III – AUDIT OF INVENTORIES SUMMARY OF PROBLEMS PROBLEM NO. 1 – Computation of adjusted inventory PROBLEM NO. 2 – Computation of adjusted inventory and related accounts (including preparation of adjusting entries) PROBLEM NO. 3 – Computation of adjusted inventory and related accounts (including preparation of adjusting entries) PROBLEM NO. 4 – Effect of inventory errors on SFP and SCI items (including preparation of adjusting entries) PROBLEM NO. 5 – Effect of inventory errors on SFP and SCI items (including preparation of adjusting entries) PROBLEM NO. 6 – Cost flow assumptions PROBLEM NO. 7 – Measurement of inventory and inventory shortage PROBLEM NO. 8 – Write down of inventory to net realizable value PROBLEM NO. 9 – Inventory estimation PROBLEM NO. 10 – Inventory estimation PROBLEM NO. 11 – Roll-forward analysis PROBLEM NO. 12 - Theory
PROBLEM NO. 1 - Ovation Company Unadjusted inventory Add (deduct) adjustments: b) Goods in-transit purchased FOB shipping - not included c) Goods in-transit sold FOB destination - included d) Goods purchased and received already - included e) Goods purchased and received already - not included f) Goods held on consignment - included g) Goods in-transit sold FOB shipping point - included e) Goods returned by customers, received already - not includ Adjusted inventory
2,348,900 134,200 85,400 (104,380) (105,200) 15,000 2,373,920
PROBLEM NO. 2 - Bulls Company Requirement No. 1 Inventory Unadjusted balances Add (deduct) adjustments: a - Goods held on consignment b - Goods out on consignment c - Unshipped goods, erroneously billed d - Goods with constructive delivery e - Goods purchased FOB shipping poi f - WIP sent to outside processor g - Goods returned by customers h - Goods sold FOB destination i - Goods excluded from physical count j - Unrecorded purchases k - Unrecorded freight-in Adjusted balances
Accts. Payable
980,000
586,000
10,048,000
(9,000) 50,000 (15,000) 71,000 30,000 32,000 21,000 27,000 3,000 1,190,000
(9,000) 71,000 56,000 6,000 710,000
(40,000) (47,000) -
Requirement No. 2 a) Accounts payable Inventory
Sales, net
9,000 9,000
b) Inventory P/L summary (Cost of sales)
50,000
c) Sales Acccounts receivable
40,000
d) P/L summary (Cost of sales) Inventory
15,000
e) Inventory Accounts payable
71,000
f) Inventory P/L summary (Cost of sales)
30,000
g) Inventory P/L summary (Cost of sales) Sales returns Acccounts receivable
32,000
h) Inventory P/L summary (Cost of sales)
21,000
i) Inventory P/L summary (Cost of sales)
27,000
j) P/L summary (Cost of sales) Accounts payable
56,000
50,000
40,000
15,000
71,000
30,000
32,000 47,000 47,000
21,000
27,000
56,000
9,961,000
k) Inventory P/L summary (Cost of sales) Accounts payable
3,000 3,000 6,000
PROBLEM NO. 3 - Quezon Corporation
Sales
Per books 5,530,000
Accounts receivable
500,000
Inventory
600,000
Accounts payable Purchases
400,000 3,000,000
1 5 1 5 3 4 6 2 2
Adjustments Inc.(Dec.) (130,000) (150,000) (130,000) (150,000) 64,000 80,000 120,000 18,000 18,000
Per audit 5,250,000 220,000 864,000
418,000 3,018,000
Note : Prepare "T" accounts then post identified adjustments. Adjusting entries 1 Sales (P46,000+P68,000+P16,000) 130,000 Accounts receivable 130,000 To adjust unshipped goods recorded as sales (SI No. 969, 970 and 971) 2 Purchases Accounts payable To take up unrecorded purchases (RR No. 1060)
18,000
3 Inventory P/L summary (Cost of sales) To take up goods under RR No. 1063
64,000
4 Inventory (P100,000/1.25) P/L summary (Cost of sales) To take up unshipped goods under SI No. 968
80,000
18,000
64,000
80,000
5 Sales Accounts receivable To reverse enrty made to record SI No. 966
150,000
6 Inventory (P150,000/1.25) P/L summary (Cost of sales) To take up goods under SI No. 966
120,000
150,000
120,000
PROBLEM NO. 4 - Makati Corporation
a b c d e f
Sales Purchases Inventory COS Effect on Profit Effect on WC over (under) over (under) over (under) over (under) over (under) over (under) (180,000) 180,000 (180,000) (180,000) (300,000) 200,000 (200,000) (100,000) (100,000) 150,000 150,000 600,000 (400,000) 400,000 200,000 200,000 250,000 (250,000) 250,000 250,000 (160,000) 160,000 (160,000) (160,000) 300,000
150,000
(140,000)
290,000
Requirement No. 2 a) Inventory Cost of sales
180,000
b) Accounts receivable Sales Cost of sales Inventory
300,000
c) Accounts payable Inventory
150,000
d) Sales Accounts receivable Inventory Cost of sales
600,000
e) Cost of sales Inventory
250,000
f) Inventory Cost of sales
160,000
180,000
300,000 200,000 200,000
150,000
600,000 400,000 400,000
250,000
160,000
10,000
10,000
PROBLEM NO. 5 - Oh! Darling Corporation Adjusting journal entries a) b) c) d) e)
f) g) h)
Cost of sales Inventory None None Sales Accounts receivable Sales Accounts receivable Inventory Cost of sales Accounts receivable Sales None Accounts receivable Sales Cost of sales Inventory
100,000 100,000
Inventory Sales COS Profit AR WC over (under) over (under) over (under) over (under) over (under) over (under) (100,000) 100,000 100,000 100,000
200,000
200,000
200,000
500,000
500,000
200,000 500,000 500,000 280,000
200,000
200,000
500,000
500,000 (280,000)
(300,000)
(300,000)
(600,000)
(600,000)
(280,000) 280,000
280,000
(280,000)
300,000 300,000
(300,000)
(300,000)
600,000
(600,000)
(600,000) 475,000
600,000 475,000
(475,000) 475,000
475,000 295,000
475,000 (200,000)
(295,000)
95,000
(200,000)
95,000
PROBLEM NO. 6 - Orang Dampuan Co. Dec. 1 Dec. 2 Dec. 3 Dec. 9 Dec. 13 Dec. 15 Dec. 16 Dec. 22 Dec. 26
Units UC 350 820 43 850 (300) 5 55 910 76 960 (86) (1) 910 (60) 72 980 154
TC ### 36,550
50,050 72,960 (910) 70,560 ###
FIFO Composition of inventory, 12/31 Date Units UC TC Dec. 26 72 980 70,560 Dec. 10 76 960 72,960 Dec. 9 6 910 5,460 Total 154 ### Inventory, 12/1 Net Purchases Total goods available fo Inventory, 12/31 Cost of sales
### ### ### ### ###
Moving average
Date
Purchased Units UC TC
Units
COS UC
TC
Dec. 1
Dec. 2 Dec. 3 Dec. 9
55
910
50,050
Dec. 13
76
960
72,960
Dec. 15 Dec. 16 Dec. 22 Dec. 26
300 (5)
(1) 72
910 980
823 823
246,900 (4,115)
86
890
76,540
60
890
53,400
(910) 70,560 ###
372,725
Units
Balance UC
TC
350 43 393 93 98 98 55 153 153
820 850 823 823 823 823 910 855 855
287,000 36,550 323,550 76,650 80,765 80,765 50,050 130,815 130,815
76 229 143 142 82 82 72 154
960 890 890 890 890 890 980 932
72,960 203,775 127,235 126,325 72,925 72,925 70,560 143,485
PROBLEM NO. 7 - Jay Roy Retailing Ltd Requirement No. 1 Baked beans Balance, June 1 Purchase 10 June Purchase 19 June Sales (73,000 cases)
Sales returns Perpetual balance Inventory shortage (squeeze) Physical count Plain flour Balance, June 1 Purchase 03 June Purchase 15 June Purchase 29 June Sales (95,000 boxes)
Perpetual balance Damaged goods Goods in transit Physical count
Quantity 35,000 20,000 47,000 (35,000) (20,000) (18,000) 5,000 34,000 (1,400) 32,600
Price 19.60 19.50 19.70 19.60 19.50 19.70 19.70 19.70 19.70 19.70
Amount 686,000 390,000 925,900 (686,000) (390,000) (354,600) 98,500 669,800 (27,580) 642,220
Quantity 62,500 15,000 20,000 24,000 (62,500) (15,000) (17,500) 26,500 (1,000) (24,000) 1,500
Price 38.40 38.45 38.45 39.00 38.40 38.45 38.45 38.45 38.45 39.00 38.45
Amount 2,400,000 576,750 769,000 936,000 (2,400,000) (576,750) (672,875) 1,032,125 (38,450) (936,000) 57,675
Cost 642,220 57,675
NRV 945,400 57,750
LCN 642,220 57,675 699,895
Requirement No. 2 Baked beans Plain flour Total
Quantity 32,600 1,500
PROBLEM NO. 8 - Bangar Sales Company Computation of units on hand, 7/31: C P Inventory, 7/1 50,000 30,000 70,000 45,000 Purchases, 7/1-15 30,000 Purchases, 7/16-31 150,000 75,000 TGAS (105,000) (50,000) Sales Inventory, 7/31 45,000 25,000
A 65,000 30,000 95,000 (45,000) 50,000
Requirement No. 1
Item
Units in Ending Inventory (FIFO)
Unit cost
Total cost
Est. Selling Est. Cost to Price (a) Sell (b)
NRV
LCN
Inventory Allowanc Total NRV at LCN e
Product C
30,000 15,000 45,000
8.00 6.50
240,000 97,500 337,500
7.20 7.20
0.72 0.72
6.48 6.48
6.48 6.48
194,400 97,200 291,600
194,400 97,200 291,600
45,600 300 45,900
Product P
25,000
10.50
262,500
9.90
0.99
8.91
8.91
222,750
222,750
39,750
Product A
30,000 20,000 50,000
1.25 0.90
37,500 18,000 55,500
1.80 1.80
0.18 0.18
1.62 1.62
1.25 0.90
48,600 32,400 81,000
37,500 18,000 55,500
595,350
569,850
655,500 (a) Existing selling price x .9 (b) Amount in letter (a) x .1
Requirement No. 2 Item
Total cost
Inventory at LCN
Allowance (a)
337,500 262,500 55,500 655,500
291,600 222,750 55,500 569,850
45,900 39,750 85,650
Product C Product P Product A
(a) Inventory at cost - Inventory at LCN Required allowance, 7/31 Recorded allowance, 7/1 Loss on inventory writedown
85,650 (3,000) 82,650
Requirement No. 3 Inventory, 7/1 (at cost) Purchases: Product C [(70,000 units x P6.50)+(30,000 units x P8) Product P (45,000 units x P10.50) Product A (30,000 units x P1.25) Total goods available for sale Inventory, 7/31 (at cost) Cost of sales before loss on inventory writedown Loss on inventory writedown Cost of sales including loss on inventory writedown
658,500 695,000 472,500 37,500
1,205,000 1,863,500 (655,500) 1,208,000 82,650 1,290,650
Alternative computation: Inventory, 7/1 (at LCN) (P658,500 - P3,000) Purchases: Product C [(70,000 units x P6.50)+(30,000 units x P8) Product P (45,000 units x P10.50) Product A (30,000 units x P1.25)
655,500 695,000 472,500 37,500
1,205,000
85,650
Total goods available for sale Inventory, 7/31 (at LCN) Cost of sales including loss on inventory writedown
1,860,500 (569,850) 1,290,650
PROBLEM NO. 9 - Mandaluyong Company Computation of adjusted balances: Inventory Nov. 30 Unadjusted balances Add (deduct) adjustments: a b c d e
Purchases Purchases Up to Nov. 30 Up to Dec. 31
1,425,000
10,125,000
12,000,000
(82,500) -
112,500 (15,000) (30,000) ### ###
(22,500) (30,000) -
1,342,500
10,110,000
11,947,500
Inventory, January 1 Add - Net purchases up to Nov. 30 Total goods available for sale Less - Inventory, Nov. 30 Cost of sales for 11 months
1,312,500 10,110,000 11,422,500 1,342,500 10,080,000
Sales for 11 months ended Nov. 30 Cost of sales for 11 months ended Nov. 30 Gross profit Divide by sales for 11 months ended Nov. 30 Gross profit rate for 11 months ended Nov. 30
12,600,000 (10,080,000) 2,520,000 12,600,000 20.00%
Computation of inventory, 12/31 Inventory, January 1 Add - Purchases for the year ended Dec. 31 Total goods available for sale Less - Cost of sales Cost of sales with profit [(14,400,000 - 150,000) x 8 Cost of sales without profit Estimated inventory, December 31
1,312,500 11,947,500 13,260,000 11,400,000 150,000
11,550,000 1,710,000
PROBLEM NO. 10 - Muntinlupa Company Inventory, December 31, 2011 Add purchases for the period Jan. 1 to April 21 Purchases up to March 31, 2012 Payments for April purchases Unrecorded obligations for April purchases Purchase returns Total goods available for sale Less cost of sales (see computation below) Estimated inventory on the date of fire Less: Proceeds from sale of salvaged merchandis Shipments in transit Inventory fire loss Computation of cost of sales: Sales up to March 31, 2012 Sales for the period April 1 to 21 Accounts receivable, 4.21.12 Accounts receivable for write-off Receipts from customers (P129,500 - P9,500) Total Less Accounts receivable, 3.31.12 Total sales x cost ratio (see computation below) Cost of sales Computation of cost ratio: Inventory, 1/1/10 Net purchases (2010 and 2011) Inventory, 12/31/11 Cost of sales (2010 and 2011) / Net sales (2010 and 2011) Overall cost ratio
750,000 520,000 34,000 106,000 (9,500)
35,000 23,000
650,500 1,400,500 830,500 570,000 58,000 512,000
1,350,000 360,000 80,000 120,000 560,000 400,000
160,000 1,510,000 0.55 830,500
660,000 5,150,000 (750,000) 5,060,000 9,200,000 0.55
PROBLEM NO. 11 - Valenzuela Manufacturing Co. Requirement No. 1 Inventory per books, 11/30 Add understatement of booked inventory Physical inventory,11/30, per client Add (deduct) adjustments Overstatement due to pricing errors Understatement due to footing and extension errors Obsolete materials Inventory per physical count, as adjusted
1,695,960 84,000 1,779,960 (61,600) 4,200 (7,000) 1,715,560
Requirement No. 2 Adjusted balance of inventory, 11/30 Purchases Direct labor Factory overhead (200% of direct labor) Total Less cost of sales: Per books Obsolete materials written off through COS Inventory, 12/31
1,715,560 691,600 338,800 677,600 3,423,560 1,920,800 (7,000)
Requirement No. 3 Inventory, 11/30 (see no. 1) Direct labor Factory overhead (200% of direct labor) Raw materials, 11/30 Purchases Total Less: Materials included in cost of sales Adjusted cost of sales (see no. 2) 1,913,800 Direct labor (386,400) Factory overhead (772,800) Cost of materials on hand and materials included in WIP Labor cost in the WIP: Labor included in 11/30 inventory 280,000 Labor incurred in December 338,800 Total 618,800 Labor included in COS (386,400) Applied factory overhead (200% of direct labor) Total, as shown in no.2
1,913,800 1,509,760
1,715,560 (280,000) (560,000) 875,560 691,600 1,567,160
754,600 812,560
232,400 464,800 1,509,760
PROBLEM NO. 12 - Theory 1 2 3 4 5 6 7 8 9 10 11 12
D A B B C C B D C C C A
