Audit OF Inventories PDF

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AUDIT OF INVENTORIESEasyFor nos. 1- Problem 1 – Computation of adjusted inventory and related accounts.You were engaged by Quezon Corporation for the audit of the company’s financial statements for the year ended December 31, 2015. The company is engaged in the wholesale business and makes all sales...

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AUDIT OF INVENTORIES Easy For nos. 1-5 Problem 1 – Computation of adjusted inventory and related accounts. You were engaged by Quezon Corporation for the audit of the company’s financial statements for the year ended December 31, 2015. The company is engaged in the wholesale business and makes all sales at 25% over cost. The following were gathered from the client’s accounting records: SALES PURCHASES Date Ref. Amount Date Ref. Amount Balance forwarded P5,200,000 Balance forwarded P2,700,000 Dec. 27 SI No. 965 40,000 Dec. 27 RR No. 1057 35,000 Dec. 28 SI No. 966 150,000 Dec. 28 RR No. 1058 65,000 Dec. 28 SI No. 967 10,000 Dec. 29 RR No. 1059 24,000 Dec. 31 SI No. 969 46,000 Dec. 30 RR No. 1061 70,000 Dec. 31 SI No. 970 68,000 Dec. 31 RR No. 1062 42,000 Dec. 31 SI No. 971 16,000 Dec. 31 RR No. 1063 64,000 Dec. 31 Closing entry (5,530,000) Dec. 31 Closing entry (3,000,000) P P00000000 Note: SI = Sales Invoice RR = Receiving Report Inventory P600,000 Accounts Receivable 500,000 Accounts Payable 400,000 You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was properly taken. When performing sales and purchases cut-off tests, you found that at December 31, the last Receiving Report which had been used was No. 1063 and that no shipments had been made in any Sales Invoices whose number is larger than No. 968. You also obtained the following additional information: a) Included in the warehouse physical inventory at December 31 were goods which had been purchased and received on Receiving Report No. 1060 but for which the invoice was not received until the following year. Cost was P18,000. b) On the evening of December 31, there were two trucks in the company siding:  - Truck No. CPA 123 was unloaded on January 2 of the following year and received on Receiving Report No. 1063. The freight was paid by the vendor.  - Truck No. ILU 143 was loaded and sealed on December 31 but leave the company premises on January 2. This order was sold for P100,000 per Sales Invoice No. 968.

c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to Brooks Trading Corporation. Brooks received the goods, which were sold on Sales Invoice No. 966 terms FOB Destination, the next day. d) Enroute to the client on December 31 was a truckload of goods, which was received on Receiving Report No. 1064. The goods were shipped FOB destination, and freight of P2,000 was paid by the client. However, the freight was deducted from the purchase price of P800,000. Determine the following as of and for the year ended December 31, 2015: 1. Sales A. P5,000,000 B. P5,250,000 C. P4,500,000 D. P4,000,000 2. Accounts Receivable A. P200,000 B. P220,000 C. P120,000 D. P100,000 3. Inventory A. P850,000 B. P864,000 C. P764,000 D. P7400,000 4. Accounts Payable A. P420,000 B. P418,000 C. P320,000 D. P318,000 5. Purchases A. P3,000,000 B. P3,018,000 C. P2,550,000 D. P2,600,000 Problem 2: Determining Inventory Quantity The management of Plum Company has engaged you to assist in the preparation of the year-end (December 31) financial statements. The company's year-end inventory of 43,500 units is based on a physical count taken on December 31 under your observation. During the month of December, sales totaled 138,630 units including 40,000 units shipped on consignment to Apple Corp. A letter received from Apple Corp. indicates that as of December 31, it has sold 15,200 units and was still trying to sell the remainder.

A review of the December purchase orders to various suppliers shows the following: Purchase Date 1/2/10 12/05/09 12/06/09 12/18/09 12/22/03 12/27/09

Invoice

Quantity Date Date Order Date in Units Shipped Received Terms 12/31/09 4,200 1/2/10 1/5/10 FOBDestination 1/2/10 3,600 12/17/09 12/22/09 FOB Destination 1/3/10 7,900 1/5/10 1/7/10 FOB Shipping pt. 12/20/09 8,000 12/29/09 1/2/10 FOB Shipping pt. 1/5/10 4,600 1/4/10 1/6/10 FOB Destination 1/7/10 3,500 1/5/10 1/7/10 FOB Destination

Plum Company uses the "passing of legal title" for inventory recognition. 6. Compute the inventory level as of November 30. A. P145,730 B. P140,000 C. P145,500 D. P150,000 For nos. 7 & 8. Problem 3 - Computing the Correct Ending Inventory Amount In your audit of the December 31, 2009 financial statements of Chevvy, Inc., you found the following inventory-related transactions: a. Goods costing P25,000 are on consignment with a customer. These goods were not included in the physical count on December 31, 2009. b. Goods costing P16,500 were delivered to Chevvy, Inc. on January 4, 2010. The invoice for these goods was received and recorded on January 10, 2010. The invoice showed the shipment was made on December 29, 2009, FOB shipping point. c. Goods costing P21,640 were shipped FOB shipping point on December 31, 2009 and were received by the customer on January 2, 2010. Although the sale was recorded in 2009, these goods were included in the 2009 ending inventory. d. Goods costing P8,645 were shipped to a customer on December 31, 2009, FOB destination. These goods were delivered to the customer on January 5, 2010 and were not included in the inventory. The sale was properly taken up in 2010. e. Goods costing P8,600 shipped by a vendor under FOB destination term, were received on January 3, 2010, and thus were not included in the physical inventory. Because the related invoice was received on December 31, 2009, this shipment was recorded as a purchase in 2009. f. Goods valued at P51,000 were received from a vendor under consignment term. These goods were not included in the physical count. g. Chevvy, Inc. recorded as a 2009 sale a P64,300 shipment of goods to a customer on December 31, 2009, FOB destination. This shipment of goods costing P37,500 was

received by the customer on January 5, 2010, and was not included in the ending inventory figure. Prior to any adjustments, Chevvy, Inc.'s ending inventory is valued at P445,346 and the reported net income for the year is P1,648,723. 7. Determine the correct inventory amount to be reported in the financial statements of Chevvy, Inc. for the year ended December 31, 2009. A. P522,000 B. P550,000 C. P511,531 D. P510,231 8. Compute the adjusted net income for the year 2009. A. P1,350,500 B. P1,320,000 C. P1,642,000 D. P1,650,000 Problem 4 - Correcting the Physical Inventory Count In your audit of the Rainbow Company, you noted that a physical inventory count on December 31, 2009, showed merchandise costing P850,000 was on hand at that date. Your examination reveals the following items are all excluded from the inventory per count. 1 Merchandise of P20,000 which was held on consignment. 2 Goods costing P39,500 which was shipped FOB destination on December 31, 2009. These goods were delivered to the customer on January 6, 2010. 3 Goods costing P16,800 which was shipped FOB shipping point to a customer on December 29, 2009. The customer received these goods on January 2, 2010. 4 Merchandise costing P76,150 shipped by a seller FOB destination on December 28, 2009, and received by Rainbow Company on January 3, 2010. 5 Goods costing P16,444 shipped by a vendor FOB seller on December 31, 2009, and received by Rainbow Company on January 4, 2010. 9. Compute the correct inventory amount at December 31, 2009. A. P850,000 B. P900,000 C. P805,944 D. P905,944 Problem 5 - Computing the Correct Ending Inventory Amount

In connection with your audit of the Alcala Manufacturing Company, you reviewed its inventory as of December 31, 2006 and found the following items: a) A packing case containing a product costing P100,000 was standing in the shipping room when the physical inventory was taken. It was not included in the inventory because it was marked “Hold for shipping instructions.” The customer’s order was dated December 18, but the case was shipped and the costumer billed on January 10, 2007. b) Merchandise costing P600,000 was received on December 28, 2006, and the invoice was recorded. The invoice was in the hands of the purchasing agent; it was marked “On consignment”. c) Merchandise received on January 6, 2007, costing P700,000 was entered in purchase register on January 7. The invoice showed shipment was made FOB shipping point on December 31, 2006. Because it was not on hand during the inventory count, it was not included. d) A special machine costing P200,000, fabricated to order for a particular customer, was finished in the shipping room on December 30. The customer was billed for P300,000 on that date and the machine was excluded from inventory although it was shipped January 4, 2007. e) Merchandise costing P200,000 was received on January 6, 2007, and the related purchase invoice was recorded January 5. The invoice showed the shipment was made on December 29, 2006, FOB destination. f) Merchandise costing P150,000 was sold on an installment basis on December 15. The customer took possession of the goods on that date. The merchandise was included in inventory because Alcala still holds legal title. Historical experience suggests that full payment on installment sale is received approximately 99% of the time. g) Goods costing P500,000 were sold and delivered on December 20. The goods were included in the inventory because the sale was accompanied by a purchase agreement requiring Alcala to buy back the inventory in February 2007. 10. Based on the above and the result of your audit, how much of these items should be included in the inventory balance at December 31, 2006? A. P1,300,000 B. P800,000 C. P1,650,000 D. P1,050,000 For nos. 11-15. Problem 6 - Computation of adjusted inventory and related accounts. The following accounts were included in the unadjusted trial balance of Bani Company as of December 31, 2006:

Cash Accounts receivable Inventory Accounts payable Accrued expenses

P 481,600 1,127,000 3,025,000 2,100,500 215,500

During your audit, you noted that Bani held its cash books open after year-end. In addition, your audit revealed the following: 1. Receipts for January 2007 of P327,300 were recorded in the December 2006 cash receipts book. The receipts of P180,050 represent cash sales and P147,250 represent collections from customers, net of 5% cash discounts. 2. Accounts payable of P186,200 was paid in January 2007. The payments, on which discounts of P6,200 were taken, were included in the December 2006 check register. 3. Merchandise inventory is valued at P3,025,000 prior to any adjustments. The following information has been found relating to certain inventory transactions. a, Goods valued at P137,500 are on consignment with a customer. These goods are not included in the inventory figure. b. Goods costing P108,750 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 P318,750 were shipped on December 31, 2006, and were delivered to the customer on January 3, 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 P91,000 shipment of goods to a customer on December 30, terms FOB destination are not included in the year-end inventory. The goods cost P65,000 and were delivered to the customer on January 3, 2007. The sale was properly recorded in 2007. e. The invoice for goods costing P87,500 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 P306,400 are on consignment from a vendor. These goods are not included in the physical inventory. Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2006: 11. Cash a. P481,600 b. P340,500

c. P334,300 d. P346,700 12. Accounts receivable a. P1,454,300 b. P1,282,000 c. P1,127,000 d. P1,274,250 13. Inventory a. P3,017,500 b. P3,040,000 c. P2,930,000 d. P2,505,000 14. Accounts payable a. P2,395,450 b. P2,307,950 c. P2,286,500 d. P2,301,750 15. Current ratio a. P2.00 b. P1.83 c. P1.84 d. P2.01 For nos. 16 to 18. Problem 7 - Biological Assets At the beginning of current year an entity purchased 100 cows which are 3 years old for P15,000 each for the purpose of producing milk for the localt community. On July 1, the cows gave birth to 20 calves. The active market provided the fair vaile less cost of disposal of the biological asset as follows: Newborn calf on July 1 Newborn calf on December 31 1/2 year old calf on December 31 3 years old cow on December 31 4 years old cow on December 31 16. What is the carrying amount of biological assets? a. 1,500,000 b. 800,000 c. 1,580,000 d. 2,000,000 17. What is the total fair value of biological assers on December 31?

4,000 5,000 7,000 18,000 24,000

a. 2,500,000 b. 2,580,000 c. 2,000,000 d. 2,540,000 18. What amount of net gain from change in fair value of biological asser should be reported on December 31? a. 900,000 b. 920,000 c. 960,000 d. 915,000 For nos. 19 & 20. Problem 8 - Biological Assets An entity produced milk for sale to local and national ice cream products. The entity began operations at the beginning of current year by purchasing 500 milk cows for P8,000,000 The entity had the following information available at year-end relating to the cows: Carrying amount of milking cows, January 1 Change in FV due to growth and price change Decrease in FV due to harvest Milk harvested during the year but not sold

8,000,000 900,000 200,000 400,000

19. What is the carrying amount of biological assets? a. 8,000,000 b. 7,100,000 c. 7,200,000 d. 8,400,000 20. What amount of net gain from the change in fair value of biological assets? a. 900,000 b. 1,100,000 c. 700,000 d. 200,000

Medium Problem 1 - Inventory Valuation Zebra Home Improvements Company installs replacement siding windows, and louvered glass doors for family homes. In your audit of the company's financial statements for the year ended December 31, 2009, you have gathered the following data concerning inventory. At December 31, 2009, the balance in Zebra's Raw Materials Inventory account was P502,000, and the Allowance for Inventory Write-down had a balance of P32,600.

The relevant inventory cost and market data at December 31, 2009 are summarized in the schedule below. Cost Replacement Cost Sales Price NRV Normal Profit Aluminum Sliding 89,000 86,000 91,500 87,000 6,400 Mahogany Sliding 94,000

92,000

93,000 85,000 7,440

Louvered Glass Doors

135,000

129,000

Glass Windows 194,000

114,000

205,000

Total

427,000

518,000

125,000

502,000

111,000 11,610

197,000 480,000

20,500 45,950

1. Determine the proper balance in the Allowance for Inventory Write-down at December 31, 2009. A. P25,000 B. P22,000 C. P23,000 D. P20,000 Problem 2 - Correcting Inventory Errors Morning Dew's annual income for the period 2005-2009 is as follows:

Year 2005 2006 2007 2008 2009

Net Income (loss) P148,000 345,000 649,000 (150,000) 200,000

A review of the company's records reveals the following inventory errors: 2005 P3,000 understatement, end of the year 2006 6,000 overstatement, end of the year 2008 4,500 understatement, end of the year 2009 11,000 overstatement, end of the year Compute the adjusted net income for each year. 2. 2005 A. P150,000 B. P151,000 C. P140,500 D. P141,200

3. 2006 A. P330,000 B. P336,000 C. P250,000 D. P320,200 4. 2007 A. P650,000 B. P655,000 C. P450,000 D. P421,500 5. 2008 A. (P140,000) B. (P145,500) C. P20,000 D. P10,000 6. 2009 A. P185,000 B. P184,500 C. P150,320 D. P480,500 Problem 3 - Income Effect Of Inventory Errors The Silverado Company reported income before taxes of P843,600 for 2008 and P965,400 for 2009. The company takes its annual physical count of inventory every December 31. Your audit revealed the following information: a. The price used for 1,500 units included in the 2008 ending inventory was $109. The correct cost was P190 per unit. b. Goods costing P23,600 was received from a vendor on January 5, 2009. The shipment was made on December 26, 2008 under FOB shipping point term. The purchase was recorded in 2008, but the shipment was not included in the 2008 ending inventory. c. Merchandise costing P64,750 was sold to a customer on December 29, 2008. Silverado was asked by the customer to keep the merchandise until January 3, 2009, when the customer could come and pick it up. Although the sale was properly recorded in 2008, the merchandise was included in the ending inventory. d. A supplier sold merchandise valued at P14,000 to Silverado Company. The merchandise was shipped FOB shipping point at December 29, 2008, and was received by Soverado on December 31, 2008. The purchase was recorded in 2009 and the merchandise was not included in the 2008 ending inventory. Compute the adjusted net income for

7. 2008 A. P843,600 B. P850,000 C. P923,950 D. P920,000 8. 2009. A. P965,400 B. P950,000 C. P885,050 D. P850,000 For nos. 9-11. Problem 4 - Correcting Inventory Error Baileys Company is a manufacturer of small tools. The following information was obtained from the company's accounting records for the year ended December 31, 2009. Inventory at December 31, 2009 (based on physical count in Baileys' warehouse at cost on December 31, 2009) Accounts payable at December 31, 2009 Net sales (sales less sales returns)

P1,870,000 1,415,000 9,693,400

Your audit reveals the following information: 1 The physical count included tools billed to a customer FOB shipping point on December 31, 2009. These tools cost P64,000 and were billed at P78,500. They were in the shipping area waiting to be picked up by the customer. 2 Goods shipped FOB shipping point by a vendor were in transit on December 31, 2009. These goods with invoice cost of P93,400 were shipped on December 29, 2003. 3 Work in process inventory costing P27,000 was sent to a job contractor for further processing. 4 Not included in the physical count were goods returned by customers on December 31, 2009. These goods costing P49,000 were inspected and returned to inventory on January 7, 2010. Credit memos for P67,800 were issued to the customers at that date. 5 In transit to a customer on December 31, 2009, were tools costing P17,740 shipped FOB destination on December 26, 2009. A sales invoice for P29,400 was issued on January 3, 2010 when Baileys company was notified by the customer that the tools had been received. 6 At exactly 5:00 pm on December 31, 2009, goods costing P31,200 were received from a vendor. These were recorded on a receiving report dated January 2, 2010. The related invoice was recorded on December 31, 2009, but the goods were not included in the physical count.

7 Included in the physical count were goods received from a vendor on December 27, 2009. However, the related invoice for P36,000 was not recorded because the accounting department's copy of the receiving report was lost. 8 A monthly freight bill for $16,000 was received on January 3, 2010. It is specifically related to merchandise bought in December 2009, one-half of which was still in the inventory at December 31, 2009. The freight was not included in either the inventory or in accounts payable at December 31, 2009. Compute for the adjusted amount of the following: 9. Inventory A. P2,096,340 B. P2,095,200 C. P2,090,000 D. P2,000,000 10. Accounts Payable A. P1,560,400 B. P1,550,000 C. P1,540,300 D. P1,500,000 11. Net Sales A. P9,547,100 B. P9,200,320 C. P9,100,250 For nos. 12-16. Problem 5 - Perpetual Inventory System The Bolinao Company values its inventory at the lower of FIFO cost or net realizable value (NRV). The inventory accounts at December 31, 2005, had the following balances. Raw materials Work in process Finished goods

P 650,000 1,200,000 1,640,000

The following are some of the transactions that affected the inventory of ...