ADVANCED REVIEW SOLUTIONS AP

3RD FLOOR LAPERAL GO BUILDING MORAYTA COR.PAREDES STREET, MANILA CITY 1008
CONTACT # 09989712041 / 09472722534 2023-07
AUDITING PROBLEMS F.O. MATEOS
1.
AUDIT OF INVENTORIES

PROBLEM 1
The following are the list of items that may or may not reported as inventory in a company’s December 31
statement of financial position: Temporary investment in stocks and bonds that will be resold in the near
future, P250,000; goods sold FOB destination that are in transit at December 31, P20,000; costs identified
with units completed but not yet sold, P130,000; goods held on consignment from another company,
P225,000; factory supplies, P10,000; raw materials on which the company has started production, but which
are not completely processed, P140,000; office supplies, P5,000; materials on hand not yet placed into
production, P175,000; costs incurred to advertise goods held for resale, P10,000; interest cost incurred for
inventories that are routinely manufactured, P20,000; factory labor costs incurred on goods still unsold,
P25,000; freight charges on goods purchased, P40,000; goods sold FOB shipping point that are in transit
December 31, P60,000; goods sold where large returns are predictable, P140,000; 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, P150,000; goods purchased FOB destination that are in transit at December 31,
P100,000; goods purchased FOB shipping point that are in transit at December 31, P60,000; goods sold on
instalment basis, P50,000; goods out on consignment at another company’s store, P400,000.

Required: How much of these items would typically be reported as inventory in the statement of financial
position as of December 31?

Problem 2
The accounting staff of Bignay Company submitted an inventory list at December 31, 2020 which showed a
total of P750,000. The following information which may or may not be relevant to the inventory value
submitted, are given below:
a. On December 31, 2020, an order for P3,750 worth of merchandise was placed. This was included in
the year-end inventory although it was received only on January 5, 2021. Seller shipped the goods
FOB destination.
b. Goods valued at P3,000 were received on December 28, 2020 for approval by Bignay Co. The
inventory team included this merchandise in the list but did not place any value on it. On January 4,
2021, the company informed the supplier by long distance telephone of the acceptance of the goods
and the supplier’s invoice was received on January 7, 2021.
c. Suppliers invoice for P4,500 worth of merchandise dated December 28, 2020 was received through
the mails on December 30, 2020 although the goods arrived only on January 4, 2021. Shipment term
is FOB shipping point. This item was included in the December 31, 2020 inventory by the company.
d. A review of the company’s purchase orders shows a commitment to buy P15,000 worth of
merchandise. This was not included in the inventory because the goods were received on January 3,
2021.
e. The bill of lading and other import documents on a merchandise were delivered by the bank and
the trust receipt accepted by the company on December 26, 2020. Taxes and duties have been paid
on this shipment but the customs broker has not delivered the merchandise until January 7, 2021.
Delivered cost of the shipment totalled P120,000. This shipment was not included in the inventory in
December 2020.
f. Excluded from the inventory were merchandise costing P12,000 because they were transferred to
the delivery department for packaging on December 28 to be shipped on January 2, 2021.

Required: The correct merchandise inventory at December 31, 2020 of Bignay Company.

Problem 3
The Panda Company’s records as of December 31, 2020 reveal the following balances:
Net Income P 255,000
Net purchases 1,150,000
Net sales 2,525,000
Accounts payable 345,000
Accounts receivable 290,000
Inventory 550,000
The company is on a calendar year basis. The following data were found during your audit:

AUDITING REVIEW 1
 ADVANCED REVIEW SOLUTIONS AP
3RD FLOOR LAPERAL GO BUILDING MORAYTA COR.PAREDES STREET, MANILA CITY 1008
CONTACT # 09989712041 / 09472722534 2023-07
AUDITING PROBLEMS F.O. MATEOS
 Merchandise costing P100,000 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.
 Your client has an invoice from a supplier, terms FOB shipping point but the goods had not
arrived as yet. However, these materials costing P85,000 had been included in the inventory
count, but no entry had been made for their purchase.
 Goods costing P50,000 and selling for P70,000 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.
 The sale of P75,000 worth of materials and costing P60,000 had been shipped FOB shipping
point on December 31. However, this inventory was found to be included in the final inventory.
The sale was properly recorded in 2020.
 Goods costing P35,000 was out on consignment with Honey Company. Since the monthly
statement from Honey Company listed those materials as on hand, the items had been excluded
from the final inventory and invoiced on December 31 at P40,000.
 Materials costing P125,000 and billed on December 30 at a selling price of P160,000, 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 customer. Terms, FOB destination.
 Goods costing P25,000 had been received, included in the inventory and recorded as a purchase.
However, upon your inspection the goods were found to be defective and would be immediately
returned.
 Goods in transit shipped FOB destination by a supplier, in the amount of P50,000, had been
excluded from the inventory, and further testing revealed that the purchase had been recorded.

Required: Determine the adjusted balances of the following as of December 31, 2020 based on your
audit.
1.
2. Inventory
3. Accounts payable
4. Net sales
5. Net purchases
6. Net income
Problem 4
Danny Factory started operations in 2020. Danny 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 2020,
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” at P360 P 79,200
300 dozens “Class B” at P360 108,000

Required: 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”?
2. How much of the total cost should be allocated to “Class B”?
3. How much is the value of inventory as of December 31, 2020?
4. How much is the cost of sales for the year 2020?
5. How much is the gross profit for the year 2020?

Problem 5
On November 27, 2020, Bunny Airlines entered into a non-cancellable commitment to purchase 3,000
barrels of aviation fuel for P9,000,000 on April 1, 2021. Bunny entered into this purchase commitment to
protect itself against the volatility in the aviation fuel market. By December 31, 2020, the purchase price of
aviation fuel had fallen to P2,200 per barrel. However, by April 1, 2021, when Bunny took delivery of the 3,000
barrels, the price of aviation fuel had risen to P3,100 per barrel.

Required: Based on the above and the result of your audit, answer the following:
1. Loss on purchase commitment on December 31, 2020.
2. Gain on purchase commitment on April 1, 2021.

Problem 6
 ADVANCED REVIEW SOLUTIONS AP
3RD FLOOR LAPERAL GO BUILDING MORAYTA COR.PAREDES STREET, MANILA CITY 1008
CONTACT # 09989712041 / 09472722534 2023-07
AUDITING PROBLEMS F.O. MATEOS
The Manggahan Merchandising Company is a leading distributor of kitchen wares. The company uses the
FIFO method of calculating the cost of goods sold. The following information concerning two of the
company’s products is taken from the month of March:

PANS KETTLES
No. of Units Unit Cost No. of Units Unit Cost
March 1, beg. Inventory 10,000 P60 6,000 P40
Purchases:
March 15 14,000 65 9,000 42
March 25 6,000 75
Sales for the month 20,000 10,000
SP: P80 SP: P44

 On March 31, Manggahan’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 April 1.
 Mangggahan 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).

Required: Based on the above and the result of your audit, answer the following:
1. Total cost of Pans as of March 31.
2. Total cost of Kettles as of March 31.
3. The inventory at March 31.
4. The loss on inventory write-down for the month of March 31.
5. The cost of sales, before loss on inventory write-down, for the month of March.

Problem 7
In conducting your audit of Mangga Corporation, a company engaged in import and wholesale business,
for the fiscal year ended June 30, 2020, you determined that its internal control system was good.
Accordingly, you observed the physical inventory at an interim date, May 31, 2020 instead as of at June 30,
2020.

 You obtained the following information from the company’s general ledger:
Physical inventory, May 31, 2020 P110,000
Inventory, July 1, 2019 70,000
Purchases for the fiscal year ended June 30, 2020 640,000
Purchases for eleven months ended May 31, 2020 (before audit 540,000
adjustments)
Sales for the fiscal year ended June 30, 2020 768,000
Sales for eleven months ended May 31, 2020 672,000
 Your audit disclosed the following additional information:
1. Shipments costing P6,000 were received in May and included in the physical inventory but
recorded as June purchases.
2. Deposit of P2,000 made with vendor and charged to purchases in April 2020. Product was
shipped in July 2020.
3. A shipment in June was damaged through the carelessness of the receiving department. The
shipment was later sold in June at its cost of P8,000.

Required: 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 answer for the
following:
1. Gross profit ratio for eleven months ended May 31, 2020.
2. Cost of goods sold during the month of June, 2020 using GP ratio method.
3. Inventory as of June 30, 2020 using the GP ratio method.

Problem 8

AUDITING REVIEW 3
 ADVANCED REVIEW SOLUTIONS AP
3RD FLOOR LAPERAL GO BUILDING MORAYTA COR.PAREDES STREET, MANILA CITY 1008
CONTACT # 09989712041 / 09472722534 2023-07
AUDITING PROBLEMS F.O. MATEOS
Benguet Store uses the average retail inventory method. The following information is available for the
current year:
Cost Retail
Beginning inventory P550,000 P1,100,000
Purchases 7,900,000 13,150,000
Freight-in 200,000
Purchase returns 300,000 500,000
Purchase allowances 150,000
Departmental transfer in 200,000 400,000
Net markups 300,000
Net markdowns 450,000
Sales 12,350,000
Sales returns 175,000
Sales discounts 100,000
Employee discounts 300,000
Loss from breakage 25,000

Required: Based on the above and the result of your audit, answer the following:
1. Cost ratio using the average retail inventory method.
2. Estimated ending inventory at retail.
3. Estimated ending inventory at cost.
4. Estimated cost of goods sold.
5. If the inventory at retail based on physical count at December 31, 2020 is P850,000, the estimated
inventory shortage is

***END OF DISCUSSION***
***If you get TIRED, learn to REST, not to QUIT***

AUDITING REVIEW 4