Cebu CPAR Audit of Inventory
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
P800,000
100,000
3. Goods purchased f.o.b. shipping point that are in transit at December 31
120,000
4. Goods purchased f.o.b. destination that are in transit at December 31
200,000
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
300,000
6. Goods sold where large returns are predictable
280,000
7. Goods sold f.o.b. shipping point that are in transit
December 31
120,000
8. Freight charges on goods purchased
80,000
9. Factory labor costs incurred on goods still unsold
50,000
10. Interest cost incurred for inventories that are routinely manufactured
40,000
11. Costs incurred to advertise goods held for resale
20,000
12. Materials on hand not yet placed into production
350,000
13. Office supplies
14. Raw materials on which a the company has started production, but which
are not completely processed
15. Factory supplies
10,000
280,000
20,000
16. Goods held on consignment from another company
450,000
17. Costs identified with units completed but not yet sold
260,000
18. Goods sold f.o.b. destination that are in transit at
December 31
40,000
19. Temporary investment in stocks and bonds that will be resold in the near
future
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 par. 6 defines “Inventories” as assets
a. held for sale in the ordinary course of business;
b. in the process of production for such sale; or
c. 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 2
-
Cost of goods sold in the income statement
Item 4
-
Not reported in the financial statements
Item 6
-
Cost of goods sold in the income statement
Item 7
-
Cost of goods sold in the income statement
Item 10
-
Interest expense in the income statement
Item 11
-
Advertising expense in the income statement
Item 13
-
Item 16
-
Item 19
-
Answer: A
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
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
P 100,000
Purchased merchandise shipped
FOB shipping point
700,000
Goods used as collateral for a loan
500,000
Total
P1,300,000
Reasons for including and excluding the items:
a) Included - Merchandise should be included in the inventory until shipped. An exception would be special orders.
b)
Excluded - Alcala Manufacturing has the merchandise on a consignment basis and therefore does not possess legal
title.
c)
Included - The merchandise was shipped FOB shipping point and therefore would be included in the inventory on the
shipping date.
d) Excluded - Title may pass on special orders when segregated for shipment.
e) Excluded - The merchandise was shipped FOB destination and was not received until January 3, 2006.
f)
Excluded - Historical experience suggests that Alcala will collect the full purchase price, so the sale is recognized
even though legal title has not passed.
g) 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.
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
c. P1,550,000
b. P1,650,000
d. P1,480,000
2. Accounts payable
a. P710,000
c. P810,000
b. P540,000
d. P760,000
3. Net sales
a. P4,550,000
c. P4,730,000
b. P4,650,000
d. P4,970,000
4. Net purchases
a. P2,370,000
c. P2,150,000
b. P2,420,000
d. P2,320,000
5. Net income
a. P220,000
c. P540,000
b. P290,000
d. P550,000
Suggested Solution:
Questions No. 1 to 5
Accounts Payable
Net Purchases
Inventory
Unadjuste
d
balanc
es
Net Income
Net Sales
P1,100,000
P690,000
P5,050,000
P2,300,000
P510,000
(a)
-
(100,000)
-
(100,000)
100,000
(b)
(50,000)
(50,000)
-
(50,000)
-
(c)
250,000
-
(320,000)
-
(70,000)
(d)
70,000
-
(80,000)
-
(10,000)
(e)
(120,000)
-
-
-
(120,000)
(f)
100,000
-
-
-
100,000
(g)
-
170,000
-
170,000
(170,000)
-
-
-
200,000
P710,000
P4,650,000
P2,320,000
P540,000
(h)
200,000
Adjusted
balanc
es
P1,550,000
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
PURCHASES
Reference
Reference
Date
Date
Amount
Balance forwarded
P7,800,000
Amount
Balance forwarded
P4,200,000
12/27
SI No. 965
60,000
12/28
RR #1059
36,000
12/28
SI No. 966
225,000
12/30
RR #1061
105,000
12/28
SI No. 967
15,000
12/31
RR #1062
63,000
12/31
SI No. 969
69,000
12/31
RR #1063
96,000
12/31
SI No. 970
102,000
12/31
Closing entry
(4,500,000)
12/31
SI No. 971
12/31
24,000
P
-
Closing entry
(8,295,000)
P
Note: SI = Sales Invoice
Accounts receivable
-
RR = Receiving Report
P750,000
Inventory
900,000
Accounts payable
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
c. P1,200,000
b. P1,221,000
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
Suggested Solution:
Questions No. 1 to 5
Sales
Unadjuste
d
balanc
es
Purchases
AR
Inventory
AP
P8,295,000
P4,500,000
P750,000
P900,000
P600,000
(195,000)
-
(195,000)
-
-
AJE No. 2
-
27,000
-
-
27,000
AJE No. 3
-
-
-
96,000
-
AJE No. 4
-
-
-
120,000
-
AJE No. 1
AJE No. 5
(225,000)
-
(225,000)
AJE No. 6
-
-
-
-
-
180,000
Adjusted
balanc
es
P7,875,000
P4,527,000
P330,000
P1,296,000
P627,000
Adjusting entries:
1) Sales (P69,000+P102,000+P24,000)
P195,000
Accounts receivable
P195,000
To adjust unshipped goods recorded as sales (SI No. 969, 970 and 971)
2) Purchases
P27,000
Accounts payable
P27,000
To take up unrecorded purchases (RR No. 1060)
3) Inventory
P96,000
Cost of sales
P96,000
To take up goods under RR No. 1063
4) Inventory (P150,000/1.25)
P120,000
Cost of sales
P120,000
To take up unshipped goods under SI No. 968
5) Sales
P225,000
Accounts receivable
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
P 500,000
3,600,000
Total goods available for sale
Less Inventory, June 30, 2006
4,100,000
700,000
Cost of goods sold
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.
e.
Invoices totaling P108,000 (the corresponding goods for which were received in June) were entered the voucher
register, July.
f.
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
Inventory
7/1/05
Unadjust
ed
balances
Purcha
ses
Inventory
6/30/06
P500,000
P3,600,
000
P700,000
Item a
130,000
-
-
Item b
-
(54,000
)
-
Item c
-
186,00
0
186,000
Item d
-
-
74,000
Item e
-
Item f
-
Add
(deduct)
adj.:
108,00
0
Net
adjustme
nts
130,000
260,000
240,00
0
Adjusted
balances
P630,000
P3,840,
000
P960,000
Question No. 4
Inventory, July 1, 2005
P 630,000
Add Purchases
3,840,000
Total goods available for sale
4,470,000
Less Inventory, June 30, 2006
960,000
Cost of goods sold
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)
P76,000
Vouchers payable (P186,000 + P108,000)
294,000
Cost of sales
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
P 481,600
Accounts receivable
1,127,000
Inventory
3,025,000
Accounts payable
2,100,500
Accrued expenses
215,500
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. The following information has been found
relating to certain inventory transactions.
1. Goods valued at P137,500 are on consignment with a customer. These goods are not included in the inventory
figure.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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
c. P334,300
b. P340,500
d. P346,700
2. Accounts receivable
a. P1,454,300
c. P1,127,000
b. P1,282,000
d. P1,274,250
3. Inventory
a. P3,017,500
c. P2,930,000
b. P3,040,000
d. P2,505,000
4. Accounts payable
a. P2,395,450
c. P2,286,500
b. P2,307,950
d. P2,301,750
5. Current ratio
a. P2.00
c. P1.84
b. P1.83
d. P2.01
Suggested Solution:
Questions No. 1 to 4
Accounts
Receivable
Cash
Unadjusted
balances
Accounts
Payable
Inventory
P481,600
P1,127,000
P3,025,000
P2,100,500
AJE No. 1
(327,300)
155,000
-
-
AJE No. 2
180,000
-
-
186,200
AJE No. 3.a
-
-
137,500
-
AJE No. 3.b
-
-
108,750
108,750
AJE No. 3.c
-
-
(318,750)
-
AJE No. 3.d
-
-
65,000
-
AJE No. 3.e
-
-
-
Add (deduct):
(87,500)
Adjusted
balances
P334,300
P1,282,000
P3,017,500
Adjusting entries:
1)
Accounts receivable (P147,250/.95)
Sales
P155,000
180,050
Cash
P327,300
Sales discount (P147,250/.95 x .05)
2)
Cash
7,750
P180,000
Purchase discount
6,200
Accounts payable
P186,200
3.a) Inventory
P137,500
Cost of sales
3.b) Inventory
P137,500
P108,750
Accounts payable
3.c) Cost of sales
P108,750
P318,750
Inventory
3.d) Inventory
P318,750
P 65,000
Cost of sales
3.e) Accounts payable
P 65,000
P 87,500
Cost of sales
P 87,500
3.f) No adjusting entry
Question No. 5
Current assets
Cash
P
334,300
P2,307,950
Accounts receivable
1,282,00
0
Inventory
3,017,50
0
P4,633,80
0
Divide by current liabilities
Accounts payable
2,307,95
0
Accrued expenses
2,523,450
215,500
Current ratio
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
P 650,000
Work in process
1,200,000
Finished goods
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.
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
P24,000
Less refinishing costs
6,800
Net realizable value
17,200
Less normal profit
3,200
Valuation of repossessed inventory
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%)
P 4,800
Accounts receivable (P24,000 – P4,800)
Sales – Repossessed inventory
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)
P51,200
Trade-in inventory (see no. 4)
4,800
Amount to be recorded as sales
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.
Total
Contract
Price
Proje
ct
Billings Through
12/31/06
Collections Through 12/31/06
Contract Costs
Incurred Through
12/31/06
Estimated
Additiona
l Costs to
Complete
P1,200,000
P 800,000
P 720,000
P 992,000
P 268,000
B
1,400,000
440,000
420,000
271,200
1,084,800
C
1,120,000
1,120,000
1,020,000
744,000
-
D
800,000
140,000
100,000
492,000
348,000
820,000
800,000
740,000
A
E
960,000
P5,420,000
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
Estimated
gross
profit
(loss)*
Percentage of
completion**
Realized
gross profit
(loss)
A
(P60,000)
not applicable
(P60,000)
B
44,000
20.00%
8,800
C
376,000
100.00%
376,000
D
(40,000)
not applicable
(40,000)
E
160,000
92.50%
148,000
Project
Total
P432,800
* (Total contract price - Total estimated costs)
** (Costs incurred through Dec. 31, 2006 / Total estimated costs)
Question No. 2
Proje
ct
Costs incurred
through
12/31/06
Realized
gross
profit
(loss)
Constructio
n
in Progress
A
P992,000
(P60,000)
P 932,000
B
271,200
8,800
280,000
D
492,000
(40,000)
452,000
E
740,000
148,000
888,000
Total
P2,552,000
Question No. 3
Construction
in Progress
Progress
Billings
Net
A
P 932,000
P 800,000
P132,000
D
452,000
140,000
312,000
E
888,000
820,000
68,000
P2,272,000
P1,760,000
P512,000
Projec
t
Total
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
P 79,200
300 dozens “Class B” @ P360
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)
P2,160,000
Divide by total sales price:
Class A (6,000 x 60% = 3,600 x
P500)
P1,800,0
00
Class B (6,000 x 40% = 2,400 x
P250)
600,000
2,400,000
Cost ratio
90%
Class A (P1,800,000 x 90%)
Class B (P600,000 x 90%)
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
Question No. 3
Class A (220 x P500 x 90%)
P 99,000
Class B (300 x P250 x 90%)
67,500
Inventory, 12/31/06
P166,500
Question No. 4
Total cost of production (6,000 dozens x P360)
Less inventory, 12/31/06
Cost of sales
Question No. 5
P2,160,000
166,500
P1,993,500
Sales of Class A [(3,600 - 220) x P500]
P1,690,000
Sales of Class B [(2,400 - 300) x P250]
525,000
Total sales
2,215,000
Less cost of sales
1,993,500
Gross profit
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
P 720,200
Raw materials purchases
5,232,800
Direct labor
4,900,000
Manufacturing overhead applied (150% of direct labor)
7,350,000
Finished goods inventory, 1/1/2006
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
P
976,800
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
P5,232,80
0
b) Data with respect to quantities are as follows:
Units
Explanation
Raw materials
Work in process (80%
completed)
Finished goods
1/1/06
12/31/06
35,000
?
-
25,000
15,000
40,000
Sales, 200,000 units
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, 2006 is
a. P992,000
c. P 936,000
b. P888,000
d. P1,040,000
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
Raw materials, 1/1/06
35,000
Add Purchases
265,000
Raw materials available for use
300,000
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
50,000
250,000
25,000
225,000
15,000
Total goods available for sale
240,000
Less finished goods, 12/31/06
40,000
Goods sold
Raw materials, 12/31/06 (50,000 units x P20.80)
200,000
P1,040,000
Question No. 2
Raw materials [(10,000 units x P20.80) + (15,000 units
x P20.40)]
P 514,000
Direct labor (25,000 units x 80% x P20a)
400,000
Factory overhead (25,000 units x 80% x P30b)
600,000
Work in process, 12/31/06
P1,514,000
Labor unit cost (P4,900,000/245,000* units)
a
P20
Overhead unit cost (P7,350,000/245,000* units)
b
P30
*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%)
185,00
0
40,000
Started, and in process (25,000 units x 80%)
20,000
Total
245,00
0
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
P 720,200
Add purchases
5,232,800
Raw materials available for use
5,953,000
Less raw materials, 12/31/06 (see no. 1)
1,040,000
Direct materials used
4,913,000
Direct labor
4,900,000
Factory overhead
7,350,000
Total manufacturing cost
17,163,000
Add work-in-process, 1/1/06
-
Total cost placed in process
17,163,000
Less work-in-process, 12/31/06 (see no. 2)
1,514,000
Cost of goods manufactured
15,649,000
Add finished goods, 1/1/06
1,240,000
Total goods available for sale
16,889,000
Less finished goods, 12/31/06 (see no. 3)
2,812,000
Cost of goods sold
P14,077,000
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:
PANS
May 1, beginning inventory
KETTLES
No. of units
Unit cost
No. of units
Unit cost
10,000
P 60
6,000
P 40
9,000
P 42
Purchases:
May 15
14,000
65
May 25
6,000
75
Sales for the month
20,000
(@ P80)
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. Both 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
c. P600,000
b. P653,300
d. P612,000
2. Total cost of Kettles as of May 31 is
a. P210,000
c. P200,000
b. P206,000
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
P260,000
6,000 units @ P75
450,000
Total cost of Pans
P710,000
Question No. 2
Total cost of Kettles (5,000 units @ P42)
P210,000
Question No. 3
Item
Unit
s
Unit
Cost
NRV
*
Pans
4,00
0
P65
P61.2
0
6,00
0
75
5,00
0
42
Kettles
Inventory
Amount**
P244,800
367,200
61.20
168,300
33.66
P780,300
* Estimated selling price – Estimated cost to sell
** Lower of cost or NRV
Question No. 4
Total cost of inventory (P710,000 + P210,000)
P920,000
Less inventory value (see no. 3)
780,300
Required allowance for inventory writedown
139,700
Less allowance, May 1 (6,000 x P0.40)
2,400
Loss on inventory writedown for May
P137,300
Question No. 5
Pans:
10,000 units @ P60
P600,000
10,000 units @ P65
650,000
Kettles:
6,000 units @ P40
240,000
P1,250,000
4,000 units @ P42
168,000
Total cost of sales
408,000
P1,658,000
Alternative computation:
Inventory, 5/1:
Pans (10,000 units x P60)
P600,000
Kettles (6,000 units x P40)
240,000
P 840,000
Add purchases:
Pans [(14,000 units x
P65) + (6,000 x P75)]
1,360,000
Kettles (9,000 units x P42)
378,000
1,738,000
Total goods available for
sale
2,578,000
Less inventory, 5/31 (at cost)
Cost of sales, before
inventory writedown
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
P1,344,000
Sales for the fiscal year ended June 30, 2006
1,536,000
Purchases for eleven months ended May 31, 2006 (before audit
adjustments)
1,080,000
Purchases for the fiscal year ended June 30, 2006
1,280,000
Inventory, July 1, 2005
140,000
Physical inventory, May 31, 2006
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. Product was shipped in July 2006.
(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
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
P1,344,000
Less cost of sales for 11
months ended 5/31/06:
Inventory, July 1, 2005
P 140,000
Add adjusted purchases:
Unadjusted
P1,080,000
Item no. 1
12,000
Item no. 2
1,088,000
(4,000)
Goods available for sale
1,228,000
Less inventory, 5/31/06
220,000
1,008,000
Gross profit
336,000
Divide by sales for 11
months ended 5/31/06
1,344,000
Gross profit rate for 11
months ended 5/31/06
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
P1,536,000
1,344,000
192,000
16,000
176,000
Multiply by cost ratio (100% - 25%)
75%
Cost of sales with profit
Add cost of sales without profit
Total cost of sales for June, 2006
132,0000
16,000
P 148,000
Question No. 3
Inventory, 7/1/05
P 140,000
Add adjusted purchases:
Unadjusted
P1,280,0
00
Item no. 2
1,276,000
(4,000)
Total goods available for sale
1,416,000
Less cost of sales:
Sales without profit
16,000
Sales with profit
[(P1,536,000 - P16,000) x 75%]
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. The material was valued at P750,000 and the finished goods at P620,000.
The inventories on January 1, 2006 consisted of:
Materials
P
310,00
0
Goods in process
1,215,0
00
Finished goods
1,700,0
00
Total
P3,225,
000
A review of the accounting records disclosed that the sales and gross profit on sales for the last three years were:
Sales
Gross
profit
2003
P8,000
,000
P2,400,
000
2004
7,600,0
00
2,215,0
00
2005
5,000,0
00
1,776,0
00
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
c. P3,925,000
b. P973,500
d. P4,375,000
3. Total cost of goods manufactured
a. P3,133,500
c. P 854,400
b. P 973,500
d. P3,014,400
4. Inventory of goods in process lost
a. P 791,500
c. P 119,100
b. P1,360,600
d. P2,951,500
Suggested Solution:
Question No. 1
2003
2004
2005
Gross profit
P2,400,000
P2,215,0
00
P1,776,00
0
Divide by
Sales
P8,000,000
P7,600,0
00
P5,000,00
0
30.00%
29.14%
35.52%
Gross profit
rate
Average gross profit rate
31.55%
Questions No. 2 to 4
Raw materials, 1/1/06
P 310,000
Purchases
1,250,000
Freight-in
100,000
Raw materials available for use
1,660,000
Raw materials, 3/31/06
(750,000)
Raw materials used
Direct labor
Factory overhead (P1,000,000 x 80%)
910,000
1,000,000
800,000
Total manufacturing cost
2,710,000
Work-in-process, 1/1/06
1,215,000
Total cost placed in process
3,925,000
(
2
)
(2,951,500)
(
4
)
973,500
(
3
)
Less work-in-process, 3/31/06 (squeeze)
Cost of goods manufactured
Finished goods, 1/1/06
1,700,000
Total goods available for sale
2,673,500
Less finished goods, 3/31/06
(620,000)
Cost of goods sold (P3,000,000 x 68.45%)
P2,053,500
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
Cost
Retail
P1,987,200
P2,760,000
Sales
7,812,000
Purchases
4,688,640
Freight in
94,560
6,512,000
Mark ups
720,000
Mark up cancellations
120,000
Markdown
240,000
Markdown cancellations
40,000
Villasis Corp. uses the retail inventory method in estimating the values of its inventories and costs.
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
c. P5,357,614
b. P5,494,812
d. P4,685,117
Suggested Solution:
Question No. 1
Cost
Retail
P1,987,200
P2,760,000
Purchases
4,688,640
6,512,000
Freight in
94,560
Beginning inventory
Net mark up (P720,000 - P120,000)
720,000
Net mark down (P240,000 - P40,000)
_________
__
120,000
Goods available for sale
P6,770,400
P9,672,000
Cost ratio (P6,770,400/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
P6,770,400
1,302,000
Estimated cost of sales
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.
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.
6.
d. Completeness
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 cut-off 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