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CHAPTER 5 – Audit of InventoryExercises - Analysis of Transactions 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, worth of merchandise was returned due to wrong specification. Moneba C...

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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 Purchases Cash Accounts Payable Accounts payable Purchases Accounts payable Purch. Disc. Cash

Seller Accounts Receivable Cash Sales Sales Accounts Receivable Cash Sales Discount Accounts Receivable

12,000 2,400 9,600 2,000 2,000 7,600 152 7,448

9,600 2,400 12,000 2,000 2,000 7,448 152 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 Jan . 5 No Entry Jan. 10 Purchases 25,000 Notes payable 10,000 Accounts pay. 15,000 Jan. 15 Accounts pay. 5,000 Cash 5,000 5,000 Date of Payment: Accounts pay. 10,000 Cash 9,700 Purchase discount 300 10,000 Discount : P15,000 x 2% = P300

Seller Jan. 5 No Entry Jan. 10 Notes Receivable 10,000 Accounts Receiv. 15,000 Sales 25,000 Jan 15 Cash 5,000 Accounts receiv.

Cash Sales discount Accounts reciev.

9,700 300

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 Accounts receivable Transportation expense Sales Cash Accounts receivable

Buyer Purchases Accounts payable Cash Accounts payable Cash

18,500 1,500 20,000 18,500 18,500

20,000 18,500 1,500 18,500 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 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

130

Answer- P 5,260 Buyer Purchases 12,000 Freight-in 950 Accounts payable 12,950 Account payable 2,500 Purchases 2,500 Accounts payable 5,000 Cash 5,000 Accounts payable 5,450 Cash 5,260 Purchase discount 190  Discount – P12,000 – P2,500 = P9,500 x 2% = P190

Seller Accounts receivable Sales Cash Sales Accounts receivable Cash Accounts receivable Cash Sales discount Accounts receivable

12,950 12,000 950 2,500 2,500 5,000 5,000 5,260 190 5,450

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 Purchases Freight-in Accounts payable Cash Claims receivable Purchases Freight-in

Seller Accounts receivable Sales

10,000 1,500

10,000 10,000

10,000 1,500 11,500 10,000 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 Machinery 50,000 Cash 25,000 Accounts payable – others 25,000

Seller Cash Accounts recei. – others Accum. depreciation Machinery Gain on sale

Machinery 2,000 Cash 2,000 Accounts payable – others 5,000 Machinery 5,000 Accounts payable – others 20,000 Cash 20,000 If paid within the discount period: Accounts payable – others 20,000 Cash 19,600 Machienry 400

25,000 25,000 18,000 60,000 8,000

Gain on sale 5,000 Accounts recie. – others 5,000 Cash 20,000 Accounts recie – others 20,000 Cash 19,600 Gain on sale 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 131

d. Cannot be determined Answer - P 20,000 Buyer Land Building Cash Sale of Building: Cash Accum. depreciation Building Gain on sale

Seller Cash Land and building

200,000 100,000

300,000 300,000

300,000 Buyer Building Cash

80,000 40,000

80,000 80,000

100,000 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. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Items in receiving department returned by customer, no communication received from customer Items ordered and in receiving department, invoice not yet received from supplier Items counted in warehouse by the inventory crew Invoice received for goods ordered, goods shipped but not received (Anecito Company pays freight) Items, shipped today, fob destination, invoice mailed to customer Items currently used for window displays Items on counter for sale per inventory count [not in (3)] Items in shipping department, invoice not mailed to customer Items in receiving department, refused by Anecito because of Damage [(not in (3)] Items shipped today, fob shipping point, invoice mailed to customer Items included in warehouse count, damaged, not returnable Items included in warehouse count, specifically crafted and segregated for shipment to customer in five days per sales contract, with return privilege.

20,000 50,000 70,000 5,000 5,000 10,000 90,000 6,000 3,000 4,000 8,000

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 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

132

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; Debit a. Cost of sales b. Inventory c. Retained earnings d. No adjustment

2.

c d 3.

e 4.

5.

a. b. c. d.

Item letter “b” is: Debit Cost of sales Inventory Cost of sales No adjustment

Item letter “c” is; Debit a. Inventory b. Cost of sales c. Inventory d. No adjustment Item letter “d” is: Debit a. Cost of sales b. Inventory c. Inventory d. No adjustment Item letter “e” is: Debit a. Cost of sales b. Inventory c. Cost of sales d. Inventory

Credit 90,000 90,000 90,000

Inventory Cost of Sales Inventory

90,000 90,000 90,000

28,000 28,000 35,000

Inventory Cost of sales Inventory

50,000 50,000 50,000

Credit Cost of sales 50,000 Inventory 50,000 Retained earnings 50,000

15,000 15,000 15,000

Credit Inventory 15,000 Cost of sales 15,000 Retained earnings 15,000

500 500 10,000 10,000

Inventory Cost of sales Inventory Cost of sales

Credit 28,000 28,000 35,000

Credit

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500 500 10,000 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 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 Retained Earnings 7,000 Retained Earnings

8,500 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 Earnings 15,000 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. 134

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 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 Earnings 25,000 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: a. P 46,000 b. P 21,000

c. P 11,000

d. P

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

135

7,000

Solution 1. Sales 35,000 Accounts receivable 2. Inventory 50,000 Cost of sales Purchases 50,000 Accounts payable 3. Inventory 20,000 Cost of sales 4. Inventory 26,000 Cost of sales Sales 40,000 Accounts receivable

35,000 50,000 50,000 20,000 26,000 40,000

5. Inventory 25,000 Cost of sales 25,000 6. Purchases 60,000 Accounts payable 60,000 7. Inventory 4,000 Accounts payable 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 s...