Chapter-5 Homework Inventories

PROBLEM 1.
You were engaged in th audit of inventory of GOODWILL Company as of December 31,

2019. The company is on a physical inventory basis. The physical inventory was
actually taken on December 31, 2019. You have observed the taking of the physical
inventory. As taken, the physical inventory included only merchandise received through
December 31, 2019.
Listed overleaf are extracted from the compnay’s purchases journal during the last few
days of 2019 and the first few days of Year 2020.
Date Date Invoice

FOB term Amount
Shipped Received Number
December 2019
Destination 12/23/2019 12/26/2019 4231 P35,000
Shipping Point 12/24/2019 12/30/2019 2108 16,000
Shipping Point 12/24/2019 12/31/2019 1234 13,200
Destination 12/24/2019 12/29/2019 0143 28,000
Shipping Point 12/26/2019 01/03/2020 6657 26,100
Destination 12/26/2019 12/31/2019 5432 19,200
Shipping Point 12/26/2019 01/04/2020 0987 14,300
Shipping Point 01/03/2020 01/04/2020 3671 15,920
January 2020
Destination 12/26/2019 01/03/2020 3625 P30,000
Shipping Point 12/27/2019 12/30/2019 4327 13,500
Destination 12/27/2019 12/29/2019 9001 4,200
Shipping Point 12/28/2019 01/04/2020 9981 16,000
Destination 12/29/2019 12/31/2019 8934 6,200
Shipping Point 01/03/2020 01/10/2020 7895 21,100
The physical inventory list includes P85,000 of merchandise received on consignment

from a supplier.
The company has other goods shipped out on consignment that were not included in
the physical inventory. Verification with the consignees indicated that of the goods
costing P120,000, P60,000 were still unsold as of December 31, 2019. Your
examination disclosed that the consigned goods were recorded as sales upon shipment
at a mark-up rate of 25% on sales.
Shipments of December 31, 2019 with total billed price of P80,000 were properly
recorded in the books as sales. You computed the cost of these sales to be P60,000.
REQUIRED:
(a) Prepare the necessary audit adjustments as at December 31, 2019. The
purchases account had already been transferred to cost of sales, while the
inventory per list of the client had already been set up.
Chapter 5
Audit of inventories
Homework
PROBLEM 2
You have been engaged for the audit of the Bulls Company for the year ended
December 31, 2019. The Bulls Company is engaged in the wholesale chemical
business and makes all sales at 25% over cost.
Following are portions of the client’s sales and purchases accounts for the calendar
year 2019:
SALES
Date Reference Amount Date Reference Amount
12/31 Closing entry P699,860 Balance forwarded P658,320
12/27 SI # 965 5,195
12/28 SI # 966 19,270
12/28 SI # 967 1,302
12/31 SI # 969 5,841
12/31 SI # 970 7,922
12/31 SI # 971 2,010
P699,860 P699,860
PURCHASES
Date Reference Amount Date Reference Amount
Balance forwarded P360,300 12/31 Closing entry 385,346
12/28 RR # 1059 3,100
12/30 RR # 1061 8,965
12/31 RR # 1062 4,861
12/31 RR # 1063 8,120
P385,346 P385,346
You observed the physical inventory of goods in the warehouse on December 31, 2019
and were satisfied thast it was properly taken. The inventory list per count indicates
total inventory of P98,000.
When performing a sales and purchases cut-off test, you found that at December 31,
2019, the last receiving report that had been used was No. 1063 and that no shipments
have been made on any sales invoices with numbers larger than no. 968. You also
obtained the additional informatoin below:
a. Included in the warehouse physical inventory at December 31, 2019 were
chemicals that had been purchased and received on receiving report no. 1060
but for which an invoice was not received until 2020. Cost was P2,183.
b. In the warehouse at December 31, 2019, were goods that had been sold and
paid for by the customer but which were not shipped out until 2020. They were
all sold on sales invoice no. 965 and were not inventoried.
c. On the evening of December 31, 2019, there were two cars on the Bulls
Company siding:
Chapter 5
Homework
 Car PRM 993 was unloaded on January 2, 2020 and received on

receiving report no. 1063. The freight was paid by the vendor.
 Car UMX 410 was loaded and sealed on December 31, 2019, and left the
company’s siding on January 2, 2020. The sales price was P12,700 and
the freight was paid by the customer. This order was sold on sales invoice
no. 968.
d. Temporarily stranded at December 31, 2019, on a railrod siding were two cars of
chemical enroute to the Lakers Co. They were sold on sales invoice no. 966 and
the terms were FOB destination.
e. En route to the Bulls Company on December 31, 2019, was a truckload of
material that was received on receiving report no. 1064. The material was
shipped FOB destination and freight of P750 was paid by the Bulls Company.
However, the freight was deducted from the purchase price of P9,750.
f. Included in the physical inventory were chemical exposed to rain while in transit
and deemed unsalable. Their invoice cost was P11,250, and freight charges of
P1,350 had been paid on the chemicals.
REQUIRED:
1. Compute the correct balance of inventory at December 31, 2019.
2. Prepare the audit adjusting entries as a result of the foregoing.
PROBLEM 3.
The BILLY CORPORATION is an importer and wholesaler. Its merchandise is
purchased from a number of suppliers and is warehoused by Golden Corp. Until sold to
consumers.
In conducting the audit of the year ended June 30, 2019, you determined that the
system of internal control was good. Accordingly, you observed the physical inventory
at an interim date, May 31, 2019, instead of at year-end.
You obtained the following information form the general ledger:
Inventory, July 1, 2018 875,000

Physical inventory, May 31, 2019 950,000
Sales for 11 months ended May 31, 2019 8,400,000
Sales for year ended June 30, 2019 9,600,000
Purchases for 11 months ended May 31, 2019 6,750,000
(before audit adjustments)
Purchases for year ended June 30, 2019 (before 8,000,000
audit adjustments)
The CPA’s audit disclosed the following information:
Shipments received in May and included in physical inventory P75,000

Chapter 5
Homework
but recorded as June purchases

Shipments received in unsalable condition and excluded from
physical inventory. Credit memos had not been received nor
had charge backs to vendors been recorded.
Total at May 31, 2019 10,000
Total at June 30, 2019 ( including the May recorded
15,000
chargebacks)
Deposit made with vendor and charged to purchases in April,
20,000
2019; product was shipped, in July 2019
Deposit made with vendor and charged to purchases in May
2019; product was shipped FOB destination, on May 29, 2019
55,000
and was included in May 31, 2019 physical inventory as goods
in transit.
Through the carelessness of the receiving department a June
shipment was damaged by rain. This shipment was later sold in 100,000
June at its cost of
In audit engagements, in which interim physical inventories are observed, a frequently

used auditing procedure is to test the resonableness of the year-end inventory by its
applicaiton of gross profit ratios.
REQUIRED:
1. Compute the gross profit for 11 months ended May 31, 2019.
2. Compute the cost of goods sold during June 2019.
3. Compute the inventory at June 30, 2019 using the gross profit method.
4.

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PROBLEM 1.

You were engaged in th audit of inventory of GOODWILL Company as of December 31,

Date Date Invoice

The physical inventory list includes P85,000 of merchandise received on consignment

 Car PRM 993 was unloaded on January 2, 2020 and received on

You obtained the following information form the general ledger:

Inventory, July 1, 2018 875,000

The CPA’s audit disclosed the following information:

Shipments received in May and included in physical inventory P75,000

but recorded as June purchases

In audit engagements, in which interim physical inventories are observed, a frequently

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