Correcting Inventory Errors

The MILL CORPORATION has adjusted and closed its books at the end of 2019. The company arrives at
its inventory position by a physical count taken on December 31 of each year. In March 2020, the
following errors were discovered:

(a) Merchandise that cost P22,500 was sold for P30,600 on December 30, 2019. The order was shipped
December 31, 2019, with terms FOB shipping point. The merchandise was not included in the ending
inventory. The sale was recorded on January 15, 2020, when the customer made payment on the sale.

(b) On January 2, 2020, Mill Corporation received merchandise that had been shipped to it on December
31, 2018. The terms of the purchase were FOB shipping point. Cost of the merchandise was P15,750.
The purchase was recorded and the goods included in the inventory on January 2, 2020.

(c) On January 8, 2020, merchandise that had been included in the ending inventory was returned to
Mill because the consignee had not been able to sell it. The cost of this merchandise was P10,800 with a
selling price of P16,200.

(d) Merchandise costing P6,750, located in a separate warehouse, was overlooked and excluded from
the 2019 inventory count .

(e) On December 27, 2019, Mill Corporation purchased merchandise costing P10,575 from a supplier.
The order was shipped December 28 (terms FOB destination) and was still "in transit" on December 31.
Because the invoice was received on December 31, the purchase was recorded in 2019. The
merchandise was not included in the inventory count.

(f) The corporation failed to make an entry for a purchase on account of P7,515 at the end of 2019,
although it included this merchandise in the inventory count. The purchase was recorded when payment
was made to the supplier in 2020.

(g) The corporation included in its 2019 ending inventory merchandise with a cost of P12,150. This
merchandise had been canton: built and was being held according to the customer's written request
until the customer could come and pick up the Or merchandise. The sale, for P16,425, was recorded in
2020.

Required: Give the entry in 2020 (2019 books are closed) to correct each error. Assume that the errors
were made during 2020, all amounts are material, and the periodic inventory system is used.

Solution :

(a) Sales 30,600

Retained earnings 30,600

(b) Merchandise inventory 15,750

Purchases 15,750

(c) No entry necessary. Consigned goods should be included in the consignor's (Mill's) inventory.

(d) Merchandise inventory 6,750

Retained earnings 6,750

(e) Purchases 10,575

Retained earnings 10,575

(f) Retained earnings 7,515

Purchases 7,515

(g) Sales 12,150

Merchandise inventory 16,425

Retained earnings 4,275

Correcting Inventory Errors

BALLNUT Co. asks you to review its December 31, 2019, inventory values and prepare the necessary
adjustments to the books. The following information is given to you.

1. BALLNUT uses the periodic method of recording inventory. A physical count reveals P2,114,010 of
inventory on hand at December 31, 2019.

2. Not included in the physical count of inventory is P93,780 of merchandise purchased on December 15
from Menggay. This merchandise was shipped f.o.b. shipping point on December 29 and arrived in
January. The invoice arrived and was recorded on December 31.

3. Included in inventory is merchandise sold to Mubbly on December 30, f.o.b. destination. This
merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale on .
account for P115,200 on December 31, The merchandise cost P66,150, and Mubbly received it on
January 3.

4. Included in inventory was merchandise received from Moodle on December 31 with an invoice price
of P140,670. The merchandise Was shipped f.o.b. destination. The invoice, which has not yet arrived,
has not been recorded.

5. Not included in inventory is P76,860 of merchandise purchased from Waundy Company. This
merchandise was received on December 31 after the inventory had been counted. The invoice was
received and recorded on December 30.
6. Included in inventory was P93,942 of inventory held by BALLNUT on consignment from Baka
Corporation.

7. Included in inventory is merchandise sold to Mimson f.o.b. shipping point. This merchandise was
shipped after it was counted. The invoke was prepared and recorded as a sale for P170,100 on
December 31. The cost of this merchandise was P103,680, and Mimson received the merchandise on
January 5.

8. Excluded from inventory was a carton labelled "Please accept for credit." This carton contains
merchandise costing P13,500 which had been sold to a customer for P23,400. No entry had been made
to the books to reflect the return, but none of the returned merchandise seemed damaged.

Required:

a. Compute the correct inventory balance for BALLNUT at December 31, 2018.

Solution:

a. Inventory per count P2,114,010

Transaction

2 P93,780

3 ---

4 ---

5 P76,860

6 (P93,942)

7 (P103,680)

8 P13,500

Inventory as Corrected P2,100,528

Analyzing Inventory Transactions

The MOAT COMPANY reviewed its inventories and found the following items:

1. In the shipping room was a product costing P40,200 when the physical count was taken. Because it
was marked "Hold for shipping instructions," it was not included in the count. The customer order was
dated December 15, but the product was shipped and the customer billed on January 4, 2020.

2. On December 27, 2019, merchandise costing P34,944 was received and recorded. The invoice
accompanying the merchandise was marked "on consignment."
3. The company received merchandise costing P13,875 on January 2, 2020. The invoice, which was
recorded on January 3, 2020, showed shipment was made under FOB shipping point on December 31,
2019. The merchandise was not Included in the inventory because it was not on hand when the physical
count was taken.

4. A product, fabricated to order for a particular customer, was completed and in the shipping room on
December 31. Although it was shipped on January 5, 2020, the customer was billed December 31 and it
was excluded from the inventory.

5. Merchandise costing P50,000 was received on January 5, 2020, and the related purchase invoice as
recorded January 6. The shipment the of this merchandise was made on December 31, 2019, FOB
destination.

6. A product costing P450,000 was sold on an instalment basis on December 10, 2019. it was delivered
to the customer on that date. The product was included in inventory because Moat still holds legal title
The company's experience suggests that full payment on instalment sales is reasonably assured.

7. An item costing P195,000 was sold and delivered to the customer on December 29, 2019. The goods
were included in the inventory because the sale was with a repurchase agreement that requires Goat to
buy back the inventory on January 15, 2020.

Indicate which of the above items are to be included in the inventory balance at December 31, 2019.
State your reasons for the treatment you suggest.

1. Included - Merchandise, except "special orders", should be included in the inventory until shipped,

2. Excluded - Company does not possess legal title because the s w received on a consignment basis.

3, Included - Because the purchase was made under FOB shipping point term, the merchandise should
be included in the Inventory on the shipping date.

4 Excluded - A product that Is manufactured for a particular customer (special order) is considered sold
upon Its completion.

5. Excluded - The merchandise was purchased under FOB destination term and was not received until
January 5, 2020.

6. Excluded - The sale is recognized even though legal title has not passed.

7. included - This is actually a loan transaction with the inventory as collateral.

Computing Cash Expenditure for Inventory

The following audited balances pertain to Bowl Company.

Accounts payable:
January 1, 2020 860,774

December 31, 2020 2,213,472

inventory balance:

January 1, 2020 2,446,158

December 31,2020 1,466,622

Cost of goods sold - 2020 5,577,246

How much was paid by Bowl Company to its suppliers in 2020?

A. P2,636,494

B. P1,081,670

C. P1,734,694

D. P1,983,470

Solution:

Cost of goods sold - 2020 P5,577,246

Add: Inventory, December 31, 2020 1,466,622

Goods available for sale 7,043,868

Less: Inventory, January 1, 2020 (2,446,158)

Purchases 4,577,710

Add: Accounts payable. January 1, 2020 860,744

Total 5,438,454

Less: Accounts payable, December 31, 2020 (2,213,472)

Amount paid to suppliers in 2020 3,224,982

Income Effect of Inventory

The SNAKE, INC. reported income before taxes of P2,527,950 for 2020 and P2,896,050 for 2021. The
company takes its annual physical count of inventory every December 31. Your audit revealed the
following information:
a. The price used for 4,500 units included in the 2018 ending inventory was P109. The correct cost was
P190 per unit.

b. Goods costing P70,800 were received from a vendor on January 5, 2020. The shipment was made on
December 26, 2019, under FOB shipping point term. The purchase was recorded in 2019 but the
shipment was not included in the 2019 ending inventory.

c. Merchandise costing P194,250 was sold to a customer on December 29, 2019. Snake was asked by the
customer to keep the merchandise until January 3, 2020, when the customer would come and pick it up.
Although the sale was properly recorded in 2019, the merchandise was included, in the ending
inventory.

d. A supplier sold merchandise valued at P42,000 to Snake, lnc. The merchandise was shipped FOB
shipping point on December 29, 2019, and was received by Snake on December 31, 2019. The purchase
was recorded in 2019 and the merchandise was not included in the 2019 ending inventory.

1. What is the adjusted income before taxes for the year ended December 31, 2019?

A. 2,769,000

B. 2,655,000

C. 2,825,000

D. 2,435,000

2. What is the adjusted income before taxes for the year ended December 31, 2019?

A. 2,769,000

B. 2,655,000

C. 2,825,000

D. 2,435,000

2020 2021

Reported income before taxes P2,527,950 P2,896,050

Adjustments:

a. Transposition error in unit cost (P190 - P109 = P81 x 4,500) 364,500 (364,500)

b. Goods purchased FOB shipping point 70,800 (70,800)

c. Goods sold in 2018 (194,250) P194,250

d. Gooch purchased FOB shipping point - -

Adjusted income before taxes P923.000 P885.000 2,769,000 2,655,000

1. Adjusted income before taxes in 2018 2,769,000 A

2. Adjusted income before taxes in 2019 2,655,000 B

Correcting Physical Inventory Count

In your audit of the WABBIT, INC., you find that a physical inventory count on December 31, 2020,
showed merchandise costing P1,389,000 Was on hand at that date. Your examination reveals the
following Items were all excluded from the inventory per count.

1. Merchandise of P62,700 which is held on consignment.

2. Goods costing P118,500 that were shipped FOB shipping point on December 31, 2020. These goods
were delivered to the customer on January 6, 2021.

3. Goods costing P50,400 that were shipped FOB destination to a customer on December 29, 2020 The
customer received these. goods on January 2, 2021.

4. Merchandise costing P228,450 shipped by a seller FOB destination on December 28, 2020, and
received by Rabbit, Inc. on January 3, 2021.

5. Goods costing P49,500 slapped by a vendor FOB seller en December 31, 2020, and received by Rabbit,
Inc. on January 4, 2021.

What is the amount that should appear on Rabbit, Inc.'s statement of financial position as inventory at
December 31, 2020?

A. P539,050 C. P535,800 B. P519,000 D. P496,300

Solution:

inventory per physical count P1,389,000

Add: (3) Goods sold FOB destination P50,400

(5) Goods purchased FOB seller P49,500 99,900

Adjusted inventory 1,488,900

Correcting Inventory and Related Accounts

A general ledger account is maintained by BLIZARD COMPANY for each class of inventory. Such
inventory accounts are debited for increases during the period and credited for decreases. The following
transactions relate to Lizard's Raw Materials Inventory account, which is debited for purchases of raw
materials and credited when they are requisitioned for use.
1. An invoice for 145,800, terms FOB destination, was received and entered January 2, 2021. The
receiving report shows that the materials were received December 29, 2020.

2. Materials costing 504,000, shipped FOB destination, were not entered by December 31, 2020,
"because they were in a railroad car on the company's siding on that date and had not been unloaded."

3. Materials costing 131,400 were returned on December 29, 2020, to the creditor, and were shipped
FOB shipping point. The return was entered on that date, even though the materials are not expected to
reach the creditor's place of business until January 7, 2021.

4. An invoice for P135,000, terms FOB shipping point, was received and entered December 31, 2020. The
receiving report shows that the materials were received January 4, 2021, and the bill of lading shows
that they were shipped January 2, 2021.

5. Materials costing 356,400 were received December 31, 2020 but no entry was made for them
because they were ordered With a specified delivery of no earlier than January 9, 2021.

Prepare correcting entries required at December 31, 2020, assuming that the books have not been
closed. Ignore income taxes.

ADJUSTING JOURNAL ENTRIES December 31, 2020

1. Raw materials inventory 145,800

Accounts payable 145,800

2. Raw materials inventory 504,000

Accounts payable 504,000

3. No adjusting entry is necessary.

4. Accounts payable P135,000

Raw materials inventory P135,000

5. Raw materials inventory 356,400

Accounts payable 356,400

Correcting Errors In Inventory and Related

The following transactions occurred a few days before and a DEOPARD COMPANY's fiscal year which
ends October the company uses a periodic inventory system.
a. An invoice for P225,000, terms FOB shipping point, was received a. and entered November 2. The
invoice shows that the material was shipped October 31, but the receiving report indicates receipt of
goods on November 3.

b An invoice for P162,000, terms FOB destination, was received and entered October 25. The receiving
report indicates that the goods were received October 30.

c. An invoice for 441,000, terms FOB shipping point, was received October 14 but never entered.
Attached to it is a receiving report indicating that the goods were received October 19. Across the face
of the receiving report is the following notation: "Merchandise not of same quality as ordered - returned
for credit October 20."

d. An invoice for P114,000, terms FOB shipping point, was received and entered October 28. The
receiving report attached to the invoice indicates that the shipment was received October 28 in
satisfactory condition.

e. An invoice for 127,800, tennis FOB shipping point, was received and recorded November 3. The
receiving report indicates that the merchandise was received October 31. You are instructed to review
these transactions and to determine whether any correcting entries are to be prepared and whether the
inventory per physical count on October 31 should be adjusted.

1. Prepare any adjusting journal entries at October 31. Assume that the books have not been closed.

2. What is the net adjustment to Leopard's inventory as determined by physical count on October 31?

A. P225,000 increase C. P303,000 decrease B. P190,000 increase D. P172,000 decrease

1. ADJUSTING JOURNAL ENTRIES

October 31

a. Purchases 225,000

Accounts payable 225,000

b. No adjusting entry is necessary.

c. Purchases 441,000

Accounts payable 441,000

Accounts payable 441,000

Purchase returns and allowances 441,000

d. No adjusting entry is necessary.

e. Purchases 127,800
Accounts payable 127,800

2. INCREASE IN INVENTORY

Material purchased under FOB shipping point term, shipped October 31, but received on November 3

225,000

Answer: A

Computation of Year-end Inventory, The physical inventory of BULL, INC. as of December 26, 2020, total
P2,835,000. You agreed on the December 26 count as the company a good internal control system. In
trying to establish the December 31 inventory, you noted the following transactions from December27
to December 31, 2020.

sales (30% markup on cost) P 1,170,000

credit Memos issued:

For goods returned on:

December 15 32,400

December 20 54,000

December 29 46,800

For goods delivered to customers not In accordance with specifications 10,800

Credit memos received: For goods returned on:

December 10 16,200

December 26 12,600

December 28 18,000

Purchases:

Placed in stock 27,000

In transit, FOB shipping point 373,500

In transit, FOB destination 117,000

What is the inventory balance on December 31, 2018?

A. P690,000 C P693,600 B. P780,000 D. P865,500

Inventory per count, December 26, 2020 P2,835,000

Add (deduct) transactions, December 27-31, 2020:

Cost of goods sold (1,170,000 / 130%) (900,000)

Goods returned by customers on Dec. 29 (P46,800 + 130%) 36,000

Goods returned to suppliers on December 28 (18,000)

Purchases: Placed in stock 270,000

In transit, purchased FOB shipping point 373,500

Inventory balance, December 31, 2020 2,596,500

Correcting Inventory Errors

HEETAH CORPORATION is a wholesale distributor of kitchen utensils. Unadjusted balance:3 obtained

from Cheetah's accounting records are as follows:

Inventory (based on physical count of goods in Heetah's warehouse at December 31) 1,296,000

Accounts payable, December 31:

Vendor Terms Amount

Bonrox, Inc. Net 30 P108,000

YeDa Corp. Net 30 84,000

Yak, Inc. Net 30 249,000

Mais Co. Net 30 -

Welma, Inc. Net 30 - 441,000

Sales p7,800,000

The following additional information was also obtained:

1. Goods held on consignment from booms, Inc., the consignor, valued at P39,000 were included in the
physical count of goods in heetah's warehouse at December 31, and in Accounts Payable balance as of
December 31, 2020.
2. Goods costing 79,200 that were purchased from mais Co. and paid for in December were sold in the
last week of the current year. The sale was properly recorded at 174,000 in December.

Because the goods were in the shipping area of heetahs warehouse to be picked up by the customer,
they were included in the physical count at December 31

3. Retailers were holding goods costing P75,000 (retail price P107,100) shipped by Cheetah under
consignment term.

4 Goods were in transit from Velma, Inc. to Cheetah on December. 31. The cost of these goods was
70,500, and they were shipped FOB shipping point on December 28.

Based on the preceding information, compute the adjusted balances of the following:

1. Inventory

A. P1,417,600 B. P1,416,100 C. 1,523,000 D. 1,323,000

2. Accounts payable

A. P534,000 B. P457,500 C. 472,500D. P570,500

3. Sales

A. 7,800,000C. P7,564,300 B. P7,635,700 D. P7,625,000

Solution:

Inventory Accounts Payable Sales

Unadjusted Balances 1,296,000 441,000 7,800,000

Item No. 1 (P39,000) (P39,000)

2 (79,200)

3 75,000

4 70,500 70,500

Adjusted Balances 1,323,000 472,500 7,800,000

Answers:

1. D

2. C

3. A.