ACCOUNTING 502 Short-term, A.Y.

2018 - 2019

AUDIT OF INVENTORY
PROBLEM 1
Your audit client presented the following information on December 31, 2018: Net purchases (all on account) – P2,400,000; Inventory,
December 31, 2018 – P350,000. The audited balance of inventory on December 31, 2017 is P260,000. Additional information:
a. The December 31, 2018 inventory balance is based on the inventory count conducted on the entity’s warehouse. All
inventories in the warehouse at that date were included, while inventories not in the warehouse were not included in the
count.
b. A purchase of inventory for P6,000 was recorded on December 28, 2018 and the goods are still in transit as of December 31.
The related freight term is FOB Destination.
c. Goods (costing P20,000) consigned by your client to another entity are not yet sold as of December 31, 2018. No journal entry
was prepared by your client upon the transfer of goods to the consignee.
d. Goods costing P8,000 were sold for P15,000 on December 28, 2018. The freight term is FOB Shipping Point.
e. A purchase of goods costing P13,500 on December 31, 2018 was not recorded until the receipt of the goods on January 3,
2019. The term is FOB Shipping Point.
f. Goods consigned to your client was recorded as a purchase upon receipt of the goods on December 10, 2018. The cost of the
goods is P30,000. The amount of inventory left in the warehouse as of December 31, 2018 is P12,000.
g. Goods costing P17,500 was sold for P22,000 on December 30, 2018; term is FOB Destination. The sale was recorded on
January 5, 2019 when the goods were already received by the customer.

Requirements:
1. What is the correct net purchases for 2018?
2. What is the correct balance of inventory as of December 31, 2018?
3. Prepare the adjusting journal entries to reflect the correct amounts, assuming that the books are still open.

PROBLEM 2
You are engaged in an audit of financial statements of Stark Corporation for the year ended October 31, 2018 and have observed the
physical inventory count on October 30, 2018. All merchandise received up to and including October 30, 2018 has been included in
the physical count which totalled to P354,500. As a result of the count, the following cost of sales schedule has been prepared by the
client’s accountant:
Stark Corporation
Schedule of Cost of Sales
For the period ended October 31, 2018

Inventory, November 1, 2017 235,000

Net purchases, unadjusted 2,543,900
Cost of goods available for sale 2,778,900
Less: Inventory per count 354,500
Cost of sales 2,424,400

The following list of invoices is for the purchases of merchandise and are entered in the purchase journal for the months of October
and November 2018:
OCTOBER
Receiving Report No. Amount Freight Terms Date of Shipment Date of Invoice Date Goods were Received
11201 14,400 Destination Oct. 18 Oct. 19 Oct. 21
11202 8,800 Destination Oct. 19 Oct. 20 Oct. 22
11203 18,500 Shipping Pt. Oct. 20 Oct. 20 Oct. 30
11204 7,800 Destination Oct. 24 Oct 25 Nov. 3
11205 5,000 Destination Oct. 28 Nov. 4 Oct. 29
11206 20,500 Shipping Pt. Oct. 24 Oct. 25 Oct. 30
11207 18,400 Shipping Pt. Oct. 25 Oct. 25 Oct. 30
11208 24,200 Destination Oct. 20 Oct. 21 Oct. 30
11209 69,200 Destination Oct. 28 Oct. 29 Oct. 30

NOVEMBER
Receiving Report No. Amount Freight Terms Date of Shipment Date of Invoice Date Goods were Received
11210 4,000 Destination Oct. 25 Oct. 29 Oct. 31
11211 9,700 Destination Oct. 25 Oct. 30 Oct. 30
11212 12,840 Shipping Pt. Oct. 27 Oct. 27 Oct. 30
11213 14,440 Shipping Pt. Nov. 1 Nov. 2 Nov. 3
11214 25,640 Shipping Pt. Oct. 21 Oct. 23 Nov. 3
11215 28,400 Shipping Pt. Oct. 23 Oct. 23 Nov. 3
11216 14,200 Destination Oct. 26 Oct. 27 Nov. 3

Requirement: What is the correct cost of sales for the period ended October 31, 2018?
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ACCOUNTING 502 Short-term, A.Y. 2018 - 2019

PROBLEM 3
You were engaged to audit the financial statements of Goblin Corporation as of and for the year ended December 31, 2018.
Information directly obtained from your client’s working trial balance are as follows:

Accounts receivable 950,000

Inventory, January 1 544,500
Net purchases 2,450,000
Accounts payable 430,000
Sales 3,940,000

Goblin conducted an inventory count on its warehouse on December 31, 2018 and determined its inventory balance to be P365,000.
Based from your audit procedures, you were able to ascertain the following:
• Inventory costing P55,000 (sold for P90,000) were shipped on December 27, 2018 with freight term FOB Destination. The sale
was recorded upon shipment. The goods were received by the customer on January 2, 2019.
• Goods costing P12,000 were sold for P18,000 on December 30, 2018. The term is FOB Destination. The sale was recorded on
January 3, 2019 when the goods were received by the customer.
• Goods costing P8,500 were purchased on December 28, 2018; term is FOB Shipping Point. The purchase was recorded upon
receipt of the goods on January 4, 2019.
• Goods costing P9,000 were sold for P15,000 on December 30, 2018; term is FOB Shipping Point. The sale was recorded on
January 2, 2019.
• Goods consigned by Grim Corporation to Goblin were initially recorded as purchases. The cost of the goods is P20,000. The
goods were received on December 20, 2018; P2,000 still remains in the warehouse by the end of 2016.
• Goods consigned to Guardian Co. costing P15,000 were immediately recorded as sales (selling price is P25,000). Records from
the consignee revealed that goods costing P3,000 still remains by the end of 2018.
• Goods costing P13,500 were purchased on December 29, 2018; term is FOB Shipping Point. The purchase was recorded on
the same date. The goods were received by the customer on January 5, 2019.
• A purchase was recorded on December 27, 2018 for goods costing P6,000. The term is FOB Destination. The goods arrived on
January 2, 2019.

Requirements:
1. What is the adjusted balance of accounts receivable as of December 31, 2018?
2. What is the adjusted balance of inventory as of December 31, 2018?
3. What is the correct amount of net purchases for 2018?
4. What is the adjusted balance of accounts payable as of December 31, 2018?
5. What is the correct amount of sales for 2018?
6. What is the gross profit rate for 2018?

PROBLEM 4
In testing the sales cut-off for the CAREFUL CORPORATION in connection with an audit for the year ended October 31, 2018, you find
the following information. A physical inventory was taken as of the close of business on October 31, 2018. All customers are within a
three-day delivery area of the company’s plant. The unadjusted balances of Sales and Inventories are P7,500,000 and P330,000,
respectively.

Invoice Number FOB Terms Date Shipped Date Recorded Sales Cost
6671 Destination Oct. 20 Oct. 31 P 3,000 P 2,700
6672 Shipping Point Oct. 31 Nov. 2 7,500 6,000
6673 Shipping Point Oct. 25 Oct. 31 5,400 3,600
6674 Destination Oct. 31 Oct. 29 12,600 9,300
6675 Destination Oct. 31 Nov. 2 27,600 24,000
6676 Shipping Point Nov. 2 Oct. 23 19,500 15,300
6677 Shipping Point Nov. 5 Nov. 6 22,500 17,400
6678 Destination Oct. 25 Nov. 3 11,700 6,000
6679 Shipping Point Nov. 4 Oct. 31 25,800 24,600
6680 Destination Nov. 5 Nov. 2 15,000 12,000

Based on the foregoing information, compute for the October 31, 2016, adjusted balances of the following accounts:
1. Sales
A. P7,461,300 C. P7,449,600
B. P7,455,900 D. P7,487,100
2. Inventories
A. P354,000 C. P348,000
B. P363,300 D. P357,300

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ACCOUNTING 502 Short-term, A.Y. 2018 - 2019

PROBLEM 5
Taken Corporation is currently preparing its interim financial statements as of and for the interim period ended September 30, 2018.
The following information were obtained:

Inventory, January 1, 2018 1,200,000

Purchases, January 1 to September 30 800,000
Purchase returns, January 1 to September 30 25,000
Purchase discounts, January 1 to September 30 35,000
Freight in 20,000
Sales 1,395,000
Sales returns 10,000
Sales discounts 40,000
Employee discounts 15,000

1. What the correct net sales for inventory estimation purposes?

2. If the company is using a gross profit rate based on sales of 30%,
a. What is the cost of goods sold for the interim period?
b. What is the estimated ending inventory as of the end of the interim period?
3. If the company is using a gross profit rate based on cost of 40%,
a. What is the cost of goods sold for the interim period?
b. What is the estimated ending inventory as of the end of the interim period?

PROBLEM 6
EIGHTEEN INC. was organized on January 1, 2017. On December 31, 2018, the company lost most of its inventory in a warehouse fire
just before the year-end count of Inventory was to take place. The company’s records disclosed the following data:

2017 2018
Inventory, January 1 P 0 P 204,000
Purchases 860,000 692,000
Purchase returns and allowances 46,120 64,600
Sales 788,000 836,000
Sales returns and allowances 16,000 20,000

On January 1, 2018, Eighteen’s pricing policy was changed so that the gross profit rate would be three percentage points higher than
the one earned in 2017. Salvaged undamaged merchandise was marked to sell at P24,000 while damaged merchandise market to sell
at P16,000 had an estimated realizable value of P3,600.

1. What is the company’s gross profit rate beginning January 1, 2018?

A. 24% C. 17%
B. 21% D. 20%
2. How much is the inventory fire loss?
A. P189,400 C. P146,920
B. P183,640 D. P254,000

PROBLEM 7
The warehouse of your client, Minamalas Corporation, was destroyed by fire on October 2, 2018. All of the inventory stored in the
warehouse were also destroyed, and you were engaged to estimate the fire loss related to the inventory. Retrieved were the records
pertaining to the inventory of your client, which shows the following information covering January 1 to September 30:

Purchases 1,766,500
Purchase discounts 22,500
Purchase returns 3,000
Sales 2,518,000
Sales returns 20,000
Sales discounts 8,000
Discounts granted to employees 2,000

You have determined that the appropriate gross profit rate to be applied in 2018 is based on the average gross profit rate for the past
three years (round gross profit rate to the nearest percentage; i.e. xx%). A summary of the previous performance of your client (for
2015, 2016, and 2017) is presented below:
2015 2016 2017
Beginning inventory 424,830 516,630 525,520
Net purchases 1,322,300 1,433,890 1,500,430
Ending inventory 516,630 525,520 524,000
Sales 2,000,000 2,439,000 2,500,800
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ACCOUNTING 502 Short-term, A.Y. 2018 - 2019

As of the date of fire, inventory costing P58,000 is still in transit, including a purchase made in October 1 for P12,000 which was not
yet recorded by your client. The term is FOB shipping point. Damaged inventory with cost of P3,000 was sold at cost after the fire. No
other transactions occurred from September 30 to October 2.

1. What is the average cost ratio?

2. What is the entity’s net sales for the purpose of determining the loss from the fire?
3. What is the estimated inventory as of October 2, 2018 before the fire?
4. What is the estimated loss on fire?

PROBLEM 8
In the evening of December 31, 2018, an explosion destroyed the whole warehouse of your client, KABOOM Corporation, before an
inventory count can be conducted. You are now tasked to ascertain the loss from the incident. To aid you in determining such loss,
you reviewed the following relevant accounts:

Accounts Receivable
The beginning balance of your client’s accounts receivable is P3,545,000. On January 3, 2019, the replies from the confirmation
requests sent to the six (6) customers with outstanding balances were received. The December 31, 2018 balance being confirmed is
P4,300,000, and the replies are noted as follows:

Customer Per Ledger Per Reply Difference

Posporo, Inc. 1,254,600 1,204,600 50,000
Apoy Company 222,000 202,000 20,000
Fireworks Corporation 894,400 894,400 -
Sindi Corporation 169,000 169,000 -
Leebang Co. 760,000 760,000 -
Pfft Ltd. 1,000,000 1,000,000 -

You were able to ascertain that the difference between the amount per ledger and amount per reply for both Posporo and Apoy were
due to shipments made on December 30, 2018 recorded as sales. The term for the sales is FOB Destination, and are still in transit as
of December 31, 2018. The entity has been consistent in using its gross profit rate of 30%. Collection of accounts receivable for 2018
total to P9,005,600.

Allowance for Bad Debts

In your client’s trial balance, the unadjusted balance of allowance for bad debts is P59,205. This includes the interim provision of bad
debts expense based from 1% of the interim credit sales of P7,000,000, and a write-off for P99,420. The entity is consistent in using
percentage of accounts receivable in estimating its uncollectible accounts. You ascertained that this method, and the percentage used
by your client (which is unchanged) is reasonable.

Inventory
The January 1, 2018 balance of KABOOM’s inventory is P947,750. Purchases for the year total P8,700,000, and purchase discounts
total P110,000. On January 2, 2019, goods purchased costing P80,000 were received and were temporarily put in an open space in the
administrative building. KABOOM recorded the purchase upon receipt of the goods. These goods were shipped by the suppliers in
2018 FOB shipping point.

Cash Sales, Sales Returns, and Sales Discounts

Cash sales for the period total to P1,360,900. Actual sales returns for 2018, all from sales on account, total to P190,080; while sales
discounts total to P450,400. An estimate of 1% of gross credit sales will be returned in 2019.

1. What is the balance of KABOOM’s inventory as of December 31, 2018?

A. 150,000 B. 129,000 C. 80,000 D. none
2. How much is the estimated inventory loss from the explosion?
A. 2,390,050 B. 1,566,420 C. 1,486,420 D. 1,367,826

PROBLEM 9
SOUPIE, Inc., your audit client, is keeping a record of their inventory at cost with their corresponding selling price. Your client’s record
revealed the following information related to their inventory on September 30, 2018:

Cost Retail
Inventory, October 1, 2017 372,000 620,000
Purchases 3,110,000 4,760,000
Transportation in 55,000
Sales 4,872,000
Purchase return 27,000 45,000
Sales allowance 125,500
Purchase allowance 18,500

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ACCOUNTING 502 Short-term, A.Y. 2018 - 2019

Sales returns 355,000

Sales discounts 322,250
Purchase discounts 15,960
Normal breakages 50,500
Abnormal breakages 200,000 308,000
Discounts granted to employees 75,500
Departmental transfer out 135,500 175,000
Departmental transfer in 125,500 165,000
Mark ups 290,000
Mark downs 283,000
Mark up cancellations 40,000
Mark down cancellations 40,000

The company reported inventories per a physical count conducted on September 30 at P225,000. You ascertained that the count
conducted was adequately made by the client. You used the retail inventory method of estimating ending inventory to check whether
the amount per count is reasonable, and whether there is a shortage in the inventory.

Note: round off percentages to whole number (for instance, 78.43% is 78%).

Requirement: Compute for the cost of inventory shortage under

1. The conventional retail method
2. The average cost retail method
3. The FIFO retail method

PROBLEM 10
FIFTEEN CO. sells musical instruments. In your audit of the company’s financial statements for the year ended December 31, 2018,
you have gathered the following data concerning inventory. At December 31, 2017, the balance in Fifteen’s Inventory account was
P502,000, and the Allowance for Inventory Write-down had a balance of P32,000. The relevant inventory cost and market data at
December 31, 2018, are summarized in the schedule below.

Replacement Sales Net Realizable Normal

Cost Cost Price Value Profit
Guitars P 89,000 P 86,000 P 91,500 P 87,000 P 6,400
Xylophones 94,000 92,000 93,000 85,000 7,440
Trumpets 125,000 135,000 129,000 111,000 11,610
Violins 194,000 114,000 205,000 197,000 20,500
Total P 502,000 P 427,000 P 518,500 P 480,000 P 45,950

Requirements:
1. What is the proper balance in the Allowance for Inventory Write-down at December 31, 2018?
A. P75,000 C. P32,000
B. P22,000 D. P25,000
2. The adjusting entry on December 31, 2018, to arrive at the proper allowance balance should be
A. Allowance for Inventory Write-down 7,000
Gain on Inventory Recovery 7,000
B. Loss on Inventory Write-down 7,000
Allowance for Inventory Write-down 7,000
C. Allowance for Inventory Write-down 3,000
Gain on Inventory Recovery 3,000
D. Loss on Inventory Write-down 43,000
Allowance for Inventory Write-down 43,000

PROBLEM 11
The balances of the inventories of Turon Corporation are presented below:

Dec. 31, 2017 Dec. 31, 2018

Finished goods 815,000 780,000
Work-in-process 340,000 354,000
Raw materials 200,000 185,000

The allowance for inventory write-down for the finished goods as of December 31, 2017 is at P15,000.

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ACCOUNTING 502 Short-term, A.Y. 2018 - 2019

Audit notes:
• The entity purchased P1,200,000 worth of raw materials for 2018. 80% of the purchases were on account.
• P25,000 worth of raw materials are still in transit as of December 31, 2018. It was included in the ending inventory, but was
only recorded as purchase in January 5, 2019. The term is FOB shipping point.
• Factory overhead for the year total to P840,000, which is 20% more than the direct labor.
• The estimated selling price of the finished goods is P800,000 and the estimated cost to sell the goods is at 4% of its selling
price.
• The entity closes any inventory write-down to its cost of goods sold.

Requirements:
1. What is the required allowance for inventory write-down on December 31, 2018?
2. How much is the cost of goods sold for 2018?

PROBLEM 12
SEVENTEEN CORPORATION is a wholesale distributor of kitchen utensils. Unadjusted balances obtained from Seventeen’s accounting
records are as follows:
Vendor Terms Amount
Zonrox, Inc. Net 30 P 36,000
Yeba Corp. Net 30 28,000
Xak, Inc. Net 30 83,000
Wais Co. Net 30 -
Velma, Inc. Net 30 -

The following additional information was also obtained:

1. Inventory (based on physical count of goods in Seventeen’s warehouse at December 31) amounted to P432,000; Sales,
P2,600,000.
2. Goods held on consignment from Zonrox, Inc., the consignor, valued at P13,000 were included in the physical count of goods in
Seventeen’s warehouse at December 31, and in Accounts Payable balance as of December 31, 2016.
3. Goods costing P26,400 that were purchased from Wais Co. and paid for in December were sold in the last week of the current
year. The sale was properly recorded at P58,000 in December. Because the goods were in the shipping area of Seventeen’s
warehouse to be picked up by the customer, they were included in the physical count at December 31.
4. Retailers were holding goods costing P25,000 (retail price is P35,700) shipped by Seventeen under consignment term.
5. Goods were in transit from Velma, Inc. to Seventeen on December 31. The cost of these goods was P23,500, and they were
shipped FOB Shipping Point on December 28.

Based on the preceding information, compute the adjusted balances of the following:
1. Inventory
A. P417,600 C. P467,500
B. P416,100 D. P441,100
2. Accounts Payable
A. P134,000 C. P157,500
B. P136,500 D. P170,500
3. Sales
A. P2,600,000 C. P2,564,300
B.P2,635,700 D. P2,625,000

PROBLEM 13
The management of FOURTEEN, INC. has engaged you to assist in the preparation of year-end (December 31) financial statements.
You are told that on November 30, the correct Inventory level was 145,730 units.

During the month of December, sales totaled 138,630 units including 40,000 units shipped on consignment to AA Corp. A letter
received from AA indicates that as of December 31, it has sold 15,200 units and was still trying to sell the remainder. A review of the
December purchase orders to various suppliers shows the following:

Purchase Invoice Quantity Date Date

Order Date Date in Units Shipped Received Terms
12/31/16 01/02/17 4,200 01/02/17 01/05/17 FOB Destination
12/05/16 01/02/17 3,600 12/17/16 12/22/16 FOB Destination
12/06/16 01/03/17 7,900 01/05/17 01/07/17 FOB Shipping Point
12/18/16 12/20/16 8,000 12/29/16 01/02/17 FOB Shipping Point
12/22/16 01/05/17 4,600 01/04/17 01/06/17 FOB Destination
12/27/16 01/07/17 3,500 01/05/17 01/07/17 FOB Destination

Fourteen Inc. uses the “passing of legal title” for inventory recognition.

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ACCOUNTING 502 Short-term, A.Y. 2018 - 2019

Requirements:
1. Good purchased during December totaled
A. 11,600 units C. 19,500 units
B. 15,800 units D. 8,000 units
2. How many units were sold during December?
A. 138,630 units C. 98,630 units
B. 113,830 units D. 153,830 units
4. How many units should be included in Fourteen, Inc.’s inventory at December 31, 2016?
A. 18,700 units C. 43,500 units
B. 39,900 units D. 47,700 units
3. Purchase cutoff procedures should be designed to test whether all inventory
A. Purchased and received before year-end was paid for.
B. Ordered before year-end was received.
C. Purchased and received before year-end was recorded.
D. Owned by the company is in the possession of the company at year-end.
5. The audit of year-end physical inventories should include steps to verify that the client’s purchases and sales cutoffs were
adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was
not recorded as a:
A. Sale in the subsequent period.
B. Purchase in the current period.
C. Sale in the current period.
D. Purchase return in the subsequent period.