Problem 12

On December 15, 2006, under your observation, your client took a complete physical
inventory and adjusted the financial perpetual inventory control accounts to agree with the
physical inventory.

As of December 31, 2006, you decided to accept the balance of the control account after
examining transactions recorded in that account between December 15 and December 31,
2006. The audit was for the year ended December 31, 2006.

In the course of conducting your examination of the sales cutoffs as of December 15 and
December 31, 2006, you discovered the following items:
Date Inventory
Item Cost Price Sales Price Date Shipped Date Billed Control Credited
A P 60,000 P 78,000 12-13-06 12-17-06 12-17-06
B 77,000 101,400 01-02-07 12-29-06 12-29-06
C 52,000 67,600 12-17-06 12-29-06 12-29-06
D 87,000 113,100 12-14-06 12-16-06 12-16-06
E 49,500 64,500 12-25-06 01-02-07 01-02-07

Question:
Based on the information above and your analysis, answer the following

1. The inventory at year-end is over/(under) by:

a. P 174,500 over c. P 114,500 over
b. P 174,500 under d. P 114,500 under

2. The cost of sales at year-end is over/(under) by:

a. P 174,500 over c. P 114,500 over
b. P 174,500 under d. P 114,500 under

3. The sales at year-end is over/(under) by:

a. P 36,900 over c. P 101,400 over
b. P 36,900 under d. P 101,400 under

4. The accounts receivable at year-end is over/(under) by:

a. P 36,900 over c. P 101,400 over
b. P 36,900 under d. P 101,400 under

Solution

AJEs as of December 31, 2002

Item Debit Credit A Inventory 60,000

Cost of Goods Sold 60,000
This item was not included in the physical inventory and was
credited to the Inventory account on 12.17.06; a physical inventory
cutoff error.
 B Sales 101,400
Inventory 77,000
Accounts Receivable 101,400 Cost of goods sold 77,000
This item is a year-end sales cut-off error.
C Properly recorded; no AJE needed.
D Inventory 87,000
Cost of goods sold 87,000
(same as Item A)
E Accounts Receivable 64,500
Cost of goods sold 49,500
Sales 64,500 Inventory 49,500
This item is a year-end sales cut-off error.

Answer:
1. b 2. a 3. a 4. a

Problem 13
The following information was obtained from the balance sheet of LION INC.:

Dec. 31, 2006 Dec. 31, 2005

Cash P706,600 P 200,000
Notes receivable 0 50,000
Inventory ? 399,750
Accounts payable ? 150,000

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 the periodic FIFO. The unit cost of inventory during
January 2006 was P65.20 and increased P0.20 per month during the year. During
2006, payments to suppliers totaled P943,400 and operating expenses totaled
P440,000. The ending inventory for 2005 was valued at P65.00 per unit.

Question:
Based on the information above and your analysis, answer the following

1. Recorded sale during 2006 is:

a. P 1,840,000 b. P 1,890,000 c. P 2,090,000 d. P 2,140,000

2. Number of units sold during 2006 is:

a. 21,400 b. P 20,900 c. 18,900 d. 18,400
3. The accounts payable balance at December 31, 2006 is:
a. P 400,000 b. P 250,000 c. P 156,000 d. P 150,000

4. The January 1, 2006 inventory balance is:

a. P 399,750 b. P 385,900 c. P 380,900 d. P 355,800

5. The amount of inventory at December 31, 2006 is:

a. P 399,750 b. P 385,900 c. P 380,900 d. P 355,800
Solution
Q1 & Q2
____________________Cash______________________
Beg. bal. 200,000 Payment to supplier 943,400
NR collect 50,000 Ope. expenses 440,000
Sales 1,840,000 Ending balance 706,600

Sales (P) – P1,840,000/P100 = P18,400 units

Q3 _______________Accounts Payable_________________
Payment to supplier 943,400 Beg. bal. 156,000
Ending balance 400,000 Purchases 1,193,400

Jan. 1,500 x P65.20 = P 97,800 P65.20 + P67.40 / 2 = P66.30

Feb. 1,500 x P65.40 = 98,100 x 18,000 units
Mar 1,500 x P65.60 = 98,400 Purchases 1,193,400
Apr 1,500 x P65.80 = 98,700
May 1,500 x P66.00 = 99,000
Jun 1,500 x P66.20 = 99,300
July 1,500 x P66.40 = 99,600
Aug 1,500 x P66.60 = 99,900
Sept 1,500 x P66.80 = 100,200
Oct 1,500 x P67.00 = 100,500
Nov 1,500 x P67.20 = 100,800
Dec 1,500 x P67.40 = 101,100
Total purchases 1,193,400

Q4 P399,750 / P65.00 = 6,150 units

Q5 6,150 beg. units + 18,000 purchased units – 18,400 sold units = 5,750 ending

FIFO: 1,500 x P67.40 = P101,100

1,500 x P67.20 = 100,800
1,500 x P67.00 = 100,500
1,250 x P66.80 = 83,500
Total P 385,900

Problem 14
Kitkat Company operates a wholesale oil products company. Kitkat believes that an
employee and a customer are conspiring to steal gasoline. The employee records sales to
the customer not less than the amount actually placed in the customer’s tank truck. In
order to confirm or refuse these suspicions, Kitkat has collected the following data for the
past 10 working days.
Quantity Cost per
(gallons) unit (gal) Total Cost
Inventory, September 1 220,000 P1.45 P 319,000
Purchases 1,560,000 1.45 2,262,000
Goods available for sale 1,780,000 2,581,000

Kitkat had sales of P2,512,000 during this 10-day period. All sales were made at P1.60 per
gallon. A physical inventory indicates that there are 192,000 gallons of gasoline in
inventory at the close of business on September 10.

Questions:
1. How much inventory should be present at the end of the 10-day period (in gallons)?
 a. 220,000 b. 210,000 c. 200,000 d. 192,000

2. What is the cost of missing inventory?

a. P 304,500 b. P 40,600 c. P 26,100 b. P 0

Answer
1 b 1,780,000 – (2,512,000/1.60) = 210,000 gallons
2 c 210,000 – 192,000 = 18,000 x P1.45 = P26,100

Problem 15
You were assigned to audit the factory accounts of Modfood Manufacturing Corporation for
the year ended December 31, 2006. The following data were gathered:

Total manufacturing Cost P 900,000

Cost of Goods Manufactured 800,000
Factory Overhead 75% of direct labor and 25% of total
manufacturing cost

Beginning work-in-process inventory, January 1, was 60% of ending work-in-process

inventory, December 31, 2006.

Manufacturing costs for the year ended December 31, 2006 submitted to you by the factory
accountant was as follows:

Raw Materials Used P400,000

Direct Labor 275,000
Factory Overhead 225,000
Total P900,000

Questions:
1. Assuming cost percentage relationships are stated are correct, what will be the
adjustment on manufacturing cost at December 31, 2006?
a. Debit: Raw materials used 25,000
Credit Direct labor
25,000 b. Debit: Direct labor 25,000
Credit Raw materials used
25,000 c. Debit: Raw materials used 50,000
Credit Direct labor 50,000
d. Debit: Direct labor 50,000
Credit Raw materials used 50,000

2. How much is the Work-in-process Inventory on December 31, 2006?

a. P 200,000 c. P 250,000
b. P 225,000 d. P 275,000

Solution
1 b Per books Per audit Difference
Raw Materials Used P400,000 P375,000 P25,000 over
 Direct Labor 275,000 300,000 P25,000 under
Factory Overhead 225,000 225,000 ---
Total P900,000 P900,000
1 c (60% of WIP, end) + 900,000 – WIP,end = 800,000
WIP, end = 100,000/40% = P250,000

Problem 16
Following are portions of the ANTHONY CORPORATION’S SALES and PURCHASES account
for
the calendar year 2006: (All sales are mark-up at 30% based on sales price)

SALES
12/31 Closing Entry P 1,411,100 Sales Register P
1,230,000
12/25 SI#876 15,000
12/27 877 25,500
12/29 879 55,000
12/31 880
85,600
PURCHASES
P 1,411,100 P
1,411,100

Purchase Register P 740,000 12/31 Closing Entry P 792,500

12/27 RR#545 15,000
12/28 547 7,500
12/29 548 10,000
12/30 549 20,000 _______
P 792,500 P 792,500

You observed the physical inventory of goods in the warehouse on December 31, 2006 and
were satisfied that it was properly taken.

When performing sales and purchases cut-off tests, you found that at December 31, 2006,
the last Receiving Report (RR) that had been used was No. 549 and that no shipments
have been made on any Sales Invoices (SI) with number larger than No. 878.

The following information were found:

1. Included in the warehouse physical inventory at December 31, 2006 were chemicals
that had been purchased and received on Receiving Report No. 546 but for which an
invoice was not received until 2007. Cost was P14,500.

2. In the warehouse at December 31, 2006, were goods that had been sold and paid for
by the customer but which were not shipped out until 2007. They were all sold on
Sales Invoice No. 876.

3. On the evening of December 31, 2006, there were two shipments on ANTHONY
CORPORATION. First shipment was unloaded on January 3, 2007 and received on
 Receiving Report No. 548. The freight was paid by the vendor. The second shipment
was loaded and sealed on December 31, 2006 but was not delivered until January 2,
2007. This order was sold on Sales Invoice No. 878, P20,000 and freight was paid by
the buyer.

4. Temporarily stranded on December 31, 2006, on a railroad sidings were two trucks of
chemicals en route to the Nelson Neil Company. They were sold on Sales Invoice No.
879 and the term were fob destination.

5. En route to ANTHONY CORPORATION on December 31, 2006 was truckload of materials

that was received on Receiving Report No. 550. The material was shipped fob
destination.

6. Included in the physical inventory were chemicals exposed to rain while in transit and
deemed unsalable. Their invoice cost was P5,500 and freight charges of P200 had been
paid on the chemicals. This was recorded as purchases on 12/31/02

Questions:
1. The Sales at December 31, 2006 is:
s. Overstated by P 70,000 c. Overstated by P 155,600
b. Overstated by P 55,000 d. Overstated by P 15,000

2. The adjusted Sales at December 31, 2006 is:

a. P 1,396,100 b. P 1,356,100 c. P 1,341,100 d. P 1,255,500

3. The adjusted Purchases at December 31, 2006 is:

a. P 797,000 b. P 796,800 c. P 791,500 d. P 782,500

4. The Purchases at December 31, 2006 is:

a. Understated by P4,500 c. Overstated by P10,000
b. Overstated by P 1,000 d. Understated by P 4,300

5.The Inventory at December31, 2006 is:

a. Understated by P 8,300 c. Overstated by P12,500
b. Understated by P 14,000 d. Understated by P 12,500

6. The Cost of Sales at December 31, 2006 is:

a. Understated by P 17,000 c. Overstated by P1,200
b. Overstated by P 9,500 d. Understated by P12,500

Solution
1. Purchases 14,500
Accounts payable 14,500
SI # 546
2. Sales 15,000
Advances from customers 15,000
SI # 876
3. Accounts payable 10,000
Purchases 10,000
RR # 548
4. Inventory 14,000
Cost of sales 14,000
 SI#878 - P20,000 x 70%
5. Sales 55,000
Accounts receivable 55,000
SI # 879
6. Claims Receivable 5,700
Purchases 5,500
Freight-in 200
7. Cost of sales 5,700
Inventory 5,700

8. Sales 85,600
Accounts receivable 85,600
SI # 880
Answer:
1. C 2. D 3. C 4. B 5. A 6. B

Problem 17
On April 15, 2007, a fire damaged the office and warehouse of KAREN MAE CORPORATION.
The only accounting record save was the general ledger, from which the trial balance below
was prepared.
KAREN MAE CORPORATION
TRIAL BALANCE
March 31, 2007
Cash 200,000
Accounts receivable 400,000
Inventory, December 31, 2006 750,000
Land 350,000
Building and equipment 1,100,000
Accumulated depreciation 413,000
Other Assets 36,000
Accounts payable 237,000
Other expense accruals 102,000
Capital stock 1,000,000
Retained earnings 520,000
Sales 1,350,000
Purchases 520,000
Operating expenses 266,000 ________
3,622,000 3,622,000
_______________________________________________________________

The following data and information have been gathered:

1. The fiscal year of the corporation ends on December 31.

2. An examination of the April bank statement and canceled checks revealed that checks
written during the period April 1-15 totaled P130,000: P57,000 paid to accounts
payable as of March 31, P34,000 for April merchandise shipments, and P39,000 paid for
other expenses. Deposits during the same period amounted to P129,500, which
consisted of receipts on account from customers with the exception of a P9,500 refund
from a vendor for merchandise returned in April.
3. Correspondence with suppliers revealed unrecorded obligations at April 15 of P106,000
for April merchandise shipments, including P23,000 for shipments in transit on that
date.

4. Customers acknowledge indebtedness of P360,000 at April 15, 2007. It was also

estimated that customers owed another P80,000 that will never be acknowledge or
recovered. Of the acknowledged indebtedness, P6,000 will probably be uncollectible.

5. The companies insuring the inventory agreed that the corporation’s 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 corporation’s audited financial
statements disclosed this information:

Year Ended December 31

2006 2005

Net Sales 5,300,000 3,900,000

Net purchases 2,800,000 2,350,000
Beginning inventory 500,000 660,000
Ending inventory 750,000 500,000

6. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The balance of the
inventory was a total loss.

Questions:
1. Cash balance at April 15, 2007 is:
a. P 70,000 b. P 143,000 c. P 190,000 d. P 199,700

2. Accounts Receivable balance at April 15, 2007 is:

a. P 350,500 b. P 360,000 c. P 400,000 d. P 440,000

3. Inventory at April 15, 2007 is:

a. P 0 b. P 35,000 c. P 58,000 d. P 93,000

4. Accounts payable at April 15, 2007 is:

a. P 106,000 b. P 180,000 c. P 276,500 d. P 286,000

5. Sales as of April 15, 2007 is:

a. P 1,470,000 b. P 1,510,000 c. P 1,750,000 d. P 1,790,000

6. Net purchases as of April 15, 2007 is:

a. P 544,500 b. P 593,500 c. P 627,500 d. P 650,500

7. Cost of Sales as of April 15, 2007 is:

a. P 513,000 b. P 547,000 c. P 721,000 d. P 830,500

8. Estimated inventory as of April 15, 2007 is:

a. P 570,000 b. P 575,500 c. P 679,500 d. P 830,500
9. Inventory loss at April 15, 2007 is:
a. P 477,000 b. P 512,000 c. P 535,000 d. P 570,000

10. The Average Gross Profit for two years (2005 and 2006) is:
a. 45% b. 55% c. 42.76% d. 56.23%

Solution

Computation of sales for the period Jan 1 - April 15, 2007

Sales up to March 31, 2007 P1,350,000
Sales for the period April 1-15

Accounts Receivable, 4.15.07 P440,000

Receipts from customers 120,000

P560,000

Less Accts. Receivable, 3.31.07 400,000 160,000

Total sales P1,510,000

1. Computation of the amount of Inventory Fire Loss

Inventory, December 31, 2006 P750,000
Add purchases for the period Jan.1 to April 15
Purchases up to March 31, 2007 P520,000 Payments for April mdse. Shipments 34,000
Unrecorded obligations for April mdse, shipment 106,000
Purchases returns (9,500) 650,500
Merchandise available for sale P1,400,500
Less cost of goods sold (P1,510,000 sales x 55%) 830,500
Estimated inventory on date of fire P570,000
Less: Proceeds from sale of salvaged mdse. P35,000
Shipments in transit 23,000 58,000
Inventory fire loss P512,000

Computation of average GP ratio:

2005 2006 Total
Net Sales P3,900,000 P5,300,000 P9,200,000
Beginning Inventory P660,000 P500,000 P660,000
Net purchases 2,350,000 2,800,000 5,150,000
Available P3,010,000 P3,300,000 P5,010,000
Ending Inventory 500,000 750,000 750,000
Cost of goods sold P2,510,000 P2,550,000 P5,060,000
Gross Profit P1,390,000 P2,750,000 P4,140,000
Gross Profit rate 45%

JOURNAL ENTRIES – APRIL 1-15

Accounts payable 57,000
Cash 57,000
Purchases 34,000
Cash 34,000
Operating expenses 39,000
Cash 39,000
Cash 129,500
Accounts receivable 120,000
Purchase returns 9,500
Accounts receivable 160,000
Sales 160,000
Purchases 106,000
 Accounts payable 106,000
Allowance for bad debts 80,000
Accounts receivable 80,000
Operating expenses (bad debts) 86,000
Allow. for bad debts 86,000
(P80,000 + P6,000)
1. Cash balance at April 15, 2007 is: d. P 199,700
2. Accounts Receivable balance at April 15, 2007 is: a. P 350,500
3. Inventory at April 15, 2007 is: c. P 58,000
4. Accounts payable at April 15, 2007 is: d. P 286,000
5. Sales as of April 15, 2007 is: b. P1,510,000
6. Net purchases as of April 15, 2007 is: d. P 650,500
7. Cost of Sales as of April 15, 2007 is: d. P 830,500
8. Estimated inventory as of April 15, 2007 is: a. P 570,000
9. Inventory loss at April 15, 2007 is: b. P 512,000
10. The Average Gross Profit for two years (2005 and 2006) is: a. 45%

PROBLEM 18
The following accounts were included in the adjusted trial balance of Jeanina Company as
of December 31, 2006:

Cash P 240,800
Accounts receivable 563,500
Merchandise Inventory 1,512,500
Accounts payable 1,050,250
Accrued expenses 107,750

During your audit, you noted that Jeanina held its cash book open after year-end. In
addition, your audit reveled the following
1. Receipts for January 2007 of P163,650 were recorded in the December 2006 cash
receipts book. The receipts of P90,025 represents cash sales and P73,625 represents
collections from customers, net of 5% cash discounts.

2. Payments to suppliers made on January 2007 of P93,100, on which discounts of P3,100

were taken, were included in the December 2006 check register.

3. Merchandise inventory is valued at P1,512,500 prior to any adjustments . The following

information has been found relating to certain inventory transactions.

a. Goods valued at P68,750 are on consignment with a customer. These goods are not
included in the P1,512,500 inventory figure.

b. Goods costing P54,375 were received from a vendor on January 4, 2007. The
related invoice was received and recorded on January 6, 2007. The goods were
shipped on December 31, 2006, terms FOB shipping point.

c. Goods costing P159,375 were shipped on December 31, 2006, and were delivered
to the customer on January3, 2007. The terms of the invoice were FOB shipping
point. The goods were included in the 2006 ending inventory even though the sale
was recorded in 2006.

d. A P45,500 shipment of goods to a customer on December 30, terms FOB destination

are not included in the year-end inventory. The goods cost P32,500 and were
 delivered to the customer on January 3, 2007. The sale was properly recorded in
2007.

e. The invoice for goods costing P43,750 was received and recorded as a purchase on
December 31, 2006. The related goods, shipped FOB destination were received on
January 4, 2007, and thus were not included in the physical inventory.

f. Goods valued at P153,200 are on consignment from a vendor. These goods are not
included in the physical inventory.

Questions
Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2006.

1. Cash
a. P 240,800 b. P 173,500 c. P 170,250 d. P 167,150

2. Accounts receivable
a. P 727,150 b. P 641,000 c. P 637,125 d. P 563,500

3. Merchandise inventory
a. P 1,520,000 b. P 1,508,750 c. P 1,465,000 d. P 1,252,500

4. Accounts payable
a. P 1,197,725 b. P 1,153,975 c. P 1,150,875 d. P 1,143,250

5. Working capital
a. P 1,158,800 b. P 1,058,275 c. P 1,055,175 d. P 1,000,800

6. Current ratio
a. 2.00 b. 2.01 c. 1.84 d. 1.83

Solution
1. Accounts receivable 77,500
Cash 73,625
Sales discount 3,875
Sales 90,025
Cash 90,025
2. Cash 90,000
Purchase discount 3,100
Accounts payable 93,100
3.a Inventory 68,750
Cost of sales 68,750
3.b Inventory 54,375
Cost of sales 54,375
Purchases 54,375
Accounts payable 54,375
3.c Cost of sales 159,375
Inventory 159,375
3.d Inventory 32,500
Cost of sales 32,500
3.e Accounts payable 43,750
Purchases 43,750
Answer:
1. d 2. b 3. b 4. b 5. c 6. c

PROBLEM 19
In conducting your audit of Ma. Angela Corporation, a company engaged in import and
wholesale business, for the fiscal year ended June 30, 2006, you determined that its
internal control system was good. Accordingly, you observed the physical inventory at an
interim date, May 31, 2006 instead of at June 30, 2006.

You obtained the following information from the company’s general ledger

Sales for eleven months ended May 31, 2006 P1,344,000

Sales for the fiscal year ended June 30, 2006 1,536,000
Purchases for eleven months ended May 31, 2006
(before audit adjestments0 1,080,000
Purchases for the fiscal year ended June 30, 2006 1,280,000
Inventory, July 1, 2005 140,000
Physical inventory, May 31, 2006 220,000

Your audit disclosed the following additional information.

(1) Shipments costing P12,000 were received in May and included in the physical
inventory but recorded as June purchases.

(2) Deposit of P4,000 made with vendor and charged to purchases in April 2006.
Product was shipped in July 2006.

(3) A shipment in June was damaged through the carelessness of the receiving
department. This shipment was later sold in June at its costs of P16,000.

Questions:
In audit engagements in which interim physical inventories are observed, a frequently used
auditing procedure is to test the reasonableness of the year-end inventory by the
application of gross profit ratios. Based on the above and the result of your audit, you are
to provide the answers to the following:

1. The gross profit ratio for eleven months ended May 31, 2006 is
a. 20% b. 25% c. 30% d. 35%

2. The cost of goods sold during the month of June, 23003 using the gross profit ratio
method is
a. P 132,000 b. P 148,000 c. P 144,000 d. P 160,000

3. The June 30, 2006 inventory using the gross profit method is
a. P 260,000 b. P 264,000 c. P 268,000 d. P 340,000

Solution
Q1 Beginning inventory 140,000
 Purchases – adjusted 1,088,000 (P1,080,000 + P12,000 – P4,000)
TGAS 1,228,000
Ending inventory 220,000
Cost of goods sold 1,008,000

Sales 1,344,000
COS 1,008,000
Gross Profit 336,000 25%

Q2 Sales for the fiscal year ended June 30, 2003 P 1,536,000
Sales for the eleven months ended May 31, 2003 1,344,000
Sales for the month of June 30, 2003 P 192,000
Less: Sales of goods at cost
16,000 Sales with gross profit P
176,000 x Cost Rate
25% Total P 132,000
Plus: Sale of goods at cost 16,000
Total Cost of Goods Sold for June 2003 P 148,000

Q3 Ending inventory P 220,000

Purchases for the month of June 200,000 (P1,280,000 – P1,080,000)
Goods sold at cost ( 16,000)
Total P 404,000
Less: Cost of items sold in June 144,000 (P192,000 x 75%)
Gross Profit P 260,000

Problem 20
You are engaged to audit the Abam’z Company and its subsidiary, Yamas Company as of
December 31, 2005. The Abam’z Company manufactures tires with it sells to its subsidiary
at cost plus 30%. During the course of the audit, you discover that the balances of the
inter-company accounts are not reconciled. Following is a copy of part of the inter-company
ledger sheets:

Accounts Receivable from Yamas

Date Reference Amount Date Reference Amount

Total Forwarded P180,000 Total P130,000

Forwarded
Dec. 26 SI 903 7,600 Dec.26 CR 10,000
27 SI 904 4,000 29 CR 20,000
28 SI 905 6,200 31 Balance 52,500
29 SI 906 3,700

31 SI 908 11,000
P 212,500 P 212,500

Accounts Payable to Abam’z

Date Reference Amount Date Reference Amount

Total Forwarded P140,000 Total P161,000

Forwarded
Dec. 26 CD 20,000 Dec. 26 VR 1003-902 19,000
31 CD 28,000 28 VR 1004-903 7,600
31 RG 80 4,100 29 VR 1005-904 4,000
 31 Balance 16,700 31 VR 1006-907 9,000
31 VR 1010-909 8,200
P 208,800 P 208,800

Legend for references:

SI – Sales register and invoices number
CR – Cash receipts book
CD – Cash disbursements book
VR – Voucher register, receiving report number, and Abam’z invoice number
RG – Returned goods register and debit memo number

A review of the inventory observation working papers discloses the following information:

Observation at Abam’z Company on December 31, 2005:

1. Last shipment prior to the physical inventory was billed on Invoice number 908 dated
December 31, 2005.
2. No returned merchandise was received from Yamas Company during the month of
December 2005.

Observation at Yamas Company on December 31, 2005:

1. The last shipment of merchandise returned to Abam’z in December 2005 was entered
on debit memo number 80 dated December 31, 2005.
2. The last receiving report used in December 2005 was number 1007 dated December
31, 2005 for merchandise billed on Abam’z invoice number 905.

Questions:
1. What is the total unrecorded purchases of Yamas as of December 31, 2005?
a. P 29,900 b. P 20,900 c. P 14,700 d. P 11,000

2. What is the reconciled balance of the inter-company accounts at December 31, 2005?
a. P 7,600 b. P 30,346 c. P 29,400 d. P 37,600

3. Abam’z Company’s inventory at December 31, 2005 should be increased by

a. P 3,154 b. P 4,100 c. P 10,077 d. P 6,923

4. Yamas Company’s inventory at December 31, 2005 should be increased by

a. P 29,400 b. P 4,100 c. P 11,000 d. P 14,700

Solution:
Abam’z Company and Yamas Company
Reconciliation of Inter-Company Accounts
Abam’z Yamas
Unadjusted balance 52,500 16,700
Abam’z shipments not recorded by Yamas
SI # 905 6,200
SI # 906 3,700
SI # 908 11,000
SI # 907 – not recorded by Abam’z 9,000
 SI # 909 – recorded by Yamas although
there is no shipment made by Abam’z (8,200)
RG # 80 – not yet recorded by Abam’z (4,100)
Remittance from Yamas not yet recorded by
Abam’z ( 28,000) ______
Adjusted balance 29,400 29,400

Inventory Adjustments
December 31, 2005
Abam’z Yamas

Items to be added on inventory lists:

Cost of returned goods in transit
(4,100/130%) 3,154
Cost of purchases in transit –
SI # 906 3,700
SI # 908 _____ 11,000
Total addition to inventory 3,154 14,700

Adjusting Entry:
Book of Abam’z Book of Yamas

Accounts Receivable 9,000 Purchases 20,900

Sales 9,000 Accounts payable 20,900
SI # 907 SI # 905, 906, 908

Sales Ret. & Allow. 4,100 Accounts payable 8,200

Accounts Receivable 4,100 Purchases 8,200
Goods in transit from Yamas SI # 909

Cash 28,000
Accounts Receivable 28,000
Cash in transit from Yamas