Problem 1: S Company reported income before taxes of 1,000,000 for 2021 and 1,200,000 for 2022.

The company takes its

annual physical count of inventory every December 31. Your audit revealed the following information:
 The price used for 4,000 units included in the 2021 ending inventory was 129. The correct cost was 119.
 Goods costing 70,000 was received from a vendor on January 5, 2022. The shipment was made on December 26, 2021
under FOB shipping point term. The purchase was recorded in 2021 but the shipment was not included in the 2021 ending
inventory.
 Merchandise costing 100,000 was sold to customer on December 29, 2021. The company was asked by the customer to
keep the merchandise until January 3, 2022, when the customer would come and pick it up. Although the sale was
properly recorded in 2021, the merchandise was included in the ending inventory.
 A supplier sold merchandise valued at 140,000 to the company. The merchandise was shipped FOB shipping point on
December 29, 2022 and was received by the company on December 31, 2022. The purchase was recorded in 2022 and
the merchandise was not included in the 2022 ending inventory.
A. The December 31, 2021 inventory is over or understated by?
B. The December 31, 2022 inventory is over or understated by?
C. The corrected net income for 2021 is?
D. The corrected net income for 2022 is?
E. If no correcting entries are made for 2 years combined, by what amount did the total income before taxes change?

Problem 2: You are engaged in the audit of E Company. The Company is on calendar basis. The following data were found during
your audit:
a. Goods in transit shipped FOB destination by a shipper in the amount of 20,000 had been excluded from the inventory,
and further testing revealed that the purchase had been recorded.
b. Goods costing 10,000 had been received, included in inventory, and recorded as a purchase. However, your inspection
revealed that the goods were found to be defective and would be immediately returned.
c. Materials costing 50,000 and billed on December 30 at a selling price of 64,000, had been segregated in the
warehouse for inventory as a signed purchase order had been received from the customer. Terms, FOB destination.
d. Goods costing 14,000 was out on consignment with M since the monthly statement from M, listed those materials on
hand, the items had been excluded from the final inventory and invoiced on December 31 at 16,000.
e. The sale of 30,000 worth of materials and costing 24,000 had been shipped FOB shipping point on December 31.
However, this inventory was found to be included in the final inventory.

Further inspection of the client’s records revealed the following

December 31, 2021 balances:

Inventory, 220,000;

Accounts receivable, 104,000;

Accounts payable, 138,000;

Sales, 1,010,000;

Purchases, 640,000;

Net Income, 180,400.

a. The adjusted balance of inventory at December 31, 2021?

b. The adjusted balance of accounts receivable at December 31, 2021?
c. The adjusted balance of accounts payable at December 31, 2021?
d. The adjusted sales of 2021?
e. The adjusted net income for 2021?

Problem 4: The company is an importer and wholesaler. Its merchandise is purchased from a number of suppliers and is
warehoused until sold to consumers. In conducting his audit for the year ended December 31, 2021, the company’s CPA
determined that the system of internal control was good. Accordingly, he observed the physical count at an interim date,
November 20, 2021. Instead of the year end. The following information was obtained from the general ledger:
Inventory, January 1, 2021 350,000
Inventory, November 30, 2021 380,000
Sales for the eleven months ended November 30, 2021 3,360,000
Sales for the year ended December 31, 2021 3,840,000
Purchases for the 11 months ended November 30, 2021 (before audit adjustments) 2,700,000
Purchases for the year ended December 31, 2021 (before audit adjustments) 3,200,000
The CPA’s audit disclosed the following information:
a. Shipments received in November and included in the physical count but recorded as December 30,000
purchases
b. Shipments received in unsalable condition and excluded from physical inventory. Credit memos had not
been received nor had chargebacks to vendors been recorded:
Total at November 30, 2021 4,000
Total at December 31, 2021 exclusive of November total 2,000
c. Deposit made with vendor and charged to purchases in October 2021. Product was shipped in February 8,000
2021
d. Deposit made with vendor and charged to purchases on November 29, 201 and was included in 22,000
November 30, 2021 inventory as goods in transit
e. Through the carelessness of the receiving department, a December shipment was damaged by rain. 40,000
This shipment was later sold in December at its cost of
a. Adjusted net purchases up to November 30, 2021?
b. Adjusted net purchases up to December 31, 2021?
c. Computation by the gross profit ratio method of cost of goods sold for the 11 months ended November 30, 2021?
d. Computation by the gross profit ratio method of cost of goods sold during December 2021?
e. Computation by the gross profit ratio method of the December 31, 2021 inventory?

Problem 5: Presented below is information taken from T Company for the three months ended March 31, of the current year:
Cost Retail
Inventory, January 1 300,000 1,200,000
Purchases 6,000,000 8,500,000
Purchase returns 400,000 800,000
Purchase discounts 150,000
Purchase allowance 50,000
Freight-in 20,000
Markups 600,000
Markup cancellation 50,000
Departmental transfer-in 600,000 1,100,000
Departmental transfer-out 560,000 1,334,000
Abnormal loss
Markdown 316,000
Markdown cancellation 100,000
Sales 7,000,000
Sales returns 700,000
Sales allowances and discounts
Normal shrinkage 500,000
a. What should be reported as the estimated cost of ending inventory using conservative method?
b. What should be reported as cost of goods sold using conservative method?
c. What should be reported as the estimated cost of ending inventory using FIFO method?
d. What should be reported as cost of goods sold using FIFO method?
e. What should be reported as the estimated cost of ending inventory using average method?