CHAPTER 5 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
Purchases
Cash
Accounts Payable
Accounts payable
Purchases
Accounts payable
Purch. Disc.
Cash

12,000
2,000
7,600

2,400
9,600
2,000
152
7,448

Seller
Accounts Receivable
Cash
Sales
Sales
Accounts Receivable
Cash
Sales Discount
Accounts Receivable

9,600
2,400
2,000
7,448
152

12,000
2,000
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
Jan . 5
No Entry
Jan. 10
Purchases
25,000
Notes payable
10,000
Accounts pay.
15,000
Jan. 15
Accounts pay.
5,000
Cash
5,000
Date of Payment:
Accounts pay.
10,000
Cash
9,700
Purchase discount
300
Discount : P15,000 x 2% = P300

Seller
Jan. 5
No Entry
Jan. 10 Notes Receivable 10,000
Accounts Receiv. 15,000
Sales
25,000
Jan 15 Cash
5,000
Accounts receiv.
Cash
Sales discount
Accounts reciev.

9,700
300

5,000

10,000

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
Accounts receivable
Transportation expense
Sales
Cash
Accounts receivable

18,500
1,500
18,500

20,000
18,500

Buyer
Purchases
Accounts payable
Cash
Accounts payable
Cash

20,000
18,500

18,500
1,500
18,500

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
Freight-in
950
Sales
Accounts payable
12,950
Cash
Account payable
2,500
Sales
Purchases
2,500
Accounts receivable
Accounts payable
5,000
Cash
Cash
5,000
Accounts receivable
Accounts payable
5,450
Cash
Cash
5,260
Sales discount
Purchase discount
190
Accounts receivable

Discount P12,000 P2,500 = P9,500 x 2% = P190

12,950
2,500
5,000
5,260
190

12,000
950
2,500
5,000
5,450

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
Purchases
Freight-in
Accounts payable
Cash
Claims receivable
Purchases
Freight-in

10,000
1,500
11,500

10,000
1,500

Seller
Accounts receivable
Sales

10,000

10,000

10,000
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
Machinery
50,000
Cash
25,000
Accounts payable others
25,000
Machinery
Cash

2,000

2,000

Seller
Cash
Accounts recei. others
Accum. depreciation
Machinery
Gain on sale

25,000
25,000
18,000

60,000
8,000

Accounts payable others

5,000
Machinery
5,000
Accounts payable others
20,000
Cash
20,000
If paid within the discount period:
Accounts payable others
20,000
Cash
19,600
Machienry
400

Gain on sale
5,000
Accounts recie. others
5,000
Cash
20,000
Accounts recie others
20,000
Cash
19,600
Gain on sale
400
Accounts payable others
20,000

7. The Ariel Company purchased land and building at lump-sum price of P300,000 from
Cherely Company on January 1, 2006. The land and building was purchased by Cherely
Company 3 year ago at a total cost of P300,000. Based on the appraisers computation
and analysis, the cost of the land is twice as much to that of the building. Ariel
Company assume a five-year life of the building with no salvage cost. Two years later,
Ariel Company sold the building at P80,000 to Jaan Company.
Ariel Company will record gain or loss from the sale of the building to Jaan Company by
a. Gain of P 20,000
b. Loss of P100,000
c. Neither gain nor loss
d. Cannot be determined
Answer - P 20,000
Buyer
Land
Building
Cash
Sale of Building:
Cash
Accum. depreciation
Building
Gain on sale

200,000
100,000

80,000
40,000

300,000

100,000
20,000

Seller
Cash
Land and building

300,000

Buyer
Building
Cash

80,000

300,000

80,000

Problem 1
Listed below are some items of inventory from Anecito Company that are in question during
the audit. The company stores a substantial portion of the merchandise in a separate
warehouse and transfer damaged goods to a special inventory account.
1. Items in receiving department returned by customer, no
communication received from customer
2. Items ordered and in receiving department, invoice not yet
received from supplier
3. Items counted in warehouse by the inventory crew
4. Invoice received for goods ordered, goods shipped but not received
(Anecito Company pays freight)
5. Items, shipped today, fob destination, invoice mailed to customer
6. Items currently used for window displays
7. Items on counter for sale per inventory count [not in (3)]
8. Items in shipping department, invoice not mailed to customer
9. Items in receiving department, refused by Anecito because of
Damage [(not in (3)]
10. Items shipped today, fob shipping point, invoice mailed to customer
11. Items included in warehouse count, damaged, not returnable
12. Items included in warehouse count, specifically crafted and

20,000
50,000
70,000
5,000
5,000
10,000
90,000
6,000
3,000
4,000
8,000

segregated for shipment to customer in five days per sales

contract, with return privilege.

18,000

Question:
1. If the recorded inventory in the balance sheet is P289,000, the year-end inventory will
be overstated by:
a. P 41,000
b. P 23,000
c. P 18,000
d. P 3,000
2. The following should be included from the inventory, except:
a. Inventory shipped today, f.o.b. shipping point, invoice mailed to customer.
b. Inventory counted in warehouse by the inventory crew.
c. Inventory shipped today, f.o.b. destination, invoice mailed to customer.
d. Inventory in warehouse count, specifically crafted and segregated for shipment to
customer with return privilege.
3. The inventory per audit at year-end is:
a. P 286,000
b. P 271,000

c. P 266,000

d. P 248,000

Solution
1. P 20,000
2.
50,000
3.
70,000
4.
5,000 (the fact that Anecito pays the freight, the term then is FOB shipping point)
5.
5,000
6.
10,000
7.
90,000
8.
6,000
9.

10.

11. ( 8,000)
12. 18,000 (this is still included in the inventory since the goods has a return privilege)
P266,000
Answer:
1. b
2. a
3. c

Problem 2
In the event of your audit, you found the following information related to the inventories on
December 31, 2006.
a. An invoice for P90,000, FOB shipping point, was received on December 15, 2006. The
receiving report indicates that the goods were received on December 18, 2006, but
across the face of the report is the notation Merchandise not of the same quality as
ordered, returned for credit, December 19. The merchandise was included in the
inventory.
b. Included in the physical count were inventories billed to customer FOB shipping point on
December 31, 2006. These inventories had a cost of P28,000 and were billed at
P35,000. The shipment was in loading dock waiting to be picked by the common carrier.
c. Merchandise with an invoice cost of P50,000, received from a vendor at 5:00 pm on
December 31, 2006, were recorded on a receiving report dated January 2, 2007. The
goods were not included in the physical count, but invoice was included in accounts
payable at December 31, 2006.

d. Merchandise costing P15,000 to the company FOB shipping point on December 26,
2006. The purchase was recorded, but the merchandise was excluded from the ending
inventory because it was not received until January 4, 2007.
e. The inventory included 1000 units erroneously priced at P9.50 per unit. The correct cost
was P10.00 per unit.
The adjusting entries for:
1. Item letter a is;
Debit
a. Cost of sales
90,000
b. Inventory
90,000
c. Retained earnings
90,000
d. No adjustment

Credit
Inventory
Cost of Sales
Inventory

90,000
90,000
90,000

2. Item letter b is:

a.
b.
c.
d.

Debit
Cost of sales
28,000
Inventory
28,000
Cost of sales
35,000
No adjustment

Credit
Inventory
Cost of sales
Inventory

28,000
28,000
35,000

3. Item letter c is;

a.
b.
c.
d.

Debit
Inventory
50,000
Cost of sales
50,000
Inventory
50,000
No adjustment

Credit
Cost of sales
50,000
Inventory
50,000
Retained earnings
50,000

4. Item letter d is:

a.
b.
c.
d.

Debit
Cost of sales
15,000
Inventory
15,000
Inventory
15,000
No adjustment

Credit
Inventory
15,000
Cost of sales
15,000
Retained earnings
15,000

5. Item letter d is:

Debit
a.
b.
c.
d.

Cost of sales
Inventory
Cost of sales
Inventory

Answer 1. a
2. d

3. a

500
500
10,000
10,000
4. b

Credit
Inventory
Cost of sales
Inventory
10,000
Cost of sales
10,000

500
500

5. b

Problem 3
You have observed the physical count of DEMI CORPORATIONs inventory taken on
December 31, 2006. The following errors were discovered:
a. Goods that cost P7,000 was sold for P8,500 on December 29, 2006. The order was
shipped December 31, 2006 with terms fob destination. The merchandise was not
included in the ending inventory. The sale was not recorded until January 4, 2007, the
date when the customer made payment of the sold goods.
b. On December 29, 2006, DEMI CORPORATION purchased merchandise costing P15,000
from a supplier. The order was shipped December 30, 2006 (terms FOB shipping point)
and was still in transit on December 31, 2006. Since the invoice was received on
December 31, the purchase was recorded in 2006. The merchandise was included in the
inventory count.
c. On January 4, 2007, goods that were included in the ending inventory at December 31,
2006, were returned to DEMI CORPORATION because the consignee had not been able
to sell it. The cost of this merchandise was P9,500 with a selling price of P14,500.
d. DEMI CORPORATION failed to make an entry for a purchase on account of P6,500 at the
end of 2005, although it included this merchandise in the inventory count. The purchase
was recorded when payment was made to the supplier in 2006.
e. On January 6, 2007, DEMI CORPORATION received merchandise which had been shipped
to them on December 31, 2006. The terms of the purchase were fob destination. Cost
of the merchandise was P6,400. The purchase was not recorded until payment was
made in January 2007 but the goods were included in the inventory as of December 31,
2006.
f.

Goods with a selling price of P30,000 was shipped to Herald Company, a consignee, on
December 29, 2005.
Since this was shipped before the inventory count, the
merchandise, which was billed 20% above cost, was excluded from the inventory count.
Sales was not recorded until the inventory was received on January 5, 2006. Your
further investigation revealed that 50% of these goods were sold in 2006 and the onhand at December 31, 2006 were not yet reported in 2006 inventory.

Questions: Based on the above information, answer the following:

1. What is the entry to adjust audit finding a at December 31, 2006?
a. Accounts Receivable 8,500
c.
Both A and B
Sales
8,500
b. Inventory
7,000
d. Accounts Receivable
8,500
Retained Earnings
7,000
Retained Earnings 8,500
2. What is the entry to adjust audit finding number b at December 31, 2006?
a. Inventory
15,000
c. Both A and B
Retained Earnings
15,000
b. Retained Earnings
15,000
d. Neither A nor B
Accounts Payable 15,000
3. DEMI CORPORATION should debit what account to adjust audit finding number c at
December 31, 2006?
a. Sales
c. Retained Earnings
b. Cost of Sales
d. No adjustment is necessary

4. In audit finding number d, choose the correct statement?

a. The company is correct for not making an entry on the P6,500 purchase on account
even though it is already included in the inventory count since no term of shipment
is given.
b. The company should reduced its purchases at December 31, 2006 since the
purchases being paid in 2006 was the purchase for 2005.
c. The company is correct in recording of purchases in year 2006 since this is the time
when the company made payment on such.
d. Inventory should be recorded at December 31, 2005 since the purchases were
recorded on this year.
5. The entry to adjust audit finding number e at December 31, 2006 is: (assume the
book is not close)
a. Retained Earnings
6,400
c. Purchases
6,400
Inventory
6,400
Accounts Payable
6,400
b. Retained Earnings
6,400
d. Cost of sales
6,400
Accounts payable
6,400
Inventory
6,400
6. The entry to adjust audit finding number f at December 31, 2006 is: (assume the book
is close)
a. Inventory
25,000
c. Cost of sales
25,000
Accounts Receivable 25,000
Sales
25,000
Cost of sales
25,000
Retained Earnings 25,000
Sales
25,000
Accounts Receivable
25,000
b. Cost of sales
25,000
d. Retained Earnings
2,500
Sales
15,000
Inventory
12,500
Retained Earnings
25,000
Accounts Receivable
15,000
Accounts Receivable
15,000
Answer
1. b
2. d

3. d

4. b

5. a

6. d

Problem 4
The PRINCE COMPANYS year-end inventory based on physical count conducted on
December 31, 2006, amounted to P885,000. Your cut-off examination disclosed the
following information:
1. Included in the physical count were goods billed to customer FOB shipping point on
December 31, 2006. These goods had a cost of P28,000 and were billed at P35,000.
The shipment was on PRINCES loading dock waiting to be picked up by the common
carrier.
2. Goods were in transit from a vendor to PRINCE on December 31, 2006. The invoice cost
was P50,000 and the goods were shipped FOB Shipping on Dec. 29,2006.
3. Work in process inventory costing P20,000 was sent to an outside processor for plating
on Dec. 30, 2006.
4. Goods returned by customers and held pending inspection in the returned goods area on
Dec. 31, 2006, were not included in the physical count. On January 8, 2007, the goods
costing P26,000 were inspected and returned to inventory. Credit memos totaling
P40,000 were issued.

5. Goods shipped to customer FOB destination on Dec. 26, 2006, were in transit at Dec.
31, 2006 and had a cost of P25,000. Upon notification of receipt by the customer on
January 2, 2007, the company issued a sales invoice for P42,000.
6. Goods received from a vendor on Dec. 26, 2006, were included in the physical count.
However the related P60,000 vendor invoice was not included in Accounts Payable as
December 31, 2006, because the Accounts Payable copy of the receiving report was lost.
7. On January 3, 2007, a monthly freight bill in the amount of P4,000 was received. This
was specifically related to merchandise purchased in Dec. 31, 2006. The freight charges
were not included in either the inventory or in accounts payable at Dec. 31, 2006.
Question:
1. Sales at year-end is overstated by:
a. P 75,000
b. P 40,000

c. P 35,000

d. P 33,000

2. Purchases at year-end is understated by:

a. P 110,000
b. P 84,000

c. P 64,000

d. P 60,000

3. Cost of sales at year-end is overstated by:

a. P 46,000
b. P 21,000

c. P 11,000

d. P

4. The inventory per audit at year-end is:

a. P 981,000
b. P 959,000

c. P 1,006,000

d. P 1,010,000

Solution
1. Sales
35,000
Accounts receivable
2. Inventory
50,000
Cost of sales
Purchases
50,000
Accounts payable
3. Inventory
20,000
Cost of sales
4. Inventory
26,000
Cost of sales
Sales
40,000
Accounts receivable
5. Inventory
25,000
Cost of sales
6. Purchases
60,000
Accounts payable
7. Inventory
4,000
Accounts payable
Answer:
1. a
2. a
3. c
4. d

7,000

35,000
50,000
50,000
20,000
26,000
40,000
25,000
60,000
4,000

Problem 5
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 suppliers 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 Arceniths shipping room
when the physical inventory was taken. It was included in the inventory because it was
marked Hold for customers 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.
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

Unadj. bal.

Inventory
end
72,000

Acnts. Receivable
60,000

Acnts.
Payable
30,000

Sales
400,000

Net
Purchases
160,000

Pretax
ncome
51,000

Item 1

800

800

Item 2

18,000

18,000

Item 3

(23,000)

(23,000)

(23,000)

(25,000)

(25,000)

(25,000)

(1,500)

(1,500)

(1,500)

10,000

10,000

Item 4
Item 5

(1,000)

Item 6

(1,000)

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

Item 12

(8,000)

Adjusted
balance
Answer:
1. c
2. a

10

3. b

13,000

13,000
(8,000)

8,000

165,000

27,300

(8,000)

(8,000)

102,800

10,500

35,000

4. c

(13,000)

5.b

6. a

350,500

Problem 6
Marlisa Companys December 31, 2005 and December 31, 2006 inventory is P35,000 and
P27,000, respectively. The beginning and ending inventories were determined by physical
count of the goods on hand on those dates, and no reconciling items were considered. All
purchases are f.o.b. shipping point. In the course of your examination of the inventory cutoff, both the beginning and ending of each year, you discover the following facts:
Beginning of the year
a. Invoices totaling P3,260 were entered in the voucher register on January, but the goods
were received during December.
b. December invoices totaling P4,100 were entered in the voucher register in December,
but the goods were not received until January.
End of the Year
c. Invoices totaling P7,260 were entered in the voucher register in January but the goods
were received in December.
d. December invoices totaling P3,600 were entered in the voucher register in December,
but the goods were not received until January.
e. Invoices totaling P1,500 were entered in the voucher register in January, and the goods
were received in January, but the invoices were dated December.
Question:
Based on your analysis and the information above, answer the following:
1. The adjusted balance of the Jan. 1, 2006 inventory is:
a. P 35,000
b. P 35,840
c. P 39,100

d. P 59,100

2. How much is the adjusted balance of the Purchases account at December 31, 2006
assuming the amount of Purchases in the trial balance is P5,176,000?
a. P 5,170,566
b. P 5,180,000
c. P 5,181,500
d. P 5,185,200
3. The corrected December 31, 2006 inventory is
a. P 52,100
b. P 50,600
c. P 32,100

d. P 28,500

4. When auditing inventories, an auditor would least likely verify that

a. All inventory owned by the client is on hand at the time of the count.
b. The client has used properly inventory pricing.
c. Damaged goods and obsolete items have been properly accounted for.
d. The financial statement presentation of inventories is appropriate.
Solution
a. Retained earnings
Purchases
b. Beginning inventory
Retained earnings
c. Purchases
Accounts payable
d. Inventory
Cost of sales
e. Inventory
Cost of sales
Purchases
Accounts payable
Answer: 1. c
2. c
3. c

3,260
4,100
7,260
3,600
1,500
1,500
4. a

3,260
4,100
7,260
3,600
1,500
1,500

11

Problem 7
During the 2006 audit of JONES Manufacturing Companys year-end inventory, you found
the following items.

A packing case containing product costing P8,160 was standing in the shipping room
when the physical inventory was taken. It was not included in the inventory because it
was marked Hold for shipping instructions. The customers order was dated December
18, but the case was shipped and the customer billed on January 10, 2007.

Merchandise costing P6,250 was received on December 28, 2006, and the invoice was
recorded. The invoice was marked On Consignment.

Merchandise received on January 6, 2007 costing P7,200 was entered in the purchase
register on January 7. The invoice showed shipment made FOB shipping point on
December 31, 2006.

A special machine, fabricated to order for a particular customer, was finished and in the
shipping room on December 30. The customer was billed on that date and the machine
was excluded from inventory although it was shipped January 2, 2007. The machine
costs P25,000 and was sold for P45,000.

Merchandise costing P23,500 was received on January 3, 2007, and the related purchase
invoice was recorded January 5. The invoice showed the shipment was made on
December 29, 2006, FOB destination.

Merchandise costing P11,000 was sold on an installment basis on December 15 at

P25,000. The customer took possession of the goods on that date. The merchandise was
included in inventory because JONES still holds legal title. Historical experience suggests
that full payment on the installment sales is received approximately 99% of the time.

Goods costing P15,000 were billed for P20,000 and delivered on December 20. The
goods were included in inventory because the sale was accompanied by a repurchase
agreement requiring JONES to buy back the inventory in February 2007.

Selected account balances before considering the effects of the above items are as follows:
Accounts receivable
Inventory
Accounts payable
Sales
Gross profit
Net income

P 185,000
114,500
67,200
942,400
287,990
84,680

Questions:
1. What is the adjusted accounts receivable balance at the end of the year?
a. P 166,000
b. P 165,000
c. P 150,000
d. P 125,000
2. What is the adjusted inventory balance at the end of 2006?
a. P 118,860
b. P 116,700
c. P 112,610

d. P 104,450

3. What is the adjusted balance of accounts payable at the end of the year?
a. P 68,150
b. P 68,000
c. P 67,200
d. P 65,000

12

4. The adjusted total sales in 2006 is

a. P 962,400
b. P 925,600

c. P 925,000

d. P 922,400

5. The adjusted Cost of goods sold in 2006 is

a. P 640,040
b. P 650,200

c. P 651,040

d. P 657,250

Solution
1. Inventory
Cost of Sales
2. Accounts payable
Purchases
Cost of sales
Inventory
3. Inventory
Cost of sales
Purchases
Accounts payable
4. No adjustments
5. No adjustments
6. Cost of sales
Inventory
7. Sales
Accounts receivable
Answer:
1. b
2. c
3. a
4. d

8,160
6,250
6,250
7,200
7,200

11,000
20,000

8,160
6,250
6,250
7,200
7,200

11,000
20,000

5. d

Problem 8
CHARMAINE COMPANY is a manufacturer of small tools. The following information was
obtained from the companys accounting records for the year ended December 31,
2006:
Inventory at December 31, 2006 (based on
physical count in Charmaines warehouse at cost
on December 31, 2006)
1,870,000
Accounts payable at December 31, 2006
1,415,000
Net sales (sales less sales returns)
9,693,400
Your audit reveals the following information:

The physical count included tools billed to a customer FOB shipping point on
December 31, 2006. These tools cost P64,000 billed at P78,500. They were in the
shipping area waiting to be picked up by the customer.

Goods shipped FOB shipping point by a vendor were in transit on December 31,
2006.These goods with invoice cost of P93.400 were shipped on December 29, 2006.

Work in process inventory costing P27,000 was sent to a job contractor for further
processing.

Not included in the physical count were goods returned by customers on December
31, 2006. These goods costing P49,000 were inspected and returned to inventory on
January 7, 2007. Credit memos for P67,800 were issued to the customers at that
date.

In transit to a customer on December 31, 2006, were tools costing P17,740 shipped
FOB destination on December 26, 2006. A sales invoice for P29,400 was issued on
January 3, 2007, when Charmaine Company was notified by the customer that the
tools had been received.

13

At exactly 5:00 pm on December 31, 2006, goods costing P31,200 were received
from a vendor. These were recorded on a receiving report dated January 2, 2007.
The related invoice was recorded on December 31, 2006, but the goods were not
included in the physical count.

Included in the physical count were goods received from a vendor on December 27,
2006. However, the related invoice for P36,000 was not recorded because the
accounting departments copy of the receiving report was lost.

A monthly freight bill for P16,000 was received on January 3, 2007. It specifically
related to merchandise bought in December 2006, one half of which was still in the
inventory at December 31, 2006. The freight was not included in either the
inventory or in accounts payable at December 31, 2006.

Question:
Based on your analysis and the information above, answer the following:
1. The inventory at year-end is:
a. Understated by P170,340
b. Understated by P162,340

c. Understated by P126,340
d. Understated by P82,140

2. The accounts payable at year-end is:

a. Understated by P93,400
b. Understated by P106,200

c. Understated by P137,400
d. Understated by P145,400

3. The amount of sales at year-end is:

a. Overstated by P67,800
b. Overstated by P38,400

c. Overstated by P29,400
d. Correctly stated

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

a. P 1,952,140
b. P 1,996,340
c. P 2,032,340
5

d. P 2,040,340

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

a. P 1,560,400
b. P 1,552,400
c. P 1,521,200

d. P 1,508,400

6. The adjusted balance of sales at year-end is:

a. P 9,722,800
b. P 9,693,400
c. P 9,655,000

d. P 9,625,600

Solution
Adjusting entry:
Cost of sales
Inventory
Inventory
Cost of sales
Purchases
Accounts payable
Inventory
Cost of sales
Inventory
Cost of sales
Sales
Accounts receivable
Inventory
Cost of sales
Inventory
Cost of sales

14

64,000
93,400
93,400
27,000
49,000
67,800
17,740
31,200

64,000
93,400
93,400
27,000
49,000
67,800
17,740
31,200

Purchases
Accounts payable
Inventory
Accounts payable
Answer:
1. b
2. c
3. a
4. c

36,000
8,000
5. b

36,000
8,000
6. d

Problem 9
The Cruzada Company is a wholesale distributor of automotive replacement parts.
amounts taken from Cruzadas accounting records are as follows:

Initial

Inventory at December 31, 2006 (based on physical count of goods in warehouse on

December 31, 2006); P1,250,000.
Accounts payable at December 31, 2006:
Dacalos Company
2% 10 days, net 30
Dano Company
Net 30
De Lira Company
Net 30
Dela Cruz Company
Net 30
Deza Company
Net 30
Encabo Company
Net 30
Sales in 2006

265,000
210,000
300,000
225,000
-___
P 1,000,000
P 9,000,000

Additional information is as follows:

a. Parts held on consigment from Dano Company to Cruzada Company, the consignee,
amounting to P155,000, were included in the physical count of goods in Cruzada
Companys warehouse on December 31, 2006 and in accounts payable at December 31,
2006.
b. P22,000 of parts which sere purchased from Deza Company and paid for in December
2006 were sold in the last week of 2006 and appropriately recorded as sales of P28,000.
The parts were included in the physical count of goods in Cruzadas warehouse on
December 31, 2006, because the parts were on the loading dock waiting to be picked up
by customers.
c. Parts in transit on December 31, 2006, to customers, shipped f.o.b. shipping point, on
December 28, 2006, amounted to P34,000. The customers received the parts on
January 6, 2007. Sales of P40,000 to the customers for the parts were recorded by
Cruzada Company on January 2, 2007.
d. Retailers were holding P210,000 at cost (P250,000 at retail) of goods on consignment
from Cruzada Company, the consignor, at their stores on December 31, 2006.
e. Goods were in transit from Encabo Company to Cruzada Company on December 31,
2006. The cost of goods was P25,000 and they were shipped f.o.b. shipping point on
December 29, 2006.
f.

A quarterly freight bill in the amount of P2,000 specifically relating to merchandise

purchases in December 2006, all of which was still in the inventory at December 31,
2006, was received on January 3, 2007. The freight bill was not included in either the
inventory or in accounts payable at December 31, 2006.

15

g. All of the purchases from Dacalos Company occurred during the last seven days of the
year. These items have been recorded in accounts payable and accounted for in the
physical inventory at cost before discount. Cruzadas policy is to pay invoices in time to
take advantage of all cash discounts, adjust inventory accordingly, and record accounts
payable, net of cash discount.
Questions:
1. The adjusted inventory is:
a. P 1,326,700
b. P 1,304,700

c. P 1,276,000

d. P 1,270,700

2. The adjusted accounts payable is:

a. P 864,700
b. P 866,700

c. P

872,000

d. P 1,017,700

3. The adjusted sales is:

a. P 8,960,000

b. P 9,000,000

c. P 9,040,000

d. P 9,100,000

155,000

Accounts payable
Purchases

155,000

Solution
a. Cost of sales
Inventory
b. Cost of sales
Inventory
c. Accounts receivable
Sales
d. Inventory
Cost of sales
e. Inventory
Accounts payable
f.
Inventory
Accounts payable
g. Accounts payable
Inventory
Answer:
1. b
2. b
3. c

22,000
40,000
210,000
25,000
2,000
5,300

155,000

155,000

22,000
40,000
210,000
25,000
2,000
5,300

Problem 10
Raffy Corporation reported income before income taxes as follows:
2005
2006

P525,000
630,000

The company uses the periodic inventory system. Ending inventories for 2005 and 2006
were properly recorded. The following additional information became available following an
analysis of the inventories:
(a) Merchandise with a gross invoice price of P7,500 was shipped FOB shipping point by a
supplier on terms of 2/10, n/30 in 2005 and was recorded as a purchase by Raffy
Corporation in 2005 when the invoice was received: however, the goods were not
included in the ending inventory because they were not received until 2006. The
company always takes advantage of the early payment discounts and accordingly,
records its purchases using the net method.
(b) Merchandise that cost P3,000 was purchased FOB shipping point by Raffy Corporation on
December 31, 2005 and was shipped by the supplier that day. The merchandise was not
included in the 2005 ending inventory and was not recorded as a purchase until 2006.

16

(c) Merchandise costing P2,850 was shipped FOB shipping point to a customer in 2005 and
not included in the ending inventory for 2005. The sale of P4,260 was recorded in 2006
when the invoice was sent.
(d) Goods being held by Raffy Corporation on consignment from a supplier in the amount of
P4,950 were included in the physical inventory for 2005.
(e) Retailers were holding P6,750 of goods at cost (P9,000 at retail), on consignment from
Raffy, at their stores on December 31, 2005. These goods were not included in the
ending inventory of Raffy Corporation for 2005.
Question:
1. How much is the correct income before taxes for 2005?
a. P 643,410
b. P 616,590
c. P 538,410

d. P 511,590

2. How much is the correct income before taxes for 2006?

a. P 643,410
b. P 616,590
c. P 538,410

d. P 511,590

3. The cost of sales at December 31, 2006 is understated by:

a. P 12,150
b. P 9,750
c. P 9,150

d. P 6,750

4. The Retained earnings beginning at December 31, 2006 is understated by:

a. P 13,410
b. P 12,150
c. P 10,410
d. P 9,150
5. The beginning inventory (January 1, 2006) of Raffy Corporation is understated by:
a. P 13,410
b. P 12,150
c. P 9,150
d. P 5,400
Solution
a. Beginning inventory
(COS)
Retained earnings beg

7,350

b.

Beginning inventory
(COS)
Retained earnings beg

3,000

Retained earnings beg

Purchases (COS)

3,000

c.

Sales
4,260
Retained earnings beg
d. Retained earnings beg
4,950
Beginning inventory (COS)4,950
e. Beginning inventory
(COS) 6,750
Retained earnings beg
Answer:
1. c
2. b
3. c
4. a
5. b

7,350
3,000
3,000

Net income
(a)
(b)
(c)
(d)
(e)
Adjusted NI

2005
525,000
7,350
3,000
( 3,000)
4,260
( 4,950)
6,750
538,410

2006
630,000
( 7,350)
( 3,000)
3,000
( 4,260)
4,950
( 6,750)
616,590

4,260

6,750

Problem 11
You audit of APAS COMPANY for the year 2006 disclosed the following:
1. The December 31 inventory was determined by a physical count on December 28 and
based on such count, the inventory was recorded by:
Inventory
1,400,000
Cost of sales
1,400,000
2. The 2006 ledger shows a sales balance of P20,000,000.
3. The company sells a mark-up of 20% based on sales.
4. The company recognizes sales upon passage of title to the customers.
5. All customers are within a four-day delivery area.

17

The sales register for December, 2006 and January, 2007, showed the following details:
December Register
Invoice No.
FOB Terms
300
Destination
301
Shipping point
302
Destination
303
Destination
304
Shipping point
305
Shipping point
January Register
Invoice No.
306
307
308
309
310

FOB Terms
Destination
Shipping point
Destination
Shipping point
Shipping point

Date Shipped
12/30
12/30
12/23
12/24
01/02
12/29
Date Shipped
12/29
12/29
01/02
01/04
12/27

Questions
1. The Sales for December is over/(under) by:
a. P 36,000 under
b. P 36,000 over

Amount
P 50,000
62,500
47,500
82,500
56,000
90,000
Amount
67,500
74,500
140,000
73,000
67,500

c. P 106,000 under
d. P 106,000 over

2. The Inventory for December is over/(under) by:

a. P 235,600 over
c. P 245,412 under
b. P 181,600 over
d. P 245,412 over
3. The adjusted inventory at December 31, 2006 is:
a. P 1,645,412
b. P 1,218,400
c. P 1,164,400

d. P 1,154,588

4. The adjusted sales at December 31, 2006 is:

a. P 20,106,000
b. P 20,036,000
c. P 19,964,000

d. P 19,894,000

5. How much sales for the month of December 2006 were erroneously recorded in January
2007?
a. P 282,000
b. P 272,500
c. P 198,000
d. P 142,000
6. How much sales for the month of January 2007 were erroneously recorded in December
2006?
a. P 228,500
b. P 188,500
c. P 180,500
d. P 106,000
Solution
For SI # 300
Sales
50,000
Accounts receivable
50,000
For SI # 301
Cost of sales
50,000
Inventory
50,000
P62,500 x 80%
For SI # 304
Sales
56,000
Accounts receivable
56,000
For SI # 305
Cost of sales
72,000
Inventory
72,000 (P90,000

18

For SI # 307
Accounts receivable
Sales
Cost of sales
Inventory
P74,500 x 80%
For SI # 310
Accounts receivable
Sales
x 80%)

74,500
59,600

67,500

74,500
59,600

67,500

Unadjusted Sales
(1)
(3)
(5)
(7)
Adjusted Sales

20,000,000
( 50,000)
( 56,000)
74,500
67,500
20,036,000

Unadjusted inventory
(2)
(4)
(6)
(8)
Adjusted inventory

1,400,000
( 50,000)
( 72,000)
( 59,600)
_________
1,218,400

Sales for the month of December that 2006

were erroneously recorded in January 2007:
Invoice # 307
74,500
Invoice # 310
67,500
Total
142,000
Sales for the month of January 2007
were erroneously recorded in December 2006:
Invoice # 300
50,000
Invoice # 304
56,000
Total
106,000
Answer:
1. a
2. b
3. b
4. b
5. d
7. d

Problem 12
On December 15, 2006, under your observation, your client took a complete physical
inventory and adjusted the financial perpetual inventory control accounts to agree with the
physical inventory.
As of December 31, 2006, you decided to accept the balance of the control account after
examining transactions recorded in that account between December 15 and December 31,
2006. The audit was for the year ended December 31, 2006.
In the course of conducting your examination of the sales cutoffs as of December 15 and
December 31, 2006, you discovered the following items:
Date Inventory
Item Cost Price
Sales Price
Date Shipped
Date Billed
Control Credited
A
P 60,000
P 78,000
12-13-06
12-17-06
12-17-06
B
77,000
101,400
01-02-07
12-29-06
12-29-06
C
52,000
67,600
12-17-06
12-29-06
12-29-06
D
87,000
113,100
12-14-06
12-16-06
12-16-06
E
49,500
64,500
12-25-06
01-02-07
01-02-07
Question:
Based on the information above and your analysis, answer the following
1. The inventory at year-end is over/(under) by:
a. P 174,500 over
c. P 114,500 over
b. P 174,500 under
d. P 114,500 under
2. The cost of sales at year-end is over/(under) by:
a. P 174,500 over
c. P 114,500 over
b. P 174,500 under
d. P 114,500 under
3. The sales at year-end is over/(under) by:
a. P 36,900 over
c. P 101,400 over
b. P 36,900 under
d. P 101,400 under

19

4. The accounts receivable at year-end is over/(under) by:

a. P 36,900 over
c. P 101,400 over
b. P 36,900 under
d. P 101,400 under
Solution
AJEs as of December 31, 2002
Item
A

C
D
E

Inventory
Cost of Goods Sold
This item was not included in the physical inventory and was
credited to the Inventory account on 12.17.06; a physical
inventory cutoff error.

Debit
60,000

Sales
Inventory
Accounts Receivable
Cost of goods sold
This item is a year-end sales cut-off error.
Properly recorded; no AJE needed.
Inventory
Cost of goods sold
(same as Item A)
Accounts Receivable
Cost of goods sold
Sales
Inventory
This item is a year-end sales cut-off error.

Answer:
1. b
2. a

3. a

Credit
60,000

101,400
77,000
101,400
77,000
87,000
64,500
49,500

87,000

64,500
49,500

4. a

Problem 13
The following information was obtained from the balance sheet of LION INC.:
Cash
Notes receivable
Inventory
Accounts payable

Dec. 31, 2006

P706,600
0
?
?

Dec. 31, 2005

P 200,000
50,000
399,750
150,000

All operating expenses are paid by Lion Inc. with cash and all purchases of inventory are
made on account. Lion, Inc. sells only one product. All sales are cash sales which are
made for P100 per unit. Lion. Inc., purchases 1,500 units of inventory per month and
values its inventory using the periodic FIFO. The unit cost of inventory during January
2006 was P65.20 and increased P0.20 per month during the year. During 2006,
payments to suppliers totaled P943,400 and operating expenses totaled P440,000. The
ending inventory for 2005 was valued at P65.00 per unit.
Question:
Based on the information above and your analysis, answer the following
1. Recorded sale during 2006 is:
a. P 1,840,000
b. P 1,890,000

c. P 2,090,000

d. P 2,140,000

2. Number of units sold during 2006 is:

a. 21,400
b. P 20,900

c. 18,900

d. 18,400

20

3. The accounts payable balance at December 31, 2006 is:

a. P 400,000
b. P 250,000
c. P 156,000

d. P 150,000

4. The January 1, 2006 inventory balance is:

a. P 399,750
b. P 385,900

c. P 380,900

d. P 355,800

5. The amount of inventory at December 31, 2006 is:

a. P 399,750
b. P 385,900
c. P 380,900

d. P 355,800

Solution
Q1 & Q2
____________________Cash______________________
Beg. bal.200,000 Payment to supplier 943,400
NR collect
50,000 Ope. expenses 440,000
Sales
1,840,000 Ending balance
706,600
Sales (P) P1,840,000/P100 = P18,400 units
Q3

_______________Accounts Payable_________________
Payment to supplier 943,400 Beg. bal.
156,000
Ending balance
400,000 Purchases 1,193,400
Jan.
1,500 x
Feb.
1,500 x
Mar
1,500 x
Apr
1,500 x
May
1,500 x
Jun
1,500 x
July
1,500 x
Aug
1,500 x
Sept
1,500 x
Oct
1,500 x
Nov
1,500 x
Dec
1,500 x
Total purchases

P65.20 = P 97,800
P65.40 = 98,100
P65.60 = 98,400
P65.80 = 98,700
P66.00 = 99,000
P66.20 = 99,300
P66.40 = 99,600
P66.60 = 99,900
P66.80 = 100,200
P67.00 = 100,500
P67.20 = 100,800
P67.40 = 101,100
1,193,400

P65.20 + P67.40 / 2 = P66.30

x 18,000 units
Purchases
1,193,400

Q4

P399,750 / P65.00 = 6,150 units

Q5

6,150 beg. units + 18,000 purchased units 18,400 sold units = 5,750 ending
FIFO:

Total

1,500
1,500
1,500
1,250

x
x
x
x

P67.40
P67.20
P67.00
P66.80

= P101,100
= 100,800
= 100,500
=
83,500
P 385,900

Problem 14
Kitkat Company operates a wholesale oil products company. Kitkat believes that an
employee and a customer are conspiring to steal gasoline. The employee records sales to
the customer not less than the amount actually placed in the customers tank truck. In
order to confirm or refuse these suspicions, Kitkat has collected the following data for the
past 10 working days.
Quantity
Cost per
(gallons)
unit (gal)
Total Cost
Inventory, September 1
220,000
P1.45
P 319,000
Purchases
1,560,000
1.45
2,262,000
Goods available for sale
1,780,000
2,581,000

21

Kitkat had sales of P2,512,000 during this 10-day period. All sales were made at P1.60 per
gallon. A physical inventory indicates that there are 192,000 gallons of gasoline in inventory
at the close of business on September 10.
Questions:
1. How much inventory should be present at the end of the 10-day period (in gallons)?
a. 220,000
b. 210,000
c. 200,000
d. 192,000
2. What is the cost of missing inventory?
a. P 304,500
b. P 40,600
Answer
1
b
2
c

c. P 26,100

b. P 0

1,780,000 (2,512,000/1.60) = 210,000 gallons

210,000 192,000 = 18,000 x P1.45 = P26,100

Problem 15
You were assigned to audit the factory accounts of Modfood Manufacturing Corporation for
the year ended December 31, 2006. The following data were gathered:
Total manufacturing Cost
Cost of Goods Manufactured
Factory Overhead

P 900,000
800,000
75% of direct labor and 25% of total
manufacturing cost

Beginning work-in-process inventory, January 1, was 60% of ending work-in-process

inventory, December 31, 2006.
Manufacturing costs for the year ended December 31, 2006 submitted to you by the factory
accountant was as follows:
Raw Materials Used
Direct Labor
Factory Overhead
Total

P400,000
275,000
225,000
P900,000

Questions:
1. Assuming cost percentage relationships are stated are correct, what will be the
adjustment on manufacturing cost at December 31, 2006?
a. Debit:
Raw materials used
25,000
Credit
Direct labor
25,000
b. Debit:
Direct labor
25,000
Credit
Raw materials used
25,000
c. Debit:
Raw materials used
50,000
Credit
Direct labor
50,000
d. Debit:
Direct labor
50,000
Credit
Raw materials used
50,000
2. How much is the Work-in-process Inventory on December 31, 2006?
a. P 200,000
c. P 250,000
b. P 225,000
d. P 275,000

22

Solution
1
b

Per books
Raw Materials Used
P400,000
Direct Labor
275,000
Factory Overhead
225,000
Total
P900,000
(60% of WIP, end) + 900,000 WIP,end = 800,000
WIP, end = 100,000/40% = P250,000

Per audit
P375,000
300,000
225,000
P900,000

Difference
P25,000 over
P25,000 under
---

Problem 16
Following are portions of the ANTHONY CORPORATIONS SALES and PURCHASES account for
the calendar year 2006: (All sales are mark-up at 30% based on sales price)
SALES
12/31

Closing Entry

P 1,411,100

Sales Register
12/25 SI#876
12/27
877
12/29
879
12/31
880

P 1,411,100
Purchase Register
12/27 RR#545
12/28
547
12/29
548
12/30
549

740,000
15,000
7,500
10,000
20,000
792,500

P 1,230,000
15,000
25,500
55,000
85,600
P 1,411,100

PURCHASES
12/31 Closing Entry

792,500

_______
792,500

You observed the physical inventory of goods in the warehouse on December 31, 2006 and
were satisfied that it was properly taken.
When performing sales and purchases cut-off tests, you found that at December 31, 2006,
the last Receiving Report (RR) that had been used was No. 549 and that no shipments have
been made on any Sales Invoices (SI) with number larger than No. 878.
The following information were found:
1. Included in the warehouse physical inventory at December 31, 2006 were chemicals that
had been purchased and received on Receiving Report No. 546 but for which an invoice
was not received until 2007. Cost was P14,500.
2. In the warehouse at December 31, 2006, were goods that had been sold and paid for by
the customer but which were not shipped out until 2007. They were all sold on Sales
Invoice No. 876.
3. On the evening of December 31, 2006, there were two shipments on ANTHONY
CORPORATION. First shipment was unloaded on January 3, 2007 and received on
Receiving Report No. 548. The freight was paid by the vendor. The second shipment
was loaded and sealed on December 31, 2006 but was not delivered until January 2,
2007. This order was sold on Sales Invoice No. 878, P20,000 and freight was paid by
the buyer.

23

4. Temporarily stranded on December 31, 2006, on a railroad sidings were two trucks of
chemicals en route to the Nelson Neil Company. They were sold on Sales Invoice No.
879 and the term were fob destination.
5. En route to ANTHONY CORPORATION on December 31, 2006 was truckload of materials
that was received on Receiving Report No. 550.
The material was shipped fob
destination.
6. Included in the physical inventory were chemicals exposed to rain while in transit and
deemed unsalable. Their invoice cost was P5,500 and freight charges of P200 had been
paid on the chemicals. This was recorded as purchases on 12/31/02
Questions:
1. The Sales at December 31, 2006 is:
s. Overstated by P 70,000
b. Overstated by P 55,000

c. Overstated by P 155,600
d. Overstated by P 15,000

2. The adjusted Sales at December 31, 2006 is:

a. P 1,396,100
b. P 1,356,100
c. P 1,341,100

d. P 1,255,500

3. The adjusted Purchases at December 31, 2006 is:

a. P 797,000
b. P 796,800
c. P 791,500

d. P 782,500

4. The Purchases at December 31, 2006 is:

a. Understated by P4,500
c. Overstated by P10,000
b. Overstated by P 1,000
d. Understated by P 4,300
5.The Inventory at December31, 2006 is:
a. Understated by P 8,300
c. Overstated by P12,500
b. Understated by P 14,000
d. Understated by P 12,500
6. The Cost of Sales at December 31, 2006 is:
a. Understated by P 17,000
c. Overstated by P1,200
b. Overstated by P 9,500
d. Understated by P12,500
Solution
1. Purchases
Accounts payable
SI # 546
2. Sales
Advances from customers
SI # 876
3. Accounts payable
Purchases
RR # 548
4. Inventory
Cost of sales
SI#878 - P20,000 x 70%
5. Sales
Accounts receivable
SI # 879
6. Claims Receivable
Purchases
Freight-in
7. Cost of sales
5,700
Inventory

24

14,500
15,000
10,000
14,000
55,000
5,700

14,500
15,000
10,000
14,000
55,000
5,500
200
5,700

8.

Sales
Accounts receivable
SI # 880
Answer:
1. C
2. D
3. C
4. B

85,600

5. A

85,600
6. B

Problem 17
On April 15, 2007, a fire damaged the office and warehouse of KAREN MAE CORPORATION.
The only accounting record save was the general ledger, from which the trial balance below
was prepared.
KAREN MAE CORPORATION
TRIAL BALANCE
March 31, 2007
Cash
200,000
Accounts receivable
400,000
Inventory, December 31, 2006
750,000
Land
350,000
Building and equipment
1,100,000
Accumulated depreciation
413,000
Other Assets
36,000
Accounts payable
237,000
Other expense accruals
102,000
Capital stock
1,000,000
Retained earnings
520,000
Sales
1,350,000
Purchases
520,000
Operating expenses
266,000
________
3,622,000
3,622,000
_______________________________________________________________
The following data and information have been gathered:
1. The fiscal year of the corporation ends on December 31.
2. An examination of the April bank statement and canceled checks revealed that checks
written during the period April 1-15 totaled P130,000: P57,000 paid to accounts
payable as of March 31, P34,000 for April merchandise shipments, and P39,000 paid for
other expenses. Deposits during the same period amounted to P129,500, which
consisted of receipts on account from customers with the exception of a P9,500 refund
from a vendor for merchandise returned in April.
3. Correspondence with suppliers revealed unrecorded obligations at April 15 of P106,000
for April merchandise shipments, including P23,000 for shipments in transit on that date.
4. Customers acknowledge indebtedness of P360,000 at April 15, 2007. It was also
estimated that customers owed another P80,000 that will never be acknowledge or
recovered. Of the acknowledged indebtedness, P6,000 will probably be uncollectible.
5. The companies insuring the inventory agreed that the corporations fire loss claim should
be based on the assumption that the overall gross profit ratio for the past two years was
in effect during the current year.
The corporations audited financial statements
disclosed this information:

25

Net Sales
Net purchases
Beginning inventory
Ending inventory

Year Ended December 31

2006
2005
5,300,000
3,900,000
2,800,000
2,350,000
500,000
660,000
750,000
500,000

6. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The balance of the
inventory was a total loss.
Questions:
1. Cash balance at April 15, 2007 is:
a. P 70,000
b. P 143,000

c. P 190,000

d. P 199,700

2. Accounts Receivable balance at April 15, 2007 is:

a. P 350,500
b. P 360,000
c. P 400,000

d. P 440,000

3. Inventory at April 15, 2007 is:

a. P 0
b. P 35,000

c. P 58,000

d. P 93,000

4. Accounts payable at April 15, 2007 is:

a. P 106,000
b. P 180,000

c. P 276,500

d. P 286,000

5. Sales as of April 15, 2007 is:

a. P 1,470,000
b. P 1,510,000

c. P 1,750,000

d. P 1,790,000

6. Net purchases as of April 15, 2007 is:

a. P 544,500
b. P 593,500

c. P 627,500

d. P 650,500

7. Cost of Sales as of April 15, 2007 is:

a. P 513,000
b. P 547,000

c. P 721,000

d. P 830,500

8. Estimated inventory as of April 15, 2007 is:

a. P 570,000
b. P 575,500

c. P 679,500

d. P 830,500

9. Inventory loss at April 15, 2007 is:

a. P 477,000
b. P 512,000

c. P 535,000

d. P 570,000

10. The Average Gross Profit for two years (2005 and 2006) is:
a. 45%
b. 55%
c. 42.76%

d. 56.23%

Solution
Computation of sales for the period Jan 1 - April 15, 2007
Sales up to March 31, 2007
Sales for the period April 1-15
Accounts Receivable, 4.15.07
Receipts from customers
Less Accts. Receivable, 3.31.07
Total sales
1.

26

Computation of the amount of Inventory Fire Loss

Inventory, December 31, 2006
Add purchases for the period Jan.1 to April 15
Purchases up to March 31, 2007

P1,350,000
P440,000
120,000
P560,000
400,000

160,000
P1,510,000
P750,000
P520,000

Payments for April mdse. Shipments

Unrecorded obligations for April mdse, shipment
Purchases returns
Merchandise available for sale
Less cost of goods sold (P1,510,000 sales x 55%)
Estimated inventory on date of fire
Less: Proceeds from sale of salvaged mdse.
Shipments in transit
Inventory fire loss
Computation of average GP ratio:
Net Sales
Beginning Inventory
Net purchases
Available
Ending Inventory
Cost of goods sold
Gross Profit
Gross Profit rate

2005
P3,900,000
P660,000
2,350,000
P3,010,000
500,000
P2,510,000
P1,390,000

JOURNAL ENTRIES APRIL 1-15

Accounts payable
57,000
Cash
57,000
Purchases
34,000
Cash
34,000
Operating expenses
39,000
Cash
39,000
Cash
129,500
Accounts receivable
120,000
Purchase returns
9,500
Accounts receivable
160,000
Sales
160,000
Purchases
106,000
Accounts payable
106,000
Allowance for bad debts
80,000
Accounts receivable
80,000
Operating expenses (bad debts)
86,000
Allow. for bad debts
86,000
(P80,000 + P6,000)
1. Cash balance at April 15, 2007 is:
2. Accounts Receivable balance at April 15, 2007 is:
3. Inventory at April 15, 2007 is:
4. Accounts payable at April 15, 2007 is:
5. Sales as of April 15, 2007 is:
6. Net purchases as of April 15, 2007 is:
7. Cost of Sales as of April 15, 2007 is:
8. Estimated inventory as of April 15, 2007 is:
9. Inventory loss at April 15, 2007 is:
10. The Average Gross Profit for two years (2005 and 2006) is:

34,000
106,000
(9,500)

P35,000
23,000

2006
P5,300,000
P500,000
2,800,000
P3,300,000
750,000
P2,550,000
P2,750,000

d.
a.
c.
d.
b.
d.
d.
a.
b.
a.

650,500
P1,400,500
830,500
P570,000
58,000
P512,000

Total
P9,200,000
P660,000
5,150,000
P5,010,000
750,000
P5,060,000
P4,140,000
45%

P 199,700
P 350,500
P 58,000
P 286,000
P1,510,000
P 650,500
P 830,500
P 570,000
P 512,000
45%

PROBLEM 18
The following accounts were included in the adjusted trial balance of Jeanina Company as of
December 31, 2006:
Cash
Accounts receivable
Merchandise Inventory
Accounts payable
Accrued expenses

240,800
563,500
1,512,500
1,050,250
107,750

During your audit, you noted that Jeanina held its cash book open after year-end. In
addition, your audit reveled the following

27

1. Receipts for January 2007 of P163,650 were recorded in the December 2006 cash
receipts book. The receipts of P90,025 represents cash sales and P73,625 represents
collections from customers, net of 5% cash discounts.
2. Payments to suppliers made on January 2007 of P93,100, on which discounts of P3,100
were taken, were included in the December 2006 check register.
3. Merchandise inventory is valued at P1,512,500 prior to any adjustments . The following
information has been found relating to certain inventory transactions.
a. Goods valued at P68,750 are on consignment with a customer. These goods are not
included in the P1,512,500 inventory figure.
b. Goods costing P54,375 were received from a vendor on January 4, 2007. The related
invoice was received and recorded on January 6, 2007. The goods were shipped on
December 31, 2006, terms FOB shipping point.
c. Goods costing P159,375 were shipped on December 31, 2006, and were delivered to
the customer on January3, 2007. The terms of the invoice were FOB shipping point.
The goods were included in the 2006 ending inventory even though the sale was
recorded in 2006.
d. A P45,500 shipment of goods to a customer on December 30, terms FOB destination
are not included in the year-end inventory. The goods cost P32,500 and were
delivered to the customer on January 3, 2007. The sale was properly recorded in
2007.
e. The invoice for goods costing P43,750 was received and recorded as a purchase on
December 31, 2006. The related goods, shipped FOB destination were received on
January 4, 2007, and thus were not included in the physical inventory.
f.

Goods valued at P153,200 are on consignment from a vendor. These goods are not
included in the physical inventory.

Questions
Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2006.
1. Cash
a. P 240,800

b. P 173,500

c. P 170,250

d. P 167,150

2. Accounts receivable
a. P 727,150

b. P 641,000

c. P 637,125

d. P 563,500

3. Merchandise inventory
a. P 1,520,000

b. P 1,508,750

c. P 1,465,000

d. P 1,252,500

4. Accounts payable
a. P 1,197,725

b. P 1,153,975

c. P 1,150,875

d. P 1,143,250

5. Working capital
a. P 1,158,800

b. P 1,058,275

c. P 1,055,175

d. P 1,000,800

28

6. Current ratio
a. 2.00
Solution
1. Accounts receivable
Cash
Sales discount
Sales
Cash
2. Cash
Purchase discount
Accounts payable
3.a Inventory
Cost of sales
3.b Inventory
Cost of sales
Purchases
Accounts payable
3.c Cost of sales
Inventory
3.d Inventory
Cost of sales
3.e Accounts payable
Purchases
Answer:
1. d
2. b
3. b
4. b

b. 2.01
77,500
90,025
90,000
3,100
68,750
54,375
54,375
159,375
32,500
43,750
5. c

c. 1.84

d. 1.83

73,625
3,875
90,025
93,100
68,750
54,375
54,375
159,375
32,500
43,750
6. c

PROBLEM 19
In conducting your audit of Ma. Angela Corporation, a company engaged in import and
wholesale business, for the fiscal year ended June 30, 2006, you determined that its
internal control system was good. Accordingly, you observed the physical inventory at an
interim date, May 31, 2006 instead of at June 30, 2006.
You obtained the following information from the companys general ledger
Sales for eleven months ended May 31, 2006
Sales for the fiscal year ended June 30, 2006
Purchases for eleven months ended May 31, 2006
(before audit adjestments0
Purchases for the fiscal year ended June 30, 2006
Inventory, July 1, 2005
Physical inventory, May 31, 2006

P1,344,000
1,536,000
1,080,000
1,280,000
140,000
220,000

Your audit disclosed the following additional information.

(1) Shipments costing P12,000 were received in May and included in the physical
inventory but recorded as June purchases.
(2) Deposit of P4,000 made with vendor and charged to purchases in April 2006. Product
was shipped in July 2006.
(3) A shipment in June was damaged through the carelessness of the receiving
department. This shipment was later sold in June at its costs of P16,000.

29

Questions:
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 ratios. Based on the above and the result of your audit, you are to
provide the answers to the following:
1. The gross profit ratio for eleven months ended May 31, 2006 is
a. 20%
b. 25%
c. 30%

d. 35%

2. The cost of goods sold during the month of June, 23003 using the gross profit ratio
method is
a. P 132,000
b. P 148,000
c. P 144,000
d. P 160,000
3. The June 30, 2006 inventory using the gross profit method is
a. P 260,000
b. P 264,000
c. P 268,000
Solution
Q1 Beginning inventory
Purchases adjusted
TGAS
Ending inventory
Cost of goods sold
Sales
COS
Gross Profit

d. P 340,000

140,000
1,088,000 (P1,080,000 + P12,000 P4,000)
1,228,000
220,000
1,008,000
1,344,000
1,008,000
336,000

25%

Q2 Sales for the fiscal year ended June 30, 2003

Sales for the eleven months ended May 31, 2003
Sales for the month of June 30, 2003
Less: Sales of goods at cost
Sales with gross profit
x Cost Rate
Total
Plus: Sale of goods at cost
Total Cost of Goods Sold for June 2003
Q3 Ending inventory
Purchases for the month of June
Goods sold at cost
Total
Less: Cost of items sold in June
Gross Profit

P 1,536,000
1,344,000
P 192,000
16,000
P 176,000
25%
P 132,000
16,000
P 148,000

P 220,000
200,000 (P1,280,000 P1,080,000)
( 16,000)
P 404,000
144,000 (P192,000 x 75%)
P 260,000

Problem 20
You are engaged to audit the Abamz Company and its subsidiary, Yamas Company as of
December 31, 2005. The Abamz Company manufactures tires with it sells to its subsidiary
at cost plus 30%. During the course of the audit, you discover that the balances of the
inter-company accounts are not reconciled. Following is a copy of part of the inter-company
ledger sheets:
Date
Dec. 26
27
28

30

Reference
Total Forwarded
SI 903
SI 904
SI 905

Accounts Receivable from Yamas

Amount
Date
Reference
P180,000
7,600
4,000
6,200

Dec.26
29
31

Total Forwarded
CR
CR
Balance

Amount
P130,000
10,000
20,000
52,500

29
31

Date

SI 906
SI 908

Reference

Total Forwarded
Dec. 26 CD
31 CD
31 RG 80
31 Balance

3,700
11,000
P 212,500

P 212,500

Accounts Payable to Abamz

Amount
Date
P140,000
20,000
28,000
4,100
16,700

Dec. 26
28
29
31
31

Reference
Total Forwarded
VR 1003-902
VR 1004-903
VR 1005-904
VR 1006-907
VR 1010-909

P 208,800

Amount
P161,000
19,000
7,600
4,000
9,000
8,200
P 208,800

Legend for references:

SI Sales register and invoices number
CR Cash receipts book
CD Cash disbursements book
VR Voucher register, receiving report number, and Abamz invoice number
RG Returned goods register and debit memo number
A review of the inventory observation working papers discloses the following information:
Observation at Abamz Company on December 31, 2005:
1. Last shipment prior to the physical inventory was billed on Invoice number 908 dated
December 31, 2005.
2. No returned merchandise was received from Yamas Company during the month of
December 2005.
Observation at Yamas Company on December 31, 2005:
1. The last shipment of merchandise returned to Abamz in December 2005 was entered on
debit memo number 80 dated December 31, 2005.
2. The last receiving report used in December 2005 was number 1007 dated December 31,
2005 for merchandise billed on Abamz invoice number 905.
Questions:
1. What is the total unrecorded purchases of Yamas as of December 31, 2005?
a. P 29,900
b. P 20,900
c. P 14,700
d. P 11,000
2. What is the reconciled balance of the inter-company accounts at December 31, 2005?
a. P 7,600
b. P 30,346
c. P 29,400
d. P 37,600
3. Abamz Companys inventory at December 31, 2005 should be increased by
a. P 3,154
b. P 4,100
c. P 10,077
d. P 6,923
4. Yamas Companys inventory at December 31, 2005 should be increased by
a. P 29,400
b. P 4,100
c. P 11,000
d. P 14,700

31

Solution:

Abamz Company and Yamas Company

Reconciliation of Inter-Company Accounts
Abamz
Unadjusted balance
52,500
Abamz shipments not recorded by Yamas
SI # 905
SI # 906
SI # 908
SI # 907 not recorded by Abamz
9,000
SI # 909 recorded by Yamas although
there is no shipment made by Abamz
RG # 80 not yet recorded by Abamz
(4,100)
Remittance from Yamas not yet recorded by
Abamz
( 28,000)
Adjusted balance
29,400
Inventory Adjustments
December 31, 2005
Items to be added on inventory lists:
Cost of returned goods in transit
(4,100/130%)
Cost of purchases in transit
SI # 906
SI # 908
Total addition to inventory

Adjusting Entry:

Book of Abamz
Accounts Receivable 9,000
Sales
SI # 907
Sales Ret. & Allow.
4,100
Accounts Receivable
Goods in transit from Yamas

9,000

4,100

Cash
28,000
Accounts Receivable
28,000
Cash in transit from Yamas

32

Abamz

Yamas
16,700
6,200
3,700
11,000
(8,200)
______
29,400

Yamas

3,154
_____
3,154

3,700
11,000
14,700

Book of Yamas
Purchases
20,900
Accounts payable
20,900
SI # 905, 906, 908
Accounts payable 8,200
Purchases
SI # 909

8,200