms FOB
shipping point) and was still “in transit” on December 31, 2016. Since the invoice was
received on December 31, the purchase was recorded in 2016. The merchandise was
included in the inventory count.

c. On January 4, 2017, goods that were included in the ending inventory at December 31,
2016, were returned to CHRONOMALY CORPORATION because the consignee had not
been able to sell it. The cost of this merchandise was P9,500 with a selling price of
P14,500.

d. CHRONOMALY CORPORATION failed to make an entry for a purchase on account of

P6,500 at the end of 2015, although it included this merchandise in the inventory count.
The purchase was recorded when payment was made to the supplier in 2016.

e. On January 6, 2017, CHRONOMALY CORPORATION received merchandise which had

been shipped to them on December 31, 2016. The terms of the purchase were fob
destination. Cost of the merchandise was P6,400. The purchase was not recorded until
payment was made in January 2017 but the goods were included in the inventory as of
December 31, 2016.

f. Goods with a selling price of P30,000 was shipped to Herald Company, a consignee, on
December 29, 2015. Since this was shipped before the inventory count, the
merchandise, which was billed 20% above cost, was excluded from the inventory count.
Sales was not recorded until the inventory was received on January 5, 2016. Your
further investigation revealed that 50% of these goods were sold in 2016 and the on-
hand at December 31, 2016 were not yet reported in 2016 inventory.

Questions: Based on the above information, answer the following:

1. What is the entry to adjust audit finding “a” at December 31, 2016?
a. Accounts Receivable 8,500 c. Both A and B
Sales 8,500
b. Inventory 7,000 d. Accounts Receivable 8,500
Retained Earnings 7,000 Retained Earnings 8,500

2. What is the entry to adjust audit finding number “b” at December 31, 2016?
a. Inventory 15,000 c. Both A and B
Retained Earnings 15,000
b. Retained Earnings 15,000 d. Neither A nor B
Accounts Payable 15,000

3. CHRONOMALY CORPORATION should debit what account to adjust audit finding number
“c” at December 31, 2016?
a. Sales c. Retained Earnings
b. Cost of Sales d. No adjustment is necessary
4. In audit finding number “d”, choose the correct statement?

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 a. The company is correct for not making an entry on the P6,500 purchase on account
even though it is already included in the inventory count since no term of shipment
is given.
b. The company should reduced its purchases at December 31, 2016 since the
purchases being paid in 2016 was the purchase for 2015.
c. The company is correct in recording of purchases in year 2016 since this is the time
when the company made payment on such.
d. Inventory should be recorded at December 31, 2015 since the purchases were
recorded on this year.

5. The entry to adjust audit finding number “e” at December 31, 2016 is: (assume the
book is not close)
a. Retained Earnings 6,400 c. Purchases 6,400
Inventory 6,400 Accounts Payable 6,400
b. Retained Earnings 6,400 d. Cost of sales 6,400
Accounts payable 6,400 Inventory 6,400

6. The entry to adjust audit finding number “f” at December 31, 2016 is: (assume the book
is close)
a. Inventory 25,000 c. Cost of sales 25,000
Accounts Receivable 25,000 Sales 25,000
Cost of sales 25,000 Retained Earnings 25,000
Sales 25,000 Accounts Receivable 25,000
b. Cost of sales 25,000 d. Retained Earnings 2,500
Sales 15,000 Inventory 12,500
Retained Earnings 25,000 Accounts Receivable 15,000
Accounts Receivable 15,000

Problem 4
The CONSTELLAR COMPANY’S year-end inventory based on physical count conducted on
December 31, 2016, amounted to P885,000. Your cut-off examination disclosed the
following information”:

1. Included in the physical count were goods billed to customer FOB shipping point on
December 31, 2016. These goods had a cost of P28,000 and were billed at P35,000.
The shipment was on CONSTELLAR’S loading dock waiting to be picked up by the
common carrier.

2. Goods were in transit from a vendor to CONSTELLAR on December 31, 2016. The
invoice cost was P50,000 and the goods were shipped FOB Shipping on Dec. 29,2016.

3. Work in process inventory costing P20,000 was sent to an outside processor for plating
on Dec. 30, 2016.

4. Goods returned by customers and held pending inspection in the returned goods area on
Dec. 31, 2016, were not included in the physical count. On January 8, 2017, the goods
costing P26,000 were inspected and returned to inventory. Credit memos totaling
P40,000 were issued.
5. Goods shipped to customer FOB destination on Dec. 26, 2016, were in transit at Dec.
31, 2016 and had a cost of P25,000. Upon notification of receipt by the customer on
January 2, 2017, the company issued a sales invoice for P42,000.

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6. Goods received from a vendor on Dec. 26, 2016, were included in the physical count.
However the related P60,000 vendor invoice was not included in Accounts Payable as
December 31, 2016, because the Accounts Payable copy of the receiving report was lost.

7. On January 3, 2017, a monthly freight bill in the amount of P4,000 was received. This
was specifically related to merchandise purchased in Dec. 31, 2016. The freight charges
were not included in either the inventory or in accounts payable at Dec. 31, 2016.

Question:
1. Sales at year-end is overstated by:
2. Purchases at year-end is understated by:
3. Cost of sales at year-end is overstated by:
4. The inventory per audit at year-end is:

Problem 5
On January 1, 2017, Barian Hope Corporation engaged an independent CPA to perform an
audit for the year ended December 31, 2016. The company uses a periodic inventory
system. The CPA did not observe the inventory count on December 31, 2016, as a result, a
special examination was made of the inventory records.

The financial statements prepared by the company (uncorrected) showed the following:
ending inventory, P72,000; accounts receivable, P60,000; accounts payable, P30,000;
sales, P400,000; net purchases, P160,000, and pretax income P51,000.

The following data were found during the audit:

1. Merchandise received on January 2, 2017, costing P800 was recorded on December 31,
2016. An invoice on hand showed the shipment was made fob supplier’s warehouse on
December 31, 2016. Because the merchandise was not on hand at December 31, 2016,
it was not included in the inventory.

2. Merchandise that cost P18,000 was excluded from the inventory, and the related sale for
P23,000 was recorded. The goods had been segregated in the warehouse for shipment;
there was no contract for sale but a “tentative order by phone”.

3. Merchandise that cost P10,000 was out on consignment for Valentin Distributing
Company and was excluded from the ending inventory. The merchandise was recorded
as a sale P25,000 when shipped to Valentin on December 29, 2016.

4. A sealed packing case containing a product costing P900 was in Barian Hope’s shipping
room when the physical inventory was taken. It was included in the inventory because
it was marked “Hold for customer’s shipping instructions.” Investigation revealed that
the customer signed a purchase contract dated December 18, 2016, but that case was
shipped and the customer billed on January 10, 2017. A sale for P1,500 was recorded
on December 31, 2016.

5. A special item, fabricated to order for a customer, was finished and in the shipping room
on December 31, 2016. The customer has inspected it and was satisfied. The customer
was billed in full on that sale in the amount of P5,000. The item was included in
inventory at cost, P1,000 because it was shipped on January 4, 2017.

6. Merchandise costing P15,600 was received on December 28, 2016. The goods were
excluded from inventory, and a purchase was not recorded. The auditor located the

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 related papers in the hands of the purchasing; they indicated, “On consignment from
Roselyn Company”.

7. Merchandise costing P2,000 was received on January 8, 2017, and the related purchase
invoice recorded January 9. The invoice showed the shipment was made on December
29, 2016, fob destination. The merchandise was excluded from the inventory.

8. Merchandise that cost P6,000 was excluded from the ending inventory and not recorded
as a sale for P7,500 on December 31, 2016. The goods had been specifically
segregated. According to the terms of the contract of sale, ownership will not pass until
actual delivery.

9. Merchandise that cost P15,000 was included in the ending inventory. The related
purchase has not been recorded. The goods had been shipped by the vendor fob
destination, and the invoice was received on December 30, 2016. The goods was
received on January 5, 2017.

10. Merchandise in transit that cost P7,000 was excluded from inventory because it was not
on hand. The shipment from the vendor was fob shipping point. The purchase was
recorded on December 29, 2016, when the invoice was received.

11. Merchandise in transit that cost P13,000 was excluded from inventory because it had not
arrived. Although the invoice had arrived, the related purchase was not recorded by
December 31, 2016. The merchandise shipped fob shipping point by the vendor.
12. Merchandise that cost P8,000 was included in the ending inventory because it was on
hand. The merchandise had been rejected because of incorrect specifications and was
being held for return to the vendor. The merchandise was recorded as a purchase on
December 26, 2016.

Question:
Based on your analysis and the information above, answer the following:

1. The adjusted balance of inventory at year-end is:

2. The adjusted balance of accounts receivable at year-end is:
3. The adjusted balance of accounts payable at year-end is:
4. The adjusted balance of Sales at year-end is:
5. The adjusted balance of Net Purchases at year-end is:
6. The adjusted balance of Pre-tax income at year-end is:

Problem 6
Comics Hero Company’s December 31, 2015 and December 31, 2016 inventory is P35,000
and P27,000, respectively. The beginning and ending inventories were determined by
physical count of the goods on hand on those dates, and no reconciling items were
considered. All purchases are f.o.b. shipping point. In the course of your examination of
the inventory cut-off, both the beginning and ending of each year, you discover the
following facts:

Beginning of the year

a. Invoices totaling P3,260 were entered in the voucher register on January, but the goods
were received during December.
b. December invoices totaling P4,100 were entered in the voucher register in December,
but the goods were not received until January.

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End of the Year

c. Invoices totaling P7,260 were entered in the voucher register in January but the goods
were received in December.
d. December invoices totaling P3,600 were entered in the voucher register in December,
but the goods were not received until January.
e. Invoices totaling P1,500 were entered in the voucher register in January, and the goods
were received in January, but the invoices were dated December.

Question:
Based on your analysis and the information above, answer the following:

1. The adjusted balance of the Jan. 1, 2016 inventory is:

2. How much is the adjusted balance of the Purchases account at December 31, 2016
assuming the amount of Purchases in the trial balance is P5,176,000?
3. The corrected December 31, 2016 inventory is
4. When auditing inventories, an auditor would least likely verify that
a. All inventory owned by the client is on hand at the time of the count.
b. The client has used properly inventory pricing.
c. Damaged goods and obsolete items have been properly accounted for.
d. The financial statement presentation of inventories is appropriate.

Problem 7
During the 2016 audit of DJINN 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, 2017.

♦ Merchandise costing P6,250 was received on December 28, 2016, and the invoice was
recorded. The invoice was marked “On Consignment.”

♦ Merchandise received on January 6, 2017 costing P7,200 was entered in the purchase
register on January 7. The invoice showed shipment made FOB shipping point on
December 31, 2016.

♦ 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, 2017. The machine
costs P25,000 and was sold for P45,000.

♦ Merchandise costing P23,500 was received on January 3, 2017, and the related purchase
invoice was recorded January 5. The invoice showed the shipment was made on
December 29, 2016, 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 DJINN still holds legal title. Historical experience suggests
that full payment on the installment sales is received approximately 99% of the time.

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♦ 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 DJINN to buy back the inventory in February 2017.

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?
2. What is the adjusted inventory balance at the end of 2016?
3. What is the adjusted balance of accounts payable at the end of the year?
4. The adjusted total sales in 2016 is
5. The adjusted Cost of goods sold in 2016 is

Problem 8
SKYPALACE COMPANY is a manufacturer of small tools. The following information was
obtained from the company’s accounting records for the year ended December 31,
2016:
Inventory at December 31, 2016 (based on
physical count in SKYPALACE’s warehouse at cost
on December 31, 2016) 1,870,000
Accounts payable at December 31, 2016 1,415,000
Net sales (sales less sales returns) 9,693,400

Your audit reveals the following information:

§ The physical count included tools billed to a customer FOB shipping point on
December 31, 2016. These tools cost P64,000 billed at P78,500. They were in the
shipping area waiting to be picked up by the customer.

§ Goods shipped FOB shipping point by a vendor were in transit on December 31,
2016.These goods with invoice cost of P93.400 were shipped on December 29, 2016.

§ Work in process inventory costing P27,000 was sent to a job contractor for further
processing.

§ Not included in the physical count were goods returned by customers on December
31, 2016. These goods costing P49,000 were inspected and returned to inventory on
January 7, 2017. Credit memos for P67,800 were issued to the customers at that
date.

§ In transit to a customer on December 31, 2016, were tools costing P17,740 shipped
FOB destination on December 26, 2016. A sales invoice for P29,400 was issued on
January 3, 2017, when SKYPALACE Company was notified by the customer that the
tools had been received.
§ At exactly 5:00 pm on December 31, 2016, goods costing P31,200 were received
from a vendor. These were recorded on a receiving report dated January 2, 2017.

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 The related invoice was recorded on December 31, 2016, but the goods were not
included in the physical count.

§ Included in the physical count were goods received from a vendor on December 27,
2016. However, the related invoice for P36,000 was not recorded because the
accounting department’s copy of the receiving report was lost.

§ A monthly freight bill for P16,000 was received on January 3, 2017. It specifically
related to merchandise bought in December 2016, one half of which was still in the
inventory at December 31, 2016. The freight was not included in either the
inventory or in accounts payable at December 31, 2016.

Question:
Based on your analysis and the information above, answer the following:

1. The inventory at year-end is:

a. Understated by P170,340 c. Understated by P126,340
b. Understated by P162,340 d. Understated by P82,140

2. The accounts payable at year-end is:

a. Understated by P93,400 c. Understated by P137,400
b. Understated by P106,200 d. Understated by P145,400

3. The amount of sales at year-end is:

a. Overstated by P67,800 c. Overstated by P29,400
b. Overstated by P38,400 d. Correctly stated

4. The adjusted balance of inventory at year-end is:

5 The adjusted balance of accounts payable at year-end is:
6. The adjusted balance of sales at year-end is:

Problem 9
The Marksman Company is a wholesale distributor of automotive replacement parts. Initial
amounts taken from Marksman’s accounting records are as follows:

Inventory at December 31, 2016 (based on physical count of goods in warehouse on

December 31, 2016); P1,250,000.

Accounts payable at December 31, 2016:

Dacalos Company 2% 10 days, net 30 265,000
Dano Company Net 30 210,000
De Lira Company Net 30 300,000
Dela Cruz Company Net 30 225,000
Deza Company Net 30 -
Encabo Company Net 30 -___
P 1,000,000

Sales in 2016 P 9,000,000

Additional information is as follows:

a. Parts held on consigment from Dano Company to Marksman Company, the consignee,
amounting to P155,000, were included in the physical count of goods in Marksman

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 Company’s warehouse on December 31, 2016 and in accounts payable at December 31,
2016.

b. P22,000 of parts which sere purchased from Deza Company and paid for in December
2016 were sold in the last week of 2016 and appropriately recorded as sales of P28,000.
The parts were included in the physical count of goods in Marksman’s warehouse on
December 31, 2016, because the parts were on the loading dock waiting to be picked up
by customers.

c. Parts in transit on December 31, 2016, to customers, shipped f.o.b. shipping point, on
December 28, 2016, amounted to P34,000. The customers received the parts on
January 6, 2017. Sales of P40,000 to the customers for the parts were recorded by
Marksman Company on January 2, 2017.

d. Retailers were holding P210,000 at cost (P250,000 at retail) of goods on consignment

from Marksman Company, the consignor, at their stores on December 31, 2016.

e. Goods were in transit from Encabo Company to Marksman Company on December 31,
2016. The cost of goods was P25,000 and they were shipped f.o.b. shipping point on
December 29, 2016.

f. A quarterly freight bill in the amount of P2,000 specifically relating to merchandise

purchases in December 2016, all of which was still in the inventory at December 31,
2016, was received on January 3, 2017. The freight bill was not included in either the
inventory or in accounts payable at December 31, 2016.
g. All of the purchases from Dacalos Company occurred during the last seven days of the
year. These items have been recorded in accounts payable and accounted for in the
physical inventory at cost before discount. Marksman’s policy is to pay invoices in time
to take advantage of all cash discounts, adjust inventory accordingly, and record
accounts payable, net of cash discount.

Questions:
1. The adjusted inventory is:
2. The adjusted accounts payable is:
3. The adjusted sales is:

Problem 10
Corebage Corporation reported income before income taxes as follows:

2015 P525,000
2016 630,000

The company uses the periodic inventory system. Ending inventories for 2015 and 2016
were properly recorded. The following additional information became available following an
analysis of the inventories:

(a) Merchandise with a gross invoice price of P7,500 was shipped FOB shipping point by a
supplier on terms of 2/10, n/30 in 2015 and was recorded as a purchase by Corebage
Corporation in 2015 when the invoice was received: however, the goods were not
included in the ending inventory because they were not received until 2016. The
company always takes advantage of the early payment discounts and accordingly,
records its purchases using the net method.

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(b) Merchandise that cost P3,000 was purchased FOB shipping point by Corebage
Corporation on December 31, 2015 and was shipped by the supplier that day. The
merchandise was not included in the 2015 ending inventory and was not recorded as a
purchase until 2016.

(c) Merchandise costing P2,850 was shipped FOB shipping point to a customer in 2015 and
not included in the ending inventory for 2015. The sale of P4,260 was recorded in 2016
when the invoice was sent.

(d) Goods being held by Corebage Corporation on consignment from a supplier in the
amount of P4,950 were included in the physical inventory for 2015.

(e) Retailers were holding P6,750 of goods at cost (P9,000 at retail), on consignment from
Corebage, at their stores on December 31, 2015. These goods were not included in the
ending inventory of Corebage Corporation for 2015.

Question:
1. How much is the correct income before taxes for 2015?
2. How much is the correct income before taxes for 2016?
3. The cost of sales at December 31, 2016 is understated by:
4. The Retained earnings – beginning at December 31, 2016 is understated by:
5. The beginning inventory (January 1, 2016) of Corebage Corporation is understated by:

Problem 11
You audit of HARPIE COMPANY for the year 2016 disclosed the following:
1. The December 31 inventory was determined by a physical count on December 28 and
based on such count, the inventory was recorded by:
Inventory 1,400,000
Cost of sales 1,400,000
2. The 2016 ledger shows a sales balance of P20,000,000.
3. The company sells a mark-up of 20% based on sales.
4. The company recognizes sales upon passage of title to the customers.
5. All customers are within a four-day delivery area.
The sales register for December, 2016 and January, 2017, showed the following details:

December Register
Invoice No. FOB Terms Date Shipped Amount
300 Destination 12/30 P 50,000
301 Shipping point 12/30 62,500
302 Destination 12/23 47,500
303 Destination 12/24 82,500
304 Shipping point 01/02 56,000
305 Shipping point 12/29 90,000

January Register
Invoice No. FOB Terms Date Shipped Amount
306 Destination 12/29 67,500
307 Shipping point 12/29 74,500
308 Destination 01/02 140,000
309 Shipping point 01/04 73,000
310 Shipping point 12/27 67,500

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Questions
1. The Sales for December is over/(under) by:
a. P 36,000 under c. P 106,000 under
b. P 36,000 over d. P 106,000 over

2. The Inventory for December is over/(under) by:

a. P 235,600 over c. P 245,412 under
b. P 181,600 over d. P 245,412 over

3. The adjusted inventory at December 31, 2016 is:

4. The adjusted sales at December 31, 2016 is:
5. How much sales for the month of December 2016 were erroneously recorded in January
2017?
6. How much sales for the month of January 2017 were erroneously recorded in December
2016?

Problem 12
On December 15, 2016, under your observation, your client took a complete physical
inventory and adjusted the financial perpetual inventory control accounts to agree with the
physical inventory.

As of December 31, 2016, you decided to accept the balance of the control account after
examining transactions recorded in that account between December 15 and December 31,
2016. The audit was for the year ended December 31, 2016.

In the course of conducting your examination of the sales cutoffs as of December 15 and
December 31, 2016, you discovered the following items:
Date Inventory
Item Cost Price Sales Price Date Shipped Date Billed Control Credited
A P 60,000 P 78,000 12-13-06 12-17-06 12-17-06
B 77,000 101,400 01-02-07 12-29-06 12-29-06
C 52,000 67,600 12-17-06 12-29-06 12-29-06
D 87,000 113,100 12-14-06 12-16-06 12-16-06
E 49,500 64,500 12-25-06 01-02-07 01-02-07

Question:
Based on the information above and your analysis, answer the following

1. The inventory at year-end is over/(under) by:

2. The cost of sales at year-end is over/(under) by:
3. The sales at year-end is over/(under) by:
4. The accounts receivable at year-end is over/(under) by:

Problem 13
The following information was obtained from the balance sheet of KUSANAGI INC.:

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 Dec. 31, 2016 Dec. 31, 2015
Cash P706,600 P 200,000
Notes receivable 0 50,000
Inventory ? 399,750
Accounts payable ? 150,000

All operating expenses are paid by Kusanagi Inc. with cash and all purchases of inventory
are made on account. Kusanagi, Inc. sells only one product. All sales are cash sales
which are made for P100 per unit. Kusanagi. Inc., purchases 1,500 units of inventory
per month and values its inventory using the periodic FIFO. The unit cost of inventory
during January 2016 was P65.20 and increased P0.20 per month during the year. During
2016, payments to suppliers totaled P943,400 and operating expenses totaled
P440,000. The ending inventory for 2015 was valued at P65.00 per unit.

Question:
Based on the information above and your analysis, answer the following

1. Recorded sale during 2016 is:

2. Number of units sold during 2016 is:
3. The accounts payable balance at December 31, 2016 is:
4. The January 1, 2016 inventory balance is:
5. The amount of inventory at December 31, 2016 is:

Problem 14
Leviathan Company operates a wholesale oil products company. Leviathan believes that an
employee and a customer are conspiring to steal gasoline. The employee records sales to
the customer not less than the amount actually placed in the customer’s tank truck. In
order to confirm or refuse these suspicions, Leviathan has collected the following data for
the past 10 working days.
Quantity Cost per
(gallons) unit (gal) Total Cost
Inventory, September 1 220,000 P1.45 P 319,000
Purchases 1,560,000 1.45 2,262,000
Goods available for sale 1,780,000 2,581,000

Leviathan had sales of P2,512,000 during this 10-day period. All sales were made at P1.60
per gallon. A physical inventory indicates that there are 192,000 gallons of gasoline in
inventory at the close of business on September 10.

Questions:
1. How much inventory should be present at the end of the 10-day period (in gallons)?
2. What is the cost of missing inventory?

Problem 15
You were assigned to audit the factory accounts of Lancelot Manufacturing Corporation for
the year ended December 31, 2016. The following data were gathered:

Total manufacturing Cost P 900,000

Cost of Goods Manufactured 800,000
Factory Overhead 75% of direct labor and 25% of total
manufacturing cost

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Beginning work-in-process inventory, January 1, was 60% of ending work-in-process
inventory, December 31, 2016.

Manufacturing costs for the year ended December 31, 2016 submitted to you by the factory
accountant was as follows:

Raw Materials Used P400,000

Direct Labor 275,000
Factory Overhead 225,000
Total P900,000

Questions:
1. Assuming cost percentage relationships are stated are correct, what will be the
adjustment on manufacturing cost at December 31, 2016?
a. Debit: Raw materials used 25,000
Credit Direct labor 25,000
b. Debit: Direct labor 25,000
Credit Raw materials used 25,000
c. Debit: Raw materials used 50,000
Credit Direct labor 50,000
d. Debit: Direct labor 50,000
Credit Raw materials used 50,000

2. How much is the Work-in-process Inventory on December 31, 2016?

Problem 16
Following are portions of the FORCE FOCUS CORPORATION’S SALES and PURCHASES
account for the calendar year 2016: (All sales are mark-up at 30% based on sales price)

SALES
12/31 Closing Entry P 1,411,100 Sales Register P 1,230,000
12/25 SI#876 15,000
12/27 877 25,500
12/29 879 55,000
12/31 880 85,600
P 1,411,100 P 1,411,100

PURCHASES
Purchase Register P 740,000 12/31 Closing Entry P 792,500
12/27 RR#545 15,000
12/28 547 7,500
12/29 548 10,000
12/30 549 20,000 _______
P 792,500 P 792,500

You observed the physical inventory of goods in the warehouse on December 31, 2016 and
were satisfied that it was properly taken.

When performing sales and purchases cut-off tests, you found that at December 31, 2016,
the last Receiving Report (RR) that had been used was No. 549 and that no shipments have
been made on any Sales Invoices (SI) with number larger than No. 878.

15
The following information were found:

1. Included in the warehouse physical inventory at December 31, 2016 were chemicals that
had been purchased and received on Receiving Report No. 546 but for which an invoice
was not received until 2017. Cost was P14,500.

2. In the warehouse at December 31, 2016, were goods that had been sold and paid for by
the customer but which were not shipped out until 2017. They were all sold on Sales
Invoice No. 876.

3. On the evening of December 31, 2016, there were two shipments on FORCE FOCUS
CORPORATION. First shipment was unloaded on January 3, 2017 and received on
Receiving Report No. 548. The freight was paid by the vendor. The second shipment
was loaded and sealed on December 31, 2016 but was not delivered until January 2,
2017. This order was sold on Sales Invoice No. 878, P20,000 and freight was paid by
the buyer.

4. Temporarily stranded on December 31, 2016, on a railroad sidings were two trucks of
chemicals en route to the Nelson Neil Company. They were sold on Sales Invoice No.
879 and the term were fob destination.

5. En route to FORCE FOCUS CORPORATION on December 31, 2016 was truckload of

materials that was received on Receiving Report No. 550. The material was shipped fob
destination.

6. Included in the physical inventory were chemicals exposed to rain while in transit and
deemed unsalable. Their invoice cost was P5,500 and freight charges of P200 had been
paid on the chemicals. This was recorded as purchases on 12/31/02

Questions:
1. The Sales at December 31, 2016 is:
s. Overstated by P 70,000 c. Overstated by P 155,600
b. Overstated by P 55,000 d. Overstated by P 15,000

2. The adjusted Sales at December 31, 2016 is:

3. The adjusted Purchases at December 31, 2016 is:

4. The Purchases at December 31, 2016 is:

a. Understated by P4,500 c. Overstated by P10,000
b. Overstated by P 1,000 d. Understated by P 4,300

5.The Inventory at December31, 2016 is:

a. Understated by P 8,300 c. Overstated by P12,500
b. Understated by P 14,000 d. Understated by P 12,500

6. The Cost of Sales at December 31, 2016 is:

a. Understated by P 17,000 c. Overstated by P1,200
b. Overstated by P 9,500 d. Understated by P12,500
Problem 17
On April 15, 2017, a fire damaged the office and warehouse of TOMAHAWK CORPORATION.
The only accounting record save was the general ledger, from which the trial balance below
was prepared.

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 TOMAHAWK CORPORATION
TRIAL BALANCE
March 31, 2017
Cash 200,000
Accounts receivable 400,000
Inventory, December 31, 2016 750,000
Land 350,000
Building and equipment 1,100,000
Accumulated depreciation 413,000
Other Assets 36,000
Accounts payable 237,000
Other expense accruals 102,000
Capital stock 1,000,000
Retained earnings 520,000
Sales 1,350,000
Purchases 520,000
Operating expenses 266,000 ________
3,622,000 3,622,000
_______________________________________________________________

The following data and information have been gathered:

1. The fiscal year of the corporation ends on December 31.

2. An examination of the April bank statement and canceled checks revealed that checks
written during the period April 1-15 totaled P130,000: P57,000 paid to accounts
payable as of March 31, P34,000 for April merchandise shipments, and P39,000 paid for
other expenses. Deposits during the same period amounted to P129,500, which
consisted of receipts on account from customers with the exception of a P9,500 refund
from a vendor for merchandise returned in April.

3. Correspondence with suppliers revealed unrecorded obligations at April 15 of P106,000

for April merchandise shipments, including P23,000 for shipments in transit on that date.

4. Customers acknowledge indebtedness of P360,000 at April 15, 2017. It was also

estimated that customers owed another P80,000 that will never be acknowledge or
recovered. Of the acknowledged indebtedness, P6,000 will probably be uncollectible.

5. The companies insuring the inventory agreed that the corporation’s fire loss claim should
be based on the assumption that the overall gross profit ratio for the past two years was
in effect during the current year. The corporation’s audited financial statements
disclosed this information:

Year Ended December 31

2016 2015
Net Sales 5,300,000 3,900,000
Net purchases 2,800,000 2,350,000
Beginning inventory 500,000 660,000
Ending inventory 750,000 500,000

6. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The balance of the
inventory was a total loss.

17
Questions:
1. Cash balance at April 15, 2017 is:
2. Accounts Receivable balance at April 15, 2017 is:
3. Inventory at April 15, 2017 is:
4. Accounts payable at April 15, 2017 is:
5. Sales as of April 15, 2017 is:
6. Net purchases as of April 15, 2017 is:
7. Cost of Sales as of April 15, 2017 is:
8. Estimated inventory as of April 15, 2017 is:
9. Inventory loss at April 15, 2017 is:
10. The Average Gross Profit for two years (2015 and 2016) is:

PROBLEM 18
The following accounts were included in the adjusted trial balance of Pegasus Company as
of December 31, 2016:

Cash P 240,800
Accounts receivable 563,500
Merchandise Inventory 1,512,500
Accounts payable 1,050,250
Accrued expenses 107,750

During your audit, you noted that Pegasus held its cash book open after year-end. In
addition, your audit reveled the following
1. Receipts for January 2017 of P163,650 were recorded in the December 2016 cash
receipts book. The receipts of P90,025 represents cash sales and P73,625 represents
collections from customers, net of 5% cash discounts.

2. Payments to suppliers made on January 2017 of P93,100, on which discounts of P3,100

were taken, were included in the December 2016 check register.

3. Merchandise inventory is valued at P1,512,500 prior to any adjustments . The following

information has been found relating to certain inventory transactions.

a. Goods valued at P68,750 are on consignment with a customer. These goods are not
included in the P1,512,500 inventory figure.

b. Goods costing P54,375 were received from a vendor on January 4, 2017. The related
invoice was received and recorded on January 6, 2017. The goods were shipped on
December 31, 2016, terms FOB shipping point.

c. Goods costing P159,375 were shipped on December 31, 2016, and were delivered to
the customer on January3, 2017. The terms of the invoice were FOB shipping point.
The goods were included in the 2016 ending inventory even though the sale was
recorded in 2016.

d. A P45,500 shipment of goods to a customer on December 30, terms FOB destination

are not included in the year-end inventory. The goods cost P32,500 and were
delivered to the customer on January 3, 2017. The sale was properly recorded in
2017.

18
 e. The invoice for goods costing P43,750 was received and recorded as a purchase on
December 31, 2016. The related goods, shipped FOB destination were received on
January 4, 2017, and thus were not included in the physical inventory.

f. Goods valued at P153,200 are on consignment from a vendor. These goods are not
included in the physical inventory.

Questions
Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2016.

1. Cash
2. Accounts receivable
3. Merchandise inventory
4. Accounts payable
5. Working capital
6. Current ratio

PROBLEM 19
In conducting your audit of Archduke Corporation, a company engaged in import and
wholesale business, for the fiscal year ended June 30, 2016, you determined that its
internal control system was good. Accordingly, you observed the physical inventory at an
interim date, May 31, 2016 instead of at June 30, 2016.

You obtained the following information from the company’s general ledger

Sales for eleven months ended May 31, 2016 P1,344,000

Sales for the fiscal year ended June 30, 2016 1,536,000
Purchases for eleven months ended May 31, 2016
(before audit adjestments0 1,080,000
Purchases for the fiscal year ended June 30, 2016 1,280,000
Inventory, July 1, 2015 140,000
Physical inventory, May 31, 2016 220,000

Your audit disclosed the following additional information.

(1) Shipments costing P12,000 were received in May and included in the physical
inventory but recorded as June purchases.

(2) Deposit of P4,000 made with vendor and charged to purchases in April 2016. Product
was shipped in July 2016.

(3) A shipment in June was damaged through the carelessness of the receiving
department. This shipment was later sold in June at its costs of P16,000.

Questions:
In audit engagements in which interim physical inventories are observed, a frequently used
auditing procedure is to test the reasonableness of the year-end inventory by the
application of gross profit ratios. Based on the above and the result of your audit, you are to
provide the answers to the following:

19
1. The gross profit ratio for eleven months ended May 31, 2016 is
a. 20% b. 25% c. 30% d. 35%

2. The cost of goods sold during the month of June, 23003 using the gross profit ratio
method is
a. P 132,000 b. P 148,000 c. P 144,000 d. P 160,000

3. The June 30, 2016 inventory using the gross profit method is
a. P 260,000 b. P 264,000 c. P 268,000 d. P 340,000

Solution
Q1 Beginning inventory 140,000
Purchases – adjusted 1,088,000 (P1,080,000 + P12,000 – P4,000)
TGAS 1,228,000
Ending inventory 220,000
Cost of goods sold 1,008,000

Sales 1,344,000
COS 1,008,000
Gross Profit 336,000 25%

Q2 Sales for the fiscal year ended June 30, 2013 P 1,536,000
Sales for the eleven months ended May 31, 2013 1,344,000
Sales for the month of June 30, 2013 P 192,000
Less: Sales of goods at cost 16,000
Sales with gross profit P 176,000
x Cost Rate 25%
Total P 132,000
Plus: Sale of goods at cost 16,000
Total Cost of Goods Sold for June 2013 P 148,000

Q3 Ending inventory P 220,000

Purchases for the month of June 200,000 (P1,280,000 – P1,080,000)
Goods sold at cost ( 16,000)
Total P 404,000
Less: Cost of items sold in June 144,000 (P192,000 x 75%)
Gross Profit P 260,000

Problem 20
You are engaged to audit the Heart-Earth Company and its subsidiary, Lion-Heart Company
as of December 31, 2015. The Heart-Earth Company manufactures tires with it sells to its
subsidiary at cost plus 30%. During the course of the audit, you discover that the balances
of the inter-company accounts are not reconciled. Following is a copy of part of the inter-
company ledger sheets:

Accounts Receivable from Lion-Heart

Date Reference Amount Date Reference Amount

Total Forwarded P180,000 Total Forwarded P130,000

Dec. 26 SI 903 7,600 Dec.26 CR 10,000
27 SI 904 4,000 29 CR 20,000
28 SI 905 6,200 31 Balance 52,500
29 SI 906 3,700
31 SI 908 11,000
P 212,500 P 212,500

Accounts Payable to Heart-Earth

Date Reference Amount Date Reference Amount

20
 Total Forwarded P140,000 Total Forwarded P161,000
Dec. 26 CD 20,000 Dec. 26 VR 1003-902 19,000
31 CD 28,000 28 VR 1004-903 7,600
31 RG 80 4,100 29 VR 1005-904 4,000
31 Balance 16,700 31 VR 1006-907 9,000
31 VR 1010-909 8,200
P 208,800 P 208,800

Legend for references:

SI – Sales register and invoices number
CR – Cash receipts book
CD – Cash disbursements book
VR – Voucher register, receiving report number, and Heart-Earth invoice number
RG – Returned goods register and debit memo number

A review of the inventory observation working papers discloses the following information:

Observation at Heart-Earth Company on December 31, 2015:

1. Last shipment prior to the physical inventory was billed on Invoice number 908 dated
December 31, 2015.
2. No returned merchandise was received from Lion-Heart Company during the month of
December 2015.

Observation at Lion-Heart Company on December 31, 2015:

1. The last shipment of merchandise returned to Heart-Earth in December 2015 was
entered on debit memo number 80 dated December 31, 2015.
2. The last receiving report used in December 2015 was number 1007 dated December 31,
2015 for merchandise billed on Heart-Earth invoice number 905.

Questions:
1. What is the total unrecorded purchases of Lion-Heart as of December 31, 2015?
2. What is the reconciled balance of the inter-company accounts at December 31, 2015?
3. Heart-Earth Company’s inventory at December 31, 2015 should be increased by
4. Lion-Heart Company’s inventory at December 31, 2015 should be increased by

21