You were engaged in the audit inventory of Bernales Company as of December 31, 2014.

The company is on a
physical inventory basis. The physical inventory was actually taken on December 29, 2014. You have observed the
taking of the physical inventory. As taken, the physical inventory included only merchandise received through
December 29, 2014.

Listed below are extracted from the company’s purchases journal during the last few days of 2014 and the first few
days of Year 2015.

December 2014
FOB Term Date Shipped Date Received Invoice Number Amount
Destination 12/23/2014 12/26/2014 4231 P35,000
Shipping Point 12/24/2014 12/30/2014 2108 16,000
Shipping Point 12/24/2014 12/31/2014 1234 13,200
Destination 12/24/2014 12/29/2014 143 28,000
Shipping Point 12/26/2014 1/3/2015 6657 26,100
Destination 12/26/2014 12/31/2014 5432 19,200
Shipping Point 12/26/2014 1/4/2015 987 14,300
Shipping Point 1/3/2015 1/4/2015 3671 15,920

January 2011
FOB Term Date Shipped Date Received Invoice Number Amount
Destination 12/26/2014 1/3/2015 3625 P30,000
Shipping Point 12/27/2014 12/30/2014 4327 13,500
Destination 12/27/2014 12/29/2014 9001 4,200
Shipping Point 12/28/2014 1/4/2015 9981 16,000
Destination 12/29/2014 12/31/2014 8934 6,200
Shipping Point 1/3/2015 1/10/2015 7895 21,100

The physical inventory list includes P85,000 of merchandise received on consignment from a supplier.

The company has other goods shipped out on consignment that were not included in the physical inventory. They
were still unsold at yearend, P65,000. Your examination disclosed that these goods were recorded as sales upon
shipment at a total sales price of P98,000.

Shipments of December 31, 2014 with total billed price of P25,000 were properly recorded on the books as sale. You
computed the cost of these sales to be P17,600.

1. Prepare the necessary audit adjustments as at December 31, 2014. The purchases account had already been
transferred to cost sales, while the inventory per list of the client had already been set up.

PROBLEM 2
A physical count of inventory at December 31, 2014 revealed that Cabria Enterprises had inventory on hand at that
date with a cost of P441,800. The annual audit identified that the following items were excluded from this amount:

∑ Merchandise of P61,000 is held by Cabria consignment. The consignor is DDCD Company.

∑ Merchandise costing P38,000 was shipped by Cabria FOB destination to a customer on December 31, 2014.
∑ Merchandise costing P46,000 was shipped by Cabria FOB shipping point to a customer on December 29,
2014. The customer was scheduled to receive the goods on January 6, 2015.
∑ Merchandise costing P83,000 shipped by a vendor FOB destination on December 31, 2014 was received by
Cabria on January 4, 2015.
∑ Merchandise costing P51,000 purchased FOB shipping point was shipped by the supplier on December
31,2014 and received by Cabria on January 5, 2015.

2. Calculate the amount that should appear for inventory on Cabria Enterprise’s Statement of Financial Position at
December 31, 2014.

3. Prepare any journal entries necessary to adjust the inventory general ledger account.

PROBLEM 3
The management of Cada LS Company has engaged you to audit their 2014 financial statements. The company’s

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 accounting period ends on December 31. You verified that on November 30, the correct inventory level was 55,000
units. A review of the December purchase orders to various suppliers showed the following. Only merchandise
received up to December 31, 2014 were recorded as purchases by Cada LS.

Date Invoice Quantity in Date Shipped Date Terms

Purchase Date Units Received
Order
12/2/2014 1/4/2015 10,000 1/3/2015 1/4/2015 Shipping point
12/11/2014 1/4/2015 12,000 12/22/2014 12/23/2014 Destination
12/13/2014 1/3/2015 14,000 12/28/2014 1/3/2015 Shipping point
12/23/2014 12/26/2014 10,000 1/3/2015 1/4/2015 Shipping point
12/28/2020 1/10/2015 8,000 12/31/2014 1/10/2015 Destination
12/31/2014 1/10/2015 15,000 1/4/2015 1/11/2015 Destination

During the month of December, the company recorded the sale 50,000 units at P125 selling price per unit. This
includes the sale of 16,000 units shipped to Louielyn SC Company, a consignee. A letter received from Louielyn SC
Company indicates that as of December 31, 2014, it had sold 12,000 units and was trying to sell the remaining units.
Inventories presented on the client prepared statement of financial position pertain to inventories actually on hand at
year-end.

4. Compute the number of units that should be included in the December 31, 2014 inventory.

5. Assuming a uniform unit cost of P90 for the inventory, prepare the necessary audit adjusting entries as at
December 31, 2014.

PROBLEM 4
You have been engaged for the audit of the Cano Company for the year ended December 31, 2014. The Cano Co. is
engaged in the wholesale chemical business and makes all sales at 25% over cost.

Following are portions of the client’s sales and purchases accounts for the calendar year 2014:

I. DATE REFERENCE AMOUNT SALE DATE REFERENC AMOUN

E T
12-31 Closing entry P699,860 Balance forwarded P658,320
12-27 *SI # 965 5,195
12-28 SI # 966 19,270
12-28 SI # 967 1,302
12-31 SI # 969 5,841
12-31 SI # 970 7,922
12-31 SI # 971 2,010
699,860 699,860

II. DATE REFERENCE AMOUNT PURCHASE DATE REFERENC AMOUN

E T
Balance Forward P360,300 12-31 Closing entry P385,346
12-28 ^RR#1059 3,100
12-30 RR#1061 8,965
12-31 RR#1062 4,861
12-31 RR#1063 8,120
385,346 385,346
*SI-Sales Invoice
^RR-receiving Report

You observed the physical inventory of goods in the warehouse on December 31, 2014 and were satisfied that it was
properly taken. The inventory list per count indicates total inventory of P98,000.

When performing a sales purchases cutoff test, you found that at December 31, 2014, the last receiving report that

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 had been used was No. 1063 and that no shipments have been made on any sales invoices with numbers larger
than No. 968. You also obtained the additional information below:

a. Included in the warehouse physical inventory at December 31, 2014 were chemicals that had been purchased and
b. received on receiving report No. 1060 but for which an invoice was not received until 2015. Cost was P2,183.
c. In the warehouse at December 31, 2014, were goods that had been sold and paid for by the customer but which were
not shipped out until 2015. They were all sold on sales invoice no. 965 and were not inventoried.
d. On the evening of December 31, 2014, there were two cars on the Cano Company siding;
1. Car PRM 993 was unloaded on January 2, 2015, and received on receiving report no. 1063. The vendor paid the
freight.
2. Car UMX 410 was loaded and sealed on December 31, 2014, and left the company’s siding on January 2, 2015. The
sales price was P12,700 and the freight was paid by the customer. This order was sold on sales invoice No. 968.
e. Temporarily stranded at December 31, 2014, on a railroad siding were two cars of chemical en route to the Darline
f. Co. They sold on sale invoice No. 966 and the terms were FOB destination.
g. En route to the Cano Company on December 31, 2014, was a truckload of material that was received on receiving
report no. 1064. The material was shipped FOB destination and the Cano Company paid freight of P750. However,
the freight was deducted from the purchase price of P9,750.
h. Included in the physical inventory were chemical exposed to rain while in transit and deemed unsalable. There
invoice cost was P11,250, and freight charges of P1,350 had been paid on the chemicals.

6. Compute the correct balance on Inventory at December 31, 2014.

7. Prepare the audit adjusting entries as a result of the foregoing.

PROBLEM 5
Casim Company, a manufacturer of small tools, provided the following information from its accounting records for the
year ended December 31, 2014:

Inventory at December 31, 2014 (based on physical count of goods in 2,400,000

Casim’s plant at cost on December 31, 2014)

Accounts payable at December 31, 2014 800,000

Net sales (sales less sales returns) 10,150,000

Additional information is as follows:

a. Included in the physical count were tools billed to the customer F.O.B. shipping point on December 31, 2014. These
tools has cost of P44,000 and were billed P60,000. The shipment was on Casim’s loading dock waiting to be picked
up by the common carrier.
b. Goods were in the transit from a vendor to Casim on December 31, 2014. The invoice was P65,000, and the goods
were shipped F.O.B. shipping point on December 29, 2014.
c. Work in process inventory costing P50,000 was sent to an outside processor for plating on December 30, 2014.
d. Tools returned by customers and held pending inspection in returned goods area on December 31, 2014 were not
included in the physical count. On January 8, 2015, the tools costing P32,000 were inspected and returned to
inventory. Credit memos totaling P45,000 were issued to the customers on the same date.
e. Tools shipped to customer F.O.B. destination on December 26, 2014, were in transit at December 31, 2014 and had
a cost of P61,000. Upon inspection of receipt by the customer on January 2, 2015, Casim issued a sales invoice for
P85,000.
f. Goods, with an invoice cost of P27,000, received from a vendor at 5:00 p.m. on December 31, 2014, were received
on a receiving report dated January 2, 2015. The goods were not included in the physical count, but the invoice was
included in accounts payable at December 31, 2014.
g. Goods received from a vendor on December 26, 2014 were included in the physical count. However, the related
P56,000 vendor invoice was not included in accounts payable at December 31, 2014, because the accounts payable
copy of the receiving report was lost.
h. On January 3, 2015, a monthly freight bill in the amount of P8,000 was received. The bill specifically related to
merchandise purchased in December 2014, one half of which was still in the inventory at December 31, 2014. The
freight charges were not included in either the inventory or in the accounts payable at December 31, 2014.

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 8. Using the format shown below, prepare a schedule of adjustments as December 31, 2014, to the initial
amounts per Casim’s accounting records. Show separately the effect, if any, of each of the eight transactions on
the December 31, 2014. If the transactions have no effect on the initial amount shown, state NONE.

Inventory Accounts Receivable Net Sales

Initial Amount P2,400,000 P800,000 P10,150,000
Adjustments
a.
b.
c.
d.
e.
f.
g.
h.
Adjusted Amount

PROBLEM 6
The inventory control account balance of Delfino Apparels at June 30, 2014 was P221,020 using the perpetual
inventory system. A physical count conducted on that day found inventory on hand worth P212,820. Net realizable
value for each inventory item held for sale exceeded cost. An investigation of the discrepancy revealed the following:

a. Goods worth P66,000 held on consignment for JM Accessories had been included in the physical count.
b. Goods costing P12,000 were purchased on credit from MJ Ltd on June 27, 2014 on FOB shipping terms. The goods
were shipped on June 28, 2014, as they had not arrived by June 30, 2014, were not included in the physical count.
The purchase invoice was received and processed on June 30, 2014
c. Goods costing P24,000 were sold on credit to FBY Ltd for P39,000 on June 28, 2014 on FOB destination terms. The
goods were still in transit on June 30, 2014. The sales invoice was raised and processed on June 29, 2014.
d. Goods costing P27,300 were purchased on credit (FOB destination) from DDD Handbags on June 28, 2014. The
goods were received on June 29, 2014 and included in the physical count. The purchase invoice was received on
July 2, 2014.
e. On June 30, 2014, Delfino sold goods costing P63,000 on credit (FOB shipping point) to JPB’s Boutique for P96,000.
The goods were dispatched from the warehouse on June 30, 2014 but the sales invoice had not been raised at that
date.
f. Damaged inventory items valued at P26,500 were discovered during the physical count. These items were still
recorded on June 30, 2014 but were omitted from the physical count records pending their write off.

9. Reconcile the inventory per count with the inventory control account.

10. Prepare any journal entries necessary on June 30, 2014 to correct any errors.

PROBLEM 7
You are engaged in the annual audit of a client, Lovely Ghost, for the year ended December 31, 2014. The client took
a complete physical inventory under your observation on December 15 and adjusted its inventory control account and
detailed perpetual inventory records agree with the physical inventory. The client considers a sale to be made in the
period that goods are shipped. Listed below are four items from your staff’s sales cut-off test worksheet:

Credited to Inventory
Shipped Recorded as Sale Selling Price
Control
Dec. 10 Dec. 19 Dec. 12 P100,000

Dec. 14 Dec. 16 Dec. 16 80,000

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 Dec. 31 Jan. 02 Dec. 31 60,000

Jan. 02 Dec. 31 Dec. 31 40,000

Goods are marked to sell at a markup rate of 25% of selling price.

11. Prepare the necessary audit adjusting entries as of December 31, 2014.

PROBLEM 8
On April 15, 2015, a fire damaged the office and warehouse of Follero Corporation. The only accounting record saved
was the general ledger, from which the trial balance on the next page was prepared.

The following information has been gathered:

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

2. An examination of 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 supplier 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 acknowledged indebtedness of P360,000 at April 15, 2015. It was also estimated that customers owed
another P80,000 that will never be acknowledged 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 statements disclosed this information:

Year Ended December 31

2014 2013
Net sales P5,300,000 P3,900,000
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 P80,000 was salvaged and sold for P30,000. The balance of the inventory was a total loss.

FOLLERO CORPORATION
TRIAL BALANCE
31-Mar-15
Debit Credit
Cash P 200,000
Accounts Receivable 400,000
Inventory, December 31, 2014 750,000
Land 350,000
Building Equipment 1,100,000
Accumulated depreciation P 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

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 Operating expenses 266,000
P 3,622,000 P 3,622,000
12. Prepare a schedule computing the amount of inventory fire loss. The supporting schedule of the computation of
the gross profit rate should be in good form.

PROBLEM 9
The Funelas Corporation is an importer and wholesaler. Its merchandise is purchased from a number of suppliers
and is warehoused by DMK Corp. until sold to costumers.
In conducting the audit for the year ended June 30, 2015, you determined that the system of internal control was
good. Accordingly, you observed the physical inventory at an interim date, May 31, 2015 instead of the year-end.
You obtained the following information from the general ledger:

Inventory July 1, 2014 P

875,000
Physical inventory, May 31, 2015 950,000

Sales for 11 months ended May 31, 2015 8,400,00

0
Sales for year ended June 30, 2015 9,600,00
0
Purchases for 11 months ended May 31, 2015 (before audit adjust.) 6,750,00
0
Purchases for year ended June 30, 2015 (before audit adjust.) 8,000,00
0

The CPA’s audit disclosed the following information:

Shipments received in May and included in physical inventory but recorded s P75,000
June purchases
Shipments received in unsalable condition and excluded physical inventory.
Credit memos had not been received nor had charge backs to vendors been
recorded.
Total at May 31, 2015 10,000
Total at June 30, 2015 (including the May recorded chargeback) 15,000
Deposit made with vendor and charged to purchases in April 2015 product 20,000
was shipped, in July, 2015
Deposit made with the vendor and charge to purchases in May, 2015 product 55,000
was shipped FOB destination, on May 29, 2015 and was included in May 31,
2015, physical inventory as goods in transit.
Through the carelessness of the receiving department a June shipment was 100,000
damaged by rain. This shipment was later sold in June at its cost of

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 its application of gross profit ratios.

13. Compute the gross profit ratio for 11 months ended May 31, 2015.

14. Compute the cost of goods sold during June 2015.

15. Compute the inventory at June 30, 2015 using the gross profit method.

PROBLEM 10
GARCIA CORPORATION manufactures three models of gearshift components for bicycles that are sold to bicycle
manufactures, retailers, and catalog outlets. Since beginning operations in 1944, Garcia has used normal absorption
costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. Except for overhead,
manufacturing costs are accumulated using actual costs. Overhead is applied to production using predetermined
overhead rates. The balances of the inventory accounts at December 31, 2014 are shown below. The inventories are
stated at cost before any year-end adjustments.

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 Finished goods 2,588,000
Work-in-process 450,000
Raw materials 960,000
Factory supplies 276,000

The following information relates to Garcia’s inventory and operations.

a. The finished goods inventory consists of the items analyzed below.

Cost NRV
Down tube shifter 1,080,000 1,056,00
0
Bar end shifter 728,000 750,400
Head tube shifter 780,000 787,800
Total 2,588,000 2,594,20
0

b. One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment.
c. Three-quarters of the bar end shifter finished goods inventory has been pledged as collateral for a bank loan.
d. One-half of the raw materials balance was acquired at a contracted price 20 percent above the current market price.
The replacement cost of the rest of the raw materials is P509,600.
e. The net realizable value of the work-in-process inventory is P434,800.
f. Included in the cost of factory supplies are obsolete items with a historical cost of P16,800. The replacement cost of
the remaining factory supplies id P263,600.
g. Garcia applies the lower of cost or NRV rule to each of the three types of shifters in finished goods inventory. For
each of the other inventory accounts, Garcia applies the lower of cost or NRV method to the total of each inventory
account.

Based on the above and the result of your audit, answer the following:
16. The finished goods inventory on December 31, 2014 should be valued at

17. The raw materials inventory on December 31, 2014 should be valued at

18. The factory supplies inventory on December 31, 2014 should be valued at

19. The total inventories to be recognized in the statement of financial position as of December 31, 2014 is

PROBLEM 11
During the audit of the records of the Gerolia Company for the year ended December 31, 2014, the following facts
were disclosed:

Raw Materials inventory, January 1, 2014 144,040

Raw Materials purchases 1,046,650
Direct Labor 1,260,000
Manufacturing overhead applied (150% of direct labor) 1,890,000
Finished Goods inventory, January 1, 2014 248,000
Selling expenses 1,624,560
Administrative expenses 1,475,440

Your examination discloses the following additional information:

a. Purchase of raw materials were as follows:

Month Units Unit Price Amount

January - February 1,100 177.60 195,360
March - April 900 200.00 180,000

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 May - June 500 196.00 98,000
July - August 700 200.00 140,000
September - October 900 204.00 183,600
November - December 1,200 208.00 249,600

b. Data with respect to quantities are as follows:

Explanation Units
01/01/14 12/31/14
Raw Materials 700 Note A
Work in Process 0 500
Finished Goods 300 800
Sales, 4,100 units

Note A: Raw materials are issued at the beginning of the manufacturing process. During the year, no returns,
spoilage, or waste occurred. Each unit of finished goods contains one unit of raw material.
From the preceding information, you are to prepare a statement of cost of goods manufactured and sold to answer
the following questions. In the preparation of this statement, inventories are to be stated at cost as follows: raw
materials, according to the FIFO Method; direct labor, at an average rate determined by correlating total direct labor
cost with effective production during the period; and manufacturing overhead, at an applied rate of 150% of direct
labor cost.

20. Raw Materials End

21. Work in Process End
22. Finished Goods Inventory End
23. Cost of Goods Manufactured
24. Cost of Goods Sold

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