NAME: ESTRADA, KATE ANSLEY D.
UNIVERSITY OF LUZON
College of Accountancy
ACC412/313/314: Audit of Inventory
1ST Semester 2021-2022
PROBLEM 1
At the close of its fiscal year on March 31, 2014, Villager Industries, Inc. was in the process of relocating its plant. This
resulted in some confusion relating to the inventory cutoff, as indicated by the following:
(1) Merchandise on hand costing P1,794 was included in the inventory although the purchase
invoice was not recorded until April 12, 2014.
(2) Merchandise shipped on April 1, 2014, was included in inventory--the cost of this merchandise
was P2,219, and the sale was recorded as P3,138 on March 31, 2014.
(3) Merchandise costing P12,150 was included in the inventory although it was shipped to a
customer on March 31, 2014, FOB shipping point; the company recorded the sale of P19,246
on that date.
(4) Merchandise costing P1,820 was not counted.
(5) Merchandise in transit (shipped to the company FOB destination) was recorded as a purchase
as of April 2, 2014, and its cost of P17,287 was not included in the March 31, 2014, inventory.
Assuming that the company does not maintain a perpetual inventory system and that the books for the fiscal year have
been closed, provide the necessary correcting entries. (Ignore income taxes.)
1. Retained Earnings 1,794
Accounts Payable 1,794
2. Retained Earnings 3,318
Accounts Receivable 3,318
3. Retained Earnings 12,150
Inventory 12,150
4. Inventory 1,820
Retained Earnings 1,820
5. No Entry. Correct recording of the transaction
PROBLEM 2
Kendall Company reported the following net income amounts:
2014 ...................................... P42,000
2015 ...................................... P67,000
2016 ...................................... P78,000
In 2017, the company discovered errors that had been made in computing the ending inventories for 2014 and 2015, as
follows:
2014 Ending inventory overstated by P9,000.
2015 Ending inventory understated by P6,000.
Compute the correct net incomes for (1) 2014, (2) 2015, and (3) 2016.
1. 2014 net income:
As reported 42,000
Correction for inventory due to overstatement (9,000)
Corrected Net Income 33,000
2. 2015 net income:
As reported 67,000
Correction for 2014 inventory overstatement 9000
Correction for 2015 inventory understatement 6000
Corrected Net Income 82,000
3. 2016 net income
As reported 78,000
Correction for 2015 inventory understatement (6000)
Corrected Net Income 72,000
PROBLEM 3
Indicate in each of the spaces provided the effect of the described errors on the various elements of a company's
financial statements. Use the following codes: O = amount is overstated; U = amount is understated; NE = no effect.
Assume a periodic inventory system.
Indicate in each of the spaces provided the effect of the described errors on the various elements of a company's
financial statements. Use the following codes: O = amount is overstated; U = amount is understated; NE = no effect.
Assume a periodic inventory system.
Accounts Accounts Cost of
Receivable Inventory Payable Sales Goods Sold
EXAMPLE: Excluded goods in rented
warehouse from inventory NE U NE NE O
count.
Accounts Inventor Accounts Sales Cost of
Receivable y Payable Goods
Sold
1. Goods in transit shipped "f.o.b. destination" by supplier were NE NE O NE O
recorded as a purchase but were excluded from ending
inventory.
2. Goods held on consignment were included in inventory count NE O O NE NE
and recorded as a purchase.
3. Goods in transit shipped "f.o.b. shipping point" were not U O NE U U
recorded as a sale and were included in ending inventory.
4. Goods were shipped and appropriately excluded from ending U NE NE U NE
inventory but sale was not recorded.
