FAR EASTERN UNIVERSITY

INSTITUTEOF ACCOUNTS, BUSINESS AND FINANCE

Department of Accountancy & Internal Auditing

AUDITING PROBLEMS
First Semester AY 2017-2018
QUIZ 8 – AUDIT OF INVENTORY
Name Date
(Family Name) (First Name) (Middle Name) Section
Professo Day/Tim
r e
Stud. No. Score /56 items
Room Rating

ANSWER SHEET
Problem Questio
No. n No. YOUR ANSWERS HERE
1 1 P 2,300,000

2 2 P 1,300,000

3 3 P 1,550,000
4 P 710,000
5 P 4,650,000
6 P 2,320,000
7 P 540,000

4 8 P 7,875,000
9 P 4,527,000
10 P 330,000
11 P 1,296,000
12 P 627,000

5 13 P 630,000
14 P 3,840,000
15 P 960,000

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Instructions:
Answer the following independent problem. Write your answer on the solution guide provided. Supporting
computation is not necessary.

Problem 1:
Presented below is a list of items that may or may not reported as inventory in a company’s December 31
statement of financial position.

1. Goods out on consignment at another company’s store P 800,000

2. Goods sold on installment basis 100,000
3. Goods purchased f.o.b. shipping point that are in transit at December 31 120,000
4. Goods purchased f.o.b. destination that are in transit at December 31 200,000
5. Goods sold to another company, for which our company has signed an agreement to
repurchase at a set price that covers all costs related to the inventory 300,000
6. Goods sold where large returns are predictable 280,000
7. Goods sold f.o.b. shipping point that are in transit December 31 120,000
8. Freight charges on goods purchased 80,000
9. Factory labor costs incurred on goods still unsold 50,000
10. Interest cost incurred for inventories that are routinely manufactured 40,000
11. Costs incurred to advertise goods held for resale 20,000
12. Materials on hand not yet placed into production 350,000
13. Office supplies 10,000
14. Raw materials on which a the company has started production, but which are not
completely processed 280,000
15. Factory supplies 20,000
16. Goods held on consignment from another company 450,000
17. Costs identified with units completed but not yet sold 260,000
18. Goods sold f.o.b. destination that are in transit at December 31 40,000
19. Temporary investment in stocks and bonds that will be resold in the near future 500,000

Question 1:
How much of these items would typically be reported as inventory in the financial statements?
ANSWER: P 2,300,000

SOLUTIONS:
PAS 2 par. 6 defines “Inventories” as assets
a. held for sale in the ordinary course of business;
b. in the process of production for such sale; or
c. in the form of materials or supplies to be consumed in the production process or in the rendering of
services.

Par. 10 further states that the cost of inventories shall comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their present location and condition.

Therefore, items 1, 3, 5, 8, 9, 12, 14, 15, 17 and 18 would be reported as inventory in the financial
statements.

The other items will be reported as follows:

Item 2 - Cost of goods sold in the income statement

Item 4 - Not reported in the financial statements

Item 6 - Cost of goods sold in the income statement

Item 7 - Cost of goods sold in the income statement

Item 10 - Interest expense in the income statement

Item 11 - Advertising expense in the income statement

Item 13 - Office supplies in the current asset section of the statement of financial position

Item 16 - Not reported in the financial statements

Item 19 - Trading securities in the current asset section of the statement of financial position

Problem 2:
In connection with your audit of the Alcala Manufacturing Company, you reviewed its inventory as of December
31, 2017 and found the following items:

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a) A packing case containing a product costing P 100,000 was standing in the shipping room when the
physical inventory was taken. It was not included in the inventory because it was marked “Hold for shipping
instructions.” The customer’s order was dated December 18, but the case was shipped and the costumer
billed on January 10, 2018.

b) Merchandise costing P 600,000 was received on December 28, 2017, and the invoice was recorded. The
invoice was in the hands of the purchasing agent; it was marked “On consignment”.

c) Merchandise received on January 6, 2018, costing P 700,000 was entered in purchase register on January
7. The invoice showed shipment was made FOB shipping point on December 31, 2017. Because it was not
on hand during the inventory count, it was not included.

d) A special machine costing P 200,000, fabricated to order for a particular customer, was finished in the
shipping room on December 30. The customer was billed for P 300,000 on that date and the machine was
excluded from inventory although it was shipped January 4, 2018.

e) Merchandise costing P 200,000 was received on January 6, 2018, and the related purchase invoice was
recorded January 5. The invoice showed the shipment was made on December 29, 2017, FOB destination.

f) Merchandise costing P 150,000 was sold on an installment basis on December 15. The customer took
possession of the goods on that date. The merchandise was included in inventory because Alcala still
holds legal title. Historical experience suggests that full payment on installment sale is received
approximately 99% of the time.

g) Goods costing P 500,000 were sold and delivered on December 20. The goods were included in the
inventory because the sale was accompanied by a purchase agreement requiring Alcala to buy back the
inventory in February 2018.

Question 2:
Based on the above and the result of your audit, how much of these items should be included in the
inventory balance at December 31, 2017?
Answer: P 1,300,000

SOLUTIONS:
Unshipped goods P 100,000
Purchased merchandise shipped FOB shipping point 700,000
Goods used as collateral for a loan 500,000
Total 1,300,000

Reasons for including and excluding the items:

a) Included - Merchandise should be included in the inventory until shipped. An exception would be
special orders.
b) Excluded - Alcala Manufacturing has the merchandise on a consignment basis and therefore does
not possess legal title.
c) Included - The merchandise was shipped FOB shipping point and therefore would be included in
the inventory on the shipping date.
d) Excluded - Title may pass on special orders when segregated for shipment.
e) Excluded - The merchandise was shipped FOB destination and was not received until January 3,
2006.
f) Excluded - Historical experience suggests that Alcala will collect the full purchase price, so the
sale is recognized even though legal title has not passed.
g) Included - This is not a sale of inventory but instead is a loan with the inventory as collateral.

Problem 3:
The Anda Company is on a calendar year basis. The following data were found during your audit:

a) Goods in transit shipped FOB destination by a supplier, in the amount of P 100,000, had been excluded
from the inventory, and further testing revealed that the purchase had been recorded.

b) Goods costing P 50,000 had been received, included in inventory, and recorded as a purchase. However,
upon your inspection the goods were found to be defective and would be immediately returned.

c) Materials costing P 250,000 and billed on December 30 at a selling price of P 320,000, had been
segregated in the warehouse for shipment to a customer. The materials had been excluded from inventory
as a signed purchase order had been received from the customer. Terms, FOB destination.

d) Goods costing P 70,000 was out on consignment with Hermie Company. Since the monthly statement from
Hermie Company listed those materials as on hand, the items had been excluded from the final inventory
and invoiced on December 31 at P 80,000.

e) The sale of P 150,000 worth of materials and costing P 120,000 had been shipped FOB point of shipment
on December 31. However, this inventory was found to be included in the final inventory. The sale was
properly recorded in 2016.

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f) Goods costing P 100,000 and selling for P 140,000 had been segregated, but not shipped at December
31, and were not included in the inventory. A review of the customer’s purchase order set forth terms as
FOB destination. The sale had not been recorded.

g) Your client has an invoice from a supplier, terms FOB shipping point but the goods had not arrived as yet.
However, these materials costing P 170,000 had been included in the inventory count, but no entry had
been made for their purchase.

h) Merchandise costing P 200,000 had been recorded as a purchase but not included as inventory. Terms of
sale are FOB shipping point according to the supplier’s invoice which had arrived at December 31.

Further inspection of the client’s records revealed the following December 31, 2017 balances: Inventory, P
1,100,000; Accounts receivable, P 580,000; Accounts payable, P 690,000; Net sales, P 5,050,000; Net
purchases, P 2,300,000; Net income, P 510,000.

QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balances of following as of December
31, 2017:

Question 3: Inventory (ANSWER: P 1,550,000)

Question 4: Accounts Payable (ANSWER: P 710,000)
Question 5: Net Sales (ANSWER: P 4,650,000)
Question 6: Net Purchases (ANSWER: P 2,320,000)
Question 7: Net Income (ANSWER: P 540,000)

Questions No. 3 to 7 Supporting Computations:

Accounts Net
Inventory Payable Net Sales Purchases Net Income
Unadjusted balances 1,100,000 690,000 5,050,000 2,300,000 510,000
(a) - (100,000) - (100,000) 100,000
(b) (50,000) (50,000) - (50,000) -
(c) 250,000 - (320,000) - (70,000)
(d) 70,000 - (80,000) - (10,000)
(e) (120,000) - - - (120,000)
(f) 100,000 - - - 100,000
(g) - 170,000 - 170,000 (170,000)
(h) 200,000 - - - 200,000
Adjusted balances 1,550,000 710,000 4,650,000 2,320,000 540,000
(No. 3) (No. 4) (No. 5) (No. 6) (No. 7)

Problem 4:
You were engaged by Asingan Corporation for the audit of the company’s financial statements for the year
ended December 31, 2017. The company is engaged in the wholesale business and makes all sales at 25%
over cost.

The following were gathered from the client’s accounting records:

PURCHASES
Date Reference Amount
Balance forwarded 4,200,000
12/28 RR #1059 36,000
12/30 RR #1061 105,000
12/31 RR #1062 63,000
12/31 RR #1063 96,000
12/31 Closing entry (4,500,000)
0

SALES
Date Reference Amount
Balance forwarded 7,800,000
12/27 SI No. 965 60,000
12/28 SI No. 966 225,000
12/28 SI No. 967 15,000
12/31 SI No. 969 69,000
12/31 SI No. 970 102,000
12/31 SI No. 971 24,000
12/31 Closing entry (8,295,000)
0

Notes: SI – Sales Invoice; RR – Receiving Report

Accounts receivable P 750,000

Inventory 900,000
Accounts payable 600,000
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You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was
properly taken.

When performing sales and purchases cut-off tests, you found that at December 31, the last Receiving Report
which had been used was No. 1063 and that no shipments had been made on any Sales Invoices whose
number is larger than No. 968. You also obtained the following additional information:

a) Included in the warehouse physical inventory at December 31 were goods which had been purchased and
received on Receiving Report No. 1060 but for which the invoice was not received until the following year.
Cost was P 27,000.

b) On the evening of December 31, there were two trucks in the company siding:
 Truck No. XXX 888 was unloaded on January 2 of the following year and received on Receiving
Report No. 1063. The freight was paid by the vendor.
 Truck No. MGM 357 was loaded and sealed on December 31 but leave the company premises on
January 2. This order was sold for P 150,000 per Sales Invoice No. 968.

c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to ABC
Trading Corporation. ABC received the goods, which were sold on Sales Invoice No. 966 terms FOB
Destination, the next day.

d) Enroute to the client on December 31 was a truckload of goods, which was received on Receiving Report
No. 1064. The goods were shipped FOB Destination, and freight of P 2,000 was paid by the client.
However, the freight was deducted from the purchase price of P 800,000.

Based on the above and the result of your audit, determine the following:

Question 8: Sales for the year ended December 31, 2017

ANSWER: P 7,875,000

Question 9: Purchases for the year ended December 31, 2017

ANSWER: P 4,527,000

Question 10: Accounts receivable as of December 31, 2017

ANSWER: P 330,000

Question 11: Inventory as of December 31, 2017

ANSWER: P 1,296,000

Question 12: Accounts payable as of December 31, 2017

ANSWER: P 627,000
Questions No. 8 to 12 Supporting Computations:

Accounts Accounts
Sales Purchases Receivable Inventory Payable
Unadjusted balances 8,295,000 4,500,000 750,000 900,000 600,000
AJE No. 1 (195,000) - (195,000) - -
AJE No. 2 - 27,000 - - 27,000
AJE No. 3 - - - 96,000 -
AJE No. 4 - - - 120,000 -
AJE No. 5 (225,000) - (225,000) - -
AJE No. 6 - - - 180,000 -
Adjusted balances 7,875,000 4,527,000 330,000 1,296,000 627,000
(No. 8) (No. 9) (No. 10) (No. 11) (No. 12)

Adjusting entries:

1. Sales (P69,000+P102,000+P24,000) 195,000

Accounts Receivable 195,000
To adjust unshipped goods recorded as sales
(SI No. 969, 970 and 971)

2. Purchases 27,000
Accounts Payable 27,000
To take up unrecorded purchases (RR No. 1060)

3. Inventory 96,000
Cost of Sales 96,000
To take up goods under RR No. 1063

4. Inventory (P150,000/1.25) 120,000

Cost of Sales 120,000
To take up unshipped goods under SI No. 968

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 5. Sales 225,000
Accounts Receivable 225,000
To reverse entry made to record SI No. 966

6. Inventory (P225,000/1.25) 180,000

Cost of Sales 180,000
To take up goods under SI No. 966

Problem 5:
Balungao Company engaged you to examine its books and records for the fiscal year ended June 30, 2017.
The company’s accountant has furnished you not only the copy of trial balance as of June 30, 2017 but also the
copy of company’s balance sheet and income statement as at said date. The following data appears in the cost
of goods sold section of the income statement:

Inventory, July 1, 2016 P 500,000

Add Purchases 3,600,000
Total goods available for sale P 4,100,000
Less Inventory, June 30, 2017 700,000
Cost of goods sold P 3,400,000

The beginning and ending inventories of the year were ascertained thru physical count except that no
reconciling items were considered. Even though the books have been closed, your working paper trial balance
show all account with activity during the year. All purchases are FOB shipping point. The company is on a
periodic inventory basis.

In your examination of inventory cut-offs at the beginning and end of the year, you took note of the following:

July 1, 2017
a. June invoices totaling to P 130,000 were entered in the voucher register in June. The corresponding goods
not received until July.
b. Invoices totaling P 54,000 were entered in the voucher register in July but the goods received during June.

June 30, 2017

c. Invoices with an aggregate value of P 186,000 were entered in the voucher register in July, and the goods
were received in July. The invoices, however, were date June.
d. June invoices totaling P 74,000 were entered in the voucher register in June but the goods were not
received until July.
e. Invoices totaling P 108,000 (the corresponding goods for which were received in June) were entered the
voucher register, July.
f. Sales on account in the total amount of P 176,000 were made on June 30 and the goods delivered at that
time. Book entries relating to the sales were made in June.

QUESTIONS:
Based on the above and the result of your cut-off tests, answer the following:

Question 13:
How much is the adjusted Inventory as of July 1, 2017?
ANSWER: P 630,000

Question 14:
How much is the adjusted Purchases for the fiscal year ended June 30, 2017?
ANSWER: P 3,840,000

Question 15:
How much is the adjusted Inventory as of June 30, 2017?
ANSWER: P 960,000

Questions No. 13 to 15

Inventory Inventory
7/1/17 Purchases 6/30/17
Unadjusted balances 500,000 3,600,000 700,000
Add (deduct) adj.:
Item a 130,000 - -
Item b - (54,000) -
Item c - 186,000 186,000
Item d - - 74,000
Item e - - -
Item f - 108,000 -

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Net adjustments 130,000 240,000 260,000
Adjusted balances 630,000 3,840,000 960,000
(No. 13) (No. 14) (No. 15)

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