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Since 1977

AUDITING PROBLEMS AP.1901-Audit of Inventories

Since 1977 AUDITING PROBLEMS AP.1901-Audit of Inventories OCAMPO/CABARLES OCTOBER 2015 The Use of Assertions in Obtainingwww.prtc.com.ph AP.1901 " id="pdf-obj-0-14" src="pdf-obj-0-14.jpg">

OCAMPO/CABARLES

OCTOBER 2015

The Use of Assertions in Obtaining Audit Evidence

Assertions about classes of transactions and events for the period under audit: (COCAC)

Completeness - all transactions and events that should have been recorded have been recorded.

Occurrence - transactions and events that have been recorded have occurred and pertain to the entity.

Classification - transactions and events have been recorded in the proper accounts.

Accuracy - amounts and other data relating to recorded transactions and events have been recorded appropriately.

Cutoff - transactions and events have been recorded in the correct accounting period.

Assertions about account balances at the period end:

(RECV)

Rights and obligations

- the entity holds or controls

the

rights to assets, and liabilities are the obligations of the entity.

Existence - assets, liabilities, and equity interests exist.

Completeness - all assets, liabilities and equity interests that should have been recorded have been recorded.

Valuation and allocation - assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

Assertions about presentation and disclosure: (COCA)

Completeness - all disclosures that should have been included in the financial statements have been included.

Occurrence and rights and obligations - disclosed events, transactions, and other matters have occurred and pertain to the entity.

Classification and understandability - financial information is appropriately presented and described, and disclosures are clearly expressed.

Accuracy and valuation - financial and other information are disclosed fairly and at appropriate amounts.

INTERNAL CONTROL MEASURES

  • 1. and

Authority

responsibility

for

controlling

the

inventories should be centralized management and in

one person.

  • 2. be

There should

careful

selection

of inventory

personnel and intensive training of such personnel in policies, objectives and system of inventory control.

  • 3. Adequate physical facilities for handling and storage of inventory should be provided.

  • 4. Adequate system of procedures, forms and reports related to the management of inventories should be developed and implemented.

  • 5. Quantitative controls through perpetual inventory records; book quantities verified with physical counts at least once a year and differences being investigated, promptly adjusted and reported to higher authority should be implemented.

  • 6. Deliveries of materials, finished stock and merchandise should be made only upon specific authorizations emanating at authorized levels.

  • 7. Slow-moving, obsolete and damaged stock should be identified and reported following periodic reviews of physical and book records by qualified employees. Valuation on the basis of approved cost-mark-down methods should be reviewed.

  • 8. Safeguards against that action of the element and inaccuracies in recording receipts and issues should be adopted. Example – Maintaining adequate insurance coverage.

EXCEL PROFESSIONAL SERVICES, INC.

SUBSTANTIVE AUDIT OF INVENTORIES

Inventory Balances

Existence: Recorded inventory exist

  • 1. Before the client takes the physical inventory, review and approve the client’s written plan for taking it.

  • 2. the

Observe

client

personnel

physically

counting

inventory.

  • 3. Confirm inventories on consignment and held in public warehouses.

Completeness: All inventory of the entity recorded

  • 4. Obtain a copy of prenumbered inventory tags used by the client in taking inventory and reconcile the tags to the listing.

  • 5. For selected items, trace from tags to listing.

  • 6. Perform cutoff procedures. Obtain the receiving report number for the last shipment received prior to year- end and determine that the item is included in inventory. Also, identify the last shipping document and determine, based on shipping terms, whether the item was properly recorded in sales or inventory.

  • 7. Perform analytical procedures.

Rights and obligations: Inventory is owned by the entity

  • 8. Determine that consigned inventory has been excluded from inventory and that inventory pledged has been properly disclosed. Examine confirmations from financial institutions and read minutes of the board of directors’ meetings.

Valuation and allocation: Recorded inventory is valued in accordance with GAAP

  • 9. Considering the method the client uses for inventory valuation, examine invoices for inventory on hand or trace prior year’s inventory listing to verify cost.

10. For selected items, determine

net realizable value

(NRV) of the inventory and apply the lower of cost or

NRV. 11. Verify computations in the inventory listing.

12. Review the obsolescence of the inventory by:

  • a. being alert while observing inventory being taken for damaged, slow-moving, or scrap inventory.

  • b. Scanning perpetual records for slow-moving items and discussing their valuation with client.

Presentation and disclosure: Inventory is classified and disclosed in accordance with GAAP

13. Determine

whether

accounts

are

classified

and

disclosed in the financial statements in accordance

with GAAP.

Purchases

Completeness: Purchases that occurred are recorded

Trace a sequence of receiving reports to entries in the voucher register. Test cutoff. Account for a sequence of entries in the voucher register.

Occurrence:

Recorded purchases are for items that were

acquired

Examine underlying documents for authenticity and reasonableness. Scan voucher register for large or unusual items. Trace inventory purchased to perpetual records. Scan voucher register for duplicate payments.

Classification: Purchase transactions have been recorded in the proper accounts

For a sample of entries in the purchases journal, verify the accuracy of account coding.

Accuracy (Valuation):

amounts

Purchases are recorded at proper

Recompute invoices and compare invoice price to purchase order.

Production

Completeness: All production transactions that occurred are recorded

Account for a sequence for production reports.

Occurrence: Recorded production transactions occurred

For selected transactions, examine signed materials requisitions, approved labor tickets, and allocation of overhead.

Classification: Production transactions have been recorded in the proper accounts

For

a sample

of entries,

verify the accuracy of account

coding.

 

Accuracy (Valuation): Production transactions are recorded at proper amounts

Test cost records by tracing to underlying documents, such as bill of materials, labor tickets, authorized labor rates, and standard overhead rates. Review variances.

- end -

EXCEL PROFESSIONAL SERVICES, INC.

PROBLEM NO. 1

You were engaged by Quezon Corporation for the audit of the company’s financial statements for the year ended

Based on the above and the result of your audit, determine the following:

December 31, 2015. The company is engaged in the

1.

Sales for the year ended December 31, 2015

 

wholesale business and makes all sales at 25% over cost.

a.

P5,250,000

c.

P5,400,000

 

b.

P5,150,000

d.

P5,350,000

The following were gathered from the client’s accounting

2.

Purchases for the year ended December 31, 2015

records:

a.

P3,000,000

c.

P3,018,000

 

S A L E S

 

P U R C H A S E S

 

b.

P3,754,000

d.

P3,818,000

Date

Ref.

Amount

Date

Ref.

Amount

 

3.

Inventory as of December 31, 2015

Balance

Balance

 

a.

P864,000

c.

P968,000

forwarded

 

P5,200,000

forwarded

 

P2,700,000

 

b.

P800,000

d.

P814,000

Dec.

SI No.

Dec.

RR No.

27

965

40,000

27

1057

35,000

4.

Accounts receivable as of December 31, 2015

Dec.

SI No.

Dec.

RR No.

a.

P350,000

c.

P370,000

28

966

150,000

28

1058

65,000

 

b.

P220,000

d.

P120,000

Dec.

SI No.

Dec.

RR No.

28

967

10,000

29

1059

24,000

5.

Accounts payable as of December 31, 2015

 

Dec.

SI No.

Dec.

RR No.

a.

P418,000

c.

P

400,000

31

969

46,000

30

1061

70,000

 

b.

P354,000

d.

P1,218,000

Dec.

SI No.

Dec.

RR No.

31

970

68,000

31

1062

42,000

 

Dec.

SI No.

Dec.

RR No.

PROBLEM NO. 2

 

31

971

16,000

31

1063

64,000

During your audit of the Makati Corporation for the year

Dec.

Closing

Dec.

Closing

 

31

entry

(5,530,000)

31

entry

(3,000,000)

ended December 31, 2015, you found the following

information relating to certain inventory transactions from

 

P

-

P

-

Note: SI = Sales Invoice

 

RR = Receiving Report

your observation of the client’s physical count and review of sales and purchases cutoff:

 

Inventory

 

P600,000

 

a.

Goods costing P180,000 were received from a vendor

Goods costing P200,000, sold for P300,000, were

Accounts receivable

500,000

 

on January 3, 2016. The goods were not included in

Accounts payable

400,000

the physical count. The related invoice was received and recorded on December 30, 2015. The goods were

You observed the physical

inventory

of

goods

in

the

shipped on December 31, 2015, terms FOB shipping

warehouse on December 31 and were satisfied that it was properly taken.

b.

point.

When performing sales and purchases cut-off tests, you

shipped on December 31, 2015, and were received by

found that at December 31, the last Receiving Report which had been used was No. 1063 and that no shipments had been made on any Sales Invoices whose number is

the customer on January 2, 2016. The terms of the invoice were FOB shipping point. The goods were included in the ending inventory for 2015 and the sale

larger

than

No.

968.

You also obtained the following

was recorded in 2016.

additional information:

 
 

c.

The invoice for goods costing P150,000 was received

  • a) Included in the warehouse physical inventory

at

and recorded as a purchase on December 31, 2015.

December 31 were goods which had been purchased and received on Receiving Report No. 1060 but for which the invoice was not received until the following year. Cost was P18,000.

d.

The related goods, shipped FOB destination were received on January 2, 2016, but were included in the physical inventory as goods in transit.

  • b) On the evening of December 31, there were two trucks in the company siding:

A P600,000 shipment of goods to a customer on December 30, 2015, terms FOB destination, was recorded as a sale upon shipment. The goods, costing

Truck No. CPA 123 was unloaded on January 2 of

P400,000 and delivered to the customer on January 6,

the

following

year

and

received

on

Receiving

2016, were not included in the 2015 ending inventory.

Report No. 1063.

The freight was

paid

by

the

vendor.

 

e.

Goods valued at P250,000 are on consignment from a

Truck

No.

ILU

143

was

loaded and

sealed on

vendor.

These goods are included in the physical

December 31 but leave the company premises on

inventory.

January 2. This order was sold for P100,000 per Sales Invoice No. 968.

f.

  • c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to Brooks Trading Corporation. Brooks received the goods, which

Goods valued at P160,000 are on consignment with a customer. These goods are not included in the physical inventory.

QUESTIONS:

were sold on Sales Invoice No. 966 terms FOB Destination, the next day.

Based on the above and the result of your audit, answer the following:

  • d) Enroute to the client on December 31 was a truckload of goods, which was received on Receiving Report No. 1064. The goods were shipped FOB Destination, and

1.

The inventory as of December 31, 2015 is understated by

freight of P2,000 was paid by the client. However, the

a.

P230,000

c.

P140,000

freight was deducted from the purchase price of

b.

P190,000

d.

P290,000

P800,000.

QUESTIONS:

EXCEL PROFESSIONAL SERVICES, INC.

2.

The cost

of

sales

for the

 

year

ended December 31,

 

transit.

82,500

2015

is overstated by

 

e)

Through the carelessness of the

a.

P290,000

c.

P440,000

 

receiving department shipment in

b.

P110,000

d.

P380,000

early December 2015 was damaged

3.

The profit for the year ended December 31, 2015 is misstated by

 

by rain. This shipment was later sold in the last week of December at cost.

150,000

a.

P190,000 over

 

c.

P140,000 under

 

b.

P 10,000 over

d.

P290,000 under

REQUIRED:

 

4.

The working capital

as

of

December

31,

2015

is

1.

Gross profit rate for 11 months ended November 30,

misstated by

 

2015.

a.

P190,000 over

 

c.

P140,000 under

 

b.

P 10,000 over

d.

P290,000 under

2.

Cost of goods sold during the month of December 2015 using the gross profit method.

SOLUTION GUIDE

 

3.

December 31, 2015 inventory using the gross profit

 

Over (Under)

 

method.

 

Inventory

COS

Profit

 

WC

a

(180)

180

(180)

(180)

 

b

200

(200)

(100)

(100)

 

SOLUTION GUIDE:

 

c

150

-

-

-

Requirement No. 1

   

d

(400)

400

200

 

200

e

250

(250)

250

 

250

Sales, up to 11/30

P12,600,000

f

(160)

160

(160)

(160)

 

Less COS, up to 11/30:

 

(140)

290

10

10

Inventory, 1/1

P 1,3,500

PROBLEM NO. 3

Your client, Mandaluyong Company, is an importer and wholesaler. Its merchandise is purchased from several suppliers and is warehoused until sold to customers.

In conducting your audit for the year ended December 31, 2015, you were satisfied that the system of internal control was good. Accordingly, you observed the physical inventory at an interim date, November 30, 2015 instead of at year end. You obtained the following information from your client’s general ledger:

Inventory, January 1, 2015

P 1,312,500

Physical inventory, November 30, 2015

1,425,000

Sales for 11 months ended Nov. 30, 2015

12,600,000

Sales for the year ended Dec. 31, 2015 Purchases for 11 months ended Nov. 30,

14,400,000

  • 2015 (before audit adjustments)

10,125,000

Purchases for the year ended Dec. 31,

  • 2015 (before audit adjustments)

12,000,000

Your audit disclosed the following information:

  • a) Shipments received in November and included in the physical inventory but recorded as December purchases.

P 112,500

  • b) Shipments received in unsalable condition and excluded from physical inventory. Credit memos had not been received nor chargebacks to vendors been recorded:

Total at November 30, 2015

15,000

Total at December 31, 2015 (including the November unrecorded chargebacks)

22,500

  • c) Deposit made with vendor and charged to purchases in October, 2015. Product was shipped in January,

2016.

30,000

  • d) Deposit made with vendor and charged to purchases in November, 2015. Product was shipped FOB destination, on November 29, 2015 and was included in November 30, 2015 physical inventory as goods in

Net purchases, 11/30

 

10,110,000

 

TGAS

11,422,500

Inventory, 11/30

( 1,342,500)

10,080,000

Gross profit

P 2,520,000

Computation of adjusted amounts:

 
 

Inventory,

N.P.,11/30

 

N.P.,12/31

11/30

(11 mos.)

(12 mos.)

Unadjusted

1,425,000

10,125,000

 

12,000,000

a

-

112,500

 

-

b

-

(

15,000)

 

(

22,500)

c

-

(

30,000)

 

(

30,000)

d

( 82,500)

(

82,500)

 

-

e

-

-

-

 

Adjusted

1,342,500

10,110,000

 

11,947,500

Requirement No. 2

 

Sales, up to 12/31

 

P14,400,000

Less sales, up to 11/30

 

12,600,000

Sales - December

1,800,000

Sales without profit

 

(

150,000)

Sales with profit

 

1,650,000

x Cost ratio

 

.8

COS with profit

 

1,320,000

COS without profit

150,000

Total

 

P

1,470,000

Requirement No. 3

 

Inventory, 1/1

 

P 1,312,500

Net purchases, 12/31

 

11,947,500

TGAS Less cost of sales:

13,260,000

With profit [(14.4M -.15M)x.8]

P11,400,000

 

Without profit

 

150,000

 

11,550,000

Estimated inventory, 12/31

 

P 1,710,000

EXCEL PROFESSIONAL SERVICES, INC.

PROBLEM NO. 4

QUESTIONS:

 

On April

21,

2015,

a

fire

damaged

the

office

and

Based on the above and the result of your audit, answer

warehouse of Muntinlupa Company. The only

the following:

accounting record saved

was

the

general ledger, from

1.

How much is the adjusted balance of Accounts Payable

which the trial balance below was prepared.

 

as of April 21, 2015?

Muntinlupa Company

a.

P286,000

 

c.

P237,000

b.

P106,000

d.

P343,000

Trial Balance March 31, 2015

 

2.

How much is the net purchases for the period January

 

DEBIT

CREDIT

1 to April 21, 2015?

Cash

 

P 180,000

 

a.

P650,500

 

c.

P660,000

b.

P673,500

d.

P683,000

Accounts receivable

400,000

3.

How

much

is

the

adjusted

balance

of

Accounts

Inventory, Dec. 31, 2014

750,000

Receivable as of April 21, 2015?

 

Land

350,000

a.

P400,000

 

c.

P360,000

Building

1,100,000

 

b.

P440,000

d.

P354,000

Acc. depreciation Other assets

56,000

P 413,000

4.

How much is the sales for the period January 1 to April 21, 2015?

Accounts payable

 

237,000

a.

P1,430,000

 

c.

P1,510,000

b.

P1,519,500

d.

P1,506,000

Accrued expenses

180,000

 

Share capital, P100 par Retained earnings

 

1,000,000

520,000

5.

How much is the cost of sales for the period January 1 to April 21, 2015?

1,350,000

a.

P786,500

 

c.

P830,500

Sales

b.

P835,725

d.

P828,300

Purchases

520,000

6.

How

much

is

the

estimated inventory

on

April

21,

Operating expenses

344,000

.

2015?

 

Totals

P3,700,000

 

P3,700,000

 

a.

P570,000

 

c.

P623,500

 

b.

P587,775

d.

P579,500

The following data and information have been gathered:

 

7.

How much is the estimated inventory fire loss?

 
  • a. The company’s year-end is December 31.

 

a.

P579,500

 

c.

P535,000

 

b.

P477,000

d.

P512,000

  • b. An examination of the April bank statement and cancelled checks revealed that checks written during the period April 1 to 21 totaled P130,000: P57,000

PROBLEM NO. 5

 

paid to accounts payable as of March 31, P34,000 for April merchandise purchases, and P39,000 paid for other expenses. Deposits during the same period

You are engaged in the regular annual examination of the accounts and records of Valenzuela Manufacturing Co.

amounted to P129,500, which consisted of receipts on

for the year ended December 31, 2015.

To reduce the

account from customers with the exception of a P9,500 refund from a vendor for merchandise returned in

workload at year end, the company, upon your recommendation, took its annual physical inventory on

April.

November 30, 2015.

You observed the taking

of the

inventory and made tests of the inventory count and the

  • c. with

Correspondence

suppliers

revealed

unpaid

inventory records.

 

obligations at

April

21

of

P106,000

for

April

merchandise purchases,

including

P23,000

for

The company’s inventory account, which includes raw

The company’s physical inventory revealed that the book

shipments in transit on that date.

 

materials and work-in-process is on perpetual basis.

  • d. Customers acknowledged indebtedness of P360,000 at April 21. It was also estimated that customers owed another P80,000 that will never be acknowledged or recovered. Of the acknowledged indebtedness, P6,000 will probably be uncollectible.

  • e. The insurance company agreed that the fire loss claim

Inventories are valued at cost, first-in, first-out method. There is no finished goods inventory.

inventory of P1,695,960 was understated by P84,000. To avoid delay in completing its monthly financial statements, the company decided not to adjust the book inventory until year-end except for obsolete inventory items.

should be based on the assumption

that the

overall

gross profit ratio for the past two years was in effect

Your examination disclosed the following information

during

the

current year.

The company’s audited

regarding the November 30 inventory:

financial

statements

information:

disclosed

2014

the

following

2013

  • a. Pricing tests showed that the physical inventory was overstated by P61,600.

Net sales

P5,300,000

P3,900,000

 
  • b. An understatement of the physical inventory by P4,200

Net purchases

2,800,000

 

2,350,000

due to errors in footings and extensions.

Beginning inventory

500,000

660,000

  • c. Direct labor included in the inventory amounted to

Ending inventory

750,000

500,000

P280,000. Overhead was included at the rate of 200%

  • f. Inventory with a cost of P70,000 was salvaged and

of direct labor. You have ascertained that the amount

sold for P35,000. total loss.

The balance of the inventory was a

of direct labor was correct and that the overhead rate was proper.

  • d. The physical inventory included obsolete materials with a total cost of P7,000. During December, the obsolete materials were written off by a charge to cost of sales.

EXCEL PROFESSIONAL SERVICES, INC.

Your audit also disclosed the following information about the December 31 inventory:

  • a. Total debits to the following accounts during December were:

Cost of sales Direct labor Purchases

P1,920,800

338,800

691,600

  • b. The cost of sales of P1,920,800 included direct labor of P386,400.

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1.

Adjusted amount of physical inventory at November 30

a.

P1,715,560

c.

P1,845,760

b.

P1,631,560

d.

P1,722,560

2.

Adjusted amount of inventory at December 31

 

a.

P1,509,760

c.

P1,502,760

b.

P1,516,760

d.

P1,425,760

3.

Cost of materials on hand, and materials included in work in process as of December 31

a.

P819,560

c.

P728,560

b.

P812,560

d.

P942,760

4.

The amount of direct labor included in work in process as of December 31

a.

P618,800

c.

P338,800

b.

P232,400

d.

P386,400

5.

The amount of factory overhead included in work in process as of December 31

a.

P

772,800

c.

P464,800

b.

P1,237,600

d.

P777,600

PROBLEM NO. 6

 

Select the best answer for each of the following:

 

1.

Which of the following is not one of the independent auditor's objectives regarding the audit of inventories?

a.

Verifying that inventory counted is owned by the client.

b.

Verifying that the client has used proper inventory pricing.

c.

Ascertaining the physical quantities of inventory on hand.

d.

Verifying that all inventory owned by the client is

 

on hand at the time of the count.

 

2.

An auditor is most likely to inspect loan agreements under which an entity’s inventories are pledged to support management’s financial statement assertion of

a.

Existence or occurrence.

 

b.

Completeness.

 

c.

Presentation and disclosure.

 

d.

Valuation or allocation.

3.

An auditor

selected

items

for

test

counts

while

observing a client’s physical inventory.

The auditor

then traced the test counts to the client’s inventory

listing.

This procedure most likely obtained evidence

concerning

 

a.

Existence.

c.

Rights.

b.

Completeness.

 

d.

Valuation.

  • 4. A client maintains perpetual inventory records in both quantities and pesos.

If the assessed level of control

risk is high an auditor will probably

a.

Apply gross profit tests to ascertain the

reasonableness of the physical counts.

 

b.

Increase the extent of tests of controls relevant to the inventory cycle.

c.

Request the client to schedule the physical inventory count at the end of the year.

d.

Insist that the client perform physical counts of

inventory items several times during the year.

  • 5. The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference?

a.

Inventory item has been counted but the tags

placed on the items had not been taken off the items and added to the inventory accumulation sheets.

b.

Credit memos for several items returned by customers had not been recorded.

c.

No journal entry had been made on the retailer’s books for several items returned to its suppliers.

d.

An item purchased “FOB shipping point” had not arrived at the date of the inventory count and had not been reflected in the perpetual records.

  • 6. Purchase cut-off 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.

  • 7. The audit of year-end inventories should include steps

to verify that the client’s purchases and sales cutoffs were adequate. These 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 in the subsequent period

 
  • 8. What form of analytical review might uncover the existence of obsolete merchandise?

a.

Inventory turnover rates.

b.

Decrease in the ratio of gross profit to sales.

c.

Ratio of inventory to accounts payable.

 

d.

Comparison of inventory values to purchase invoices.

An auditor

  • 9. is

most likely

to

learn

of slow-moving

inventory through

a.

Inquiry of sales personnel

b.

Inquiry of warehouse personnel

 

c.

Physical observation of inventory

d.

Review of perpetual inventory records.

10. The auditor tests the quantity of materials charged to work in process by tracing these quantities to

a.

Cost ledgers.

b.

Perpetual inventory records.

 

c.

Receiving reports.

d.

Material requisitions.

- now do the DIY drill -

EXCEL PROFESSIONAL SERVICES, INC.

DO-IT-YOURSELF (DIY) DRILL

PROBLEM NO. 1

Jay Roy Retailing Ltd is a food wholesaler that supplies independent grocery stores. The company operates a perpetual inventory system, with the first-in, first-out method used to assign costs to inventory items. Transactions and other related information regarding two of the items (baked beans and plain flour) carried by Jay Roy Ltd are given below for June 2015 the last month of the company's reporting period.

Unit of packaging Inventory @ 1 June 2015 Purchases

Purchase terms June sales Returns and allowances

Baked beans Case containing 25 x 410g cans 35,000 cases @ P19.60 1. 10 June: 20,000 cases @ P19.50 per case 2. 19 June: 47,000 cases @ P19.70 per case 2/10, n/30, FOB destination 73,000 cases @ P28.50 A customer returned 5,000 cases that had been shipped in error. The customer's account was credited for P142,500.

Physical count at 30 June

  • 2015 32,600 cases on hand No explanation found assumed stolen

Explanation of variance

Net realizable value at 30 June 2015

P29.00 per case

Plain flour

Box containing 12 x 4kg bags 62,500 boxes @ P38.40

  • 1. 3 June: 15,000 boxes @ P38.45

  • 2. 15 June: 20,000 boxes @ P38.45

  • 3. 29 June: 24,000 boxes @ P39.00

n/30, FOB destination 95,000 boxes @ 40.00 As June 15 purchase was unloaded, 1,000 boxes were discovered damaged. A credit of P38,450 was received by Jay Roy Retailing Ltd.

1,500 boxes on hand Boxes purchased on 29 June still in transit on 30 June

P38.50 per box

QUESTIONS:

Based on the above and the result of your audit, answer the following:

  • 1. The inventory of baked beans as of June 30, 2015 at cost, as adjusted is

a.

P641,860

c.

P642,360

 

b.

P642,220

d.

P641,360

  • 2. The inventory of plain cost, as adjusted is

flour

as

of

June

30, 2015

at

a.

P134,575

c.

P57,675

 

b.

P993,675

d.

P57,725

  • 3. The amount of inventory shortage is

 

a.

P27,440

c.

P168,560

 

b.

P27,580

d.

P

0

  • 4. The total inventory to be recognized

in

the

balance

sheet as of June 30, 2015 is

 

a.

P699,895

c.

P

699,535

 

b.

P700,035

d.

P1,623,970

  • 5. of

Which

the

following

is

the

best procedure for

identifying shortages of specific items in an inventory of raw materials?

a.

Compare the results of a physical inventory of raw materials with perpetual inventory records.

b.

Compare inventory turnover rates with prevailing rates from previous years.

c.

Estimates inventory quantities by using the gross profit method.

d.

Review internal controls for the physical protection of inventories.

The following are some of the transactions that affected the inventory of the Bolinao Company during 2015.

Jan.

8

Bolinao purchased raw materials

with

a

list

 

price of P200,000 and was given a trade discount of 20% and 10%; terms 2/15, n/30.

Bolinao values inventory price

at

the

net

invoice

Feb. 14

Bolinao repossessed an inventory item from a

customer who was overdue

in making

payment.

The unpaid balance on the sale is

P15,200.

The repossessed merchandise is to

be refinished

and

placed

on

sale.

It

is

expected that the item can be sold for P24,000 after estimated refinishing costs of P6,800. The normal profit for this item is considered to be P3,200.

Mar.

1

Refinishing costs of P6,400 were incurred on

Apr.

3

the repossessed item. The repossessed item was resold for P24,000

Aug. 30

on account, 20% down. A sale on account was made of finished goods

that have a list price of P59,200 and a cost

P38,400.

A reduction of P8,000

off the

list

price was granted as a trade-in allowance. The trade-in item is to be priced to sell at P6,400 as

is.

The normal profit on this type of inventory

is 25% of the sales price.

QUESTIONS:

Based on the above and the result of your audit, answer

 

the following:

(Assume

 

the

client

is using perpetual

PROBLEM NO. 2

inventory system)

 

The Bolinao Company values its inventory at the lower of

6.

The entry

on

Jan.

8

will

include

a

debit

to

Raw

FIFO cost or net realizable

value (NRV).

The inventory

Materials Inventory of

 

accounts at December 31,

2014,

had

the

following

a.

P200,000

 

c.

P141,120

 

balances.

b.

P144,000

d.

P196,000

Raw materials

P 650,000

 

7.

The repossessed inventory on Feb. 14 is most likely to

Work in process

1,200,000

 

be valued at

Finished goods

1,640,000

a.

P14,000

c.

P17,200

 

b.

P24,000

d.

P14,400

 

8.

The journal entries on April 3 will include a

 

EXCEL PROFESSIONAL SERVICES, INC.

  • a. Debit to Cash of P24,000.

  • b. Debit to Cost of Repossessed Goods Sold of P14,000.

  • c. Credit to Profit on Sale of Repossessed Inventory of P3,600.

  • d. Credit to Repossessed Inventory of P20,400.

  • 9. The trade-in inventory on Aug. 30 is most likely to be valued at

  • a. P8,000

c.

P6,000

  • b. P4,800

d.

P6,400

10. How much will be recorded as Sales on Aug. 30?

  • a. P51,200

c.

P57,200

  • b. P56,000

d.

P57,600

PROBLEM NO. 3

The cost goods sold section of the income statement prepared by your client for the year ended December 31 appears as follows:

Inventory, January 1

P

80,000

Purchases

1,600,000

Cost of goods available for sale

1,680,000

Inventory, December 31

100,000

Cost of goods sold

P1,580,000

Although the books have been closed, your working paper trial balance is prepared showing all accounts with activity during the year. This is the first time your firm has made an examination. The January 1 and December 31 inventories appearing above were determined by physical count of the goods on hand on those dates and no reconciling items were considered. All purchases are FOB shipping point.

In the course of your examination of the inventory cutoff, both at the beginning and end of the year, you discovered the following facts:

Beginning of the Year

  • 1. Invoices totaling P25,000 were entered in the voucher register in January, but the goods were received during December.

  • 2. December invoices totaling P13,200 were entered in the voucher register in December, but goods were not received until January.

End of the Year

  • 3. Sales of P43,000 (cost of P12,900) were made on account on December 31 and goods delivered at that time, but all entries relating to the sales were made on January 2.

  • 4. Invoices totaling P15,000 were entered in the voucher register in January, but the goods were received in December.

  • 5. December invoices totaling P18,000 were entered in the voucher register in December, but the goods were not received until January.

  • 6. Invoices totaling P12,000 were entered in the voucher register in January, and the goods were received in January, but the invoices were dated December.

Based on the preceding information, determine the net working paper adjustment that should be made for each of the following accounts:

  • 11. Retained earnings

 

a.

P13,200 credit

c.

P25,000 debit

b.

P11,800 debit

d.

P38,200 debit

  • 12. Purchases

a.

P27,000 debit

c.

P25,000 credit

b.

P28,000 debit

d.

P2,000 debit

  • 13. Beginning inventory

 

a.

P25,000 credit

c.

P13,200 debit

b.

P38,200 debit

d.

P11,800 debit

  • 14. Accounts receivable

 

a.

P43,000 debit

c.

P30,000 debit

b.

P43,000 credit

d.

No adjustment

  • 15. Sales

a.

P43,000 debit

c.

P30,000credit

b.

P43,000 credit

d.

No adjustment

- end of AP.1901 -