7/21/2019 Cebu CPAR Audit of Inventory http://slidepdf.com/reader/full/cebu-cpar-audit-of-inventory-56e47a2a49fa5 1/30 Cebu CPAR Audit of Inventory AUDIT OF INVENTORIES PROBLEM NO. 1 Presented below is a list of items that may or may not reported as inventory in a company’s December 31 balance sheet. 1. Goods out on consignment at another company’s store P800,000 Goods sold on installment basis 100,000 Goods purchased f.o.b. shipping point that are in transit at December 31 120,000 Goods purchased f.o.b. destination that are in transit at December 31 200,000 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 300,000 Goods sold where large returns are predictable 280,000 Goods sold f.o.b. shipping point that are in transit December 31 120,000 Freight charges on goods purchased 80,000 Factory labor costs incurred on goods still unsold 50,000 Interest cost incurred for inventories that are routinely manufactured 40,000 Costs incurred to advertise goods held for resale 20,000 Materials on hand not yet placed into production 350,000 Office supplies 10,000 Raw materials on which a the company has started production, but which are not completely processed 280,000 Factory supplies 20,000 Goods held on consignment from another company 450,000 Costs identified with units completed but not yet sold 260,000 Goods sold f.o.b. destination that are in transit at December 31 40,000 Temporary investment in stocks and bonds that will be resold in the near future 500,000 Question: How much of these i tems would typically be reported as i nventory in the financial statements? a. P2,300,000 c. P2,260,000 b. P2,000,000 d. P2,220,000 Suggested Solution: PAS 2 par. 6 defines “Inventories” as assets a. held for sale in the ordinary course of business; b. in the process of production for such sale; or
Presented below is a list of items that may or may not reported as inventory in a company’sDecember 31 balance sheet.
1. Goods out on consignment at another company’s store P800,000 Goods sold on installment basis 100,000 Goods purchased f.o.b. shipping point that are in transit atDecember 31 120,000 Goods purchased f.o.b. destination that are in transit atDecember 31 200,000 Goods sold to another company, for which our company hassigned an agreement to repurchase at a set price that coversall costs related to the inventory
300,000 Goods sold where large returns are predictable 280,000 Goods sold f.o.b. shipping point that are in transitDecember 31 120,000 Freight charges on goods purchased 80,000 Factory labor costs incurred on goods still unsold 50,000 Interest cost incurred for inventories that are routinelymanufactured 40,000 Costs incurred to advertise goods held for resale 20,000 Materials on hand not yet placed into production 350,000 Office supplies 10,000 Raw materials on which a the company has startedproduction, but which are not completely processed 280,000 Factory supplies 20,000 Goods held on consignment from another company 450,000 Costs identified with units completed but not yet sold 260,000 Goods sold f.o.b. destination that are in transit atDecember 31 40,000 Temporary investment in stocks and bonds that will be resold inthe near future 500,000
Question:
How much of these i tems 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
Suggested Solution:
PAS 2 par. 6 defines “Inventories” as assets a. held for sale in the ordinary course of business; b. in the process of production for such sale; or
c. 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 ofconversion 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 2 - Cost of goods sold in the income statement Item 4 - Not reported in the financial statements Item 6 - Cost of goods sold in the income statement Item 7 - Cost of goods sold in the income statement Item 10 - Interest expense in the income statement Item 11 - Advertising expense in the income statement Item 13 - ffice supplies in the current asset section of the balance sheet Item 16 - Not reported in the financial statements Item 19 - ading securities in the current asset section of the balance
sheet
Answer: A
PROBLEM NO. 2
In connection with your audit of the Alcala Manufacturing Company, you reviewed its inventory asof 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 thephysical inventory was taken. It was not included in the inventory because it was marked “Hold forshipping instructions.” The customer’s order was dated Dece mber 18, but the case was shipped andthe 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 onJanuary 7. The invoice showed shipment was made FOB shipping point onDecember 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 theshipping room on December 30. The customer was billed for P300,000 on that date and the machinewas 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 invoicewas recorded January 5. The invoice showed the shipment was made onDecember 29, 2006, FOBdestination.
(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 stillholds legal title. Historical experience suggests that full payment on installment sale is receivedapproximately 99% of the time.
(g) Goods costing P500,000 were sold and delivered on December 20. The goods were included in theinventory because the sale was accompanied by a purchase agreement requiring Alcala to buyback the inventory in February 2007.
Question:
Based on the above and the result of your audit, how much of these items should be included in theinventory balance at December 31, 2006? a. P1,300,000 c. P1,650,000 b. P 800,000 d. P1,050,000
Suggested Solution:
Unshipped goods P 100,000 rchased merchandise shippedFOB shipping point 700,000 Goods used as collateral for a loan 500,000 Total 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 doesnot possess legal title.
c) Included - The merchandise was shipped FOB shipping point and therefore would be included in theinventory 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, 2006. 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.
The Anda Company is on a calendar year basis. The following data were found during your audit:
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 immediatelyreturned.
c. Materials costing P250,000 and billed on December 30 at a selling price of P320,000, had beensegregated in the warehouse for shipment to a customer. The materials had been excluded frominventory 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 statementfrom Hermie Company listed those materials as on hand, the items had been excluded from the finalinventory 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 ofshipment on December 31. However, this inventory was found to be included in the final inventory.The sale was properly recorded in 2005.
f. Goods costing P100,000 and selling for P140,000 had been segregated, but not shipped at December31, and were not included in the inventory. A review of the customer’s purchase order set forth termsas FOB destination. The sale had not been recorded.
g. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not arrived asyet. However, these materials costing P170,000 had been included in the inventory count, but noentry 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 atDecember 31.
Further inspection of the client’s records revealed the following December 31, 2006 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 asof December 31, 2006:
1. Inventory a. P1,230,000 c. P1,550,000 b. P1,650,000 d. P1,480,000
You were engaged by Asingan Corporation for the audit of the company’s financial statements forthe year ended December 31, 2006. The company is engaged in the wholesale business and makesall sales at 25% over cost.
The following were gathered from the client’s accounting records:
S A L E S P U R C H A S E S Date Reference Amount Date Reference Amount
You observed the physical inventory of goods in the warehouse on December 31 and were satisfiedthat it was properly taken.
When performing sales and purchases cut-off tests, you found that at December 31, the lastReceiving Report which had been used was No. 1063 and that no shipments had been made on anySales Invoices whose number is larger than No. 968. You also obtained the following additionalinformation:
a) Included in the warehouse physical inventory at December 31 were goods which had beenpurchased and received on Receiving Report No. 1060 but for which the invoice was not receiveduntil 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. 1063. The freight was paid by the vendor. · Truck No. MGM 357 was loaded and sealed on December 31 but leave the company premises onJanuary 2. This order was sold for P150,000 per Sales Invoice No. 968.
c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to ABCTrading Corporation. ABC received the goods, which were sold on Sales Invoice No. 966 terms FOBDestination, the next day.
d) Enroute to the client on December 31 was a truckload of goods, which was received on ReceivingReport No. 1064. The goods were shipped FOB Destination, and freight of P2,000 was paid by theclient. 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:
1. Sales for the year ended December 31, 2006 a. P8,100,000 c. P7,875,000 b. P7,725,000 d. P8,025,000
4) Inventory (P150,000/1.25) P120,000 Cost of sales P120,000
To take up unshipped goods under SI No. 968
5) Sales P225,000
Accounts receivable P225,000 To reverse entry made to record SI No. 966
6) Inventory (P225,000/1.25) P180,000 Cost of sales P180,000
To take up goods under SI No. 966
Answers: 1) C ; 2) D; 3) A; 4) D, 5) B
PROBLEM NO. 5
Balungao Company engaged you to examine its books and records for the fiscal year endedJune30, 2006. The company’s accountant has furnished you not only the copy of trial balance as of June30, 2006 but also the copy of company’s balance sheet and income statement as at said date. Thefollowing data appears in the cost of goods sold section of the income statement:
Inventory, July 1, 2005 Add Purchases
P 500,000 3,600,000
Total goods available for sale Less Inventory, June 30, 2006
4,100,000 700,000
Cost of goods sold P3,400,000
The beginning and ending inventories of the year were ascertained thru physical count except thatno reconciling items were considered. Even though the books have been closed, your workingpaper trial balance show all account with activity during the year. All purchases are FOB shippingpoint. 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 thefollowing:
July 1, 2005
a. June invoices totaling to P130,000 were entered in the voucher register in June. The correspondinggoods not received until July.
b. Invoices totaling P54,000 were entered in the voucher register in July but the goods received duringJune.
June 30, 2006
c. Invoices with an aggregate value of P186,000 were entered in the voucher register in July, and thegoods 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 notreceived until July.
e. Invoices totaling P108,000 (the corresponding goods for which were received in June) were enteredthe voucher register, July.
f. Sales on account in the total amount of P176,000 were made on June 30 and the goods delivered atthat 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, 2005? 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, 2006? a. P3,840,000 c. P3,894,000 b. P3,600,000 d. P3,914,000
3. How much is the adjusted Inventory as of June 30, 2006? 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 30, 2006? a. P3,316,000 c. P3,510,000 b. P3,970,000 d. P3,564,000
5. The necessary compound adjusting journal entry as of June 30, 2006 would include a net adjustmentto Retained Earnings of
a. P130,000 c. P76,000 b. P184,000 d. P54,000
Suggested Solution:
Questions No. 1 to 3 Inventory7/1/05
Purchases Inventory6/30/06
Unadjustedbalances
P500,000 P3,600,000 P700,000
Add (deduct)adj.:
Item a 130,000 - - Item b - (54,000) - Item c - 186,000 186,000 Item d - - 74,000 Item e - - Item f - 108,000 -
During your audit, you noted that Bani held its cash books open after year-end. In addition, youraudit revealed the following:
1. Receipts for January 2007 of P327,300 were recorded in the December 2006 cash receipts book. Thereceipts 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 P6,200were 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 hasbeen found relating to certain inventory transactions.
a. Goods valued at P137,500 are on consignment with a customer. These goods are notincluded in the inventory figure.
b. Goods costing P108,750 were received from a vendor on January 4, 2007. The relatedinvoice 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 tothe customer on January 3, 2007. The terms of the invoice were FOB shipping point. Thegoods were included in the 2006 ending inventory even though the sale was recorded in2006.
d. A P91,000 shipment of goods to a customer on December 30, terms FOB destinationare not included in the year-end inventory. The goods cost P65,000 and were delivered tothe 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 purchaseonDecember 31, 2006. The related goods, shipped FOB destination were received onJanuary 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 notincluded 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. P481,600 c. P334,300 b. P340,500 d. P346,700
2. Accounts receivable a. P1,454,300 c. P1,127,000 b. P1,282,000 d. P1,274,250
3. Inventory a. P3,017,500 c. P2,930,000 b. P3,040,000 d. P2,505,000
4. Accounts payable a. P2,395,450 c. P2,286,500 b. P2,307,950 d. P2,301,750
Current assets Cash P 334,300 Accounts receivable 1,282,000 Inventory 3,017,500 P4,633,800 Divide by current liabilities Accounts payable 2,307,950 Accrued expenses 215,500 2,523,450
urrent ratio 1.84
Answers: 1) C ; 2) B; 3) A; 4) B, 5) C
PROBLEM NO. 7
The Bolinao Company values its inventory at the lower of FIFO cost or net realizable value (NRV). Theinventory accounts at December 31, 2005, had the following balances.
Raw materials P 650,000 Work in process 1,200,000 Finished goods 1,640,000
The following are some of the transactions that affected the inventory of the Bolinao Companyduring 2006.
Jan. 8 Bolinao purchased raw materials with a list price of P200,000and was given a trade discount of 20% and 10%; terms 2/15,n/30. Bolinao values inventory at the net invoice price
Feb. 14 Bolinao repossessed an inventory item from a customer whowas overdue in making payment. The unpaid balance on thesale is P15,200. The repossessed merchandise is to be refinishedand placed on sale. It is expected that the item can be soldfor P24,000 after estimated refinishing costs of P6,800. Thenormal profit for this item is considered to be P3,200.
Mar. 1 Refinishing costs of P6,400 were incurred on the repossesseditem.
Apr. 3 The repossessed item was resold for P24,000 on account, 20%
down. Aug. 30 A sale on account was made of finished goods that have a list
price of P59,200 and a cost P38,400. A reduction of P8,000 offthe list price was granted as a trade-in allowance. The trade-initem is to be priced to sell at P6,400 as is. The normal profit onthis type of inventory is 25% of the sales price.
Based on the above and the result of your audit, answer the following: (Assume the client is usingperpetual inventory system)
1. The entry on Jan. 8 will include a debit to Raw Materials Inventory of
a. P200,000 c. P141,120 b. P144,000 d. P196,000
2. The repossessed inventory on Feb. 14 is most likely to be valued at a. P14,000 c. P17,200 b. P24,000 d. P14,400
3. The journal entries on April 3 will include a a. Debit to Cash of P24,000. b. Debit to Cost of Repossessed Goods Sold of P14,000. c. Credit to Profit on Sale of Repossessed Inventory of P3,600. d. Credit to Repossessed Inventory of P20,400.
4. The trade-in inventory on Aug. 30 is most likely to be valued at a. P8,000 c. P6,000 b. P4,800 d. P6,400
5. How much will be recorded as Sales on Aug. 30? a. P51,200 c. P57,200 b. P56,000 d. P57,600
Suggested Solution:
Question No. 1 Amount to be debited to Raw Materials Inventory (P200,000 x .8 x .9 x .98) P141,120
Question No. 2 Estimated selling price P24,000 ss refinishing costs 6,800 Net realizable value 17,200 Less normal profit 3,200 Valuation of repossessed inventory P14,000
Repossessed inventory is valued at fair value or best possible approximation of fair value. Since fairvalue of the item is not given, the item was valued at net realizable value less the normal profit.Incidentally, this is the valuation of trade-in inventory.
Cash (P24,000 x 20%) P 4,800 Accounts receivable (P24,000 – P4,800) 19,200
Sales – Repossessed inventory P24,000
Cost of Repossessed Goods Sold (P14,000+P6,400) P20,400 Repossessed Inventory P20,400
Question No. 4 Estimated selling price (net realizable value) P6,400 Less normal profit (P6,400 x 25%) 1,600 Valuation of trade-in inventory P4,800
Question No. 5 Accounts receivable (P59,200 - P8,000) P51,200 Trade-in inventory (see no. 4) 4,800 Amount to be recorded as sales P56,000
Answers: 1) C ; 2) A; 3) D; 4) B, 5) B
PROBLEM NO. 8
Calasiao Construction Corporation engaged you to advise it regarding the proper accounting for aseries of long-term contracts. Calasiao commenced doing business on January 2, 2006. Constructionactivities for the first year of operations are shown below. All contract costs are with differentcustomers, and any work remaining at December 31, 2006, is expected to be completed in 2007.
Project
TotalContractPric
e
BillingsThrough12/31/06
Collections Through12/31/06
Contract CostsIncurred
Through12/31/06
EstimatedAdditional
CoststoComplet
e
A P1,200,000 P 800,000 P 720,000 P 992,000 P 268,000 B 1,400,000 440,000 420,000 271,200 1,084,800 C 1,120,000 1,120,000 1,020,000 744,000 - D 800,000 140,000 100,000 492,000 348,000 E 960,000 820,000 800,000 740,000 60,000
a. P462,133 c. P1,149,419 b. P432,800 d. P 276,000
2. Balance of Construction in Progress account as of December 31, 2006 a. P2,552,000 c. P3,268,619
b. P2,581,333 d. P2,395,200
3. Amount to be reported in the current assets section of the balance sheet as Inventories asof December 31, 2006
a. P541,333 c. P352,000 b. P512,000 d. P444,000
4. Amount to be reported in the current liabilities section of the balance sheet as ofDecember 31, 2006 a. P 56,960 c. P160,000 b. P248,800 d. P 0
5. Net realized gross profit for the year 2006 assuming the company used the completed-contractmethod
a. P432,800 c. P376,000 b. P436,000 d. P276,000
Suggested Solution:
Question No. 1
Project
Estimatedgross
profit (loss)* Percentage
ofcompletion** Realized
grossprofit (loss) A (P60,000) not applicable (P60,000) B 44,000 20.00% 8,800 C 376,000 100.00% 376,000 D (40,000) not applicable (40,000) E 160,000 92.50% 148,000
Total P432,800
* (Total contract price - Total estimated costs) ** (Costs incurred through Dec. 31, 2006 / Total estimated costs)
Net A P 932,000 P 800,000 P132,000 D 452,000 140,000 312,000 E 888,000 820,000 68,000
Total P2,272,000 P1,760,000 P512,000
Question No. 4
Progress billings in excess of costs andrecognized profit – Project B (P440,000 - P280,000) P160,000
Question No. 5
Project Realized
grossprofit (loss) A (P60,000) B – not yet completed - C 376,000 D – not yet completed - E (40,000)
P276,000
Answers: 1) B; 2) A; 3) B; 4) C , 5) D
PROBLEM NO. 9
Dasol Factory started operations in 2006. Dasol manufactures bath towels. 60% of the production are“Class A” which sell for P500 per dozen and 40% are “Class B” which sell for P250 per dozen. During2006, 6,000 dozens were produced at an average cost of P360 per dozen. The inventory at the endof the year was as follows:
3. How much is the value of inventory as of December 31, 2006? a. P187,200 c. P117,000 b. P187,946 d. P166,500
4. How much is the cost of sales for the year 2006? a. P1,972,800 c. P2,043,000 b. P1,993,500 d. P1,972,054
5. How much is the gross profit for the year 2006? a. P242,200 c. P221,500 b. P406,500 d. P242,946
Suggested Solution:
Questions No. 1 & 2 Total cost of production
(6,000 dozens x P360) P2,160,000 Divide by total sales price: Class A (6,000 x 60% = 3,600 x P500) P1,800,000 Class B (6,000 x 40% = 2,400 x P250) 600,000 2,400,000
ost ratio 90%
Class A (P1,800,000 x 90%) P1,620,000 Class B (P600,000 x 90%) P540,000
Alternative computation:
Class A (P2,160,000 x 18/24) P1,620,000 Class B (P2,160,000 x 6/24) P540,000
Question No. 3 Class A (220 x P500 x 90%) P 99,000 Class B (300 x P250 x 90%) 67,500 Inventory, 12/31/06 P166,500
Question No. 4
Total cost of production (6,000 dozens x P360) P2,160,000 Less inventory, 12/31/06 166,500 Cost of sales P1,993,500
Question No. 5 Sales of Class A [(3,600 - 220) x P500] P1,690,000 Sales of Class B [(2,400 - 300) x P250] 525,000 Total sales 2,215,000
Less cost of sales 1,993,500 Gross profit P 221,500
Answers: 1) B; 2) A; 3) D; 4) B, 5) C
PROBLEM NO. 10
During your audit of the records of the Manaoag Corporation for the year ended December 31, 2006,the following facts were disclosed:
Raw materials inventory, 1/1/2006 P 720,200 Raw materials purchases 5,232,800 Direct labor 4,900,000 Manufacturing overhead applied (150% of direct labor) 7,350,000 Finished goods inventory, 1/1/2006 1,240,000 Selling expenses 8,112,800 Administrative expenses 7,377,200
Your examination disclosed the following additional information:
a) Purchases of raw materials
Month Units Unit Price Amount January – February 55,000 P17.76 P 976,800 March – April 45,000 20.00 900,000 May – June 25,000 19.60 490,000 July – August 35,000 20.00 700,000 September – October 45,000 20.40 918,000 November – December 60,000 20.80 1,248,000
265,000 P5,232,800
b) Data with respect to quantities are as follows:
Explanation Units
1/1/06 12/31/06 Raw materials 35,000 ? Work in process (80% completed) - 25,000 Finished goods 15,000 40,000 Sales, 200,000 units
c) Raw materials are issued at the beginning of the manufacturing process. During the year, no returns,spoilage, or wastage occurred. Each unit of finished goods contains one unit of raw materials.
d) Inventories are stated at cost as follows: · Raw materials – according to the FIFO method · Direct labor – at an average rate determined by correlating total direct labor cost with effective
production during the period · Manufacturing overhead – at an applied rate of 150% of direct labor cost
Based on the above and the result of your audit, answer the following:
1. The raw materials inventory as of December 31, 2006 is a. P992,000 c. P 936,000
b. P888,000 d. P1,040,000
2. The work in process inventory as of December 31, 2006 is a. P1,496,000 c. P1,746,000 b. P1,514,000 d. P1,776,000
3. The finished goods inventory as of December 31, 2006 is a. P2,793,600 c. P3,553,130 b. P3,334,000 d. P2,812,000
4. The cost of goods sold for the year ended December 31, 2006 is a. P16,897,000 c. P14,077,000 b. P14,161,400 d. P13,911,400
Suggested Solution:
Question No. 1
Units Raw materials, 1/1/06 35,000 Add Purchases 265,000 Raw materials available for use 300,000 Less raw materials, 12/31/06 (squeeze) 50,000 Goods placed in process 250,000 Less work-in-process, 12/31/06 25,000 Goods manufactured 225,000 Finished goods, 1/1/06 15,000 Total goods available for sale 240,000 Less finished goods, 12/31/06 40,000 Goods sold 200,000
Raw materials, 12/31/06 (50,000 units x P20.80) P1,040,000
Question No. 2
Raw materials [(10,000 units x P20.80) + (15,000units x P20.40)]
P 514,000 Direct labor (25,000 units x 80% x P20 a ) 400,000 Factory overhead (25,000 units x 80% x P30 b ) 600,000 Work in process, 12/31/06 P1,514,000
Labor unit cost (P4,900,000/245,000* units) P20 a
Overhead unit cost (P7,350,000/245,000* units) P30 b
*Equivalent production for labor and overhead ted, finished and sold [(200,000 units - 15,000 units) x100%] 185,000 Started, finished and on hand (40,000 units x 100%) 40,000 Started, and in process (25,000 units x 80%) 20,000 Total 245,000
Question No. 3 Raw materials [(30,000 units x P20.40) +(10,000
units x P20)] P 812,000 Direct labor (40,000 units x P20 a ) 800,000 Factory overhead (40,000 units x P30 b ) 1,200,000 Finished goods inventory, 12/31/06 P2,812,000
Question No. 4 Raw materials, 1/1/06 P 720,200
Add purchases 5,232,800 Raw materials available for use 5,953,000 Less raw materials, 12/31/06 (see no. 1) 1,040,000 Direct materials used 4,913,000 Direct labor 4,900,000 Factory overhead 7,350,000 Total manufacturing cost 17,163,000 Add work-in-process, 1/1/06 - Total cost placed in process 17,163,000 Less work-in-process, 12/31/06 (see no. 2) 1,514,000 Cost of goods manufactured 15,649,000 Add finished goods, 1/1/06 1,240,000 Total goods available for sale 16,889,000
Less finished goods, 12/31/06 (see no. 3) 2,812,000 Cost of goods sold P14,077,000
Answers: 1) D; 2) B; 3) D; 4) C
PROBLEM NO. 11
The Mangaldan Merchandising Company is a leading distributor of kitchen wares. The company usesthe first-in, first-out method of calculating the cost of goods sold. The following informationconcerning two of the company’s products is taken from the mon th of May:
PANS KETTLES No.
ofunits Unit cost No.
ofunits Unitcost
May 1, beginning inventory 10,000 P 60 6,000 P 40 Purchases:
On May 31, Mangaldan’s suppliers reduced their price from the last purchase price by the followingpercentages:
Pans…………………..25% Kettles…………………20%
Accordingly, the company agreed to reduce selling prices by 15% on all items beginning June 1.
Mangaldan Merchandising Company’s selling costs are calculated at 10% of selling price. Bothproducts have a normal profit of 30% on sales prices (after selling costs).
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. Total cost of Pans as of May 31 is a. P710,000 c. P600,000 b. P653,300 d. P612,000
2. Total cost of Kettles as of May 31 is a. P210,000 c. P200,000 b. P206,000 d. P168,300
3. The inventory at May 31 should be valued at a. P768,300 c. P920,000 b. P780,300 d. P890,000
4. The loss on inventory write down for the month of May is a. P139,700 c. P29,300 b. P137,300 d. P27,600
5. The cost of sales, before loss on inventory write down, for the month of May is a. P1,778,000 c. P1,797,700 b. P1,685,600 d. P1,658,000
Suggested Solution:
Question No. 1
4,000 units @ P65 P260,000
6,000 units @ P75 450,000 Total cost of Pans P710,000
Question No. 2
Total cost of Kettles (5,000 units @ P42) P210,000
* Estimated selling price – Estimated cost to sell ** Lower of cost or NRV
Question No. 4
Total cost of inventory (P710,000 + P210,000) P920,000 Less inventory value (see no. 3) 780,300 Required allowance for inventory writedown 139,700 Less allowance, May 1 (6,000 x P0.40) 2,400 Loss on inventory writedown for May P137,300
Question No. 5 Pans: 10,000 units @ P60 P600,000 10,000 units @ P65 650,000 P1,250,000
ttles: 6,000 units @ P40 240,000 4,000 units @ P42 168,000 408,000
tal cost of sales P1,658,000
Alternative computation: Inventory, 5/1: Pans (10,000 units x P60) P600,000 Kettles (6,000 units x P40) 240,000 P 840,000
dd purchases: ns [(14,000 units x P65) + (6,000 x
P75)] 1,360,000 Kettles (9,000 units x P42) 378,000 1,738,000
tal goods available for sale 2,578,000 ss inventory, 5/31 (at cost) 920,000
ost of sales, before inventorywritedown P1,658,000
Answers: 1) A; 2) A; 3) B; 4) B, 5) D
PROBLEM NO. 12
In conducting your audit of Mangatarem Corporation, a company engaged in import and wholesalebusiness, for the fiscal year ended June 30, 2006, you determined that its internal control system wasgood. Accordingly, you observed the physical inventory at an interim date,May 31, 2006 instead ofat 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 les for the fiscal year ended June 30, 2006 1,536,000 rchases for eleven months ended May 31, 2006 (before
audit adjustments) 1,080,000 rchases for the fiscal year ended June 30, 2006 1,280,000 entory, July 1, 2005 140,000 ysical 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 recordedas June purchases.
(2) Deposit of P4,000 made with vendor and charged to purchases in April 2006. Product was shipped inJuly 2006.
(3) A shipment in June was damaged through the carelessness of the receiving department. Thisshipment was later sold in June at its cost of P16,000.
QUESTIONS:
In audit engagements in which interim physical inventories are observed, a frequently used auditingprocedure is to test the reasonableness of the year-end inventory by the application of gross profitratio. Based on the above and the result of your audit, you are to provide the answers to thefollowing:
1. The gross profit ratio for eleven months ended May 31, 2006 is a. 20% c. 30% b. 35% d. 25%
2. The cost of goods sold during the month of June, 2006 using the gross profit ratio method is a. P132,000 c. P148,000 b. P144,000 d. P160,000
3. The June 30, 2006 inventory using the gross profit method is a. P264,000 c. P268,000 b. P340,000 d. P260,000
ivide by sales for 11 monthsended 5/31/06 1,344,000
ross profit rate for 11 monthsended 5/31/06 25%
Question No. 2
Sales for the fiscal year ended June 30, 2006 P1,536,000 ss sales for 11 months ended May 31, 2006 1,344,000 Sales for June, 2006 192,000 Less sales without profit 16,000 Sales with profit 176,000 Multiply by cost ratio (100% - 25%) 75% Cost of sales with profit 132,0000 Add cost of sales without profit 16,000 Total cost of sales for June, 2006 P 148,000
tal goods available for sale 1,416,000 ss cost of sales: ales without profit 16,000 ales with profit[(P1,536,000 - P16,000) x 75%] 1,140,000 1,156,000
ventory, 6/30/06 P 260,000
Answers: 1) D; 2) C ; 3) D
PROBLEM NO. 13
On March 31, 2006 San Fabian Company had a fire which completely destroyed the factory buildingand inventory of goods in process; some of the equipment was saved.
After the fire, a physical inventory was taken. The material was valued at P750,000 and the finishedgoods at P620,000.
The sales for the first three months of 2006 were P3,000,000. Material purchases were P1,250,000,transportation on purchases was P100,000 and direct labor cost for the three months was P1,000,000.For the past two years, factory overhead cost has been 80% of direct labor cost.
QUESTIONS:
Based on the above and the result of your audit, compute the following:
1. The most likely gross profit rate to be used in estimating the inventory of goods in process destroyed byfire
a. 31.55% c. 35.52% b. 32.76% d. 36.00%
2. Total cost of goods placed in process a. P2,710,000 c. P3,925,000
b. P973,500 d. P4,375,000
3. Total cost of goods manufactured a. P3,133,500 c. P 854,400 b. P 973,500 d. P3,014,400
4. Inventory of goods in process lost a. P 791,500 c. P 119,100 b. P1,360,600 d. P2,951,500
Suggested Solution:
Question No. 1
2003 2004 2005 ross profit P2,400,000 P2,215,000 P1,776,000 ivide by Sales P8,000,000 P7,600,000 P5,000,000 ross profit rate 30.00% 29.14% 35.52%
eight-in 100,000 w materials available for use 1,660,000 w materials, 3/31/06 (750,000) w materials used 910,000
irect labor 1,000,000 ctory overhead (P1,000,000 x 80%) 800,000 Total manufacturing cost 2,710,000 Work-in-process, 1/1/06 1,215,000 Total cost placed in process 3,925,000 (2) Less work-in-process, 3/31/06 (squeeze) (2,951,500) (4) Cost of goods manufactured 973,500 (3) Finished goods, 1/1/06 1,700,000 Total goods available for sale 2,673,500 Less finished goods, 3/31/06 (620,000) Cost of goods sold (P3,000,000 x 68.45%) P2,053,500
Answers: 1) A; 2) C ; 3) B; 4) D
PROBLEM NO. 14
You obtained the following information in connection with your audit of Villasis Corporation:
Cost Retail Beginning inventory P1,987,200 P2,760,000 Sales 7,812,000 Purchases 4,688,640 6,512,000 Freight in 94,560 Mark ups 720,000 Mark up cancellations 120,000 Markdown 240,000 Markdown cancellations 40,000
Villasis Corp. uses the retail inventory method in estimating the values of its inventories and costs.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The cost ratio to be used considering the provisions of PAS 2 is a. 68.58% c. 70.00% b. 69.20% d. 75.78%
2. The estimated ending inventory at retail is a. P2,300,000 c. P1,940,000 b. P2,060,000 d. P1,860,000
3. The estimated ending inventory at cost is a. P1,412,786 c. P1,302,000 b. P1,275,588 d. P1,287,120
4. The estimated cost of goods sold is
a. P5,468,400 c. P5,357,614 b. P5,494,812 d. P4,685,117
Suggested Solution:
Question No. 1 Cost Retail
Beginning inventory P1,987,200 P2,760,000 Purchases 4,688,640 6,512,000 Freight in 94,560 Net mark up (P720,000 - P120,000) 720,000 Net mark down (P240,000 - P40,000) ___________ 120,000 Goods available for sale P6,770,400 P9,672,000
Cost ratio (P6,770,400/P9,672,000) 70%
PAS 2 par. 22 states that the retail inventory method is often used in the retail industry for measuringinventories of large numbers of rapidly changing items with similar margins for which it isimpracticable to use other costing methods. The cost of inventory is determined by reducing the
sales value of the inventory by the appropriate percentage gross margin. The percentage used takesinto consideration inventory that has been marked down to below its original selling price. Anaverage percentage for each retail department is often used.
Previously, the conventional approach (lower of average cost or market valuation) is often used if theproblem is silent. The conventional approach ignores markdown in the computation of cost ratio.However, since PAS 2 specifically states that the percentage should take into consideration inventorythat has been marked down to below its original selling price, the cost ratio was computed using theaverage method.
Question No. 2 Goods available for sale at retail P9,672,000 Less sales 7,812,000 Ending inventory, at retail P1,860,000
Question No. 3 Ending inventory, at cost (P1,860,000 x 70%) P1,302,000
Question No. 4
Goods available for sale at cost P6,770,400 Less ending inventory, at cost 1,302,000 Estimated cost of sales P5,468,400
1. Otso Manufacturing Corporation mass produces eight different products. The controller, who isinterested in strengthening internal controls over the accounting for materials used in production,would be most likely to implement
a. A separation of duties among production personnel. b. A perpetual inventory system. c. An economic order quantity (EOQ) system. d. A job order cost accounting system.
2. Which of the following control procedures would most likely be used to maintain accurate perpetualinventory records?
a. Independent matching of purchase orders, receiving reports, and vendors' invoices. b. Independent storeroom count of goods received.c. Periodic independent reconciliation of control and subsidiary records. d. Periodic independent comparison of records with goods on hand.
3. The accuracy of perpetual inventory records may be established in part by comparing perpetualinventory records with a. Purchase requisitions. c. Receiving reports. b. Purchase orders. d. Vendor payments.
4. The auditor tests the quantity of materials charged to work in process by tracing these quantities to a. Receiving reports. c. Materials requisition forms. b. Perpetual inventory records. d. Cost ledgers.
5. An auditor would analyze inventory turnover rates to obtain evidence concerning management’sassertion about a. Valuation or allocation. c. Presentation and disclosure. b. Rights and obligations. d. Completeness
6. In auditing inventories, a major objective relates to the existence assertion. Of the following auditprocedures relating to inventories, which does not support the existence assertion?
a. The auditor reviews the client's inventory-taking instructions for such matters as proper arrangement of
goods, separation of consigned goods, and limits on movements of goods during inventory. b. The auditor observes the client's inventory and performs test counts as appropriate. c. The auditor confirms inventories not on the premises. d. The auditor performs a lower of cost or market test for major categories of inventory.
7. In a manufacturing company, which one of the following audit procedures would give the leastassurance of the valuation of inventory at the audit date?
a. Obtaining confirmation of inventories pledged under loan agreements.
b. Testing the computation of standard overhead rates. c. Examining paid vendors' invoices. d. Reviewing direct labor rates.
8. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to
obtain evidence that a. No goods held on consignment for customers are included in the inventory balance. b. No goods observed during the physical count are pledged or sold. c. All goods owned at year end are included in the inventory balance d. All goods purchased before year end are received before the physical inventory count.
9. Which of the following items should not be included in a physical inventory? a. Materials in transit from vendors. b. Goods in a private warehouse. c. Goods received for repairs under warranty. d. Consignment to an agent.
10. You were engaged to conduct an annual examination for the fiscal year ended October 31, 2006.Because of the expected holiday, you were able to convince your client to take a complete physicalinventory, in which you were present on October 15. Perpetual inventory records are kept and theclient considers a sale to be made in the period in which goods are shipped. You had a sales cut-offtest worksheet prepared. Which item among those listed below will not require an adjusting entry toreconcile the client's detailed inventory record with the physical inventory?
a. b. c. d. Date Goods Shipped Oct 31 Nov 2 Oct 14 Oct 10 Transaction Recorded as Sale Nov 2 Oct 31 Oct 16 Oct 19 Date Inventory Control Credited Oct 31 Oct 31 Oct 16 Oct 12
Answers: 1) B; 2) D; 3) C ; 4) C , 5) A; 6) D; 7) A; 8) C ; 9) C ; 10) D
