Audit of Inventories (Done)

Mindanao State University
College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City
AUDIT OF INVENTORIES
Accounting 152
Problem 1 – Inventory Identification

Mistletoe Company provided you with the following data with respect to its inventory:
Items counted at the warehouse P 8,000,000
Items excluded from the count segregated per sale contract 200,000
Items in the receiving department, returned by customer and in good
condition 100,000
Items ordered and in the receiving department, invoice not received 800,000
Items ordered, invoice received, but goods not received. Shipping
term was FAS (free alongside) 600,000
Items shipped today, invoice mailed, CIF (cost, insurance, freight) 500,000
Items shipped today, invoice mailed, ex-ship 300,000
Items currently being used for window display 400,000
Items on counter for sale 1,600,000
Items in the receiving department, refused by Mistletoe Company
because of damage 360,000
Items included from the count, damaged and unsalable 600,000
Based on your audit, what is the correct amount of inventory to be presented in Mistletoe’s statement of financial
position? Answer: P11,200,000.

As the auditor of Burjani Company, determine the correct amount of inventory that shall be reported by your client
in its 2011 balance sheet:
Goods out on consignment at another company’s store P 1,000,000
Goods held on consignment at the Burjani’s stores 750,000
Goods purchased FOB seller that are in transit 300,000
Goods purchased FOB buyer that are in transit 200,000
Goods sold where large returns are predictable 60,000
Goods sold FOB shipping point that are in transit 400,000
Freight charges on goods purchased 30,000
Interest cost incurred for inventories that are routinely manufactured 50,000
Costs incurred to advertise goods held for sale 10,000
Factory labor costs incurred on goods still unsold 400,000
Freight paid for transporting goods to consignees 30,000
Materials on hand not yet placed into production 500,000
Office supplies not yet used 30,000
Raw materials on which the company has started production but not
yet completed 450,000
Unused machine lubricants 30,000
Costs identified with units completed but not yet sold 330,000
Temporary investment in stocks and bonds that will be resold in the
near future 400,000
Goods sold on installment basis due in three equal annual payments 220,000
Goods sold with a right to repurchase 155,000
Based on your audit, what is the correct amount of inventory to be presented in Mistletoe’s statement of financial
position? Answer: P3,225,000.

La Union Company, your audit client for the current year included the following items under inventories:
Raw materials P 1,400,000
Advances for materials ordered 200,000
Goods in process 650,000
Unexpired insurance on inventories 60,000
Advertising catalogs and shipping boxes 150,000
Finished goods in factory 2,000,000
Finished goods in company owned retail stores including 50% profit 750,000
on cost
Finished goods in hands of consignees including 40% profit on sales 400,000
Finished goods in transit to customers, shipped FOB destination, at 250,000
cost
Finished goods out on approval, at cost 100,000
Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 1
Unsalable finished goods, at cost 50,000
Office supplies 40,000
Materials in transit shipped FOB shipping point, excluding freight 330,000
of P30,000
Goods held on consignment, at selling price, with a cost of 200,000
P150,000
Compute the amount to be presented as inventories under current assets in the statement of financial position for the
year. Answer: P5,500,000.
Problem 4 – Inventory Valuation

Roque, Incorporated purchased goods for resale. Costs related to this purchase are listed below:
List price, trade discounts allowed by seller is
20% and payment terms is at 2/10, n/30 P 2,000,000
Import duties 30,000
Irrecoverable purchase taxes 21,000
Commission paid to agents for arranging imports 15,000
Packaging for shipment 5,000
Normal shipping cost 100,000
Special handling charges 13,000
Abnormal freight charge due to express shipping 20,000
Interest paid on inventory loan 7,500
Based on the above and the result of your audit, answer the following questions,
1. Assuming Roque uses the gross method of recording purchases and the term of the purchase was FOB seller,
how much of these costs are inventoriable by Roque? Answer: P1,784,000.
2. Assuming Roque uses the gross method of recording purchases and the term of the purchase was FOB buyer,
how much of these costs are inventoriable by Roque? Answer: P1,666,000.

You were engaged by Qatar Company for the audit of the company’s financial statements for the year ended
December 31, 2012. The company is engaged in the wholesale business and makes all sales at 25% over cost. The
following were gathered from the client’s accounting records all for the month of December:
SALES PURCHASES
Date Reference Amount Date Reference Amount
Balance forwarded P5,200,000 Balance forwarded P2,700,000
27 SI No. 965 40,000 27 RR No. 1057 35,000
28 SI No. 966 150,000 28 RR No. 1058 65,000
28 SI No. 967 10,000 29 RR No. 1059 24,000
31 SI No. 969 46,000 30 RR No. 1061 70,000
31 SI No. 970 68,000 31 RR No. 1062 42,000
31 SI No. 971 16,000 31 RR No. 1063 64,000
31 Closing entry (5,530,000) 31 Closing entry (3,000,000)
P 0 P 0
Note: SI = Sales Invoice RR = Receiving Report
Accounts receivable P 500,000
Inventory 600,000
Accounts payable 400,000
You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was
properly taken. When performing sales and purchases cut off tests, you found that at December 31, the last
receiving report which had been used was No. 1063 and that no shipments had been made on any sales invoices
whose number is larger than No. 968. You also obtained the following additional information:
A. Included in the warehouse physical inventory at December 31 were goods which had been purchased and
received on Receiving Report No. 1060 but for which the invoice was not received until the following year.
Cost was P18,000.
B. On the evening of December 31, there were two trucks in the company siding:
 Truck No. MSB 123 was unloaded on January 2 of the following year and received Receiving
Report No. 1063. The freight was paid by the vendor.
 Truck No. ACE 143 was loaded and sealed on December 31 but leave the company premises on
January 2. This order was sold for P100,000 per Sales Invoice No. 968.
C. Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to Bagets
Trading Company. Bagets received the goods, which were sold on Sales Invoice No. 966 terms FOB
destination, the next day.
D. Enroute to the client on December 31 was a truckload of goods, which was received on Receiving Report
No. 1064. The goods were shipped FOB destination and freight of P2,000 was paid by the client. However,
the freight was deducted from the purchase price of P800,000.
Based on the above and the result of your audit, answer the following questions:
1. The correct amount of sales for the year ended December 31, 2012 is: Answer: P5,250,000.
2. The correct amount of purchases for the year ended December 31, 2012 is: Answer: P3,018,000.
3. The correct amount of inventory as of December 31, 2012 is: Answer: P864,000.
4. The correct balance of the accounts receivable as of December 31, 2012 is: Answer: P220,000.
5. The correct balance of the accounts payable as of December 31, 2012 is: Answer: P418,000.

Moose company is preparing its 2011 financial statements. Prior to any adjustments, inventory is valued at
P1,605,000. During your audit, you found the following information relating to certain inventory transactions from
your cut-off test:
A. Goods valued at P110,000 are on consignment with a customer. These goods were not included in the
ending inventory figure.
B. Goods costing P87,000 were received from a vendor on January 5, 2012. The related invoice was received
and recorded on January 12, 2012. The goods were shipped on December 31, 2011, terms FOB shipping
point.
C. Goods costing P85 000, sold for P102,000, were shipped on December 31, 2011, and were delivered to the
customer on January 2, 2012. The terms of the invoice were FOB shipping point. The goods were included
in the ending inventory for 2011 and the sale was recorded in 2012.
D. A P35,000 shipment of goods to a customer on December 31, terms FOB destination was not included in
the year-end inventory. The goods cost P26,000 and were delivered to the customer on January 8, 2012.
The sale was properly recorded in 2012.
E. The invoice for goods costing P35,000 was received and recorded as a purchase on December 31, 2011.
The related goods, shipped FOB destination were received on January 2, 2012 and thus were not included
in the physical count.
F. Goods valued at P154,000 are on consignment from a vendor. These goods were not included in the
physical inventory.
G. A P60,000 shipment of goods to a customer on December 30, 2011, terms FOB destination, was recorded
as a sale in 2012. The goods, costing P37,000 and delivered to the customer on January 6, 2012, were not
included in the 2011 ending inventory.
1. Compute the proper inventory amount to be reported on Moose’s statement of financial position for 2011.
Answer: P1,780,000.
2. By how much would the net income have been overstated (understated) if no adjustments were made to the
above transactions? Answer: P225,000 understated.

Bird Company is a manufacturer of small tools. The following information was obtained from the company’s
accounting records for the year ended December 31, 2010:
Inventory at December 31, 2010 (based on physical count in Bird’s
warehouse at cost on December 31, 2010) P 1,870,000
Accounts payable at December 31, 2010 1,415,000
Net sales 9,700,000
Your audit reveals the following information:
A. The physical count included tools billed to a customer FOB shipping point on December 31, 2010. These
tools cost P64,000 and were billed at P78,500. They were in the shipping area waiting to be picked up by
the customer.
B. Goods shipped FOB shipping points by vendor were in transit on December 31, 2010. These goods with
invoice cost of P93, 000 were shipped on December 29, 2010.
C. Work in process inventory costing P27,000 was sent to a job contractor for further processing.
D. Not included in the physical count were goods returned by customers on December 31, 2010. These goods
costing P49,000 were inspected and returned to inventory on January 7, 2011. Credit memos for P67,800
were issued to the customers at that date.
E. In transit to a customer on December 31, 2010, were tools costing P17,000 shipped FOB shipping on
December 26, 2010. A sales invoice for P29,400 was issued on January 3, 2011, when Bird Company was
notified by the customer that the tools had been received.
F. At exactly 5:00pm on December 31, 2010, goods costing P31,200 were received from a vendor. These
were recorded on a receiving report dated January 2, 2011. The related invoice was recorded on December
31, 2010, but the goods were not included in the physical count.
G. Included in the physical count were goods received from a vendor on December 27, 2010. However, the
related invoice for P36,000 was not recoded because the accounting department’s copy of the receiving
report was lost.
H. A monthly freight bill for P32,000 was received on January 3, 2011. It specifically related to merchandise
bought in December 2010, one-half of which was still in the inventory at December 31, 2010. The freight
was not included in either the inventory or in accounts payable at December 31, 2010.
1. Bird’s December 31, 2010 inventory should be reported at: Answer: P2,086,200.
2. The current liabilities of Bird would include accounts payable of: Answer: P1,576,000.
3. The amount of recorded net sales should be increased (decreased) by: Answer: Decreased by P116,900.
4. Which of the items above as lettered would require an adjustment on the amount of reported inventory but not
on reported net sales and accounts payable? Answer: Items C and F.
5. Which of the items above as lettered would require a reduction on the amount of reported inventory?
Answer: None of the items.
Problem 8 – Error Correction

The Alcasar Company reported income before taxes of P370,000 for 2010 and P526, 000 for 2011. A later audit
produced the following information:
A. The ending inventory for 2010 included 2,000 units erroneously priced at P5.90 per unit. The correct cost
was P9.50 per unit.
B. Merchandise costing P17,500 was shipped to the Alcasar Company, FOB shipping point, on December 26.
2010. The purchase was recorded in 2010, but the merchandise was excluded from the ending inventory
because it was not received until January 4, 2011.
C. On December 28, 2010, merchandise costing P2,900 was sold for P4,000 to Kapuso Corp. Kapuso had
asked Alcasar to keep the merchandise for it until January 2, when it would come and pick it up. Because
the merchandise was still in the merchandise was still in the store at year end, the merchandise was
included in the inventory count. The sale was recorded in December 2010.
D. Kapamilya Company sold merchandise costing P1,500 to Alcasar Company. The purchase was made on
December 29, 2010, and the merchandise was shipped on December 30. Terms were FOB shipping point.
Because Alcasar Company bookkeeper was on vacation, neither the purchase nor the receipt of goods was
recorded on the books until January 2011.
1. The December 31, 2010 inventory is overstated (understated) by: Answer: P23,300.
2. The corrected net income for 2010 is: Answer: P391,800.
3. The net income for 2011 is overstated (understated) by: Answer: P21,800.
4. By what amount did the total income before taxes change for the two years combined? Answer: P0.
Problem 9 – Repossessed Inventory

The Bolinao Company values its inventory at the lower of FIFO cost or net realizable value and employs the
perpetual inventory system in accounting for its inventory. The inventory accounts at December 31, 2009, had the
following balances.
Raw materials P 650,000
Work in process 1,200,000
Finished goods 1,640,000
The following are some of the transactions that affected the inventory of the Bolinao Company during 2010.
A. On January 8, Bolinao purchased raw materials with a list price of P200,000 and was given a trade discount
of 20% and 10%; terms 2/15, n/30. Bolinao values inventory at the net invoice price.
B. Bolinao repossessed an inventory item from a customer on February 14 who was overdue in making
payment. The unpaid balance on the sale is P15,200. The repossessed merchandise is to be refinished and
placed on sale. It is expected that the item can be sold for P24,000 after estimated finishing costs of P6,800.
The normal profit for this item is considered to be P3,200.
C. Refinishing costs of P6,400 were incurred on the repossessed item on March 1.
D. On April 3, the repossessed item was resold for P24,000 on account, 20% down payment.
E. A sale on account was made, on August 30, of finished goods that have a list price of P59,200 and a cost of
P38,400. A reduction of P8,000 off the list price was granted as a trade-in allowance. The trade-in item is to
be priced to sell at P6,400 as is. The normal profit on this type of inventory is 25% of the sales price.
1. The entry on January 8 will include a debit to Raw Materials Inventory of: Answer: P141,120.
2. The repossessed inventory on February 14 is most likely to be valued at: Answer P14,000.
3. The journal entries made on April 3 by Bolinao were:
Answer: Cash P 4,800
Accounts Receivable 19,200
Sales – Repossessed Inventory P24,000
Cost of Repossessed Goods Sold P20,400
Repossessed Inventory P20,400
4. The trade-in inventory on August 30 is most likely to be valued at: Answer: P4,800.
5. How much will be recorded as sales on August 30? Answer: P56,000.

Honoria Company wholesales bicycles. It uses the perpetual inventory system. The company’s reporting date is
December 31. At December 1 2010, inventory on hand consisted of 350 bicycles at P820 each and 43 bicycles at
P850 each. During the month ended December 31, 2010, the following inventory transactions took place (all
purchases and sales are on credit):
December 2 Sold 300 bicycles for P1 200 each.
December 3 Five bicycles were returned by a customer. They had originally cost P820 each and
were sold for P1 200 each.
December 9 Purchased 55 bicycles at P910 each.
December 13 Purchased 76 bicycles at P960 each
December 16 Returned one damaged bicycle to the supplier. This bicycle had been purchased on
December 9.
December 26 Purchased 72 bicycles at P980 each
December 29 Two bicycles sold on December 22 were returned by a customer. The bicycles were
badly damaged so it was decided to write them off. They had originally cost P910 each.
1. The cost of inventory as of December 31, 2010 using FIFO method: Answer: P148,980
2. The cost of sales for the month ended December 31, 2010 using FIFO method: Answer: P367,230.
3. The cost of inventory as of December 31, 2010 using moving average method: Answer: P143,485.
4. The cost of sales for the month ended December 31, 2010 using moving average method: Answer: P372,725.

The following information has been extracted from the records of Bernaber Company for 2011 regarding its product,
Ber:
Date Transaction Units Unit cost Total cost
1-Jan Beginning balance 1,600 P 14.00 P 22,400
6-Jan Purchased 600 14.10 8,460
5-Feb Sold at P24 per unit 2,000
19-Mar Purchased 2,200 14.70 32,340
24-Mar Purchase returns 160 14.70 2,352
10-Apr Sold at P24.20 per unit 1,400
22-Jun Purchased 16,800 15.00 252,000
31-Jul Sold at P26.50 per unit 3,600
4-Aug Sales returns at P26.50 per unit 40
4-Sep Sold at P27 per unit 7,000
15-Nov Purchased 1,000 16.00 16,000
28-Dec Sold at P30 per unit 6,200
During 2011, the total administrative and selling expense incurred by Bernaber totaled P21,500. Based on the above
and the result of your audit, answer the following questions (round unit cost to two decimal places):
1. If Bernaber uses the FIFO method and employs a periodic system in accounting and valuing its inventories, the
December 31, 2011 inventory would be: Answer: P29,200.
2. If Bernaber uses the FIFO method and employs a perpetual system in accounting and valuing its inventories,
the cost of goods sold for 2011 would be: Answer: P29,648.
3. If Bernaber uses the average method and employs a periodic system in accounting and valuing its inventories,
the gross profit for 2011 would be: Answer: P250,422.
4. If Bernaber uses the average method and employs a perpetual system in accounting and valuing its inventories,
the net income for 2011, ignoring income tax would be: Answer: P229,283.

Balanga Sales Company uses the FIFO method in calculating cost of goods sold for the three products that the
company handles. Inventories and purchase information concerning the three products are given for the month of
July:
Description Product C Product P Product A
July 1 Inventory 50,000 units 30,000 units at 65,000 units at
at P6.00 P10.00 P0.90
July 1-15 Purchases 70,000 units 45,000 units at 30,000 units at
at P6.50 P10.50 P1.25
July 16-31 Purchases 30,000 units None None
at P8.00
July 1-31 Sales 105,000 units 50,000 units 45,000 units
July 31 Selling price P8.00 per unit P11.00 per unit P2.00 per unit
On July 31, the company’s suppliers reduced their prices from the most recent purchase prices by the following
percentages: Product C, 20%; Product P, 10%; Product A, 8%. Accordingly, Balanga decided to reduce its sales
prices on all items by 10%, effective August 1. Balanga’s selling cost is 10% of sales price. Products C and P have a
normal profit (after selling costs) of 30% on sales prices while the normal profit on product A (after selling costs) is
15% of sales price. Based on the above and the result of your audit, answer the following questions:
1. The cost of inventory at July 31 is: Answer: P655,500.
2. The amount of inventory to be reported on Balanga’s statement of financial position at July 31is: Answer:
P569,850.
3. The allowance for inventory writedown at July 31 is: Answer: P85,650.
4. The loss on inventory writedown for the month of July is: Answer: P82,650.
5. The cost of sales after loss on inventory writedown for the month of July is: Answer: P1,290,650.
Jay Roy Retailing Ltd. is a food wholesaler that supplies independent grocery stores. The company operates a
perpetual inventory system, with the first-in, first-out method to assign costs to inventory items. Transactions and
other related information regarding two of the items (baked beans and plain flour) carried by Jay Roy are given
below for June 2008, the last month of the company’s reporting period.
Baked Beans Plain Flour
Unit of Packaging Case containing 25 x 410g cans Box containing 12 x 4kg bags
Inventory at June 1, 2008 35,000 cases at P19.60 62,500 boxes at P38.40
June 10: 20,000 cases at P19.50 per June 3: 15,000 boxes at P38.45
case
Purchases June 19: 47,000 cases at P19.70 per June 15: 20,000 boxes at P38.45
case
June 29: 24,000 boxes at P39.00
Purchase Terms 2/10, n/30, FOB destination n/30, FOB destination
June Sales 73,000 cases at P28.50 95,000 boxes at P40.00
A customer returned 5,000 cases that

As the June 15 purchase was being
had been shipped in error. The
unloaded, 1,000 boxes were
Returns and allowances customer’s account was credited for
discovered damaged. A credit of
P142,500.
P38,450 was received by Jay Roy.
Physical count at June 30,

32,600 cases on hand 1,500 boxes on hand
2008
No explanation found, thus, assumed Boxes purchased on June 29 still in

Explanation of variance
stolen transit on June 30
Net realizable value at 30

P29.00 per case P38.50 per box
June 2008
1. The inventory of baked beans as of June 30, 2008 at cost, as adjusted: Answer: P642,220.
2. The inventory of plain flour as of June 30, 2008 at cost, as adjusted: Answer: P57,675.
3. The amount of inventory shortage: Answer: P27,580.
4. The total inventory to be recognized in the balance sheet as of June 30, 2008 is: Answer: P699,895.

During your audit of the records of the Kiss The Wall Corporation for the year ended December 31, 2010, the
following facts were disclosed:
Raw materials inventory 1/1/2010 P 720,200
Raw materials purchases 5,232,800
Direct labor 6,300,00
Manufacturing overhead applied (150% of direct labor) 9,450,000
Finished goods inventory, 1/1/2010 1,240,000
Selling expenses 8,112,800
Administrative expenses 7,337,200
Your examination disclosed the following additional information:
A. Purchases of raw materials:
Month Units Unit price Amount
January to February 55,000 P 17.76 P 976,800
March to April 45,000 20.00 900,000
May to June 25,000 19.60 490,000
July to August 35,000 20.00 700,000
September to October 45,000 20.40 918,000
November to December 60,000 20.80 1,248,000
Total 265,000 P 5,232,800
B. Data with respect to quantities are as follows:
Explanation Units on Units on
1/1/2010 12/31/2010
Raw materials 35,000 ?
Work in process (80% completed) Nil 25,000
Finished goods 15,000 40,000
Sales, 205 000 units
C. Raw materials are issued at the beginning of the manufacturing process. During the year, no returns,
spoilage, or wastage occurred. Each unit of finished goods contains one unit of raw materials.
D. Inventories are stated at cost as follows:
 Raw materials – according to FIFO method.
 Direct labor – at an average rate determined by correlating direct labor cost with effective
production during the period.
 Manufacturing overhead – at an applied rate of 150% of direct labor cost.
1. The raw materials inventory as of December 31, 2010 is: Answer: P936,000.
2. The work in process inventory as of December 31, 2010 is: Answer: P1,776,000.
3. The finished goods inventory as of December 31, 2010 is: Answer: P3,334,000.
4. The cost of goods sold for the year ended December 31, 2010 is: Answer: P16,897,000.
Problem 15 – Inventory Estimation

The Malawi Company is an importer and wholesaler. Its merchandise is purchased from a number of suppliers and
is warehoused until sold to customers. In conducting his audit for the year ended December 31, 2010, the company’s
accountant determined that the system of internal control was good. Accordingly, he observed the physical inventory
at an interim date, November 30, 2010, instead of at year end.
The following information was obtained from the general ledger:
Inventory, January 1, 2010 P 90,000
Inventory, November 30, 2010 225,000
Sales for eleven months ended November 30, 2010 800,000
Sales for the year ended December 31, 2010 950,000
Purchases for eleven months ended November 30, 2010 (before audit
adjustments ) 720,000
Purchases for year ended December 31, 2010 (before audit
adjustments) 810,000
Additional information is as follows:
A. Goods received on November but recorded as purchases in December
P 10,000
B. Deposits made in October 2010 for purchases to be made in 2011 but charged to
purchases 14,000
C. Defective merchandise returned to suppliers:
Total at November 30, 2010 5,000
Total at December 31, 2010, excluding November items 7,000
The returns have not been recorded pending receipt of credit memos from the
suppliers. The defective goods were not included in inventory.
D. Goods shipped in November under FOB destination and received in December
were recorded as purchases in November 18,500
E. Through the carelessness of the client’s warehouseman, certain goods were
damaged in December and sold in the same month at its cost
20,000
F. Audit of the client’s November inventory summary revealed the following:
 Items counted but not included in inventory summary
 Items duplicated 7,000
 Purchases in transit: 3,000
Under FOB shipping point
Under FOB destination 12,000
 Errors in extension that overvalued the items 18,500
4,000
1. The correct amount of net purchases up to November 30, 2010 is: Answer: P692,500.
2. The correct amount of net purchases up to December 31, 2010 is: Answer: P784,000.
3. What is the correct amount of net purchases for the month of December 2010? Answer: P91,500.
4. The correct inventory on November 30, 2010 is: Answer: P206,500.
5. What is the gross income for eleven months ended November 30, 2010? Answer: P224,000.
6. What is the cost of sales ratio for the eleven months ended November 30, 2010? Answer: 72%.
7. What is the total cost of goods sold for the month of December 2010? Answer: P113,600.
8. What is the estimated inventory on December 31, 2010? Answer: P184,400.
In conducting the audit of Tamerin, Inc. for the year ended June 30, 2011, the entity’s CPA observed the physical
inventory at an interim date, May 31, 2011, instead of at year end. The following information was obtained from
general ledger.
Inventory, July 1, 2010 P 875,000
Physical inventory, May 31, 2011 950,000
Sales for 11 months ended May 31, 2011 8,400,000
Sales for year ended June 30, 2011 9,600,000
Purchases for 11 months ended May 31, 2011 6,750,000
Purchases for year ended June 30, 2011 8,000,000
Your audit disclosed the following additional information.
A. Shipments received in May and included in the physical inventory but recorded
as June purchases P 75,000
B. Shipments received in unsalable condition and excluded from physical
inventory. Credit memos had not been received nor had chargebacks to vendors
been recorded:
Total at May 31, 2011 10,000
Total at June 30, 2011 (including the May unrecorded chargebacks
15,000
C. Deposit made with vendor and charged to purchases in April 2011. Product was
shipped in July 2011. 20,000
D. Deposit made with vendor and charged to purchases in May 2011. Product was
shipped FOB destination on May 29, 2011 and was included in May 31, 2011
physical inventory as goods in transit. 55,000
E. Through the carelessness of the receiving department, a June shipment was
damaged by rain. This shipment was later sold in June at its cost of
100,000
1. The gross profit ratio for eleven months ended May 31, 2011 is: Answer: 20%.
2. The cost of goods sold during the month of June 2011 is: Answer: P980,000.
3. The June 30, 2011 inventory using the gross profit method is: Answer: P1,140,000.
4. The correct amount of net purchases up to May 31, 2011 is: Answer: P692,500.
5. The correct amount of net purchases up to June 30, 2011 is: Answer: P784,000.
PROBLEM 17 – Sales and Purchases Cutoff

Balungao Company engaged you to examine its books and records for the fiscal year ended June 30, 2012. The
company’s accountant has furnished you not only the copy of trial balance as of June 30, 2012 but also the copy of
company’s statement of financial position and statement of comprehensive income as at said date. The following
data appears in the cost of goods sold section of the statement of comprehensive income:
Inventory, July 1, 2011 P 500,000
Add: Purchases 3,600,000
Total goods available for sale P 4,100,000
Less: Inventory, June 30, 2012 700,000
Cost of goods sold P 3,400,000
The beginning and ending inventories of the year were ascertained through a physical count except that no
reconciling items were considered. Even though the books have been closed, your working paper trial balance show
all account with activity during the year. The company is on a periodic inventory basis and all purchases were made
FOB shipping point. In your examination of inventory cutoffs at the beginning and end of the year, you took note of
the following:
JULY 1, 2011
A. June involves invoices totaling P260,000 were entered in the voucher register in June. The corresponding
goods not received until July.
B. Invoices totaling P108,000 were entered in the voucher register in July but the goods were received during
June.
JUNE 30, 2012
A. Invoices with an aggregate value of P372,000 were entered in the voucher register in July and the goods
were received in July. The invoices, however, were dated June.
B. June invoices totaling P148,000 were entered in the voucher register in June but the goods were not
received until July.
C. Invoices totaling P216,000 were entered in the voucher register in July but the corresponding goods were
received in June.
D. Sales on account in the total amount of P352,000 were made on June 30 and the goods delivered at that
time. Book entries relating to the sales were made in June.
1. How much is the adjusted inventory as of July 1, 2011? Answer: P760,000.
2. How much is the adjusted purchases for the fiscal year ended June 30, 2012? Answer: P4,080,000.
3. How much is the adjusted inventory as of June 30, 2012? Answer: P1,220,000.
4. How much is the adjusted cost of goods sold for the fiscal year ended June 30, 2012? Answer: P3,620,000.
5. The necessary compound adjusting journal entry would include a net credit (debit) to retained earnings of:
Answer: P152,000 credit.
PROBLEM 18 – Inventory and Other Accounts

The following accounts were included in the unadjusted trial balance of Cheng Company as of Dec. 31, 2011:
Cash P 963,200
Accounts receivable 2,254,000
Inventory 6,050,000
Accounts payable 4,201,000
Accrued expenses 431,000
During your audit, you noted that Cheng held its cash books open after year-end, In addition, your audit revealed the
following:
A. Receipts for January 2012 of P654,600 were recorded in the December 2011 cash receipts book. The
receipts of P360,100 represent cash sales and P294,500 represent collections from customers, net of 5%
cash discounts.
B. Accounts payable of P372,400 was paid in January 2012. The payments, on which discounts of P12,400
were taken, were included in the December 2011 check register.
C. Merchandise inventory is valued at P6,050,000 prior to any adjustments. The following information has
been found relating to certain inventory transactions.
 Goods valued at P275,000 are on consignment with a customer. These goods are not included in the
inventory figure.
 Goods costing P217,500 were received from a vendor on January 4, 2012. The related invoice was
received and recorded on January 6, 2012. The goods were shipped on December 31, 2012 terms
FOB shipping point.
 Goods costing P637,500 were shipped on December 31, 2011, and were delivered to the customer on
January 3, 2012. The terms of the invoice were FOB shipping point. The goods were included in the
2011 ending inventory even though the sale was recorded in 2011.
 A P182,000 shipment of goods to a customer on December 30, terms FOB destination are not
included in the year-end inventory. The goods cost P130,000 and were delivered to the customer on
January 3, 2012. The sale was properly recorded in 2012.
 The invoice for goods costing P175,000 was received and recorded as a purchase on December 31,
2011. The related goods, shipped FOB destination were received on January 4, 2012, and thus were
riot included in the physical inventory.
 Goods valued at P612,800 are on consignment from a vendor. These goods are not included in the
physical inventory.
1. The adjusted cash as of December 31, 2011 is: Answer: P668,600.
2. The adjusted accounts receivable as of December 31, 2011 is: Answer: P2,564,000.
3. The adjusted inventory as of December 31, 2011 is: Answer: P6,035,000.
4. The adjusted accounts payable as of December 31, 2011 is: Answer: P4,615,900.
5. The current ratio as of December 31, 2011 is: Answer: 1.84.
PROBLEM 19 – Purchase Commitments

On December 31, 2011, Nero Company has outstanding purchase commitments for 10,000 gallons at P200 per
gallon of raw material to be used in its manufacturing process. The company prices its raw materials inventory at
cost or market whichever is lower. Based on the preceding information, answer the following independent questions:
1. Assuming that the market price on December 31, 2011 is P210, what entry is necessary to recognize this price
change for the year ended December 31, 2011?
2. Assuming it is expected that the market price will decline to P170 in early January 2012, what entry is
necessary to recognize this expected price change for the year ended December 31, 2011?
3. Assuming that the market price on December 31, 2011 is P170, what entry is necessary to recognize this price
change for the year ended December 31, 2011?
4. Give the entry in January 2012, when the 10,000 gallon shipment is received, assuming the situation given in
No. 3 existed on December 31, 2011 and the market price is P150 in January 2012.
5. Give the entry in January 2012 when the 10,000 gallon shipment is received, assuming the situation given in
No. 3 existed on December 31, 2011 but the market price is P210 in January 2012.
PROBLEM 20 – Inventory Valuation

Kalvin Corporation manufactures three models of gear shift components for bicycles that are sold to bicycle
manufacturers, retailers and catalog outlets. Since beginning operations in 1944, Kalvin has used normal absorption
costing and has assumed a FIFO cost flow in its perpetual inventory system. Except for overhead, manufacturing
costs are accumulated using actual costs. Overhead is applied to production using predetermined overhead rates. The
balances of the inventory accounts at December 31, 2010 are shown below. The inventories are stated at cost before
any year-end adjustments:
Finished goods P 2,070,400
Work in process 360,000
Raw materials 768,000
Factory supplies 220,800
The following information relates to Kalvin’s inventory and operations:
A. The finished goods inventory consists of the items analyzed below:
Net
Cost realizable value
Down tube shifter P 864,000 P 844,800
Bar end shifter 582,400 600,320
Head tube shifter 624,000 630,240
B. One half of the head tube shifter finished goods inventory has been pledged as collateral for a bank loan.
C. One half of the raw materials balance was acquired at a contracted price 20% above the current market
price. The replacement cost of the rest of the materials is P407,680.
D. The net realizable value of the work in process inventory is P347,840.
E. Included in the cost of factory supplies are obsolete items with a historical cost of P13,440. The
replacement cost of the remaining factory supplies is P210,880.
F. Kalvin applies the lower of cost or NRV rule to each of the three types of shifter finished goods inventory.
For each of the other inventory accounts, Kalvin applies the lower of cost or NRV method to the total of
each inventory account.
1. The finished goods inventory on December 31, 2010 should be valued at: Answer: P2,051,200.
2. The raw materials inventory on December 31, 2010 should be valued at: Answer: P727,680.
3. The factory supplies inventory on December 31, 2010 should be valued at: Answer: P207,360.
4. The total inventories to be recognized in the statement of financial position as of December 31, 2010 is:
Answer: P3,334,080.
5. The total loss on inventory writedown to be recognized in the income statement for 2010 is: Answer: P85,120.

The Mangaldan Merchandising Company is a leading distributor of kitchenwares. The company uses the FIFO
method of calculating cost of goods sold. The following information concerning two of the company’s products is
taken from the month of May:
PANS KETTLES
No. of units Unit cost No. of units Unit cost
May 1, Beginning inventory 10,000 P 60 6,000 P 40
Purchases:
May 15 14,000 65 9,000 42
May 25 6,000 75
20,000 10,000
Sales for the month (at P80 each) (at P44 each)
On May 31, Mangaldan’s suppliers reduced their prices from the last purchase price by the following percentages:
25% for pans and 20% for kettles. Accordingly, the company agreed to reduce their selling prices by 15% on all
items beginning June1. Mangaldan Merchandising Company’s selling costs are calculated at 10% of selling price.
Both products have a normal profit of 30% on sales prices after selling costs. Based on the above and the result of
your audit, answer the following questions:
1. The pans should be valued on May 31 at: Answer: P612,000.
2. The kettles should be valued on May 31 at: Answer: P168,300.
3. The required allowance for inventory writedown as of May 31 is: Answer: P139,700.
4. The total cost of sales to be reported in the income statement for the month of May, should Managaldan
prepare one, is: Answer: P1,795,300.
PROBLEM 22 – Inventory Estimation

On April 30, 2011, a fire damaged the office of Amaze Company. The following balances were gathered from the
general ledger on March 31, 2011:
Accounts receivable P 920,000
Inventory – January 1 1,880,000
Sales 3,600,000
Purchases 1,680,000
Additional information follows:
A. An examination of the April bank statement and canceled checks revealed checks written during the period
April 1-30 as follows:
Accounts payable as of March 31 P 240,000
April merchandise shipments 80,000
Expenses 160,000
Deposits during the same period amounted to P440,000 which consisted of collections from customers with
the exception of P20,000 refunds from a vendor for merchandise returned in April.
B. Customers acknowledged indebtedness of P1,040,000 at April 30. Customers owed another P60,000 that
will never be recovered. Of the acknowledged indebtedness, P40,000 may prove uncollectible.
C. Correspondence with suppliers revealed unrecorded obligations at April 30 of P340,000 for April
merchandise shipment including, P100,000 for shipments in transit on that date.
D. The average gross profit rate is 40%.
E. Inventory with a cost of P260,000 was salvaged and sold for P140,000. The balance of the inventory was a
total loss.
1. What is the amount of sales from January 1 to April 30? Answer: P4,200,000.
2. What is the amount of purchases from January 1 to April 30? Answer: P2,100,000.
3. What is the amount of fire loss to be recognized by Amaze Company on April 30? Answer: Answer
P1,200,000.

The following information is based on the first audit of Merill Company. The client has not prepared financial
statements for 2009, 2010 or 2011. During these years, no accounts have been written off as uncollectible, and the
rate of gross profit on sales has remained constant for each of the three years. Prior to January 1, 2009, the client
used the accrual methods of accounting. From January 1, 2009 up to December 31, 2011, only cash receipts and
disbursements records were maintained. When sales on account were made, they were entered in the subsidiary
accounts receivable ledger. No general ledger postings have been made since December 31, 2009. As a result of
your examination, the correct data shown below were available:
Accounts receivable balances: 12/31/2008 12/31/2011
Less than 1 year old P 77,000 P 141,000
1 to 2 years old 6,000 9,000
2 to 3 years old 4,000
Over 3 years old 11,000
Total accounts receivable P 83,000 P 165,000
Inventories P 58,000 P 94,000

Accounts payable for inventory purchased 25,000 55,000
2009 2010 2011

Cash received applied to:
Current year sales P 744,000 P 809,000 P 1,044,000
Accounts of prior year 67,000 75,000 84,000
Accounts of two years prior 3,000 2,000 10,000
Cash sales P 85,000 P 130,000 P 156,000

Payments of accounts payable 625,000 706,000 869,000
1. Compute for the total sales for each year – 2009, 2010 and 2011. Answer: P918,000; P1,032,000;
P1,341,000.
2. Compute for the total purchases of Merill from 2009, 2010 and 2011. Answer: P2,230,000.
3. Compute for the total cost of sales of Merill from 2009, 2010 and 2011. Answer: P2,194,000.
4. Compute for the total gross profit for each year – 2009, 2010 and 2011. Answer: P306,000; P344,000;
P447,000.

Lingayen Mart uses the retail inventory method. At the end of the current year, Lingayen Mart suffered a fire loss
that destroyed most of its inventory. After the fire, only goods with a cost of P100,000 but with a net realizable
value of P75,000 was salvaged. The following information is available prior to the fire:
Cost Retail
Beginning inventory P 1,100,000 P 2,200,000
Purchases 15,800,000 26,300,000
Freight in 540,000
Purchase returns 600,000 1,000,000
Purchase allowances 300,000
Departmental transfer in 400,000 800,000
Markups 300,000
Cancelation of markdown 100,000
Departmental transfer out 350,000 900,000
Markdowns 800,000
Cancelation of markup 50,000
Sales 24,700,000
Sales returns 350,000
Sales discounts 200,000
Sales allowances 100,000
Employee discounts 600,000
Normal wastage is 5% of sales
1. Compute the estimated fire loss if Lingayen applies the conservative retail approach. Answer: P384,000.
2. What is the estimated cost of goods sold if Lingayen applies the FIFO retail approach? Answer: P16,108,050.
3. Determine the estimated ending inventory if Lingayen applies the average cost approach. Answer: P470,930.

As an established auditor in Olongapo City, you have been the auditor of choice of many establishments in the city.
During 2011, you were engaged by several retail companies in the vicinity. In a twist of fate, most of your clients
need an estimate of their inventories as of December 31, 201. Below are the information provided to you:
A. Caramel Company uses the FIFO retail inventory method. The retail records reveal the following:
2010 Cost Retail
Opening inventory P 556,800 P 928,000
Purchases 4,576,000 7,028,000
Net markup 42,000
Net markdown 30,000
Sales 6,840,000
2011 Cost Retail
Purchases P 4,760,000 P 6,812,000
Net markup 56,000
Net markdown 68,000
Sales 6,928,000
B. Jollibee Company uses the retail inventory method. The following information is available for the current
year:
Cost Retail
Purchases 15,800,000 26,300,000
Freight in 400,000
Purchase returns 600,000 1,000,000
Purchase allowances 300,000
Departmental transfer in 400,000 800,000
Net markups 600,000
Net markdowns 900,000
Sales 24,700,000
Sales returns 350,000
Sales discounts 200,000
Employee discounts 600,000
Loss from breakage 50,000
C. Groom Company uses the LIFO retail method of inventory valuation. The following information is
available for the current year:
Cost Retail
Net purchases 4,200,000 5,900,000
Net markups 200,000
Net markdowns 100,000
Net sales 5,500,000
Based on the above and the result of your audit of each company, answer the following questions:
1. Determine the estimated cost of ending inventory of Caramel Company as of December 31, 2011. Answer:
P700,000.
2. Determine the estimated ending inventory of Jollibee Company as of December 31, 2011 assuming the client
uses the conservative method. Answer: P1,743,900.
3. Determine the estimated cost of sales of Jollibee Company for 2011 assuming the client uses the average
method. Answer: P15,000,000.
4. Determine the estimated cost of ending inventory of Groom Company as of December 31, 2011. Answer:
P1,550,000.

A recent fire severely damaged Penguin Company’s administration building and destroyed many of its financial
records. You have been contracted by Penguin’s management to reconstruct as much financial information as
possible for the month of July. You learn that Penguin makes a physical inventory count at the end of each month to
determine monthly ending inventory values. You also find out that the company applies the average cost method.
You are able to gather the following information by examining various documents:
Inventory, July 31 in units 400,000
Total cost of goods available for sale in July P 950,400
Cost of goods sold during July 792,000
Gross profit on sales for July 808,000
Cost per unit of inventory, July 1 0.35
The following are Penguin’s July purchases of merchandise:
Date Quantity Unit Cost
July 6 480,000 P 0.40
July 12 400,000 0.41
July 16 320,000 0.42
July 17 400,000 0.45
1. The number of units on hand, July 1 is: Answer: 800,000 units.
2. The number of units sold during July is: Answer: 2,000,000 units.
3. The unit cost of inventory at July 31 is (round off to the nearest thousandths): Answer: P0.396 per unit.
4. The inventory at July 31 should be valued at: Answer: P158, 400.
PROBLEM 28 – Biological Assets

Candelaria Company markets meat from its farms. The entity produces 20% of the community’s meat that is
consumed. Candelaria Company owns 5 farms and has a stock of 1,050 cows (average age, 2 years old) and 150
heifers (average age, 1 year old) as of January 1, 2010. Candelaria purchased 375 heifers, average age, 1 year old, on
July 1, 2010. One cow was born on the same date and no sale of animals was made during the year. The fair value
less costs to sell were as follows:
½ year old animal, December 31, 2010 P 1,750
1 ½ year old animal, December 31, 2010 1,800
1 year old animal, December 31, 2010 1,810
1 year old animal, January 1, 2010 1,800
1 year old animal, July 1, 2010 1,805
2 year old animal, July 1, 2010 1,855
Newly born animal, December 31, 2010 1,710
Newly born animal, January 1, 2010 1,700
Newly born animal, July 1, 2010 1,700
1. At what amount should Candelaria recognize its biological assets at December 31, 2010? Answer:
P3,061,750.
2. In Candelaria’s income statement, the increase in fair value due to price change amounts to: Answer: P55,885.
3. In Candelaria’s income statement, the increase in fair value due to physical change amounts to: Answer:
P116,490.
PROBLEM 29 – Biological Assets

A public limited company, Mabini Dairy Products, produces milk on its farms. As of January 1, 2010, Mabini owns
5 farms and has a stock of 1,050 cows (average age, 2 years old) and 150 heifers (average age, 1 year old).
Additional information follows:
A. Mabini purchased 375 heifers (average age, 1 year) on July 1, 2010. No animals were born or sold during
the year.
B. The company produced milk with a fair value of P660,000 determined at the time of its milking on
December 15, 2010. On the same date, the company also estimated the following costs:
Commissions to brokers and dealers P 30,000
Transport and other costs necessary to get milk to
a market 10,000
Financing costs 35,000
Levies by regulatory agencies 18,000
Transfer taxes and duties 27,000
Income taxes 15,000
On December 31, 2010, it was determined that the fair value less costs to sell of the milk was P600,000
with a net realizable value of P560,000.
C. The company has had problems during the year. Contaminated milk was sold to customers. As a result,
milk consumption has gone down. The government decided to compensate farmers for potential loss in
revenue from sale of milk. This fact was published in the national press on December 1, 2010, stating that
P100,000 would be paid to it on April 3, 2011.
D. The company’s business is spread over different parts of the country. The only region affected by the
contamination was Region X, where the government curtailed milk production in the region. The cattle
were unaffected by the contamination and were healthy. The company estimates that the future discounted
cash flow income from the cattle in Region X amounted to P2 million, after taking into account the
government restriction order. The company feels that it cannot measure the fair value of the cows in the
region because of the problems created by the contamination. There are 300 cows and 100 heifers in the
region. All these animals had been purchased before January 1, 2010. A rival company had offered Mabini,
P1,500,000 for these animals after costs to sell and further offered P3,000,000 for the farms themselves in
that region. Mabini has no intention of selling the farms at present.
E. The fair values less costs to sell were:
1 year old animal at December 31, 2010 P 3,200
2 year old animal at December 31, 2010 4,500
1 ½ year old animal at December 31, 2010 3,600
3 year old animal at December 31, 2010 5,000
1 year old animal at January 1, 2010 and July 1, 2010 3,000
2 year old animal at January 1, 2010 4,000
1. The milk should be valued on December 15, 2010 at:
2. The loss on inventory writedown to be recognized relating to the milk on December 31, 2010, if any, is:
3. The increase in value of biological assets in 2010 due to price change is:
4. The increase in value of biological assets in 2010 due to physical change is:
5. The carrying amount of the biological assets as of January 1, 2010 is:
6. The carrying amount of the biological assets as of December 31, 2010 is:
PROBLEM 30 – Inventory Identification

Paraguay Company, a manufacturer of small tools, provided the following information from its accounting records
for the year ended December 31, 2011:
Inventory at December 31, 2011 (based on physical count at year
Your audit end) P 1,290,000 reveals the
following Accounts payable at December 31, 2011 876,000
Net sales (sales less sales returns) 8,087,000
information:
A. Parts held on consignment from Araguay to Paraguay amounting to P9,000, were included in the physical count
of goods in Paraguay’s warehouse on December 31, 2011, and in accounts payable at December 31, 2011.
B. Retailers were holding P50,000, at cost, of goods on consignment from Paraguay, at their stores on
December 31, 2011.
C. Included in the physical count were tools billed to a customer FOB shipping point on December 31, 2011.
These tools had a cost of P31,000 and were billed at P40,000. The shipment was on Paraguay’s loading
dock waiting to be picked up by the common carrier.
D. P15,000 worth of parts which were purchased from Saraguay and paid for in December 2011 were sold in
the last week of 2011 and appropriately recorded as sales of P21,000. The parts were included in the
physical count on December 31, 2011, because the parts were on the loading dock waiting to be picked up
by the customer.
E. Goods were in transit from a vendor to Paraguay on December 31, 2011. The invoice cost was P71,000,
and the goods were shipped FOB shipping point on December 29, 2011.
F. Work in process inventory costing P30,000 was sent to an outside processor for plating on December 30,
2011.
G. Tools returned by customers and held pending inspection in the returned goods area on December 31, 2011,
were not included in the physical count. On January 8, 2012, the tools costing P32,000 were inspected and
returned to inventory. Credit memos totaling P47 000 were issued to the customers on the same date.
H. Tool shipped to a customer FOB destination on December 26, 2011, were in transit at December 31, 2011,
and had a cost of P21,000. Upon notification of receipt by customer on January 2, 2012, Paraguay issued a
sales invoice for P42,000.
I. Goods, with an invoice cost of P27,000, received from a vendor at 5:00 pm on December 31, 2011, were
recorded on a receiving report dated January 2, 2012. The goods were not included in the physical count,
but the invoice was included in accounts payable at December 31, 2011.
J. Goods received from a vendor on December 26, 2011, were included in the physical count. However, the
related P56,000 vendor invoice was not included in accounts payable at December 31, 2011, because the
accounts payable copy of the receiving report was lost.
K. On January 3, 2012, a monthly freight bill in the amount of P6 000 was received. The bill specifically
related to merchandise purchased in December 2011, one-half of which was still in the inventory at
December 31, 2011. The freight charges were not included in either the inventory or accounts payable at
December 31, 2011.
1. Determine the adjusted amount of inventories as of December 31, 2011. Answer: P1,500,000.
2. Determine the adjusted accounts payable as of December 31, 2011. Answer: P1,000,000.
3. What is the adjusted net sales for the year 2011? Answer: P8,000,000.

You are engaged in the regular annual examination of the accounts and records of Vendetta Company for the year
ended December 31, 2012. To reduce the workload at year end, the company, upon your recommendation, took its
annual inventory physical count 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, FIFO 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 count 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 P 1,920,800
Direct labor 338,800
Purchases 691,600
B. The cost of sales of P1,920,800 included direct labor of P386,400.
1. What is the adjusted amount of physical inventory at November 30, 2012? Answer: P1,715,560.
2. What is the adjusted amount of inventory at December 31, 2012? Answer: P1,509,760.
3. The total cost of materials on hand and materials included in the work-in-process as of December 31, 2012 is:
Answer: P812,560.
4. The total amount of direct labor included in the work-in-process as of December 31, 2012 is: Answer:
P232,400.
5. The total amount of factory overhead as of December 31, 2012 is: Answer: P464,800.

In connection with your audit of Alcala Manufacturing Company, you reviewed its inventory as of December 31,
2010 and found the following items:
A. A packing case containing a product costing P100,000 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 customer’s order was dated December 18 but the case was shipped and
the customer billed on January 10, 2011.
B. Merchandise costing P600,000 was received on December 28, 2010 and the invoice was recorded. The
invoice was in the hands of the purchasing agents and it was marked, “ON CONSIGNMENT.”
C. Merchandise received on January 6, 2011, costing P700,000 was entered in the purchase register on
January 7. The invoice showed shipment was made FOB shipping point on December 31, 2010. Because it
was not on hand during the inventory count, it was not included.
D. A special machine costing P200,000, fabricated to order for a particular customer was finished in the
shipping room on December 30. The customer was billed for P300,000 on that date and the machine was
excluded from inventory although it was shipped January 4, 2011.
E. Merchandise costing P200,000 was received on January 6, 2011 and the related purchase invoice was
recorded January 5. The invoice showed the shipment was made on December 29, 2010, FOB destination.
F. Merchandise costing P150,000 was sold on an installment basis on December 15. The customer took
possession of the goods on that date. The merchandise was included in inventory because Alcala still holds
legal title. Historical experience suggests that full payment on installment sale is received approximately
99% of the time.
G. Goods costing P500,000 were sold and delivered on December 20. The goods were included in the
inventory because the sale was accompanied by a purchase agreement requiring Alcala to buy back the
inventory in February 2011.
Based on the above and the result of your audit, how much of these items should be included in the inventory
balance at December 31, 2010? Answer: P1,300,000.

The accounting staff of Agno Company submitted an inventory list at December 31, 2010 which showed a total of
P1,500,000. The following information which may or may not be relevant to the inventory value submitted, are
given below:
A. Excluded from the inventory were merchandise costing P24,000 because they were transferred to the
delivery department for packaging on December 28 to be shipped on January 2, 2011.
B. The bill of lading and other import documents on a merchandise were delivered by the bank and the trust
receipt accepted by the company on December 26, 2010. Taxes and duties have been paid on this shipment
but the customs broker has not delivered the merchandise until January 7, 2011. Delivered cost of the
shipment totaled P240,000. This shipment was not included in the inventory in December 2010.
C. A review of the company’s purchase orders shows a commitment to buy P30,000 worth of merchandise.
This was not included in the inventory because the goods were received on January 3, 2011.
D. Supplier’s invoice for P9,000 worth of merchandise dated December 28, 2010 was received though the
mails on December 30, 2010 although the goods arrived only on January 4, 2011. Shipment term is FOB
shipping point. This item was included in the December 31, 2010 inventory by the company.
E. Goods valued at P6,000 were received on December 28, 2010 for approval by Agno Company. The
inventory team included this merchandise in the list but did not place any value on it. On January 4, 2011,
the company informed the supplier by long distance telephone of the acceptance of the goods and the
supplier’s invoice was received on January 7, 2011.
F. On December 27, 2010, an order for P7,500 worth of merchandise was placed. This was included in the
year-end inventory although it was received only on January 5, 2011. Seller shipped the goods FOB
destination.
Based on the above and the result of your audit, the correct merchandise inventory at December 31, 2010 of Agno
Company is: Answer: P1,756,500.

The Anda Company is on a calendar year basis. The following data were found during your audit:
A. Goods in transit shipped FOB destination by a supplier in the amount of P100,000 had been excluded from
the inventory and further testing revealed that the purchase had been recorded.
B. Goods costing P50,000 had been received, included in inventory and recorded as a purchase. However,
upon your inspection, the goods were found to be defective and would immediately be returned.
C. Materials costing P250,000 and billed on December 30 at a selling price of P320,000 had been segregated
in the warehouse for shipment to a customer. The materials had been excluded from inventory as a signed
purchase order had been received from the customer. The shipping term was FOB destination.
D. Goods costing P70,000 was out on consignment with Hermie Company. Since the monthly statement from
Hermie Company listed those materials as on hand, the items had been excluded from the final inventory
and invoiced on December 31 at P80,000.
E. The sale of P150,000 worth of materials and costing P120,000 had been shipped FOB point of shipment on
December 31. However, this inventory was found to be included in the final inventory. The sale was
properly recorded in 2010.
F. Goods costing P100,000 and selling for P140,000 had been segregated but not shipped at December 31 and
were not included in the inventory. A review of the customer’s purchase orders set forth terms as FOB
destination. The sale had not been recorded.
G. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not arrived as yet.
However, these materials costing P170,000 had been included in the inventory count but no entry had been
made for their purchase.
H. Merchandise costing P200,000 had been recorded as a purchase but not included as inventory. Terms of
sale are FOB shipping point according to the supplier’s invoice which had arrived at December 31.
Further inspection of the client’s records revealed the following December 31, 2010 balances: inventory,
P1,100,000; accounts receivable, P580,000; accounts payable, P690,000; net sales, P5,050,000; net purchases,
P2,300,000; and net income, P510,000. Based on the above and the result of your audit, answer the following
questions:
1. The adjusted inventory on December 31, 2010 is: Answer: P1,550,000.
2. The adjusted accounts payable on December 31, 2010 is: Answer: P710,000.
3. The adjusted net sales on December 31, 2010 is: Answer: P4,650,000.
4. The adjusted net purchases on December 31, 2010 is: Answer: P2,320,000.
5. The adjusted net income on December 31, 2010 is: Answer: P540,000.

Calasiao, Inc., owner of a trading company, engaged your services as auditor. There is a discrepancy between the
company’s income and the sales volume. The owner suspects that the staff is committing theft. You are to determine
whether or not this is true. Your investigations revealed the following:
A. Physical inventory, taken December 31, 2010 under your observation showed that cost was P265,000 and
net realizable value, P244,000. The inventory on January 1, 2010 showed cost of P390,000 and net
realizable value of P375,000. It is the corporation’s practice to value inventory at lower of cost or net
realizable value. Any loss between cost and net realizable value is included in other expense.
B. The average gross profit rate was 40% of net sales.
C. The accounts receivable as of January 1, 2010 were P135,000. During 2010, accounts receivable written off
during the year amounted to P10,000. Accounts receivable as of December 31, 2010 were P375,000.
D. Outstanding purchase invoices amounted to P300,000 at the end of 2010. At the beginning of 2010, they
were P375,000.
E. Receipts from customers during 2010 amounted to P3,000,000 whereas disbursements to merchandise
creditors amounted to P2,000,000.
1. The total sales in 2010 is: Answer: P3,250,000.
2. The total purchases in 2010 is: Answer: P1,925,000.
3. The amount of inventory shortage as of December 31, 2010 is: Answer: P100,000.
The inventory on hand on December 31, 2011 for Fair Company is valued at cost of P950,000. The following items
were not included in this inventory amount:
Item 1. Purchased goods in transit, shipped FOB destination, invoice price P30,000 which includes freight
charge of P1,500.
Item 2. Goods held on consignment by Fair Company at a sales price of P28,000, including sales
commission of 20% of the sales price.
Item 3. Goods sold to Grace Company, under terms FOB destination, invoiced for P18,500 which includes
P1,000 freight charge to deliver the goods. Goods are in transit. The entity’s selling price is 140% of
cost.
Item 4. Purchased goods in transit, terms FOB shipping point, invoice price, P50,000, freight cost, P2,500.
Item 5. Goods out on consignment to Manila Company, sales price P35,000, shipping cost of P2,000.
Based on your audit, what is the adjusted cost of inventory on December 31, 2011? Answer: P1,042,000.
PROBLEM 37 – Biological assets

Dairy Company provided the following balances for the year ended December 31, 2011:
Cash P 500,000
Trade and other receivables 1,500,000
Inventories 100,000
Dairy livestock – immature 50,000
Dairy livestock – mature 400,000
Property, plant and equipment, net 1,400,000
Trade and other payables 520,000
Note payable – long term 1,500,000
Share capital 1,000,000
Retained earnings – January 1 800,000
Fair value of milk produced 600,000
Gain from change in fair value 50,000
Inventories used 140,000
Staff costs 120,000
Depreciation expense 15,000
Other operating expenses 190,000
Income tax expense 55,000
1. What is the net income for 2011? Answer: P130,000.
2. What is the fair value of biological assets on December 31, 2011? Answer: P450,000.

You are conducting a financial statement audit of the Beverly Hills Corporation for the year ended December 31,
2010. You have observed the taking of physical inventory and have noted that all merchandise actually received up
to the close of business on December 28, 2010 has been recorded on the inventory sheets. The total invoice cost of
the items included in the physical count is P300,000. The following purchase invoices have been recorded in the
purchases journal as follows:
Date
Invoice Number Amount Invoice Date FOB Term Received
DECEMBER 2011
251 20,000 23-Dec Destination 24-Dec
253 16,000 26-Dec Shipping point 30-Dec
254 18,000 26-Dec Shipping point 5-Jan
255 27,000 2-Jan Destination 31-Dec
256 21,000 31-Dec Destination 4-Jan
258 50,000 8-Jan Shipping point 2-Jan
JANUARY 2012
264 6,500 2-Jan Shipping point 5-Jan
265 8,500 28-Dec Shipping point 4-Jan
Transportation – in charges on purchases averaged 6% during the year and are to be included in the inventory
valuation. Based on the above and the result of your audit, answer the following questions:
1. Prepare the auditor’s adjusting entries, if any, required by the above information.
2. What is the adjusted inventory balance of Beverly Hills as of December 31, 2011?
The management of Maria Venus Raj, Inc. has engaged you to assist in the preparation of year-end financial
statements. You are told that the correct inventory level on November 30 was 145,730 units. During the month of
December, sales totaled 138,630 units including 40,000 units shipped on consignment to Shamcey Supsup Company
A letter received from Shamcey indicates that as of December 31, it has sold 15,300 units and was still trying to sell
the remainder. A review of the purchase order for December shows the following:
Purchase Quantity Date
Order Date Invoice Date (in units) Date Shipped Received FOB Terms
31-Dec 2-Jan 4,200 2-Jan 5-Jan Destination
5-Dec 2-Jan 3,600 17-Dec 22-Dec Destination
6-Dec 3-Jan 7,900 5-Jan 7-Jan Shipping point
18-Dec 20-Dec 8,000 29-Dec 2-Jan Shipping point
1. How many units were purchased during December?
2. How many units were sold during December?

Gavial, Inc. sells electric stoves. The company’s reporting date is December 31. At December 1, 2010, inventory on
hand consisted of 350 stoves at P820 each and 43 stoves at P850 each. During the month ended December 31, 2010,
the following inventory transactions occurred (all purchase and sales transactions are on credit):
Dec. 1 Sold 300 stoves for P 1,200 each.
3 Five stoves were returned by customers. They had originally cost P820 each and were sold
for P1, 200 each.
9 Purchased 55 stoves at P910 each.
15 Sold 86 stoves for P1, 350 each.
17 Returned one damaged stove to the supplier. This stove had been purchased on December
9.
22 Sold 60 stoves for P1, 250 each.
1. What is the FIFO cost of Gavial’s inventory on December 31, 2010? Answer: P148,980.
2. What is the cost of goods sold in December 2010? Answer: P367,230.
3. What is Gavial’s gross profit in December 2010? Answer: P177,870.

The following information was obtained from the statement of financial position of Lion, Inc.:
December 31, 2010 December 31, 2009
Cash P 706,600 P 200,000
Notes receivable Nil 50,000
Inventory 399,750
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 periodic FIFO. The unit cost of inventory during January
2010 was P65.20 and increased P0.20 per month during the year. During 2010, payments to suppliers totaled
P943,400 and operating expenses totaled P440,000. The ending inventory for 2009 was valued at P65.00 per unit.
1. The number of units sold during 2010 is: Answer: 18,400 units.
2. The total cost of purchases during 2010 is: Answer: P1,193,400.
3. The accounts payable balance at December 31, 2010 is: Answer: P400,000.
4. The FIFO cost of inventory on December 31, 2010 is: Answer: P385,900.

On April 15, 2010, a fire damaged the office and warehouse of Peacock Company. The trial balance below was
prepared from the general ledger which was the only accounting record saved.
Peacock Company
TRIAL BALANCE
March 31, 2010
Debit Credit
Cash P 35,000
Trading securities 350,000
Accounts receivable 120,000
Inventory, December 31, 2009 225,000
Land 950,000
Building 800,000
Accumulated depreciation – building P 260,000
Machinery and equipment 130,500
Accumulated depreciation – M. and E. 69,400
Other non-current assets 98,000
Other expense accruals 15,400
Ordinary share capital 1,220,600
Retained earnings 849,000
Sales 405,000
Purchases 156,000
Other operating expenses 26,000
The following additional information has been obtained throughout the audit:
A. The company’s year-end is December 31.
B. An examination of the April bank statement and canceled checks revealed the following:
 Checks written, April 1–15 (P17,100 paid to accounts payable as of March 31; P10,200 for April
merchandise shipments; and P11,700 paid for other operating expenses), P39,000.
 Deposits, April 1–15 (consisted of collections from customers with the exception of a P2,850
refund from a supplier for goods returned in April), P38,850.
C. Communication with suppliers disclosed unrecorded payables at April 15 of P31,800 for April merchandise
shipments, including P6,900 for goods in transit (shipped FIB shipping point) on that date.
D. Customers acknowledged indebtedness of P108,000, including P1,800 that will probably be uncollectible.
It was also estimated that customers owed another P24,000 that will never be acknowledged or recovered.
E. The insurance company agreed that the 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 company’s audited
financial statements disclosed the following information:
December 31, 2009 December 31, 2008
Net sales P 1,590,000 P 1,170,000
Net purchases 840,000 705,000
Beginning inventory 150,000 225,000
Ending inventory 225,000 150,000
F. Inventory costing P21,000 was salvaged and sold for P10,500. The balance of the inventory was a total
loss.
1. The total sales from January 1, 2010 to April 15, 2010 is: Answer: P453,000.
2. The net purchases from January 1, 2010 to April 15, 2010 is: Answer: P195,150.
3. The inventory fire loss on April 15, 2010 is: Answer: P149,070.

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Mindanao State University

College of Business Administration and Accountancy

Problem 1 – Inventory Identification

Problem 2 – Inventory Identification

Problem 3 – Inventory Identification

Problem 4 – Inventory Valuation

Problem 5 – Inventory Identification

Problem 6 – Inventory Identification

Problem 7 – Inventory Identification

Problem 8 – Error Correction

Problem 9 – Repossessed Inventory

Problem 10 – Inventory Valuation

Problem 11 – Inventory Valuation

Problem 12 – Inventory Valuation

Inventory at June 1, 2008 35,000 cases at P19.60 62,500 boxes at P38.40

Purchase Terms 2/10, n/30, FOB destination n/30, FOB destination

June Sales 73,000 cases at P28.50 95,000 boxes at P40.00

A customer returned 5,000 cases that

Physical count at June 30,

No explanation found, thus, assumed Boxes purchased on June 29 still in

Net realizable value at 30

Problem 14 – Inventory Valuation

Problem 15 – Inventory Estimation

Problem 16 – Inventory Estimation

PROBLEM 17 – Sales and Purchases Cutoff

PROBLEM 18 – Inventory and Other Accounts

PROBLEM 19 – Purchase Commitments

PROBLEM 20 – Inventory Valuation

PROBLEM 21 – Inventory Valuation

PROBLEM 22 – Inventory Estimation

PROBLEM 23 – Inventory Estimation

Inventories P 58,000 P 94,000

2009 2010 2011

Cash sales P 85,000 P 130,000 P 156,000

Problem 25 – Inventory Estimation

PROBLEM 26 – Inventory Estimation

PROBLEM 27 – Inventory Estimation

PROBLEM 28 – Biological Assets

PROBLEM 29 – Biological Assets

PROBLEM 30 – Inventory Identification

PROBLEM 31 – Inventory Valuation

PROBLEM 32 – Inventory Identification

PROBLEM 33 – Inventory Identification

PROBLEM 34 – Inventory Identification

PROBLEM 35 – Inventory Estimation

PROBLEM 36 – Inventory Identification

PROBLEM 37 – Biological assets

PROBLEM 38 – Sales and Purchases Cutoff

PROBLEM 39 – Sales and Purchases Cutoff

PROBLEM 40 – Inventory Valuation

PROBLEM 41 – Inventory Valuation

PROBLEM 42 – Inventory Estimation

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