Problem 1

During your audit of M Company for the year ended December 31, 2020, you found the following information
relating to certain inventory transactions from your observation of the client’s physical count and review of sales
and purchases cutoff.
a. Goods costing 180,000 were received from a vendor on January 3, 2021. The goods were not included in
the physical count. The related invoice was received and recorded on December 31, 2020, terms FOB
shipping point.
b. Goods costing 200,000, sold for 300,000, were shipped on December 31, 2020, and were received by the
customer on January 2, 2021. The terms of the invoice were FOB shipping point. The goods were included
in the ending inventory for 2020 and the sale were recorded in 2021.
c. The invoice for goods costing 150,000 was received and recorded a purchase on December 31, 2020. The
related goods shipped FOB destination were received on January 2, 2021, but were included in the
physical inventory as goods in transit.
d. A 600,000 shipment of goods to a customer on December 30, 2020 terms FOB destination was recorded
as a sale upon shipment. The goods, costing 400,000 and delivered to the customer on January 6, 2021,
were not included in the 2020 ending inventory.
e. Goods valued at 250,000 are on consignment from a vendor. These goods are included in the physical
inventory.
f. Goods valued at 160,000 are on consignment with a customer. These goods are not included in the physical
inventory.
Requirements:
a. Determine the effect of the errors as of and for the year ended December 31, 2020 (indicate whether
overstated or understated)
1. Inventory
2. Cost of sales
3. Profit
4. Working capital
b. Adjusting entries as of December 31, 2020.

Problem 2

O Company, wholesales bicycle. The company’s reporting date is December 31. At December 1, 2020, inventory
on hand consisted of 350 bicycles at 820 each and 43 bicycles at 850 each. During the month ended December
31, 2020, the following inventory transactions took place (All purchases and sales transactions are on credit)
12/02 Five bicycles were returned by a customer. They had originally cost 820 each and were sold at 1,200 each.
12/09 Purchased 55 bicycles at 910 each
12/13 Purchased 76 bicycles at 960 each
12/15 Sold 86 bicycles for 1,350 each
12/16 Returned one damaged bicycle to the supplier. The bicycle had been purchased on December 9.
12/22 Sold 60 bicycles for 1,250 each
12/26 Purchased 72 bicycles at 980 each
12/29 Two bicycles, sold on December 22, were returned by a customer. The bicycles were badly damaged so
it was decided to write them off. They had originally cost 910 each.
Determine the cost of ending inventory as of December 31, 2020 and the cost of sales for the month of December
using:
a. FIFO
b. Moving average method
c. Weighted average method

Problem 3

D Company operates in 2020, D manufactures bath towels. 60% of the production are class A which sell for 500
per dozen and 40% are class B which sell for 250 per dozen. During 2020, 6,000 dozen were produce at an average
cost of 360 per dozen. The inventory at the end of the year was as follows:
220 dozens class A @ 360 79,200
300 dozens class B @ 360 108,000
Using the relative sales price method, which management considers as a more equitable basis of cost distribution,
answer the following:
a. How much of the total cost should be allocated to Class A?
b. How much of the total cost should be allocated to Class B?
c. How much is the value of inventory as of December 31, 2020?
d. How much is the cost of sales for the year 2020?
e. How much is the gross profit for the year 2020?
Problem 4

The following data pertain to a particular item sold by G Company:

Aug. 1 – Beginning Inventory 2,000 units @ 50
Aug. 8 – Purchases 9,000 units @ 52
Aug. 10 – Sales 1,500 units @ 130
Aug, 14 – Purchases 3,000 units @ 55
Aug. 20 – Sales 8,000 units @ 135
Aug. 29 – Purchases 1,500 units @ 59
a. Using FIFO cost flow, how much is the cost of inventory at August 31?
b. Using the weighted average method, how much is the gross profit during the month of August?
c. If the units sold on August 10 are specifically identified as originating from the beginning balance on
August 1 and the August 20 sales are specifically identified as originating from August 8 purchases, how
much is the cost of goods sold during August?

Problem 5

During 2021, P Company signed a non-cancelable contract with G Company to purchase 1,000, 50-kilos sacks of
rice at 2,700 per sack with delivery to be made on April 1, 2022. On December 31, 2021, the price of rice had
fallen to 2,680 per sack. On April 1, 2022, the price per sack of rice further decrease to 2,670.
a. In P Company’s December 31, 2021 profit or loss, how much is reported as loss on purchase commitment?
b. What is the amount of loss on purchase commitment recognized upon delivery of the 1,000 sacks on April
1, 2022?