Since 1977

AUDITING PROBLEMS
AP.1901-Audit of Inventories

OCAMPO/CABARLES
OCTOBER 2015

The Use of Assertions in Obtaining Audit Evidence

Assertions about classes of transactions and events for the
period under audit: (COCAC)
Completeness - all transactions and events that should
have been recorded have been recorded.
Occurrence - transactions and events that have been
recorded have occurred and pertain to the entity.
Classification - transactions and
recorded in the proper accounts.

events

have

been

Accuracy - amounts and other data relating to recorded

transactions and events have been recorded appropriately.
Cutoff - transactions and events have been recorded in the
correct accounting period.
Assertions about account balances at the period end:
(RECV)
Rights and obligations - the entity holds or controls the
rights to assets, and liabilities are the obligations of the
entity.

Existence - assets, liabilities, and equity interests exist.

Completeness - all assets, liabilities and equity interests
that should have been recorded have been recorded.
Valuation and allocation - assets, liabilities, and equity
interests are included in the financial statements at
appropriate amounts and any resulting valuation or
allocation adjustments are appropriately recorded.
Assertions about presentation and disclosure: (COCA)
Completeness - all disclosures that should have been
included in the financial statements have been included.
Occurrence and rights and obligations - disclosed events,
transactions, and other matters have occurred and pertain
to the entity.
Classification and understandability - financial information
is appropriately presented and described, and disclosures
are clearly expressed.
Accuracy and valuation - financial and other information
are disclosed fairly and at appropriate amounts.

INTERNAL CONTROL MEASURES

1.

Authority and responsibility for controlling the

inventories should be centralized management and in
one person.

6.

Deliveries of materials, finished stock and merchandise

should be made only upon specific authorizations
emanating at authorized levels.

2.

There should be careful selection of inventory

personnel and intensive training of such personnel in
policies, objectives and system of inventory control.

7.

3.

Adequate physical facilities for handling and storage of

inventory should be provided.

Slow-moving, obsolete and damaged stock should be

identified and reported following periodic reviews of
physical and book records by qualified employees.
Valuation on the basis of approved cost-mark-down
methods should be reviewed.

4.

Adequate system of procedures, forms and reports

related to the management of inventories should be
developed and implemented.

8.

Safeguards against that action of the element and

inaccuracies in recording receipts and issues should be
adopted. Example Maintaining adequate insurance
coverage.

5.

Quantitative controls through perpetual inventory

records; book quantities verified with physical counts
at least once a year and differences being investigated,
promptly adjusted and reported to higher authority
should be implemented.

Page 1 of 8

www.prtc.com.ph

AP.1901

EXCEL PROFESSIONAL SERVICES, INC.

SUBSTANTIVE AUDIT OF INVENTORIES
Inventory Balances

Purchases

Existence: Recorded inventory exist

Completeness: Purchases that occurred are recorded

1.

Before the client takes the physical inventory, review

and approve the clients written plan for taking it.

2.

Observe the
inventory.

Trace a sequence of receiving reports to entries in the

voucher register. Test cutoff. Account for a sequence of
entries in the voucher register.

3.

Confirm inventories on consignment and held in public

warehouses.

client

personnel

physically

counting

Completeness: All inventory of the entity recorded

4.

Obtain a copy of prenumbered inventory tags used by

the client in taking inventory and reconcile the tags to
the listing.

5.

For selected items, trace from tags to listing.

6.

Perform cutoff procedures. Obtain the receiving report

number for the last shipment received prior to yearend and determine that the item is included in
inventory. Also, identify the last shipping document
and determine, based on shipping terms, whether the
item was properly recorded in sales or inventory.

7.

Perform analytical procedures.

Rights and obligations: Inventory is owned by the entity

8.

Determine that consigned inventory has been excluded

from inventory and that inventory pledged has been
properly disclosed.
Examine confirmations from
financial institutions and read minutes of the board of
directors meetings.

Valuation and allocation: Recorded inventory is valued in

accordance with GAAP
9.

Considering the method the client uses for inventory

valuation, examine invoices for inventory on hand or
trace prior years inventory listing to verify cost.

10. For selected items, determine net realizable value

(NRV) of the inventory and apply the lower of cost or
NRV.
11. Verify computations in the inventory listing.
12. Review the obsolescence of the inventory by:
a. being alert while observing inventory being taken
for damaged, slow-moving, or scrap inventory.
b. Scanning perpetual records for slow-moving items
and discussing their valuation with client.
Presentation and disclosure: Inventory is classified and
disclosed in accordance with GAAP
13. Determine whether accounts are classified and
disclosed in the financial statements in accordance
with GAAP.

Occurrence: Recorded purchases are for items that were

acquired
Examine underlying documents for authenticity and
reasonableness.
Scan voucher register for large or
unusual items. Trace inventory purchased to perpetual
records. Scan voucher register for duplicate payments.
Classification: Purchase transactions have been recorded
in the proper accounts
For a sample of entries in the purchases journal, verify the
accuracy of account coding.
Accuracy (Valuation):
amounts

Purchases are recorded at proper

Recompute invoices and compare invoice price to purchase

order.
Production
Completeness: All production transactions that occurred
are recorded
Account for a sequence for production reports.
Occurrence: Recorded production transactions occurred
For selected transactions, examine signed materials
requisitions, approved labor tickets, and allocation of
overhead.
Classification: Production transactions have been recorded
in the proper accounts
For a sample of entries, verify the accuracy of account
coding.
Accuracy (Valuation):
Production
recorded at proper amounts

transactions

are

Test cost records by tracing to underlying documents, such

as bill of materials, labor tickets, authorized labor rates,
and standard overhead rates. Review variances.

- end -

EXCEL PROFESSIONAL SERVICES, INC.

PROBLEM NO. 1
You were engaged by Quezon Corporation for the audit
of the companys financial statements for the year ended
December 31, 2015. The company is engaged in the
wholesale business and makes all sales at 25% over cost.
The following were gathered from the clients accounting
records:
SALES

Date
Ref.
Balance
forwarded
Dec.
SI No.
27
965
Dec.
SI No.
28
966
Dec.
SI No.
28
967
Dec.
SI No.
31
969
Dec.
SI No.
31
970
Dec.
SI No.
31
971
Dec.
Closing
31
entry

Amount
P5,200,000
40,000
150,000
10,000
46,000
68,000
16,000
(5,530,000)
P
-

Note: SI = Sales Invoice

Inventory
Accounts receivable
Accounts payable

Amount

Sales for the year ended December 31, 2015

a. P5,250,000
c. P5,400,000
b. P5,150,000
d. P5,350,000

2.

Purchases for the year ended December 31, 2015

a. P3,000,000
c. P3,018,000
b. P3,754,000
d. P3,818,000

3.

Inventory as of December 31, 2015

a. P864,000
c. P968,000
b. P800,000
d. P814,000

4.

Accounts receivable as of December 31, 2015

a. P350,000
c. P370,000
b. P220,000
d. P120,000

5.

Accounts payable as of December 31, 2015

a. P418,000
c. P 400,000
b. P354,000
d. P1,218,000

P2,700,000
35,000
65,000
24,000
70,000
42,000
64,000
(3,000,000)
P
-

RR = Receiving Report
P600,000
500,000
400,000

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 P18,000.
b) On the evening of December 31, there were two trucks
in the company siding:

Truck No. CPA 123 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. ILU 143 was loaded and sealed on

December 31 but leave the company premises on
January 2. This order was sold for P100,000 per
Sales Invoice No. 968.
Temporarily stranded at December 31 at the railroad
siding were two delivery trucks enroute to Brooks
Trading Corporation. Brooks 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 P2,000 was paid by the client. However, the
freight was deducted from the purchase price of
P800,000.
QUESTIONS:

1.

PURCHASES

Date
Ref.
Balance
forwarded
Dec.
RR No.
27
1057
Dec.
RR No.
28
1058
Dec.
RR No.
29
1059
Dec.
RR No.
30
1061
Dec.
RR No.
31
1062
Dec.
RR No.
31
1063
Dec.
Closing
31
entry

You observed the physical inventory of goods in the

warehouse on December 31 and were satisfied that it was
properly taken.

c)

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

the following:

PROBLEM NO. 2
During your audit of the Makati Corporation for the year
ended December 31, 2015, you found the following
information relating to certain inventory transactions from
your observation of the clients physical count and review
of sales and purchases cutoff:

a.

Goods costing P180,000 were received from a vendor

on January 3, 2016. The goods were not included in
the physical count. The related invoice was received
and recorded on December 30, 2015. The goods were
shipped on December 31, 2015, terms FOB shipping
point.

b.

Goods costing P200,000, sold for P300,000, were

shipped on December 31, 2015, and were received by
the customer on January 2, 2016. The terms of the
invoice were FOB shipping point. The goods were
included in the ending inventory for 2015 and the sale
was recorded in 2016.

c.

The invoice for goods costing P150,000 was received

and recorded as a purchase on December 31, 2015.
The related goods, shipped FOB destination were
received on January 2, 2016, but were included in the
physical inventory as goods in transit.

d.

A P600,000 shipment of goods to a customer on

December 30, 2015, terms FOB destination, was
recorded as a sale upon shipment. The goods, costing
P400,000 and delivered to the customer on January 6,
2016, were not included in the 2015 ending inventory.

e.

Goods valued at P250,000 are on consignment from a

vendor. These goods are included in the physical
inventory.

f.

Goods valued at P160,000 are on consignment with a

customer. These goods are not included in the physical
inventory.

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

1.

The inventory as of December 31, 2015 is understated

by
a. P230,000
c. P140,000
b. P190,000
d. P290,000

EXCEL PROFESSIONAL SERVICES, INC.

2.

The cost of sales for the year ended December 31,

2015 is overstated by
a. P290,000
c. P440,000
b. P110,000
d. P380,000

3.

The profit for the year ended December 31, 2015 is

misstated by
a. P190,000 over
c. P140,000 under
b. P 10,000 over
d. P290,000 under

4.

The working capital as of December 31, 2015 is

misstated by
a. P190,000 over
c. P140,000 under
b. P 10,000 over
d. P290,000 under

SOLUTION GUIDE

a
b
c
d
e
f

Inventory
(180)
200
150
(400)
250
(160)
(140)

Over (Under)
COS
Profit
180
(180)
(200)
(100)
400
200
(250)
250
160
(160)
290
10

WC
(180)
(100)
200
250
(160)
10

PROBLEM NO. 3
Your client, Mandaluyong Company, is an importer and
wholesaler. Its merchandise is purchased from several
suppliers and is warehoused until sold to customers.
In conducting your audit for the year ended December 31,
2015, you were satisfied that the system of internal control
was good.
Accordingly, you observed the physical
inventory at an interim date, November 30, 2015 instead
of at year end. You obtained the following information
from your clients general ledger:
Inventory, January 1, 2015
Physical inventory, November 30, 2015
Sales for 11 months ended Nov. 30, 2015
Sales for the year ended Dec. 31, 2015
Purchases for 11 months ended Nov. 30,
2015 (before audit adjustments)
Purchases for the year ended Dec. 31,
2015 (before audit adjustments)

P 1,312,500
1,425,000
12,600,000
14,400,000
10,125,000

b)

c)

d)

Shipments received in November and

included in the physical inventory
but recorded as December
purchases.
Shipments received in unsalable
condition and excluded from physical
inventory. Credit memos had not
been received nor chargebacks to
vendors been recorded:
Total at November 30, 2015
Total at December 31, 2015
(including the November
unrecorded chargebacks)
Deposit made with vendor and charged
to purchases in October, 2015.
Product was shipped in January,
2016.
Deposit made with vendor and charged
to purchases in November, 2015.
Product was shipped FOB
destination, on November 29, 2015
and was included in November 30,
2015 physical inventory as goods in

transit.
Through the carelessness of the
receiving department shipment in
early December 2015 was damaged
by rain. This shipment was later
sold in the last week of December at
cost.

82,500

150,000

REQUIRED:

1.

Gross profit rate for 11 months ended November 30,

2015.

2.

Cost of goods sold during the month of December

2015 using the gross profit method.

3.

December 31, 2015 inventory using the gross profit

method.

SOLUTION GUIDE:
Requirement No. 1
Sales, up to 11/30
Less COS, up to 11/30:
Inventory, 1/1
Net purchases, 11/30
TGAS
Inventory, 11/30
Gross profit

P12,600,000
P 1,3,500
10,110,000
11,422,500
( 1,342,500)

10,080,000
P 2,520,000

Computation of adjusted amounts:

Inventory,
11/30

N.P.,11/30
(11 mos.)

N.P.,12/31
(12 mos.)

1,425,000

10,125,000

12,000,000

112,500

15,000)

22,500)

30,000)

30,000)

( 82,500)

Unadjusted

Adjusted

1,342,500

82,500)

10,110,000

11,947,500

12,000,000
Requirement No. 2

Your audit disclosed the following information:

a)

e)

P 112,500

15,000
22,500

30,000

Sales, up to 12/31
Less sales, up to 11/30
Sales - December
Sales without profit
Sales with profit
x Cost ratio
COS with profit
COS without profit
Total

P14,400,000
12,600,000
1,800,000
(
150,000)
1,650,000
.8
1,320,000
150,000
P 1,470,000

Requirement No. 3
Inventory, 1/1
P 1,312,500
Net purchases, 12/31
11,947,500
TGAS
13,260,000
Less cost of sales:
With profit
[(14.4M -.15M)x.8]
P11,400,000
Without profit
150,000
11,550,000
Estimated inventory, 12/31
P 1,710,000

EXCEL PROFESSIONAL SERVICES, INC.

PROBLEM NO. 4

QUESTIONS:

On April 21, 2015, a fire damaged the office and

warehouse of Muntinlupa Company.
The only
accounting record saved was the general ledger, from
which the trial balance below was prepared.

Based on the above and the result of your audit, answer

the following:
1. How much is the adjusted balance of Accounts Payable
as of April 21, 2015?
a. P286,000
c. P237,000
b. P106,000
d. P343,000

Muntinlupa Company
Trial Balance
March 31, 2015
DEBIT
Cash

400,000

Inventory, Dec. 31, 2014

750,000

Land

350,000
P 413,000
237,000

Accrued expenses

180,000

Share capital, P100 par

1,000,000

Retained earnings
520,000

Operating expenses

344,000

P3,700,000

P3,700,000

The following data and information have been gathered:

a.

The companys year-end is December 31.

b.

An examination of the April bank statement and

cancelled checks revealed that checks written during
the period April 1 to 21 totaled P130,000: P57,000
paid to accounts payable as of March 31, P34,000 for
April merchandise purchases, and P39,000 paid for
other expenses.
Deposits during the same period
amounted to P129,500, which consisted of receipts on
account from customers with the exception of a P9,500
refund from a vendor for merchandise returned in
April.

e.

f.

How much is the sales for the period January 1 to April

21, 2015?
a. P1,430,000
c. P1,510,000
b. P1,519,500
d. P1,506,000

5.

How much is the cost of sales for the period January 1

to April 21, 2015?
a. P786,500
c. P830,500
b. P835,725
d. P828,300

6.

How much is the estimated inventory on April 21,

2015?
a. P570,000
c. P623,500
b. P587,775
d. P579,500

7.

How much is the estimated inventory fire loss?

a. P579,500
c. P535,000
b. P477,000
d. P512,000

1,350,000

Purchases

d.

4.

520,000

Sales

c.

How much is the adjusted balance of Accounts

Receivable as of April 21, 2015?
a. P400,000
c. P360,000
b. P440,000
d. P354,000

56,000

Accounts payable

Totals

3.

CREDIT

1,100,000

Acc. depreciation
Other assets

How much is the net purchases for the period January

1 to April 21, 2015?
a. P650,500
c. P660,000
b. P673,500
d. P683,000

P 180,000

Accounts receivable

Building

2.

Correspondence with suppliers revealed unpaid

obligations at April 21 of P106,000 for April
merchandise
purchases,
including
P23,000
for
shipments in transit on that date.
Customers acknowledged indebtedness of P360,000 at
April 21. It was also estimated that customers owed
another P80,000 that will never be acknowledged or
recovered. Of the acknowledged indebtedness, P6,000
will probably be uncollectible.
The insurance company agreed that the fire loss claim
should be based on the assumption that the overall
gross profit ratio for the past two years was in effect
during the current year.
The companys audited
financial
statements
disclosed
the
following
information:
2014
2013
Net sales
P5,300,000
P3,900,000
Net purchases
2,800,000
2,350,000
Beginning inventory
500,000
660,000
Ending inventory
750,000
500,000

PROBLEM NO. 5
You are engaged in the regular annual examination of the
accounts and records of Valenzuela Manufacturing Co.
for the year ended December 31, 2015. To reduce the
workload at year end, the company, upon your
recommendation, took its annual physical inventory on
November 30, 2015. You observed the taking of the
inventory and made tests of the inventory count and the
inventory records.
The companys inventory account, which includes raw
materials and work-in-process is on perpetual basis.
Inventories are valued at cost, first-in, first-out method.
There is no finished goods inventory.
The companys physical inventory revealed that the book
inventory of P1,695,960 was understated by P84,000. To
avoid delay in completing its monthly financial statements,
the company decided not to adjust the book inventory until
year-end except for obsolete inventory items.
Your examination disclosed the following information
regarding the November 30 inventory:
a. Pricing tests showed that the physical inventory was
overstated by P61,600.
b.

An understatement of the physical inventory by P4,200

due to errors in footings and extensions.

c.

Direct labor included in the inventory amounted to

P280,000. Overhead was included at the rate of 200%
of direct labor. You have ascertained that the amount
of direct labor was correct and that the overhead rate
was proper.

d.

The physical inventory included obsolete materials with

a total cost of P7,000. During December, the obsolete
materials were written off by a charge to cost of sales.

Inventory with a cost of P70,000 was salvaged and

sold for P35,000. The balance of the inventory was a
total loss.

EXCEL PROFESSIONAL SERVICES, INC.

Your audit also disclosed the following information about
the December 31 inventory:
a. Total debits to the following accounts during December
were:
Cost of sales
P1,920,800
Direct labor
338,800
Purchases
691,600
b.

4.

A client maintains perpetual inventory records in both

quantities and pesos. If the assessed level of control
risk is high an auditor will probably
a. Apply gross profit tests to ascertain the
reasonableness of the physical counts.
b. Increase the extent of tests of controls relevant to
the inventory cycle.
c. Request the client to schedule the physical
inventory count at the end of the year.
d. Insist that the client perform physical counts of
inventory items several times during the year.

5.

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 item has 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 retailers
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.

6.

Purchase cut-off 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.

7.

The audit of year-end inventories should include steps

to verify that the clients purchases and sales cutoffs
were adequate. These 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 in the subsequent period

8.

What form of analytical review might uncover the

existence of obsolete merchandise?
a. Inventory turnover rates.
b. Decrease in the ratio of gross profit to sales.
c. Ratio of inventory to accounts payable.
d. Comparison of inventory values to purchase
invoices.

9.

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.

The cost of sales of P1,920,800 included direct labor of

P386,400.

QUESTIONS:
Based on the above and the result of your audit, determine
the following:
1.

Adjusted amount of physical inventory at November 30

a. P1,715,560
c. P1,845,760
b. P1,631,560
d. P1,722,560

2.

Adjusted amount of inventory at December 31

a. P1,509,760
c. P1,502,760
b. P1,516,760
d. P1,425,760

3.

Cost of materials on hand, and materials included in

work in process as of December 31
a. P819,560
c. P728,560
b. P812,560
d. P942,760

4.

The amount of direct labor included in work in process

as of December 31
a. P618,800
c. P338,800
b. P232,400
d. P386,400

5.

The amount of factory overhead included in work in

process as of December 31
a. P 772,800
c. P464,800
b. P1,237,600
d. P777,600

PROBLEM NO. 6
Select the best answer for each of the following:
1.

2.

3.

Which of the following is not one of the independent

auditor's objectives regarding the audit of inventories?
a. Verifying that inventory counted is owned by the
client.
b. Verifying that the client has used proper inventory
pricing.
c. Ascertaining the physical quantities of inventory on
hand.
d. Verifying that all inventory owned by the client is
on hand at the time of the count.
An auditor is most likely to inspect loan agreements
under which an entitys inventories are pledged to
support managements financial statement assertion of
a. Existence or occurrence.
b. Completeness.
c. Presentation and disclosure.
d. Valuation or allocation.
An auditor selected items for test counts while
observing a clients physical inventory. The auditor
then traced the test counts to the clients inventory
listing. This procedure most likely obtained evidence
concerning
a. Existence.
c. Rights.
b. Completeness.
d. Valuation.

10. The auditor tests the quantity of materials charged to

work in process by tracing these quantities to
a. Cost ledgers.
b. Perpetual inventory records.
c. Receiving reports.
d. Material requisitions.
- now do the DIY drill -

EXCEL PROFESSIONAL SERVICES, INC.

DO-IT-YOURSELF (DIY) DRILL
PROBLEM NO. 1
Jay Roy Retailing Ltd is a food wholesaler that supplies independent grocery stores. The company operates a perpetual
inventory system, with the first-in, first-out method used to assign costs to inventory items. Transactions and other
related information regarding two of the items (baked beans and plain flour) carried by Jay Roy Ltd are given below for
June 2015 the last month of the company's reporting period.
Baked beans
Case containing 25 x 410g cans
35,000 cases @ P19.60
1. 10 June: 20,000 cases @ P19.50 per
case
2. 19 June: 47,000 cases @ P19.70 per
case
2/10, n/30, FOB destination
73,000 cases @ P28.50
A customer returned 5,000 cases that had
been shipped in error. The customer's
account was credited for P142,500.

Plain flour
Box containing 12 x 4kg bags
62,500 boxes @ P38.40
1. 3 June: 15,000 boxes @ P38.45
2. 15 June: 20,000 boxes @ P38.45
3. 29 June: 24,000 boxes @ P39.00

Physical count at 30 June

2015
Explanation of variance

32,600 cases on hand

No explanation found assumed stolen

1,500 boxes on hand

Boxes purchased on 29 June still in transit
on 30 June

Net realizable value at 30

June 2015

P29.00 per case

P38.50 per box

Unit of packaging
Inventory @ 1 June 2015
Purchases

Purchase terms
June sales
Returns and allowances

QUESTIONS:
Based on the above and the result of your audit, answer
the following:
1.

The inventory of baked beans as of June 30, 2015 at

cost, as adjusted is
a. P641,860
c. P642,360
b. P642,220
d. P641,360

2.

The inventory of plain flour as of June 30, 2015 at

cost, as adjusted is
a. P134,575
c. P57,675
b. P993,675
d. P57,725

3.

The amount of inventory shortage is

a. P27,440
c. P168,560
b. P27,580
d. P
0

4.

The total inventory to be recognized in the balance

sheet as of June 30, 2015 is
a. P699,895
c. P 699,535
b. P700,035
d. P1,623,970

5.

Which of the following is the best procedure for

identifying shortages of specific items in an inventory of
raw materials?
a. Compare the results of a physical inventory of raw
materials with perpetual inventory records.
b. Compare inventory turnover rates with prevailing
rates from previous years.
c. Estimates inventory quantities by using the gross
profit method.
d. Review internal controls for the physical protection
of inventories.

The following are some of the transactions that affected

the inventory of the Bolinao Company during 2015.
Jan. 8

Bolinao purchased raw materials with a list

price of P200,000 and was given a trade
discount of 20% and 10%; terms 2/15, n/30.
Bolinao values inventory at the net invoice
price

Feb. 14

Bolinao repossessed an inventory item from a

customer who was overdue in making
payment. The unpaid balance on the sale is
P15,200. The repossessed merchandise is to
be refinished and placed on sale.
It is
expected that the item can be sold for P24,000
after estimated refinishing costs of P6,800.
The normal profit for this item is considered to
be P3,200.

Mar. 1

Refinishing costs of P6,400 were incurred on

the repossessed item.

Apr. 3

The repossessed item was resold for P24,000

on account, 20% down.

Aug. 30

A sale on account was made of finished goods

that have a list price of P59,200 and a cost
P38,400. A reduction of P8,000 off the list
price was granted as a trade-in allowance. The
trade-in item is to be priced to sell at P6,400 as
is. The normal profit on this type of inventory
is 25% of the sales price.

QUESTIONS:
Based on the above and the result of your audit, answer
the following: (Assume the client is using perpetual
inventory system)

PROBLEM NO. 2
The Bolinao Company values its inventory at the lower of
FIFO cost or net realizable value (NRV). The inventory
accounts at December 31, 2014, had the following
balances.
Raw materials
Work in process
Finished goods

n/30, FOB destination

95,000 boxes @ 40.00
As June 15 purchase was unloaded, 1,000
boxes were discovered damaged. A credit
of P38,450 was received by Jay Roy
Retailing Ltd.

P 650,000
1,200,000
1,640,000

6.

The entry on Jan. 8 will include a debit to Raw

Materials Inventory of
a. P200,000
c. P141,120
b. P144,000
d. P196,000

7.

The repossessed inventory on Feb. 14 is most likely to

be valued at
a. P14,000
c. P17,200
b. P24,000
d. P14,400

8.

The journal entries on April 3 will include a

EXCEL PROFESSIONAL SERVICES, INC.

a.
b.
c.
d.
9.

Debit to Cash of P24,000.

Debit to Cost of Repossessed Goods Sold of
P14,000.
Credit to Profit on Sale of Repossessed Inventory
of P3,600.
Credit to Repossessed Inventory of P20,400.

The trade-in inventory on Aug. 30 is most likely to be

valued at
a. P8,000
c. P6,000
b. P4,800
d. P6,400

10. How much will be recorded as Sales on Aug. 30?

a. P51,200
c. P57,200
b. P56,000
d. P57,600

2.

End of the Year

3.

Sales of P43,000 (cost of P12,900) were made on

account on December 31 and goods delivered at that
time, but all entries relating to the sales were made
on January 2.

4.

Invoices totaling P15,000 were entered in the voucher

register in January, but the goods were received in
December.

5.

December invoices totaling P18,000 were entered in

the voucher register in December, but the goods were
not received until January.

6.

Invoices totaling P12,000 were entered in the voucher

register in January, and the goods were received in
January, but the invoices were dated December.

PROBLEM NO. 3
The cost goods sold section of the income statement
prepared by your client for the year ended December 31
appears as follows:
Inventory, January 1
Purchases
Cost of goods available for sale
Inventory, December 31
Cost of goods sold

P 80,000
1,600,000
1,680,000
100,000
P1,580,000

Although the books have been closed, your working paper

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

Invoices totaling P25,000 were entered in the voucher

register in January, but the goods were received
during December.

December invoices totaling P13,200 were entered in

the voucher register in December, but goods were not
received until January.

Based on the preceding information, determine the net

working paper adjustment that should be made for each of
the following accounts:
11. Retained earnings
a. P13,200 credit
b. P11,800 debit

c. P25,000 debit
d. P38,200 debit

12. Purchases
a. P27,000 debit
b. P28,000 debit

c. P25,000 credit
d. P2,000 debit

13. Beginning inventory

a. P25,000 credit
b. P38,200 debit

c. P13,200 debit
d. P11,800 debit

14. Accounts receivable

a. P43,000 debit
b. P43,000 credit

c. P30,000 debit
d. No adjustment

15. Sales
a. P43,000 debit
b. P43,000 credit

c. P30,000credit
d. No adjustment

- end of AP.1901 -