III AUDIT OF INVENTORIES

SUMMARY OF PROBLEMS

PROBLEM NO. 1 Computation of adjusted inventory

PROBLEM NO. 2 Computation of adjusted inventory and related accounts

(including preparation of adjusting entries)

PROBLEM NO. 3 Computation of adjusted inventory and related accounts

(including preparation of adjusting entries)

PROBLEM NO. 4 Effect of inventory errors on SFP and SCI items

(including preparation of adjusting entries)

PROBLEM NO. 5 Effect of inventory errors on SFP and SCI items

(including preparation of adjusting entries)

PROBLEM NO. 6 Cost flow assumptions

PROBLEM NO. 7 Measurement of inventory and inventory shortage

PROBLEM NO. 8 Write down of inventory to net realizable value

PROBLEM NO. 9 Inventory estimation

PROBLEM NO. 10 Inventory estimation

PROBLEM NO. 11 Roll-forward analysis

PROBLEM NO. 12 - Theory

PROBLEM NO. 1 - Ovation Company

Unadjusted inventory 2,348,900

Add (deduct) adjustments:
b) Goods in-transit purchased FOB shipping - not included 134,200
c) Goods in-transit sold FOB destination - included -
d) Goods purchased and received already - included -
e) Goods purchased and received already - not included 85,400
f) Goods held on consignment - included (104,380)
g) Goods in-transit sold FOB shipping point - included (105,200)
e) Goods returned by customers, received already - not includ 15,000
Adjusted inventory 2,373,920
PROBLEM NO. 2 - Bulls Company

Requirement No. 1
Inventory Accts. Payable Sales, net
Unadjusted balances 980,000 586,000 10,048,000
Add (deduct) adjustments:
a - Goods held on consignment (9,000) (9,000) -
b - Goods out on consignment 50,000 - -
c - Unshipped goods, erroneously billed - - (40,000)
d - Goods with constructive delivery (15,000) - -
e - Goods purchased FOB shipping poi 71,000 71,000 -
f - WIP sent to outside processor 30,000 - -
g - Goods returned by customers 32,000 - (47,000)
h - Goods sold FOB destination 21,000 - -
i - Goods excluded from physical count 27,000 - -
j - Unrecorded purchases - 56,000 -
k - Unrecorded freight-in 3,000 6,000
Adjusted balances 1,190,000 710,000 9,961,000

Requirement No. 2
a) Accounts payable 9,000
Inventory 9,000

b) Inventory 50,000
P/L summary (Cost of sales) 50,000

c) Sales 40,000
Acccounts receivable 40,000

d) P/L summary (Cost of sales) 15,000

Inventory 15,000

e) Inventory 71,000
Accounts payable 71,000

f) Inventory 30,000
P/L summary (Cost of sales) 30,000

g) Inventory 32,000
P/L summary (Cost of sales) 32,000
Sales returns 47,000
Acccounts receivable 47,000

h) Inventory 21,000
P/L summary (Cost of sales) 21,000

i) Inventory 27,000
P/L summary (Cost of sales) 27,000

j) P/L summary (Cost of sales) 56,000

Accounts payable 56,000
k) Inventory 3,000
P/L summary (Cost of sales) 3,000
Accounts payable 6,000
PROBLEM NO. 3 - Quezon Corporation
Adjustments
Per books Inc.(Dec.) Per audit
Sales 5,530,000 1 (130,000) 5,250,000
5 (150,000)
Accounts receivable 500,000 1 (130,000) 220,000
5 (150,000)
Inventory 600,000 3 64,000 864,000
4 80,000
6 120,000
Accounts payable 400,000 2 18,000 418,000
Purchases 3,000,000 2 18,000 3,018,000

Note : Prepare "T" accounts then post identified adjustments.

Adjusting entries

1 Sales (P46,000+P68,000+P16,000) 130,000

Accounts receivable 130,000
To adjust unshipped goods recorded as sales (SI No. 969, 970 and 971)

2 Purchases 18,000
Accounts payable 18,000
To take up unrecorded purchases (RR No. 1060)

3 Inventory 64,000
P/L summary (Cost of sales) 64,000
To take up goods under RR No. 1063

4 Inventory (P100,000/1.25) 80,000

P/L summary (Cost of sales) 80,000
To take up unshipped goods under SI No. 968

5 Sales 150,000
Accounts receivable 150,000
To reverse enrty made to record SI No. 966

6 Inventory (P150,000/1.25) 120,000

P/L summary (Cost of sales) 120,000
To take up goods under SI No. 966
PROBLEM NO. 4 - Makati Corporation

Sales Purchases Inventory COS Effect on Profit Effect on WC

over (under) over (under) over (under) over (under) over (under) over (under)
a - - (180,000) 180,000 (180,000) (180,000)
b (300,000) - 200,000 (200,000) (100,000) (100,000)
c - 150,000 150,000 - - -
d 600,000 (400,000) 400,000 200,000 200,000
e 250,000 (250,000) 250,000 250,000
f (160,000) 160,000 (160,000) (160,000)

300,000 150,000 (140,000) 290,000 10,000 10,000

Requirement No. 2
a) Inventory 180,000
Cost of sales 180,000

b) Accounts receivable 300,000

Sales 300,000
Cost of sales 200,000
Inventory 200,000

c) Accounts payable 150,000

Inventory 150,000

d) Sales 600,000
Accounts receivable 600,000
Inventory 400,000
Cost of sales 400,000

e) Cost of sales 250,000

Inventory 250,000

f) Inventory 160,000
Cost of sales 160,000
PROBLEM NO. 5 - Oh! Darling Corporation

Adjusting journal entries Inventory Sales COS Profit AR WC

over (under) over (under) over (under) over (under) over (under) over (under)
a) Cost of sales 100,000 (100,000) 100,000
Inventory 100,000 100,000 100,000
b) None
c) None
d) Sales 200,000 200,000 200,000
Accounts receivable 200,000 200,000 200,000
e) Sales 500,000 500,000 500,000
Accounts receivable 500,000 500,000 500,000
Inventory 280,000 (280,000) (280,000)
Cost of sales 280,000 280,000 (280,000)
f) Accounts receivable 300,000 (300,000) (300,000)
Sales 300,000 (300,000) (300,000)
g) None
h) Accounts receivable 600,000 (600,000) (600,000)
Sales 600,000 (600,000) (600,000)
Cost of sales 475,000 (475,000) 475,000
Inventory 475,000 475,000 475,000

295,000 (200,000) (295,000) 95,000 (200,000) 95,000

PROBLEM NO. 6 - Orang Dampuan Co.

Units UC TC
Dec. 1 350 820 ###
43 850 36,550
Dec. 2 (300)
Dec. 3 5
Dec. 9 55 910 50,050
Dec. 13 76 960 72,960
Dec. 15 (86)
Dec. 16 (1) 910 (910)
Dec. 22 (60)
Dec. 26 72 980 70,560
154 ###

FIFO
Composition of inventory, 12/31
Date Units UC TC
Dec. 26 72 980 70,560
Dec. 10 76 960 72,960
Dec. 9 6 910 5,460
Total 154 ###

Inventory, 12/1 ###

Net Purchases ###
Total goods available fo ###
Inventory, 12/31 ###
Cost of sales ###

Moving average

Purchased COS Balance

Date Units UC TC Units UC TC Units UC TC
Dec. 1 350 820 287,000
43 850 36,550
393 823 323,550
Dec. 2 300 823 246,900 93 823 76,650
Dec. 3 (5) 823 (4,115) 98 823 80,765
Dec. 9 55 910 50,050 98 823 80,765
55 910 50,050
153 855 130,815
Dec. 13 76 960 72,960 153 855 130,815
76 960 72,960
229 890 203,775
Dec. 15 86 890 76,540 143 890 127,235
Dec. 16 (1) 910 (910) 142 890 126,325
Dec. 22 60 890 53,400 82 890 72,925
Dec. 26 72 980 70,560 82 890 72,925
72 980 70,560
### 372,725 154 932 143,485
PROBLEM NO. 7 - Jay Roy Retailing Ltd

Requirement No. 1
Baked beans Quantity Price Amount
Balance, June 1 35,000 19.60 686,000
Purchase 10 June 20,000 19.50 390,000
Purchase 19 June 47,000 19.70 925,900
Sales (73,000 cases) (35,000) 19.60 (686,000)
(20,000) 19.50 (390,000)
(18,000) 19.70 (354,600)
Sales returns 5,000 19.70 98,500
Perpetual balance 34,000 19.70 669,800
Inventory shortage (squeeze) (1,400) 19.70 (27,580)
Physical count 32,600 19.70 642,220

Plain flour Quantity Price Amount

Balance, June 1 62,500 38.40 2,400,000
Purchase 03 June 15,000 38.45 576,750
Purchase 15 June 20,000 38.45 769,000
Purchase 29 June 24,000 39.00 936,000
Sales (95,000 boxes) (62,500) 38.40 (2,400,000)
(15,000) 38.45 (576,750)
(17,500) 38.45 (672,875)
Perpetual balance 26,500 38.45 1,032,125
Damaged goods (1,000) 38.45 (38,450)
Goods in transit (24,000) 39.00 (936,000)
Physical count 1,500 38.45 57,675

Requirement No. 2
Quantity Cost NRV LCN
Baked beans 32,600 642,220 945,400 642,220
Plain flour 1,500 57,675 57,750 57,675
Total 699,895
PROBLEM NO. 8 - Bangar Sales Company

Computation of units on hand, 7/31:

C P A
Inventory, 7/1 50,000 30,000 65,000
Purchases, 7/1-15 70,000 45,000 30,000
Purchases, 7/16-31 30,000
TGAS 150,000 75,000 95,000
Sales (105,000) (50,000) (45,000)
Inventory, 7/31 45,000 25,000 50,000

Requirement No. 1

Units in
Ending
Inventory Est. Selling Est. Cost to Inventory Allowanc
Item (FIFO) Unit cost Total cost Price (a) Sell (b) NRV LCN Total NRV at LCN e
Product C 30,000 8.00 240,000 7.20 0.72 6.48 6.48 194,400 194,400 45,600
15,000 6.50 97,500 7.20 0.72 6.48 6.48 97,200 97,200 300
45,000 337,500 291,600 291,600 45,900

Product P 25,000 10.50 262,500 9.90 0.99 8.91 8.91 222,750 222,750 39,750

Product A 30,000 1.25 37,500 1.80 0.18 1.62 1.25 48,600 37,500 -
20,000 0.90 18,000 1.80 0.18 1.62 0.90 32,400 18,000 -
50,000 55,500 81,000 55,500 -

655,500 595,350 569,850 85,650

(a) Existing selling price x .9
(b) Amount in letter (a) x .1

Requirement No. 2
Inventory Allowance
Item Total cost at LCN (a)
Product C 337,500 291,600 45,900
Product P 262,500 222,750 39,750
Product A 55,500 55,500 -
655,500 569,850 85,650
(a) Inventory at cost - Inventory at LCN

Required allowance, 7/31 85,650

Recorded allowance, 7/1 (3,000)
Loss on inventory writedown 82,650

Requirement No. 3

Inventory, 7/1 (at cost) 658,500

Purchases:
Product C [(70,000 units x P6.50)+(30,000 units x P8) 695,000
Product P (45,000 units x P10.50) 472,500
Product A (30,000 units x P1.25) 37,500 1,205,000
Total goods available for sale 1,863,500
Inventory, 7/31 (at cost) (655,500)
Cost of sales before loss on inventory writedown 1,208,000
Loss on inventory writedown 82,650
Cost of sales including loss on inventory writedown 1,290,650

Alternative computation:
Inventory, 7/1 (at LCN) (P658,500 - P3,000) 655,500
Purchases:
Product C [(70,000 units x P6.50)+(30,000 units x P8) 695,000
Product P (45,000 units x P10.50) 472,500
Product A (30,000 units x P1.25) 37,500 1,205,000
Total goods available for sale 1,860,500
Inventory, 7/31 (at LCN) (569,850)
Cost of sales including loss on inventory writedown 1,290,650
PROBLEM NO. 9 - Mandaluyong Company
Computation of adjusted balances:
Inventory Purchases Purchases
Nov. 30 Up to Nov. 30 Up to Dec. 31
Unadjusted balances 1,425,000 10,125,000 12,000,000
Add (deduct) adjustments:
a - 112,500 -
b - (15,000) (22,500)
c - (30,000) (30,000)
d (82,500) ### -
e - ### -
1,342,500 10,110,000 11,947,500

Inventory, January 1 1,312,500

Add - Net purchases up to Nov. 30 10,110,000
Total goods available for sale 11,422,500
Less - Inventory, Nov. 30 1,342,500
Cost of sales for 11 months 10,080,000

Sales for 11 months ended Nov. 30 12,600,000

Cost of sales for 11 months ended Nov. 30 (10,080,000)
Gross profit 2,520,000
Divide by sales for 11 months ended Nov. 30 12,600,000
Gross profit rate for 11 months ended Nov. 30 20.00%

Computation of inventory, 12/31

Inventory, January 1 1,312,500
Add - Purchases for the year ended Dec. 31 11,947,500
Total goods available for sale 13,260,000
Less - Cost of sales
Cost of sales with profit [(14,400,000 - 150,000) x 8 11,400,000
Cost of sales without profit 150,000 11,550,000
Estimated inventory, December 31 1,710,000
PROBLEM NO. 10 - Muntinlupa Company

Inventory, December 31, 2011 750,000

Add purchases for the period Jan. 1 to April 21
Purchases up to March 31, 2012 520,000
Payments for April purchases 34,000
Unrecorded obligations for April purchases 106,000
Purchase returns (9,500) 650,500
Total goods available for sale 1,400,500
Less cost of sales (see computation below) 830,500
Estimated inventory on the date of fire 570,000
Less: Proceeds from sale of salvaged merchandis 35,000
Shipments in transit 23,000 58,000
Inventory fire loss 512,000

Computation of cost of sales:

Sales up to March 31, 2012 1,350,000
Sales for the period April 1 to 21
Accounts receivable, 4.21.12 360,000
Accounts receivable for write-off 80,000
Receipts from customers (P129,500 - P9,500) 120,000
Total 560,000
Less Accounts receivable, 3.31.12 400,000 160,000
Total sales 1,510,000
x cost ratio (see computation below) 0.55
Cost of sales 830,500

Computation of cost ratio:

Inventory, 1/1/10 660,000
Net purchases (2010 and 2011) 5,150,000
Inventory, 12/31/11 (750,000)
Cost of sales (2010 and 2011) 5,060,000
/ Net sales (2010 and 2011) 9,200,000
Overall cost ratio 0.55
PROBLEM NO. 11 - Valenzuela Manufacturing Co.

Requirement No. 1
Inventory per books, 11/30 1,695,960
Add understatement of booked inventory 84,000
Physical inventory,11/30, per client 1,779,960
Add (deduct) adjustments
Overstatement due to pricing errors (61,600)
Understatement due to footing and extension errors 4,200
Obsolete materials (7,000)
Inventory per physical count, as adjusted 1,715,560

Requirement No. 2
Adjusted balance of inventory, 11/30 1,715,560
Purchases 691,600
Direct labor 338,800
Factory overhead (200% of direct labor) 677,600
Total 3,423,560
Less cost of sales:
Per books 1,920,800
Obsolete materials written off through COS (7,000) 1,913,800
Inventory, 12/31 1,509,760

Requirement No. 3
Inventory, 11/30 (see no. 1) 1,715,560
Direct labor (280,000)
Factory overhead (200% of direct labor) (560,000)
Raw materials, 11/30 875,560
Purchases 691,600
Total 1,567,160
Less: Materials included in cost of sales
Adjusted cost of sales (see no. 2) 1,913,800
Direct labor (386,400)
Factory overhead (772,800) 754,600
Cost of materials on hand and materials included in WIP 812,560
Labor cost in the WIP:
Labor included in 11/30 inventory 280,000
Labor incurred in December 338,800
Total 618,800
Labor included in COS (386,400) 232,400
Applied factory overhead (200% of direct labor) 464,800
Total, as shown in no.2 1,509,760
PROBLEM NO. 12 - Theory

1 D
2 A
3 B
4 B
5 C
6 C
7 B
8 D
9 C
10 C
11 C
12 A