PROBLEM NO.

MONKEY CO., annual net income for the period 2014-2018 is as follows:

YEAR NET INCOME (LOSS)

2014 P150,000
2015 340,000
2016 645,000
2017 (100,000)
2018 250,000

A review if the company’s records reveals the following inventory

errors:

2014 P3,000 overstatement, end of year

2015 6,000 understatement, end of year
2017 4,500 understatement, end of year
2018 11,000 understatement, end of year

Questions:

1. What is the adjusted net income in 2014?

a. P150,000 c. P153,000
b. P159,000 d. P147,000
2. What is the adjusted net income in 2015?
a. P331,000 c. P349,000
b. P337,000 d. P340,000
3. What is the adjusted net income in 2016?
a. P651,000 c. P639,000
b. P648,000 d. P645,000
4. What is the adjusted net loss in 2017?
a. P89,500 c. P100,000
b. P101,500 d. P95,500
5. What is the adjusted net income in 2018?
a. P250,000 c. P243,500
b. P234,500 d. P256,500

PROBLEM NO.2

BIRD COMPANY is a manufacturer of small tools. The following

information was obtained from the company’s accounting records for the
year ended December 31, 2018:

Inventory at December 31, 2018 (based on physical count P1,870,000

in Bird’s warehouse at cost on December 31, 2018)
Accounts Payable at December 31, 2018 1,415,000
Net Sales (Sales less sales returns) 9,693,400

Your audit reveals the following information:

1) The physical count included tools billed to a customer FOB shipping
point on December 31, 2018. These tools cost P64,000 and were billed
at P78,500. They were in the shipping area waiting to be picked up by
the customer.

2) Goods shipped FOB Shipping point by a vendor were in transit on

December 31, 2018. These goods with invoice cost of P93,000 were
shipped on December 29, 2018.

3) Work in process inventory costing P27,000 was sent to a job

contractor for further processing.

4) Not included in the physical count were goods returned by customers

on December 31, 2018. These goods costing P49,000 were inspected and
returned to inventory on January 7, 2019. Credit memos for P67,800
were issued to the customers at that date.

5) In transit to a customer on December 31, 2018, were tools costing

P17,000 shipped FOB Shipping point on December 26, 2018. A sales
invoice for P29,400 was issued on January 3, 2019, when BIRD Company
was notified by the customer that the tools had been received.

6) At exactly 5:00 PM on December 31, 2018, goods costing P31,200 were

received from a vendor. These were recorded on a receiving report
dated January 2, 2019. The related invoice was recorded on December
31, 2018, but the goods were not included in the physical count.

7) Included in the physical count were goods received from a vendor on

December 27, 2018. However, the related invoice for P36,000 was not
recorded because the accounting department’s copy of the receiving
report was lost.

8) A monthly freight bill for P32,000 was received on January 3, 2019.

It specifically related to merchandise bought in December 2018, one-
half of which was still in the inventory at December 31, 2018. The
freight was not included in either the inventory or in accounts
payable at December 31, 2018.

Questions:

1. Bird’s December 31, 2018, inventory should be increased by

a. P216,200 c. P252,200
b. P233,200 d. P123,200
2. Bird’s accounts payable at December 31, 2018, should be increased
by
a. P68,000 c. P125,000
b. P145,000 d. P161,000
3. The amount of net sales to be reported on BIRD’s income statement
for the year ended December 31, 2018, should be
a. P9,547,100 c. P9,591,000
b. P9,576,500 d. P9,595,300
4. BIRD’s statement of financial position at December 31, 2018, should
report accounts payable of
a. P1,576,000 c. P1,540,000
b. P1,483,000 d. P1,431,000
5. The amount of inventory to be reported on BIRD’s December 31, 2018,
statement of financial position should be
a. P2,103,200 c. P2,122,200
b. P2,086,200 d. P1,993,200

Problem no.3
You are engaged in the regular annual examination of the accounts and
records of Buddy Manufacturing Company for the year ended December 31,
2004. To reduce the work load at year-end, the company, upon your
recommendation, took its annual physical inventory on November 30,
2004. You observed the taking of the inventory and made tests of the
inventory count and the inventory records.
The company’s inventory account, which includes raw materials and
work-in-process is on a perpetual basis. Inventories are valued at
cost, first-in, first-out method. There is no finished goods
inventory.
The company’s physical inventory revealed that the book inventory of
P4,239,900 was understated by P210,000. To avoid delay in completing
its monthly financial statements, the company decided not to adjust
the book inventory until year end except for obsolete inventory.
You examination disclosed the following information regarding the
November 30 inventory:
1. Pricing tests showed that physical inventory was overstated by
P154,000.
2. An understatement of the physical inventory by P10,500 due to
errors in footings and extensions.
3. Direct labor included in the inventory amounted to P700,000.
Overhead was included at the rate of 200% of direct labor. You
have ascertained that the amount of direct labor was correct and
that the overhead rate was proper.
4. The physical inventory included obsolete materials with a total
cost of P17,500. During December, the obsolete materials were
written off by a change to cost of sales.

Your audit also disclosed the following information about the December
31 inventory:
1. Total debits to the following accounts during December were:

Cost of sales 4,802,000 *

Direct labor 847,000
Manufacturing expense 1,764,000
 Purchases 1,729,000

* Includes direct labor of P966,000 and manufacturing overhead of

P1,932,000.
2. Scrap loss on established product lines is normally
insignificant. However, a special order started and completed
during December had a scrap loss of P56,000. This amount was
charged to manufacturing expense.

Questions:
1. The adjusted amount of physical inventory at November 30, 2004 is:
a. P 4,078,900 b.P 4,288,900 c. P 4,498,900 d. P 4,596,900
2. The adjusted amount of inventory at December 31, 2004 is:
a. P 3,844,400 b. P 3,826,900 c. P 3,774,400 d. P 3,756,900
3. The raw materials included in the ending inventory at December 31,
2004 is:
a. P 1,961,400 b. P 2,013,900 c. P 2,031,400 d. P 2,188.900
4. The direct labor included in the ending inventory at December 31,
2004 is:
a. P 581,000 b. P 847,000 c. P 700,000 d. P 966,000
5. The total cost of sales for December 31, 2004 is:
a. P 4,854,500 b. P 4,802,000 c. P 4,784,500 d. P 4,714,500
Problem no.4

During your audit of the records of the Chivas Corporation for the
year ended December 31, 2005, the following facts were disclosed:

Raw materials inventory, 1/1/2005 P 720,200

Raw materials purchases 5,232,800
Direct labor 6,300,000
Manufacturing overhead applied (150% of direct labor) 9,450,000
Finished goods inventory, 1/1/2005 1,240,000
Selling expenses 8,112,800
Administrative expenses 7,377,200

Your examination disclosed the following additional information:

a) Purchases of raw materials
Month Units Unit Price Amount
January – February 55,000 P17.76 P976,800
March – April 45,000 20.00 900,000
May – June 25,000 19.60 490,000
July – August 35,000 20.00 700,000
September – October 45,000 20.40 918,000
November – December 60,000 20.80 1,248,000
265,000 P5,232,800
b) Data with respect to quantities are as follows:

Units
Explanation 1/1/05 12/31/05

Raw materials 35,000 ?

Work in process (80% completed) 0 25,000
Finished goods 15,000 40,000
Sales, 205,000 units 15,000 40,000

c) Raw materials are issued at the beginning of the manufacturing

process
during the year, no returns, spoilage, or wastage occurred. Each unit
of finished goods contains one unit of raw materials.

d) Inventories are 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
 Manufacturing overhead – at an applied rate of 150% of direct
labor cost

Questions:
Based on the above and the result of your audit, answer the following:
1. The raw materials inventory as of December 31, 2005 is
a. P1,976,000 b. P936,000 c.
P1,352,000 d. P897,800
2. The work in process inventory as of December 31, 2005 is
a. P1,780,000 b. P1,885,565 c. P
1,751,294 d. P1,776,000
3. The finished goods inventory as of December 31, 2005 is
a. P3,352,000 b. P3,553,130 c.
P3,334,000 d. P3,284,588
4. The cost of goods sold for the year ended December 31, 2005
is
a. P16,897,000 b. P15,857,000 c.
P16,568,304 d. P16,875,000
5. Which of the following audit procedure is most appropriate
to determine whether cost of inventories is properly calculated?
a. Select a sample of items during
the physical inventory count and determine they have been
included on count sheets.
b. Select a sample of recorded
items and examine supporting vendors’ invoices and contracts.
c. Select a sample of recorded
items on count sheets during the physical inventory count and
determine that items are on hand.
d. Examine current vendors’ price
lists.