CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
AUDIT OF INVENTORIES
PROBLEM NO. 1
Presented below is a list of items that may or may not reported as inventory in a company’s
December 31 balance sheet.
1. Goods out on consignment at another company’s store
2. Goods sold on installment basis
3. Goods purchased f.o.b. shipping point that are in transit
at December 31
4. Goods purchased f.o.b. destination that are in transit at
December 31
5. Goods sold to another company, for which our company
has signed an agreement to repurchase at a set price that
covers all costs related to the inventory
6. Goods sold where large returns are predictable
7. Goods sold f.o.b. shipping point that are in transit
December 31
8. Freight charges on goods purchased
9. Factory labor costs incurred on goods still unsold
10. Interest cost incurred for inventories that are routinely
manufactured
11. Costs incurred to advertise goods held for resale
12. Materials on hand not yet placed into production
13. Office supplies
14. Raw materials on which a the company has started
production, but which are not completely processed
15. Factory supplies
16. Goods held on consignment from another company
17. Costs identified with units completed but not yet sold
18. Goods sold f.o.b. destination that are in transit at
December 31
19. Temporary investment in stocks and bonds that will be
resold in the near future
P800,000
100,000
120,000
200,000
300,000
280,000
120,000
80,000
50,000
40,000
20,000
350,000
10,000
280,000
20,000
450,000
260,000
40,000
500,000
Question:
How much of these items would typically be reported as inventory in the financial statements?
a. P2,300,000
c. P2,260,000
b. P2,000,000
d. P2,220,000
Suggested Solution:
PAS 2
a.
b.
c.
par. 6 defines “Inventories” as assets
held for sale in the ordinary course of business;
in the process of production for such sale; or
in the form of materials or supplies to be consumed in the production process or in the
rendering of services.
Par. 10 further states that the cost of inventories shall comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their present location and condition.
Therefore, items 1, 3, 5, 8, 9, 12, 14, 15, 17 and 18 would be reported as inventory in the financial
statements.
The other items will be reported as follows:
Item
Item
Item
Item
Item
Item
Item
2
4
6
7
10
11
13
-
Item 16
Item 19
-
Cost of goods sold in the income statement
Not reported in the financial statements
Cost of goods sold in the income statement
Cost of goods sold in the income statement
Interest expense in the income statement
Advertising expense in the income statement
Office supplies in the current asset section of the balance
sheet
Not reported in the financial statements
Trading securities in the current asset section of the balance
sheet
Answer: A
1
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
PROBLEM NO. 2
In connection with your audit of the Alcala Manufacturing Company, you reviewed its inventory as
of December 31, 2006 and found the following items:
(a) A packing case containing a product costing P100,000 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 costumer billed on January 10, 2007.
(b) Merchandise costing P600,000 was received on December 28, 2006, and the invoice was
recorded. The invoice was in the hands of the purchasing agent; it was marked “On
consignment”.
(c) Merchandise received on January 6, 2007, costing P700,000 was entered in purchase register
on January 7. The invoice showed shipment was made FOB shipping point on December 31,
2006. Because it was not on hand during the inventory count, it was not included.
(d) A special machine costing P200,000, fabricated to order for a particular customer, was finished
in the shipping room on December 30. The customer was billed for P300,000 on that date and
the machine was excluded from inventory although it was shipped January 4, 2007.
(e) Merchandise costing P200,000 was received on January 6, 2007, and the related purchase
invoice was recorded January 5. The invoice showed the shipment was made on December 29,
2006, FOB destination.
(f) Merchandise costing P150,000 was sold on an installment basis on December 15. The customer
took possession of the goods on that date. The merchandise was included in inventory because
Alcala still holds legal title. Historical experience suggests that full payment on installment sale
is received approximately 99% of the time.
(g) Goods costing P500,000 were sold and delivered on December 20. The goods were included in
the inventory because the sale was accompanied by a purchase agreement requiring Alcala to
buy back the inventory in February 2007.
Question:
Based on the above and the result of your audit, how much of these items should be included in the
inventory balance at December 31, 2006?
a. P1,300,000
c. P1,650,000
b. P 800,000
d. P1,050,000
Suggested Solution:
Unshipped goods
Purchased merchandise shipped
FOB shipping point
Goods used as collateral for a loan
Total
P 100,000
700,000
500,000
P1,300,000
Reasons for including and excluding the items:
a)
b)
c)
d)
e)
f)
g)
Included - Merchandise should be included in the inventory until shipped. An exception would be
special orders.
Excluded - Alcala Manufacturing has the merchandise on a consignment basis and therefore does
not possess legal title.
Included - The merchandise was shipped FOB shipping point and therefore would be included in
the inventory on the shipping date.
Excluded - Title may pass on special orders when segregated for shipment.
Excluded - The merchandise was shipped FOB destination and was not received until January 3,
2006.
Excluded - Historical experience suggests that Alcala will collect the full purchase price, so the sale
is recognized even though legal title has not passed.
Included - This is not a sale of inventory but instead is a loan with the inventory as collateral.
Answer: A
PROBLEM NO. 3
The Anda 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 P100,000, had been
excluded from the inventory, and further testing revealed that the purchase had been recorded.
2
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
b. Goods costing P50,000 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.
c.
Materials costing P250,000 and billed on December 30 at a selling price of P320,000, 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.
d. Goods costing P70,000 was out on consignment with Hermie Company. Since the monthly
statement from Hermie Company listed those materials as on hand, the items had been
excluded from the final inventory and invoiced on December 31 at P80,000.
e.
The sale of P150,000 worth of materials and costing P120,000 had been shipped FOB point of
shipment on December 31. However, this inventory was found to be included in the final
inventory. The sale was properly recorded in 2005.
f.
Goods costing P100,000 and selling for P140,000 had been segregated, but not shipped at
December 31, 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 P170,000 had been included in the inventory
count, but no entry had been made for their purchase.
h. Merchandise costing P200,000 had been recorded as a purchase but not included as inventory.
Terms of sale are FOB shipping point according to the supplier’s invoice which had arrived at
December 31.
Further inspection of the client’s records revealed the following December 31, 2006 balances:
Inventory, P1,100,000; Accounts receivable, P580,000; Accounts payable, P690,000; Net sales,
P5,050,000; Net purchases, P2,300,000; Net income, P510,000.
QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balances of following as of
December 31, 2006:
1. Inventory
a. P1,230,000
b. P1,650,000
c. P1,550,000
d. P1,480,000
2. Accounts payable
a. P710,000
b. P540,000
c. P810,000
d. P760,000
3. Net sales
a. P4,550,000
b. P4,650,000
c. P4,730,000
d. P4,970,000
4. Net purchases
a. P2,370,000
b. P2,420,000
c. P2,150,000
d. P2,320,000
5. Net income
a. P220,000
b. P290,000
c. P540,000
d. P550,000
Suggested Solution:
Questions No. 1 to 5
Unadjusted
balances
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Adjusted
balances
Inventory
Accounts
Payable
Net Sales
Net
Purchases
Net
Income
P1,100,000
(50,000)
250,000
70,000
(120,000)
100,000
200,000
P690,000
(100,000)
(50,000)
170,000
-
P5,050,000
(320,000)
(80,000)
-
P2,300,000
(100,000)
(50,000)
170,000
-
P510,000
100,000
(70,000)
(10,000)
(120,000)
100,000
(170,000)
200,000
P1,550,000
P710,000
P4,650,000
P2,320,000
P540,000
3
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
PROBLEM NO. 4
You were engaged by Asingan Corporation for the audit of the company’s financial statements for
the year ended December 31, 2006. The company is engaged in the wholesale business and makes
all sales at 25% over cost.
The following were gathered from the client’s accounting records:
SALES
Date
Reference
Balance forwarded
12/27
SI No. 965
12/28
SI No. 966
12/28
SI No. 967
12/31
SI No. 969
12/31
SI No. 970
12/31
12/31
PURCHASES
Amount
P7,800,000
60,000
225,000
15,000
69,000
102,000
SI No. 971
Closing entry
Date
Reference
Balance forwarded
12/28
RR #1059
12/30
RR #1061
12/31
RR #1062
12/31
RR #1063
12/31
Closing entry
Amount
P4,200,000
36,000
105,000
63,000
96,000
(4,500,000)
P
-
24,000
(8,295,000)
P
-
Note: SI = Sales Invoice
RR = Receiving Report
Accounts receivable
Inventory
Accounts payable
P750,000
900,000
600,000
You observed the physical inventory of goods in the warehouse on December 31 and were satisfied
that it was properly taken.
When performing sales and purchases cut-off tests, you found that at December 31, the last
Receiving Report which had been used was No. 1063 and that no shipments had been made on any
Sales Invoices whose number is larger than No. 968. You also obtained the following additional
information:
a)
Included in the warehouse physical inventory at December 31 were goods which had been
purchased and received on Receiving Report No. 1060 but for which the invoice was not received
until the following year. Cost was P27,000.
b) On the evening of December 31, there were two trucks in the company siding:
 Truck No. XXX 888 was unloaded on January 2 of the following year and received on
Receiving Report No. 1063. The freight was paid by the vendor.
 Truck No. MGM 357 was loaded and sealed on December 31 but leave the company
premises on January 2. This order was sold for P150,000 per Sales Invoice No. 968.
c)
Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to
ABC Trading Corporation. ABC received the goods, which were sold on Sales Invoice No. 966
terms FOB Destination, the next day.
d) Enroute to the client on December 31 was a truckload of goods, which was received on Receiving
Report No. 1064. The goods were shipped FOB Destination, and freight of P2,000 was paid by
the client. However, the freight was deducted from the purchase price of P800,000.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Sales for the year ended December 31, 2006
a. P8,100,000
c. P7,875,000
b. P7,725,000
d. P8,025,000
2. Purchases for the year ended December 31, 2006
a. P4,500,000
c. P5,631,000
b. P5,727,000
d. P4,527,000
3. Accounts receivable as of December 31, 2006
a. P330,000
c. P525,000
b. P555,000
d. P180,000
4. Inventory as of December 31, 2006
a. P1,452,000
b. P1,221,000
c. P1,200,000
d. P1,296,000
5. Accounts payable as of December 31, 2006
a. P600,000
c. P 531,000
b. P627,000
d. P1,827,000
4
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
Suggested Solution:
Questions No. 1 to 5
Unadjusted
balances
AJE No. 1
AJE No. 2
AJE No. 3
AJE No. 4
AJE No. 5
AJE No. 6
Adjusted
balances
Sales
Purchases
AR
Inventory
AP
P8,295,000
(195,000)
(225,000)
-
P4,500,000
27,000
-
P750,000
(195,000)
(225,000)
-
P900,000
96,000
120,000
180,000
P600,000
27,000
-
P7,875,000
P4,527,000
P330,000
P1,296,000
P627,000
Adjusting entries:
1) Sales (P69,000+P102,000+P24,000)
Accounts receivable
P195,000
P195,000
To adjust unshipped goods recorded as sales (SI No. 969, 970 and 971)
2) Purchases
Accounts payable
P27,000
P27,000
To take up unrecorded purchases (RR No. 1060)
3) Inventory
Cost of sales
P96,000
P96,000
To take up goods under RR No. 1063
4) Inventory (P150,000/1.25)
Cost of sales
P120,000
P120,000
To take up unshipped goods under SI No. 968
5) Sales
Accounts receivable
P225,000
P225,000
To reverse entry made to record SI No. 966
6) Inventory (P225,000/1.25)
Cost of sales
P180,000
P180,000
To take up goods under SI No. 966
Answers: 1) C; 2) D; 3) A; 4) D, 5) B
PROBLEM NO. 5
Balungao Company engaged you to examine its books and records for the fiscal year ended June 30,
2006. The company’s accountant has furnished you not only the copy of trial balance as of June
30, 2006 but also the copy of company’s balance sheet and income statement as at said date. The
following data appears in the cost of goods sold section of the income statement:
Inventory, July 1, 2005
Add Purchases
Total goods available for sale
Less Inventory, June 30, 2006
Cost of goods sold
P 500,000
3,600,000
4,100,000
700,000
P3,400,000
The beginning and ending inventories of the year were ascertained thru physical count except that
no reconciling items were considered. Even though the books have been closed, your working paper
trial balance show all account with activity during the year. All purchases are FOB shipping point.
The company is on a periodic inventory basis.
In your examination of inventory cut-offs at the beginning and end of the year, you took note of the
following:
July 1, 2005
a. June invoices totaling to P130,000 were entered in the voucher register in June. The
corresponding goods not received until July.
b. Invoices totaling P54,000 were entered in the voucher register in July but the goods received
during June.
June 30, 2006
c.
Invoices with an aggregate value of P186,000 were entered in the voucher register in July, and
the goods were received in July. The invoices, however, were date June.
d. June invoices totaling P74,000 were entered in the voucher register in June but the goods were
not received until July.
5
CEBU CPAR CENTER, INC.
e.
f.
www.Cebu-CPAR.com
Invoices totaling P108,000 (the corresponding goods for which were received in June) were
entered the voucher register, July.
Sales on account in the total amount of P176,000 were made on June 30 and the goods
delivered at that time. Book entries relating to the sales were made in June.
QUESTIONS:
Based on the above and the result of your cut-off tests, answer the following:
1. How much is the adjusted Inventory as of July 1, 2005?
a. P500,000
c. P576,000
b. P630,000
d. P370,000
2. How much is the adjusted Purchases for the fiscal year ended June 30, 2006?
a. P3,840,000
c. P3,894,000
b. P3,600,000
d. P3,914,000
3. How much is the adjusted Inventory as of June 30, 2006?
a. P784,000
c. P892,000
b. P500,000
d. P960,000
4. How much is the adjusted Cost of Goods Sold for the fiscal year ended June 30, 2006?
a. P3,316,000
c. P3,510,000
b. P3,970,000
d. P3,564,000
5. The necessary compound adjusting journal entry as of June 30, 2006 would include a net
adjustment to Retained Earnings of
a. P130,000
c. P76,000
b. P184,000
d. P54,000
Suggested Solution:
Questions No. 1 to 3
Unadjusted balances
Add (deduct) adj.:
Item a
Item b
Item c
Item d
Item e
Item f
Net adjustments
Inventory
7/1/05
P500,000
Adjusted balances
Inventory
6/30/06
P700,000
Purchases
P3,600,000
130,000
130,000
(54,000)
186,000
108,000
240,000
186,000
74,000
260,000
P630,000
P3,840,000
P960,000
Question No. 4
Inventory, July 1, 2005
Add Purchases
Total goods available for sale
Less Inventory, June 30, 2006
Cost of goods sold
P 630,000
3,840,000
4,470,000
960,000
P3,510,000
Question No. 5
Compound adjusting entry:
Inventory, 7/1/05
P130,000
Purchases
240,000
Inventory, 6/30/06
260,000
Retained earnings (P130,000 - P54,000)
Vouchers payable (P186,000 + P108,000)
Cost of sales
P76,000
294,000
260,000
Answers: 1) B; 2) A; 3) D; 4) C, 5) C
PROBLEM NO. 6
The following accounts were included in the unadjusted trial balance of Bani Company as of
December 31, 2006:
Cash
Accounts receivable
Inventory
Accounts payable
Accrued expenses
P 481,600
1,127,000
3,025,000
2,100,500
215,500
6
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
During your audit, you noted that Bani held its cash books open after year-end. In addition, your
audit revealed the following:
1. Receipts for January 2007 of P327,300 were recorded in the December 2006 cash receipts book.
The receipts of P180,050 represent cash sales and P147,250 represent collections from
customers, net of 5% cash discounts.
2. Accounts payable of P186,200 was paid in January 2007. The payments, on which discounts of
P6,200 were taken, were included in the December 2006 check register.
3. Merchandise inventory is valued at P3,025,000 prior to any adjustments.
information has been found relating to certain inventory transactions.
a. Goods valued at P137,500 are on consignment with a customer.
included in the inventory figure.
The following
These goods are not
b. Goods costing P108,750 were received from a vendor on January 4, 2007. The related
invoice was received and recorded on January 6, 2007. The goods were shipped on
December 31, 2006, terms FOB shipping point.
c.
Goods costing P318,750 were shipped on December 31, 2006, and were delivered to the
customer on January 3, 2007. The terms of the invoice were FOB shipping point. The
goods were included in the 2006 ending inventory even though the sale was recorded in
2006.
d. A P91,000 shipment of goods to a customer on December 30, terms FOB destination are not
included in the year-end inventory. The goods cost P65,000 and were delivered to the
customer on January 3, 2007. The sale was properly recorded in 2007.
e.
The invoice for goods costing P87,500 was received and recorded as a purchase on
December 31, 2006. The related goods, shipped FOB destination were received on January
4, 2007, and thus were not included in the physical inventory.
f.
Goods valued at P306,400 are on consignment from a vendor. These goods are not included
in the physical inventory.
QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balances of the following as
of December 31, 2006:
1. Cash
a. P481,600
b. P340,500
c. P334,300
d. P346,700
2. Accounts receivable
a. P1,454,300
b. P1,282,000
c. P1,127,000
d. P1,274,250
3. Inventory
a. P3,017,500
b. P3,040,000
c. P2,930,000
d. P2,505,000
4. Accounts payable
a. P2,395,450
b. P2,307,950
c. P2,286,500
d. P2,301,750
5. Current ratio
a. P2.00
b. P1.83
c. P1.84
d. P2.01
Suggested Solution:
Questions No. 1 to 4
Unadjusted balances
Add (deduct):
AJE No. 1
AJE No. 2
AJE No. 3.a
AJE No. 3.b
AJE No. 3.c
AJE No. 3.d
AJE No. 3.e
Adjusted balances
Cash
P481,600
Accounts
Receivable
P1,127,000
Inventory
P3,025,000
Accounts
Payable
P2,100,500
(327,300)
180,000
P334,300
155,000
P1,282,000
137,500
108,750
(318,750)
65,000
P3,017,500
186,200
108,750
(87,500)
P2,307,950
7
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
Adjusting entries:
1)
2)
Accounts receivable (P147,250/.95)
P155,000
Sales
180,050
Cash
Sales discount (P147,250/.95 x .05)
P327,300
7,750
Cash
Purchase discount
Accounts payable
P186,200
P180,000
6,200
3.a) Inventory
Cost of sales
P137,500
3.b) Inventory
Accounts payable
P108,750
3.c) Cost of sales
Inventory
P318,750
3.d) Inventory
Cost of sales
P 65,000
3.e) Accounts payable
Cost of sales
P 87,500
P137,500
P108,750
P318,750
P 65,000
P 87,500
3.f) No adjusting entry
Question No. 5
Current assets
Cash
Accounts receivable
Inventory
Divide by current liabilities
Accounts payable
Accrued expenses
Current ratio
P 334,300
1,282,000
3,017,500
2,307,950
215,500
P4,633,800
2,523,450
1.84
Answers: 1) C; 2) B; 3) A; 4) B, 5) C
PROBLEM NO. 7
The Bolinao Company values its inventory at the lower of FIFO cost or net realizable value (NRV).
The inventory accounts at December 31, 2005, had the following balances.
Raw materials
Work in process
Finished goods
P 650,000
1,200,000
1,640,000
The following are some of the transactions that affected the inventory of the Bolinao Company
during 2006.
Jan.
8
Bolinao purchased raw materials with a list price of P200,000
and was given a trade discount of 20% and 10%; terms 2/15,
n/30. Bolinao values inventory at the net invoice price
Feb. 14
Bolinao repossessed an inventory item from a customer who
was overdue in making payment. The unpaid balance on the
sale is P15,200.
The repossessed merchandise is to be
refinished and placed on sale. It is expected that the item can
be sold for P24,000 after estimated refinishing costs of P6,800.
The normal profit for this item is considered to be P3,200.
Mar.
1
Refinishing costs of P6,400 were incurred on the repossessed
item.
Apr.
3
The repossessed item was resold for P24,000 on account, 20%
down.
Aug. 30
A sale on account was made of finished goods that have a list
price of P59,200 and a cost P38,400. A reduction of P8,000
off the list price was granted as a trade-in allowance. The
trade-in item is to be priced to sell at P6,400 as is. The
normal profit on this type of inventory is 25% of the sales
price.
8
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
QUESTIONS:
Based on the above and the result of your audit, answer the following: (Assume the client is using
perpetual inventory system)
1. The entry on Jan. 8 will include a debit to Raw Materials Inventory of
a. P200,000
c. P141,120
b. P144,000
d. P196,000
2. The repossessed inventory on Feb. 14 is most likely to be valued at
a. P14,000
c. P17,200
b. P24,000
d. P14,400
3. The journal entries on April 3 will include a
a. Debit to Cash of P24,000.
b. Debit to Cost of Repossessed Goods Sold of P14,000.
c. Credit to Profit on Sale of Repossessed Inventory of P3,600.
d. Credit to Repossessed Inventory of P20,400.
4. The trade-in inventory on Aug. 30 is most likely to be valued at
a. P8,000
c. P6,000
b. P4,800
d. P6,400
5. How much will be recorded as Sales on Aug. 30?
a. P51,200
c. P57,200
b. P56,000
d. P57,600
Suggested Solution:
Question No. 1
Amount to be debited to Raw Materials Inventory
(P200,000 x .8 x .9 x .98)
P141,120
Question No. 2
Estimated selling price
Less refinishing costs
Net realizable value
Less normal profit
Valuation of repossessed inventory
P24,000
6,800
17,200
3,200
P14,000
Repossessed inventory is valued at fair value or best possible approximation of fair value. Since
fair value of the item is not given, the item was valued at net realizable value less the normal
profit. Incidentally, this is the valuation of trade-in inventory.
Question No. 3
Journal entries on April 3, 2006:
Cash (P24,000 x 20%)
Accounts receivable (P24,000 – P4,800)
Sales – Repossessed inventory
P 4,800
19,200
P24,000
Cost of Repossessed Goods Sold (P14,000+P6,400) P20,400
Repossessed Inventory
P20,400
Question No. 4
Estimated selling price (net realizable value)
Less normal profit (P6,400 x 25%)
Valuation of trade-in inventory
P6,400
1,600
P4,800
Question No. 5
Accounts receivable (P59,200 - P8,000)
Trade-in inventory (see no. 4)
Amount to be recorded as sales
P51,200
4,800
P56,000
Answers: 1) C; 2) A; 3) D; 4) B, 5) B
PROBLEM NO. 8
Calasiao Construction Corporation engaged you to advise it regarding the proper accounting for a
series of long-term contracts.
Calasiao commenced doing business on January 2, 2006.
Construction activities for the first year of operations are shown below. All contract costs are with
different customers, and any work remaining at December 31, 2006, is expected to be completed in
2007.
9
CEBU CPAR CENTER, INC.
Project
A
B
C
D
E
www.Cebu-CPAR.com
Total
Contract
Price
Billings
Through
12/31/06
Collections
Through
12/31/06
Contract
Costs
Incurred
Through
12/31/06
P1,200,000
P 800,000
P 720,000
P 992,000
1,400,000
1,120,000
800,000
960,000
P5,420,000
Estimated
Additional
Costs to
Complete
P 268,000
440,000
420,000
271,200 1,084,800
1,120,000 1,020,000
744,000
140,000
100,000
492,000
348,000
820,000
800,000
740,000
60,000
P3,320,000 P3,060,000 P3,239,200 P1,760,800
QUESTIONS:
Based on the above and the result of your engagement, determine the following using the
percentage-of-completion method:
1. Net realized gross profit for the year 2006
a. P462,133
c. P1,149,419
b. P432,800
d. P 276,000
2. Balance of Construction in Progress account as of December 31, 2006
a. P2,552,000
c. P3,268,619
b. P2,581,333
d. P2,395,200
3. Amount to be reported in the current assets section of the balance sheet as Inventories as of
December 31, 2006
a. P541,333
c. P352,000
b. P512,000
d. P444,000
4. Amount to be reported in the current liabilities section of the balance sheet as of December 31,
2006
a. P 56,960
c. P160,000
b. P248,800
d. P
0
5. Net realized gross profit for the year 2006 assuming the company used the completed-contract
method
a. P432,800
c. P376,000
b. P436,000
d. P276,000
Suggested Solution:
Question No. 1
Project
A
B
C
D
E
Total
Estimated
gross
profit (loss)*
(P60,000)
44,000
376,000
(40,000)
160,000
Percentage of
completion**
not applicable
20.00%
100.00%
not applicable
92.50%
Realized gross
profit (loss)
(P60,000)
8,800
376,000
(40,000)
148,000
P432,800
* (Total contract price - Total estimated costs)
** (Costs incurred through Dec. 31, 2006 / Total estimated costs)
Question No. 2
Project
A
B
D
E
Total
Costs incurred
through
12/31/06
P992,000
271,200
492,000
740,000
Realized gross
profit (loss)
(P60,000)
8,800
(40,000)
148,000
Construction
in Progress
P 932,000
452,000
888,000
Progress
Billings
P 800,000
140,000
820,000
Construction
in Progress
P 932,000
280,000
452,000
888,000
P2,552,000
Question No. 3
Project
A
D
E
10
Net
P132,000
312,000
68,000
CEBU CPAR CENTER, INC.
Project
Total
Construction
in Progress
P2,272,000
www.Cebu-CPAR.com
Progress
Billings
P1,760,000
Net
P512,000
Question No. 4
Progress billings in excess of costs and
recognized profit – Project B (P440,000 - P280,000)
P160,000
Question No. 5
Project
A
B – not yet completed
C
D – not yet completed
E
Realized gross
profit (loss)
(P60,000)
376,000
(40,000)
P276,000
Answers: 1) B; 2) A; 3) B; 4) C, 5) D
PROBLEM NO. 9
Dasol Factory started operations in 2006. Dasol manufactures bath towels. 60% of the production
are “Class A” which sell for P500 per dozen and 40% are “Class B” which sell for P250 per dozen.
During 2006, 6,000 dozens were produced at an average cost of P360 per dozen. The inventory at
the end of the year was as follows:
220 dozens “Class A” @ P360
300 dozens “Class B” @ P360
P 79,200
108,000
P187,200
QUESTIONS:
Using the relative sales value method, which management considers as a more equitable basis of
cost distribution, answer the following:
1. How much of the total cost should be allocated to “Class A”?
a. P1,296,000
c. P1,284,324
b. P1,620,000
d. P 925,714
2. How much of the total cost should be allocated to “Class B”?
a. P540,000
c. P 864,000
b. P875,676
d. P1,234,286
3. How much is the value of inventory as of December 31, 2006?
a. P187,200
c. P117,000
b. P187,946
d. P166,500
4. How much is the cost of sales for the year 2006?
a. P1,972,800
c. P2,043,000
b. P1,993,500
d. P1,972,054
5. How much is the gross profit for the year 2006?
a. P242,200
c. P221,500
b. P406,500
d. P242,946
Suggested Solution:
Questions No. 1 & 2
Total cost of production
(6,000 dozens x P360)
Divide by total sales price:
Class A (6,000 x 60% = 3,600 x P500)
Class B (6,000 x 40% = 2,400 x P250)
Cost ratio
Class A (P1,800,000 x 90%)
Class B (P600,000 x 90%)
P2,160,000
P1,800,000
600,000
P1,620,000
P540,000
Alternative computation:
Class A (P2,160,000 x 18/24)
Class B (P2,160,000 x 6/24)
P1,620,000
P540,000
11
2,400,000
90%
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
Question No. 3
Class A (220 x P500 x 90%)
Class B (300 x P250 x 90%)
Inventory, 12/31/06
P 99,000
67,500
P166,500
Question No. 4
Total cost of production (6,000 dozens x P360)
Less inventory, 12/31/06
Cost of sales
P2,160,000
166,500
P1,993,500
Question No. 5
Sales of Class A [(3,600 - 220) x P500]
Sales of Class B [(2,400 - 300) x P250]
Total sales
Less cost of sales
Gross profit
P1,690,000
525,000
2,215,000
1,993,500
P 221,500
Answers: 1) B; 2) A; 3) D; 4) B, 5) C
PROBLEM NO. 10
During your audit of the records of the Manaoag Corporation for the year ended December 31, 2006,
the following facts were disclosed:
Raw materials inventory, 1/1/2006
Raw materials purchases
Direct labor
Manufacturing overhead applied (150% of direct labor)
Finished goods inventory, 1/1/2006
Selling expenses
Administrative expenses
P 720,200
5,232,800
4,900,000
7,350,000
1,240,000
8,112,800
7,377,200
Your examination disclosed the following additional information:
a)
Purchases of raw materials
Month
January – February
March – April
May – June
July – August
September – October
November – December
Units
55,000
45,000
25,000
35,000
45,000
60,000
265,000
Unit Price
P17.76
20.00
19.60
20.00
20.40
20.80
Amount
P 976,800
900,000
490,000
700,000
918,000
1,248,000
P5,232,800
b) Data with respect to quantities are as follows:
Units
Explanation
Raw materials
Work in process (80% completed)
Finished goods
Sales, 200,000 units
c)
1/1/06
35,000
15,000
12/31/06
?
25,000
40,000
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, 2006 is
a. P992,000
c. P 936,000
b. P888,000
d. P1,040,000
12
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
2. The work in process inventory as of December 31, 2006 is
a. P1,496,000
c. P1,746,000
b. P1,514,000
d. P1,776,000
3. The finished goods inventory as of December 31, 2006 is
a. P2,793,600
c. P3,553,130
b. P3,334,000
d. P2,812,000
4. The cost of goods sold for the year ended December 31, 2006 is
a. P16,897,000
c. P14,077,000
b. P14,161,400
d. P13,911,400
Suggested Solution:
Question No. 1
Units
35,000
265,000
300,000
50,000
250,000
25,000
225,000
15,000
240,000
40,000
200,000
Raw materials, 1/1/06
Add Purchases
Raw materials available for use
Less raw materials, 12/31/06 (squeeze)
Goods placed in process
Less work-in-process, 12/31/06
Goods manufactured
Finished goods, 1/1/06
Total goods available for sale
Less finished goods, 12/31/06
Goods sold
Raw materials, 12/31/06 (50,000 units x P20.80)
P1,040,000
Question No. 2
Raw materials [(10,000 units x P20.80) +
(15,000 units x P20.40)]
Direct labor (25,000 units x 80% x P20a)
Factory overhead (25,000 units x 80% x P30b)
Work in process, 12/31/06
P 514,000
400,000
600,000
P1,514,000
Labor unit cost (P4,900,000/245,000* units)
P20a
Overhead unit cost (P7,350,000/245,000* units)
P30b
*Equivalent production for labor and overhead
Started, finished and sold [(200,000 units - 15,000
units) x 100%]
Started, finished and on hand (40,000 units x 100%)
Started, and in process (25,000 units x 80%)
Total
185,000
40,000
20,000
245,000
Question No. 3
Raw materials [(30,000 units x P20.40)
+(10,000 units x P20)]
Direct labor (40,000 units x P20a)
Factory overhead (40,000 units x P30b)
Finished goods inventory, 12/31/06
P 812,000
800,000
1,200,000
P2,812,000
Question No. 4
Raw materials, 1/1/06
Add purchases
Raw materials available for use
Less raw materials, 12/31/06 (see no. 1)
Direct materials used
Direct labor
Factory overhead
Total manufacturing cost
Add work-in-process, 1/1/06
Total cost placed in process
Less work-in-process, 12/31/06 (see no. 2)
Cost of goods manufactured
Add finished goods, 1/1/06
Total goods available for sale
Less finished goods, 12/31/06 (see no. 3)
Cost of goods sold
P
720,200
5,232,800
5,953,000
1,040,000
4,913,000
4,900,000
7,350,000
17,163,000
17,163,000
1,514,000
15,649,000
1,240,000
16,889,000
2,812,000
P14,077,000
13
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
Answers: 1) D; 2) B; 3) D; 4) C
PROBLEM NO. 11
The Mangaldan Merchandising Company is a leading distributor of kitchen wares. The company
uses the first-in, first-out method of calculating the cost of goods sold. The following information
concerning two of the company’s products is taken from the month of May:
May 1, beginning inventory
PANS
No. of
Unit
units
cost
10,000
P 60
Purchases:
May 15
May 25
14,000
6,000
Sales for the month
65
75
20,000
(@ P80)
KETTLES
No. of
Unit
units
cost
6,000
P 40
9,000
P 42
10,000
(@ P44)
On May 31, Mangaldan’s suppliers reduced their price from the last purchase price by the following
percentages:
Pans…………………..25%
Kettles…………………20%
Accordingly, the company agreed to reduce selling prices by 15% on all items beginning June 1.
Mangaldan Merchandising Company’s selling costs are calculated at 10% of selling price.
products have a normal profit of 30% on sales prices (after selling costs).
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. Total cost of Pans as of May 31 is
a. P710,000
b. P653,300
c. P600,000
d. P612,000
2. Total cost of Kettles as of May 31 is
a. P210,000
b. P206,000
c. P200,000
d. P168,300
3. The inventory at May 31 should be valued at
a. P768,300
c. P920,000
b. P780,300
d. P890,000
4. The loss on inventory write down for the month of May is
a. P139,700
c. P29,300
b. P137,300
d. P27,600
5. The cost of sales, before loss on inventory write down, for the month of May is
a. P1,778,000
c. P1,797,700
b. P1,685,600
d. P1,658,000
Suggested Solution:
Question No. 1
4,000 units @ P65
6,000 units @ P75
Total cost of Pans
P260,000
450,000
P710,000
Question No. 2
Total cost of Kettles (5,000 units @ P42)
P210,000
Question No. 3
Item
Pans
Kettles
Units
4,000
6,000
5,000
Unit Cost
P65
75
42
NRV*
P61.20
61.20
33.66
* Estimated selling price – Estimated cost to sell
** Lower of cost or NRV
14
Inventory
Amount**
P244,800
367,200
168,300
P780,300
Both
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
Question No. 4
Total cost of inventory (P710,000 + P210,000)
Less inventory value (see no. 3)
Required allowance for inventory writedown
Less allowance, May 1 (6,000 x P0.40)
Loss on inventory writedown for May
P920,000
780,300
139,700
2,400
P137,300
Question No. 5
Pans:
10,000 units @ P60
10,000 units @ P65
Kettles:
6,000 units @ P40
4,000 units @ P42
Total cost of sales
Alternative computation:
Inventory, 5/1:
Pans (10,000 units x P60)
Kettles (6,000 units x P40)
Add purchases:
Pans [(14,000 units x P65) +
(6,000 x P75)]
Kettles (9,000 units x P42)
Total goods available for sale
Less inventory, 5/31 (at cost)
Cost of sales, before inventory
writedown
P600,000
650,000
240,000
168,000
P600,000
240,000
1,360,000
378,000
P1,250,000
408,000
P1,658,000
P 840,000
1,738,000
2,578,000
920,000
P1,658,000
Answers: 1) A; 2) A; 3) B; 4) B, 5) D
PROBLEM NO. 12
In conducting your audit of Mangatarem Corporation, a company engaged in import and wholesale
business, for the fiscal year ended June 30, 2006, you determined that its internal control system
was good. Accordingly, you observed the physical inventory at an interim date, May 31, 2006
instead of at June 30, 2006.
You obtained the following information from the company’s general ledger.
Sales for eleven months ended May 31, 2006
Sales for the fiscal year ended June 30, 2006
Purchases for eleven months ended May 31, 2006
(before audit adjustments)
Purchases for the fiscal year ended June 30, 2006
Inventory, July 1, 2005
Physical inventory, May 31, 2006
P1,344,000
1,536,000
1,080,000
1,280,000
140,000
220,000
Your audit disclosed the following additional information.
(1) Shipments costing P12,000 were received in May and included in the physical inventory but
recorded as June purchases.
(2) Deposit of P4,000 made with vendor and charged to purchases in April 2006.
shipped in July 2006.
Product was
(3) A shipment in June was damaged through the carelessness of the receiving department. This
shipment was later sold in June at its cost of P16,000.
QUESTIONS:
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 the application of gross profit
ratio. Based on the above and the result of your audit, you are to provide the answers to the
following:
1. The gross profit ratio for eleven months ended May 31, 2006 is
a. 20%
c. 30%
b. 35%
d. 25%
2. The cost of goods sold during the month of June, 2006 using the gross profit ratio method is
a. P132,000
c. P148,000
b. P144,000
d. P160,000
15
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
3. The June 30, 2006 inventory using the gross profit method is
a. P264,000
c. P268,000
b. P340,000
d. P260,000
Suggested Solution:
Question No. 1
Sales for 11 months
ended 5/31/06
Less cost of sales for 11
months ended 5/31/06:
Inventory, July 1, 2005
Add adjusted purchases:
Unadjusted
Item no. 1
Item no. 2
Goods available for sale
Less inventory, 5/31/06
Gross profit
Divide by sales for 11 months
ended 5/31/06
Gross profit rate for 11
months ended 5/31/06
P1,344,000
P 140,000
P1,080,000
12,000
(4,000)
1,088,000
1,228,000
220,000
1,008,000
336,000
1,344,000
25%
Question No. 2
Sales for the fiscal year ended June 30, 2006
Less sales for 11 months ended May 31, 2006
Sales for June, 2006
Less sales without profit
Sales with profit
Multiply by cost ratio (100% - 25%)
Cost of sales with profit
Add cost of sales without profit
Total cost of sales for June, 2006
P1,536,000
1,344,000
192,000
16,000
176,000
75%
132,0000
16,000
P 148,000
Question No. 3
Inventory, 7/1/05
Add adjusted purchases:
Unadjusted
Item no. 2
Total goods available for sale
Less cost of sales:
Sales without profit
Sales with profit
[(P1,536,000 - P16,000) x 75%]
P 140,000
P1,280,000
(4,000)
1,276,000
1,416,000
16,000
1,140,000
Inventory, 6/30/06
1,156,000
P 260,000
Answers: 1) D; 2) C; 3) D
PROBLEM NO. 13
On March 31, 2006 San Fabian Company had a fire which completely destroyed the factory building
and inventory of goods in process; some of the equipment was saved.
After the fire, a physical inventory was taken.
finished goods at P620,000.
The material was valued at P750,000 and the
The inventories on January 1, 2006 consisted of:
Materials
Goods in process
Finished goods
Total
P 310,000
1,215,000
1,700,000
P3,225,000
A review of the accounting records disclosed that the sales and gross profit on sales for the last
three years were:
2003
2004
2005
Sales
P8,000,000
7,600,000
5,000,000
Gross profit
P2,400,000
2,215,000
1,776,000
16
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
The sales for the first three months of 2006 were P3,000,000. Material purchases were P1,250,000,
transportation on purchases was P100,000 and direct labor cost for the three months was
P1,000,000. For the past two years, factory overhead cost has been 80% of direct labor cost.
QUESTIONS:
Based on the above and the result of your audit, compute the following:
1. The most likely gross profit rate to be used in estimating the inventory of goods in process
destroyed by fire
a. 31.55%
c. 35.52%
b. 32.76%
d. 36.00%
2. Total cost of goods placed in process
a. P2,710,000
b. P973,500
c. P3,925,000
d. P4,375,000
3. Total cost of goods manufactured
a. P3,133,500
b. P 973,500
c. P 854,400
d. P3,014,400
4. Inventory of goods in process lost
a. P 791,500
b. P1,360,600
c. P 119,100
d. P2,951,500
Suggested Solution:
Question No. 1
Gross profit
Divide by Sales
Gross profit rate
Average gross profit rate
2003
P2,400,000
P8,000,000
30.00%
2004
P2,215,000
P7,600,000
29.14%
2005
P1,776,000
P5,000,000
35.52%
31.55%
Questions No. 2 to 4
Raw materials, 1/1/06
Purchases
Freight-in
Raw materials available for use
Raw materials, 3/31/06
Raw materials used
Direct labor
Factory overhead (P1,000,000 x 80%)
Total manufacturing cost
Work-in-process, 1/1/06
Total cost placed in process
Less work-in-process, 3/31/06 (squeeze)
Cost of goods manufactured
Finished goods, 1/1/06
Total goods available for sale
Less finished goods, 3/31/06
Cost of goods sold (P3,000,000 x 68.45%)
P 310,000
1,250,000
100,000
1,660,000
(750,000)
910,000
1,000,000
800,000
2,710,000
1,215,000
3,925,000
(2,951,500)
973,500
1,700,000
2,673,500
(620,000)
P2,053,500
(2)
(4)
(3)
Answers: 1) A; 2) C; 3) B; 4) D
PROBLEM NO. 14
You obtained the following information in connection with your audit of Villasis Corporation:
Beginning inventory
Sales
Purchases
Freight in
Mark ups
Mark up cancellations
Markdown
Markdown cancellations
Cost
P1,987,200
4,688,640
94,560
Retail
P2,760,000
7,812,000
6,512,000
720,000
120,000
240,000
40,000
Villasis Corp. uses the retail inventory method in estimating the values of its inventories and costs.
17
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The cost ratio to be used considering the provisions of PAS 2 is
a. 68.58%
c. 70.00%
b. 69.20%
d. 75.78%
2. The estimated ending inventory at retail is
a. P2,300,000
c. P1,940,000
b. P2,060,000
d. P1,860,000
3. The estimated ending inventory at cost is
a. P1,412,786
c. P1,302,000
b. P1,275,588
d. P1,287,120
4. The estimated cost of goods sold is
a. P5,468,400
b. P5,494,812
c. P5,357,614
d. P4,685,117
Suggested Solution:
Question No. 1
Beginning inventory
Purchases
Freight in
Net mark up (P720,000 - P120,000)
Net mark down (P240,000 - P40,000)
Goods available for sale
Cost
P1,987,200
4,688,640
94,560
___________
P6,770,400
Cost ratio (P6,770,400/P9,672,000)
Retail
P2,760,000
6,512,000
720,000
120,000
P9,672,000
70%
PAS 2 par. 22 states that the retail inventory method is often used in the retail industry for
measuring inventories of large numbers of rapidly changing items with similar margins for which it
is impracticable to use other costing methods. The cost of inventory is determined by reducing the
sales value of the inventory by the appropriate percentage gross margin. The percentage used
takes into consideration inventory that has been marked down to below its original selling price.
An average percentage for each retail department is often used.
Previously, the conventional approach (lower of average cost or market valuation) is often used if
the problem is silent. The conventional approach ignores markdown in the computation of cost
ratio. However, since PAS 2 specifically states that the percentage should take into consideration
inventory that has been marked down to below its original selling price, the cost ratio was
computed using the average method.
Question No. 2
Goods available for sale at retail
Less sales
Ending inventory, at retail
P9,672,000
7,812,000
P1,860,000
Question No. 3
Ending inventory, at cost (P1,860,000 x 70%)
P1,302,000
Question No. 4
Goods available for sale at cost
Less ending inventory, at cost
Estimated cost of sales
P6,770,400
1,302,000
P5,468,400
Answers: 1) C; 2) D; 3) C; 4) A
PROBLEM NO. 15
Select the best answer for each of the following:
1. Otso Manufacturing Corporation mass produces eight different products. The controller, who is
interested in strengthening internal controls over the accounting for materials used in
production, would be most likely to implement
a. A separation of duties among production personnel.
b. A perpetual inventory system.
c. An economic order quantity (EOQ) system.
d. A job order cost accounting system.
18
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
2. Which of the following control procedures would most likely be used to maintain accurate
perpetual inventory records?
a. Independent matching of purchase orders, receiving reports, and vendors' invoices.
b. Independent storeroom count of goods received.
c. Periodic independent reconciliation of control and subsidiary records.
d. Periodic independent comparison of records with goods on hand.
3. The accuracy of perpetual inventory records may be established in part by comparing perpetual
inventory records with
a. Purchase requisitions.
c. Receiving reports.
b. Purchase orders.
d. Vendor payments.
4. The auditor tests the quantity of materials charged to work in process by tracing these
quantities to
a. Receiving reports.
c. Materials requisition forms.
b. Perpetual inventory records.
d. Cost ledgers.
5. An auditor would analyze inventory turnover rates to obtain evidence concerning management’s
assertion about
a. Valuation or allocation.
c. Presentation and disclosure.
b. Rights and obligations.
d. Completeness
6. In auditing inventories, a major objective relates to the existence assertion. Of the following
audit procedures relating to inventories, which does not support the existence assertion?
a. The auditor reviews the client's inventory-taking instructions for such matters as proper
arrangement of goods, separation of consigned goods, and limits on movements of goods
during inventory.
b. The auditor observes the client's inventory and performs test counts as appropriate.
c. The auditor confirms inventories not on the premises.
d. The auditor performs a lower of cost or market test for major categories of inventory.
7. In a manufacturing company, which one of the following audit procedures would give the least
assurance of the valuation of inventory at the audit date?
a. Obtaining confirmation of inventories pledged under loan agreements.
b. Testing the computation of standard overhead rates.
c. Examining paid vendors' invoices.
d. Reviewing direct labor rates.
8. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test
to obtain evidence that
a. No goods held on consignment for customers are included in the inventory balance.
b. No goods observed during the physical count are pledged or sold.
c. All goods owned at year end are included in the inventory balance
d. All goods purchased before year end are received before the physical inventory count.
9. Which of the following items should not be included in a physical inventory?
a. Materials in transit from vendors.
b. Goods in a private warehouse.
c. Goods received for repairs under warranty.
d. Consignment to an agent.
10. You were engaged to conduct an annual examination for the fiscal year ended October 31, 2006.
Because of the expected holiday, you were able to convince your client to take a complete physical
inventory, in which you were present on October 15. Perpetual inventory records are kept and the
client considers a sale to be made in the period in which goods are shipped. You had a sales cutoff test worksheet prepared. Which item among those listed below will not require an adjusting
entry to reconcile the client's detailed inventory record with the physical inventory?
a.
b.
c.
d.
Date Goods Shipped
Oct 31
Nov 2
Oct 14
Oct 10
Transaction Recorded as Sale
Nov 2
Oct 31
Oct 16
Oct 19
Date Inventory Control Credited Oct 31
Oct 31
Oct 16
Oct 12
Answers: 1) B; 2) D; 3) C; 4) C, 5) A; 6) D; 7) A; 8) C; 9) C; 10) D
19