Auditing and Assurance Concepts and Principles

Problems on Inventories

PROBLEM 1
The TILL CORPORATION has adjusted and closed its books at the end of 2018. The company arrives at its
inventory position by a physical count taken on December 31 of each year. In March 2019, the following
errors were discovered.
a.) Merchandise that cost P7,500 was sold for P10,200 on December 30, 2018. The order was shipped
December 31, 2018, with terms FOB shipping point. The merchandise was not included in the ending
inventory. The sale was recorded on January 15, 2019, when the customer made payment on the sale.
b.) On January 2, 2019, Till Corporation received merchandise that had been shipped to it on December
31, 2018. The terms of the purchase were FOB shipping point. Cost of the merchandise was P5,250.
The purchase was recorded and the goods included in the inventory on January 2, 2019.
c.) On January 8, 2018, merchandise that had been included in the ending inventory was returned to Till
because the consignee had not been able to sell it. The cost of this merchandise was P3,600 with a
selling price P5,400.
d.) Merchandise costing P2,250, located in a separate warehouse, was overload and excluded from the
2018 inventory count.
e.) On December 27, 2018, Till Corporation purchased merchandise costing P3,525 from a supplier. The
order was shipped December 28 (terms FOB destination) and was still “in transit” on December 31.
Because the invoice was received on December 31, the purchase was recorded in 2018. The
merchandise was not included in the inventory count.
f.) The corporation failed to make an entry for a purchase on account of P2,505 at the end of 2018,
although it included this merchandise in the inventory count. The purchase was recorded when
payment was made to the supplier in 2019.
g.) The corporation included in its 2018 ending inventory merchandise with a cost of P4,050. This
merchandise had been custom built and was being held according to the customer’s written request
until the customer could come and pick up the merchandise. The sale for P5,475, was recorded in
2019.

Required:
Give the entry in 2019 (2018 books are closed) to correct each error. Assume that the errors were made
during 2019, all amounts are material, and the periodic inventory system is used.

PROBLEM 2
WALLNUT Co. asks you to review its December 31, 2018 inventory values and prepare the necessary
adjustments to the books. The following information is given to you.
1. Wallnut uses the periodic method of recording inventory. A physical count reveals P704,670 of
inventory on hand at December 31, 2018.
2. Not included in the physical count of inventory is P31,260 of merchandise purchase on December
15 from Benggay. This merchandise was shipped FOB shipping point on December 29 and arrived
in January. The invoice arrived and was recorded on December 31.
3. Included in inventory is merchandise sold to Bubbly on December 31, FOB destination. This
merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale
on account for P38,400 on December 31. The merchandise cost P22,050, and Bubbly received it
on January 3.
 4. Included in inventory was merchandise received from Doodle on December 31 with an invoice
price of P46,890. The merchandise was shipped FOB destination. The invoice, which has not yet
arrived has not been recorded.
5. Not included in inventory is P25,620 of merchandise purchased from Maudy Company. This
merchandise was received on December 31 after the inventory had been counted. The invoice
was received on December 30.
6. Included in inventory was P31,314 of inventory held by Wallnut in consignment from Jaka
Corporation.
7. Included in inventory is merchandise sold to Simson FOB shipping point. This merchandise was
shipped after it was counted. The invoice was prepared and recorded as a sale for P56,700 on
December 31. The cost of this merchandise was P34,560, and Simson received the merchandise
on January 5.
8. Excluded from inventory was a carton labelled “Please accept for credit”. This carton contains
merchandise costing P4,500 which had been sold to a customer for P7,800. No entry had been
made to the books to reflect the return, but none of the returned merchandise seemed
damaged.
Required:
a. Compute the correct inventory balance for Wallnut at December 31, 2018.
b. Prepare any correcting entries to adjust inventory and related accounts to their proper amounts at
December 31, 2018. Assume the books have not been closed.

PROBLEM 3
In testing the sales cut-off for the BIG LOVE COMPANY in connection with an adult for the year ended October
31, 2018 you find the following information.

A physical inventory was taken as the close of business on October 31, 2018. All customers are within a three-
day delivery area of the company’s plant. The unadjusted balances of sales and inventories are P7,500,000
and P330,000, respectively.

Invoice FOB terms Date shipped Date recorded sales Cost

number
6671 Destination Oct 20 Oct 31 P3,000 P2,700
6672 Shipping point Oct 31 Nov 2 7,500 6,000
6673 Shipping point Oct 25 Oct 31 5,400 3,600
6674 Destination Oct 31 Oct 29 12,600 9,300
6675 Destination Oct 31 Nov 2 27,600 24,000
6676 Shipping point Nov 2 Oct 23 19,500 15,300
6677 Shipping point Nov 5 Nov 6 22,500 17,400
6678 Destination Oct 25 Nov 3 11,700 6,000
6679 Shipping point Nov 4 Oct 31 25,800 24,600
6680 Destination Nov 5 Nov 5 15,000 12,000

Based on the foregoing information, compute the October 31, 2018 adjusted balances of the following
accounts:
1. Sales
a. P7,461,300 c. P7,449,600
b. P7,455,900 d. P7,487,100
 2. Inventories
a. P354,000 c. P348,000
b. P363,300 d. P357,300

PROBLEM 4
You are conducting a financial statement audit of the BEVERLY HILLS CORP. for the year ended December 31,
2018. You have observed the taking of physical inventory and have noted that all merchandise actually
received up to the close of business on December 28, 2018, has been recorded on the inventory sheets. The
total invoice cost of the items included in the physical count is P300,000.

The following purchase invoices have been recorded in the Purchases journal as follows.
December 2018
Invoice number Amount invoice date FOB term Date received
251 P10,248 Dec 23 Destination Dec 24
252 8,136 Dec 23 Destination Dec 29
253 3,123 Dec 26 Shipping point Dec 30
254 12,600 Dec 26 Shipping point Jan 5
255 13,833 Jan 2 Destination Dec 31
256 6,309 Dec 31 Destination Jan 4
257 3,486 Dec 27 Shipping point Dec 21
258 21,162 Jan 8 Shipping point Jan 2
259 34,866 Dec 22 Destination Dec 28
260 11,331 Dec 28 Destination Dec 27

January 2019
261 P3,672 Dec 28 Destination Jan 4
262 11,391 Dec 30 Destination Dec 28
263 17,712 Dec 29 Shipping point Dec 31
264 14,700 Jan 2 Shipping point Jan 5
265 41,400 Dec 28 Shipping point Jan 4
266 17,877 Dec 30 Destination Jan 6

Required:
1. Auditor’s adjusting entries, if any, required by the above information.
2. Show the detailed composition of the value of the inventory to be used on the financial statements.
Transportation-in charges on purchases averaged 6% during the year and are to be included in the
inventory valuation.

PROBLEM 5
The GOAT COMPANY reviewed its inventories and found the following items:

1. In the shipping room was a product costing P13,400 when the physical count was taken. Because it was
marked "Hold for shipping instructions," it was not included in the count. The customer order was dated
December 15, but the product was shipped and the customer billed on January 4, 2019.
2. On December 27, 2018, merchandise costing P11,648 was received and recorded. The invoice
accompanying the merchandise was marked "on consignment."

3. The company received merchandise costing P4,625 on January 2, 2019. The invoice, which was recorded on
January 3, 2019, showed shipment was made under FOB shipping point on December 31, 2018. The
merchandise was not included in the inventory because it was not on hand when the physical count was
taken.

4. A product, fabricated to order for a particular customer, was completed and in the shipping room on
December 31. Although it was shipped on January 5, 2019, the customer was billed on December 31, 2018,
and it was excluded from the inventory.

5. Merchandise costing P16,666 was received on January 5, 2019, and the related purchase invoice was
recorded January 6. The shipment of this merchandise was made on December 31, 2018, FOB destination.

6. A product costing P150,000 was sold on an installment basis on December 10, 2018. It was delivered to the
customer on that date. The product was included in inventory because Goat still holds legal title. The
company's experience suggests that full payment on installment sales is reasonably assured.

7. An item costing P65,000 was sold and delivered to the customer on December 29, 2018. The goods were
included in the inventory because the sale was with a repurchase agreement that requires Goat to buy back
the inventory on January 15, 2019.

PROBLEM 6
The management of PIG, INC. has engaged you to assist in the preparation of year-end (December 31)
financial statements. You are told that on November 30, the correct inventory level was 145,730 units. During
the month of December, sales totaled 138,630 units including 40,000 units shipped on consignment to AA
Corp. A letter received from AA indicates that as of December 31, it has sold 15,200 units and was still trying
to sell the remainder.

A review of the December purchase orders to various suppliers shows the following:
Purchase Invoice date Quantity in Date Shipped Date Terms
Order Date Units Received
12/13/18 01/02/19 4,200 01/02/19 01/05/19 FOB destination
12/05/18 01/02/19 3,600 12/17/18 12/22/18 FOB destination
12/06/18 01/03/19 7,900 01/05/19 01/07/19 FOB destination
12/18/18 12/20/18 8,000 12/29/18 01/02/19 FOB destination
12/22/18 01/05/19 4,600 01/04/19 01/06/19 FOB destination
12/27/18 01/07/19 3,500 01/05/19 01/07/19 FOB destination

1. Goods purchased during December totaled

A. 11,600 units
B. 15,800 units
C. 19,500 units
D. 8,000 units
2. How many units were sold during December?
A. 138,630 units
B. 113,830 units
C. 98,630 units
D. 153,830 units

3. How many units should be included in Pig, Inc's inventory at December 31, 2018?
A. 18,700 units
B. 39,900 units
C. 43,500 units
D. 47,700 units

4. Purchase cutoff procedures should be designed to test whether all inventory

A. Purchased and received before year-end was paid for.
B. Ordered before year-end was received.
C. Purchased and received before year-end was recorded.
D. Owned by the company is in the possession of the company at year-end.

5. The audit of year-end physical inventories should include steps to verify that the client's purchases and
sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in
the physical count at year-end was not recorded as a
A. Sale in the subsequent period.
B. Purchase in the current period.
C. Sale in the current period.
D. Purchase return in the subsequent period.

PROBLEM 7
The following audited balances pertain to OWL COMPANY.
Accounts payable:
January 1, 2018 P286,924
December 31, 2018 737,824
Inventory balance:
January 1, 2018 815,386
December 31, 2018 488,874
Cost of goods sold – 2018 1,859,082

How much was paid by Owl Company to its suppliers in 2018?

A. P2,636,494
B. P1,081,670
C. P1,734,694
D. P1,983,470

PROBLEM 8
The following information was provided by the bookkeeper of COW, INC.:
1. Sales for the month of June totaled 286,000 units.

2. The following purchases were made in June:

Date Quantity Unit Cost

June 4 50,000 P13.00
8 62,500 12.50
11 75,000 12.00
24 70,000 12.40

3. There were 108,500 units on hand on June i with a total cost of P1,450,000.

Cow, Inc. uses a periodic FIFO costing system. The company's gross profit for June was P2,058,750.

1. How many units were on hand on June 30?

A. 80,000
B. 177,500
C. 28,500
D. 149,000

2. What is the FIFO cost of the company's inventory on June 30?

A. P1,025,000
B. P1,016,230
C. P988,000
D. P1,069,124

3. What is the total cost of goods sold in June?

A. P3,632,200
B. P3,617,900
C. P3,580,126
D. P3,661,250

4. The 286,000 units sold in June had a unit selling price of

A. P20
B. P13
C. P12.70
D. P7.20

5. An essential procedural control to ensure the accuracy of the recorded inventory quantities is
A. Performing a gross profit test.
B. Testing inventory extensions.
C. Calculating unit costs and valuing obsolete or damaged inventory items in accordance with inventory
policy.
D. Establishing a cutoff for goods received and shipped.

PROBLEM 9
In your audit of the December 31, 2018, financial statements of CHICKEN, INC., you found the following
inventory-related transactions.

a. Goods costing P50,000 are on consignment with a customer. These goods were not included in the physical
count on December 31, 2018.

b. Goods costing P16,500 were delivered to Chicken, Inc. on January 4, 2019. The invoice for these goods was
received and recorded on January 10, 2019. The invoice showed the shipment was made on December 29,
2018, FOB shipping point.

c. Goods costing P21,640 were shipped FOB shipping point on December 31, 2018, and were received by the
customer on January 2, 2019. Although the sale was recorded in 2016, these goods were included in the 2018
ending inventory.

d. Goods costing P8,640 were shipped to a customer on December 31, 2018, FOB destination. These goods
were delivered to the customer on January 5, 2019, and were not included in the inventory. The sale was
properly taken up in 2019.

e. Goods costing P8,600 shipped by a vendor under FOB destination term, were received on January 3, 2019,
and thus were not included in the physical inventory. Because the related invoice was received on December
31, 2018, this shipment was recorded as a purchase in 2018.

f. Goods valued at P51.000 were received from a vendor under consignment term. These goods were included
in the physical count.

g. Chicken, Inc. recorded as a 2016 sale a P64,300 shipment of goods to a customer on December 31, 2018,
FOB destination. This shipment of goods costing P37,500 was received by the customer on January 5, 2019,
and was not included in the ending inventory figure.

Prior to any adjustments, Chicken, Inc.'s ending inventory is valued at P445,000 and the reported net income
for the year is P1,648,000.

1. Chicken's December 31, 2018, inventory should be increased by

A. P8,000
B. P40,000
C. P66,000
D. P61,640

2. Which of the errors described in "a to g" will not affect the company's net income for 2018?
A. Item a
B. Item g
C. Item e
D. Item b

3. What is Chicken's adjusted net income for the year 2018?

A. P1,565,800
B. P1,607,160
C. P1,615,800
D. P1,666,800

4. Purchase cutoff procedures test the cutoff and completeness assertions. A company should include goods
in its inventory if it
A. Has sold the goods.
B. Holds legal title to the goods.
C. Has physical possession of the goods.
D. Has paid for the goods.

5. When title to merchandise in transit has passed to the audit client, the auditor engaged in the performance
of a purchase cutoff will encounter the greatest difficulty in gaining assurance with respect
to the
A. Quantity
B. Quality
C. Price
D. Terms

PROBLEM 10
You are engaged in an audit of the KURATSO CO. for the year ended December 31, 2018. To reduce the
workload at year-end, the company took its annual physical inventory under your observation on November
30, 2018.

The company's inventory account, which includes raw materials and work in process, is on a perpetual basis
and it uses the first-in, first- out method of pricing. It has no finished goods inventory.

The company's physical inventory revealed that the book inventory of P181,710 was understated by P9,000.
To avoid distorting the interim financial statements, the company decided not to adjust the book inventory
until year-end except for obsolete inventory items. Your audit revealed this information about the November
30 inventory:

(a) Pricing tests showed that the physical inventory was overpriced by P6,600.
(b) Footing and extension errors resulted in a P450 understatement of the physical inventory.
(c) Direct labor included in the physical inventory amounted to P30,000. Overhead was included at
the rate of 200% of direct labor. You determined that the amount of direct labor was correct and the
overhead rate was proper.
(d) The physical inventory included obsolete materials recorded at P750. During December, these
materials were removed from the inventory account by a charge to cost of sales.

Your audit also disclosed the following information about the December 31, 2018, inventory.

(e) Total debits to certain accounts during December are:

Purchases P74,100
 Direct labor 36,300
Manufacturing overhead expense 75,600
Cost of sales 205,800

(f) The cost of sales of P205,800 included direct labor of P41,400.

(g) Normal scrap loss on established product lines is negligible. However, a special order started and
completed during December had excessive scrap loss of P2,400, which was charged to Manufacturing
overhead expense.

1. What is the inventory per physical count on November 30, 2018?

A. P183,810
B. P190,710
C. P172,710
D. P181,710

2. What is the correct amount of the physical inventory at November 30, 2018?
A. P183,810
B. P190,710
C. P165,810
D. P184,560

Without prejudice to your answers to questions 1 and 2, assume that the correct amount of the inventory at
November 30, 2018, was P173,100.
3. What is the materials inventory at December 31, 2018?
A. P74,700
B. P76,350
C. P73,950
D. P78,750

4. What is the amount of direct labor cost included in the December 31, 2018, inventory?
A. P30,000
B. P24,900
C. P66,300
D. P41,400

5. What is the correct inventory at December 31, 2018?

A. P148,650
B. P198,150
C. P149,400
D. P151,050

PROBLEM 11
ZEBRA MUSIKAHAN CO. sells musical instruments. In your audit of the company's financial statements for the
year ended December 31, 2018, you have gathered the following data concerning inventory.
At December 31, 2017, the balance in Zebra's Inventory account was P502,000, and the Allowance for
Inventory Write down had a balance of P32,000. The relevant inventory cost and market data at December
31, 2018, are summarized in the schedule below.

Costs Replacement Sales Net Realizable Normal

Costs Price Value Profit
Guitars P89,000 P86,000 P91,500 P87,000 P6,400
Xylophones 94,000 92,000 93,000 85,000 7,440
Trumpets 125,000 135,000 129,000 111,000 11,610
Violins 194,000 114,000 205,000 197,000 20,500
Total P502,000 P427,000 P518,500 P480,000 P45,950

1.What is the proper balance in the Allowance for Inventory write-down at December 31, 2018?
A. P75,000
B. P22,000
C. P32,000
D. P25,000

2. The adjusting entry on December 31, 2018, to arrive at the proper allowance balance should be
A. Allowance for inventory writedown 7,000
Gain on inventory recovery 7,000
B. Loss on inventory writedown 7,000
Allowance for inventory writedown 7,000
C. Allowance for inventory writedown 3,000
Gain on inventory recovery 3,000
D. Loss on inventory writedown 43,000
Allowance for inventory writedown 43,000

PROBLEM 12
MALOX Specialty Company manufactures three models of gear shift components for bicycles that are sold to
bicycle manufacturers, retailers, and catalog outlets. Since its inception, Malox has used normal absorption
costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. The balances of the
inventory accounts at the end of Malox's fiscal year, November 30, 2018, are shown below. The inventories
are stated at cost before any year-end adjustments.

Finished goods P1,941,000

Work in process 337,500
Raw materials 792,000
Factory supplies 207,000

The following information relates to Malox’s inventory and operations.

1. The finished goods inventory consists of the items analyzed below
Cost NRV
Down tube shifter
Standard model P202,500 P201,000
Click adjustment model 283,500 267,000
 Deluxe model 324,000 330,000
Total down tube shifters 810,000 789,000

Bar end shifter

Standard model 249,000 270,150
Click adjustment model 297,000 292,650
Total bar end shifters 546,000 562,800

Head tube shifter

Standard model 234,000 232,950
Click adjustment model 351,000 590,850
Total head tube shifters 585,000 590,850
Total finished goods P1,941,000 P1,951,650

2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment

3. Three-quarters of the bar end shifter finished goods inventory had been pledged as collateral for a bank
loan.

4. One-half of the raw materials balance represents derailleurs acquired at a contracted price 20 percent
above the net realizable value. The net realizable value of the rest of the raw materials is P382,200.

5. The total net realizable value of the work in process inventory is P326,100.
6. Included in the cost of factory supplies are obsolete items with historical cost of P12,600. The net realizable
value of the remaining factory supplies is P197,700.

7. Malox applies the lower of cost or net realizable value method to each of the three types of shifters in
finished goods inventory. For each of the other three inventory accounts, Malox applies the lower of cost or
net realizable value method to the total of each inventory account.

8. Consider all amounts presented above to be material in relation to Malox's financial statements taken as a
whole.

Based on the preceding information, determine the proper values of the following on November 30, 2018.

1. Finished goods inventory

A. P1,941,000
B. P1,929,000
C. P1,951,650
D. P1,963,650

2. Work in process inventory

A. P324,900
B. P337,500
C. P326,100
D. P313,500
3. Raw materials inventory
A. P792,000
B. P682,200
C. P726,000
D. P712,200

4. Factory supplies
A. P194,400
B. P197,700
C. P185,100
D. P207,000

5. Which of the following best describes the PAS 2 requirement for applying the same cost formula to all
inventories?
A. When they are purchased from different suppliers.
B. When they are purchased from the same geographic region.
C. When they are similar in nature or use.
D. When they sell for the same price.

PROBLE 13
GAVIAL, INC. sells electric stoves. It uses the perpetual inventory system and allocates cost to inventory on a
first-in, first-out basis. The company's reporting date is December 31. At December 1, 2018, inventory on
hand consisted of 350 stoves at P820 each and 43 stoves at P850 each. During the month ended December
31, 2018, the following inventory transactions occurred (all purchase and sales transactions are on credit):

2018
Dec.
1 Sold 300 stoves for P1,200 each.
3 Five stoves were returned by customers. They had originally cost P820 each and were sold for
P1,200 each.
9 Purchased 55 stoves at P910 each.
10 Purchased 76 stoves at P960 each.
15 Sold 86 stoves for P1,350 each.
17 Returned one damaged stove to the supplier. This stove had been purchased on December 9.
22 Sold 60 stoves for P1,250 each
26 Purchased 72 stoves at P980 each.

1. What is the FIFO cost of Gavial's inventory on December 31, 2018?

A P148,930
B. P148,980
C. P133,607
D. P126,280

2 What is the cost of goods sold in December 2018?

A. P367,230
B. P371,330
C. P366,320
D. P389,930

3. What is Gavial's gross profit in December 2018?

A. P173,770
B. P155,170
C. P177,870
D. P183,870

4. PAS 2 requires inventories to be measured at the lower of cost and net realizable value. Which of the
following are possible reasons why the net realizable value of the stoves on hand at December 31, 2016, may
be below their cost?
I. Inventories are damaged.
II. Inventories are wholly or partially obsolete.
III. Selling prices have declined below cost.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III

5. If the net realizable value of Gavial's inventory on December 31. 2018, falls to P920, the inventory value
should be reduced by
A. P7,300
B. P7,250
C. P8,162
D. PO

PROBLEM 14
The following information was obtained from the statement of financial position of LION, INC.:
Dec. 31, 2018 Dec. 31, 2017
Cash P706,600 P200,000
Notes receivable 0 50,000
Inventory ? 399,750
Accounts payable ? 150,000

All operating expenses are paid by Lion, Inc. with cash and all purchases of inventory are made on account.
Lion, Inc. sells only one product. All sales are cash less which are made for P100 per unit. Lion, Inc. purchases
1,500 units of inventory per month and values its inventory using periodic FIFO. The unit cost of inventory
during January 2018 was P65.20 and increased P0.20 per month during the year. During 2018, payments to
suppliers totalled P943,400 and operating expenses totalled P440,000. The ending inventory for 2017 was
valued at P65.00 per unit.

Based on the preceding information, determine the following:

1. Number of units sold during 2018
A. 18,900 C. 16,000
B. 18,400 D. 21,400

2. Total cost of purchases during 2018

A. P1,173,600 C. P1,213,200
B. P1,191,600 D. P1,193,400

3. Accounts payable balance at December 31, 2018

A. P793,400 C. P400,000
B. P393,400 D. P419,800

4. Inventory quantity at December 31, 2018

A. 5,750 C. 5,250
B. 6550 D. 8,150

5. FIFO cost of inventory on December 31, 2018

A. 352,500 C. 385,900
B. 439,230 D. 425,830

PROBLEM 15
Your client took complete physical inventory under your observation as of December 15 and adjusted the
inventory control account (perpetual inventory method) to agree with the physical inventory. You have to
decided to accept the balance of the control account as of December 31, after reflecting transactions
recorded therein from December 16 to December 31, in connection with your financial statement audit for
the year ended December 31.

Your examination of the sales cut-off as of December 15 and December 31 revealed the following items not
previously considered.
D A T E

Cost Sales Price Shipped Billed Inventory Control

P5,650 P7,200 12/14 12/17 12/17
2,430 4,650 12/13 12/20 12/13
6,870 9,200 01/03 12/31 12/31

1. What adjusting journal entries, if any, would you make for each of these items?

2. 1. ADJUSTING JOURNAL
ENTRIES
3. 1. Inventory 5,650
4.Inventory over and short 5,650
5.2. Sales 9,200
6.Accounts receivable 9,200
7.3. Inventory 6,870
8.Cost of sales 6,870
9.1. ADJUSTING JOURNAL
ENTRIES
10. 1. Inventory 5,650
11. Inventory over and short 5,650
12. 2. Sales 9,200
13. Accounts receivable 9,200
14. 3. Inventory 6,870
15. Cost of sales 6,870
16. 1. ADJUSTING JOURNAL
ENTRIES
17. 1. Inventory 5,650
18. Inventory over and short 5,650
19. 2. Sales 9,200
 20. Accounts receivable 9,200
21. 3. Inventory 6,870
22. Cost of sales 6,870
23. 1. ADJUSTING JOURNAL
ENTRIES
24. 1. Inventory 5,650
25. Inventory over and short 5,650
26. 2. Sales 9,200
27. Accounts receivable 9,200
28. 3. Inventory 6,870
29. Cost of sales 6,870
ADJUSTING JOURNAL ENTRIES

1. Inventory 5,650
Inventory over and short 5,650
Inventory 5,650
Inventory over and short 5,650
Inventory 5,650
Inventory over and short 5,650
Sales 9,200
Accounts receivable 9,200
Inventory 6,870
Cost of sale 6,870
Cost of sale were appropriately made in the current year
2. Periodic or cycle counts of selected inventory items are made a various times during the year rather
than a single inventory count at year end. Which of the fallowing is necessary if the auditor plans to observe
inventories at interim dates?
A. Complete recounts by independent teams are performed.
B. Perpetual inventory records are maintained.
C. Unit cost records are integrated with production accounting records.
D. Inventory balances are rarely at low levels.

3. If the perpetual inventory records show lower quantities of inventory than the physical count, an
explanation of the difference might be unrecorded
A. Sales C. Purchases
B. Sales discounts D. Purchase discounts

4. The physical count of inventory of a retailer was higher than shown by the perpetual records. Which
of the fallowing could explain the difference?
A. Inventory items had been counted but the tags placed on the items had not been taken off the items
and added to the inventory accumulation sheets.
B. Credit memos for several items returned by customer had not been recorded.
C. No journal entry had been made on the retailer’s books for several times returned to its suppliers.
D. An item purchased “FOB shipping point” had not arrived at the date of the inventory count and had
not been reflected in the perpetual records.

5. An auditor is most likely to learn of slow-moving inventory through

A. Inquiry of sales personnel
B. Inquiry of warehouse personnel
C. Physical observation of inventory
D. Review of perpetual inventory records

PROBLEM 16
CAIMAN INC. uses a perpetual inventory system and reports inventory at the lower of FIFO cost or net
realizable value. Caiman’s inventory control account balance at June 30, 2018, was P442,040. A physical count
conducted on that day found inventory on hand worth P440,400. Net realizable value for each inventory item
held for sale exceed cost. An investigation of the discrepancy disclosed the following:

1. Goods worth P13,200 held on consignment for Bugok Co. had been included in the physical count.

2. Goods costing P2,400 were purchased on credit from Amor Co. on June 27, 2018, on FOB shipping poiny
terms. The good were shipped on June 28, 2018, but, as they had not arrived by June 30,2016, were not
included in the physical count. The purchase invoice was received and processed on June 30, 2016.

3. Goods costing P4,800 were sold on credit to Acero Co. for P7,800 on June 28, 2018, on FOB destination
terms,. The goods were still in transit on June 30, 2018. The sales invoice was processed and recorded on June
29, 2018.
4. Goods costing P5,460 were purchased on credit (FOB destination) from San Miguel Co. on June 28, 2018.
The goods were received on June 29, 2018, and included in the physical count. The purchase invoice was
received on July 02, 2018.

5. On June 30, 2018, Caiman sold goods costing p12,600 on credit (FOB shipping point) terms to Pisaro Corp.
for P19,200. The goods were dispatched form the warehouse on June 30,2018, but the sales invoice had not
been processed at that date.

6. Damaged inventory items valued at P5,300 were discovered during the physical count. These items were
still recorded on June 30, 2018, but were omitted from the physical count records pending their write-off.

1. What is the adjusted inventory balance on June 30, 2018?

A. P424,800 C. P445,000
B. P421,200 D. 434,400

2. What adjustment should be made to Caimans’s sales revenue for the year ended June 30, 2018?
A. Net increased of P11,400
B. Net decreased of P11,400
C. Increased of P19,200
D. Decreased of P7,800

3. Caiman’s accounts payable at June 30, 2018, should be

A. Decreased by P5,460
B. Increased by P5,460
C. Decreased by P5,300
D. Increased by P160

4. The “unlocated difference” between the perpetual balance and the physical count amounts to
A. P5.300 C. P1,640
B. P160 D. P 0

5. The entry to correct the error described in item no. 2 is

A. Purchased 2,400
Accounts payable 2,400
B. Inventory 2,400
Accounts payable 2,400
C. Inventory 2,400
Cost of sales 2,400
D. No adjusting entry is necessary

PROBLEM 17
You are engaged in an audit of the financial statement of the CARABAO COMPANY for the year ended October
31, 2018, and have observed the physical inventory count on that date.
All merchandise received up to and including October 30,2018, has been included in the physical count. The
following list of invoices is for purchases of merchandise and are entered in the purchases journal for the
months of October and November 2018, respectively:

Amount FOB Date of invoice Date Merchandise received

OCTOBER 2018
P7,200 Destination October 19 October 21
4,400 Destination October 20 October 22
9,250 Shipping point October 20 October 30
3,900 Destination October 25 November 3
2.500 Destination November 4 October 29
10,250 Shipping point October 26 October 30
9,200 Shipping point October 27 October 30
13,600 Destination October 21 October 30
34,600 Destination October 29 October 30

NOVEMBER 2018
P2,000 Destination October 29 November 4
4,850 Destination October 30 October 31
6,420 Shipping point October 27 October 30
7,220 Shipping point November 2 October 30
12,820 Shipping point October 23 November 3
14,200 Shipping point October 23 November 3
15,000 Destination October 27 November 3

No perpetual inventory records are maintained, and the physical inventory count is to be used as a basis for
the financial statements.

1. What adjusting entry is necessary for the October 25 invoice?

A. Accounts payable 3,900
Purchases 3,900
B. Purchases 3,900
Accounts payable 3,900
C. Inventory, ending 3,900
Cost of sales 3,900
D. No adjusting entry is necessary

2. What adjusting entry is necessary for the November 4 invoice?

A. Purchase 2,500
Accounts payable 2,500
B. Accounts payable 2,500
Purchases 2,500
C. Cost of sales 2,500
Inventory 2,500
D. No adjusting entry s necessary
3. The journal entry to adjust the purchases account should include a
A. Debit to purchases of P45,510
B. Credit to purchases of P3,900
C. Net debit to purchases of P41,610
D. Net credit to purchases of P41,610

4. The net adjustment to accounts payable is

A. P3,900 increase C. P41,610 increase
B. P3,900 decrease D. P41,610 decrease

5. Carabao’s October 31 physical inventory should be increased by

A. P31,870 C. P45,510
B. 41,610 D. P73,480

PROBLEM 19
The following information was taken from the audited financial statements of HORSE CO.:
Inventories:
December 31, 2018 P791,000
December 31, 2017 744,000
December 31, 2016 720,800
2018 2017
Sales P10,832,000 P10,053,400
Cost of goods sold 4,482,000 4,246,000
Net profit 952,800 734,800

Based on the preceding information, compute for the following:

1. 2017 inventory turnover

A. 5.80 times C. 5.71 times
B. 5.89 times D. 6.12 times

2. 2018 inventory turnover

A. 5.67 times C. 5.84 times
B. 5.53 times D. 6.02 times

3. 2017 average days to sell inventory

A.63.9 C. 62
B. 59.6 D. 62.9

4. 2018 average days to sell inventory

A. 64.4 C. 60.6
B. 62.5 D. 66

PROBLEM 3-20
MONKEY CO.’s annual net income for the period 2014-2018 is as follows:
Year Net income (loss)
 2014 P150,000
2015 340,000
2016 645,000
2017 (100,000)
2018 250,000

A review of the company’s records reveals the following inventory errors:

2014 P3,000 overstatement , end of year
2015 7,000 understatement, end of year
2017 4,500 understatement, end of year
2018 11,000 understatement, end of year

1. What is the adjusted net income in 2014?

A. P150,000
B. P159,000
C. P153,000
D. P147,000

2. What is the adjusted net income in 2015?

A. P331,000
B. P337,000
C. P349,000
D. P340,000

3. What is the adjusted net income in 2016?

A. P651,000
B. P648,000
C. P639,000
D. P645,000

4. What is the adjusted net loss in 2017?

A. P89,500
B. P101,500
C. P100,000
D. P95,500

5. What is the adjusted net income in 2018?

A. P250,000
B. P234,500
C. P243,500
D. P256,500

PROBLEM 21
The SNAKE, INC. reported income before taxes of P842,650 for 2018 and P965,350 for 2019. The company
takes its annual physical count of inventory every December 31. Your audit revealed the following
information:

a. The price used for 1,500 units included in the 2018 ending inventory was P109. The correct cost was P190
per unit.

b. Goods costing P23,600 were received from a vendor on January 5, 2019. The shipment was made on
December 26, 2018, under FOB shipping point term. The purchase was recorded in 2018 but the shipment
was not included in the 2018 ending inventory.

c. Merchandise costing P64,750 was sold to a customer on December 29, 2018. Snake was asked by the
customer to keep the merchandise until January 3, 2019, when the customer would come and pick it up.
Although the sale was properly recorded in 2018, the merchandise was included in the ending inventory.

d. A supplier sold merchandise valued at P14,000 to Snake, Inc. The merchandise was shipped FOB shipping
point on December 29, 2018, and was received by Snake on December 31, 2018. The purchase was recorded
in 2019 and the merchandise was not included in the 2018 ending inventory.

1. What is the adjusted income before taxes for the year ended December 31, 2018?
A. P809,500
B. P632,800
C. P875,800
D. P923,000

2. What is the adjusted income before taxes for the year ended December 31, 2019?
A. P877,000
B. P932,200
C. P885,000
D. P843,850

PROBLEM 22
In your audit of the RABBIT, INC., you find that a physical inventory count on December 31, 2018, showed
merchandise costing P463,000 was on hand at that date. Your examination reveals the following items were
all excluded from the inventory per count.

1. Merchandise of P20,000 which is held on consignment.

2. Goods costing P39,500 that were shipped FOB shipping point on December 31, 2018. These goods were
delivered to the customer on January 6, 2019.
3. Goods costing P16,800 that were shipped FOB destination to a customer on December 29, 2018. The
customer received these goods on January 2, 2019.
4. Merchandise costing P76,150 shipped by a seller FOB destination on December 28, 2018, and received
by Rabbit, Inc. on January 3, 2019.
5. Goods costing P16,500 shipped by a vendor FOB seller on December 31, 2018, and received by Rabbit,
Inc. on January 4, 2019.
What is the amount that should appear on Rabbit, Inc.'s statement of financial position as inventory at
December 31, 2018?
A P539,000
B. P519,000
C. P535,800
D. P496,300

PROBLEM 23
BIRD COMPANY is a manufacturer of small tools. The following information was obtained from the
company's accounting records for the year ended December 31, 2018:

Inventory at December 31, 2018 (based on physical count in Bird's warehouse at cost
on December 31, 2018) P1,870,000
Accounts payable at December 31, 2018 1,415,000
Net sales (sales less sales returns) 9,693,400

Your audit reveals the following information:

1. The physical count included tools billed to a customer FOB shipping point on December 31, 2018. These
tools cost P64,000 and were billed at P78,500. They were in the shipping area waiting to be picked up by
the customer.

2. Goods shipped FOB shipping point by a vendor were in transit on December 31, 2018. These goods with
invoice cost of P93,000 were shipped on December 29, 2018.

3. Work in process inventory costing P27,000 was sent to a job contractor for further processing.
4. Not included in the physical count were goods returned by customers on December 31, 2018. These
goods costing P49,000 were inspected and returned to inventory on January 7, 2019. Credit memos for
P67,800 were issued to the customers at that date.

5. In transit to a customer on December 31, 2018, were tools costing P17,000 shipped FOB shipping point
on December 26, 2018. A sales invoice for P29,400 was issued on January 3, 2019, when Bird Company
was notified by the customer that the tools had been received.

6. At exactly 5:00 pm on December 31, 2018, goods costing P31,200 were received from a vendor. These
were recorded on a receiving report dated January 2, 2019. The related invoice was recorded on
December 31, 2018, but the goods were not included in the physical count.
7. Included in the physical count were goods received from a vendor on December 27, 2018. However, the
related invoice for P36,000 was not recorded because the accounting department's copy of the receiving
report was lost.

8. A monthly freight bill for P32,000 was received on January 3 2019. It specifically related to merchandise
bought in December 2018, one-half of which was still in the inventory at December 31, 2018. The freight
was not included in either the inventory or in accounts payable at December 31, 2018.
1. Bird's December 31, 2018, inventory should be increased by
A. P216,200
B. P233,200
C. P252,200
D. P123,200

2. Bird's accounts payable balance at December 31, 2018, should be

A. P68,000
B. P145,000
C. P125,000
D. P161,000

3. The amount of net sales to be reported on Bird's income statement for the year ended December 31,
2018, should be
A. P9,547,100
B. P9,576,500
C. P9,591,000
D. P9,595,300

4. Bird's statement of financial position at December 31, 2018, should report accounts payable of
A. P1,576,000
B. P1,483,000
C. P1,540,000
D. P1,431,000

5. The amount of inventory to be reported on Bird's December 31, 2018, statement of financial position
should be
A. P2,103,200
B. P2,086,200
C. P2,122,200
 D. P1,993,200

Inventory A/P Net Sales 2. Accoun

Unadjusted Balances P 1,870,000 P1,415,000 P9,693,400 ts
Adjustments: payable
1. (78,500) per
2. 93,000 93,000 audit
3. 27,000
4. 49,000 (67,800)
5. 29,400
6. 31,200
7. 36,000
8. 16,000 32,000
Adjusted Balances P 2,086,200 P 1,576,000 P 9,576,500

1. Inventory per Audit P2,086,200

Inventory per count 1,870,000
Net adjustment – increase P 216,200 A
P1,576,000
Accounts payable per books 1,415,000
Net adjustment – increase P 161,000

3. Net sales for the year ended December 31, 2010 P9,576,500

4. Accounts payable, December 31, 2010 P1,576,000

5. Inventory, December 31, 2010 P2,086,200

PROBLEM 24
The cost of goods sold section of the income statement prepared by your client for the year ended
December 31 appears as follows:

Inventory, January 1 P 80,000

Purchases 1,600,000
Cost of goods available for sale P1,680,000
Inventory, December 31 Cost of goods sold 100,000
Cost of goods sold P1.580.000

Although the books have been closed, your working paper trial balance is prepared showing all accounts
with activity during the year. This is the first time your firm has made an examination. The January 1 and
December 31 inventories appearing above were determined by physical count of the goods on hand on
those dates and no reconciling items were considered. All purchases are FOB shipping point.
In the course of your examination of the inventory cutoff, both at the beginning and end of the year, you
discovered the following facts:

Beginning of the Year

1. Invoices totaling P25,000 were entered in the voucher register in January, but the goods were received
during December.

2. December invoices totaling P13,200 were entered in the voucher register in December, but the goods
were not received until January.

End of the Year

3. Sales of P43,000 (cost of P12,900) were made on account on December 31 and the goods delivered at
that time, but all entries relating to the sales were made on January 2.
4. Invoices totaling P15,000 were entered in the voucher register in January, but the goods were received
in December.
5. December invoices totaling P18,000 were entered in the voucher register in December, but the goods
were not received until January.
6. Invoices totaling P12,000 were entered in the voucher register in January, and the goods were received
in January, but the invoices were dated December.

1. What working paper adjustment should be made at the end of the current year for item no. 1?
A. Purchases P25,000
Retained earnings 25,000
B. Retained earnings 25,000
Purchases 25,000
C. Inventory, beginning 25,000
Purchases 25,000
D. No adjusting entry is necessary.

2. The working paper adjustment to correct the error described in item no. 3 should include a debit to
A. Accounts receivable of P43,000
B. Sales of P43,000
C. Inventory of P12,900
D. Retained earnings of P30,100

3. The company's statement of financial position as of the end of the current year should show inventory
of
A. P130,000
B. P100,000
C. P93,200
D. P117,100

4. What is the net adjustment to purchases of the current year?

A. P27,000 increase
B. P25,000 decrease
C. P2,000 increase
D. P2,000 decrease

5. The cost of goods sold for the year current year is

A. P1,561,200 C. P1,580,000
B. P1,553,200 D. P1,565,200

PROBLEM 25

CHEETAH CORPORATION is a wholesale distributor of kitchen utensils. Unadjusted balances obtained

from cheetah’s accounting records are as following.
Inventory (based on physical count of goods in cheetah’s
warehouse at December 31) P432,000

Accounts payable, December 31:

Vendor Terms Amount
Zonrox, Inc. Net 30 P36,000
Yeba Corp. Net 30 28,000
Xak, Inc. Net 30 83,000
Wais Co. Net 30 -
Velma, inc. Net 30 -
P147,000
Sales P2,600.000

The following additional information was also obtained:

1. Goods held on consignment from Zonrox, Inc., the consignor, valued at P13,000 were included in the
physical count of goods in Cheetah’s warehouse at December 31, and in account payable balance as of
December 31, 2018.
2. Goods costing P26,400 that were purchased from Wais Co. and paid for in December were sold in the
last week of the current year. The sale was properly recorded at P58,000 in December. Because the goods
were in the shipping area of Cheetah’s warehouse to be picked up by the customer, they were included
in the physical count at December 31.
3. Retailers were holding goods costing P25,000 (retail price is P35,700) shipped by Cheetah under
consignment term.
4. Goods were in transit from Velma, Inc. to Cheetah on December 31. The cost of these goods was
P23,500, and they were shipped FOB shipping point on December 28.

Based on the preceding information, compute the adjusted balances of the following:
1. Inventory
A. P417,600 C. P467,500
B. P416,100 D. P441,100

2. Accounts payable
A. P134,000 C. P157,500
B. P136,500 D. P170,500
3. Sales
A. P2,600,000 C. P2,564,300
B. P2,635,700 D. P2,625,000

Inventory A/p Sales

Unadjusted Balances P432,000 P147,000 P2,600,000

Item No. 1 (13,000) (13,000)
2 (26,400)
3 25,000
4 23,500 23,500
Adjusted Balances P441,100 P157,500 P2,600,000

1. Inventory P441,100

2. Accounts Payable P157,500

3. Sales
P2,600,000

PROBLEM 26

You have been engaged to audit the financial statement of CAMEL CORP. for the year ended December
31, 2018. The company is engaged in the wholesale chemical business and makes all sales at 30% above
cost.

Shown below are portions of the company’s sales and purchases ledger accounts:
S A L E S

Date Reference Amount Date Reference Amount

12/31 closing entry P1,221,027 Balance Forwarded P946,720
12/28 SI No. 835 25,680
12/28 SI No. 836 14,196
 12/28 SI No. 837 11,439
12/31 SI No. 839 65,436
12/31 SI No. 840 81,122
12/31 SI No. 841 76,434
P1,221,027 P1,221,027
(SI = Sales Invoice)

PURCHASES

DATE REFERENCE AMOUNT DATE REFERENCE AMOUNT

Balance forwarded P418,600 12/31 Closing entry P509,025
12/28 RR No. 949 14,500
12/30 RR No. 951 26,700
12/31 RR No. 952 34,550
12/31 RR No. 952 14,675
_________________ ________________
P509,025 P509.025
(RR = Receiving Report)

Camel Corp. conducted its annual physical inventory at December 31, 2018. You observed the physical
count and were satisfied that it was properly taken.

When performing a sales and purchases cutoff test, you found the following:
a. All receiving reports and sales invoices are prepared in strict numeral sequence.
b. The last receiving report number used in calendar year 2018 is RR No. 953.
c. The sales invoice number corresponding to the last shipment made in 2018 is SI No. 838.

You also obtained the following additional information:

1. Included in the physical count at December 31 were chemicals costing P25,000 that have been
purchased and received on RR No. 950. As of December 31, 2018, no vendor invoice has been received for
these chemicals.
2. There were goods located in the shipping area of Camel Corp. on December 31, 2018, but were not
included in the physical count. These had been sold to XYZ Co. who had already paid for the goods. The
goods were picked up by XYZ Co.’s truck on January 3, 2019. The sale was recorded on SI No. 835.
3. At the close of business on December 31, 2018, there were two box-cars standing on Camel Corp.’s
siding:
(a.) Boxcar 14344AA was unloaded on January 2, 2019. The receiving report for this merchandise is RR No.
953. The freight was paid by the vendor.
(b.) Boxcar 021261JR was loaded and sealed on December 31, 2018. The car was taken from Camel
Corp.’s siding on January 2, 2019. It contained a shipment of goods to ABC Co. and was covered by SI No.
838. The sales price for this order was P65,000, and transportation charges were to be paid by ABC Co.
4. Temporarily stranded on a distant railroad siding at December 31, 2018, was a boxcar of chemicals en
route to DEF Company. This was covered by SI No. 836. The terms of this shipment were FOB destination.
 5. Goods in transit from a vendor at December 31, 2018, were received on RR No. 954. The terms of this
shipment were FOB destination. Freight charges of P1,500 were paid by Camel Corp. However, this P1,500
freight charge was deducted from the purchase price og P16,800.

Determined the net adjustment to be made at December 31, 2018, for each of the following accounts.
1. Sales
A. P222,992 debit C. P171,752 debit
B. P237,188 debit D. P208,796 debit

2. Accounts receivable
A. P208.796 credit C. P237,188 credit
B. P222,992 credit D. P171,752 credit

3. Cost of sales
A. P50,595 credit C. P39,675 credit
B. P75,595 credit D. P25,000 debit

4. Accounts payable
A. P39, 675 credit C. P25,000 debit
B. P39,675 debit D. P25,000 credit

5. Inventory
A. P60,920 debit C. P 75,595 debit
B. P50,000 debit D. P64,675 debit

Adjusting Journal Entries

December 31, 2010

1. Sales 222,992

Accounts receivable 222,992

To reverse sales entries for unshipped goods.

SI No. 839 P 65,436

SI No. 840 81,122

SI No. 841 76,434

Total P222,992

2. Cost of sales 25,000

 Accounts payable 25,000

To record purchase of chemicals per RR No. 950.

3. Inventory 14,675
Cost of sales 14,675

To include in ending inventory goods purchased per RR No. 953.

4. Inventory 50,000
Cost of sales 50,000

To include in ending inventory goods shipped to customers on January 2, 2011. (P65,00/130% =

P50,000)

5. Sales 14,196

Accounts receivable 14,196

To reverse entry made for goods in transit to customer shipped FOB destination.

6. Inventory 10,920

Cost of sales 10,920

To include in ending inventory cost of goods in transit to customer shipped

FOB destination. (P14,196 / 130% = P10,920)

Debit (Credit)

y
Sales A/R COS A/P Inventor

DATE 1 P222,992 (P222.992)

2 P25,000 (P25,000)
3 (14,675) P14,675
4 (50,000) 50,000
5 (10,920) 10,920
1. Sale P237,188 debit
Net P237,188 (P237,188) (P50,595) (P25,000) P75,595
 2. Accounts Receivable P237,188 credit

3. Cost of sales P50,595 credit

4. Accounts payable P25,000 credit
5. Inventory P75,595 debit

PROBLEM 27
The following information was taken from the record of CROCODILE BOUTIQUE for the month of
December:

Sales P198,000
Sales return 4,000
Additional mark-ups 20,000
Markup cancellations 3,000
Markdowns 18,600
Markdown cancellations 5,600
Freight in 4,800
Purchases at cost 96,000
Purchase at retail 176,000
Purchase returns at cost 4,000
Purchase return at retail 6,000
Beginning inventory at cost 60,000
Beginning inventory at retail 93,000

1. What is the cost of Crocodile’s ending inventory under the retail inventory (average cost) method?
A. P40,880 C. P51,296
B. P43,070 D. 43,500

2. The difference in the calculation of the cost–to-retail percentage applying the conventional retail
method and the average cost method is that the average cost method
A. Excludes beginning inventory
B. Excludes markdowns
C. Includes mark-ups
D. Includes markdowns

Cost Retail
Beginning inventory P60,000 P93,000
Purchases 96,000 176,000
Freight in 4,800
Purchase returns (4,000) (6,000)
Additional markups 20,000
Markup cancellations (3,000)
Markdowns (18,600)
Markdown cancellations 5,600
Goods available for sale P156,800 267,000

Less: Net sales (P198,000 – P4,000) 194,000

Ending Inventory at retail P73,000

Cost ratio (P156,800 / P267,000) 59%

Ending inventory at cost (P73,000 x 59%) P43,070

PROBLEM 28
On September 5, 2018, a fire damaged the warehouse of TIGER COMPANY. All inventory items and many
accounting records stored in the warehouse were destroyed. However, a portion of the inventory could
be sold for scrap. The company’s backup files provide the following information:
Inventory, January 1 P750,000
Cash sales, January 1- September 5 445,000
Purchase, , January 1- September 5 2,770,000
Collection of accounts receivable,
January 1- September 5 4,230,000
Accounts receivable, January 1 350,000
Accounts receivable, September 5 530,000
Salvage value of inventory 15,000
Gross profit ratio 32%

What is the estimated inventory fire loss?

A. P208,400 C. P203,600
B. P506,200 D. P218,600

Accounts receivable, September 5 P530,000

Add: Collections, January 1 – September 5 4,230,000
Total 4,760,000
Less: Accounts receivable, January 1 350,000
Sales on account 4,410,000
Add: Cash sales 445,000
Total sales 4,855,000
Cost of sales ratio(100-32%) 68%
Estimated cost of goods sold P3,301,400

Inventory, January 1 P750,000

Add: Purchases 2,770,000
Goods available for sale 3,520,000
Less: Estimated cost of goods sold 3,301,400
Estimated inventory, September 5 218,600
Less: Salvage value of inventory 15,000
Estimated inventory loss P203,600

PROBLEM 29
CAT CORP. began operations in 2013. On July 15, 2018, a fire broke out in the company’s warehouse
destroying all inventory and many accounting records. The following information was assembled from the
microfilmed records. All sales and purchases are on count.
Jan. 1, 2018 July 15, 2018
Inventory P287,700
Accounts receivable 261,180 P257,780
Accounts payable 176,280 245,700
Collections from customer 1/1/18-7/15/18 1,507,600
Payments to suppliers, 1/1/18-7/15/18 975,000
Goods out on consignment on
July 15, 2018 at cost 97,500
Goods in transit at July 15, 2018
Purchased FOB shipping point (included in the July
15 accounts payable balance) 34,750

The following is a summary of prior year’s sales and gross profit on sales:
2015 2016 2017
Sales P1,252,000 P1,410,000 P1,360,000
Gross profit 375,600 366,600 426,400
1. What is the company’s average gross profit ratio based on its prior year’s sales?
A. 26% C. 30%
B. 34% D. 29%

2. What is the company’s total sales for the period January 1 through July 15 of the current year?
A. P1,504,200 C. P1,765,380
B. P1,511,000 D. P1,768,780

3. What is the company’s total purchases for the period January 1 through July 15 of the current year?
A. P905,580 C. P1,044,420
B. P912,170 D. P1,009,670

4. What is the company’s estimated inventory on July 15, 2018, before the fire?
A. P186,605 C. P146,930
B. P244,430 D. P279,180

5. What is the inventory fire loss?

A. P146,930 C. P132,250
B. P186,605 D. P112,180

1. Average Gross Profit Ratio Based on Sales

2007 2008 2009

Gross profit P375,600 P366,600 P462,400
Divide by sales 1,252,000 1,410,000 1,360,000
Gross profit ratio 30% 26% 34%
Average gross profit ratio: (30%+26%+34%) = 30%

2. Estimated sales

Accounts receivable, July 15 P257,780

Add: Collections from customers 1,507,600
Total 1,765,380
Less: Accounts receivable, Jan 1 261,180
Estimated sales, January 1 – July 15 1,504,200

3. Estimated Purchases
Accounts payable, July 15 P245,700
Add: Payments to suppliers 975,000
Total: 1,22,700
LesS: Accounts payable, January 1 176,280
Estimated purchases, January 1 – July 15 1,044,420
4. Estimated Inventory, July 15 ( Before the Fire)

Inventory, January 1 P287,700

Add: Estimated purchases 1,044,420
Goods available for sale 1,332,120
Less: Estimated cost of goods sold
(P1,504,200 x 70%) 1,052,940
Estimated inventory, July 15 279,180

5. Inventory Fire Loss

Estimated Inventory, July 15 (see no. 4) P279,180

Less: Goods out on consignment P97,500

Goods in transit 34,750

Inventory fire loss P146,930

PROBLEM 30 Inventory Fire Loss

On April 15, 2019, fire damaged the office and warehouse of PEACOCK COMPANY. The trial balance below
was prepared from the general ledger which was the only accounting record saved.

PEACOCK COMPANY
TRIAL BALANCE
March 31, 2019

Debit Credit
Cash P 35,000
Held-for-trading securities 350,000
Accounts receivable 120,000
Inventory, December 31, 2018 225,000
Land 950,000
Building 800,000
Accumulated depreciation-building P 260,000
Machinery and equipment 130,500
Accumulated depreciation – Mach. & Equip. 69,400
Other noncurrent assets 98,000
Accounts payable 71,100
Other expense accruals 15,400
Ordinary share capital 1,220,600
Retained earnings 849.000
Sales 405,000
Purchases 156,000
Other operating expenses 26,000
__________________ ___________________
P2,890,500 P2,890,500
The following additional information has been obtained:
1. The company’s year-end is December 31.
2. An examination of the April bank statement and canceled checks revealed the following:
• Checks written, April 1-15 P39,000
(P17,100 paid to accounts payable as of March 31,
P10,200 for April merchandise shipments, and P11,700
paid for other operating expenses)
• Deposits, April 1-15 38,850
(consistent of collections from customer
With the exception of a P2,850 refund
from a supplier for goods returned in April)
3. Communications with suppliers disclosed unrecorded payables at April 15 of P31,800 for April
merchandise shipments, including P6,900 for goods in transit (FOB shipping point) on that date.
4. Customers acknowledge indebtedness of P108,000 (including P1,800 that will probably be
uncontrolled). It was all estimated that customer owed another P24,000 that will never be acknowledge
or recovered.
5. The insurance company agreed that the fire-loss claim should be based on the assumption that the
overall gross profit ratio for the part 2years was in effect during the current year. The company’s audited
financial statements disclosed the following information:

Dec. 31, 2018 Dec. 31, 2017

Net sales P1,590,000 P1,170,000
Net purchases 840,000 705,000
Beginning inventory 150,000 225,000
Ending inventory 225,000 150,000

6. Inventory costing P21,000 was salvaged and sold for P10,500. The balance of the inventory was a total
loss.
 Based on the preceding information, determined the following
1. Gross profit ratio
A. 52% C. 44%
B. 33% D. 47%

2. Sales, January 1, 2019- April 15, 2019

A. P429,000 C. P405,000
B. P381,000 D. P453,000

3. Net purchases, January 1, 2019- April 15, 2019

A. P195,150 C. P188,250
B. P198,000 D. P204,900

4. Cost of inventory not destroyed by fire

A. P27,900 C. 10,500
B. P17,400 D. 21,000

5. Inventory fire loss

A. P175,950 C. P138,570
B. P165,450 D. 149,070

SOLUTN:
1.Adjusting journal entries
a.Accounts payable 3,900
Purchases 3,900
b.Purchases 45,510
Accounts payable 45,510
Invoice date Amount
October 30 P4,850
October 27 6,420
November 2 7,220
October 23 12,820
October 23 14,200
P45,510
SOLUTION:
1.Adjusting journal entries
a.Accounts payable 3,900
Purchases 3,900
b.Purchases 45,510
Accounts payable 45,510
Invoice date Amount
October 30 P4,850
October 27 6,420
November 2 7,220
October 23 12,820
October 23 14,200
P45,510
SOLUTION:
1.Adjusting journal entries
a.Accounts payable 3,900
Purchases 3,900
b.Purchases 45,510
Accounts payable 45,510
Invoice date Amount
October 30 P4,850
October 27 6,420
November 2 7,220
October 23 12,820
October 23 14,200
P45,510
SOLUTION:
1.Adjusting journal entries
a.Accounts payable 3,900
Purchases 3,900
b.Purchases 45,510
Accounts payable 45,510
Invoice date Amount
October 30 P4,850
October 27 6,420
November 2 7,220
October 23 12,820
October 23 14,200
P45,510

1. Gross Profit Ratio

Net sales ( P 1,590,000 + P 1,170,000) P 2,760,000

Cost of goods sold:
Inventory, Jan. 1,2008 P 225,600
Add: Net purchases
( P 840,000 + P 705,000) 1,545,000
Goods available for sale 1,770,600
Less: Inventory, Dec.31, 2009 225,000 1,545,000
Gross profit P 1,214,400

Gross profit ratio ( P 1,214,400 / P 2,760,000) = 44%

2. Sales, January 1, 2010- April 15, 2010

balance, March 31 120,00 Sales ( SQUEEZE)

 48,000 Accounts Receivable
36,000 Collections
( P 38,850- P 2,850
Balance, April 15 132,000*

*P 108,000 + P 24,000 = 132,000

sales, January 1- Match 31

(per trialbalance) P 405,000
Sales, April 1- April 15 48,000
Total sales, January 1- April 15 P 453,000
 3. Net purchases, Janauary 1,2010- April 15, 2010

Purchases, Jan. 1 – March 31, 2010 ( per trial balance)

P 156,000 April merchandise shipments paid

10,200
Unrecorded purchases on account 31,800
Purchase returns ( 2,850)
Net purchases, Jan. 1 – April 15,2010 P 195,150

4. Cost of inventory not destroyed by fire

Salvaged inventory P 21,000

Goods in transit, purchased FOB shipping point
Total

5. Inventory fire loss

Inventory, Jan. 1, 2010 P 225,000

Add: Net purchases (see no. 3) 195,150
Goods available for sale 420,150
Less: estimated cost of goods sold
(P 453,000 x 56%) 253,680
Estimated inventory 166,470
Less: Salvaged inventory P 10, 500
Merchandise in transit 6,900 17,400
Inventory fire loss P 149,070