Cordillera Career Development College

Buyagan, Poblacion, La Trinidad, Benguet

Tel. No.: (074) 422-2221/Email: ccdc@ccdc.edu.ph
COLLEGE OF ACCOUNTANCY

AUDIT OF INVENTORIES:
Instructions: Write down your answers in a piece of paper together with your solution.
Have it scanned or photographed then send it to my messenger: Faus B. Ladu-an or
email it at faustinoladuan@gmail.com

Problem 1
In testing the sales cut-off for the BATO CO. in connection with an audit for the year
ended December 31, 2020, you find the following information.

A physical inventory was taken as of the close of business on October 31, 2020. All
customers are within a three-day delivery area of the company’s plant. The unadjusted
balances of Sales and Inventories are P 7, 500, 000 and P 330, 000 respectively.

Invoice FOB Terms Date Date Sales Cost

Number Shipped Recorded
6671 Destination Oct. 20 Oct. 31 P 3, 000 2, 700
6672 Shipping point Oct. 31 Nov. 2 7, 500 6, 000
6673 Shipping point Oct. 25 Oct. 31 5, 400 3, 600
6674 Destination Oct. 31 Oct. 29 12, 600 9, 300
6675 Destination Oct. 31 Nov. 2 27, 600 24, 000
6676 Shipping Point Nov. 2 Oct. 23 19, 500 15, 300
6677 Shipping point Nov. 5 Nov. 6 22, 500 17, 400
6678 Destination Oct. 25 Nov. 3 11, 700 6, 000
6679 Shipping point Nov. 4 Oct. 31 25, 800 24, 600
6680 Destination Nov. 5 Nov. 2 15, 000 12, 000

1. Sales
A. P 7,461,300 C. P 7,449,600
B. P 7,455,900 D. P 7,487,100

2. Inventories
A. P 354,000 C. P 348,000
B. P 363,300 D. P 357,300
Problem 2
The management of LACSON CO. 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 totaled 138, 630
units including 40,000 units shipped on consignment BONG CO. A letter received from
BONG CO. 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 Terms

Order Date in Units shipped Received
Date
12/31/20 01/02/21 4,200 01/02/21 01/05/21 FOB Destination
12/05/20 01/02/21 3,600 12/17/20 12/22/20 FOB Destination
12/06/20 01/03/21 7,900 01/05/21 01/07/21 FOB Shipping point
12/18/20 12/20/20 8,000 12/29/20 01/02/21 FOB Shipping point
12/22/20 01/05/21 4,600 01/04/21 01/06/21 FOB Destination
12/27/20 01/07/21 3,500 01/05/21 01/07/21 FOB Destination

LACSON CO. uses the “passing of legal title” for inventory recognition.

1. Good purchases during December totaled

A. 11, 600 units C. 19, 500 units
B. 15, 800 units D. 8, 000 units

2. How many units were sold during December?

A. 138, 630 units C. 98, 630 units
B. 113, 830 units D. 153, 830 units

3. How many units should be included in LACSON CO.’s Inventory at December 31,
2020?
A. 18, 700 units C. 43, 500 units
B. 39, 900 units D. 47, 700 units

4. 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.
 5. The audit of year –end physical inventories should include steps to verify that the
client’s purchases and sales cutoffs were adequate. The audit steps should be
designed to detect whether merchandise included in the physical count at year-
end was mot recorded as a
A. Sale in the subsequent period.
B. Purchase in the current period
C. Sale in the current period
D. Purchase return in the subsequent period.

Problem 3
LENLEN CO. sells musical instruments. In your audit of the company’s financial
statements for the year ended December 31, 2020, you have gathered the following data
concerning inventory.

At December 31, 2019, the balance in LENLEN CO’s Inventory account was 502,000, and
the Allowance for Inventory Write down had a balance of 32,000. The relevant inventory
cost and market data at December 31, 2020 are summarized in the schedule below.

Net
Cost Replacement Sales Realizable Normal
cost Price Value Profit

Guitars 89,000 86,000 91,500 87,000 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 502,000 427,000 518,500 480,000 45,950

1. What is the proper balance in the Allowance for Inventory Write down at
December 31, 2020?
A. P75,000 C. P32, 000
B. P22, 000 D. P25, 000
 2. The adjusting entry on December 31, 2020, to arrive at the proper allowance
balance should be

A. Allowance for inventory write down 7, 000

Gain on inventory recovery 7, 000
B. Loss on inventory write down 7, 000
Allowance for inventory write down 7, 000
C. Allowance for inventory write down 3, 000
Gain on inventory recovery 3, 000
D. Loss in inventory write down 43, 000
Allowance for inventory write down 43, 000

Problem 4
The following information was obtained from the statement of financial position of
RASTAMAN CO.:

December 31, 2020 December 31, 2019

Cash P706, 600 P200,000
Notes receivable 0 50,000
Inventory ? 399,750
Accounts payable ? 150, 000

All operating expenses are paid by RASTAMAN CO. with cash and all purchases of
inventory are made on account. RASTAMAN CO. sells only one product. All sales are
cash sales which are made for P100 per unit. Lion, Inc. purchases 1,500 units of inventory
per month and values its inventory using periodic FIFO. The unit cost of inventory during
January 2020 was P65.20 and increased P0.20 per month during the year. During 2020,
payments to suppliers totaled P943, 400 and operating expenses totaled P440, 000. The
ending inventory for 2019 was valued at P65 per unit. Based on the preceding
information, determine the following:

1. Number of units sold

A. 18,900
B. 18,400
C. 16,000
D. 21,400
 2. Total cost of purchases during 2020
A.P1, 173,600 C.P1,213,200
B.P1, 191, 600 D.P1, 193,400

3. Accounts payable balance at December 31, 2020

A. P793, 400 B. P393,400
C. P400,000 D. P419,800

4. Inventory quantity at December 31, 2020

A. 5,750 B. 6,550
C. 5,250 D. 8,150
5. FIFO cost of inventory on December 31, 2020
A. P352,500 B. P439,230
C. P385,900 D. P425,830

Problem 5
ISKO CO. is a manufacturer of small tools. The following information was obtained
from the company’s accounting records for the year ended December 31, 2020:
Inventory at December 31, 2020 (based on Physical count in ISKO CO.’s
warehouse at cost on 12/31/2020) P1,870,000
Accounts payable at Dec. 31, 2020 1,415,000
Net sales (sales less sales returns) 9,693,400

Your audit reveals the following information:

a. The physical count included tools billed to a customer FOB shipping point on
December 31, 2020. These tools cost P 64,000 and were billed at P 78,500. They were in the
shipping area waiting to be picked up by the customer.

b. Goods shipped FOB shipping point by a vendor was in transit on December 31, 2020.
These goods with invoice cost of P 93,000 were shipped on December 29, 2020.

c. Work in process inventory costing P 27,000 was sent to a job contractor for further
processing.

d. Not included in the physical count were goods returned by customers on December
31, 2020. These goods costing P 49,000 were inspected and returned to inventory on
January 7, 2021. Credit memos for P 67,800 were issued to the customers at that date.
e. In transit to a customer on December 31, 2020, were tools costing P 17,000 shipped FOB
shipping point on December 26, 2020. A sales invoice for P 29,400 was issued on January
3, 2021, when Bird Company was notified by the customer that the tools had been
received.
f. At exactly 5:00 pm on December 31, 2020, goods costing P 31,200 were received from a
vendor. These were recorded on a receiving report dated January 2, 2021. The related
invoice was recorded on December 31, 2020, but the good were not included in the
physical count.

g. Included in the physical count were goods received from a vendor on December 27,
2020. However, the related invoice for P 36,000 was not recorded because the accounting
department’s copy of the receiving report was lost.

h. A monthly freight bill for P 32,000 was received on January 3, 2021. It specifically
related to merchandise bought in December 2020, one-half of which was still in the
inventory at December 31, 2020. The freight was not included in either the inventory or
in accounts payable at December 31, 2020.

1. ISKO CO.’s December 31, 2020, inventory should be increased by

A. P 216,200 C. P 252,200
B. P 233,200 D. P 123,200

2. ISKO CO.’s accounts payable balance at December 31, 2020, should be

increased by
A. P 68,000 C. P 125,000
B. P 145,000 D. P 161,000

3. The amount of net sales to be reported on ISKO CO.’s income statement for the
year ended December 31, 2020, should be
A. P 9,547,100 C. P 9,591,000
B. P 9,576,500 D. P 9,595,300

4. ISKO CO.’s statement of financial position at December 31, 2020, should report
accounts payable of
A. P 1,576,000 C. P 1,540,000
B. P 1,483,000 D. P 1,431,000
 5. The amount of inventory to be reported on ISKO CO.’s December 31, 2020,
statement of financial position should be
A. P 2,103,200 C. P 2,122,200
B. P 2,086,200 D. P 1,993,200

Problem 6
On April 15, 2020, fire damaged the office and warehouse of PACMAN CO. The trial
balance below was prepared from the general ledger which was the only accounting
record saved.

PACMAN CO.
TRIAL BALANCE
March 31,2020

DEBIT CREDIT
Cash 35,000.00
Held-for-trading securities 350,000.00
Accounts receivable 120,000.00
Inventory, December 31, 2019 225,000.00
Land 950,000.00
Building 800,000.00
Accumulated depreciation- Bldg. P 260,000
Machinery and equipment 130,500.00
Accumulated depreciation- Mach. & Equip. 69,400.00
Other noncurrent assets 98,000.00
Accounts payable 71,100.00
Other expense accruals 15,400.00
Ordinary share capital 1,220,600.00
Retained earnings 849,000.00
Sales 405,000.00
Purchases 156,000.00
Other operating expenses 26,000.00 -
2,890,500.00 2,890,500.00

The following additional information has been obtained:

1. The company’s year-end is December 31.
2. An examination of the April bank statement and cancelled checks revealed the
following:
• Checks written, April 1-15 P 39,000
(P 17,000 paid to accounts payable as of March 31,
P10,200 for April merchandise shipments, and
P 11,700 Paid for other operating expenses)
• Deposits, April 1-15 P 38,850
(Consisted of collections from customers with the exception of a P 2,850
refund from a supplier for goods returned in April)

3. Communication with the suppliers disclosed unrecorded payables at April 15 of

P 31,800 for April merchandise shipments, including P 6,900 for goods in transit
(FOB shipping point) on that date.

4. Customers acknowledged indebtedness of P 108,000 (including P 1,800 that will

probably be uncollectible). It was also estimated that the customers owed another
P 24,000 that will never be acknowledged or recovered.

5. 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 company’s audited financial statements disclosed the
following information:
Dec. 31, 2019 Dec. 31, 2018
Net sales P 1,590,000 P 1,170,000
Net purchases 840,000 705,000
Beginning inventory 150,000 225,600
Ending inventory 225,000 150,000

6. Inventory costing P 21,000 was salvaged and sold for P 10,500. The balance of the
inventory was a total loss.

Based on the preceding information, determine the following:

1. Gross profit ratio

a. 52% c. 44%
b. 33% d. 47%

2. Sales, January 1, 2020- April 15,2020

a. P429,000 c. P 405,000
b. P 381,000 d. P 453,000
3. Net purchases, January 1, 2020- April 15, 2020
a. P 195,150 c. P 188,250
b. P 198,000 d. P 204,900

4. Cost of inventory not destroyed by fire

a. P 27,900 c. P 10,500
b. P17,400 d. P 21,000

5. Inventory fire loss

a. P 175,950 c. P 138,570
b. P 165,450 d. P 149,070