Cebu CPAR Audit of InventoryAUDIT OF INVENTORIES PROBLEM NO. 1 Presented below is a list of items that may or may not reported as inventory in a company’s December 31 balance sheet. 1. Goods out on consignment at another company’s store 2. Goods sold on installment basis 3. Goods purchased f.o.b. shipping point that are in transit at December 31 4. Goods purchased f.o.b. destination that are in transit at December 31 5. Goods sold to another company, for which our company has signed an agreement to repurchase at a set price that covers all costs related to the inventory 6. Goods sold where large returns are predictable 7. Goods sold f.o.b. shipping point that are in transit December 31 8. Freight charges on goods purchased 9. Factory labor costs incurred on goods still unsold 10. Interest cost incurred for inventories that are routinely manufactured 11. Costs incurred to advertise goods held for resale 12. Materials on hand not yet placed into production 13. Office supplies 14. Raw materials on which a the company has started production, but which are not completely processed 15. Factory supplies 16. Goods held on consignment from another company 17. Costs identified with units completed but not yet sold 18. Goods sold f.o.b. destination that are in transit at December 31 19. Temporary investment in stocks and bonds that will be resold in the near future P800,000 100,000 120,000 200,000 300,000 280,000 120,000 80,000 50,000 40,000 20,000 350,000 10,000 280,000 20,000 450,000 260,000 40,000 500,000 Question: How much of these items would typically be reported as inventory in the financial statements? a. P2,300,000 c. P2,260,000 b. P2,000,000 d. P2,220,000 Suggested Solution: PAS 2 par. 6 defines “Inventories” as assets a. held for sale in the ordinary course of business; b. in the process of production for such sale; or c. in the form of materials or supplies to be consumed in the production process or in the rendering of services. Par. 10 further states that the cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Therefore, items 1, 3, 5, 8, 9, 12, 14, 15, 17 and 18 would be reported as inventory in the financial statements. The other items will be reported as follows: Item Item Item Item Item Item Item 2 4 6 7 10 11 13 Item 16 Item 19 - Cost of goods sold in the income statement - Not reported in the financial statements - Cost of goods sold in the income statement - Cost of goods sold in the income statement - Interest expense in the income statement - Advertising expense in the income statement -Office supplies in the current asset section of the balance sheet - Not reported in the financial statements -Trading securities in the current asset section of the balance sheet Answer: A PROBLEM NO. 2 In connection with your audit of the Alcala Manufacturing Company, you reviewed its inventory as of December 31, 2006 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 costumer billed on January 10, 2007. (b) Merchandise costing P600,000 was received on December 28, 2006, and the invoice was recorded. The invoice was in the hands of the purchasing agent; it was marked “On consignment”. (c) Merchandise received on January 6, 2007, costing P700,000 was entered in purchase register on January 7. The invoice showed shipment was made FOB shipping point onDecember 31, 2006. 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, 2007. (e) Merchandise costing P200,000 was received on January 6, 2007, and the related purchase invoice was recorded January 5. The invoice showed the shipment was made onDecember 29, 2006, 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 2007. Question: 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, 2006? a. P1,300,000 c. P1,650,000 b. P 800,000 d. P1,050,000 Suggested Solution: Unshipped goods Purchased merchandise shipped FOB shipping point Goods used as collateral for a loan Total P 100,000 700,000 500,000 P1,300,000 Reasons for including and excluding the items: a) b) c) d) e) f) g) Included - Merchandise should be included in the inventory until shipped. An exception would be special orders. Excluded - Alcala Manufacturing has the merchandise on a consignment basis and therefore does not possess legal title. Included - The merchandise was shipped FOB shipping point and therefore would be included in the inventory on the shipping date. Excluded - Title may pass on special orders when segregated for shipment. Excluded - The merchandise was shipped FOB destination and was not received until January 3, 2006. Excluded - Historical experience suggests that Alcala will collect the full purchase price, so the sale is recognized even though legal title has not passed. Included - This is not a sale of inventory but instead is a loan with the inventory as collateral. Answer: A 000.000 worth of materials and costing P120. The sale had not been recorded. Net purchases. 2006 balances: Inventory.000. had been segregated in the warehouse for shipment to a customer. Goods costing P70. Net sales. Accounts receivable. Merchandise costing P200. terms FOB shipping point but the goods had not arrived as yet. included in inventory.000. Net income. c. Goods costing P100. d. determine the adjusted balances of following as of December 31. had been excluded from the inventory. Goods costing P50. However. but no entry had been made for their purchase. the items had been excluded from the final inventory and invoiced on December 31 at P80.000. The materials had been excluded from inventory as a signed purchase order had been received from the customer. However. P5. P510. FOB destination. The sale was properly recorded in 2005. this inventory was found to be included in the final inventory. P2.550.000.050.000 and billed on December 30 at a selling price of P320.000 had been segregated. h. Terms of sale are FOB shipping point according to the supplier’s invoice which had arrived at December 31. and further testing revealed that the purchase had been recorded. However. Your client has an invoice from a supplier.000 c. P1.000 . and were not included in the inventory. P690. Since the monthly statement from Hermie Company listed those materials as on hand.230.000. 2006: 1. The following data were found during your audit: a.000 and selling for P140. Terms. Further inspection of the client’s records revealed the following December 31. and recorded as a purchase. e.000 had been recorded as a purchase but not included as inventory. QUESTIONS: Based on the above and the result of your audit. g. Goods in transit shipped FOB destination by a supplier.300. A review of the customer’s purchase order set forth terms as FOB destination.000. P1.000 had been received.100.000 had been included in the inventory count. 3 The Anda Company is on a calendar year basis. upon your inspection the goods were found to be defective and would be immediately returned. f. P580. P1.000.000.000 was out on consignment with Hermie Company. but not shipped at December 31.000 had been shipped FOB point of shipment on December 31. these materials costing P170. in the amount of P100. b. Inventory a. Materials costing P250. The sale of P150. Accounts payable.PROBLEM NO. Net purchases a.000) 250.550.b.000 b. P4.000 c.000) - 170.000 P2.000 (170. P4.000 (100. P2.000 P5. The following were gathered from the client’s accounting records: .650.000 d.0 00 PROBLEM NO.650.000) 200. P1. P710.000 P510.000 2. P220. 2006.000 c.100.000) - - (10.320.000 d.000 d. P4.000 (50.000 P4.730.000 b.480. P810.000) (50.000 Suggested Solution: Questions No.370. P2.000 - 200.000 d.320. P2. P550. The company is engaged in the wholesale business and makes all sales at 25% over cost.000 5.650.970.000 - 100. Net sales a.000 b.000) (120.000 ) (80. Accounts payable a.0 00 P2.000 (70. P760. P540.0 00 P690.150.000 3.300. Net income a.000 - - (320.000 170. 1 to 5 Inventor y Unadjuste d balance s (a) (b) (c) (d) (e) (f) (g) (h) AccountsPayabl e NetIncom e P1.000 (120.550. P540.000) 70.000 d.420.000 4.000 P540.000) - 100.0 00 P710.050.000 ) 100.000 Adjusted balance s Net Sales NetPurchas es P1.000) - (100. P1. P2. 4 You were engaged by Asingan Corporation for the audit of the company’s financial statements for the year ended December 31.000 b. P4. P290.000 c.000 c.000) (50. 970 102. 966 225. which was received on Receiving Report No. the next day. The freight was paid by the vendor. The goods were shipped FOB Destination.000) P - Note: SI = Sales Invoice RR = Receiving Report Accounts receivable Inventory Accounts payable P750. there were two trucks in the company siding: · Truck No. you found that at December 31. However. ABC received the goods.000 12/31 RR #1063 96.000 per Sales Invoice No. 1064. 1060 but for which the invoice was not received until the following year.000 12/31 RR #1062 63. 1063 and that no shipments had been made on any Sales Invoices whose number is larger than No. which were sold on Sales Invoice No. 969 69. the last Receiving Report which had been used was No.000 You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was properly taken. 965 60.000 12/28 SI No. This order was sold for P150. When performing sales and purchases cut-off tests.000 12/28 SI No.000 12/31 SI No. 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. d) Enroute to the client on December 31 was a truckload of goods.SALES Date Reference Balance forwarded PURCHASES Amount P7. 967 15. 968.000) P - Closing entry (8. XXX 888 was unloaded on January 2 of the following year and received on Receiving Report No. 966 terms FOB Destination. QUESTIONS: .000. b) On the evening of December 31.500. · Truck No. 968.800.000 12/31 Closing entry 12/31 SI No. and freight of P2.000 12/27 SI No. 1063.000 900.000 12/31 SI No. c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to ABC Trading Corporation.000 was paid by the client.200. 971 24.295.000.000 12/30 RR #1061 105.000 12/28 RR #1059 36. MGM 357 was loaded and sealed on December 31 but leave the company premises on January 2.000 600. the freight was deducted from the purchase price of P800. Cost was P27.000 12/31 (4.000 Date Reference Balance forwarded Amount P4. 000) Accounts receivable P195.000 d.100.025.00 0 (195. P8.000 c.000) - P4.00 0 P627.000 - P7. P8. P1.000 P600. P 531.000 c. P1.000+P24. P330. P1. 1 AJE No. 4 AJE No.527. P5.000 b.00 0 27.000 4.500.452.000 P195.631.727.725.00 0 27.827.875. P4. P1.00 0 P4.500.875. P5.000 b. P525. P180.296.000 b. 1 to 5 Unadjusted balances AJE No. 969.000 .000 c. 2 AJE No.000 P1.00 0 P330.000) - 96. Purchases for the year ended December 31. 2006 a.000) (225.00 0 Adjusting entries: 1) Sales (P69.000+P102.000 b. Accounts payable as of December 31. Sales for the year ended December 31.000 d.000 d. Inventory as of December 31.000 b.000 P900. 6 Adjusted balances Sales Purchases AR Inventory AP P8. P7.000 3. 3 AJE No. 5 AJE No.296. 2006 a.000 5.295. P600.527.000 d.200. 2006 a.221.000) (225. P1. P4. P7.000 To adjust unshipped goods recorded as sales (SI No.000 Suggested Solution: Questions No.000 (195.000 120. 970 and 971) 2) Purchases P27. P555. 2006 a. Accounts receivable as of December 31.000 - P750.000 180.000 c.Based on the above and the result of your audit. determine the following: 1.000 c. P627. 2006 a.000 d.000 2. The company is on a periodic inventory basis. The company’s accountant has furnished you not only the copy of trial balance as of June 30. 2006 Cost of goods sold P 500. 2006.000 700.000 were entered in the voucher register in July but the goods received during June. 966 Answers: 1) C.000/1.000 The beginning and ending inventories of the year were ascertained thru physical count except that no reconciling items were considered. .25) Cost of sales P120.25) Cost of sales P180.000 4. you took note of the following: July 1. b.000 Accounts receivable P225.100.000 3. 2005 a.400.000 P180.600.000 were entered in the voucher register in June.000 P3. 966 6) Inventory (P225. 1060) 3) Inventory Cost of sales P96. Invoices totaling P54.000 P96. In your examination of inventory cut-offs at the beginning and end of the year. 5 Balungao Company engaged you to examine its books and records for the fiscal year endedJune 30.000 To take up goods under RR No. 2) D. The following data appears in the cost of goods sold section of the income statement: Inventory.000 To reverse entry made to record SI No. 3) A. Even though the books have been closed. All purchases are FOB shipping point.000 P120. June 30. 5) B PROBLEM NO. 1063 4) Inventory (P150.000/1. 968 5) Sales P225. your working paper trial balance show all account with activity during the year. 2006 but also the copy of company’s balance sheet and income statement as at said date. June invoices totaling to P130. 4) D.000 To take up goods under SI No. The corresponding goods not received until July. 2005 Add Purchases Total goods available for sale Less Inventory.000 To take up unrecorded purchases (RR No.000 To take up unshipped goods under SI No.Accounts payable P27. July 1. were date June.000 2. P3. and the goods were received in July. The invoices.000 130. P3.000 (the corresponding goods for which were received in June) were entered the voucher register. 2006? a.000 b. Book entries relating to the sales were made in June. P500. P576. QUESTIONS: Based on the above and the result of your cut-off tests. 2006 c. f.000 - Purchases P3.894.000 d.00 0 (54. 2006 would include a net adjustment to Retained Earnings of a. P370.000 d. P960. P892. P3. P3.000 b.000 c. P130.000 c.000 3.600.316.564. Invoices totaling P108.000 . P784. 2006? a.000) 186.840.000 d. P630. P184.000 5.510. Invoices with an aggregate value of P186. June invoices totaling P74. P3. P500. P54.000 b.600. Sales on account in the total amount of P176.000 b. d. P3. 2005? a. P76. 1 to 3 Unadjusted balances Add (deduct) adj.000 were entered in the voucher register in July. How much is the adjusted Cost of Goods Sold for the fiscal year ended June 30. 2006? a.000 b.000 c.000 Suggested Solution: Questions No. How much is the adjusted Inventory as of June 30.000 Inventory6/30/0 6 P700.June 30.914.000 were entered in the voucher register in June but the goods were not received until July.000 186. How much is the adjusted Inventory as of July 1.: Item a Item b Item c Inventory7/1/0 5 P500. How much is the adjusted Purchases for the fiscal year ended June 30. P3.000 d. P3. answer the following: 1.000 c. The necessary compound adjusting journal entry as of June 30.000 were made on June 30 and the goods delivered at that time.000 d.970.000 c. e.000 4. July. however. 000 240.000) Vouchers payable (P186. 4) C. 2006: Cash Accounts receivable Inventory Accounts payable Accrued expenses P 481. net of 5% cash discounts. 2) A.000 260.500 215.000 P630. The receipts of P180.600 1.250 represent collections from customers.000 P3.510.000 + P108.000 4.Item d Item e Item f Inventory7/1/0 5 - Net adjustments Adjusted balances 130.300 were recorded in the December 2006 cash receipts book.100.840.050 represent cash sales and P147. you noted that Bani held its cash books open after year-end.840.000 Inventory6/30/0 6 74.000 - Purchases - 108. 7/1/05 P130. 5 Compound adjusting entry: Inventory.000 Retained earnings (P130.000 294. July 1. In addition.000 Question No.000 3.000) Cost of sales P76. Receipts for January 2007 of P327.470. 2006 Cost of goods sold P 630. 4 Inventory.000 P3. your audit revealed the following: 1.025.000 Question No.127.500 During your audit.000 2. . 6 The following accounts were included in the unadjusted trial balance of Bani Company as ofDecember 31.000 Purchases 240.000 . 5) C PROBLEM NO.000 Answers: 1) B. June 30.00 0 P960.000 960.P54. 6/30/06 260.000 260.000 3.000 Inventory. 3) D. 2005 Add Purchases Total goods available for sale Less Inventory. P3. The goods cost P65. Accounts payable . P346. and thus were not included in the physical inventory.300 b. These goods are not included in the inventory figure.600 b. The goods were included in the 2006 ending inventory even though the sale was recorded in 2006. Inventory a. P3.000 c.500 was received and recorded as a purchase onDecember 31. P1.930. P340.127.400 are on consignment from a vendor. terms FOB destination are not included in the year-end inventory. determine the adjusted balances of the following as of December 31. 2007.000 d. 2006.025.282. 2007. Goods valued at P137. The sale was properly recorded in 2007. 3.200 was paid in January 2007.000 d. e. and were delivered to the customer on January 3.017. 2006. The following a. shipped FOB destination were received on January 4.500 c. c.700 2. f. on which discounts of P6. 2007. terms FOB shipping point. The goods were shipped on December 31. P2.2. Goods costing P318. P334. d. Goods costing P108. The invoice for goods costing P87. Accounts receivable a.505. 2006: 1.500 are on consignment with a customer. b. P2.000 c. P481.750 were received from a vendor on January 4. P1. 2007. P1.000 prior to any adjustments.000 shipment of goods to a customer on December 30.454.274. The related invoice was received and recorded on January 6. 2007.000 and were delivered to the customer on January 3. Goods valued at P306.040. P1. QUESTIONS: Based on the above and the result of your audit. information has been found relating to certain inventory transactions. Accounts payable of P186. The related goods. The terms of the invoice were FOB shipping point.250 3. 2006. Merchandise inventory is valued at P3.500 b. The payments. Cash a. These goods are not included in the physical inventory. A P91.750 were shipped on December 31. were included in the December 2006 check register.300 d.000 4.200 were taken. a.750 P318. P2.a) Inventory Cost of sales P137.000 6.450 b.d AJE No. P1.00 b.025.200 108.282.200 3.750 (87. P2.750 3.84 d.250/.95) P155.83 c.050 Cash P327. P2.600 P1.500 108.950 Cash Unadjusted balances Accounts Payable Add (deduct): AJE No.100.750) 65.200 P186.d) Inventory P 65.01 Suggested Solution: Questions No.000 P334.500 d. P2. 3.950 c.500 3. Current ratio a.00 0 137.286.300 Sales discount (P147.017.05) 7.750 3.750 (318.750 2) Cash Purchase discount Accounts payable P180.c AJE No.a AJE No.750 .e Adjusted balances Adjusting entries: 1) Accounts receivable (P147. 2 AJE No. 3.250/.c) Cost of sales Inventory P318.300 155.95 x .b AJE No. 3.750 5.500 (327.000 P1.307. P2.50 0 186. 1 AJE No.000 Sales 180. P1. P2. 1 to 4 Accounts Receivable Inventory P481.000 P137.00 0 P3.127.000 P3. 3.b) Inventory Accounts payable P108.300) 180.307.500 P108.00 0 P2.500) P2. 3.395.301. 2) B. The repossessed merchandise is to be refinished and placed on sale.000 after estimated refinishing costs of P6.000 on account.800.Cost of sales 3. Jan.640.307.400 were incurred on the repossessed item.633. 2005. 4) B. n/30.200.500 P4.000 and was given a trade discount of 20% and 10%.800 2.000 1. 1 Refinishing costs of P6.282.017. The normal profit for this item is considered to be P3.200.84 Answers: 1) C.000 1. The inventory accounts at December 31.e) Accounts payable Cost of sales P 65. Bolinao values inventory at the net invoice price Feb. 14 Bolinao repossessed an inventory item from a customer who was overdue in making payment. 3 The repossessed item was resold for P24.450 1. 20% down.523. 7 The Bolinao Company values its inventory at the lower of FIFO cost or net realizable value (NRV). 5 Current assets Cash Accounts receivable Inventory Divide by current liabilities Accounts payable Accrued expenses Current ratio P 334. 3) A. 5) C PROBLEM NO.200.f) No adjusting entry Question No.500 P 87. terms 2/15. had the following balances.000 3. The unpaid balance on the sale is P15.950 215. . Apr.000 The following are some of the transactions that affected the inventory of the Bolinao Company during 2006. Mar. It is expected that the item can be sold for P24.300 1. 8 Bolinao purchased raw materials with a list price of P200.000 P 87. Raw materials Work in process Finished goods P 650.500 2.500 3. P6. QUESTIONS: Based on the above and the result of your audit. P141. The trade-in inventory on Aug.200 and a cost P38. P6. The trade-in item is to be priced to sell at P6.200 b. c. How much will be recorded as Sales on Aug. 8 will include a debit to Raw Materials Inventory of a.200 P14. P57.800 d. 30 is most likely to be valued at a. b. P57. 30 A sale on account was made of finished goods that have a list price of P59. Debit to Cost of Repossessed Goods Sold of P14. P51.98) to Raw Materials P141. P24.8 x . P14.400.000.000. P4. A reduction of P8.Aug.000 2.120 Question No.000 x . Credit to Profit on Sale of Repossessed Inventory of P3. The entry on Jan.000 c. 4. 1 Amount to be debited Inventory (P200. answer the following: (Assume the client is using perpetual inventory system) 1. P144.120 b.000 off the list price was granted as a trade-in allowance.600. The normal profit on this type of inventory is 25% of the sales price.000 .9 x .400 5. P200. a.000 b. Credit to Repossessed Inventory of P20.400 3.000 d.200 b.000 c.200 c.600 Suggested Solution: Question No.000 d.000 d.000 6. 2 Estimated selling price Less refinishing costs Net realizable value Less normal profit Valuation of repossessed inventory P24. d.400.800 17. The repossessed inventory on Feb.000 c.200 3. P56. P14. The journal entries on April 3 will include a Debit to Cash of P24. P17. 30? a. P8. P196. 14 is most likely to be valued at a.400 as is. 400 x 25%) Valuation of trade-in inventory P6.000 271.8 00 - . is expected to be completed in 2007.000 Answers: 1) C. 4 Estimated selling price (net realizable value) Less normal profit (P6.000 744.000 Cost of Repossessed Goods Sold (P14.000 1.200 1. Question No.P8.000) Trade-in inventory (see no. the item was valued at net realizable value less the normal profit. Since fair value of the item is not given. 4) Amount to be recorded as sales P51. Proj ect A B C Contract Costs Incurred Through1 2/31/06 Total Contract Price BillingsThroug h12/31/06 CollectionsThroug P1.000+P6. 3 Journal entries on April 3. Incidentally. 5) B PROBLEM NO. Construction activities for the first year of operations are shown below.00 h12/31/06 Estimat ed Additio nal Costs toCom plete P 268.400 1. Calasiao commenced doing business on January 2.000 x 20%) Accounts receivable (P24.200.000 – P4. 3) D. 8 Calasiao Construction Corporation engaged you to advise it regarding the proper accounting for a series of long-term contracts.000 1. 2006.Repossessed inventory is valued at fair value or best possible approximation of fair value.084. 2) A.800 19. All contract costs are with different customers. 2006: Cash (P24. and any work remaining at December 31. 4) B.000 P 992.800 Question No.400. this is the valuation of trade-in inventory.000 P 720. 2006.020.120.120.400 Repossessed Inventory P20.200 4.400 Question No.000 420.400) P20. 5 Accounts receivable (P59.00 0 1.800) Sales – Repossessed inventory P 4.200 .0 00 P 800.200 P24.600 P4.000 1.800 P56.000 440. 000 d.333 c.419 b. Net realized gross profit for the year 2006 a. P432. 800 QUESTIONS: Based on the above and the result of your engagement. P436. determine the following using the percentage-of-completion method: 1. 2006 a.200 3.000 b.Proj ect D Total Contract Price Contract Costs Incurred Through1 2/31/06 BillingsThroug h12/31/06 CollectionsThroug 140. P2.800 d. P2. P160. Balance of Construction in Progress account as of December 31. P541.000 E 960.133 c.320.149.000 b. Net realized gross profit for the year 2006 assuming the company used the completed-contract method a.000 820.20 0 0 800.000 c. P248.000 Suggested Solution: Question No. P352.000 492.000 100.000 2. 1 .239. P512. P2.000 740.581. P444.0 00 h12/31/06 Estimat ed Additio nal Costs toCom plete 348.800 c. P376. P 56.800 d.060.960 c.268.395. P 0 5.000 P3. Amount to be reported in the current assets section of the balance sheet as Inventories as of December 31.619 b.00 0 60.000 P1.420.552. P432.000 800.000 P3.000 P3. P276.000 d. 2006 a. P462.333 d.000 b.000 4. P1. P 276. P3.760. Amount to be reported in the current liabilities section of the balance sheet as ofDecember 31. 2006 a.000 P5. 000 888.000 68.000 .800 (40.000 P512.272.000 280.000 888. 2 Project A B D E Total Costs incurred through12/31/0 6 P992.000 820.000 P1.000 .000) 8.000) 44.P280.000) 160.000 (40.000 Construction in Progress P 932. 5 Project A B – not yet completed C D – not yet completed E Answers: 1) B.800 * (Total contract price .552.000 Realized grossprofit (loss) (P60.Project A B C D E Estimated gross profit (loss)* Percentage ofcompletion** (P60.Total estimated costs) ** (Costs incurred through Dec.000 Question No.000) 8.000 P2. 3) B.760.000 452.200 492.000) 148.000 P2.000 P432.000 Construction in Progress P 932.000 Question No.000 312.000) 148.00% 100.000 not applicable 20.000 (40.000 271. 31.000) P160.000) P276.000 Question No.000 ProgressBilling s P 800. 4 Progress billings in excess of costs and recognized profit – Project B (P440.000 376. 5) D Realized grossprofit (loss) (P60.50% Total Realized grossprofit (loss) (P60.000) 376.800 376. 3 Project A D E Total Net P132.000 140.000 740.000 452. 4) C.000 (40. 2006 / Total estimated costs) Question No. 2) A.00% not applicable 92. 000 x 60% = 3. P166.200 c. 9 Dasol Factory started operations in 2006.676 d.000 P1. The inventory at the end of the year was as follows: 220 dozens “Class A” @ P360 300 dozens “Class B” @ P360 P 79.500 b. P406. P221.972.993. P1.400 x P250) Cost ratio P2. P875.000 90% .500 4.000 b.286 3.620. 1 & 2 Total cost of production (6.000 b.000 2. P1. P1. P1.000 dozens were produced at an average cost of P360 per dozen. P1.000 x 40% = 2.800. P 864. How much of the total cost should be allocated to “Class A”? a. P1.972.000 dozens x P360) Divide by total sales price: Class A (6.000 d.296.500 d. P117. answer the following: 1.PROBLEM NO. How much is the cost of sales for the year 2006? a.500 d. P1.200 c. which management considers as a more equitable basis of cost distribution.324 b.600 x P500) Class B (6.714 2. How much of the total cost should be allocated to “Class B”? a.946 Suggested Solution: Questions No.000 c. P 925.043. Dasol manufactures bath towels. How much is the gross profit for the year 2006? a.234. 6. P242. P242.200 108.000 b. During 2006.400.200 QUESTIONS: Using the relative sales value method.054 5. How much is the value of inventory as of December 31.946 d.284.800 c. P187. P2.00 0 600.000 P187. 2006? a. 60% of the production are “Class A” which sell for P500 per dozen and 40% are “Class B” which sell for P250 per dozen.000 c. P187. P540.160. 000 Class B (P2.620.000 Class B (P600.500 P166.000 Question No. 5) C PROBLEM NO.900.000 1.993.993.240.215.232.160.000 x 90%) P1.400 .200 Your examination disclosed the following additional information: a) Purchases of raw materials Month Units Unit Price Amount .300) x P250] Total sales Less cost of sales Gross profit P1. the following facts were disclosed: Raw materials inventory.620.000 525.000 166.500 Question No.000 2. 12/31/06 Cost of sales P2.000 x 6/24) P540. 2006. 12/31/06 P 99.000 8.000 Alternative computation: Class A (P2.Class A (P1.800 7. 10 During your audit of the records of the Manaoag Corporation for the year ended December 31.500 Question No.000 x 90%) P540. 3 Class A (220 x P500 x 90%) Class B (300 x P250 x 90%) Inventory.000 1.200 5. 3) D.690.160.600 .000 dozens x P360) Less inventory. 1/1/2006 Selling expenses Administrative expenses P 720.000 67.800.000 x 18/24) P1.500 Answers: 1) B. 2) A.350.160. 5 Sales of Class A [(3.112.500 P1.000 7.377. 1/1/2006 Raw materials purchases Direct labor Manufacturing overhead applied (150% of direct labor) Finished goods inventory. 4) B.800 4.500 P 221. 4 Total cost of production (6.220) x P500] Sales of Class B [(2. 911.000 d.000 d. 2006 is a. P14. answer the following: 1.000 918.40 20.000 Raw materials are issued at the beginning of the manufacturing process. no returns. P14.800 900.000 2. 2006 is a.000 c.000 490. P16.040.000 b. P992. P1.000 b.800 b) Data with respect to quantities are as follows: Units Explanation Raw materials Work in process (80% completed) Finished goods Sales.000 d.077.000 45. spoilage. d) Inventories are stated at cost as follows: · Raw materials – according to the FIFO method · Direct labor – at an average rate determined by correlating total direct labor cost with effective production during the period · Manufacturing overhead – at an applied rate of 150% of direct labor cost QUESTIONS: Based on the above and the result of your audit.400 Suggested Solution: .793. P3.000 4.000 3.80 P 976.248.746. P3.000 60.161.000 1.000 700.000 - 12/31/06 ? 25. P2.334.000 P17. P1.000 265. The cost of goods sold for the year ended December 31.812.000 45. P1. P1.76 20.000 40.000 units c) 1/1/06 35. The finished goods inventory as of December 31. Each unit of finished goods contains one unit of raw materials.00 19.897.553. 2006 is a.000 b.00 20.60 20.000 25.January – February March – April May – June July – August September – October November – December 55.400 d.600 c. P1. 2006 is a. During the year.000 15. or wastage occurred.000 P5.000 c.232.000 35.496. 200. P13.000 c. P 936.130 b.776. P2. The raw materials inventory as of December 31. The work in process inventory as of December 31. P888.514. 000 400.200.000 40.000 .000 units . 1) Direct materials used Direct labor P 720.000 240.000 15.80) P1.000* units) P30b *Equivalent production for labor and overhead Started.232.040.000 265. and in process (25. 12/31/06 (see no. finished and on hand (40. 4 Raw materials. 1/1/06 Add Purchases Raw materials available for use Less raw materials.000 Raw materials. 1/1/06 Total goods available for sale Less finished goods.000 Question No.000 225.350. 2 Raw materials [(10.040.80) + (15.000 units x 80%) Total 185.Question No.000 Labor unit cost (P4. 12/31/06 Goods manufactured Finished goods. 12/31/06 P 812.000 units x P20. finished and sold [(200.000 units x P20.000 300.000 units x P30b) Finished goods inventory.000 250.000 units x 100%) Started. 1/1/06 Add purchases Raw materials available for use Less raw materials.900. 12/31/06 P 514.000 1.000 units x 80% x P30b) Work in process.000 50.000 Question No.000 units x P20.000 40.913. 1 Units 35.900.000 20.000 units) x 100%] Started.000 P2.812.000 units x P20.40) +(10. 12/31/06 Goods sold Raw materials.000 4.000 units x 80% x P20a) Factory overhead (25.000 units x P20)] Direct labor (40.000 600. 3 Raw materials [(30.953.800 5.200 5.514.000 245.000/245.000* units) P20a Overhead unit cost (P7.000 units x P20a) Factory overhead (40. 12/31/06 (50.000 Question No. 12/31/06 (squeeze) Goods placed in process Less work-in-process.000 25.15.40)] Direct labor (25.000 800.000 P1.000 1.000/245.000 200.000 4. P653.000 .350. 1/1/06 Total goods available for sale Less finished goods. 4) C PROBLEM NO.000 d. first-out method of calculating the cost of goods sold. QUESTIONS: Based on the above and the result of your audit.000 17.000 16. Mangaldan’s suppliers reduced their price from the last purchase price by the following percentages: Pans………………….000 1.240.000 P 40 9. 3) Cost of goods sold 7.000 (@ P80) KETTLES No.000 2. 12/31/06 (see no. 1/1/06 Total cost placed in process Less work-in-process.000 P14.000 15.514. Both products have a normal profit of 30% on sales prices (after selling costs). Total cost of Pans as of May 31 is a. 12/31/06 (see no. The following information concerning two of the company’s products is taken from the month of May: May 1.Factory overhead Total manufacturing cost Add work-in-process.649.000 1.000 17.000 P 60 Purchases: May 15 May 25 14.163.163. 11 The Mangaldan Merchandising Company is a leading distributor of kitchen wares. Unitco ofunits st 6.300 c.000 (@ P44) On May 31. beginning inventory PANS No.000 6. P612. answer the following: 1.889. P600.000 P 42 10.812.25% Kettles…………………20% Accordingly.000 Answers: 1) D.. The company uses the first-in.000 Sales for the month 65 75 20.000 b. Unit co ofunits st 10. P710. 2) B. 3) D. 2) Cost of goods manufactured Add finished goods. Mangaldan Merchandising Company’s selling costs are calculated at 10% of selling price. the company agreed to reduce selling prices by 15% on all items beginning June 1.077. P168. 3 Item Pans Kettles Units 4.778.000) Less inventory value (see no.000 units @ P75 Total cost of Pans P260.300 b. P210.000 d.000 b. P27.000 450.000 + P210.685.300 P780.700 2.800 367. 1 4.000 4.66 InventoryAmount* * P244. 5 P920.000 Question No.000 Question No.400 P137.658. for the month of May is a.300 c.000 Unit Cost P65 75 42 NRV* P61.200 168.000 x P0. P29. P206. 2 Total cost of Kettles (5.000 units @ P42) P210.000 Suggested Solution: Question No.600 5. P768. before loss on inventory write down.000 units @ P65 6. P920.797. P137.600 d.300 139.300 d.20 33.700 c. Total cost of Kettles as of May 31 is a. The loss on inventory write down for the month of May is a.000 P710.300 d. The inventory at May 31 should be valued at a. P1. P1.000 5.000 780.300 . P200. P1.000 c.2. 3) Required allowance for inventory writedown Less allowance.000 c.300 3.40) Loss on inventory writedown for May Question No. May 1 (6. P890.000 6. P780.300 * Estimated selling price – Estimated cost to sell ** Lower of cost or NRV Question No. 4 Total cost of inventory (P710. The cost of sales.20 61.000 b. P139. P1.700 b. before inventory writedown P600. . 2006 Inventory. 2006. 2006 P1. for the fiscal year ended June 30.000 units x P40) Add purchases: Pans [(14.May 31.280. (1) Shipments costing P12.000 140.000 168.000 were received in May and included in the physical inventory but recorded as June purchases.344. Accordingly.000 P1.738.000 P 840.000 240. you determined that its internal control system was good.000 units @ P65 Kettles: 6. 3) B.000 units @ P42 Total cost of sales Alternative computation: Inventory. May 31.000 1.658.536.000 P1.000 x P75)] Kettles (9. 5/1: Pans (10. 4) B.250.000 units @ P40 4.000 units x P65) + (6. 2006 (before audit adjustments) Purchases for the fiscal year ended June 30. a company engaged in import and wholesale business.080. 5/31 (at cost) Cost of sales. Product was shipped in July 2006. Sales for eleven months ended May 31.000 220.000 P1. July 1. You obtained the following information from the company’s general ledger. 2005 Physical inventory.Pans: 10.000 Your audit disclosed the following additional information.000 made with vendor and charged to purchases in April 2006.658.000 920.000 units x P60) Kettles (6.000 240.360.578. 2006. 5) D PROBLEM NO. you observed the physical inventory at an interim date.000 408.000 650. 2) A.000 P600.000 378.000 Answers: 1) A. 2006 Purchases for eleven months ended May 31. 12 In conducting your audit of Mangatarem Corporation.000 2. 2006 instead of at June 30.000 1.000 units x P42) Total goods available for sale Less inventory.000 1. (2) Deposit of P4.000 1. 2006 Sales for the fiscal year ended June 30.000 1.000 units @ P60 10. 080. you are to provide the answers to the following: 1. P340.000 (4. 35% d.228.5/31/06 Gross profit Divide by sales for 11 months ended 5/31/06 Gross profit rate for 11 months ended 5/31/06 Question No.000) 1. This shipment was later sold in June at its cost of P16. P264.00 0 12. The gross profit ratio for eleven months ended May 31. 2 Goods available for sale Less inventory. 2006 is a. 2006 using the gross profit ratio method is a. P132. P144. P260. 2 P1. P148.000 P 140. P268. 2005 Add adjusted purchases: Unadjusted Item no.000 b. Based on the above and the result of your audit.000 3.000 25% .000 P1.000 d.000.000 Suggested Solution: Question No. 30% b.000 1. a frequently used auditing procedure is to test the reasonableness of the year-end inventory by the application of gross profit ratio.000 c.000 220.344.008. QUESTIONS: In audit engagements in which interim physical inventories are observed.344.000 b.000 1. July 1. P160. 1 Item no. The cost of goods sold during the month of June. The June 30.(3) A shipment in June was damaged through the carelessness of the receiving department.000 1. 20% c.000 d. 25% 2.000 c.088.000 336. 2006 inventory using the gross profit method is a. 1 Sales for 11 months ended 5/31/06 Less cost of sales for 11 months ended5/31/06: Inventory. 000 P 260.Sales for the fiscal year ended June 30.215.000 1.000 Gross profit P2.416.140.000 16.000 2.000 Answers: 1) D. 2006 consisted of: Materials Goods in process Finished goods Total P 310.600.000 .000. 2006 Sales for June. 7/1/05 Add adjusted purchases: Unadjusted P 140. 2006 Less sales without profit Sales with profit Multiply by cost ratio (100% . After the fire.000 75% 132. 2006 Less sales for 11 months ended May 31. 2) C.276.000 1.000 A review of the accounting records disclosed that the sales and gross profit on sales for the last three years were: 2003 2004 2005 Sales P8. 13 On March 31.000 P3.000 1.215.776.000 Item no. 2 Total goods available for sale Less cost of sales: Sales without profit Sales with profit [(P1.000 P 148.P16. some of the equipment was saved.000 16.536.000 1.000 Question No.000.225.700. 6/30/06 P1.000 192.000) 1.000.000) x 75%] Inventory.156.400. a physical inventory was taken.000 176. 2006 San Fabian Company had a fire which completely destroyed the factory building and inventory of goods in process.00 0 (4. 2006 P1.000 1.000 7.280.000 5. 3 Inventory.536.0000 16.000 . 3) D PROBLEM NO.000 1. The inventories on January 1.000 and the finished goods at P620.000 1.344. The material was valued at P750.25%) Cost of sales with profit Add cost of sales without profit Total cost of sales for June. 133.000.00 0 29.000 P5. P1.660.000 (750. 3/31/06 Raw materials used Direct labor Factory overhead (P1. 1 Gross profit 2003 P2. 2 to 4 Raw materials.00% 2004 P2. P973.000 31.400.375. 36. transportation on purchases was P100. The most likely gross profit rate to be used in estimating the inventory of goods in process destroyed by fire a.925. Total cost of goods manufactured a.000 1. P 854.000.400 d.52% b.000.500 Suggested Solution: Question No. QUESTIONS: Based on the above and the result of your audit.000.000 Gross profit rate Average gross profit rate 30.710. 1/1/06 Purchases Freight-in Raw materials available for use Raw materials.600 c.000 3. 35. For the past two years.600.000.000 800.000 Divide by Sales P8.400 4. P4.000 100.000.55% Questions No.000.500 c.14% 2005 P1.500 b.000 x 80%) P 310. Total cost of goods placed in process a.000. compute the following: 1. P 791.000 1.000 35. P 119.500 c.215. P3.52% . factory overhead cost has been 80% of direct labor cost.250.014.776. P2.100 d.951.500 b.250. 31.00 0 P7. P 973.00% 2. P3.76% d.360.000. P3.55% c. 32.The sales for the first three months of 2006 were P3. Material purchases were P1.000 1. Inventory of goods in process lost a.000 d.000) 910.000 and direct labor cost for the three months was P1.000 b. P2. 00 0 7. The estimated ending inventory at cost is a.000 6.500 1.925.812. P2.860. 68. 3/31/06 Cost of goods sold (P3.500) 973.000 3. The estimated ending inventory at retail is a. P1.760. P1.00% b.000 d.000 Villasis Corp. P1.Total manufacturing cost Work-in-process.588 d. 70. 3/31/06 (squeeze) Cost of goods manufactured Finished goods.000 2.287.45%) 2. P1. 1/1/06 Total cost placed in process Less work-in-process. 14 You obtained the following information in connection with your audit of Villasis Corporation: Beginning inventory Sales Purchases Freight in Mark ups Mark up cancellations Markdown Markdown cancellations Cost P1.053.710.000 b. P1.000 1. 75.000 b.512.000 120. P1.060.000 c.120 4.987.412.500 (620. 3) B.275.688.215.951.000 720. 4) D PROBLEM NO.000 240.786 c.20% d.000 (2. uses the retail inventory method in estimating the values of its inventories and costs.302.640 94. QUESTIONS: Based on the above and the result of your audit.000 x 68.700. answer the following: 1.673. The cost ratio to be used considering the provisions of PAS 2 is a. 1/1/06 Total goods available for sale Less finished goods.200 4. 69.000 40.58% c.78% 2. 2) C.500 (2) (4) (3) Answers: 1) A.000.000 3. P2.000) P2.940.560 Retail P2. The estimated cost of goods sold is .300. 770.357. 4 Goods available for sale at cost Less ending inventory. 2 Goods available for sale at retail Less sales Ending inventory. at cost (P1. the conventional approach (lower of average cost or market valuation) is often used if the problem is silent.302. However. An average percentage for each retail department is often used. the cost ratio was computed using the average method.000) Cost P1.000 120.P40.000 P1.400 1.812.000 x 70%) P1. P5. 3 Ending inventory.672.770.400 .672.468.200 4. P5. P5.000 70% PAS 2 par.000) Net mark down (P240.468. Question No.512. at cost Estimated cost of sales Answers: 1) C.688.812 c.987.560 ___________ P6.000 6.400 b.860.302.000 .860. since PAS 2 specifically states that the percentage should take into consideration inventory that has been marked down to below its original selling price.000 P5.400 Retail P2.000 7. 1 Beginning inventory Purchases Freight in Net mark up (P720.000 Question No. P4.a.000 720.640 94.P120.000 Question No.614 d.494.000 P9. The percentage used takes into consideration inventory that has been marked down to below its original selling price. The cost of inventory is determined by reducing the sales value of the inventory by the appropriate percentage gross margin.760.117 Suggested Solution: Question No.000 . 2) D. 15 P6. 3) C. Previously.685.000) Goods available for sale Cost ratio (P6.770. 4) A PROBLEM NO. at retail P9. The conventional approach ignores markdown in the computation of cost ratio.400/P9. 22 states that the retail inventory method is often used in the retail industry for measuring inventories of large numbers of rapidly changing items with similar margins for which it is impracticable to use other costing methods.672. Receiving reports. 4. Completeness 6. d. Of the following audit procedures relating to inventories. The auditor confirms inventories not on the premises. b. The auditor tests the quantity of materials charged to work in process by tracing these quantities to a. 7. Examining paid vendors' invoices. c. 2. and vendors' invoices. b. which one of the following audit procedures would give the least assurance of the valuation of inventory at the audit date? a. Receiving reports. and limits on movements of goods during inventory. Purchase orders. Independent matching of purchase orders. b. The auditor observes the client's inventory and performs test counts as appropriate. Valuation or allocation. Materials requisition forms. The auditor reviews the client's inventory-taking instructions for such matters as proper arrangement of goods. receiving reports. d. Independent storeroom count of goods received. An economic order quantity (EOQ) system.Select the best answer for each of the following: 1. would be most likely to implement a. a major objective relates to the existence assertion. Periodic independent comparison of records with goods on hand. b. Cost ledgers. who is interested in strengthening internal controls over the accounting for materials used in production. Presentation and disclosure. Obtaining confirmation of inventories pledged under loan agreements. c. c. The auditor performs a lower of cost or market test for major categories of inventory. Rights and obligations. The accuracy of perpetual inventory records may be established in part by comparing perpetual inventory records with a. Testing the computation of standard overhead rates. In auditing inventories. b. Perpetual inventory records. A perpetual inventory system. c. Periodic independent reconciliation of control and subsidiary records. 5. Vendor payments. A job order cost accounting system. The controller. d. c. which does not support the existence assertion? a. Otso Manufacturing Corporation mass produces eight different products. A separation of duties among production personnel. c. An auditor would analyze inventory turnover rates to obtain evidence concerning management’s assertion about a. separation of consigned goods. Purchase requisitions. c. b. d. . b. d. Which of the following control procedures would most likely be used to maintain accurate perpetual inventory records? a. 3. In a manufacturing company. d. 4) C. you were able to convince your client to take a complete physical inventory. a. Goods received for repairs under warranty. 8) C. d. Which of the following items should not be included in a physical inventory? Materials in transit from vendors. You had a sales cut-off test worksheet prepared. in which you were present on October 15. Perpetual inventory records are kept and the client considers a sale to be made in the period in which goods are shipped. 9. b. 9) C. b. No goods observed during the physical count are pledged or sold. All goods purchased before year end are received before the physical inventory count. All goods owned at year end are included in the inventory balance d. c. c. c. the auditor performs a purchase cutoff test to obtain evidence that a. 8. Reviewing direct labor rates. When auditing merchandise inventory at year end. Goods in a private warehouse. 10. Because of the expected holiday. 3) C. You were engaged to conduct an annual examination for the fiscal year ended October 31. Date Goods Shipped Oct 31 Nov 2 Oct 14 Oct 10 Transaction Recorded as Sale Nov 2 Oct 31 Oct 16 Oct 19 Date Inventory Control Oct 31 Oct 31 Oct 16 Oct 12 Credited Answers: 1) B. d. 5) A. 10) D . 7) A. 6) D. Which item among those listed below will not require an adjusting entry to reconcile the client's detailed inventory record with the physical inventory? a.d. 2) D. b. 2006. Consignment to an agent. No goods held on consignment for customers are included in the inventory balance.