Audit of Inventory

Exercises - Analysis of Transactions

1. Moneba Company bought merchandise on January 2, 2006 from Lynn Company costing
P15,000; terms, less 20%, 20% down payment, balance 2/10, n/30. Two days after,
P2,000 worth of merchandise was returned due to wrong specification. Moneba
Company paid the account within the discount period. How much Moneba Company
paid to Lynn Company?
a. P 7,600 b. P 7,448 c. P 7,408 d. P 7,360

Answer - P 7,448
Buyer Seller
Purchases 12,000 Accounts Receivable 9,600
Cash 2,400 Cash 2,400
Accounts Payable 9,600 Sales 12,000
Accounts payable 2,000 Sales 2,000
Purchases 2,000 Accounts Receivable 2,000
Accounts payable 7,600 Cash 7,448
Purch. Disc. 152 Sales Discount 152
Cash 7,448 Accounts Receivable 7,600

2. Merchandise shipped fob destination to customer was made on January 5, 2006 for
P25,000. The customer issued P10,000 12% 30-day note and the balance 2/10, n/30
on January 10, 2006, the date the goods were received. The customer made a partial
payment on January 15, 2006 for P5,000. Payment was made within the discount
period. How much discount was granted?
a. P 0 b. P 200 c. P 300 d. P 500

Answer - P 300
Buyer Seller
Jan . 5 No Entry Jan. 5 No Entry
Jan. 10 Purchases 25,000 Jan. 10 Notes Receivable 10,000
Notes payable 10,000 Accounts Receiv. 15,000
Accounts pay. 15,000 Sales 25,000
Jan. 15 Accounts pay. 5,000 Jan 15 Cash 5,000
Cash 5,000 Accounts receiv. 5,000
Date of Payment:
Accounts pay. 10,000 Cash 9,700
Cash 9,700 Sales discount 300
Purchase discount 300 Accounts reciev. 10,000
Discount : P15,000 x 2% = P300

3. On January 10, 2006, Lao Company sold merchandise on account fob destination to
Febryan Co. for P20,000. Febryan Co. paid the freight cost of P1,500 to be deducted
from its account. How much Febryan Company paid to Lao Company?
a. P 21,500 b. P 20,000 c. P 19,600 d. P 18,500
Answer - P 18,500
Seller Buyer
Accounts receivable 18,500 Purchases 20,000
Transportation expense 1,500 Accounts payable 18,500
Sales 20,000 Cash 1,500
Cash 18,500 Accounts payable 18,500
Accounts receivable 18,500 Cash 18,500

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4. Goods worth P12,000 was shipped on account (2/10, n/30) to Ibuyan Company on
January 15, 2006 from Rubenil Company The term of the shipment was fob shipping
point. Rubenil Company paid freight of P950. On January 12, 2006, P2,500 worth of
merchandise was received by Rubenil Co. from Ibuyan Co. due to wrong specification.
Ibuyan Company made a partial payment of P5,000. How much is the subsequent
collection of Rubenil Company from Ibuyan Company assuming Ibuyan Company paid
within the discount period?
a. P 5,450 b. P 5,260 c. P 4,500 d. P 4,410

Answer- P 5,260
Buyer Seller
Purchases 12,000 Accounts receivable 12,950
Freight-in 950 Sales 12,000
Accounts payable 12,950 Cash 950
Account payable 2,500 Sales 2,500
Purchases 2,500 Accounts receivable 2,500
Accounts payable 5,000 Cash 5,000
Cash 5,000 Accounts receivable 5,000
Accounts payable 5,450 Cash 5,260
Cash 5,260 Sales discount 190
Purchase discount 190 Accounts receivable 5,450
 Discount – P12,000 – P2,500 = P9,500 x 2% = P190

5. Gabutero Company purchased merchandise on account for P10,000 from Lilibeth

Company with term shipping point. The freight cost was P1,500 and was paid by
Gabutero Company Upon the arrival of the carrier, it found out that the merchandise
got lost while in transit. The carrier company accepted the loss as their fault. How
much is the subsequent collection of Lilibeth Company from Gabutero Company?
a. P 11,500 b. P 10,000 c. P 8,500 d. P 0

Answer - P 10,000
Buyer Seller
Purchases 10,000 Accounts receivable 10,000
Freight-in 1,500 Sales 10,000
Accounts payable 10,000
Cash 1,500
Claims receivable 11,500
Purchases 10,000
Freight-in 1,500

6. Chan Company bought from Casas Company a second-hand machinery for the use of its
plant for P50,000 A 50% down payment was made and balance 2/10, n/30. Freight
cost was paid by Chan Company for P2,000. Casas Company acquired the machinery
three years ago at P60,000 with 10 year life. (Straight-line method is use in computing
Depreciation). Two days after purchase, Casas Company granted the request of Chan
Company for a P5,000 price adjustments because of some defects of the machinery.
Cash paid by Chan Company to Casas Company assuming the account was paid within
the discount period is
a. P 20,400 b. P 20,000 c. P 19,600 d. P 19,000

Answer - P 19,600
Buyer Seller
Machinery 50,000 Cash 25,000
Cash 25,000 Accounts recei. – others 25,000
Accounts payable – others 25,000 Accum. depreciation 18,000
Machinery 60,000
Gain on sale 8,000
Machinery 2,000
Cash 2,000

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 Accounts payable – others 5,000 Gain on sale 5,000
Machinery 5,000 Accounts recie. – others 5,000
Accounts payable – others 20,000 Cash 20,000
Cash 20,000 Accounts recie – others 20,000
If paid within the discount period:
Accounts payable – others 20,000 Cash 19,600
Cash 19,600 Gain on sale 400
Machienry 400 Accounts payable – others 20,000

Problem
On January 1, 2007, Arcenith Corporation engaged an independent CPA to perform an audit
for the year ended December 31, 2006. The company uses a periodic inventory system.
The CPA did not observe the inventory count on December 31, 2006, as a result, a special
examination was made of the inventory records.

The financial statements prepared by the company (uncorrected) showed the following:
ending inventory, P72,000; accounts receivable, P60,000; accounts payable, P30,000;
sales, P400,000; net purchases, P160,000, and pretax income P51,000.

The following data were found during the audit:

1. Merchandise received on January 2, 2007, costing P800 was recorded on December 31,
2006. An invoice on hand showed the shipment was made fob supplier’s warehouse on
December 31, 2006. Because the merchandise was not on hand at December 31, 2006,
it was not included in the inventory.

2. Merchandise that cost P18,000 was excluded from the inventory, and the related sale for
P23,000 was recorded. The goods had been segregated in the warehouse for shipment;
there was no contract for sale but a “tentative order by phone”.

3. Merchandise that cost P10,000 was out on consignment for Valentin Distributing
Company and was excluded from the ending inventory. The merchandise was recorded
as a sale P25,000 when shipped to Valentin on December 29, 2006.

4. A sealed packing case containing a product costing P900 was in Arcenith’s shipping room
when the physical inventory was taken. It was included in the inventory because it was
marked “Hold for customer’s shipping instructions.” Investigation revealed that the
customer signed a purchase contract dated December 18, 2006, but that case was
shipped and the customer billed on January 10, 2007. A sale for P1,500 was recorded
on December 31, 2006.

5. A special item, fabricated to order for a customer, was finished and in the shipping room
on December 31, 2006. The customer has inspected it and was satisfied. The customer
was billed in full on that sale in the amount of P5,000. The item was included in
inventory at cost, P1,000 because it was shipped on January 4, 2007.

6. Merchandise costing P15,600 was received on December 28, 2006. The goods were
excluded from inventory, and a purchase was not recorded. The auditor located the
related papers in the hands of the purchasing; they indicated, “On consignment from
Roselyn Company”.

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7. Merchandise costing P2,000 was received on January 8, 2007, and the related purchase
invoice recorded January 9. The invoice showed the shipment was made on December
29, 2006, fob destination. The merchandise was excluded from the inventory.

8. Merchandise that cost P6,000 was excluded from the ending inventory and not recorded
as a sale for P7,500 on December 31, 2006. The goods had been specifically
segregated. According to the terms of the contract of sale, ownership will not pass until
actual delivery.

9. Merchandise that cost P15,000 was included in the ending inventory. The related
purchase has not been recorded. The goods had been shipped by the vendor fob
destination, and the invoice was received on December 30, 2006. The goods was
received on January 5, 2007.

10. Merchandise in transit that cost P7,000 was excluded from inventory because it was not
on hand. The shipment from the vendor was fob shipping point. The purchase was
recorded on December 29, 2006, when the invoice was received.

11. Merchandise in transit that cost P13,000 was excluded from inventory because it had not
arrived. Although the invoice had arrived, the related purchase was not recorded by
December 31, 2006. The merchandise shipped fob shipping point by the vendor.
12. Merchandise that cost P8,000 was included in the ending inventory because it was on
hand. The merchandise had been rejected because of incorrect specifications and was
being held for return to the vendor. The merchandise was recorded as a purchase on
December 26, 2006.

Question:
Based on your analysis and the information above, answer the following:

1. The adjusted balance of inventory at year-end is:

a. P 101,900 b. P 102,000 c. P 102,800 d. P 120,400

2. The adjusted balance of accounts receivable at year-end is:

a. P 10,500 b. P 12,000 c. P 35,000 d. P 37,000

3. The adjusted balance of accounts payable at year-end is:

a. P 43,000 b. P 35,000 c. P 30,000 d. P 22,000

4. The adjusted balance of Sales at year-end is:

a. P 377,000 b. P 352,000 c. P 350,500 d. P 347,000

5. The adjusted balance of Net Purchases at year-end is:

a. P 152,000 b. P 165,000 c. P 173,000 d. P 181,000

6. The adjusted balance of Pre-tax income at year-end is:

a. P 27,300 b. P 29,000 c. P 29,800 d. P 35,800
Solution

Inventory Acnts. Receivable Acnts. Sales Net Pretax

end Payable Purchases ncome
Unadj. bal. 72,000 60,000 30,000 400,000 160,000 51,000
Item 1 800 800
Item 2 18,000 18,000

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 (23,000) (23,000) (23,000)
Item 3 10,000 10,000
(25,000) (25,000) (25,000)
Item 4 (1,500) (1,500) (1,500)
Item 5 (1,000) (1,000)
Item 6 - - - - - -
Item 7 - - - - - -
Item 8 6,000 6,000
Item 9 (15,000) (15,000)
Item 10 7,000 7,000
Item 11 13,000 13,000
13,000 13,000 (13,000)
Item 12 (8,000) (8,000)
- - (8,000) (8,000) 8,000
Adjusted 102,800 10,500 35,000 350,500 165,000 27,300
balance

Answer:
1. c 2. a 3. b 4. c 5.b 6. a