CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
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 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 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 the income statement Not reported in the financial statements Cost of goods sold in the income statement Cost of goods sold in the income statement Interest expense in the income statement Advertising expense in the income statement Office supplies in the current asset section of the balance sheet Not reported in the financial statements Trading securities in the current asset section of the balance sheet
Answer: A
1
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
PROBLEM NO. 2 In connection with your audit of the Alcala Manufacturing Company, you reviewed its inventory as of December 31, 2006 and found the following items: (a) A packing case containing a product costing P100,000 was standing in the shipping room when the physical inventory was taken. It was not included in the inventory because it was marked “Hold for shipping instructions.” The customer’s order was dated December 18, but the case was shipped and the costumer billed on January 10, 2007. (b) Merchandise costing P600,000 was received on December 28, 2006, and the invoice was recorded. The invoice was in the hands of the purchasing agent; it was marked “On consignment”. (c) Merchandise received on January 6, 2007, costing P700,000 was entered in purchase register on January 7. The invoice showed shipment was made FOB shipping point on December 31, 2006. Because it was not on hand during the inventory count, it was not included. (d) A special machine costing P200,000, fabricated to order for a particular customer, was finished in the shipping room on December 30. The customer was billed for P300,000 on that date and the machine was excluded from inventory although it was shipped January 4, 2007. (e) Merchandise costing P200,000 was received on January 6, 2007, and the related purchase invoice was recorded January 5. The invoice showed the shipment was made on December 29, 2006, FOB destination. (f) Merchandise costing P150,000 was sold on an installment basis on December 15. The customer took possession of the goods on that date. The merchandise was included in inventory because Alcala still holds legal title. Historical experience suggests that full payment on installment sale is received approximately 99% of the time. (g) Goods costing P500,000 were sold and delivered on December 20. The goods were included in the inventory because the sale was accompanied by a purchase agreement requiring Alcala to buy back the inventory in February 2007. 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, 2006? a. P1,300,000 c. P1,650,000 b. P 800,000 d. P1,050,000 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) b) c) d) e) f) g)
Included - Merchandise should be included in the inventory until shipped. An exception would be special orders. Excluded - Alcala Manufacturing has the merchandise on a consignment basis and therefore does not possess legal title. Included - The merchandise was shipped FOB shipping point and therefore would be included in the inventory on the shipping date. Excluded - Title may pass on special orders when segregated for shipment. Excluded - The merchandise was shipped FOB destination and was not received until January 3, 2006. Excluded - Historical experience suggests that Alcala will collect the full purchase price, so the sale is recognized even though legal title has not passed. Included - This is not a sale of inventory but instead is a loan with the inventory as collateral.
Answer: A PROBLEM NO. 3 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.
2
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
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 2005.
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.
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, 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 as of December 31, 2006: 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
Suggested Solution: Questions No. 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
3
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
PROBLEM NO. 4 You were engaged by Asingan Corporation for the audit of the company’s financial statements for the year ended December 31, 2006. The company is engaged in the wholesale business and makes all sales at 25% over cost. The following were gathered from the client’s accounting records: SALES Date Reference Balance forwarded 12/27 SI No. 965 12/28 SI No. 966 12/28 SI No. 967 12/31 SI No. 969 12/31 SI No. 970 12/31 12/31
PURCHASES Amount P7,800,000 60,000 225,000 15,000 69,000 102,000
SI No. 971 Closing entry
Date Reference Balance forwarded 12/28 RR #1059 12/30 RR #1061 12/31 RR #1062 12/31 RR #1063 12/31 Closing entry
Amount P4,200,000 36,000 105,000 63,000 96,000 (4,500,000) P -
24,000 (8,295,000) P -
Note: SI = Sales Invoice
RR = Receiving Report
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. 1063 and that no shipments had been made on any Sales Invoices whose number is larger than No. 968. You also obtained the following additional information: a)
Included in the warehouse physical inventory at December 31 were goods which had been purchased and received on Receiving Report No. 1060 but for which the invoice was not received until the following year. Cost was 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 on January 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 ABC Trading Corporation. ABC received the goods, which were sold on Sales Invoice No. 966 terms FOB Destination, the next day.
d) Enroute to the client on December 31 was a truckload of goods, which was received on Receiving Report No. 1064. The goods were shipped FOB Destination, and freight of P2,000 was paid by the client. However, the freight was deducted from the purchase price of P800,000. 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 2. Purchases for the year ended December 31, 2006 a. P4,500,000 c. P5,631,000 b. P5,727,000 d. P4,527,000 3. Accounts receivable as of December 31, 2006 a. P330,000 c. P525,000 b. P555,000 d. P180,000 4. Inventory as of December 31, 2006 a. P1,452,000 b. P1,221,000
c. P1,200,000 d. P1,296,000
5. Accounts payable as of December 31, 2006 a. P600,000 c. P 531,000 b. P627,000 d. P1,827,000
4
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
Suggested Solution: Questions No. 1 to 5
Unadjusted balances AJE No. 1 AJE No. 2 AJE No. 3 AJE No. 4 AJE No. 5 AJE No. 6 Adjusted balances
Sales
Purchases
AR
Inventory
AP
P8,295,000 (195,000) (225,000) -
P4,500,000 27,000 -
P750,000 (195,000) (225,000) -
P900,000 96,000 120,000 180,000
P600,000 27,000 -
P7,875,000
P4,527,000
P330,000
P1,296,000
P627,000
Adjusting entries:
1) Sales (P69,000+P102,000+P24,000) Accounts receivable
P195,000 P195,000
To adjust unshipped goods recorded as sales (SI No. 969, 970 and 971)
2) Purchases Accounts payable
P27,000
P27,000
To take up unrecorded purchases (RR No. 1060)
3) Inventory Cost of sales
P96,000 P96,000
To take up goods under RR No. 1063
4) Inventory (P150,000/1.25) Cost of sales
P120,000 P120,000
To take up unshipped goods under SI No. 968
5) Sales Accounts receivable
P225,000 P225,000
To reverse entry made to record SI No. 966
6) Inventory (P225,000/1.25) Cost of sales
P180,000 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 ended June 30, 2006. The company’s accountant has furnished you not only the copy of trial balance as of June 30, 2006 but also the copy of company’s balance sheet and income statement as at said date. The following data appears in the cost of goods sold section of the income statement: Inventory, July 1, 2005 Add Purchases Total goods available for sale Less Inventory, June 30, 2006 Cost of goods sold
P 500,000 3,600,000 4,100,000 700,000 P3,400,000
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, 2005 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, 2006 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.
5
CEBU CPAR CENTER, INC. e. f.
www.Cebu-CPAR.com
Invoices totaling P108,000 (the corresponding goods for which were received in June) were entered the voucher register, July. 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, 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 adjustment to Retained Earnings of a. P130,000 c. P76,000 b. P184,000 d. P54,000 Suggested Solution: Questions No. 1 to 3
Unadjusted balances Add (deduct) adj.: Item a Item b Item c Item d Item e Item f Net adjustments
Inventory 7/1/05 P500,000
Adjusted balances
Inventory 6/30/06 P700,000
Purchases P3,600,000
130,000 130,000
(54,000) 186,000 108,000 240,000
186,000 74,000 260,000
P630,000
P3,840,000
P960,000
Question No. 4 Inventory, July 1, 2005 Add Purchases Total goods available for sale Less Inventory, June 30, 2006 Cost of goods sold
P 630,000 3,840,000 4,470,000 960,000 P3,510,000
Question No. 5 Compound adjusting entry:
Inventory, 7/1/05 P130,000 Purchases 240,000 Inventory, 6/30/06 260,000 Retained earnings (P130,000 - P54,000) Vouchers payable (P186,000 + P108,000) Cost of sales
P76,000 294,000 260,000
Answers: 1) B; 2) A; 3) D; 4) C, 5) C PROBLEM NO. 6 The following accounts were included in the unadjusted trial balance of Bani Company as of December 31, 2006: Cash Accounts receivable Inventory Accounts payable Accrued expenses
P 481,600 1,127,000 3,025,000 2,100,500 215,500
6
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
During your audit, you noted that Bani held its cash books open after year-end. In addition, your audit revealed the following: 1. Receipts for January 2007 of P327,300 were recorded in the December 2006 cash receipts book. The receipts of P180,050 represent cash sales and P147,250 represent collections from customers, net of 5% cash discounts. 2. Accounts payable of P186,200 was paid in January 2007. The payments, on which discounts of P6,200 were taken, were included in the December 2006 check register. 3. Merchandise inventory is valued at P3,025,000 prior to any adjustments. information has been found relating to certain inventory transactions. a. Goods valued at P137,500 are on consignment with a customer. included in the inventory figure.
The following
These goods are not
b. Goods costing P108,750 were received from a vendor on January 4, 2007. The related invoice was received and recorded on January 6, 2007. The goods were shipped on December 31, 2006, terms FOB shipping point. c.
Goods costing P318,750 were shipped on December 31, 2006, and were delivered to the customer on January 3, 2007. The terms of the invoice were FOB shipping point. The goods were included in the 2006 ending inventory even though the sale was recorded in 2006.
d. A P91,000 shipment of goods to a customer on December 30, terms FOB destination are not included in the year-end inventory. The goods cost P65,000 and were delivered to the customer on January 3, 2007. The sale was properly recorded in 2007. e.
The invoice for goods costing P87,500 was received and recorded as a purchase on December 31, 2006. The related goods, shipped FOB destination were received on January 4, 2007, and thus were not included in the physical inventory.
f.
Goods valued at P306,400 are on consignment from a vendor. These goods are not included in the physical inventory.
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 b. P340,500
c. P334,300 d. P346,700
2. Accounts receivable a. P1,454,300 b. P1,282,000
c. P1,127,000 d. P1,274,250
3. Inventory a. P3,017,500 b. P3,040,000
c. P2,930,000 d. P2,505,000
4. Accounts payable a. P2,395,450 b. P2,307,950
c. P2,286,500 d. P2,301,750
5. Current ratio a. P2.00 b. P1.83
c. P1.84 d. P2.01
Suggested Solution: Questions No. 1 to 4
Unadjusted balances Add (deduct): AJE No. 1 AJE No. 2 AJE No. 3.a AJE No. 3.b AJE No. 3.c AJE No. 3.d AJE No. 3.e Adjusted balances
Cash P481,600
Accounts Receivable P1,127,000
Inventory P3,025,000
Accounts Payable P2,100,500
(327,300) 180,000 P334,300
155,000 P1,282,000
137,500 108,750 (318,750) 65,000 P3,017,500
186,200 108,750 (87,500) P2,307,950
7
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
Adjusting entries:
1)
2)
Accounts receivable (P147,250/.95) P155,000 Sales 180,050 Cash Sales discount (P147,250/.95 x .05)
P327,300 7,750
Cash Purchase discount Accounts payable
P186,200
P180,000 6,200
3.a) Inventory Cost of sales
P137,500
3.b) Inventory Accounts payable
P108,750
3.c) Cost of sales Inventory
P318,750
3.d) Inventory Cost of sales
P 65,000
3.e) Accounts payable Cost of sales
P 87,500
P137,500 P108,750 P318,750 P 65,000 P 87,500
3.f) No adjusting entry Question No. 5 Current assets Cash Accounts receivable Inventory Divide by current liabilities Accounts payable Accrued expenses Current ratio
P 334,300 1,282,000 3,017,500 2,307,950 215,500
P4,633,800 2,523,450 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). The inventory accounts at December 31, 2005, had the following balances. Raw materials Work in process Finished goods
P 650,000 1,200,000 1,640,000
The following are some of the transactions that affected the inventory of the Bolinao Company during 2006. Jan.
8
Bolinao purchased raw materials with a list price of P200,000 and 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 who was overdue in making payment. The unpaid balance on the sale is P15,200. The repossessed merchandise is to be refinished and placed on sale. It is expected that the item can be sold for P24,000 after estimated refinishing costs of P6,800. The normal profit for this item is considered to be P3,200.
Mar.
1
Refinishing costs of P6,400 were incurred on the repossessed item.
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 off the list price was granted as a trade-in allowance. The trade-in item is to be priced to sell at P6,400 as is. The normal profit on this type of inventory is 25% of the sales price.
8
CEBU CPAR CENTER, INC.
www.Cebu-CPAR.com
QUESTIONS: Based on the above and the result of your audit, answer the following: (Assume the client is using perpetual 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 Less refinishing costs Net realizable value Less normal profit Valuation of repossessed inventory
P24,000 6,800 17,200 3,200 P14,000
Repossessed inventory is valued at fair value or best possible approximation of fair value. Since fair value 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. Question No. 3 Journal entries on April 3, 2006: Cash (P24,000 x 20%) Accounts receivable (P24,000 – P4,800) Sales – Repossessed inventory
P 4,800 19,200 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) Less normal profit (P6,400 x 25%) Valuation of trade-in inventory
P6,400 1,600 P4,800
Question No. 5 Accounts receivable (P59,200 - P8,000) Trade-in inventory (see no. 4) Amount to be recorded as sales
P51,200 4,800 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 a series of long-term contracts. Calasiao commenced doing business on January 2, 2006. Construction activities for the first year of operations are shown below. All contract costs are with different customers, and any work remaining at December 31, 2006, is expected to be completed in 2007.
9
CEBU CPAR CENTER, INC.
Project A B C D E
www.Cebu-CPAR.com
Total Contract Price
Billings Through 12/31/06
Collections
Through 12/31/06
Contract Costs Incurred Through 12/31/06
P1,200,000
P 800,000
P 720,000
P 992,000
1,400,000 1,120,000 800,000 960,000 P5,420,000
Estimated Additional Costs to Complete P 268,000
440,000 420,000 271,200 1,084,800 1,120,000 1,020,000 744,000 140,000 100,000 492,000 348,000 820,000 800,000 740,000 60,000 P3,320,000 P3,060,000 P3,239,200 P1,760,800
QUESTIONS: Based on the above and the result of your engagement, determine the following using the percentage-of-completion method: 1. Net realized gross profit for the year 2006 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 as of 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 of December 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-contract method a. P432,800 c. P376,000 b. P436,000 d. P276,000 Suggested Solution: Question No. 1
Project A B C D E Total
Estimated gross profit (loss)* (P60,000) 44,000 376,000 (40,000) 160,000
Percentage of completion** not applicable 20.00% 100.00% not applicable 92.50%
Realized gross profit (loss) (P60,000) 8,800 376,000 (40,000) 148,000 P432,800
* (Total contract price - Total estimated costs) ** (Costs incurred through Dec. 31, 2006 / Total estimated costs) Question No. 2
Project A B D E Total
Costs incurred through 12/31/06 P992,000 271,200 492,000 740,000
Realized gross profit (loss) (P60,000) 8,800 (40,000) 148,000
Construction in Progress P 932,000 452,000 888,000
Progress Billings P 800,000 140,000 820,000
Construction in Progress P 932,000 280,000 452,000 888,000 P2,552,000
Question No. 3 Project A D E
10
Net P132,000 312,000 68,000
CEBU CPAR CENTER, INC. Project Total
Construction in Progress P2,272,000
www.Cebu-CPAR.com Progress Billings P1,760,000
Net P512,000
Question No. 4 Progress billings in excess of costs and recognized profit – Project B (P440,000 - P280,000)
P160,000
Question No. 5 Project A B – not yet completed C D – not yet completed E
Realized gross profit (loss) (P60,000) 376,000 (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. During 2006, 6,000 dozens were produced at an average cost of P360 per dozen. The inventory at the end of the year was as follows: 220 dozens “Class A” @ P360 300 dozens “Class B” @ P360
P 79,200 108,000 P187,200
QUESTIONS: Using the relative sales value method, which management considers as a more equitable basis of cost distribution, answer the following: 1. How much of the total cost should be allocated to “Class A”? a. P1,296,000 c. P1,284,324 b. P1,620,000 d. P 925,714 2. How much of the total cost should be allocated to “Class B”? a. P540,000 c. P 864,000 b. P875,676 d. P1,234,286 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) Divide by total sales price: Class A (6,000 x 60% = 3,600 x P500) Class B (6,000 x 40% = 2,400 x P250) Cost ratio Class A (P1,800,000 x 90%) Class B (P600,000 x 90%)
P2,160,000 P1,800,000 600,000 P1,620,000 P540,000
Alternative computation: Class A (P2,160,000 x 18/24) Class B (P2,160,000 x 6/24)
P1,620,000 P540,000
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2,400,000 90%
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Question No. 3 Class A (220 x P500 x 90%) Class B (300 x P250 x 90%) Inventory, 12/31/06
P 99,000 67,500 P166,500
Question No. 4 Total cost of production (6,000 dozens x P360) Less inventory, 12/31/06 Cost of sales
P2,160,000 166,500 P1,993,500
Question No. 5 Sales of Class A [(3,600 - 220) x P500] Sales of Class B [(2,400 - 300) x P250] Total sales Less cost of sales Gross profit
P1,690,000 525,000 2,215,000 1,993,500 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 Raw materials purchases Direct labor Manufacturing overhead applied (150% of direct labor) Finished goods inventory, 1/1/2006 Selling expenses Administrative expenses
P 720,200 5,232,800 4,900,000 7,350,000 1,240,000 8,112,800 7,377,200
Your examination disclosed the following additional information: a)
Purchases of raw materials Month January – February March – April May – June July – August September – October November – December
Units 55,000 45,000 25,000 35,000 45,000 60,000 265,000
Unit Price P17.76 20.00 19.60 20.00 20.40 20.80
Amount P 976,800 900,000 490,000 700,000 918,000 1,248,000 P5,232,800
b) Data with respect to quantities are as follows: Units Explanation Raw materials Work in process (80% completed) Finished goods Sales, 200,000 units c)
1/1/06 35,000 15,000
12/31/06 ? 25,000 40,000
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 QUESTIONS: 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
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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 35,000 265,000 300,000 50,000 250,000 25,000 225,000 15,000 240,000 40,000 200,000
Raw materials, 1/1/06 Add Purchases Raw materials available for use Less raw materials, 12/31/06 (squeeze) Goods placed in process Less work-in-process, 12/31/06 Goods manufactured Finished goods, 1/1/06 Total goods available for sale Less finished goods, 12/31/06 Goods sold 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) + (15,000 units x P20.40)] Direct labor (25,000 units x 80% x P20a) Factory overhead (25,000 units x 80% x P30b) Work in process, 12/31/06
P 514,000 400,000 600,000 P1,514,000
Labor unit cost (P4,900,000/245,000* units)
P20a
Overhead unit cost (P7,350,000/245,000* units)
P30b
*Equivalent production for labor and overhead Started, finished and sold [(200,000 units - 15,000 units) x 100%] Started, finished and on hand (40,000 units x 100%) Started, and in process (25,000 units x 80%) Total
185,000 40,000 20,000 245,000
Question No. 3 Raw materials [(30,000 units x P20.40) +(10,000 units x P20)] Direct labor (40,000 units x P20a) Factory overhead (40,000 units x P30b) Finished goods inventory, 12/31/06
P 812,000 800,000 1,200,000 P2,812,000
Question No. 4 Raw materials, 1/1/06 Add purchases Raw materials available for use Less raw materials, 12/31/06 (see no. 1) Direct materials used Direct labor Factory overhead Total manufacturing cost Add work-in-process, 1/1/06 Total cost placed in process Less work-in-process, 12/31/06 (see no. 2) Cost of goods manufactured Add finished goods, 1/1/06 Total goods available for sale Less finished goods, 12/31/06 (see no. 3) Cost of goods sold
P
720,200 5,232,800 5,953,000 1,040,000 4,913,000 4,900,000 7,350,000 17,163,000 17,163,000 1,514,000 15,649,000 1,240,000 16,889,000 2,812,000 P14,077,000
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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 uses the first-in, first-out method of calculating the cost of goods sold. The following information concerning two of the company’s products is taken from the month of May:
May 1, beginning inventory
PANS No. of Unit units cost 10,000 P 60
Purchases: May 15 May 25
14,000 6,000
Sales for the month
65 75
20,000 (@ P80)
KETTLES No. of Unit units cost 6,000 P 40 9,000
P 42
10,000 (@ P44)
On May 31, Mangaldan’s suppliers reduced their price from the last purchase price by the following percentages: 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. products 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 b. P653,300
c. P600,000 d. P612,000
2. Total cost of Kettles as of May 31 is a. P210,000 b. P206,000
c. P200,000 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 6,000 units @ P75 Total cost of Pans
P260,000 450,000 P710,000
Question No. 2 Total cost of Kettles (5,000 units @ P42)
P210,000
Question No. 3 Item Pans Kettles
Units 4,000 6,000 5,000
Unit Cost P65 75 42
NRV* P61.20 61.20 33.66
* Estimated selling price – Estimated cost to sell ** Lower of cost or NRV
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Inventory Amount** P244,800 367,200 168,300 P780,300
Both
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Question No. 4 Total cost of inventory (P710,000 + P210,000) Less inventory value (see no. 3) Required allowance for inventory writedown Less allowance, May 1 (6,000 x P0.40) Loss on inventory writedown for May
P920,000 780,300 139,700 2,400 P137,300
Question No. 5 Pans: 10,000 units @ P60 10,000 units @ P65 Kettles: 6,000 units @ P40 4,000 units @ P42 Total cost of sales Alternative computation: Inventory, 5/1: Pans (10,000 units x P60) Kettles (6,000 units x P40) Add purchases: Pans [(14,000 units x P65) + (6,000 x P75)] Kettles (9,000 units x P42) Total goods available for sale Less inventory, 5/31 (at cost) Cost of sales, before inventory writedown
P600,000 650,000 240,000 168,000
P600,000 240,000 1,360,000 378,000
P1,250,000
408,000 P1,658,000
P 840,000
1,738,000 2,578,000 920,000 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 wholesale business, for the fiscal year ended June 30, 2006, you determined that its internal control system was good. Accordingly, you observed the physical inventory at an interim date, May 31, 2006 instead of at June 30, 2006. You obtained the following information from the company’s general ledger. Sales for eleven months ended May 31, 2006 Sales for the fiscal year ended June 30, 2006 Purchases for eleven months ended May 31, 2006 (before audit adjustments) Purchases for the fiscal year ended June 30, 2006 Inventory, July 1, 2005 Physical inventory, May 31, 2006
P1,344,000 1,536,000 1,080,000 1,280,000 140,000 220,000
Your audit disclosed the following additional information. (1) Shipments costing P12,000 were received in May and included in the physical inventory but recorded as June purchases. (2) Deposit of P4,000 made with vendor and charged to purchases in April 2006. shipped in July 2006.
Product was
(3) A shipment in June was damaged through the carelessness of the receiving department. This shipment 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 auditing procedure is to test the reasonableness of the year-end inventory by the application of gross profit ratio. Based on the above and the result of your audit, you are to provide the answers to the following: 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
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3. The June 30, 2006 inventory using the gross profit method is a. P264,000 c. P268,000 b. P340,000 d. P260,000 Suggested Solution: Question No. 1 Sales for 11 months ended 5/31/06 Less cost of sales for 11 months ended 5/31/06: Inventory, July 1, 2005 Add adjusted purchases: Unadjusted Item no. 1 Item no. 2 Goods available for sale Less inventory, 5/31/06 Gross profit Divide by sales for 11 months ended 5/31/06 Gross profit rate for 11 months ended 5/31/06
P1,344,000 P 140,000 P1,080,000 12,000 (4,000)
1,088,000 1,228,000 220,000
1,008,000 336,000 1,344,000 25%
Question No. 2 Sales for the fiscal year ended June 30, 2006 Less sales for 11 months ended May 31, 2006 Sales for June, 2006 Less sales without profit Sales with profit Multiply by cost ratio (100% - 25%) Cost of sales with profit Add cost of sales without profit Total cost of sales for June, 2006
P1,536,000 1,344,000 192,000 16,000 176,000 75% 132,0000 16,000 P 148,000
Question No. 3 Inventory, 7/1/05 Add adjusted purchases: Unadjusted Item no. 2 Total goods available for sale Less cost of sales: Sales without profit Sales with profit [(P1,536,000 - P16,000) x 75%]
P 140,000 P1,280,000 (4,000)
1,276,000 1,416,000
16,000 1,140,000
Inventory, 6/30/06
1,156,000 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 building and inventory of goods in process; some of the equipment was saved. After the fire, a physical inventory was taken. finished goods at P620,000.
The material was valued at P750,000 and the
The inventories on January 1, 2006 consisted of: Materials Goods in process Finished goods Total
P 310,000 1,215,000 1,700,000 P3,225,000
A review of the accounting records disclosed that the sales and gross profit on sales for the last three years were: 2003 2004 2005
Sales P8,000,000 7,600,000 5,000,000
Gross profit P2,400,000 2,215,000 1,776,000
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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 by fire a. 31.55% c. 35.52% b. 32.76% d. 36.00% 2. Total cost of goods placed in process a. P2,710,000 b. P973,500
c. P3,925,000 d. P4,375,000
3. Total cost of goods manufactured a. P3,133,500 b. P 973,500
c. P 854,400 d. P3,014,400
4. Inventory of goods in process lost a. P 791,500 b. P1,360,600
c. P 119,100 d. P2,951,500
Suggested Solution: Question No. 1 Gross profit Divide by Sales Gross profit rate Average gross profit rate
2003 P2,400,000 P8,000,000 30.00%
2004 P2,215,000 P7,600,000 29.14%
2005 P1,776,000 P5,000,000 35.52%
31.55%
Questions No. 2 to 4 Raw materials, 1/1/06 Purchases Freight-in Raw materials available for use Raw materials, 3/31/06 Raw materials used Direct labor Factory overhead (P1,000,000 x 80%) Total manufacturing cost Work-in-process, 1/1/06 Total cost placed in process Less work-in-process, 3/31/06 (squeeze) Cost of goods manufactured Finished goods, 1/1/06 Total goods available for sale Less finished goods, 3/31/06 Cost of goods sold (P3,000,000 x 68.45%)
P 310,000 1,250,000 100,000 1,660,000 (750,000) 910,000 1,000,000 800,000 2,710,000 1,215,000 3,925,000 (2,951,500) 973,500 1,700,000 2,673,500 (620,000) P2,053,500
(2) (4) (3)
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: Beginning inventory Sales Purchases Freight in Mark ups Mark up cancellations Markdown Markdown cancellations
Cost P1,987,200 4,688,640 94,560
Retail P2,760,000 7,812,000 6,512,000 720,000 120,000 240,000 40,000
Villasis Corp. uses the retail inventory method in estimating the values of its inventories and costs.
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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 b. P5,494,812
c. P5,357,614 d. P4,685,117
Suggested Solution: Question No. 1 Beginning inventory Purchases Freight in Net mark up (P720,000 - P120,000) Net mark down (P240,000 - P40,000) Goods available for sale
Cost P1,987,200 4,688,640 94,560 ___________ P6,770,400
Cost ratio (P6,770,400/P9,672,000)
Retail P2,760,000 6,512,000 720,000 120,000 P9,672,000
70%
PAS 2 par. 22 states that the retail inventory method is often used in the retail industry for measuring inventories of large numbers of rapidly changing items with similar margins for which it is impracticable 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 takes into consideration inventory that has been marked down to below its original selling price. An average percentage for each retail department is often used. Previously, the conventional approach (lower of average cost or market valuation) is often used if the problem 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 inventory that has been marked down to below its original selling price, the cost ratio was computed using the average method. Question No. 2 Goods available for sale at retail Less sales Ending inventory, at retail
P9,672,000 7,812,000 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 Less ending inventory, at cost Estimated cost of sales
P6,770,400 1,302,000 P5,468,400
Answers: 1) C; 2) D; 3) C; 4) A PROBLEM NO. 15 Select the best answer for each of the following: 1. Otso Manufacturing Corporation mass produces eight different products. The controller, who is interested 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.
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2. Which of the following control procedures would most likely be used to maintain accurate perpetual inventory 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 perpetual inventory 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’s assertion 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 audit procedures 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 least assurance 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 physical inventory, in which you were present on October 15. Perpetual inventory records are kept and the client considers a sale to be made in the period in which goods are shipped. You had a sales cutoff test worksheet prepared. Which item among those listed below will not require an adjusting entry to reconcile 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
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