Practical Accounting Problems - INVENTORIES PDF

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TOPIC 3 –INVENTORIES PRACTICAL ACCOUNTING PROBLEMSPROBLEM NO. 1 – Items considered inventoriesPresented below is a list of items that may or may not reported as inventory in a company’s December 31 statement of financial position. Goods out on consignment at another company’s store P800, Goods sold ...

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TOPIC 3 –INVENTORIES PRACTICAL ACCOUNTING PROBLEMS PROBLEM NO. 1 – Items considered inventories Presented below is a list of items that may or may not reported as inventory in a comp any’s December 31 statement of financial position. 1. Goods out on consignment at another company’s store 2. Goods sold on installment basis 3. Goods purchased f.o.b. shipping point that are in transit at December 31 4. Goods purchased f.o.b. destination that are in transit at December 31 5. Goods sold to another company, for which our company has signed an agreement to repurchase at a set price that covers all costs related to the inventory 6. Goods sold where large returns are predictable 7. Goods sold f.o.b. shipping point that are in transit December 31 8. Freight charges on goods purchased 9. Factory labor costs incurred on goods still unsold 10. Interest cost incurred for inventories that are routinely manufactured 11. Costs incurred to advertise goods held for resale 12. Materials on hand not yet placed into production 13. Office supplies 14. Raw materials on which a the company has started production, but which are not completely processed 15. Factory supplies 16. Goods held on consignment from another company 17. Costs identified with units completed but not yet sold 18. Goods sold f.o.b. destination that are in transit at December 31 19. Temporary investment in stocks and bonds that will be resold in the near future

P800,000 100,000 120,000 200,000

300,000 280,000 120,000 80,000 50,000 40,000 20,000 350,000 10,000 280,000 20,000 450,000 260,000 40,000 500,000

QUESTION: How much of these items would typically be reported as inventory in the financial statements? a. P2,300,000 c. P2,260,000 b. P2,000,000 d. P2,220,000

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Answer: A Suggested Solution: PAS 2 a. b. c.

par. 6 defines “Inventories” as assets held for sale in the ordinary course of business; in the process of production for such sale; or in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Par. 10 further states that the cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Therefore, items 1, 3, 5, 8, 9, 12, 14, 15, 17 and 18 would be reported as inventory in the financial statements. The other items will be reported as follows: Item Item Item Item Item Item Item

2 4 6 7 10 11 13

-

Item 16 Item 19

-

Cost of goods sold in profit or loss Not reported in the financial statements Cost of goods sold in profit or loss Cost of goods sold in profit or loss Interest expense in profit or loss Advertising expense in profit or loss Office supplies in the current asset section of the statement of financial position Not reported in the financial statements Trading securities in the current asset section of the statement of financial position

PROBLEM NO. 2 – Items to be included in inventories In connection with your audit of the Alcala Manufacturing Company, you reviewed its inventory as of December 31, 20 10 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 113

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18, but the case was shipped and the costumer billed on January 10, 2011. (b) Merchandise costing P600,000 was received on December 28, 2010, 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, 20 11, costing P700,000 was entered in purchase register on January 7. The invoice showed shipment was made FOB shipping point on December 31, 2010. 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, 20 11. (e) Merchandise costing P200,000 was received on January 6, 2011, and the related purchase invoice was recorded January 5. The invoice showed the shipment was made on December 29, 2010, 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 20 11. QUESTION: Based on the above and the result of your audit, how much of these items should be included in the inventory balance at December 31, 2010? a. P1,300,000 c. P1,650,000 b. P 800,000 d. P1,050,000 114

3 – Inventories_Practical Accounting Problems

Answer: A Suggested Solution: Unshipped goods Purchased merchandise shipped FOB shipping point Goods used as collateral for a loan Total

P 100,000 700,000 500,000 P1,300,000

Reasons for including and excluding the items: a)

Included - Merchandise should be included in the inventory until shipped. An exception would be special orders.

b)

Excluded - Alcala Manufacturing has the merchandise on a consignment basis and therefore does not possess legal title.

c)

Included - The merchandise was shipped FOB shipping point and therefore would be included in the inventory on the shipping date.

d)

Excluded - Title may pass on special orders when segregated for shipment.

e)

Excluded - The merchandise was shipped FOB destination and was not received until January 3, 20 11.

f)

Excluded - Historical experience suggests that Alcala will collect the full purchase price, so the sale is recognized even though legal title has not passed.

g)

Included - This is not a sale of inventory but instead is a loan with the inventory as collateral.

PROBLEM NO. 3 – Computation of adjusted inventory The accounting staff of Agno Co. submitted an inventory list at December 31, 20 10 which showed a total of P1,500,000. The following information which may or may not be relevant to the inventory value submitted, are given below: •

Excluded from the inventory were merchandise costing P24,000 because they were transferred to the delivery department for packaging on December 28 to be shipped on January 2, 20 11.

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•

The bill of lading and other import documents on a merchandise were delivered by the bank and the trust receipt accepted by the company on December 26, 20 10. Taxes and duties have been paid on this shipment but the customs broker has not delivered the merchandise until January 7, 20 11. Delivered cost of the shipment totaled P240,000. This shipment was not included in the inventory in December 20 10.

•

A review of the company’s purchase orders shows a commitment to buy P30,000 worth of merchandise. This was not included in the inventory because the goods were received on January 3, 20 11.

•

Suppliers invoice for P9,000 worth of merchandise dated December 28, 2010 was received through the mails on December 30, 20 10 although the goods arrived only on January 4, 20 11. Shipment term is f.o.b. shipping point. This item was included in the December 31, 2010 inventory by the company.

•

Goods valued at P6,000 were received on December 28, 20 10 for approval by Agno Co. The inventory team included this merchandise in the list but did not place any value on it. On January 4, 2011 the company informed the supplier by long distance telephone of the acceptance of the goods and the supplier’s invoice was received on January 7, 20 11.

•

On December 27, 2010, an order for P7,500 worth of merchandise was placed. This was included in the year-end inventory although it was received only on January 5, 20 11. Seller shipped the goods f.o.b. destination.

QUESTION: The correct merchandise inventory at December 31, 20 10 of Agno Co. is a. P1,756,500 c. P1,747,500 b. P1,516,500 d. P1,764,000

Answer: A

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Suggested Solution: Unadjusted inventory, 12/31/10 Add (deduct) adjustments: Unshipped goods Goods in the hands of customs broker Goods in transit – fob destination Adjusted inventory, 12/31/10

P1,500,000 24,000 240,000 (7,500) P1,756,500

PROBLEM NO. 4 – Sales and purchases cutoff The Anda Company is on a calendar year basis. were found during your audit:

The following data

a. Goods in transit shipped FOB destination by a supplier, in the amount of P100,000, had been excluded from the inventory, and further testing revealed that the purchase had been recorded. b. Goods costing P50,000 had been received, included in inventory, and recorded as a purchase. However, upon your inspection the goods were found to be defective and would be immediately returned. c. Materials costing P250,000 and billed on December 30 at a selling price of P320,000, had been segregated in the warehouse for shipment to a customer. The materials had been excluded from inventory as a signed purchase order had been received from the customer. Terms, FOB destination. d. Goods costing P70,000 was out on consignment with Hermie Company. Since the monthly statement from Hermie Company listed those materials as on hand, the items had been excluded from the final inventory and invoiced on December 31 at P80,000. e. The sale of P150,000 worth of materials and costing P120,000 had been shipped FOB point of shipment on December 31. However, this inventory was found to be included in the final inventory. The sale was properly recorded in 20 10. f.

Goods costing P100,000 and selling for P140,000 had been segregated, but not shipped at December 31, and were not included in the inventory. A review of the customer’s purchase order set forth terms as FOB destination. The sale had not been recorded. 117

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g. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not arrived as yet. However, these materials costing P170,000 had been included in the inventory count, but no entry had been made for their purchase. h. Merchandise costing P200,000 had been recorded as a purchase but not included as inventory. Terms of sale are FOB shipping point according to the supplier’s invoice which had arrived at December 31. Further inspection of the client’s records revealed the following December 31, 2010 balances: Inventory, P1,100,000; Accounts receivable, P580,000; Accounts payable, P690,000; Net sales, P5,050,000; Net purchases, P2,300,000; Net income, P510,000. QUESTIONS: Based on the above and the result of your audit, determine the adjusted balances of following as of December 31, 20 10: 1. Inventory a. P1,230,000 b. P1,650,000

c. P1,550,000 d. P1,480,000

2. Accounts payable a. P710,000 b. P540,000

c. P810,000 d. P760,000

3. Net sales a. P4,550,000 b. P4,650,000

c. P4,730,000 d. P4,970,000

4. Net purchases a. P2,370,000 b. P2,420,000

c. P2,150,000 d. P2,320,000

5. Net income a. P220,000 b. P290,000

c. P540,000 d. P550,000

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Answers: 1) C; 2) A; 3) B; 4) D, 5) C Suggested Solution: Question Nos. 1 to 5

Unadjusted balances (a) (b) (c) (d) (e) (f) (g) (h) Adjusted balances

Inventory

Accounts Payable

Net Sales

Net Purchases

Net Income

P1,100,000 (50,000) 250,000 70,000 (120,000) 100,000 200,000

P690,000 (100,000) (50,000) 170,000 -

P5,050,000 (320,000) (80,000) -

P2,300,000 (100,000) (50,000) 170,000 -

P510,000 100,000 (70,000) (10,000) (120,000) 100,000 (170,000) 200,000

P1,550,000

P710,000

P4,650,000

P2,320,000

P540,000

PROBLEM NO. 5 – Sales and purchases cutoff You were engaged by Asingan Corporation for the audit of the company’s financial statements for the year ended December 31, 2010. 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: Date Balance 12/27 12/28 12/28 12/31 12/31 12/31 12/31

SALES Reference Amount forwarded P7,800,000 SI No. 8 65 60,000 SI No. 8 66 225,000 SI No. 8 67 15,000 SI No. 8 69 69,000 SI No. 8 70 102,000 SI No. 8 71 Closing entry

PURCHASES Date Reference Amount Balance forwarded P4,200,000 12/28 RR #2059 36,000 12/30 RR #2061 105,000 12/31 RR #2062 63,000 12/31 RR #2063 96,000 12/31 Closing entry (4,500,000) P -

24,000

(8,295,000) P Note: SI = Sales Invoice

RR = Receiving Report 119

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Accounts receivable Inventory Accounts payable

P750,000 900,000 600,000

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. 2063 and that no shipments had been made on any Sales Invoices whose number is larger than No. 868. 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. 2060 but for which the invoice was not received until the following year. Cost was P27,000. b) On the evening of December 31, there were two trucks in the company siding: • Truck No. XXX 888 was unloaded on January 2 of the following year and received on Receiving Report No. 2063. The freight was paid by the vendor. • Truck No. MGM 357 was loaded and sealed on December 31 but leave the company premises on January 2. This order was sold for P150,000 per Sales Invoice No. 8 68. c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to ABC Trading Corporation. ABC received the goods, which were sold on Sales Invoice No. 866 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. 2064. 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. QUESTIONS: Based on the above and the result of your audit, determine the following: 120

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1. Sales for the year ended December 31, 2010 a. P8,100,000 c. P7,875,000 b. P7,725,000 d. P8,025,000 2. Purchases for the year ended December 31, 2010 a. P4,500,000 c. P5,631,000 b. P5,727,000 d. P4,527,000 3. Accounts receivable as of December 31, 2010 a. P330,000 c. P525,000 b. P555,000 d. P180,000 4. Inventory as of December 31, 2010 a. P1,452,000 c. P1,200,000 b. P1,221,000 d. P1,296,000 5. Accounts payable as of December 31, 2010 a. P600,000 c. P 531,000 b. P627,000 d. P1,827,000

Answers: 1) C; 2) D; 3) A; 4) D, 5) B

Suggested Solution: Question Nos. 1 to 5 Sales Unadjusted balances AJE No. 1 AJE No. 2 AJE No. 3 AJE No. 4 AJE No. 5 AJE No. 6 Adjusted balances

Purchases

AR

P8,295,000 P4,500,000 (195,000) 27,000 (225,000) -

P750,000 (195,000) (225,000) -

P7,875,000

P330,000

P4,527,000

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Inventory

AP

P900,000 96,000 120,000 180,000

P600,000 27,000 -

P1,296,000

P627,000

3 – Inventories_Practical Accounting Problems

Adjusting entries: 1) Sales (P69,000+P102,000+P24,000) P195,000 Accounts receivable

P195,000

To adjust unshipped goods recorded as sales (SI No. 869, 870 and 871)

2) Purchases P27,000 Accounts payable P27,000 To take up unrecorded purchases (RR No. 2060) 3) Inventory P96,000 Profit or loss summary To take up goods under RR No. 2 063

P96,000

4) Inventory (P150,000/1.25) P120,000 Profit or loss summary P120,000 To take up unshipped goods under SI No. 8 68 5) Sales P225,000 Accounts receivable P225,000 To reverse entry made to record SI No. 8 66 6) Inventory (P225,000/1.25) P180,000 Profit or loss summary P180,000 To take up goods under SI No. 866

PROBLEM NO. 6 – Sales and purchases cutoff Balungao Company engaged you to examine its books and records for the fiscal year ended June 30, 2010. The company’s accountant has furnished you not only the copy of trial balance as of June 30, 20 10 but also the copy of company’s statement of financial position and statement of comprehensive income as at said date. The following data appears in the cost of goods sold section of the statement of comprehensive income: Inventory, July 1, 2009 Add Purchases Total goods available for sale Less Inventory, June 30, 20 10 Cost of goods sold

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P 500,000 3,600,000 4,100,000 700,000 P3,400,000

3 – Inventories_Practical Accounting Problems

The beginning and ending inventories of the year were ascertained thru physical count except that no reconciling items were considered. Even though the books have been closed, your working paper trial balance show all account with activity during the year. All purchases are FOB shipping point. The company is on a periodic inventory basis. In your examination of inventory cut-offs at the beginning and end of the year, you took note of the following: July 1, 2009 a. June invoices totaling to P130,000 were entered in the voucher register in June. The corresponding goods not received until July. b. Invoices totaling P54,000 were entered in the voucher register in July but the goods received during June. June 30, 2010 c. Invoices with an aggregate value of P186,000 were entered in the voucher register in July, and the goods were received in July. The invoices, however, were date June. d. June invoices totaling P74,000 were entered in the voucher register in June but the goods were not received until July. e. Invoices totaling P108,000 (the corresponding goods for which were received in June) were entered the voucher register, July. f.

Sales on account in the total amount of P176,000 were made on June 30 and the goods delivered at that time. Book entries relating to the sales were made in June.

QUESTIONS: Based on the above and the result of your cut-off tests, answer the following: 1. How much is the adjusted Inventory as of July 1, 2009? a. P500,000 c. P576,000 b. P630,000 d. P370,000 2. How much is the adjusted Purchases for the fiscal year ended June 30, 2010? a. P3,840,000 c. P3,894,000 b. P3,600,000 d. P3,914,000 123

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3. How much is the adjusted Inventory as of June 30, 2010? a. P784,000 c. P892,000 b. P500,000 d. P960,000 4. How much is the adjusted Cost of Goods Sold for the fiscal year ended June...