AUDIT OF INVENTORIES – 2nd SET

PROBLEM 1
During the 2019 audit of JONES 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, 2020.

• Merchandise costing P6,250 was received on December 28, 2019, and the invoice was recorded.
The invoice was marked “On Consignment.”

• Merchandise received on January 6, 2020 costing P7,200 was entered in the purchase register on
January 7. The invoice showed shipment made FOB shipping point on December 31, 2019.

• 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, 2020. The machine costs P25,000 and was sold for P45,000.

• Merchandise costing P23,500 was received on January 3, 2020, and the related purchase invoice
was recorded January 5. The invoice showed the shipment was made on December 29, 2019, 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
JONES still holds legal title. Historical experience suggests that full payment on the installment sales is
received approximately 99% of the time.

• 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 JONES to
buy back the inventory in February 2020.

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 2019?
3. What is the adjusted balance of accounts payable at the end of the year?
4. The adjusted total sales in 2019 is
5. The adjusted Cost of goods sold in 2019 is

PROBLEM 2

CHARMAINE COMPANY is a manufacturer of small tools. The following information was obtained from
the company’s accounting records for the year ended December 31, 2019:
Inventory at December 31, 2019 (based on
physical count in Charmaine’s warehouse at cost
on December 31, 2019) 1,870,000
Accounts payable at December 31, 2019 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, 2019.
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, 2019.These goods
with invoice cost of P93.400 were shipped on December 29, 2019.

 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, 2019.
These goods costing P49,000 were inspected and returned to inventory on January 7, 2020. Credit
memos for P67,800 were issued to the customers at that date.

 In transit to a customer on December 31, 2019, were tools costing P17,740 shipped FOB
destination on December 26, 2019. A sales invoice for P29,400 was issued on January 3, 2020,
when Charmaine Company was notified by the customer that the tools had been received.
 At exactly 5:00 pm on December 31, 2019, goods costing P31,200 were received from a vendor.
These were recorded on a receiving report dated January 2, 2020. The related invoice was
recorded on December 31, 2019, but the goods were not included in the physical count.

 Included in the physical count were goods received from a vendor on December 27, 2019.
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, 2020. It specifically related to
merchandise bought in December 2019, one half of which was still in the inventory at December 31, 2019.
The freight was not included in either the inventory or in accounts payable at December 31, 2019.

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

1. The inventory at year-end is overstated(understated) by:

2. The accounts payable at year-end is overstated(understated) by:
3. The amount of sales at year-end is overstated (understated) by:
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 3
The Cruzada Company is a wholesale distributor of automotive replacement parts. Initial amounts taken
from Cruzada’s accounting records are as follows:

Inventory at December 31, 2019 (based on physical count of goods in warehouse on December 31,
2019); P1,250,000.

Accounts payable at December 31, 2019:

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 2019 P 9,000,000

Additional information is as follows:

a. Parts held on consigment from Dano Company to Cruzada Company, the consignee, amounting
to P155,000, were included in the physical count of goods in Cruzada Company’s warehouse on
December 31, 2019 and in accounts payable at December 31, 2019.

b. P22,000 of parts which sere purchased from Deza Company and paid for in December 2019
were sold in the last week of 2019 and appropriately recorded as sales of P28,000. The parts
were included in the physical count of goods in Cruzada’s warehouse on December 31, 2019,
because the parts were on the loading dock waiting to be picked up by customers.

c. Parts in transit on December 31, 2019, to customers, shipped f.o.b. shipping point, on December
28, 2019, amounted to P34,000. The customers received the parts on January 6, 2020. Sales of
P40,000 to the customers for the parts were recorded by Cruzada Company on January 2, 2020.

d. Retailers were holding P210,000 at cost (P250,000 at retail) of goods on consignment from
Cruzada Company, the consignor, at their stores on December 31, 2019.

e. Goods were in transit from Encabo Company to Cruzada Company on December 31, 2019. The
cost of goods was P25,000 and they were shipped f.o.b. shipping point on December 29, 2019.

f. A quarterly freight bill in the amount of P2,000 specifically relating to merchandise purchases in
December 2019, all of which was still in the inventory at December 31, 2019, was received on
 January 3, 2020. The freight bill was not included in either the inventory or in accounts payable
at December 31, 2019.
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. Cruzada’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 4
Raffy Corporation reported income before income taxes as follows:

2018 P525,000
2019 630,000

The company uses the periodic inventory system. Ending inventories for 2018 and 2019 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 2018 and was recorded as a purchase by Raffy Corporation in 2018 when the invoice
was received: however, the goods were not included in the ending inventory because they were not
received until 2019. The company always takes advantage of the early payment discounts and accordingly,
records its purchases using the net method.

(b) Merchandise that cost P3,000 was purchased FOB shipping point by Raffy Corporation on December
31, 2018 and was shipped by the supplier that day. The merchandise was not included in the 2018 ending
inventory and was not recorded as a purchase until 2019.

(c) Merchandise costing P2,850 was shipped FOB shipping point to a customer in 2018 and not included
in the ending inventory for 2018. The sale of P4,260 was recorded in 2019 when the invoice was sent.

(d) Goods being held by Raffy Corporation on consignment from a supplier in the amount of P4,950 were
included in the physical inventory for 2018.

(e) Retailers were holding P6,750 of goods at cost (P9,000 at retail), on consignment from Raffy, at their
stores on December 31, 2018. These goods were not included in the ending inventory of Raffy Corporation
for 2018.

Question:
1. How much is the correct income before taxes for 2018?

2. How much is the correct income before taxes for 2019?

3. The cost of sales at December 31, 2019 is understated by:

4. The Retained earnings – beginning at December 31, 2019 is understated by:

5. The beginning inventory (January 1, 2019) of Raffy Corporation is understated by:

PROBLEM 5

You audit of APAS COMPANY for the year 2019 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 2019 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, 2019 and January, 2020, 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

Questions
1. The Sales for December is over/(under) by:

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

3. The adjusted inventory at December 31, 2019 is:

4. The adjusted sales at December 31, 2019 is:

5. How much sales for the month of December 2019 were erroneously recorded in January 2020?

6. How much sales for the month of January 2020 were erroneously recorded in December 2019?

PROBLEM 6

On December 15, 2019, 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, 2019, you decided to accept the balance of the control account after examining
transactions recorded in that account between December 15 and December 31, 2019. The audit was for
the year ended December 31, 2019.

In the course of conducting your examination of the sales cutoffs as of December 15 and December 31,
2019, 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 7
The following information was obtained from the balance sheet of LION INC.:

Dec. 31, 2019 Dec. 31, 2018

Cash P706,600 P 200,000
Notes receivable 0 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 the periodic FIFO. The unit
cost of inventory during January 2019 was P65.20 and increased P0.20 per month during the year. During
2019, payments to suppliers totaled P943,400 and operating expenses totaled P440,000. The ending
inventory for 2018 was valued at P65.00 per unit.

Question:

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

1. Recorded sale during 2019 is:

2. Number of units sold during 2019 is:

3. The accounts payable balance at December 31, 2019 is:

4. The January 1, 2019 inventory balance is:

5. The amount of inventory at December 31, 2019 is: