CHAPTER 5 Caselette Audit of Inventory

CHAPTER 5 – Audit of Inventory
Exercises - Analysis of Transactions
1. Moneba Company bought merchandise on January 2, 2006 from Lynn Company costing
P15,000; terms, less 20%, 20% down payment, balance 2/10, n/30. Two days after,
P2,000 worth of merchandise was returned due to wrong specification. Moneba
Company paid the account within the discount period. How much Moneba Company paid
to Lynn Company?
a. P 7,600 b. P 7,448 c. P 7,408 d. P 7,360
Answer - P 7,448
Buyer Seller
Purchases 12,000 Accounts Receivable 9,600
Cash 2,400 Cash 2,400
Accounts Payable 9,600 Sales 12,000
Accounts payable 2,000 Sales 2,000
Purchases 2,000 Accounts Receivable 2,000
Accounts payable 7,600 Cash 7,448
Purch. Disc. 152 Sales Discount 152
Cash 7,448 Accounts Receivable 7,600
2. Merchandise shipped fob destination to customer was made on January 5, 2006 for
P25,000. The customer issued P10,000 12% 30-day note and the balance 2/10, n/30 on
January 10, 2006, the date the goods were received. The customer made a partial
payment on January 15, 2006 for P5,000. Payment was made within the discount period.
How much discount was granted?
a. P 0 b. P 200 c. P 300 d. P 500
Answer - P 300
Buyer Seller
Jan . 5 No Entry Jan. 5 No Entry
Jan. 10 Purchases 25,000 Jan. 10 Notes Receivable 10,000
Notes payable 10,000 Accounts Receiv. 15,000
Accounts pay. 15,000 Sales 25,000
Jan. 15 Accounts pay. 5,000 Jan 15 Cash 5,000
Cash 5,000 Accounts receiv. 5,000
Date of Payment:
Accounts pay. 10,000 Cash 9,700
Cash 9,700 Sales discount 300
Purchase discount 300 Accounts reciev. 10,000
Discount : P15,000 x 2% = P300
3. On January 10, 2006, Lao Company sold merchandise on account fob destination to
Febryan Co. for P20,000. Febryan Co. paid the freight cost of P1,500 to be deducted
from its account. How much Febryan Company paid to Lao Company?
a. P 21,500 b. P 20,000 c. P 19,600 d. P 18,500
Answer - P 18,500
Seller Buyer
Accounts receivable 18,500 Purchases 20,000
Transportation expense 1,500 Accounts payable 18,500
Sales 20,000 Cash 1,500
Cash 18,500 Accounts payable 18,500
Accounts receivable 18,500 Cash 18,500
4. Goods worth P12,000 was shipped on account (2/10, n/30) to Ibuyan Company on
January 15, 2006 from Rubenil Company The term of the shipment was fob shipping
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point. Rubenil Company paid freight of P950. On January 12, 2006, P2,500 worth of
merchandise was received by Rubenil Co. from Ibuyan Co. due to wrong specification.
Ibuyan Company made a partial payment of P5,000. How much is the subsequent
collection of Rubenil Company from Ibuyan Company assuming Ibuyan Company paid
within the discount period?
a. P 5,450 b. P 5,260 c. P 4,500 d. P 4,410
Answer- P 5,260
Buyer Seller
Purchases 12,000 Accounts receivable 12,950
Freight-in 950 Sales 12,000
Accounts payable 12,950 Cash 950
Account payable 2,500 Sales 2,500
Cash 5,000 Accounts receivable 5,000
Cash 5,260 Sales discount 190
Purchase discount 190 Accounts receivable 5,450
 Discount – P12,000 – P2,500 = P9,500 x 2% = P190
5. Gabutero Company purchased merchandise on account for P10,000 from Lilibeth

Company with term shipping point. The freight cost was P1,500 and was paid by
Gabutero Company Upon the arrival of the carrier, it found out that the merchandise got
lost while in transit. The carrier company accepted the loss as their fault. How much is
the subsequent collection of Lilibeth Company from Gabutero Company?
a. P 11,500 b. P 10,000 c. P 8,500 d. P 0
Answer - P 10,000
Buyer Seller
Freight-in 1,500 Sales 10,000
Accounts payable 10,000
Cash 1,500
Claims receivable 11,500
Purchases 10,000
Freight-in 1,500
6. Chan Company bought from Casas Company a second-hand machinery for the use of its
plant for P50,000 A 50% down payment was made and balance 2/10, n/30. Freight cost
was paid by Chan Company for P2,000. Casas Company acquired the machinery three
years ago at P60,000 with 10 year life. (Straight-line method is use in computing
Depreciation). Two days after purchase, Casas Company granted the request of Chan
Company for a P5,000 price adjustments because of some defects of the machinery.
Cash paid by Chan Company to Casas Company assuming the account was paid within
the discount period is
a. P 20,400 b. P 20,000 c. P 19,600 d. P 19,000
Answer - P 19,600
Buyer Seller
Machinery 50,000 Cash 25,000
Cash 25,000 Accounts recei. – others 25,000
Accounts payable – others 25,000 Accum. depreciation 18,000
Machinery 60,000
Gain on sale 8,000
Machinery 2,000
Cash 2,000
Accounts payable – others 5,000 Gain on sale 5,000
Machinery 5,000 Accounts recie. – others 5,000
Accounts payable – others 20,000 Cash 20,000
Cash 20,000 Accounts recie – others 20,000
If paid within the discount period:
Accounts payable – others 20,000 Cash 19,600
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Cash 19,600 Gain on sale 400
Machienry 400 Accounts payable – others 20,000
7. The Ariel Company purchased land and building at lump-sum price of P300,000 from
Cherely Company on January 1, 2006. The land and building was purchased by Cherely
Company 3 year ago at a total cost of P300,000. Based on the appraiser’s computation
and analysis, the cost of the land is twice as much to that of the building. Ariel Company
assume a five-year life of the building with no salvage cost. Two years later, Ariel
Company sold the building at P80,000 to Jaan Company.
Ariel Company will record gain or loss from the sale of the building to Jaan Company by
a. Gain of P 20,000
b. Loss of P100,000
c. Neither gain nor loss
d. Cannot be determined
Answer - P 20,000
Buyer Seller
Land 200,000 Cash 300,000
Building 100,000 Land and building 300,000
Cash 300,000
Sale of Building: Buyer

Cash 80,000 Building 80,000
Accum. depreciation 40,000 Cash 80,000
Building 100,000
Gain on sale 20,000
Problem 1
Listed below are some items of inventory from Anecito Company that are in question during
the audit. The company stores a substantial portion of the merchandise in a separate
warehouse and transfer damaged goods to a special inventory account.
1. Items in receiving department returned by customer, no

communication received from customer 20,000
2. Items ordered and in receiving department, invoice not yet
received from supplier 50,000
3. Items counted in warehouse by the inventory crew 70,000
4. Invoice received for goods ordered, goods shipped but not received
(Anecito Company pays freight) 5,000
5. Items, shipped today, fob destination, invoice mailed to customer 5,000
6. Items currently used for window displays 10,000
7. Items on counter for sale per inventory count [not in (3)] 90,000
8. Items in shipping department, invoice not mailed to customer 6,000
9. Items in receiving department, refused by Anecito because of
Damage [(not in (3)] 3,000
10. Items shipped today, fob shipping point, invoice mailed to customer 4,000
11. Items included in warehouse count, damaged, not returnable 8,000
12. Items included in warehouse count, specifically crafted and
segregated for shipment to customer in five days per sales
contract, with return privilege. 18,000
Question:
1. If the recorded inventory in the balance sheet is P289,000, the year-end inventory will be
overstated by:
a. P 41,000 b. P 23,000 c. P 18,000 d. P 3,000
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2. The following should be included from the inventory, except:
a. Inventory shipped today, f.o.b. shipping point, invoice mailed to customer.
b. Inventory counted in warehouse by the inventory crew.
c. Inventory shipped today, f.o.b. destination, invoice mailed to customer.
d. Inventory in warehouse count, specifically crafted and segregated for shipment to
customer with return privilege.
3. The inventory per audit at year-end is:

a. P 286,000 b. P 271,000 c. P 266,000 d. P 248,000
Solution
1. P 20,000
2. 50,000
3. 70,000
4. 5,000 (the fact that Anecito pays the freight, the term then is FOB shipping point)
5. 5,000
6. 10,000
7. 90,000
8. 6,000
9. –
10. –
11. ( 8,000)
12. 18,000 (this is still included in the inventory since the goods has a return privilege)
P266,000
Answer:
1. b 2. a 3. c
Problem 2
In the event of your audit, you found the following information related to the inventories on
December 31, 2006.
a. An invoice for P90,000, FOB shipping point, was received on December 15, 2006. The
receiving report indicates that the goods were received on December 18, 2006, but
across the face of the report is the notation “Merchandise not of the same quality as
ordered, returned for credit, December 19”. The merchandise was included in the
inventory.
b. Included in the physical count were inventories billed to customer FOB shipping point on
December 31, 2006. These inventories had a cost of P28,000 and were billed at P35,000.
The shipment was in loading dock waiting to be picked by the common carrier.
c. Merchandise with an invoice cost of P50,000, received from a vendor at 5:00 pm on

December 31, 2006, were recorded on a receiving report dated January 2, 2007. The
goods were not included in the physical count, but invoice was included in accounts
payable at December 31, 2006.
d. Merchandise costing P15,000 to the company FOB shipping point on December 26, 2006.
The purchase was recorded, but the merchandise was excluded from the ending
inventory because it was not received until January 4, 2007.
e. The inventory included 1000 units erroneously priced at P9.50 per unit. The correct cost
was P10.00 per unit.
The adjusting entries for:
1. Item letter “a” is;
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Debit Credit
a. Cost of sales 90,000 Inventory 90,000
b. Inventory 90,000 Cost of Sales 90,000
c. Retained earnings 90,000 Inventory 90,000
d. No adjustment
2. Item letter “b” is:

Debit Credit
b. Inventory 28,000 Cost of sales 28,000
c. Cost of sales 35,000 Inventory 35,000
d. No adjustment
3. Item letter “c” is;

Debit Credit
a. Inventory 50,000 Cost of sales 50,000
b. Cost of sales 50,000 Inventory 50,000
c. Inventory 50,000 Retained earnings 50,000
d. No adjustment
4. Item letter “d” is:

Debit Credit
b. Inventory 15,000 Cost of sales 15,000
c. Inventory 15,000 Retained earnings 15,000
d. No adjustment
5. Item letter “d” is:

Debit Credit
a. Cost of sales 500 Inventory 500
b. Inventory 500 Cost of sales 500
c. Cost of sales 10,000 Inventory 10,000
d. Inventory 10,000 Cost of sales 10,000
Answer -
1. a 2. d 3. a 4. b 5. b
Problem 3
You have observed the physical count of DEMI CORPORATION’s inventory taken on
December 31, 2006. The following errors were discovered:
a. Goods that cost P7,000 was sold for P8,500 on December 29, 2006. The order was
shipped December 31, 2006 with terms fob destination. The merchandise was not
included in the ending inventory. The sale was not recorded until January 4, 2007, the
date when the customer made payment of the sold goods.
b. On December 29, 2006, DEMI CORPORATION purchased merchandise costing P15,000

from a supplier. The order was shipped December 30, 2006 (terms FOB shipping point)
and was still “in transit” on December 31, 2006. Since the invoice was received on
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December 31, the purchase was recorded in 2006. The merchandise was included in the
inventory count.
c. On January 4, 2007, goods that were included in the ending inventory at December 31,
2006, were returned to DEMI CORPORATION because the consignee had not been able to
sell it. The cost of this merchandise was P9,500 with a selling price of P14,500.
d. DEMI CORPORATION failed to make an entry for a purchase on account of P6,500 at the
end of 2005, although it included this merchandise in the inventory count. The purchase
was recorded when payment was made to the supplier in 2006.
e. On January 6, 2007, DEMI CORPORATION received merchandise which had been shipped
to them on December 31, 2006. The terms of the purchase were fob destination. Cost of
the merchandise was P6,400. The purchase was not recorded until payment was made
in January 2007 but the goods were included in the inventory as of December 31, 2006.
f. Goods with a selling price of P30,000 was shipped to Herald Company, a consignee,
on December 29, 2005. Since this was shipped before the inventory count, the
merchandise, which was billed 20% above cost, was excluded from the inventory count.
Sales was not recorded until the inventory was received on January 5, 2006. Your further
investigation revealed that 50% of these goods were sold in 2006 and the on-hand at
December 31, 2006 were not yet reported in 2006 inventory.
Questions: Based on the above information, answer the following:

1. What is the entry to adjust audit finding “a” at December 31, 2006?
a. Accounts Receivable 8,500 c. Both A and B
Sales 8,500
b. Inventory 7,000 d. Accounts Receivable 8,500
Retained Earnings7,000 Retained Earnings 8,500
2. What is the entry to adjust audit finding number “b” at December 31, 2006?
a. Inventory 15,000 c. Both A and B
Retained Earnings15,000
b. Retained Earnings 15,000 d. Neither A nor B
Accounts Payable 15,000
3. DEMI CORPORATION should debit what account to adjust audit finding number “c” at
December 31, 2006?
a. Sales c. Retained Earnings
b. Cost of Sales d. No adjustment is necessary
4. In audit finding number “d”, choose the correct statement?
a. The company is correct for not making an entry on the P6,500 purchase on account
even though it is already included in the inventory count since no term of shipment is
given.
b. The company should reduced its purchases at December 31, 2006 since the
purchases being paid in 2006 was the purchase for 2005.
c. The company is correct in recording of purchases in year 2006 since this is the time
when the company made payment on such.
d. Inventory should be recorded at December 31, 2005 since the purchases were
recorded on this year.
5. The entry to adjust audit finding number “e” at December 31, 2006 is: (assume the book
is not close)
a. Retained Earnings 6,400 c. Purchases 6,400
Inventory 6,400 Accounts Payable 6,400
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b. Retained Earnings 6,400 d. Cost of sales 6,400
Accounts payable 6,400 Inventory 6,400
6. The entry to adjust audit finding number “f” at December 31, 2006 is: (assume the book
is close)
a. Inventory 25,000 c. Cost of sales 25,000
Accounts Receivable 25,000 Sales 25,000
Cost of sales 25,000 Retained Earnings 25,000
Sales 25,000 Accounts Receivable 25,000
b. Cost of sales 25,000 d. Retained Earnings 2,500
Sales 15,000 Inventory 12,500
Retained Earnings25,000 Accounts Receivable 15,000
Accounts Receivable 15,000
Answer
1. b 2. d 3. d 4. b 5. a 6. d
Problem 4
The PRINCE COMPANY’S year-end inventory based on physical count conducted on
December 31, 2006, amounted to P885,000. Your cut-off examination disclosed the
following information”:
1. Included in the physical count were goods billed to customer FOB shipping point on
December 31, 2006. These goods had a cost of P28,000 and were billed at P35,000.
The shipment was on PRINCE’S loading dock waiting to be picked up by the common
carrier.
2. Goods were in transit from a vendor to PRINCE on December 31, 2006. The invoice cost
was P50,000 and the goods were shipped FOB Shipping on Dec. 29,2006.
3. Work in process inventory costing P20,000 was sent to an outside processor for plating
on Dec. 30, 2006.
4. Goods returned by customers and held pending inspection in the returned goods area on
Dec. 31, 2006, were not included in the physical count. On January 8, 2007, the goods
costing P26,000 were inspected and returned to inventory. Credit memos totaling
P40,000 were issued.
5. Goods shipped to customer FOB destination on Dec. 26, 2006, were in transit at Dec. 31,
2006 and had a cost of P25,000. Upon notification of receipt by the customer on January
2, 2007, the company issued a sales invoice for P42,000.
6. Goods received from a vendor on Dec. 26, 2006, were included in the physical count.
However the related P60,000 vendor invoice was not included in Accounts Payable as
December 31, 2006, because the Accounts Payable copy of the receiving report was lost.
7. On January 3, 2007, a monthly freight bill in the amount of P4,000 was received. This
was specifically related to merchandise purchased in Dec. 31, 2006. The freight charges
were not included in either the inventory or in accounts payable at Dec. 31, 2006.
Question:
1. Sales at year-end is overstated by:
a. P 75,000 b. P 40,000 c. P 35,000 d. P 33,000
2. Purchases at year-end is understated by:

a. P 110,000 b. P 84,000 c. P 64,000 d. P 60,000
3. Cost of sales at year-end is overstated by:
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a. P 46,000 b. P 21,000 c. P 11,000 d. P 7,000
4. The inventory per audit at year-end is:

a. P 981,000 b. P 959,000 c. P 1,006,000 d. P 1,010,000
Solution
1. Sales 35,000
Accounts receivable 35,000
2. Inventory 50,000
Cost of sales 50,000
Purchases 50,000
3. Inventory 20,000
4. Inventory 26,000
Sales 40,000
5. Inventory 25,000
6. Purchases 60,000
7. Inventory 4,000
Answer:
1. a 2. a 3. c 4. d
Problem 5
On January 1, 2007, Arcenith Corporation engaged an independent CPA to perform an audit
for the year ended December 31, 2006. The company uses a periodic inventory system. The
CPA did not observe the inventory count on December 31, 2006, as a result, a special
examination was made of the inventory records.
The financial statements prepared by the company (uncorrected) showed the following:
ending inventory, P72,000; accounts receivable, P60,000; accounts payable, P30,000; sales,
P400,000; net purchases, P160,000, and pretax income P51,000.
The following data were found during the audit:
1. Merchandise received on January 2, 2007, costing P800 was recorded on December 31,
2006. An invoice on hand showed the shipment was made fob supplier’s warehouse on
December 31, 2006. Because the merchandise was not on hand at December 31, 2006,
it was not included in the inventory.
2. Merchandise that cost P18,000 was excluded from the inventory, and the related sale for
P23,000 was recorded. The goods had been segregated in the warehouse for shipment;
there was no contract for sale but a “tentative order by phone”.
3. Merchandise that cost P10,000 was out on consignment for Valentin Distributing
Company and was excluded from the ending inventory. The merchandise was recorded
as a sale P25,000 when shipped to Valentin on December 29, 2006.
4. A sealed packing case containing a product costing P900 was in Arcenith’s shipping room
when the physical inventory was taken. It was included in the inventory because it was
marked “Hold for customer’s shipping instructions.” Investigation revealed that the
customer signed a purchase contract dated December 18, 2006, but that case was
shipped and the customer billed on January 10, 2007. A sale for P1,500 was recorded on
December 31, 2006.
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5. A special item, fabricated to order for a customer, was finished and in the shipping room
on December 31, 2006. The customer has inspected it and was satisfied. The customer
was billed in full on that sale in the amount of P5,000. The item was included in
inventory at cost, P1,000 because it was shipped on January 4, 2007.
6. Merchandise costing P15,600 was received on December 28, 2006. The goods were
excluded from inventory, and a purchase was not recorded. The auditor located the
related papers in the hands of the purchasing; they indicated, “On consignment from
Roselyn Company”.
7. Merchandise costing P2,000 was received on January 8, 2007, and the related purchase
invoice recorded January 9. The invoice showed the shipment was made on December
29, 2006, fob destination. The merchandise was excluded from the inventory.
8. Merchandise that cost P6,000 was excluded from the ending inventory and not recorded
as a sale for P7,500 on December 31, 2006. The goods had been specifically
segregated. According to the terms of the contract of sale, ownership will not pass until
actual delivery.
9. Merchandise that cost P15,000 was included in the ending inventory. The related
purchase has not been recorded. The goods had been shipped by the vendor fob
destination, and the invoice was received on December 30, 2006. The goods was
received on January 5, 2007.
10. Merchandise in transit that cost P7,000 was excluded from inventory because it was not
on hand. The shipment from the vendor was fob shipping point. The purchase was
recorded on December 29, 2006, when the invoice was received.
11. Merchandise in transit that cost P13,000 was excluded from inventory because it had not
arrived. Although the invoice had arrived, the related purchase was not recorded by
December 31, 2006. The merchandise shipped fob shipping point by the vendor.
12. Merchandise that cost P8,000 was included in the ending inventory because it was on
hand. The merchandise had been rejected because of incorrect specifications and was
being held for return to the vendor. The merchandise was recorded as a purchase on
December 26, 2006.
Question:
Based on your analysis and the information above, answer the following:
1. The adjusted balance of inventory at year-end is:

a. P 101,900 b. P 102,000 c. P 102,800 d. P 120,400
2. The adjusted balance of accounts receivable at year-end is:

a. P 10,500 b. P 12,000 c. P 35,000 d. P 37,000
3. The adjusted balance of accounts payable at year-end is:

a. P 43,000 b. P 35,000 c. P 30,000 d. P 22,000
4. The adjusted balance of Sales at year-end is:

a. P 377,000 b. P 352,000 c. P 350,500 d. P 347,000
5. The adjusted balance of Net Purchases at year-end is:

a. P 152,000 b. P 165,000 c. P 173,000 d. P 181,000
6. The adjusted balance of Pre-tax income at year-end is:
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a. P 27,300 b. P 29,000 c. P 29,800 d. P 35,800
Solution
Inventory Acnts. Receivable Acnts. Sales Net Pretax

end Payable Purchases ncome
Unadj. bal. 72,000 60,000 30,000 400,000 160,000 51,000
Item 1 800 800
Item 2 18,000 18,000
(23,000) (23,000) (23,000)
Item 3 10,000 10,000
(25,000) (25,000) (25,000)
Item 4 (1,500) (1,500) (1,500)
Item 5 (1,000) (1,000)
Item 6 - - - - - -
Item 7 - - - - - -
Item 8 6,000 6,000
Item 9 (15,000) (15,000)
Item 10 7,000 7,000
Item 11 13,000 13,000
13,000 13,000 (13,000)
Item 12 (8,000) (8,000)
- - (8,000) (8,000) 8,000
Adjusted 102,800 10,500 35,000 350,500 165,000 27,300
balance
Answer:
1. c 2. a 3. b 4. c 5.b 6. a
Problem 6
Marlisa Company’s December 31, 2005 and December 31, 2006 inventory is P35,000 and
P27,000, respectively. The beginning and ending inventories were determined by physical
count of the goods on hand on those dates, and no reconciling items were considered. All
purchases are f.o.b. shipping point. In the course of your examination of the inventory cut-
off, both the beginning and ending of each year, you discover the following facts:
Beginning of the year
a. Invoices totaling P3,260 were entered in the voucher register on January, but the goods
were received during December.
b. December invoices totaling P4,100 were entered in the voucher register in December,
but the goods were not received until January.
End of the Year
c. Invoices totaling P7,260 were entered in the voucher register in January but the goods
were received in December.
d. December invoices totaling P3,600 were entered in the voucher register in December,
but the goods were not received until January.
e. Invoices totaling P1,500 were entered in the voucher register in January, and the goods
were received in January, but the invoices were dated December.
Question:
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1. The adjusted balance of the Jan. 1, 2006 inventory is:
a. P 35,000 b. P 35,840 c. P 39,100 d. P 59,100
2. How much is the adjusted balance of the Purchases account at December 31, 2006
assuming the amount of Purchases in the trial balance is P5,176,000?
a. P 5,170,566 b. P 5,180,000 c. P 5,181,500 d. P 5,185,200
3. The corrected December 31, 2006 inventory is

a. P 52,100 b. P 50,600 c. P 32,100 d. P 28,500
4. When auditing inventories, an auditor would least likely verify that

a. All inventory owned by the client is on hand at the time of the count.
b. The client has used properly inventory pricing.
c. Damaged goods and obsolete items have been properly accounted for.
d. The financial statement presentation of inventories is appropriate.
Solution
a. Retained earnings 3,260
Purchases 3,260
b. Beginning inventory 4,100
Retained earnings 4,100
c. Purchases 7,260
d. Inventory 3,600
Cost of sales 3,600
e. Inventory 1,500
Cost of sales 1,500
Purchases 1,500
Answer: 1. c 2. c 3. c 4. a
Problem 7
During the 2006 audit of JONES Manufacturing Company’s year-end inventory, you found the
following items.
 A packing case containing product costing P8,160 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, 2007.
 Merchandise costing P6,250 was received on December 28, 2006, and the invoice was
recorded. The invoice was marked “On Consignment.”
 Merchandise received on January 6, 2007 costing P7,200 was entered in the purchase
register on January 7. The invoice showed shipment made FOB shipping point on
December 31, 2006.
 A special machine, fabricated to order for a particular customer, was finished and in the
shipping room on December 30. The customer was billed on that date and the machine
was excluded from inventory although it was shipped January 2, 2007. The machine
costs P25,000 and was sold for P45,000.
 Merchandise costing P23,500 was received on January 3, 2007, and the related purchase
invoice was recorded January 5. The invoice showed the shipment was made on
December 29, 2006, FOB destination.
 Merchandise costing P11,000 was sold on an installment basis on December 15 at

P25,000. The customer took possession of the goods on that date. The merchandise was
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included in inventory because JONES still holds legal title. Historical experience suggests
that full payment on the installment sales is received approximately 99% of the time.
 Goods costing P15,000 were billed for P20,000 and delivered on December 20. The
goods were included in inventory because the sale was accompanied by a repurchase
agreement requiring JONES to buy back the inventory in February 2007.
Selected account balances before considering the effects of the above items are as follows:
Accounts receivable P 185,000

Inventory 114,500
Sales 942,400
Gross profit 287,990
Net income 84,680
Questions:
1. What is the adjusted accounts receivable balance at the end of the year?
a. P 166,000 b. P 165,000 c. P 150,000 d. P 125,000
2. What is the adjusted inventory balance at the end of 2006?

a. P 118,860 b. P 116,700 c. P 112,610 d. P 104,450
3. What is the adjusted balance of accounts payable at the end of the year?
a. P 68,150 b. P 68,000 c. P 67,200 d. P 65,000
4. The adjusted total sales in 2006 is

a. P 962,400 b. P 925,600 c. P 925,000 d. P 922,400
5. The adjusted Cost of goods sold in 2006 is

a. P 640,040 b. P 650,200 c. P 651,040 d. P 657,250
Solution
1. Inventory 8,160
Cost of Sales 8,160
2. Accounts payable 6,250
Purchases 6,250
Cost of sales 6,250
Inventory 6,250
3. Inventory 7,200
Cost of sales 7,200
Purchases 7,200
4. No adjustments
5. No adjustments
6. Cost of sales 11,000
Inventory 11,000
7. Sales 20,000
Answer:
1. b 2. c 3. a 4. d 5. d
Problem 8
CHARMAINE COMPANY is a manufacturer of small tools. The following information was
obtained from the company’s accounting records for the year ended December 31, 2006:
Inventory at December 31, 2006 (based on
physical count in Charmaine’s warehouse at cost
on December 31, 2006) 1,870,000
Accounts payable at December 31, 2006 1,415,000
12
Net sales (sales less sales returns) 9,693,400
Your audit reveals the following information:
 The physical count included tools billed to a customer FOB shipping point
on December 31, 2006. These tools cost P64,000 billed at P78,500. They were in the
shipping area waiting to be picked up by the customer.
 Goods shipped FOB shipping point by a vendor were in transit on

December 31, 2006.These goods with invoice cost of P93.400 were shipped on
December 29, 2006.
 Work in process inventory costing P27,000 was sent to a job contractor for
further processing.
 Not included in the physical count were goods returned by customers on

December 31, 2006. These goods costing P49,000 were inspected and returned to
inventory on January 7, 2007. Credit memos for P67,800 were issued to the
customers at that date.
 In transit to a customer on December 31, 2006, were tools costing P17,740

shipped FOB destination on December 26, 2006. A sales invoice for P29,400 was
issued on January 3, 2007, when Charmaine Company was notified by the customer
that the tools had been received.
 At exactly 5:00 pm on December 31, 2006, goods costing P31,200 were
received from a vendor. These were recorded on a receiving report dated January 2,
2007. The related invoice was recorded on December 31, 2006, but the goods were
not included in the physical count.
 Included in the physical count were goods received from a vendor on

December 27, 2006. However, the related invoice for P36,000 was not recorded
because the accounting department’s copy of the receiving report was lost.
 A monthly freight bill for P16,000 was received on January 3, 2007. It

specifically related to merchandise bought in December 2006, one half of which was
still in the inventory at December 31, 2006. The freight was not included in either
the inventory or in accounts payable at December 31, 2006.
Question:
1. The inventory at year-end is:

a. Understated by P170,340 c. Understated by P126,340
b. Understated by P162,340 d. Understated by P82,140
2. The accounts payable at year-end is:

a. Understated by P93,400 c. Understated by P137,400
b. Understated by P106,200 d. Understated by P145,400
3. The amount of sales at year-end is:

a. Overstated by P67,800 c. Overstated by P29,400
b. Overstated by P38,400 d. Correctly stated
4. The adjusted balance of inventory at year-end is:

a. P 1,952,140 b. P 1,996,340 c. P 2,032,340 d. P 2,040,340
13
5 The adjusted balance of accounts payable at year-end is:
a. P 1,560,400 b. P 1,552,400 c. P 1,521,200 d. P 1,508,400
6. The adjusted balance of sales at year-end is:

a. P 9,722,800 b. P 9,693,400 c. P 9,655,000 d. P 9,625,600
Solution
Adjusting entry:
Inventory 64,000
Inventory 93,400
Purchases 93,400
Inventory 27,000
Inventory 49,000
Sales 67,800
Inventory 17,740
Inventory 31,200
Purchases 36,000
Inventory 8,000
Answer:
1. b 2. c 3. a 4. c 5. b 6. d
Problem 9
The Cruzada Company is a wholesale distributor of automotive replacement parts. Initial
amounts taken from Cruzada’s accounting records are as follows:
Inventory at December 31, 2006 (based on physical count of goods in warehouse on

December 31, 2006); P1,250,000.
Accounts payable at December 31, 2006:

Dacalos Company 2% 10 days, net 30 265,000
Dano Company Net 30 210,000
De Lira Company Net 30 300,000
Dela Cruz Company Net 30 225,000
Deza Company Net 30 -
Encabo Company Net 30 -___
P 1,000,000
Sales in 2006 P 9,000,000
Additional information is as follows:
a. Parts held on consigment from Dano Company to Cruzada Company, the consignee,
amounting to P155,000, were included in the physical count of goods in Cruzada
Company’s warehouse on December 31, 2006 and in accounts payable at December 31,
2006.
b. P22,000 of parts which sere purchased from Deza Company and paid for in December
2006 were sold in the last week of 2006 and appropriately recorded as sales of P28,000.
14
The parts were included in the physical count of goods in Cruzada’s warehouse on
December 31, 2006, because the parts were on the loading dock waiting to be picked up
by customers.
c. Parts in transit on December 31, 2006, to customers, shipped f.o.b. shipping point, on
December 28, 2006, amounted to P34,000. The customers received the parts on January
6, 2007. Sales of P40,000 to the customers for the parts were recorded by Cruzada
Company on January 2, 2007.
d. Retailers were holding P210,000 at cost (P250,000 at retail) of goods on consignment

from Cruzada Company, the consignor, at their stores on December 31, 2006.
e. Goods were in transit from Encabo Company to Cruzada Company on December 31,
2006. The cost of goods was P25,000 and they were shipped f.o.b. shipping point on
December 29, 2006.
f. A quarterly freight bill in the amount of P2,000 specifically relating to merchandise

purchases in December 2006, all of which was still in the inventory at December 31,
2006, was received on January 3, 2007. The freight bill was not included in either the
inventory or in accounts payable at December 31, 2006.
g. All of the purchases from Dacalos Company occurred during the last seven days of
the year. These items have been recorded in accounts payable and accounted for in the
physical inventory at cost before discount. Cruzada’s policy is to pay invoices in time to
take advantage of all cash discounts, adjust inventory accordingly, and record accounts
payable, net of cash discount.
Questions:
1. The adjusted inventory is:
a. P 1,326,700 b. P 1,304,700 c. P 1,276,000 d. P 1,270,700
2. The adjusted accounts payable is:

a. P 864,700 b. P 866,700 c. P 872,000 d. P 1,017,700
3. The adjusted sales is:

a. P 8,960,000 b. P 9,000,000 c. P 9,040,000 d. P 9,100,000
Solution
a. Cost of sales 155,000 Accounts payable 155,000
Inventory 155,000 Purchases 155,000
b. Cost of sales 22,000
Inventory 22,000
c. Accounts receivable 40,000
Sales 40,000
d. Inventory 210,000
e. Inventory 25,000
f. Inventory 2,000
g. Accounts payable 5,300
Inventory 5,300
Answer:
1. b 2. b 3. c
Problem 10
Raffy Corporation reported income before income taxes as follows:
2005 P525,000
2006 630,000
15
The company uses the periodic inventory system. Ending inventories for 2005 and 2006
were properly recorded. The following additional information became available following an
analysis of the inventories:
(a) Merchandise with a gross invoice price of P7,500 was shipped FOB shipping point by a
supplier on terms of 2/10, n/30 in 2005 and was recorded as a purchase by Raffy
Corporation in 2005 when the invoice was received: however, the goods were not
included in the ending inventory because they were not received until 2006. The
company always takes advantage of the early payment discounts and accordingly,
records its purchases using the net method.
(b) Merchandise that cost P3,000 was purchased FOB shipping point by Raffy Corporation on
December 31, 2005 and was shipped by the supplier that day. The merchandise was not
included in the 2005 ending inventory and was not recorded as a purchase until 2006.
(c) Merchandise costing P2,850 was shipped FOB shipping point to a customer in 2005 and
not included in the ending inventory for 2005. The sale of P4,260 was recorded in 2006
when the invoice was sent.
(d) Goods being held by Raffy Corporation on consignment from a supplier in the amount of
P4,950 were included in the physical inventory for 2005.
(e) Retailers were holding P6,750 of goods at cost (P9,000 at retail), on consignment from
Raffy, at their stores on December 31, 2005. These goods were not included in the
ending inventory of Raffy Corporation for 2005.
Question:
1. How much is the correct income before taxes for 2005?
a. P 643,410 b. P 616,590 c. P 538,410 d. P 511,590
2. How much is the correct income before taxes for 2006?

a. P 643,410 b. P 616,590 c. P 538,410 d. P 511,590
3. The cost of sales at December 31, 2006 is understated by:

a. P 12,150 b. P 9,750 c. P 9,150 d. P 6,750
4. The Retained earnings – beginning at December 31, 2006 is understated by:

a. P 13,410 b. P 12,150 c. P 10,410 d. P 9,150
5. The beginning inventory (January 1, 2006) of Raffy Corporation is understated by:

a. P 13,410 b. P 12,150 c. P 9,150 d. P 5,400
Solution
a. Beginning inventory (COS) 7,350 2005 2006
Retained earnings – beg 7,350 Net income 525,000 630,000
(a) 7,350 ( 7,350)
b. Beginning inventory (COS) 3,000 (b) 3,000 ( 3,000)
Retained earnings – beg 3,000 ( 3,000) 3,000
(c) 4,260 ( 4,260)
Retained earnings – beg 3,000 (d) ( 4,950) 4,950
Purchases (COS) 3,000 (e) 6,750 ( 6,750)
Adjusted NI 538,410 616,590
c. Sales 4,260
Retained earnings – beg 4,260
d. Retained earnings – beg 4,950
Beginning inventory (COS) 4,950
e. Beginning inventory (COS) 6,750
16
Retained earnings – beg 6,750
Answer:
1. c 2. b 3. c 4. a 5. b
Problem 11
You audit of APAS COMPANY for the year 2006 disclosed the following:
1. The December 31 inventory was determined by a physical count on December 28
and based on such count, the inventory was recorded by:
Inventory 1,400,000
Cost of sales 1,400,000
2. The 2006 ledger shows a sales balance of P20,000,000.
3. The company sells a mark-up of 20% based on sales.
4. The company recognizes sales upon passage of title to the customers.
5. All customers are within a four-day delivery area.
The sales register for December, 2006 and January, 2007, showed the following details:
December Register
Invoice No. FOB Terms Date Shipped Amount
300 Destination 12/30 P 50,000
301 Shipping point 12/30 62,500
302 Destination 12/23 47,500
303 Destination 12/24 82,500
January Register
Invoice No. FOB Terms Date Shipped Amount
306 Destination 12/29 67,500
308 Destination 01/02 140,000
Questions
1. The Sales for December is over/(under) by:
a. P 36,000 under c. P 106,000 under
b. P 36,000 over d. P 106,000 over
2. The Inventory for December is over/(under) by:

a. P 235,600 over c. P 245,412 under
b. P 181,600 over d. P 245,412 over
3. The adjusted inventory at December 31, 2006 is:

a. P 1,645,412 b. P 1,218,400 c. P 1,164,400 d. P 1,154,588
4. The adjusted sales at December 31, 2006 is:

a. P 20,106,000 b. P 20,036,000 c. P 19,964,000 d. P 19,894,000
5. How much sales for the month of December 2006 were erroneously recorded in January
2007?
a. P 282,000 b. P 272,500 c. P 198,000 d. P 142,000
6. How much sales for the month of January 2007 were erroneously recorded in December
2006?
a. P 228,500 b. P 188,500 c. P 180,500 d. P 106,000
17
Solution
For SI # 300 For SI # 307
Sales 50,000 Accounts receivable 74,500
Accounts receivable 50,000 Sales 74,500
For SI # 301 Cost of sales 59,600
Cost of sales 50,000 Inventory 59,600
Inventory 50,000 P74,500 x 80%
P62,500 x 80%
For SI # 304 For SI # 310
Sales 56,000 Accounts receivable 67,500
Accounts receivable 56,000 Sales 67,500
For SI # 305
Inventory 72,000 (P90,000 x 80%)
Unadjusted Sales 20,000,000 Unadjusted inventory 1,400,000
(1) ( 50,000) (2) ( 50,000)
(3) ( 56,000) (4) ( 72,000)
(5) 74,500 (6) ( 59,600)
(7) 67,500 (8) _________
Adjusted Sales 20,036,000 Adjusted inventory 1,218,400
Sales for the month of December that 2006

were erroneously recorded in January 2007:
Invoice # 307 74,500
Invoice # 310 67,500
Total 142,000
Sales for the month of January 2007

were erroneously recorded in December 2006:
Invoice # 300 50,000
Invoice # 304 56,000
Total 106,000
Answer:
1. a 2. b 3. b 4. b 5. d 7. d
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
18
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
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
(same as Item A)
E Accounts Receivable 64,500
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:
19
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
20
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
21
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
P 1,411,100 P 1,411,100
PURCHASES
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.
22
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
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
SI#878 - P20,000 x 70%
5. Sales 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
SI # 880
23
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
Inventory, December 31, 2006 750,000
Land 350,000
Building and equipment 1,100,000
Accumulated depreciation 413,000
Other Assets 36,000
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
24
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
25
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

Cash 57,000
Purchases 34,000
Cash 34,000
Operating expenses 39,000
Cash 39,000
Cash 129,500
Purchase returns 9,500
Sales 160,000
Purchases 106,000
Allowance for bad debts 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
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.
26
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
3.a Inventory 68,750
27
3.b Inventory 54,375
Purchases 54,375
3.c Cost of sales 159,375
Inventory 159,375
3.d Inventory 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
28
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 Forwarded P130,000

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 Forwarded P161,000

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:
29
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
30
(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
Cash in transit from Yamas
31

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CHAPTER 5 Caselette Audit of Inventory

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CHAPTER 5 – Audit of Inventory

Exercises - Analysis of Transactions

5. Gabutero Company purchased merchandise on account for P10,000 from Lilibeth

Sale of Building: Buyer

1. Items in receiving department returned by customer, no

3. The inventory per audit at year-end is:

c. Merchandise with an invoice cost of P50,000, received from a vendor at 5:00 pm on

The adjusting entries for:

1. Item letter “a” is;

2. Item letter “b” is:

3. Item letter “c” is;

4. Item letter “d” is:

5. Item letter “d” is:

b. On December 29, 2006, DEMI CORPORATION purchased merchandise costing P15,000

Questions: Based on the above information, answer the following:

2. Purchases at year-end is understated by:

3. Cost of sales at year-end is overstated by:

4. The inventory per audit at year-end is:

The following data were found during the audit:

1. The adjusted balance of inventory at year-end is:

2. The adjusted balance of accounts receivable at year-end is:

3. The adjusted balance of accounts payable at year-end is:

4. The adjusted balance of Sales at year-end is:

5. The adjusted balance of Net Purchases at year-end is:

6. The adjusted balance of Pre-tax income at year-end is:

Inventory Acnts. Receivable Acnts. Sales Net Pretax

Beginning of the year

End of the Year

3. The corrected December 31, 2006 inventory is

4. When auditing inventories, an auditor would least likely verify that

 Merchandise costing P11,000 was sold on an installment basis on December 15 at

Accounts receivable P 185,000

2. What is the adjusted inventory balance at the end of 2006?

4. The adjusted total sales in 2006 is

5. The adjusted Cost of goods sold in 2006 is

Your audit reveals the following information:

 Goods shipped FOB shipping point by a vendor were in transit on

 Not included in the physical count were goods returned by customers on

 In transit to a customer on December 31, 2006, were tools costing P17,740

 Included in the physical count were goods received from a vendor on

 A monthly freight bill for P16,000 was received on January 3, 2007. It

1. The inventory at year-end is:

2. The accounts payable at year-end is:

3. The amount of sales at year-end is:

4. The adjusted balance of inventory at year-end is:

6. The adjusted balance of sales at year-end is:

Inventory at December 31, 2006 (based on physical count of goods in warehouse on

Accounts payable at December 31, 2006:

Sales in 2006 P 9,000,000

Additional information is as follows:

d. Retailers were holding P210,000 at cost (P250,000 at retail) of goods on consignment

f. A quarterly freight bill in the amount of P2,000 specifically relating to merchandise

2. The adjusted accounts payable is:

3. The adjusted sales is:

2. How much is the correct income before taxes for 2006?

3. The cost of sales at December 31, 2006 is understated by:

4. The Retained earnings – beginning at December 31, 2006 is understated by:

5. The beginning inventory (January 1, 2006) of Raffy Corporation is understated by:

2. The Inventory for December is over/(under) by: