AUDIT OF INVENTORIES

1. Alondra Company bought merchandise on January 2, 2019 from Highland 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. Alondra Company paid the account within the discount period. How much Alondra Company paid to
Highland Company?

2. Merchandise shipped fob destination to customer was made on January 5, 2019 for P25,000. The customer issued
P10,000 12% 30-day note and the balance 2/10, n/30 on January 10, 2019, the date the goods were received. The
customer made a partial payment on January 15, 2019 for P5,000. Payment was made within the discount period.
How much discount was granted?

3. On January 10, 2019, Alondra Company sold merchandise on account fob destination to Highland Co. for P20,000.
Highland Co. paid the freight cost of P1,500 to be deducted from its account. How much Highland Company paid to
Alondra Company?

4. Goods worth P12,000 was shipped on account (2/10, n/30) to Highland Company on January 15, 2019 from Alondra
Company The term of the shipment was fob shipping point. Alondra Company paid freight of P950. On January 12,
2019, P2,500 worth of merchandise was received by Alondra Co. from Highland Co. due to wrong specification.
Highland Company made a partial payment of P5,000. How much is the subsequent collection of Alondra Company
from Highland Company assuming Highland Company paid within the discount period?

5. Alondra Company bought from Highland 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 Alondra Company for P2,000.
Highland 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, Highland Company granted the request of Alondra Company
for a P5,000 price adjustments because of some defects of the machinery. How much cash paid by Alondra Company
to Highland Company assuming the account was paid within the discount period?

6. Listed below are some items of inventory from Alondra 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.
a. Items in receiving department returned by customer,
no communication received from customer P20,000
b. Items ordered and in receiving department, invoice not yet received from supplier 50,000
c. Items counted in warehouse by the inventory crew 70,000
d. Invoice received for goods ordered, goods shipped
but not received (Alondra Company pays freight) 5,000
e. Items, shipped today, fob destination, invoice mailed to customer 5,000
f. Items currently used for window displays 10,000
g. Items on counter for sale per inventory count [not in (c)] 90,000
h. Items in shipping department, invoice not mailed to customer 6,000
i. Items in receiving department, refused by Alondra because of Damage [(not in (c)] 3,000
j. Items shipped today, fob shipping point, invoice mailed to customer 4,000
k. Items included in warehouse count, damaged, not returnable 8,000
l. 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:

7. In the event of your audit, you found the following information related to the inventories on December 31, 2019.

a. An invoice for P90,000, FOB shipping point, was received on December 15, 2019. The receiving report indicates
that the goods were received on December 18, 2019, but across the face of the report is the notation
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“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, 2019.
These inventories had a cost of P28,000 and were billed at P35,000. The shipment was in loading dock waiting to
be picked by the common carrier.

c. Merchandise with an invoice cost of P50,000, received from a vendor at 5:00 pm on December 31, 2019, were
recorded on a receiving report dated January 2, 2020. The goods were not included in the physical count, but
invoice was included in accounts payable at December 31, 2019.

d. Merchandise costing P15,000 to the company FOB shipping point on December 26, 2019. The purchase was
recorded, but the merchandise was excluded from the ending inventory because it was not received until January
4, 2020.

e. The inventory included 1000 units erroneously priced at P9.50 per unit. The correct cost was P10.00 per unit.

Question: What are the adjusting entries?

8. You have observed the physical count of ALONDRA CORPORATION’s inventory taken on December 31, 2019. The
following errors were discovered:
a. Goods that cost P7,000 was sold for P8,500 on December 29, 2019. The order was shipped December 31, 2019
with terms fob destination. The merchandise was not included in the ending inventory. The sale was not recorded
until January 4, 2020, the date when the customer made payment of the sold goods.
b. On December 29, 2019, ALONDRA CORPORATION purchased merchandise costing P15,000 from a supplier. The
order was shipped December 30, 2019 (terms FOB shipping point) and was still “in transit” on December 31, 2019.
Since the invoice was received on December 31, the purchase was recorded in 2019. The merchandise was
included in the inventory count.
c. On January 4, 2020, goods that were included in the ending inventory at December 31, 2019, were returned to
ALONDRA 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. ALONDRA CORPORATION failed to make an entry for a purchase on account of P6,500 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.
e. On January 6, 2020, ALONDRA CORPORATION received merchandise which had been shipped to them on
December 31, 2019. 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 2020 but the goods were included in the inventory
as of December 31, 2019.
f. Goods with a selling price of P30,000 was shipped to RTM Company, a consignee, on December 29, 2018. 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, 2019. Your
further investigation revealed that 50% of these goods were sold in 2019 and the on hand at December 31, 2019
were not yet reported in 2019 inventory.

Based on the above information, answer the following:

(1) What is the entry to adjust audit finding “a” at December 31, 2019?
(2) What is the entry to adjust audit finding number “b” at December 31, 2019?
(3) ALONDRA CORPORATION should debit what account to adjust audit finding number “c” at December 31, 2019?
(4) In audit finding number “d”, choose the correct statement?
(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, 2019 since the purchases being paid in 2019 was
the purchase for 2018.
(c) The company is correct in recording of purchases in year 2019 since this is the time when the company made
payment on such.
(d) Inventory should be recorded at December 31, 2018 since the purchases were recorded on this year.

(5) What is the entry to adjust audit finding number “e” at December 31, 2019?
(6) What is the entry to adjust audit finding number “f” at December 31, 2019?

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9. On January 1, 2020, Alondra Corporation engaged an independent CPA to perform an audit for the year ended
December 31, 2019. The company uses a periodic inventory system. The CPA did not observe the inventory count on
December 31, 2019, 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, 2020, costing P800 was recorded on December 31, 2019. An invoice on hand
showed the shipment was made fob supplier’s warehouse on December 31, 2019. Because the merchandise was
not on hand at December 31, 2019, 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, 2019.
4. A sealed packing case containing a product costing P900 was in Alondra’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, 2019, but
that case was shipped and the customer billed on January 10, 2020. A sale for P1,500 was recorded on December
31, 2019.
5. A special item, fabricated to order for a customer, was finished and in the shipping room on December 31, 2019.
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, 2020.
6. Merchandise costing P15,600 was received on December 28, 2019. The goods were excluded from inventory, and
a purchase was not recorded. The auditor located the related papers in the hands of the purchasing; they
indicated, “On consignment from Kimberly Company”.
7. Merchandise costing P2,000 was received on January 8, 2020, and the related purchase invoice recorded January
9. The invoice showed the shipment was made on December 29, 2019, 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, 2019. 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, 2019. The goods was received on January 5, 2020.
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, 2019, 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, 2019. 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, 2019.

Based on your analysis and the information above, answer the following:
(a) What is the adjusted balance of inventory at year-end?
(b) What is the adjusted balance of accounts receivable at year-end?
(c) What is the adjusted balance of accounts payable at year-end?
(d) What is the adjusted balance of Sales at year-end?
(e) What is the adjusted balance of Net Purchases at year-end?
(f) What is the adjusted balance of Pre-tax income at year-end?

10. Alondra Company’s December 31, 2018 and December 31, 2019 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

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reconciling items were considered. All purchases are f.o.b. shipping point. In the course of your examination of the
inventory cutoff, 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.

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.

Based on your analysis and the information above, answer the following:
(1) What is the adjusted balance of the Jan. 1, 2019 inventory?
(2) How much is the adjusted balance of the Purchases account at December 31, 2019 assuming the amount of
Purchases in the trial balance is P5,176,000?
(3) What is the corrected December 31, 2019 inventory?
(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.