BIRD COMPANY is a manufacturer of small tools.

The following information was obtained from the

company’s accounting records for the year ended December 31, 2018:
Inventory at December 31, 2018 (based on physical on
physical count in Bird’s warehouse at cost on December
31, 2018) P 1,870,000
Accounts Payable at December 31, 2018 1,415,000
Net sales (sales less sales returns) 9,693,400

Your audit reveals the following information:

1. The physical count included tools billed to a customer FOB shipping point on December 31, 2018. These
tools cost P64,000 and were billed at P78,500. They were in the shipping area waiting to be picked up by
the customer.

2. Goods shipped FOB shipping point by a vendor were in transit on December 31, 2018. These goods with
invoice cost of P93,000 were shipped on December 29, 2018.

3. Work in process inventory costing P27,000 was sent to a job contractor for further processing.

4. Not included in the physical count were goods returned by customers on December 31, 2018. These goods
costing P49,000 were inspected and returned to inventory on January 7, 2019. Credits memos for P67,800
were issued to the customers at that date.

5. In transit to a customer on December 31, 2018, were tools costing P17,000 shipped FOB shipping point on
December 26, 2018. A sales invoice for P29,400 was issued on January 3, 2019, when Bird Company was
notified by the customer that the tools has been received.

6. At exactly 5:00 pm on December 31, 2018, goods costing P31,200 were received from a vendor. These were
recorded on a receiving report dated January 2, 2019. The related invoice was recorded on December 31,
2018, but the goods were not included in the physical count.

7. Included in the physical count were goods received from a vendor on December 27, 2018. However, the
related invoice for P36,000 was not recorded because the accounting department’s copy of the receiving
report was lost.
8. A monthly freight bill for P32,000 was received on January 3, 2019. It specifically related to merchandise
bought in December 2018, one-half of which was still in the inventory at December 31, 2018. The freight
was not included in the either the inventory or in accounts payable at December 31, 2018.

1. Bird’s December 31, 2018, inventory should be increased by

A. P216,200 C. P252,200
 B. P233,200 D. P123,200

2. Bird’s accounts payable balance at December 31, 2018, should be increased by

A. P68,000 C. P125,000
B. P145,000 D. P161,000

3. The amount of net sales to be reported on Bird’s income statement for the year ended December 31, 2018,
should be
A. P9,547,100 C. P9,591,000
B. P9,576,500 D. P9,595,300

4. Bird’s statement of financial position at December 31, 2018, should report accounts payable of
A. P1,576,000 C. P1,540,000
B. P1,483,000 D. P1,431,000

5. The amount of inventory to be reported on Bird’s December 31, 2018, statement of financial position should
be
A. P2,103,200 C. P2,122,200
B. P2,086,200 D. P1,993,200

SOLUTION 3 - 23

Inventory Accounts Payable Net Sales

Unadjusted balances P1,870,000 P1,415,000 P9,693,400
Adjustments:
1. (78,500)
2. 93,000 93,000
3. 27,000
 4. 49,000 (67,800)
5. 29,400
6. 31,200
7. 36,000
8. 16,000 32,000
Adjusted balances P2,086,200 P,1576,000 P9,576,500

1. Inventory per audit P2,086,200

Inventory per count 1,870,000
Net adjustment – increase P 216,200

Answer: A

2. Accounts payable per audit P1,576,000

Accounts payable per books 1,415,000
Net adjustment – increase P 161,000

Answer: D

3. Net sales for the year ended December 31, 2018 P9,576,500

Answer: B

4. Accounts payable, December 31, 2018 P1,576,000

Answer: A

5. Inventory, December 31, 2018 P2,086,200

Answer: B

PROBLEM 3 - 24
Correcting Inventory Errors
The cost of goods sold section of the income statement prepared by your client for the year ended December 31
appears as follows:
Inventory, January 1 P 80,000
Purchases 1,600,000
 Cost of goods available for sale P1,680,000
Inventory, December 31 100,000
Cost of goods solid 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.

2. December invoices totaling P13,200 were entered in the voucher register in December, but the goods were
not received until January.

End of the Year

3. Sales of P43,000 (cost of P12,900) were made on account on December 31 and the 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.

1. What working paper adjustment should be made at the end of the current year for item no. 1?
A. Purchases 25,000
Retained earnings 25,000
B. Retained earnings 25,000
Purchases 25,000
C. Inventory, beginning 25,000
Purchases 25,000
 D. No adjusting entry is necessary.

2. The working paper adjustment to correct the error described in item no. 3 should include a debit to
A. Accounts receivable of P43,000
B. Sales of P43,000
C. Inventory of P12,900
D. Retained earnings of P30,100

3. The company’s statement of financial position as of the end of the current year should show inventory of
A. P130,000 C. P93,200
B. P100,000 D. P117,100

4. What is the net adjustment to purchase of the current year?

A. P27,000 increase C. P2,000 increase
B. P25,000 decrease D. P2,000 decrease

5. The cost of goods sold for the current year is

A. P1,561,200 C. P1,580,000
B. P1,553,200 D. P1,565,200
SOLUTION 3 - 24

SUMMARY OF WORKING PAPER ADJUSTMENTS

Debit ( Credit )
Retained Beginning Accounts Accounts Ending
No. Earnings Purchases Inventory Receivable Sales Payable Inventory
1 P25,000 (25,000) - - - - -
2 (P13,200) - P13,200 - - - -
3 - - - P43,000 (P43,000) - -
4 - 15,000 - - - (P15,000) -
5 - - - - - - P18,000
6 - 12,000 - - - (12,000) 12,000
P11,800 P 2,000 P13,200 P43,000 (P43,000) (P27,000) P30,000

1. Retained earnings 25,000

Purchases 25,000

Answer: B

2. Accounts receivable 43,000

Sales 43,000

Answer: A

3. Inventory per client – prepared income statement P100,000

Add: Item no. 5 P18,200
Item no. 6 12,000 30,000
Adjusted inventory, December 31 P130,000

Answer: A

4. Net adjustment to purchases – increase P2,000

5. Inventory, Jan 1 (P80,000 + P13,200) P 93,200

Add: Purchases (P1,600,000 + P2,000) 1,602,000
Cost of goods available for sale 1,695,200
Less: Inventory, Dec. 31 (P100,000 + P30,000) 130,000
Cost of goods sold P1,565,200

Answer: D