Audit of Inventories and Trade Payables BA 123 Exercise Set B

Problem 1: BA 123, Inc. (Inventory for a Manufacturing Industry)

Your client, BA 123, Inc. takes inventory on a cycle basis throughout the year. The following is an
inventory card for MockCPA, the latest PC game among the wealthy and bright kids of Manila.
MockCPA was developed to stimulate CPA board exam paranoia among its users. The
information presented below covers the month of November 2019:

Date Received Issued Balance Cost Received Issued Balance

1 Balance 15 100 1,500
2 Transfer 35 50 100 3500 5,000
from work-
in process
6 Sales 8 42 100 800 4,200
invoice #
137
11 Transfer 45 87 100 4,500 8,700
from work-
in process
13 Sales 9 78 100 900 7,800
invoice #
159
16 Sales 4 74 100 400 7,400
invoice #
173
20 Correction 10 84 100 1,000 8,400
per count

On November 14, 2019, a count of MockCPA was conducted with 88 as the resulting figure to
which you assented since you were present to observe the count. A correcting entry was
subsequently booked with credit to Inventory Over/Short. You further gathered the following
information:
1. Three of the units on hand on November 14, 2019 were part of the 9 units covered by Sales
Invoice No. 159. Each unit was sold for ₱200. The units were held pending shipment
instructions.
2. Sales invoice No. 137 was posted to the wrong card. The invoice actually was for 8 units of
Mock123Finals which carries a cost of ₱190 per unit. Each unit of Mock123Finals was sold
for ₱300. A physical inventory of Mock123Finals was found to be 8 units short and an
adjustment was accordingly made.
3. Although Sales invoice No. 173 was posted on November 16, 2019, the goods were actually
shipped before inventory count was made. Each unit was sold for ₱200.
4. The transfer from work in process on November 11, 2018 should have been for 54 units @
₱100. Work in process has not been fully inventoried.

REQUIRED:
1. Prepare a schedule computing the actual overage or shortage of MockCPA on November
14, 2019.

BA 123 – 2 Semester, S.Y. 2020-2021

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Audit of Inventories and Trade Payables BA 123 Exercise Set B

Problem 2: DUNWICH CORPORATION (Classification of Liabilities)

In the audit of the Dunwich Corporation’s financial statements at December 31, 2020, the chief
accountant of the said corporation provided the following information:

Notes payable:
Arising from purchase of goods ₱120,000
Arising from bank loans, on which marketable securities valued at 500,000
P600,000 have been pledged as security, due Dec. 31, 2021
Arising from advances by officers, due June 30, 2021 50,000
Reserve for general contingencies 400,000
Employees’ income tax withheld 20,000
Advances received from customers on purchase orders 64,000
Containers’ deposit from customers 50,000
Accounts payable arising from purchase of goods, net of debit balances 170,000
₱30,000
Accounts receivable, net of credit balances ₱40,000 360,000
Cash dividends payable 80,000
Stock dividends payable 100,000
Dividends in arrears on preferred stock, not yet declared 200,000
Convertible bonds, due January 31, 2022 1,000,000
First mortgage serial bonds, payable in semi-annual installments of 2,000,000
₱50,000, due April 1 and October 1 of each year
Overdraft with Allied Bank 90,000
Cash in bank balance with PNB 390,000
Estimated damages to be paid as a result of unsatisfactory performance 160,000
on a contract
Estimated expenses on meeting guarantee for service requirements on 120,000
merchandise sold
Accrued interest on bonds payable 360,000
Common stock warrants outstanding 120,000
Common stock options outstanding 210,000
Unused letters of credit 80,000
Deficiency income tax assessment being contested 500,000

REQUIRED:
Based on your audit of the above items, compute for the following as of December 31, 2020:
1. Total current liabilities to be reported in the 2020 Financial Statements of Dunwich
Corporation.
2. Total liabilities to be reported in the 2020 Financial Statements of Dunwich Corporation.

BA 123 – 2 Semester, S.Y. 2020-2021

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Audit of Inventories and Trade Payables BA 123 Exercise Set B

Problem 3: JOLINA’S MUSIC EMPORIUM (Current Liabilities)

Jolina’s Music Emporium carries a wide variety of musical instruments, sound reproduction
equipment, and sheet music. The company started operations in January 1, 2020. The following
pertain to some of the liabilities of Jolina at year-end 2020:

1. Cut-off procedures revealed that a ₱50,000 advertising bill was received last January 10,
2021, comprising costs of ₱37,500 for advertisements in December 2020 and ₱12,500
for January 2021. No accrual was posted as of December 31, 2020.
2. A store lease, effective January 1, 2020, calls for fixed rent of ₱120,000 per month,
payable one month from the effective date and monthly thereafter. In addition, rent equal
to 5% of net sales over Php6,000,000 per calendar year is payable every January 31 of
the following year. Sales for the year amounted to ₱7,500,000. The company has not yet
made any record to accrue its rent expense.
3. Jolina has a bonus agreement with the company under which she receives 10% of
audited net income after bonuses each year. Since net income is yet to be determined,
the bonus has not been provided for.
4. The company sold 70,000 units of sheet music. Each sheet music comes with a coupon,
which if submitted with ₱50, entitles the customer to a free mixed song CD. Jolina pays
₱70 for the CDs. Jolina estimates that 70% of the coupons will be redeemed. Actual
redemption amounted to 30,000 coupons for the year. The accountant expensed CDs
given out as redeemed at cost net of cash remitted. For the year, Jolina bought 450,000
mixed song CDs.
5. Musical products are sold with a one-year warranty for replacement parts and labor. The
estimated warranty cost is 10% of musical product sales which comprise 40% of total
sales. Like coupons, warranty expense of ₱64,000 was recorded as replacement parts
are requisitioned and as job time tickets of personnel are submitted. Of this amount, the
cost of replacement parts used were ₱40,000 and the cost of labor was estimated at
₱24,000.
6. The accounts payable ledger included debits amounting to ₱240,000 representing
overpayment to a supplier.
7. The unpaid voucher files were examined. The following payables and amounts were
traced from the accounts payable GL to the unpaid vouchers:
a) A Company – ₱224,000 merchandise shipped on December 31, 2020, FOB
destination. The inventory was received on January 10,2021. The Company uses
periodic inventory.
b) B Company – ₱192,000; merchandise shipped on December 26, 2020, FOB
shipping point, received on January 16, 2021.
c) C Super Services – ₱144,000; for janitorial services over a three month period
ending January 31, 2021.
d) Meralco – ₱67,200; for electric bills covering the period December 15 to January
15, 2021.
8. Unaudited net income, and current liabilities amounted to ₱1,000,000 and ₱5,350,000,
respectively.

REQUIRED:
1. Proposed audit adjustments from the foregoing data.
2. Audited net income.
3. Schedule indicating adjustments for audited liabilities.

BA 123 – 2 Semester, S.Y. 2020-2021

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Audit of Inventories and Trade Payables BA 123 Exercise Set B

Problem 4: AVALON COMPANY (Sales, AR, Inventory, and AP)

The following information is based on a first audit of Avalon Company:

The client had not prepared financial statements for 2017, 2018, or 2019. During these years,
no accounts have been written off as uncollectible, and the rate of gross profit on sales has
remained constant for each of the three years.

Prior to January 1, 2017, the client used the accrual method of accounting. From January 1,
2017, to December 31, 2019, only cash receipts and disbursements records were maintained.
When sales on account were made, they were entered in the subsidiary accounts receivable
ledger. No general ledger postings have been made since December 31, 2017.

As a result of your examination, the correct data shown in the table are available:
12/31/2016 12/31/2019
Accounts receivable balances:
Less than 1 year old ₱30,800 ₱56,400
One to two years old 2,400 3,600
Two to three years old 0 1,600
Over three years old 0 4,400
33,200 66,000
Inventories 23,200 37,600
Accounts Payable for inventory purchased 10,000 22,000

Cash received on accounts receivable in 2017 2018 2019

Applied to:
Current year collections ₱297,600 ₱323,600 ₱417,600
Accounts of the prior year 26,800 30,000 33,600
Accounts of two prior years 1,200 800 4,000
TOTAL ₱325,600 ₱354,400 ₱455,200
Cash Sales 34,000 52,000 62,400
Cash disbursements for inventory purchased ₱250,000 ₱282,400 ₱347,600

REQUIRED:
Prepare a schedule setting forth the sales, cost of goods sold, and gross profit for 2017, 2018
and 2019, and in total for the three years. The schedule should be supported by necessary
computations.

BA 123 – 2 Semester, S.Y. 2020-2021

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Audit of Inventories and Trade Payables BA 123 Exercise Set B

Problem 5: VIEGO COMPANY (Correction of Errors - Expenses)

As an audit associate, you have been assigned to audit Viego Company’s reported revenue for
2020. During your audit, after performing substantive procedures through tracing and cutoff
tests, you found the following errors in the company’s records:

Year ending December 31

2018 2019 2020
Omissions from the books:
a. Accrued expenses, December 31 ₱150,000 ₱70,000 ₱220,000
b. Prepaid expenses, December 31 160,000 120,000 60,000

INSTRUCTIONS: Assuming a tax-free world, determine the effects of the errors noted on the
specific assertions below. Write O if the effect is an overstatement, U if the effect is an
understatement, and X if the error has no effect, then indicate the amount of the
over/understatement, if applicable.

EFFECT AMOUNT
1. What is the effect on 2019 net income of the omission of
accrued expenses at the end of 2018?
2. What is the effect on 2020 net income of the omission of
accrued expenses at the end of 2019?
3. What is the effect on 2020 net income of the omission of
accrued expenses at the end of 2018, 2019, and 2020, when
considered together?
4. What is the effect on retained earnings after closing at
December 31, 2019 of the omission of accrued expenses at the
end of 2018 and 2019, when considered together?
5. What is the effect on retained earnings after closing at
December 31, 2020 of the omission of accrued expenses at the
end of 2018 and 2019, and 2020, when considered together?
6. What is the effect on working capital at December 31, 2020 of
the omission of accrued expenses at the end of 2018, 2019,
and 2020, when considered together?
7. What is the effect on retained earnings after closing at
December 31, 2019 of the omission of accrued expenses at the
end of 2018?
8. What is the effect on 2019 net income of the omission of
prepaid expenses at the end of 2018 and 2019?
9. What is the effect on working capital at December 31, 2020 of
the omission of prepaid expenses at the end of 2019 and 2020?
10. What is the effect on retained earnings after closing at
December 31, 2019 of the omission of prepaid expenses at the
end of 2018 and 2019?
11. What is the effect on retained earnings after closing at
December 31, 2020 of the omission of prepaid expenses at the
end of 2018, 2019, and 2020?
12. What is the effect on 2020 net income of the omission of
prepaid expenses at the end of 2018 and 2019?

BA 123 – 2 Semester, S.Y. 2020-2021

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Audit of Inventories and Trade Payables BA 123 Exercise Set B

EFFECT AMOUNT
13. What is the effect on working capital at December 31, 2020 of
the omission of prepaid expenses at the end of 2018, 2019, and
2020?
14. What is the effect on 2019 net income of the omission of
accrued expenses and prepaid expenses at the end of 2018
and 2019?
15. What is the effect on 2020 net income of the omission of
accrued expenses and prepaid expenses at the end of 2018,
2019 and 2020 when considered together?
16. What is the effect on retained earnings after closing at
December 31, 2019 of the omission of accrued expenses and
prepaid expenses at the end of 2018 and 2019?
17. What is the effect on retained earnings after closing at
December 31, 2020 of the omission of accrued expenses and
prepaid expenses at the end of 2018, 2019 and 2020 when
considered together?
18. What is the effect on working capital at December 31, 2020 of
the omission of accrued expenses and prepaid expenses at the
end of 2018, 2019 and 2020 when considered together?

BA 123 – 2 Semester, S.Y. 2020-2021

nd
Inventories Exercise Set B mbmagana/rgplacido