AUDITING PROBLEMS

PROBLEM NO. 1
You are engaged in the regular annual examination of the accounts and records of PRTC Manufacturing
Co. for the year ended December 31, 2012. To reduce the workload at year end, the company, upon
your recommendation, took its annual physical inventory on November 30, 2012. You observed the
taking of the inventory and made tests of the inventory count and the inventory records. The company’s
inventory account, which includes raw materials and work-in-process is on perpetual basis. Inventories
are valued at cost, first-in, first-out method. There is no finished goods inventory. The company’s
physical inventory revealed that the book inventory of P1,695,960 was understated by P84,000. To avoid
delay in completing its monthly financial statements, the company decided not to adjust the book
inventory until year-end except for obsolete inventory items. Your examination disclosed the following
information regarding the November 30 inventory: a. Pricing tests showed that the physical inventory
was overstated by P61,600. b. An understatement of the physical inventory by P4,200 due to errors in
footings and extensions. c. Direct labor included in the inventory amounted to P280,000. Overhead was
included at the rate of 200% of direct labor. You have ascertained that the amount of direct labor was
correct and that the overhead rate was proper. d. The physical inventory included obsolete materials
with a total cost of P7,000. During December, the obsolete materials were written off by a charge to cost
of sales.

Your audit also disclosed the following information about the December 31 inventory:
a. Total debits to the following accounts during December were:
Cost of sales P1,920,800
Direct labor 338,800
Purchases 691,600
b. The cost of sales of P1,920,800 included direct labor of P386,400.

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

1. Adjusted amount of physical inventory at November 30, 2012

a. P1,715,560 c. P1,845,760
b. P1,631,560 d. P1,722,560
2. Adjusted amount of inventory at December 31, 2012
a. P1,509,760 c. P1,502,760
b. P1,516,760 d. P1,425,760
3. Cost of materials on hand, and materials included in work in process as of December 31, 2012
a. P819,560 c. P728,560
b. P812,560 d. P942,760
4. The amount of direct labor included in work in process as of December 31, 2012
a. P618,800 c. P338,800
b. P232,400 d. P386,400
5. The amount of factory overhead included in work in process as of December 31, 2012
a. P 772,800 c. P464,800
b. P1,237,600 d. P777,600