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CHAPTER 5 – Audit of Inventory
Exercises – Analysis of Transactions
1. Moneba Company bought merchandise on January 2, 2006 from Lynn Company costing
P15,000; terms, less 20%, 20% down payment, balance 2/10, n/30. Two days after,
P2,000 worth of merchandise was returned due to wrong specification. Moneba
Company paid the account within the discount period. How much Moneba Company
paid to Lynn Company?
a. P 7,600 b. P 7,448 c. P 7,408 d. P 7,360
Answer – P 7,448
Buyer Seller
Purchases 12,000 Accounts Receivable 9,600
Cash 2,400 Cash 2,400
Accounts Payable 9,600 Sales 12,000
Accounts payable 2,000 Sales 2,000
Purchases 2,000 Accounts Receivable 2,000
Accounts payable 7,600 Cash 7,448
Purch. Disc. 152 Sales Discount 152
Cash 7,448 Accounts Receivable 7,600
2. Merchandise shipped fob destination to customer was made on January 5, 2006 for
P25,000. The customer issued P10,000 12% 30-day note and the balance 2/10, n/30
on January 10, 2006, the date the goods were received. The customer made a partial
payment on January 15, 2006 for P5,000. Payment was made within the discount
period. How much discount was granted?
a. P 0 b. P 200 c. P 300 d. P 500
Answer – P 300
Buyer Seller
Jan . 5 No Entry Jan. 5 No Entry
Jan. 10 Purchases 25,000 Jan. 10 Notes Receivable 10,000
Notes payable 10,000 Accounts Receiv. 15,000
Accounts pay. 15,000 Sales 25,000
Jan. 15 Accounts pay. 5,000 Jan 15 Cash 5,000
Cash 5,000 Accounts receiv. 5,000
Date of Payment:
Accounts pay. 10,000 Cash 9,700
Cash 9,700 Sales discount 300
Purchase discount 300 Accounts reciev. 10,000
Discount : P15,000 x 2% = P300
3. On January 10, 2006, Lao Company sold merchandise on account fob destination to
Febryan Co. for P20,000. Febryan Co. paid the freight cost of P1,500 to be deducted
from its account. How much Febryan Company paid to Lao Company?
a. P 21,500 b. P 20,000 c. P 19,600 d. P 18,500
Answer – P 18,500
Seller Buyer
Accounts receivable 18,500 Purchases 20,000
Transportation expense 1,500 Accounts payable 18,500
Sales 20,000 Cash 1,500
Cash 18,500 Accounts payable 18,500
Accounts receivable 18,500 Cash 18,500
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4. Goods worth P12,000 was shipped on account (2/10, n/30) to Ibuyan Company on
January 15, 2006 from Rubenil Company The term of the shipment was fob shipping
point. Rubenil Company paid freight of P950. On January 12, 2006, P2,500 worth of
merchandise was received by Rubenil Co. from Ibuyan Co. due to wrong specification.
Ibuyan Company made a partial payment of P5,000. How much is the subsequent
collection of Rubenil Company from Ibuyan Company assuming Ibuyan Company paid
within the discount period?
a. P 5,450 b. P 5,260 c. P 4,500 d. P 4,410
Answer- P 5,260
Buyer Seller
Purchases 12,000 Accounts receivable 12,950
Freight-in 950 Sales 12,000
Accounts payable 12,950 Cash 950
Account payable 2,500 Sales 2,500
Purchases 2,500 Accounts receivable 2,500
Accounts payable 5,000 Cash 5,000
Cash 5,000 Accounts receivable 5,000
Accounts payable 5,450 Cash 5,260
Cash 5,260 Sales discount 190
Purchase discount 190 Accounts receivable 5,450
Discount – P12,000 – P2,500 = P9,500 x 2% = P190
5. Gabutero Company purchased merchandise on account for P10,000 from Lilibeth
Company with term shipping point. The freight cost was P1,500 and was paid by
Gabutero Company Upon the arrival of the carrier, it found out that the merchandise
got lost while in transit. The carrier company accepted the loss as their fault. How
much is the subsequent collection of Lilibeth Company from Gabutero Company?
a. P 11,500 b. P 10,000 c. P 8,500 d. P 0
Answer – P 10,000
Buyer Seller
Purchases 10,000 Accounts receivable 10,000
Freight-in 1,500 Sales 10,000
Accounts payable 10,000
Cash 1,500
Claims receivable 11,500
Purchases 10,000
Freight-in 1,500
6. Chan Company bought from Casas Company a second-hand machinery for the use of its
plant for P50,000 A 50% down payment was made and balance 2/10, n/30. Freight
cost was paid by Chan Company for P2,000. Casas Company acquired the machinery
three years ago at P60,000 with 10 year life. (Straight-line method is use in computing
Depreciation). Two days after purchase, Casas Company granted the request of Chan
Company for a P5,000 price adjustments because of some defects of the machinery.
Cash paid by Chan Company to Casas Company assuming the account was paid within
the discount period is
a. P 20,400 b. P 20,000 c. P 19,600 d. P 19,000
Answer – P 19,600
Buyer Seller
Machinery 50,000 Cash 25,000
Cash 25,000 Accounts recei. – others 25,000
Accounts payable – others 25,000 Accum. depreciation 18,000
Machinery 60,000
Gain on sale 8,000
Machinery 2,000
Cash 2,000
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Accounts payable – others 5,000 Gain on sale 5,000
Machinery 5,000 Accounts recie. – others 5,000
Accounts payable – others 20,000 Cash 20,000
Cash 20,000 Accounts recie – others 20,000
If paid within the discount period:
Accounts payable – others 20,000 Cash 19,600
Cash 19,600 Gain on sale 400
Machienry 400 Accounts payable – others 20,000
7. The Ariel Company purchased land and building at lump-sum price of P300,000 from
Cherely Company on January 1, 2006. The land and building was purchased by Cherely
Company 3 year ago at a total cost of P300,000. Based on the appraiser’s computation
and analysis, the cost of the land is twice as much to that of the building. Ariel
Company assume a five-year life of the building with no salvage cost. Two years later,
Ariel Company sold the building at P80,000 to Jaan Company.
Ariel Company will record gain or loss from the sale of the building to Jaan Company by
a. Gain of P 20,000
b. Loss of P100,000
c. Neither gain nor loss
d. Cannot be determined
Answer – P 20,000
Buyer Seller
Land 200,000 Cash 300,000
Building 100,000 Land and building 300,000
Cash 300,000
Sale of Building: Buyer
Cash 80,000 Building 80,000
Accum. depreciation 40,000 Cash 80,000
Building 100,000
Gain on sale 20,000
Problem 1
Listed below are some items of inventory from Anecito Company that are in question during
the audit. The company stores a substantial portion of the merchandise in a separate
warehouse and transfer damaged goods to a special inventory account.
1. Items in receiving department returned by customer, no
communication received from customer 20,000
2. Items ordered and in receiving department, invoice not yet
received from supplier 50,000
3. Items counted in warehouse by the inventory crew 70,000
4. Invoice received for goods ordered, goods shipped but not received
(Anecito Company pays freight) 5,000
5. Items, shipped today, fob destination, invoice mailed to customer 5,000
6. Items currently used for window displays 10,000
7. Items on counter for sale per inventory count [not in (3)] 90,000
8. Items in shipping department, invoice not mailed to customer 6,000
9. Items in receiving department, refused by Anecito because of
Damage [(not in (3)] 3,000
10. Items shipped today, fob shipping point, invoice mailed to customer 4,000
11. Items included in warehouse count, damaged, not returnable 8,000
12. Items included in warehouse count, specifically crafted and
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segregated for shipment to customer in five days per sales
contract, with return privilege. 18,000
Question:
1. If the recorded inventory in the balance sheet is P289,000, the year–end inventory will
be overstated by:
a. P 41,000 b. P 23,000 c. P 18,000 d. P 3,000
2. The following should be included from the inventory, except:
a. Inventory shipped today, f.o.b. shipping point, invoice mailed to customer.
b. Inventory counted in warehouse by the inventory crew.
c. Inventory shipped today, f.o.b. destination, invoice mailed to customer.
d. Inventory in warehouse count, specifically crafted and segregated for shipment to
customer with return privilege.
3. The inventory per audit at year-end is:
a. P 286,000 b. P 271,000 c. P 266,000 d. P 248,000
Solution
1. P 20,000
2. 50,000
3. 70,000
4. 5,000 (the fact that Anecito pays the freight, the term then is FOB shipping point)
5. 5,000
6. 10,000
7. 90,000
8. 6,000
9. –
10. –
11. ( 8,000)
12. 18,000 (this is still included in the inventory since the goods has a return privilege)
P266,000
Answer:
1. b 2. a 3. c
Problem 2
In the event of your audit, you found the following information related to the inventories on
December 31, 2006.
a. An invoice for P90,000, FOB shipping point, was received on December 15, 2006. The
receiving report indicates that the goods were received on December 18, 2006, but
across the face of the report is the notation “Merchandise not of the same quality as
ordered, returned for credit, December 19”. The merchandise was included in the
inventory.
b. Included in the physical count were inventories billed to customer FOB shipping point on
December 31, 2006. These inventories had a cost of P28,000 and were billed at
P35,000. The shipment was in loading dock waiting to be picked by the common carrier.
c. Merchandise with an invoice cost of P50,000, received from a vendor at 5:00 pm on
December 31, 2006, were recorded on a receiving report dated January 2, 2007. The
goods were not included in the physical count, but invoice was included in accounts
payable at December 31, 2006.
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d. Merchandise costing P15,000 to the company FOB shipping point on December 26,
2006. The purchase was recorded, but the merchandise was excluded from the ending
inventory because it was not received until January 4, 2007.
e. The inventory included 1000 units erroneously priced at P9.50 per unit. The correct cost
was P10.00 per unit.
The adjusting entries for:
1. Item letter “a” is;
Debit Credit
a. Cost of sales 90,000 Inventory 90,000
b. Inventory 90,000 Cost of Sales 90,000
c. Retained earnings 90,000 Inventory 90,000
d. No adjustment
2. Item letter “b” is:
Debit Credit
a. Cost of sales 28,000 Inventory 28,000
b. Inventory 28,000 Cost of sales 28,000
c. Cost of sales 35,000 Inventory 35,000
d. No adjustment
3. Item letter “c” is;
Debit Credit
a. Inventory 50,000 Cost of sales 50,000
b. Cost of sales 50,000 Inventory 50,000
c. Inventory 50,000 Retained earnings 50,000
d. No adjustment
4. Item letter “d” is:
Debit Credit
a. Cost of sales 15,000 Inventory 15,000
b. Inventory 15,000 Cost of sales 15,000
c. Inventory 15,000 Retained earnings 15,000
d. No adjustment
5. Item letter “d” is:
Debit Credit
a. Cost of sales 500 Inventory 500
b. Inventory 500 Cost of sales 500
c. Cost of sales 10,000 Inventory 10,000
d. Inventory 10,000 Cost of sales 10,000
Answer –
1. a 2. d 3. a 4. b 5. b
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Problem 3
You have observed the physical count of DEMI CORPORATION’s inventory taken on
December 31, 2006. The following errors were discovered:
a. Goods that cost P7,000 was sold for P8,500 on December 29, 2006. The order was
shipped December 31, 2006 with terms fob destination. The merchandise was not
included in the ending inventory. The sale was not recorded until January 4, 2007, the
date when the customer made payment of the sold goods.
b. On December 29, 2006, DEMI CORPORATION purchased merchandise costing P15,000
from a supplier. The order was shipped December 30, 2006 (terms FOB shipping point)
and was still “in transit” on December 31, 2006. Since the invoice was received on
December 31, the purchase was recorded in 2006. The merchandise was included in the
inventory count.
c. On January 4, 2007, goods that were included in the ending inventory at December 31,
2006, were returned to DEMI CORPORATION because the consignee had not been able
to sell it. The cost of this merchandise was P9,500 with a selling price of P14,500.
d. DEMI CORPORATION failed to make an entry for a purchase on account of P6,500 at the
end of 2005, although it included this merchandise in the inventory count. The purchase
was recorded when payment was made to the supplier in 2006.
e. On January 6, 2007, DEMI CORPORATION received merchandise which had been shipped
to them on December 31, 2006. The terms of the purchase were fob destination. Cost
of the merchandise was P6,400. The purchase was not recorded until payment was
made in January 2007 but the goods were included in the inventory as of December 31,
2006.
f. Goods with a selling price of P30,000 was shipped to Herald Company, a consignee, on
December 29, 2005. Since this was shipped before the inventory count, the
merchandise, which was billed 20% above cost, was excluded from the inventory count.
Sales was not recorded until the inventory was received on January 5, 2006. Your
further investigation revealed that 50% of these goods were sold in 2006 and the on-
hand at December 31, 2006 were not yet reported in 2006 inventory.
Questions: Based on the above information, answer the following:
1. What is the entry to adjust audit finding “a” at December 31, 2006?
a. Accounts Receivable 8,500 c. Both A and B
Sales 8,500
b. Inventory 7,000 d. Accounts Receivable 8,500
Retained Earnings 7,000 Retained Earnings 8,500
2. What is the entry to adjust audit finding number “b” at December 31, 2006?
a. Inventory 15,000 c. Both A and B
Retained Earnings 15,000
b. Retained Earnings 15,000 d. Neither A nor B
Accounts Payable 15,000
3. DEMI CORPORATION should debit what account to adjust audit finding number “c” at
December 31, 2006?
a. Sales c. Retained Earnings
b. Cost of Sales d. No adjustment is necessary
4. In audit finding number “d”, choose the correct statement?
a. The company is correct for not making an entry on the P6,500 purchase on account
even though it is already included in the inventory count since no term of shipment
is given.
b. The company should reduced its purchases at December 31, 2006 since the
purchases being paid in 2006 was the purchase for 2005.
c. The company is correct in recording of purchases in year 2006 since this is the time
when the company made payment on such.
d. Inventory should be recorded at December 31, 2005 since the purchases were
recorded on this year.
5. The entry to adjust audit finding number “e” at December 31, 2006 is: (assume the
book is not close)
a. Retained Earnings 6,400 c. Purchases 6,400
Inventory 6,400 Accounts Payable 6,400
b. Retained Earnings 6,400 d. Cost of sales 6,400
Accounts payable 6,400 Inventory 6,400
6. The entry to adjust audit finding number “f” at December 31, 2006 is: (assume the book
is close)
a. Inventory 25,000 c. Cost of sales 25,000
Accounts Receivable 25,000 Sales 25,000
Cost of sales 25,000 Retained Earnings 25,000
Sales 25,000 Accounts Receivable 25,000
