PROBLEM 3-1

Correcting Inventory Errors

The TILL CORPORATION has adjusted and closed its books at the end 2023 The company arrives at its inventory
position by a physical 202 take on December 31 of each year. In March 2024, the following errors were discovered

(a) Merchandise that cost December 30, 2023. The order was shipped December 31, 2023, Dete thens FOB
shipping point. The merchandise was not included in the ending inventory. The sale was recorded on January 15,
2024, when the customer made payment on the sale.

(b) On January 2, 2024, Till Corporation received merchandise that had been shipped to it on December 31, 2023.
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, 2024.

(c) On January 8, 2024, 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 of P5,400.

(d) Merchandise costing P2,250, located in a separate warehouse, was overlooked and excluded from the 2023
inventory count.

(e) On December 27, 2023, 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 2023. The merchandise was not included in the inventory
count.

(f) he corporation failed to make an entry for a purchase on account of P2.505 at the end of 2023, although it
included this merchandise in the inventory count. The purchase was recorded when payment was made to the
supplier in 2024.

(g) The corporation included in its 2023 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 2024.

Required: Give the entry in 2024 (2023 books are closed) to correct each error. Assume that the errors were made
during 2023, all amounts are material, and the periodic inventory system is used

PROBLEM 3-2

Correcting Inventory Errors

WALLNUT Co. asks you to review its December 31, 202300ventory values and prepke you toercessary 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, 2023.

2. Not included in the physical count of inventory is P31,260 of merchandise purchased on December 15 from
Benggay. This merchandise was shipped f.o.b. 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 30, f.o.b. 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 f.o.b. destination. The invoice, which has not yet arrived, has not been recorded.

5. Not included in inventory is P25,620 of merchandise purchased from Maundy Company. This merchandise was
received on December 31 after the inventory had been counted. The invoice was received and recorded on
December 30.

6. Included in inventory was P31,314 of inventory held by Wallnut on consignment from Jaka Corporation.

7. Included in inventory is merchandise sold to Simson fo.b. 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 labeled "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, 2023.

b. Prepare any correcting entries to adjust inventory and related accounts to their proper amounts at December 31,
2023. Assume the books have not been closed.

PROBLEM 3-3

Computation of Adjusted Sales and Inventories

In testing the sales cut-off for the BIG LOVE COMPANY in connection with an audit for the year ended October 31,
2023, you find the following information.

A physical inventory was taken as of the close of business on October 31, 2023. 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 DATE DATE

NUMBER FOB TERMS SHIPPED RECORDED SALES COST
6671 Destination Oct 20 Oct 31 P 3,000 P 2,700
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 2 15,000 12,000

Based on the foregoing information compute the October 31, 2023, adjusted balances of the following accounts:

1. Sales
A. P7,461,300 C P7,449,600

B P7,455,900 D. P 357,300
 2. Inventories
A. P354,000 C. P348,000
B. P 363,300 D. P357,300

Problem 3-4

Cut-off for Purchases

You are conducting a financial statement audit of the Beverly Hills Corp for the year ended December 31, 2023. 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, 2023, 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 involves have been recorded in the purchases Journal as follows:

December 2023

Invoice Number Amount Invoice Date FOB Term Date Received

251 P 10,248 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 2024

261 P 3,672 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 incharge on purchases averaged 6% during the year and are to be included in the inventory
valuation.

Problem 3-5

Inventory Estimation

The MALAWI COMPANY is an importer and wholesaler. Its merchandise is purchased from a number of suppliers
and is warehoused until sold to consumers.
In conducting his audit for the year ended December 31, 2023, the company's CPA determined that the system of
internal control was good. Accordingly, he observed the physical inventory at an interim date, November 30, 2023,
instead of at year end.

The following information was obtained from the general ledger:

Inventory, January 1, 2023 P 90,000

Inventory, November 30, 2023 225,000

Sales for eleven months ended November 30, 2023 800,000

Sales for year ended December 31, 2023 950,000

Purchases for eleven months ended November 30, 2023 (before audit adjustments) 720,000

Purchases for year ended December 31, 2023 (before audit adjustments) 810,000

Additional information is as follows:

a Goods received on November 28 but recorded as purchases in December 10,000

b.Deposits made in October 2023 for purchases to be made in 2024 but 14,000

charged to Purchases

C Defective merchandise returned to suppliers:

Total at November 30, 2023 5,000

Total at December 31, 2023, excluding November items 7,000

The returns have not been recorded pending receipt of credit memos from

the suppliers. The defective goods were not included in the inventory.

d. Goods shipped in November under FOB destination and received in

December were recorded as purchases in November 18,500

e. Through the carelessness of the client's warehouseman, certain

goods were damaged in December and sold in the same month at its cost. 20,000

f. Audit of the client's November inventory summary revealed the following:

Items duplicated P 3,000

Purchases in transit:

Under FOB shipping point 12,000

Under FOB destination 18,500

Items counted but not included in

the inventory summary 7,000

Errors in extension that overvalued

the items 4,000

 1. The correct amount of net purchases up to November 30, 2023
A. P716,000 C. P682,500
B. P692,500 D. P706,500

2. The correct amount of net purchases up to December 31, 2023 is

A. P765,500 C. P803,000

B. P784,000 D. P789,000

3. The correct inventory on November 30, 2023, is

A. P206,500 C. P214,500

B. P237,000 D. P218,500

4. What is the gross income for eleven months ended November 30, 2023?

A. P234,000 C. P224,000

B. P 217,000 D. P 237,500

5. What is the estimated inventory on December 31, 2023?

A. P183,100 C. P 184,400

B. P175,900 D. P 190,000

Problem 3-6

Analyzing Inventory Transactions

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, 2024.

2. On December 27, 2023, 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, 2024. The invoice, which was recorded on
January 3, 2024, showed shipment was made under FOB shipping point on December 31, 2023. 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, 2024, the customer was billed on December 31, 2023, and it was
excluded from the inventory.

5. Merchandise costing P16,666 was received on January 5, 2024, and the related purchase invoice was recorded
January 6. The shipment of this merchandise was made on December 31, 2023, FOB destination.

6. A product costing P150,000 was sold on an installment basis on December 10, 2023. 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, 2023. 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, 2024.

Indicate which of the above items are to be included in the inventory balance at December 31, 2023. State your
reasons for the treatment you suggest.

Problem 3-7

Physical Count of Inventory

A physical count of merchandise on hand was made by SUMMIT COMPANY, your audit client, on December 30 and
31, 2023, which reflected a balance of P3,873,000. Your review of the inventory list disclosed the following:

1. Goods costing P148,000 shipped FOB shipping point on December 30, 2023, by a supplier to Summit Company
was received on January 3, 2024. The purchase was recorded on December 30, 2023.

2 Goods costing P195,000, shipped FOB destination by the supplier on December 28, 2023, were recorded and
received on January 5, 2024.

3. Goods purchased in cash for P41,700 were returned to the supplier on December 22, 2023. These goods were
still included in the inventory schedule and the refund was received and recorded on January 10, 2024.

4. Goods consigned to Summit Company totaling P89,500 were included in the physical count.

5. Included in the physical count were goods sold to a customer on FOB shipping point on December 27, 2023.
These goods with a selling price of P52,830 and a cost of P35,600 were already recorded as sales on account but
were shipped only on January 5, 2024.

What is the adjusted Inventory on December 31, 2023?

A. P3,979,300 C. P3,889,800

B. P3,854,200 D. P4,084,800

Problem 3-8

Determining Inventory Quantity

The management of PIG, INC has engaged you to assist in the of year-end (December 31) financial statements. You
are preparation 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 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 Order Invoice Quantity in Date Date Terms

Date Date Units Shipped Received
12/31/2023 01/02/2024 4,200 01/02/2024 01/05/2024 FOB Destination
12/05/2023 01/02/2024 3,600 12/17/2023 12/22/2023 FOB Destination
12/06/2023 01/03/2024 7,900 01/05/2024 01/07/2024 FOB Shipping point
12/18/2023 12/20/2023 8,000 12/29/2023 01/02/2024 FOB Shipping point
12/22/2023 01/05/2024 4,600 01/04/2024 01/06/2024 FOB Destination
12/27/2023 01/07/2024 3,500 01/05/2024 01/07/2024 FOB Destination
Pig, Inc. uses the “passing of legal title” for inventory recognition.

1. Goods purchased during December totaled

A. 11,600 units C. 19,500 units

B. 15,800 unit D. 8,000 units

2. How many units were sold during December?

A. 138,630 units C. 98,630 units

B. 113,830 units D. 153,830 units

3. How many units should be included in Pig, Inc.'s inventory at December 31, 2023?

A. 18,700 units C. 43,500 units

B. 39,900 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 3-9

Computing Cash Expenditure for Inventory

The following audited balances pertain to OWL COMPANY.

Accounts payable:

January 1, 2023 P286,924

December 31, 2023 737,824

Inventory balance:

January 1, 2023 815,386

December 31, 2023 488,874

Cost of goods sold – 2023 1,859,082

How much was paid by Owl Company to its suppliers in 2023?

A. P2,636,494 C. P1,734,694

B. P1,081,670 D. P1,983,470

Problem 3-10

FIFO Costing Method

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 P 13.00
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 1 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 C. 28,500

B. 177,500 D. 149,000

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

A. P1,025,000 C. P988,000

B. P1,016,230 D. P1,069,124

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

A. P3,632,200 C. P3,580,126

B. P3,617,900 D. P3,661,250

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

A. P20 C. P12.70

B. P13 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 3-11

Passage of Title

In your audit of the December 31, 2023, 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, 2023.

b. Goods costing P16,500 were delivered to Chicken, Inc. on January 4, 2024. The invoice for these goods was
received and recorded on January 10, 2024. The invoice showed the shipment was made on December 29,
2023, FOB shipping point.

C. Goods costing P21,640 were shipped FOB shipping point on December 31, 2023, and were received by the
customer on January 2, 2024. Although the sale was recorded in 2023, these goods were included in the 2023
ending inventory.

d Goods costing P8,640 were shipped to a customer on December 31 2023, FOB destination. These goods
were delivered to the customer on January 5, 2024 and were not included in the inventory. The sale was
properly taken up in 2024.

e. Goods costing P8,600 shipped by a vendor under FOB destination term, were received on January 3, 2024,
and thus were not Because the related was received on December 31, 2023, this shipment was recorded as a
purchase in 2023.

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 2023 sale a P64,300 shipment of goods to a customer on December 31, 2023,
FOB destination. This shipment of goods costing P37,500 was received by the customer on January 5, 2024,
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, 2023, inventory should be increased by

A. P8,000 C. P66,000

B. P40,000 D. P61,640

2. Which of the errors described in "a to g" will not affect the company's net income for 2023?

A. Item a C. Item e

B. Item g D. Item b

3. What is Chicken's adjusted net income for the year 2023?

A. P1,565,800 C. P1,615,800

B. P1,607,160 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 transiť 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 3-12

Inventory Valuation

You are engaged in an audit of the KURATSO CO. for the year ended December 31, 2023. To reduce the
workload at year-end, the company took its annual physical inventory under your observation on November 30,
2023.

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 testy 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, 2023, 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, 20237

A. P183,810 C. P172,710

B. P190,710 D. P181,710

2. What is the correct amount of the physical inventory at November 30, 2023?

A. P183,810 C. P165,810

B. P190,710 D. P184,560

Without prejudice to your answers to dusty assume that the correct amount of the inventory at November 30,
2023, was P173,100.

3. What is the materials inventory at December 31, 20237

A. P74,700 C. P73,950

B. P76,350 D. P78,750

4. What is the amount of direct labor cost included in the December 31, 2023, inventory?

A. P30,000 C. P66,300

B. P24,900 D. P41,400

5. What is the correct inventory at December 31, 20237

A. P148,650 C. P149,400

B. P198,150 D. P151,050

Problem 3-13

Inventory Valuation: Lower of Cost or Net Realizable Value

ZEBRA MUSIKAHAN CO. sells musical instruments. In your audit of the company's financial statements for the year
ended December 31, 2023, you have gathered the following data concerning inventory.

December 31, 2023, the balance in Zebra's Inventory account was P502,000, and the Allowance for Inventory
Writedown had a balance of P32,000. The relevant inventory cost and market data at December 31, 2023, are
summarized in the schedule below.
 Replacement Sales Net Realizable Normal
Cost Cost Price Value Profit
Guitars P 89,000 P 86,000 P 91,500 P 87,000 P 6,400
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 P 502,000 P 427,000 P 518,500 P 480,000 P 45,950

1. What is the proper balance in the Allowance for Inventory Writedown at December 31, 2023?

A. P75,000 C. P32,000

B. P22,000 D. P25,000

2. The adjusting entry on December 31, 2023, 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 3-14

Valuation of Inventories

MALOX Specialty Company manufactures three modelsanu gear shif 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, 2023, 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 P 202,500 P 201,000
Click adjustment model 283,500 267,000
Deluxe model 324,000 330,000
TOTAL DOWN TUBE SHIFTERS 810,000 798,000

COST NRV
Bar End Shifter
Standard Model 249,000 270,150
Click adjustment model 297,000 292,650
TOTAL BAR END SHIFTERS 546,000 562,800

COST NRV
Head Tube Shifter
Standard Model P 234,000 232,950
Click adjustment model 351,000 357,900
Total Head tube shifters 585,000 590,850
TOTAL FINISHED GOODS P 1,941,000 P 1,951,650

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, 2023.

1. Finished goods inventory

A. P1,941,000 C. P1,951,650

B. P1,929,000 D. P1,963,650

2. Work in process inventory

A P324,900 C. P326,100

B. P337,500 D P313,500
3. Raw materials inventory

A. P792,000 C. P726,000

B. P682,200 D. P712,200

4. Factory supplies

A. P194,400 C P185,100

B. P197,700 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.

Problem 3-15

FIFO Costing Method

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, 2023, inventory on hand
consisted of 350 stoves at P820 each and 43 stoves at P850 each. During the month ended December 31, 2023,
the following inventory transactions occurred (all purchase and sales transactions are on credit):

2023

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 inve or on December 31, 2023

A P148,930 C. P133,607

B. P148,980 D. P126,280
2. What is the cost of goods sold in December 2023?

A. P367,230 C. P366,320

B. P371,330 D. P389,930

3. What is Gavial's gross profit in December 2023?

A. P173,770 C. P177,870

B. P155,170 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, 2023, 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 C. I and III only

B. II and III only D. I, II, and III

5. If the net realizable value of Gavial's inventory on December 31, 2023, falls to P920, the inventory value should
be reduced by

A. P7,300 C. P8,162

B. P7,250 D. P 0

Problem 3-16

FIFO Costing Method

The following information was obtained from the statement of financial position of LION, INC.

Dec 31, 2023 Dec 31, 2023

Cash P 706,600 P 200,000
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 sales 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
2023 was P65.20 and increased P0.20 per month during the year. During 2023, payments to suppliers totaled
P943,400 and operating expenses totaled P440,000. The ending inventory for 2022 was valued at P65.00 per unit.

Based on the preceding information, determine the following:

1. Number of units sold during 2023

A. 18,900 C. 16,000
 B. 18,400 D. 21,400

2. Total cost of purchases during 2023

A. P1,173,600 C. P1,213,200

B. P1,191,600 D. P1,193,400

3. Accounts payable balance at December 31, 2023

A. P793,400 C. P400,000

B. P393,400 D. P419,800

4. Inventory quantity at December 31, 2023

A. 5,750 C. 5,250

B. 6,550 D. 8,150

5. FIFO cost of inventory on December 31, 2023

A. P352,500 C. P385,900

B. P439,230 D. P425,830

Problem 3-17

Perpetual Inventory System

Your client took a 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 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

COST SALES PRICE SHIPPED BILLED Credited to

Inventory
Control
P 5,650 P 7,200 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. Periodic or cycle counts of selected inventory items are made at various times during the year rather than a
single inventory count at year-end Which of the following 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 discount

4. The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the
following 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 customers had not been recorded.

C. No journal entry had been made on the retailer's books for several items 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 3-18

Correcting Inventory Errors: Perpetual Inventory System

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, 2023, 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
exceeded 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, 2023, on FOB shipping point terms.
The goods were shipped on June 28, 2023, but, as they had not arrived by June 30, 2023, were not included in the
physical count. The purchase invoice was received and processed on June 30, 2023.

3. Goods costing P4,800 were sold on credit to Acero Co. for P7,800 on June 28, 2023, on FOB destination terms.
The goods were still in transit on June 30, 2023. The sales invoice was processed and recorded on June 29, 2023.

4. Goods costing P5,460 were purchased on credit (FOB destination) from San Miguel Co. on June 28, 2023. The
goods were received on June 29, 2023, and included in the physical count. The purchase invoice was received on
July 2, 2023.
5. On June 30, 2023, Caiman sold goods costing P12,600 on credit (FOB shipping point) terms to Pisaro Corp. for
P19,200. The goods were dispatched from the warehouse on June 30, 2023, 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, 2023, but were omitted from the physical count records pending their write-off.

1. What is the adjusted inventory balance on June 30, 2023?

A. P424,800 C. P445,000

B. P421,200 D. P434,400

2. What adjustment should be made to Caiman's sales revenue for the year ended June 30, 2023?

A. Net increase of P11,400

B. Net decrease of P11,400

C. Increase of P19,200

D. Decrease of P7,800

3. Caiman's accounts payable at June 30, 2023, 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. Purchases 2400

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 3-19

Purchases Cut Off Test

You are engaged in an audit of the financial statements of the CARABAO COMPANY for the year ended October 31,
2023, and have observed the physical inventory count on that date.

All merchandise received up to and including October 30, 2023, 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 2023, respectively:

OCTOBER 2023

Amount FOB Date of Invoice Date Merchandise

Received
P 7,200 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 03
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 2023

Amount FOB Date of Invoice Date Merchandise

Received
2,000 Destination October 29 November 04
4,850 Destination October 30 October 31
6,420 Shipping Point October 27 October 30
7,220 Shipping Point November 02 October 30
12,820 Shipping Point October 23 November 03
14,200 Shipping Point October 23 November 03
15,000 Destination October 27 November 03

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. Purchases 2,500
Accounts Payable 2,500
B. Accounts Payable 2,500
Purchases 2,500
C. Cost of Sales 2,500
Inventory, ending 2,500
D. No adjusting entry is necessary

3. The journal entry to adjust the purchases account should include

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. P41,610 D. P73,480

Problem 3-20

FIFO Costing Method

SEAL WHOLESALER wholesales food products to independent grocery stores. The company uses the perpetual
inventory system assigns cost to on a Inventory o first-in, first-out basis. Transactions and other related information
regarding two of the items (baked beans and plain flour) carried by Seal are given below for December 2023, the
last month of the company's reporting period.

BAKED BEANS PLAIN FLOUR

Unit of packaging Case containing 25 x 410 g cans Box containing 12 x 4 kg bags
Inventory @ Dec 1 350 cases @ P196 625 boxes @ P 384
Purchases 1. Dec 10: 200 cases @ 195 1. Dec 3: 150 boxes@ 384.50
2. Dec 19 470@197 per case 2. Dec 15: 200 boxes @ 384.50
3. Dec 29: 240 boxes @ 390
Purchase item 2/10, n/30, FOB Shipping n/30, FOB destination
December sales 730 cases @ P 285 950 boxes @ P 400
Returns and A customer returned 50 cases that As the Dec 15 purchase was
allowances had been shipped in error. The unloaded 10 boxes were discovered
customer’s account was credited for damaged. A credit of P 3,845 was
P 14,250 received by Seal Wholesaler.
Physical count at 326 cases on hand 15 boxes on hand
December 31
 Explanation of No explanation found assumed stolen Boxes purchased on Dec 29 still in
variance transit on Dec 31
Net realizable value P 290 per case P 385 per box
at Dec 31

1. What is the cost of Baked Beans inventory that was assumed stolen?

A. P2,744 C. P2,730

B. P4,060 D. P2,758

2 What is the cost of Plain Flour inventory on December 31, 20237

A P5,850 C. P5,767

B. P5,760 D. P5,775

3. What is the total cost of Seal's inventory (Baked Beans and Plain Flour) on December 31, 2023?

A. P69,989 C. P77,301

B. P72,747 D. P100,315

4. PAS 2 requires inventory to be stated at the lower of cost and

A. fair value C. nominal value

B. net realizable value D. net selling price

5. What amount of loss on decline in value of inventory should be recognized by Seal at the end of its reporting
period?

A. P38,236 C. P30,326

B. P7,910 D. P 0

Problem 3-21

Correcting Inventory Turnover and Average Days to Sell Inventory

The following information was taken from the audited financial statements of HORSE CO.:

Inventories

December 31, 2023 P 791,000

December 31, 2023 744,000

December 31, 2023 720,800

2023 2022

Sales P 10, 832,000 P 10,053,400

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 2022 inventory turnover

A. 5.80 times C. 5.71 times

B. 5.89 times D. 6.12 times

2. 2023 inventory turnover

A. 5.67 times C. 5.84 times

B. 5.53 times D. 6.02 times

3. 2022 average days to sell inventory

A. 63.9 C. 62

B. 59.6 D. 62.9

4. 2023 average days to sell inventory

A. 64.4 C. 60.6

B. 62.5 D. 66

Problem 3-22

Correcting Inventory Errors

MONKEY CO.'s annual net income for the period 2019-2023 is as follows:

YEAR Net Income (loss)

2019 150,000 overstated end of year

2020 340,000 understatement end of year

2021 645,000 understatement end of year

2022 (100,000) understatement end of year

2023 11,000 understatement end of year

1. What is the adjusted net income in 2019?

A. P150,000 C. P153,000

B. P159,000 D. P147,000

2. What is the adjusted net income in 2020?

A. P331,000 C. P349,000

B. P337,000 D. P340,000
3. What is the adjusted net income in 2021?

A. P651,000 C. P639,000

B. P648,000 D. P645,000

4. What is the adjusted net loss in 20227

A P89,500 C. P100,000

B. P101,500 D. P95,500

5. What is the adjusted net income in 20237

A. P250,000 C. P243,500

B. P234,500 D. P256,500

Problem 3-23

Income effect of inventory errors

The SNAKE, INC. reported income before taxes of P842,650 for 2023 and P965,350 for 2024. 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 2023 ending inventory was P109. The correct cost was P190 per
unit.

b. Goods costing P23,600 were received from a vendor on January 5, 2024. The shipment was made on December
26, 2023, under FOB shipping point term. The purchase was recorded in 2023 but the shipment was not included in
the 2023 ending inventory.

c. Merchandise costing P64,750 was sold to a customer on December 29, 2023. Snake was asked by the customer
to keep the merchandise until January 3, 2024, when the customer would come and pick it up. Although the sale
was properly recorded in 2023, 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, 2023, and was received by Snake on December 31, 2023. The purchase was recorded in 2024
and the merchandise was not included in the 2023 ending inventory.

1. What is the adjusted income before taxes for the year ended December 31, 20237

A. P809,500 C. P875,800

B. P632,800 D. P923,000

2. What is the adjusted income before taxes for the year ended December 31, 20247

A. P877,000 C. P885,000

B. P932,200 D. P843,850
Problem 3-24

Correcting Physical Inventory Cost

In your audit of the RABBIT, INC., you find that a physical count on December 31, 2023, showed merchandise
costing was on hand at that date. Your examination reveals the following items were all excluded from the inventory
per count. Inventory

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

2. Goods costing P39,500 that were shipped FOB shipping point on December 31, 2023. These goods were
delivered to the customer on January 6, 2024.

3. Goods costing P16,800 that were shipped FOB destination to a customer on December 29, 2023. The customer
received these goods on January 2, 2024.

4. Merchandise costing P76,150 shipped by a seller FOB destination on December 28, 2023, and received by
Rabbit, Inc. on January 3, 2024.

5. Goods costing P16,500 shipped by a vendor FOB seller on December 31, 2023, and received by Rabbit, Inc. on
January 4, 2024.

1. What is the amount that should appear on Rabbit, Inc.'s statement of financial position as inventory at
December 31, 2023?

A. P539,000 C. P535,800

B. P519,000 D. P496,300

Problem 3-25

Correcting Inventory Errors

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, 2023.

Inventory at December 31, 2023

(based on physical count in Bird's

warehouse at cost on December 31, 2023) P 1,870,000

Accounts Payable at Decemeber 31,2023 1,415,000

Net Sales(sales less sales return) 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, 2023. 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, 2023. These goods with invoice
cost of P93,000 were shipped on December 29, 2023.

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, 2023. These goods
costing P49,000 were inspected and returned to inventory on January 7, 2024 Credit memos for P67.800 were
issued to the customers at that date
5. in transit to a customer on December 31, 2023, were tools costing In 1000 shipped FOB shipping point on
Decemy 26, 2023 sales invoice for P29,400 was issued on January 3, 2024, when Bird Company was notified by the
customer that the tools had been received

6. At exactly 5:00 pm on December 31, 2023, goods costing P31,200 were received from a vendor. These were
recorded on a receiving report dated January 2, 2024. The related invoice was recorded on December 31, 2023, 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, 2023. 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, 2024. It specifically related to merchandise bought
in December 2023, one-half of which was still in the inventory at December 31, 2023. The freight was not included
in either the inventory or in accounts payable at December 31, 2023.

1. Bird's December 31, 2023, inventory should be increased by

A. P216,200 C. P252,200

B. P233,200 D. P123,200

2. Bird's accounts payable balance at December 31, 2023, should be increased by

A. P68,000 C. P125,000

B. P145,000 D. P161,000

3. The amount of net sales to be reported on Bird's income statement for the year ended December 31, 2023,
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, 2023, 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, 2023, statement of financial position should be

A. P2,103,200

B. P2,086,200

C. P2,122,200

D. P1,993,200