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AUDITING
(Problems)

BOOKLET 2
MAY 2023 BATCH

TOPICS:

AP 0503 – AUDIT OF RECEIVABLES

AP 0504 – AUDIT OF INVENTORY

PROF. LORD GEN RILLORAZA

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AUDIT OF RECEIVABLES
(PRACTICE PROBLEMS)

PROBLEM 1
Proprietary Company provided the following breakdown of its Accounts
Receivable account as of December 31, 2021:
January 1 balance P600,000
Credit sales 5,000,000
Subscriptions receivable 250,000
Claims against common carrier for damages 140,000
Advances to employees 20,000
Cash advances to affiliates 500,000
Advances to suppliers 95,000
Recoveries 15,000
Collections from customers 4,900,000
Write-off 35,000
Sales returns 38,000
Sales discounts 130,000
Collections from claims against carrier 40,000
Collections from subscriptions 120,000

The collections from customers include the recovery initially written off.
The receivable from the subscribed shares are collectible within one year
from December 31, 2021.

Requirements:
1. What is the correct balance of Accounts Receivable that should be
presented as of December 31, 2021?
2. What is the correct amount to be presented as Trade and Other
Receivables under Current Assets as of December 31, 2021?

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3. Indicate where to present the items excluded from accounts
receivable.

PROBLEM 2
Your audit of the financial statements of Fantastic Corporation for the
period ended and as of December 31, 2021 revealed the following
regarding its accounts receivable and related allowance for doubtful
accounts:

• The January 1 balances of Accounts Receivable and Allowance for

Doubtful accounts are P2,000,000 and P55,000 respectively.
• The December 31 balance of Accounts Receivable, with the
corresponding aging, is shown below:
Period Outstanding Amount
Current (under 30 days) ₱980,000
30-60 days 500,000
61-120 days 380,000
121-180 days 200,000
Over 180 days 40,000
Total ₱2,100,000

• The credit term is 2/15, n/30. Past experiences show that 30% of
the current accounts avail of the cash discount.
• 75% of the accounts that are over 180 days are already worthless.
• Based on past experiences, the following percentages are
determined to be appropriate in estimating the allowance for
doubtful accounts:
Period Outstanding Percentage
Current (under 30 days) -
30-60 days 2%
61-120 days 20%
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121-180 days 40%
Over 180 days 50%

• Doubtful accounts expense was recorded on September 30, 2021

which is 2% of the credit sales amounting to P4,000,000 for the
interim period ended September 30, 2021.

Requirements:
1. What is the adjusted balance of the Accounts Receivable account
as of December 31, 2021?

2. How much is the additional doubtful accounts expense to be

recognized for the period beginning October 1, 2021 to December
31, 2021?

3. What is the adjusted balance of Allowance for Doubtful Accounts

account as of December 31, 2021?

4. What is the carrying value of the accounts receivable as of

December 31, 2021?

5. If the company is using the percentage of accounts receivable in

determining the allowance for doubtful accounts, what is the
correct doubtful accounts expense for the year ended December
31, 2021?

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PROBLEM 3
You were engaged to audit the financial statements of Healthy Teeth
Company, a company selling different kinds of chocolates, as of and for
the period ended December 31, 2021.

The ending accounts receivable balance of your client is P4,300,000. The

following is a summary of the amounts based from the customers’ replies
to the confirmation requests, and the corresponding aging of their
accounts (based from the subsidiary ledger):

Age
Amount per Over
Amount per 61-120 121-180
Customer Subsidiary 0-30 days 31-60 days 180
Reply days days
Ledger days
Ashe 1,250,000 1,240,000 1,200,000 50,000
Brand 800,000 800,000 700,000 60,000 40,000
Corki 734,000 734,000 700,000 34,000
Darius 866,000 866,000 850,000 16,000
Ekko 300,000 250,000 300,000
Fizz 320,000 320,000 300,000 20,000
Graves 30,000 - 30,000
Totals 4,300,000 4,210,000 1,800,000 2,320,000 94,000 40,000 46,000

Percent uncollectible 1% 5% 15% 30% 70%

Additional information related to the audit are as follows:

• Healthy Teeth sells good with terms 2/10, n/30.
• Collections for 2021 total to P10,369,000.
• The beginning balances of Accounts Receivable and Allowance for
Bad Debts are P4,050,000 and P57,900, respectively.

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• The differences in the amount of Ashe Company’s account and
Ekko Corp.’s account in the subsidiary ledger and their reply are
from recorded sales on December 30, 2021 with term FOB
Destination. The goods were received by Ashe on January 5, 2022;
while Ekko received the goods on January 6, 2022.
• Graves’s account had been outstanding for almost 1.5 years
already. The entity decided to write-off the account.

1. What is the adjusted balance of Accounts Receivable as of

December 31, 2021?
2. What is the ending balance of Allowance for Bad Debts as of
December 31, 2021?
3. How much is the bad debts for the current period?
4. How much is the net sales for the current period?
5. What is the net realizable value of Healthy Teeth’s Accounts
Receivable as of December 31, 2021?

PROBLEM 4
Bigatin Corporation sells heavy equipment and machinery to various
entities. Part of the company’s policy is to prepare prenumbered shipping
documents to be issued for each sale. Upon receiving the shipping
document, the billing clerk prepares a sales invoice and bills the customer.

The last shipment made in the year ended December 31, 2021 was
recorded on Shipping Document No. 442. A cut-off testing was
conducted on January 10, 2022 and the following shipping documents,
paired with their corresponding sales invoice, were gathered:

Shipping Doc. No. Sales Invoice No. Amount of Sale

436 1001 ₱340,000
437 1008 120,000
438 1003 100,000
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439 1006 300,000
440 1005 250,000
441 1007 180,000
442 1009 220,000
443 1002 140,000
444 1004 165,000

Sales invoices with numbers 1001 to 1007 were the only ones recorded in
the December 2021 sales journal.

Requirements:
1. What is the net overstatement/understatement of sales for the year
ended December 31, 2021?
2. What is the adjusting journal entry to correct the balance of the
accounts receivables and sales?

PROBLEM 5
In the course of your audit of the Loans and Receivables account of
Lender Co., a lending company, for the year ended December 31, 2021,
you discovered the following information from the company’s subsidiary
ledger accounts:
Borrower Term Balance per Ledger
Who Corp. 10% ₱5,000,000
What Corp. 12% 2,000,000
When Corp. non-int. bearing 4,000,000
Why Corp. 10% serial 2,000,000
Audit notes:
• The three-year loan to Who Corp. was made on January 1, 2020
when the prevailing rate of interest was at 12%. The company
recorded the loan as a debit to the Loans and Receivables account
at the face value of the loan charging any difference between the
loaned amount and the face value of the loan to interest income.
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Semi-annual interest collection on the loan every June 30 and
December 31 has been appropriately recorded.
• The loan to What Corp., an associate, was made at face value on
January 1, 2021 and is due on December 31, 2023. The first annual
interest collection on the loan on December 31 was correctly
recorded.
• The P4,000,000, five-year non-interest-bearing loan to When Corp.
was made on January 1, 2019. The total amount disbursed on that
date was based on the appropriate discount rate prevailing on that
date at 10%. The transaction was recorded by the client as a debit
to Loans and Receivables at face value of the loan charging interest
income for its difference to the amount credited to cash.
• The Why Corp. serial notes which were dated January 1, 2021 were
collectible at the rate of P500,000 every July 1 and January 1. The
company recorded the loan as a debit to the Loans and Receivables
account at the face value of the loan charging any difference
between the loaned amount and the face value of the loan to
interest income. The first collection was made on July 1 of the
current year. The amount extended on the loan was consistent
with the prevailing interest rate for similar note which was 12%.
• Notes are from normal lending operations unless otherwise
specified.

Requirements:
1. The total amount extended to Who Corp. on January 1, 2020 and
the outstanding balance as of December 31, 2021.

2. The total amount extended to What Corp. on January 1, 2021 and

the outstanding balance of the loan as of December 31, 2021.

3. The total amount extended to When Corp. on January 1, 2019 and

the outstanding balance of the loan as of December 31, 2021.
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4. The total amount extended to Why Corp. on January 1, 2021 and

the outstanding balance as of December 31, 2021.

5. Correct interest income for 2021.

6. Accrued interest receivable as of December 31, 2021.

7. Correct balance of Loans and Receivables to be presented as

current asset.

8. Correct balance of Loans and Receivables to be presented as

noncurrent asset.

PROBLEM 6
During the course of your audit of the notes receivables of Megatron
Corporation, you were able to gather the following information regarding
the transactions that transpired for the whole year ended December 31,
2021:

• The entity sold a parcel of land on January 1, 2021 for a note with
a face value of P1,500,000. The rate is 12%, and interest is payable
semiannualy every July 1 and January 1. The note is due on January
1, 2024. The carrying value of the land as of the date of sale is
P1,200,000.
• Another tract of land was sold on July 1, 2021 and Megatron
received a note in exchange. The face value of the note is
P2,000,000 with a rate of 12%, and is due on June 30, 2022. The
carrying value of the land as of the date of sale is P1,900,000.

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• The entity is following up on its plan to expand and relocate in
2022, so the entity sold its plant in Marikina last October 1, 2021
for a P5,000,000 note with a rate of 11%. The note is payable on
September 30, 2024. The prevailing market rate is 12%. Present
value factor of 1 at 12% for 3 years is 0.7118, and the present value
factor of an ordinary annuity of 1 at 12% for 3 years is 2.4018. The
carrying value of the building as of December 31, 2020 is
P5,600,000, which is 80% depreciated. The remaining useful life of
the building is 2 years.
• An equipment was sold by the entity on January 1, 2021 for a
noninterest bearing note with a face value of P800,000. The note is
payable on December 31, 2022. The prevailing market rate is 12%.
Present value factor of 1 at 12% for 2 years is 0.7972, and the
present value factor of an ordinary annuity of 1 at 12% for 2 years
is 1.6901. The carrying value of the equipment as of December 31,
2020 is P640,000.

Requirements:
1. What is the total balance notes receivable as of December 31,
2021?

2. What is the net gain/loss from sale from the transactions?

3. What is the interest income to be recognized for 2021?

4. How much should be presented as accrued interest receivable as of

December 31, 2021?

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PROBLEM 7
On January 1, 2019, Beloved Co. extended a loan to Bewitched Co. and
received a five-year, 10%, P4,000,000 note. The amount extended resulted
to a yield rate of 9%. The note calls for annual interest to be paid every
December 31.

Beloved received the 2019 and 2020 interest on schedule, however, during
2021, Beautiful had been experiencing financial difficulties. On December
31, 2021, Bewitched was not able to pay the interest. Beloved recorded
the accrued interest for 2021.
Bewitched communicated to Beloved a revised payment scheme due to
the recent financial difficulty the entity had experience. The payment
schedule included the following:
• Bewitched will not be paying the interest anymore
• The principal will be paid in four (4) equal instalments starting
December 31, 2023

The effective interest rate on December 31, 2021 is 13%.

Note: round-off present value factors to 4 decimal places (i.e. x.xxxx)

Requirements:
1. What is the amount of loan extended to Bewitched Co.?

2. How much is the interest income for 2021?

3. What is the present value of the recoverable amount on December

31, 2021?

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4. How much is the impairment loss?

5. How much is the interest income for 2022, 2023, 2024, 2025, and
2026?

6. What is the balance of loan receivable as of December 31, 2022,

2023, 2024, 2025, and 2026?

QUIZZER – AUDIT OF RECEIVABLES

Problem 1
Your sales cut-off examination revealed the following information:

1. The December 31 inventory was determined by a physical count

on December 29 and based on such count, the inventory was
recorded by:
Inventory 450,000
Cost of Sales 450,000

2. The 2021 ledger shows a Sales balance of P 1,820,000.

3. The company sells at a markup of 25% based on cost.
4. All customers are within a four-day delivery area of the company
plant.
5. The sales register for December 2021 and January 2022, showed the
following details:

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December
Register FOB Terms Date Shipped Amount
Invoice Number
101 Shipping point 12/30 12,000
102 Destination 12/27 9,000
103 Shipping point 12/29 17,500
104 Destination 12/29 7,200
105 Shipping point 12/28 18,000

January
Register FOB Terms Date Shipped Amount
Invoice Number
106 Destination 12/31 P 24,000
107 Shipping Point 12/29 15,000
108 Destination 01/02 22,500
109 Destination 12/27 30,000
110 Shipping Point 12/31 5,000

Required:
1. What is the adjusted sale in 2021?
A. 1,812,800 B. 1,827,800 C. 1,857,800.00 D. 1,862,800

2. What is the adjusted inventory balance at December 31, 2021?

A. 474,960 B. 455,760 C. 444,240 D. 430,800

Problem 2
The Royal Company included the following in its notes receivable as of
December 31, 2021:
Note receivable from sale of land P 880,000
Note receivable from consultation 1,200,000
Note receivable from sale of equipment 1,600,000

In connection with your audit, you were able to gather the following
transactions during 2021 and other information pertaining to the
company’s notes receivable:

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❖ On January 1, 2021, Royal Company sold a tract of land. The land,
purchased 10 years ago, was carried on Royal Company’s books at
a value of P500,000. Royal received a noninterest-bearing note for
P880,000. The note is due on December 31, 2022. There is no
readily available market value for the land, but the current market
rate of interest for comparable notes is 10%.

❖ On January 1, 2021, Royal Company finished consultation services

and accepted in exchange a promissory note with a face value of
P1,200,000, a due date of December 31, 2023, and a stated rate of
5% with interest receivable at the end of each year. The fair value
of the services is not readily determinable and the note is not
readily marketable. Under the circumstances, the note is
considered to have an appropriate imputed rate of interest of 10%.

❖ On January 1, 2021, Royal Company sold equipment with a

carrying amount of P1,600,000 to X Company. As payment, X
gave Royal Company a P2,400,000 note. The note bears interest
rate of 4% and is to be repaid in three annual installments of
P800,000 (plus interest on the outstanding balance). The first
payment was received on December 31, 2021. The market price of
the equipment is not reliably determinable. The prevailing rate of
interest for notes of this type is 14%.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
(Round off present value factors to four decimal places and final answers
to nearest hundred)
3. The consultation service fee revenue that should be recognized in
2021 is
a. P1,050,800 c. P 901,600
b. P1,095,800 d. P1,200,000

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4. The gain on sale of equipment that should be recognized in 2021 is
a. P331,600 c. P412,400
b. P257,280 d. P800,000

5. The noncurrent note receivable as of December 31, 2021 is

a. P2,605,706 c. P2,494,000
b. P1,825,800 d. P2,625,700

6. The current portion of long-term notes receivable as of December 31,

2018 is
a. P1,600,000 c. P 1,468,200
b. P1,680,000 d. P 800,000

7. The interest income to be recognized in 2018 is

a. P464,000 c. P 459,500
b. P435,800 d. P 156,000

Problem 3
BDO granted a loan to a borrower in the amount of P5,000,000 on
January 1, 2021. The interest rate on the loan is 10% payable annually
starting December 31, 2021. The loan matures in five years on December
31, 2023. BDO incurs P39,400 of direct loan origination cost and P10,000
of indirect loan origination cost. In addition, BDO charges the borrower
an 8-point nonrefundable loan origination fee.

QUESTIONS:
Based on the above information, answer the following: (Round off
present value factors to four decimal places)
8. The carrying amount of the loan as of January 1, 2021 is
a. P5,000,000 c. P5,039,400
b. P4,639,400 d. P4,649,400

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9. The effective interest rate of the loan is
a. 10.00% c. 12.00%
b. 11.94% d. 9.80%

10. The interest income to be recognized in 2021 is

a. P500,000 c. P493,861
b. P555,138 d. P556,728

11. The carrying amount of the loan as of December 31, 2021 is

a. P5,000,000 c. P5,033,261
b. P4,696,128 d. P4,704,538

Problem 4
On January 1, 2020, Samsung Company loaned Sansui Company
amounting to P2,000,000 and received a two-year, 6%, P2,000,000 note.
The note calls for annual interest to be paid each December 31. Samsung
collected the 2020 interest on schedule. However, on December 31, 2021,
based on the Sansui’s recent financial difficulties, Samsung expects that
the 2021 interest, which was recorded in the books, will not be collected
and that only P1,200,000 of the principal will be recovered. The 1,200,000
principal amount is expected to be collected in two equal installments on
December 31, 2023 and December 31, 2025. The prevailing interest rate
for similar type of note as of December 31, 2021 is 8%.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
(Round off present value factors to four decimal places)

12. The present value of the expected future cash flows as of December
31, 2021 is
a. P 955,380 c. P1,009,260
b. P2,079,060 d. P 950,920
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13. The loan impairment loss in 2021 is

a. P1,164,620 c. P1,110,740
b. P 990,740 d. P 40,940

14. How much is the interest income for the year 2022?
a. P 60,556 c. P57,323
b. P 124,744 d. P 0

15. Carrying amount of the loan as of December 31, 2023 is?

a. P473,465 c. P1,736,032
b. P534,005 d. P1,134,005

Problem 5
On December 31, 2021, Ms. Robredo signed a P2,000,000 note to PNB
Bank. The market interest rate at that time was 12%. The stated interest
rate on the note was 10%, payable annually. The note matures in five
years. Unfortunately, because of lower sales, Ms. Robredo’s financial
condition worsened. On December 31, 2023, PNB Bank determined that
it was probable that Ms. Robredo would pay back only P1,200,000 of the
principal at maturity. However, it was also considered likely that interest
would continue to be paid, based on the P2,000,000 loan. The prevailing
interest rate for similar type of note as of December 31, 2023 is 4%.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
(Round off present value factors to four decimal places)

16. Amount in cash Ms. Robredo received from the loan on December
31, 2021
a. P2,000,000 c. P1,855,760
b. P1,892,960 d. P1,134,800
e.
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17. Interest income in 2023
a. P225,414 c. P222,691
b. P230,414 d. P200,000

18. Loan impairment loss in 2023

a. P665,480 c. P569,345
b. P616,009 d. P761,489

19. Interest income in 2024

a. P137,085 c. P239,858
b. P160,142 d. P200,000

Problem 6
On January 1, 2019, CRC Company loaned P3,000,000 to ACE Company.
The terms of the loan were payment in full on January 1, 2024, plus
annual interest payments at 11%. The interest payment was made as
scheduled on January 1, 2020; however, due to financial setbacks, ACE
was unable to make its 2021 interest payment. CRC considers the loan
impaired and projects the following cash flows from the loan as of
December 31, 2021 and 2022. Assume that CRC accrued the interest at
December 31, 2021, but did not continue to accrue interest due to the
impairment of the loan.
Amount projected as of
Date of Flow Dec. 31, 2021 Dec. 31, 2022
December 31, 2022 P 200,000 P 200,000
December 31, 2023 400,000 600,000
December 31, 2024 800,000 1,200,000
December 31, 2025 1,200,000 1,000,000
December 31, 2026 400,000
QUESTIONS:
Your client requested you to determine the following: (Round-off present
value factors to four decimal places)
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20. Loan impairment loss in 2021
a. P 882,380 c. P1,212,380
b. P1,549,500 d. P1,542,380

21. Interest income for 2022 assuming the P200,000 was collected on
December 31, 2022 as scheduled
a. P195,855 c. P200,000
b. P232,938 d. P 66,000

22. Interest income in 2023 assuming the P600,000 was collected

December 31, 2023 as scheduled
a. P225,210 c. P236,561
b. P247,023 d. P222,541

23. Carrying amount of loan receivable as of December 31, 2023

a. P1,672,570 c. P1,645,641
b. P2,150,558 d. P1,892,683

Problem 7
The following long-term receivables were reported in the December 31,
2020, balance sheet of Mango Corporation:

Note receivable from sale of plant P 3,000,000

Note receivable from officer 800,000

The following transactions during 2021 and other information relate to

company’s long-term receivables:

1. The note receivable from sale of plant bears interest at 12% per
annum. The note is payable in 3 annual installments of P1,000,000
plus interest on the unpaid balance every April 1. The initial
principal and interest payment was made on April 1, 2021.

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2. The note receivable from officer is dated December 31, 2020,
earns interest of 10% per annum, and is due on December 31,
2023. The 2021 interest was received on December 31, 2021.

3. Mango sold a piece of equipment to Banana, Inc. on April 1, 2021,

in exchange for a P400,000 non-interest-bearing note due on April
1, 2024. The note had no ready market, and there was no
established exchange price for the equipment. The prevailing
interest rate for a note of this type at April 1, 2021, was 10%.

4. A tract of land was sold by Mango to Orange, Inc. on July 1, 2021,

for P2,000,000 under an installment sale contract. Orange signed a
4-year 11% note for P1,400,000 on July 1, 2021, in addition to the
down payment of P600,000. The equal annual payments of
principal and interest on the note will be P451,250 payable on July
1, 2022, 2023, 2024 and 2025. The land had an established cash
price of P2,000,000 and its cost to Mango was P1,5000,000. The
collection of the installments on this note is reasonably assured.

Required: Compute the following:

24. Noncurrent receivables.
a. 3,225,815 b. 3,523,065 c. 3,672,815 d. 3,742,827

25. Current portion of noncurrent

a. 1,000,000 b. 1,297,250 c. 1,800,000 d. 2,097,250

26. Accrued interest receivable at December 31, 2021.

a. 77,000 b. 90,000 c. 180,000 d. 257,000

27. Interest income for the year ended December 31, 2021.
a. 270,000 b. 350,000 c. 372,539 d. 449,539

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AUDIT OF INVENTORY
(PRACTICE PROBLEMS)

PROBLEM 1
Your audit client presented the following information on December 31,
2021: Net purchases (all on account) – P2,400,000; Inventory, December
31, 2021 (based on physical inventory count) – P350,000.

The audited balance of inventory on December 31, 2020 is P260,000.

Additional information:
a. A purchase of inventory for P6,000 was recorded on December
28, 2021 and the goods are still in transit as of December 31. The
related freight term is FOB Destination.
b. Goods (costing P20,000) consigned by your client to another entity
are not yet sold as of December 31, 2021. No journal entry was
prepared by your client upon the transfer of goods to the
consignee.
c. Goods costing P8,000 were sold for P15,000 on December 28,
2021. The freight term is FOB Shipping Point.
d. A purchase of goods costing P13,500 on December 31, 2021 was
not recorded until the receipt of the goods on January 3, 2022. The
term is FOB Shipping Point.
e. Goods consigned to your client was recorded as a purchase upon
receipt of the goods on December 10, 2021. The cost of the goods
is P30,000. The amount of inventory left in the warehouse as of
December 31, 2021 is P12,000.
f. Goods costing P17,500 was sold for P22,000 on December 30,
2021; term is FOB Destination. The sale was recorded on January
5, 2022 when the goods were already received by the customer.

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Requirements:
1. What is the correct net purchases for 2021?

2. What is the correct balance of inventory as of December 31, 2021?

3. Prepare the adjusting journal entries to reflect the correct amounts.

PROBLEM 2
You are engaged in an audit of financial statements of Stark Corporation
for the year ended October 31, 2021, and have observed the physical
inventory count on October 30, 2021.

All merchandise received up to and including October 30, 2021 has been
included in the physical count which totalled to P354,500. As a result of
the count, the following cost of sales schedule has been prepared by the
client’s accountant:
Stark Corporation
Schedule of Cost of Sales
For the period ended October 31, 2021

Inventory, November 1, 2020 235,000

Net purchases, unadjusted 2,543,900
Cost of goods available for sale 2,778,900
Less: Inventory per count 354,500
Cost of sales 2,424,400

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The following list of invoices is for the purchases of merchandise and are
entered in the purchase journal for the months of October and November
2021:

OCTOBER
Receiving Report No. Amount Freight Terms Date of Invoice Date Goods were Received
11201 14,400 Destination Oct. 19 Oct. 21
11202 8,800 Destination Oct. 20 Oct. 22
11203 18,500 Shipping Pt. Oct. 20 Oct. 30
11204 7,800 Destination Oct 25 Nov. 3
11205 5,000 Destination Nov. 4 Oct. 29
11206 20,500 Shipping Pt. Oct. 25 Oct. 30
11207 18,400 Shipping Pt. Oct. 25 Oct. 30
11208 24,200 Destination Oct. 21 Oct. 30
11209 69,200 Destination Oct. 29 Oct. 30

NOVEMBER
Receiving Report No. Amount Freight Terms Date of Invoice Date Goods were Received
11210 4,000 Destination Oct. 29 Oct. 31
11211 9,700 Destination Oct. 30 Oct. 30
11212 12,840 Shipping Pt. Oct. 27 Oct. 30
11213 14,440 Shipping Pt. Nov. 2 Nov. 3
11214 25,640 Shipping Pt. Oct. 23 Nov. 3
11215 28,400 Shipping Pt. Oct. 23 Nov. 3
11216 14,200 Destination Oct. 27 Nov. 3

Requirement: What is the correct cost of sales for the period ended
October 31, 2021?

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PROBLEM 3
Taken Corporation is currently preparing its interim financial statements
as of and for the interim period ended September 30, 2021. The following
information were obtained:
Inventory, January 1, 2021 1,200,000
Purchases, January 1 to September 30 800,000
Purchase returns, January 1 to September 30 25,000
Purchase discounts, January 1 to September 30 35,000
Freight in 20,000
Sales 1,395,000
Sales returns 10,000
Sales discounts 40,000
Employee discounts 15,000

1. What the correct net sales for inventory estimation purposes?

2. If the company is using a gross profit rate based on sales of 30%,

a. What is the cost of goods sold for the interim period?
b. What is the estimated ending inventory as of the end of the
interim period?

3. If the company is using a gross profit rate based on cost of 40%,

a. What is the cost of goods sold for the interim period?
b. What is the estimated ending inventory as of the end of the
interim period?

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PROBLEM 4
The warehouse of your client, Minamalas Corporation, was destroyed by
fire on October 2, 2021. All of the inventory stored in the warehouse
were also destroyed, and you were engaged to estimate the fire loss related
to the inventory.

Retrieved were the records pertaining to the inventory of your client,

which shows the following information covering January 1 to September
30:
Purchases 1,766,500
Purchase discounts 22,500
Purchase returns 3,000
Sales 2,518,000
Sales returns 20,000
Sales discounts 8,000
Discounts granted to employees 2,000

You have determined that the appropriate gross profit rate to be applied
in 2021 is based on the average gross profit rate for the past three years
(round gross profit rate to the nearest percentage; i.e. xx%). A summary
of the previous performance of your client (for 2018, 2019, and 2020) is
presented below:

2018 2019 2020

Beginning inventory 424,830 516,630 525,520
Net purchases 1,322,300 1,433,890 1,500,430
Ending inventory 516,630 525,520 524,000
Sales 2,000,000 2,439,000 2,500,800

As of the date of fire, inventory costing P58,000 is still in transit, including

a purchase made in October 1 for P12,000 which was not yet recorded by
your client. The term is FOB shipping point. Damaged inventory with
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cost of P3,000 was sold at cost after the fire. No other transactions
occurred from September 30 to October 2.

1. What is the average cost ratio?

2. What is the entity’s net sales for the purpose of determining the
loss from the fire?
3. What is the estimated inventory as of October 2, 2021 before the
fire?
4. What is the estimated loss on fire?

PROBLEM 5
In the evening of December 31, 2021, an explosion destroyed the whole
warehouse of your client, KABOOM Corporation, before an inventory
count can be conducted. You are now tasked to ascertain the loss from
the incident. To aid you in determining such loss, you reviewed the
following relevant accounts:

Accounts Receivable
The beginning balance of your client’s accounts receivable is P3,545,000.
On January 3, 2022, the replies from the confirmation requests sent to the
six (6) customers with outstanding balances were received. The December
31, 2021 balance being confirmed is P4,300,000, and the replies are noted
as follows:
Per
Customer Per Ledger Reply Difference
Posporo, Inc. 1,254,600 1,204,600 50,000
Apoy Company 222,000 202,000 20,000
Fireworks Corporation 894,400 894,400 -
Sindi Corporation 169,000 169,000 -
Leebang Co. 760,000 760,000 -
Pfft Ltd. 1,000,000 1,000,000 -
You were able to ascertain that the difference between the amount per
ledger and amount per reply for both Posporo and Apoy were due to
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shipments made on December 30, 2021 recorded as sales. The term for
the sales is FOB Destination, and are still in transit as of December 31,
2021. The entity has been consistent in using its gross profit rate of 30%.
Collection of accounts receivable for 2021 total to P9,005,600.

Allowance for Bad Debts

In your client’s trial balance, the unadjusted balance of allowance for bad
debts is P59,205. This includes the interim provision of bad debts expense
based from 1% of the interim credit sales of P7,000,000, and a write-off
for P99,420. The entity is consistent in using percentage of accounts
receivable in estimating its uncollectible accounts. You ascertained that
this method, and the percentage used by your client (which is unchanged)
is reasonable.

Inventory
The January 1, 2021 balance of KABOOM’s inventory is P947,750.
Purchases for the year total P8,700,000, and purchase discounts total
P110,000. On January 2, 2022, goods purchased costing P80,000 were
received and were temporarily put in an open space in the administrative
building. KABOOM recorded the purchase upon receipt of the goods.
These goods were shipped by the suppliers in 2018 FOB shipping point.

Cash Sales, Sales Returns, and Sales Discounts

Cash sales for the period total to P1,360,900. Actual sales returns for
2021, all from sales on account, total to P190,080; while sales discounts
total to P450,400. An estimate of 1% of gross credit sales will be returned
in 2022.
1. What is the balance of KABOOM’s inventory as of December 31,
2021?
A. 150,000 B. 129,000 C. 80,000 D. none
2. How much is the estimated inventory loss from the explosion?
A. 2,390,050 B. 1,566,420 C. 1,486,420 D. 1,367,826

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PROBLEM 6
SOUPIE, Inc., your audit client, is keeping a record of their inventory at
cost with their corresponding selling price. Your client’s record revealed
the following information related to their inventory on September 30,
2021:
Cost Retail
Inventory, October 1, 2020 372,000 620,000
Purchases 3,110,000 4,760,000
Transportation in 55,000
Sales 4,872,000
Purchase return 27,000 45,000
Sales allowance 125,500
Purchase allowance 18,500
Sales returns 355,000
Sales discounts 322,250
Purchase discounts 15,960
Normal breakages 50,500
Abnormal breakages 200,000 308,000
Discounts granted to employees 75,500
Departmental transfer out 135,500 175,000
Departmental transfer in 125,500 165,000
Mark ups 290,000
Mark downs 283,000
Mark up cancellations 40,000
Mark down cancellations 40,000

The company reported inventories per a physical count conducted on

September 30 at P225,000. You ascertained that the count conducted was
adequately made by the client.

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You used the retail inventory method of estimating ending inventory to

check whether the amount per count is reasonable, and whether there is a
shortage in the inventory.

Note: round off percentages to whole number (for instance, 78.43% is 78%).

Requirement: Compute for the cost of inventory shortage under

1. The conventional retail method

2. The average cost retail method

3. The FIFO retail method

PROBLEM 7
The balances of the inventories of Turon Corporation are presented
below:
Dec. 31, 2020 Dec. 31, 2021
Finished goods 815,000 780,000
Work-in-process 340,000 354,000
Raw materials 200,000 185,000

The allowance for inventory writedown for the finished goods as of

December 31, 2020 is at P15,000.

Audit notes:
• The entity purchased P1,200,000 worth of raw materials for 2021.
80% of the purchases were on account.
• P25,000 worth of raw materials are still in transit as of December
31, 2021. It was included in the ending inventory, but was only
recorded as purchase in January 5, 2022. The term is FOB shipping
point.

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• Factory overhead for the year total to P840,000, which is 20%
more than the direct labor.
• The estimated selling price of the finished goods is P800,000 and
the estimated cost to sell the goods is at 4% of its selling price.
• The entity closes any inventory writedown to its cost of goods
sold.

Requirements:
1. What is the required allowance for inventory writedown on
December 31, 2021?

2. How much is the cost of goods sold for 2021?

PROBLEM 8
LORDS Corporation uses the lower of cost and net realizable value in
presenting its inventory. Data regarding the company’s inventories are as
follows:

Finished Goods AAA BBB CCC

Cost 550,000 540,000 430,000
Selling price 675,000 620,000 820,000
Estimated cost to sell, as % of sales 20% 15% 15%

Work-in-process
Cost 240,000 188,000 320,000
Selling price 360,000 289,000 735,000
Estimated cost to complete 48,000 97,650 74,000
Replacement cost 208,000 168,000 375,000
Normal profit margin as % of selling 40%
price 25% 35%

Raw Materials - Item AAA A001 A002 A003

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Cost 250,000 500,000 400,000
Current purchase price 250,000 480,000 375,000

Raw Materials - Item BBB B001 B002 B003

Cost 400,000 300,000 200,000
Current purchase price 450,000 275,000 180,000

Raw Materials - Item CCC C001 C002

Cost 375,000 450,000
Current purchase price 395,000 420,000
The beginning balances of the following accounts are as follows:
Allowance for Inventory Writedown - Finished Goods 10,000
Allowance for Inventory Writedown – Work-in-
Process 0
Allowance for Inventory Writedown - Raw Materials 40,000

Requirements:
1. What is the correct Finished Goods inventory to be reported at the
balance sheet date for
a. AAA? b. BBB? c. CCC?
2. What is the correct Work-in-process inventory to be reported at
the balance sheet date for
a. AAA? b. BBB? c. CCC?
3. What is the correct total raw materials for AAA to be reported at
the balance sheet date?
4. What is the correct total raw materials for BBB to be reported at
the balance sheet date?
5. What is the correct total raw materials for CCC to be reported at
the balance sheet date?
6. What is the total loss on inventory write-down to be reported for
the period?

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INVENTORY
(QUIZZER)
Problem 1
In testing the sales cut-off for the Powder Company in connection with an audit
for the year ended October 31, 2021, you find the following information.

A physical inventory was taken as of the close of business on October 31, 2021.
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 Sales Cost
Number Recorded
6671 Destination Oct. 20 Oct. 31 P 3,000 P 2,700
6672 Shipping Oct. 31 Nov. 2 7,500 6,000
Point
6673 Shipping Oct. 25 Oct. 31 5,400 3,600
Point
6674 Destination Oct. 31 Oct. 29 12,600 9,300
6675 Destination Oct. 31 Nov. 2 27,600 24,000
6676 Shipping Nov. 2 Oct. 23 19,500 15,300
Point
6677 Shipping Nov. 5 Nov. 6 22,500 17,400
Point
6678 Destination Oct. 25 Nov. 3 11,700 6,000
6679 Shipping Nov. 4 Oct. 31 25,800 24,600
Point
6680 Destination Nov. 5 Nov. 2 15,000 12,000

Based on the foregoing information, compute for the October 31, 2021,
adjusted balances of the following accounts:
1. Sales
A. P7,461,300 C. P7,449,600
B. P7,455,900 D. P7,487,100

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2. Inventories
A. P354,000 C. P348,000
B. P363,300 D. P357,300

Problem 2
Vi Co. was organized on January 1, 2020. On December 31, 2021, the company
lost most of its inventory in a warehouse fire just before the year-end count of
Inventory was to take place. The company’s records disclosed the following
data:
2020 2021
Inventory, January 1 P 0 P 204,000
Purchases 860,000 692,000
Purchase returns and allowances 46,120 64,600
Sales 788,000 836,000
Sales returns and allowances 16,000 20,000

On January 1, 2021, Vi’s pricing policy was changed so that the gross profit rate
would be three percentage points higher than the one earned in 2020.

Salvaged undamaged merchandise was marked to sell at P24,000 while damaged

merchandise market to sell at P16,000 had an estimated realizable value of
P3,600.

3. What is the company’s gross profit rate beginning January 1, 2021?

A. 24% C. 17%
B. 21% D. 20%

4. How much is the inventory fire loss?

A. P189,400 C. P146,920
B. P183,640 D. P254,000

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Problem 3
TUNOG CO. sells musical instruments. In your audit of the company’s
financial statements for the year ended December 31, 2021, you have gathered
the following data concerning inventory.

At December 31, 2020, the balance in TUNOG’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, 2021, are
summarized in the schedule below.
Replacement Sales Net Normal
Cost Cost Price Realizable Profit
Value
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

Requirements:
5. What is the proper balance in the Allowance for Inventory Writedown at
December 31, 2021?
A. P75,000 C. P32,000
B. P22,000 D. P25,000

6. The adjusting entry on December 31, 2021, 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 4

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The management of SENNA, 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 totalled 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 Quantity Date Date
Order Date in Units Shipped Received Terms
Date
12/31/16 01/02/17 4,200 01/02/22 01/05/22 FOB
Destination
12/05/16 01/02/17 3,600 12/17/21 12/22/21 FOB
Destination
12/06/16 01/03/17 7,900 01/05/22 01/07/22 FOB Shipping
Point
12/18/16 12/20/16 8,000 12/29/21 01/02/22 FOB Shipping
Point
12/22/16 01/05/17 4,600 01/04/22 01/06/22 FOB
Destination
12/27/16 01/07/17 3,500 01/05/22 01/07/22 FOB
Destination
SENNA Inc. uses the “passing of legal title” for inventory recognition.

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

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9. How many units should be included in SENNA, Inc.’s inventory at
December 31, 2021?
A. 18,700 units C. 43,500 units
B. 39,900 units D. 47,700 units

10. 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.

11. 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 5
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You are engaged in an audit of the financial statements of the LUCIAN
COMPANY for the year ended October 31, 2021, and have observed the
physical inventory count on that date. All merchandise received up to and
including October 30, 2021, 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 2021, respectively.
Amount FOB Date of Invoice Date Merchandise Received
OCTOBER 2016
P 7,200 Destination October 19 October 21
4,400 Destination October 20 October 22
9,250 Shipping October 20 October 30
Point
3,900 Destination October 25 November 3
2,500 Destination November 4 October 29
10,250 Shipping October 26 October 30
Point
9,200 Shipping October 27 October 30
Point
13,600 Destination October 21 October 30
34,600 Destination October 29 October 30

NOVEMBER 2016
P 2,000 Destination October 29 November 4
4,850 Destination October 30 October 31
6,420 Shipping October 27 October 30
Point
7,220 Shipping November 2 October 30
Point
12,820 Shipping October 23 November 3
Point
14,200 Shipping October 23 November 3
Point
15,000 Destination October 27 November 3

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No perpetual inventory records are maintained, and the physical inventory
count is to be used as a basis for the financial statements.
Requirements:
12. 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.
13. 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.
14. 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
15. The net adjustment to accounts payable is
A. P3,900 increase C. P41,610 increase
B. P3,900 decrease D. P41,610 decrease
16. LUCIAN’s October 31 physical inventory should be increased by
A. P31,870 C. P45,510
B. P41,610 D. P73,480

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Problem 6
THRESH CORPORATION is a wholesale distributor of kitchen utensils.
Unadjusted balances obtained from THRESH’s accounting records are as
follows:

Inventory (based on physical count of goods in

THRESH’s warehouse at December 31) P 432,000

Accounts Payable, December 31:

Vendor Terms Amount
Zonrox, Inc. Net 30 P 36,000
Yeba Corp. Net 30 28,000
Xak, Inc. Net 30 83,000
Wais Co. Net 30 -
Velma, Inc. Net 30 - P 147,000

Sales P 2,600,000

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 THRESH’s warehouse
at December 31, and in Accounts Payable balance as of December 31, 2021.

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 THRESH’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 THRESH under consignment term.

4. Goods were in transit from Velma, Inc. to THRESH on December 31. The
cost of these goods was P23,500, and they were shipped FOB Shipping Point
on December 28.

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Based on the preceding information, compute the adjusted balances of the following:
17. Inventory
A. P417,600 C. P467,500
B. P416,100 D. P441,100
18. Accounts Payable
A. P134,000 C. P157,500
B. P136,500 D. P170,500
19. Sales
A. P2,600,000 C. P2,564,300
B.P2,635,700 D. P2,625,000

lgr/cde

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