CSTC COLLEGE OF SCEINCES, TECHNOLOGY, AND COMMUNICATIONS, INC.

AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1

INVENTORIES MA DELGADO, CPA, LPT, MBA

PROBLEM 1

Pasay Company is a wholesale distributor of automobile replacement parts.

Initial amounts taken from Pasay’s accounting records are as follows:

Inventory at December 31, 2014 (based

on physical count on December 31, P400,000
2014)

Accounts payable at December 31,2014:

Vendor Terms Amount
Anito Company Net 30 P 9,000
Victoria Company Net 30 36,500
Winston Company Net 30 48,000
Sogo Company Net 30 74,000
Rotonda Company Net 30 -
P167,500

Sales in 2014 P5,000,000

Additional information follows:

1. Parts held on consignment from Anito to Pasay amounting to P9,000, were

included in the physical count of goods in Pasay’s warehouse on December
31, 2014, and in accounts payable at December 31, 2014.

2. P15,000 worth of parts which were purchased from Sogo and paid for in
December 2014 were sold in the last week of 2014 and appropriately
recorded as sales of P21,000. The parts were included in the physical
count on December 31, 2014, because the parts were on the loading dock
waiting to be picked up by the customer.

3. Parts in transit on December 31, 2014, to customers, shipped FOB

destination, December 28, 2014, amounted to P11,000. The customers
received the parts on January 6, 2015. Sales of P15,000 to the customers
for the parts were recorded by Pasay on January 2, 2015.

4. Retailers were holding P50,000, at cost, of goods on consignment from

Pasay, at their stores on December 31, 2014.
5. Goods were in transit from Rotonda to Pasay on December 31, 2014. The
cost was P8,000 and these were shipped FOB shipping point on December
29, 2014.

REQUIRED:

Determine the adjusted balances of Inventory and Accounts Payable as of

December 31, 2014, and Sales for the year 2014.

PROBLEM 2

Makati Company is preparing its 2014 financial statements. Prior to any

adjustments, inventory is valued at P1,605,000. During your audit, you found the
following information relating to certain inventory transactions from your cutoff
test.

a. Goods valued at P110,000 are on consignment with a customer. These

goods were not included in the ending inventory figure.

b. Goods costing P87,000 were received from a vendor on January 5, 2014.

The related invoice was received and recorded on January 12, 2014. The
goods were shipped on December 31, 2014, terms FOB shipping point.

c. Goods costing P85,000, sold for P102,000, were shipped on December 31,
2014, and were delivered to the customer on January 2, 2015. The terms of
 the invoice were FOB shipping point. The goods were included in the
ending inventory for 2014 and the sale was recorded in 2015.

d. A P35,000 shipment of goods to a customer on December 31, terms FOB

destination was not included in the year-end inventory. The goods cost
P26,000 and were delivered to the customer on January 8, 2015. The sale
was properly recorded in 2015.

e. The invoice for goods costing P35,000 was received and recorded as a
purchase on December 31, 2014. The related goods shipped FOB
destination were received on January 2, 2015, and thus were not included in
the physical inventory.

f. Goods valued at P154,000 are on consignment from a vendor. These

goods are not included in the physical inventory.

g. A P60,000 shipment of goods to a customer on December 30, 2014, terms

FOB destination, was recorded as a sale in 2006. The goods, costing
P37,000 and delivered to the customer on January 6, 2015, were not
included in the 2005 ending inventory.

REQUIRED:

1. Compute the proper inventory amount to be reported on Makati’s balance

sheet for the year ended December 31, 2015.
2. By how much would the net income have been misstated if no adjustments
were made for the above transactions? (Disregard tax implications)
PROBLEM 3

You were engaged to perform an audit of the accounts of the Manila Company
for the year ended December 31, 2014, and you observed the taking of the
physical inventory of the company on December 30, 2014. Only merchandise
shipped by the company to customers up to and including December 30, 2014
have been eliminated from inventory. The inventory as determined by physical
inventory count has been recorded on the books by the company’s controller. No
perpetual inventory records are maintained. All sales are made on an FOB
shipping point basis. You are to assume that all purchase invoices have been
correctly recorded. The inventory was recorded through the cost of sales
method.

The following lists of sales invoices are entered in the sales books for the month
of December 2014 and January 2015, respectively.

DECEMBER 2014
Sales Sales Cost of
invoice amount invoice date merchandise sold Date shipped
a) P 150,000 Dec. 21 P 100,000 Dec. 31, 2014
b) 100,000 Dec. 31 40,000 Nov. 03, 2014
c) 50,000 Dec. 29 30,000 Dec. 30, 2014
d) 200,000 Dec. 31 120,000 Jan. 03, 2015
e) 500,000 Dec. 30 280,000 Dec. 29, 2014
(shipped to
consignee)

JANUARY 2015
Sales invoice Sales invoice Cost of Date shipped
amount date merchandise sold
f) P 300,000 Dec. 31 P 200,000 Dec. 30, 2014
g) 200,000 Jan. 02 115,000 Jan. 02, 2015
h) 400,000 Jan. 03 275,000 Dec. 31, 2014

REQUIRED:

Prepare the necessary adjusting entries at December 31, 2014.

PROBLEM 4

Mandaluyong Company is an importer and wholesaler. Its merchandise is

purchased from several suppliers and is warehoused until sold to customers.

In conducting an audit for the year ended December 31, 2014 the company’s
CPA determined that the system of internal control was good. Accordingly, the
CPA observed the physical inventory at an interim date, November 30, 2005
instead of at year end. The following information was obtained from the general
ledger:

Inventory, January 1, 2014 P 1,312,500

Physical inventory, November 30, 2014 1,425,000
Sales for 11 months ended November 30, 2014 12,600,000
Sales for the year ended December 31, 2014 14,400,000
Purchases for 11 months ended November 30, 2014
(before audit adjustments) 10,125,000
Purchases for the year ended December 31, 2014
(before audit adjustments) 12,000,000

The audit disclosed the following information:

a) Shipments received in November and included in the

physical inventory but recorded as December purchases. P 112,500
b) Shipments received in unsalable condition and excluded from
physical inventory. Credit memos had not been received nor
chargebacks to vendors been recorded:
Total at November 30, 2014 15,000
Total at December 31, 2014 (including the
 November unrecorded chargebacks) 22,500
c) Deposit made with vendor and charged to purchases in
October, 2014. Product was shipped in January, 2015. 30,000
d) Deposit made with vendor and charged to purchases in
November, 2014. Product was shipped FOB destination, on
November 29, 2014 and was included in November 30, 2014
physical inventory as goods in transit. 82,500
e) Through the carelessness of the receiving department
shipment in early December 2014 was damaged by rain.
This shipment was later sold in the last week of December at
cost, P150,000.

REQUIRED:

1. Gross profit rate for 11 months ended November 30, 2014.

2. Cost of goods sold during the month of December 2014 using the gross
profit method.
3. December 31, 2014 inventory using the gross profit method.
PROBLEM 5

Desire Company provided the following data for the current year:

Inventory, January 1 Sales return 200,000

Cost P1,000,000 Sales discount 40,000
Selling price 1,440,000 Purchase discount 90,000
Purchases: Markup 200,000
Cost 6,140,000 Markdown 700,000
Selling price 8,600,000 Markup cancellation 60,000
Transportation-in 140,000 Markdown cancellation 20,000
Purchase returns: Sales 8,150,000
Cost 50,000 Employee discount 50,000
Selling price 80,000

Required: Determine the cost of the ending inventory using

1. Conservative retail method.
2. Average cost retail method.
3. FIFO retail method.
PROBLEM 6

On April 21, 2014, a fire damaged the office and warehouse of Muntinlupa
Company. The only accounting record saved was the general ledger, from
which the trial balance below was prepared.

Muntinlupa Company
Trial Balance
March 31, 2014
DEBIT CREDIT
Cash P 180,000
Accounts receivable 400,000
Inventory, December 31, 2004 750,000
Land 350,000
Building 1,100,000
Accumulated depreciation P 413,000
Other assets 56,000
Accounts payable 237,000
Accrued expenses 180,000
Share capital, P100 par 1,000,000
Retained earnings 520,000
Sales 1,350,000
Purchases 520,000
Operating expenses 344,000 .
Totals P3,700,000 P3,700,000

The following data and information have been gathered:

a. The company’s year-end is December 31.

b. An examination of the April bank statement and cancelled checks revealed

that checks written during the period April 1 to 21 totaled P130,000:
P57,000 paid to accounts payable as of March 31, P34,000 for April
merchandise purchases, 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.

c. Correspondence with suppliers revealed unrecorded obligations at April 21

of P106,000 for April merchandise purchases, including P23,000 for
shipments in transit on that date.

d. Customers acknowledged indebtedness of P360,000 at April 21, 2014. 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.
e. The insurance company agreed that the fire loss claim should be based on
the assumption that the overall gross profit ratio for the past two years was in
effect during the current year. The company’s audited financial statements
disclosed the following information:
2013 2012
Net sales P 5,300,000 P 3,900,000
Net purchases 2,800,000 2,350,000
Beginning inventory 500,000 660,000
Ending inventory 750,000 500,000

f. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The
balance of the inventory was a total loss.

Based on the above and the result of your audit, answer the following:

1. How much is the adjusted balance of Accounts Receivable as of April 21,

2014?
A. 400,000 B. 360,000 C. 440,000 D. 354,000

2. How much is the sales for the period January 1 to April 21, 2014?
A. 1,430,000 B. 1,510,000 C. 1,519,500 D. 1,506,000

3. How much is the adjusted balance of Accounts Payable as of April 21,

2014?
A. P286,000 B. P237,000 C. 106,000 D. 343,000

4. How much is the net purchases for the period January 1 to April 21, 2014?
A. 650,500 B. 660,000 C. 673,500 D. 683,000

5. How much is the cost of sales for the period January 1 to April 21, 2014?
A. 786,500 B. 830,500 C. 835,725 D. 828,300

6. How much is the estimated inventory on April 21, 2014?

A. 570,000 B. 623,500 C. 587,775 D. 579,500

7. How much is the estimated inventory fire loss?

A. 579,500 B. 535,000 C. 477,000 D. 512,000
PROBLEM 7

Malabon Sales Company uses the first-in, first-out method in calculating cost of
goods sold for the three products that the company handles. Inventories and
purchase information concerning the three products are given for the month of
October.

Product C Product P Product A

Oct. 1 Inventory 50,000 units 30,000 units 65,000 units
at P6.00 at P10.00 at P0.90
Oct. 1-15 Purchases 70,000 units 45,000 units 30,000 units
at P6.50 at P10.50 at P1.25
Oct. 16-31 Purchases 30,000 units
at P8.00
Oct. 1-31 Sales 105,000 units 50,000 units 45,000 units
Oct. 31 Sales price P8.00/unit P11.00/unit P2.00/unit

On October 31, the company’s suppliers reduced their prices from the most
recent purchase prices by the following percentages: product C, 20%; product P,
10%; product A, 8%. Accordingly, Malabon decided to reduce its sales prices on
all items by 10%, effective November 1. Malabon’s selling cost is 10% of sales
price. Products C and P have a normal profit (after selling costs) of 30% on
sales prices, while the normal profit on product A (after selling cost) is 15% of
sales price.
Based on the above and the result of your audit, determine the following:

1. Total cost of Inventory at October 31 is

A. 565,000 B. 557,310 C. 655,500 D. 617,500

2. The amount of Inventory to be reported on the company’s balance sheet at

October 31 is
A. 569,850 B. 559,350 C. 543,810 D. 595,350

3. The Allowance for inventory write down at October 31 is

A. 5,650 B. 85,650 C. 13,500 D. 60,150

4. The cost of sales, before loss on inventory write-down, for the month of
October is
A. 1,298,500 B. 1,022,260 C. 1,293,650 D. 1,208,000

PROBLEM 8

Walter Mart uses the average retail method. The following information is
available for the current year:
Cost Retail
Inventory, January 1 P2,200,000 P 4,400,000
Purchases 31,600,000 52,600,000
Freight in 800,000
Purchase returns 1,200,000 2,000,000
Purchase allowances 600,000
Departmental transfer-in 800,000 1,600,000
Markups 1,500,000
Markup cancellations 300,000
Markdowns 2,000,000
 Markdown cancelations 200,000
Sales 49,400,000
Sales returns 700,000
Sales discounts 400,000
Employee discounts 1,200,000
Loss from breakage 100,000

Based on the above information and as a result of your audit, answer the
following:

1. Cost ratio is:

A. 58.13% B. 60.00% C. 61.07% D. 62.00%

2. Estimated inventory at December 31, at retail, is:

A. 5,600,000 B. 6,000,000 C. 7,200,000 D. 7,300,000

3. Estimated inventory at December 31, at cost, is:

A. 3,387,142 B. 3,587,890 C. 3,600,000 D. 3,664,286

4. Estimated cost of goods sold for the year is:

A. 29,802,858 B. 30,000,000 C. 30,112,110 D.30,534,714

5. If the inventory at retail based on physical count at year end is P3,400,000,

the estimated inventory shortage is:
A. 0 B. 1,511,408 C. 1,560,000 D. 1,587,858
PROBLEM 9

Tiger Company is on a calendar year basis. The following data were found during
your audit.

a. Goods in transit shipped FOB destination by a supplier, in the amount of

P200,000, had been excluded from the inventory, and further testing
revealed that the purchase had been recorded.
b. Materials costing P 500,000 and billed on December 30, 2014 at a selling
price of
P 640,000, had been segregated in the warehouse for shipment to a
customer. The materials had been excluded from inventory as a signed
purchase order had been received from the customer. Terms, FOB
destination.
c. Goods costing P 100,000 had been received, included in inventory, and
recorded as a purchase. However, upon your inspection the goods were
found to be defective and would be immediately returned.
d. The sale of P 300,000 worth of materials and costing P 240,000 had been
shipped FOB point of shipment on December 31, 2014. However, this
inventory was found to be included in the final inventory. The sale was
properly recorded in 2014.
e. Goods costing P 140,000 was out of consignment with Lion Company.
Since the monthly statement from Lion Company listed those materials as
on hand, the items had been excluded from the final inventory and
invoiced on December 31, 2014 at P 160,000.
f. Goods costing P 200,000 and selling for P 280,000 had been segregated,
but not shipped at December 31, 2014, and were not included in the
inventory. A review of the customer’s purchase order set forth terms as
FOB destination. The sale had not been recorded.
g. Your client has an invoice from a supplier, terms FOB shipping point but
the goods had not arrived as yet. However, these materials costing P
340,000 had been included in the inventory count, but no entry had been
made for their purchase.
h. Merchandise costing P 400,000 had been recorded as purchase but not
included in inventory count, Terms of sale are FOB shipping point
according to the supplier’s invoice which had arrived at December 31,
2014.

Further inspection of the clients revealed the following December 31, 2014
balances: Inventory, P 2,200,000; Accounts receivable, P 1,160,000;
Accounts payable, P 1,380,000; Net sales, P 10,100,000; Net purchases, P
4,600,000; Net income, P 1,020,000.
Based on the above and the result of your audit, determine the adjusted
balances of balances of following as of December 31, 2014:

1. Inventory
A. 2,460,000 B. 2,960,000 C. 3,100,000 D. 3,300,000

2. Accounts payable
A. 1,020,000 B. 1,420,000 C. 1,520,000 D. 1,620,000

3. Net Sales
A. 9,100,000 B. 9,300,000 C. 9,460,000 D. 9,940,000

4. Net Purchases
A. 4,300,000 B. 4,640,000 C. 4,740,000 D. 4,840,000

5. Net income
A. 440,000 B. 580,000 C. 1,080,000 D. 1,100,000