DE LA SALLE LIPA

College of Business, Economics, Accountancy and Management

Accountancy Department
2nd Semester A.Y. 2012-2013
Auditing Problem
AUDIT OF INVENTORY

I. Components of Inventory

Problem 1. The following items are included in the Inventory Account of CANON Inc.:
Finished goods held by customer on “sale or return” arrangement P 100,000
Raw materials held by CANON on “sale on approval or trial” arrangement 200,000
Raw materials held by CANON on “consignment” 50,000
Finished goods held by customer on “consignment” 150,000
Finished goods held by customer on “sale on approval or trial” arrangement 20,000
Raw materials held by CANON on “sale or return” arrangement 30,000
Finished goods on display in CANON’s retail store 40,000
Finished goods on CANON’s warehouse which is specifically segregated per sale contract 10,000
Raw Materials in transit, FOB Destination 30,000
Finished goods in transit, FOB Shipping Point 20,000
Raw Materials in transit, FOB Shipping Point 60,000
Finished goods in transit, FOB Destination 80,000
Finished Goods in the CANON’s warehouse 10,000
Finished Goods in the loading dock of CANON 20,000
Work-in-process in the CANON’s warehouse 30,000
Raw Materials in the receiving department, invoice not yet received 20,000
Finished Goods in the shipping department 40,000
Finished Goods on counter for sale 50,000
Unexpired insurance on inventories 100,000
Office supplies 10,000
Advertising catalogs and shipping cartons 25,000

Required: What is the total amount that should be included in Inventory Account?

II. Inventory Cost Components

Problem 2. Sharp Inc. is engaged in manufacturing and selling appliances in the Philippines. The manufacturer uses
perpetual inventory system and net method in its purchases. Moreover, the entity implemented Just-in-Time Cost
Accounting in its production. During the 2011, Sharp Inc. incurred the following expenditures in the production of its
product:
List or Catalog Price of purchased materials P1,000,000
Trade discount and rebates 200,000
Purchase discounts not taken 100,000
Foreign exchange differences arising from acquisition 100,000
Creditable value added tax 120,000
Nonrefundable import duties 100,000
Brokerage commission 200,000
Freight and insurance of materials 300,000
Other handling costs 200,000
Fixed factory overhead 100,000
Variable administrative overhead 200,000
Direct Labor 300,000
Variable factory overhead 400,000
Normal amount of production waste 200,000
Abnormal amount of production waste 100.000
Variable administrative overhead 200,000
After-sales warranty cost 200,000
Distribution cost 100,000
Storage cost of finished goods 200,000
Salary of inventory clerk 300,000
Salary of sales staff 400,000

Required: What is the total costs of Inventory?

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III. FIFO, Weighted Average & Moving Average

Problem 3. On the month of December 2011, the following transactions occurred in one of the branches of Panda Inc.:

Date Transaction Unit Cost Unit Total Cost

December 1 Beginning Balance P5.00 1,000 P 5,000
5 Purchase 6.00 2,000 12,000
10 Purchase 8.00 3,000 24,000
11 Purchase Return 6.00 (1,000) (6,000)
15 Purchase 9.00 2,000 18,000
16 Sales (5,000)
20 Sales Return 2,000
21 Purchase 10.00 3,000 30,000
22 Sales 1,000
23 Purchase 11,000 1,000 11,000
30 Purchase return 10.00 (1,000) 10,000

Required: Determine the following for the month of December 2011:

Assumption FIFO Weighted Average Moving Average
1. TGAS __________ __________ __________
2. Cost of Sales __________ __________ __________
3. Cost of Ending Inventory __________ __________ __________

IV. Lower of Cost or Net Realizable Value

Problem 4. Avida Inc. is engaged in real estate business. On December 31, 2011, Avida provided the following data
concerning its different types of inventories:

Product Cost Estimated Normal Profit Cost to Cost to

Selling Price % based on SP Complete Sell
Condominium P1,000,000 P2,000,000 20% P500,000 P300,000
House and Lot 2,000,000 3,000,000 30% 600,000 800,000
Resort House 3,000,000 4,000,000 10% 700,000 400,000
Land 2,000,000 2,500,000 10% 250,000 100,000

Required: Determine the following for the year ended December 31,2011:
____________1. Total Net Realizable Value of Inventory
____________2. Total Amount to be presented in the Statement of Financial Position on December 31,2011
____________3. Loss on Inventory Writedown on 2011

V. Gross Profit Method

Problem 5. On December 30,2011, the warehouse of Silver Inc. was razed by a fire. As a result, all merchandise
inventories in the warehouse were destroyed except for a necklace. The necklace was sold on December 31,2011 for
P200,000. The following data are obtained from the accounting records of Silver Inc as of December 30,2011:
Inventory Beginning P1,500,000
Purchases 5,000,000
Freight – In 500,000
Purchase return 300,000
Purchase discount 400,000
Purchase allowance 400,000
Total Sales as of December 30,2011 6,000,000
Sales return 1,000,000
Sales discount 500,000
Sales allowance 500,000
Required: Determine the following:
Assumption 20% based on Sale 20% based on Cost
1. TGAS ________________ ________________
2. Gross Profit as of December 30,2011 ________________ ________________
3. Cost of Sales as of December 30,2011 ________________ ________________
4. Ending Inventory as of December 30,2011 ________________ ________________
5. Loss on Fire ________________ ________________

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6. Adjusted Gross Profit as of Dec. 31,2011 ________________ ________________
7. Adjusted Cost of Sales as of Dec. 31,2011 ________________ ________________
VI. Retail Inventory Method

Problem 6. The following data are provided by Bench Inc. for the year ended December 31,2011:
Cost Retail
Beginning Inventory P500,000 P800,000
Purchases 2,000,000 2,500,000
Freight In 200,000
Purchase return (100,000) (120,000)
Purchase allowance (50,000)
Purchase discount (50,000)
Department transfer in 200,000 240,000
Department transfer out (150,000) (200,000)
Mark up 200,000
Mark down (100,000)
Mark up cancellation (100,000)
Mark down cancellation 50,000
Sales 1,500,000
Sales discount (100,000)
Sales return (200,000)
Sales allowance (100,000)
Normal shortage 100,000
Employee discount 200,000

Required: Determine the following:

Assumption: Average Retail Approach FIFO Retail Approach

1. TGAS at Retail ________________ ________________
2. TGAS at Cost ________________ ________________
3. Cost Ratio ________________ ________________
4. Ending Inventory at Retail ________________ ________________
5. Ending Inventory at Cost ________________ ________________
6. Cost of Sales ________________ ________________

VII. Biological Assets

Problem 7. The Farm Inc. is engaged in poultry business. On January 1,2011, the following data are provided concerning
the pigs of The Farm:

Biological Asset Fair Value less Cost to Sell

100 pigs (1-year old) P2,000

On July 1,2011, The Farm purchased 200 pigs (6 months – old) for P1,500 each. On October 1,2011, 300 pigs were born
and the fair value less cost to sell on such date of new born is P1,000.

The active market provided the fair value less cost to sell of the pigs on December 31,2011:

Biological Asset Fair Value less Cost to Sell

New Born P1,200
3-month Old 1,400
6-month Old 1,800
1-year Old 2,200
2-year Old 2,500

Required: Determine the following:

____________1. Biological Asset on December 31,2011

____________2. Total Gain or (Loss) on Changes in Fair Value less Cost to Sell in Profit or Loss
____________3. Gain or (Loss) arising from price change
____________4. Gain or (Loss) arising from physical change

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VIII. Purchase, Sale & Inventory Cut-off

Problem 8. MLB Inc. is a merchandiser of baseballs. All purchases and sales of MLB are on account. The following
information was obtained from the company’s accounting records for the year ended December 31,2011:

Inventory at December 31, 2011 (based on physical count in MLB’s warehouse

at cost on December 30,2011) P12,000,000
Net Purchases 13,000,000
Accounts Payable 11,000,000
Net Sales 15,000,000
Accounts Receivable 14,000,000
Net Income 12,500,000

The following data were found during your audit:

a. Goods were in transit costing P100,000 from a supplier on December 30,2011 with shipping term of FOB
Destination. Further testing revealed that the purchase had been recorded on December 31,2011 because the
invoice was sent on such date.
b. Goods were in transit with selling price of P200,000 to a customer on December 29,2011 with shipping term of
FOB Destination. The goods arrived to customer on January 1,2012. The sale is recorded by MLB on December
31,2011. (The mark-up is 20% based on sale)
c. Goods costing P50,000 was held on consignment on December 30,2011 and included in the physical inventory
count. MLB recorded this transaction as a purchase on December 31,2011.
d. Goods were in transit costing P150,000 from a supplier on December 29,2011 with shipping term FOB Shipping
point. The goods arrived to MLB on December 31,2011. The purchase was recorded by MLB on January 2,2012
when the invoice arrived.
e. Goods in were transit with selling price of P240,000 to a customer on January 1,2012. The goods arrived to the
customer on January 2,2012. The shipping term is FOB Shipping Point. The sale was recorded by MLB on
December 31,2011 when the sales invoice was sent to the customer. (The mark-up is 20% based on sale)
f. Goods costing P250,000 was out on consignment with a customer on December 30,2011. This is recorded as
sales on account for P300,000.
g. Goods costing P150,000 on December 30,2011 was found to be defective. They are included in the physical
inventory count and expected to be returned on December 31,2011.
h. Goods were in transit costing P400,000 from a supplier on December 31,2011 with shipping term FOB Shipping
Point. Further testing revealed that the purchase had been recorded on December 31,2011 because the invoice
was sent on such date.
i. Good were in transit with selling price of P100,000 to a customer on December 31,2011. The goods were shipped
on December 31,2011 with shipping term of FOB shipping point. (The mark-up is 30% based on sale). The sale is
recorded by MLB on January 1,2012 when the invoice was sent to the customer.
j. MLB received goods costing P200,000 on December 31,2011. The shipping term is FOB-destination and MLB
recorded the purchase on January 1,2012 when the invoice was received.
k. Goods were shipped to a customer on December 29,2011 with selling price of P200,000. The shipping term is
FOB-destination and the goods arrived to the customer on January 1,2012. The sale was recorded by MLB on
December 31,2011. (The mark-up is 30% based on sale)
l. Goods costing P150,000 were shipped on January 1,2012 from a supplier. The goods were received by MLB on
January 2,2012 and the shipping term is FOB Shipping Point. The purchase was recorded by MLB on December
31,2011 when the invoice was received.
m. Goods costing P300,000 were shipped on December 28,2011 from a supplier. The goods were received by MLB
on January 1,2012 with shipping term FOB shipping point. The purchase was recorded by MLB on December
31,2011 when the invoice was received.
n. Goods costing P240,000 were shipped on December 28,2011 to a customer. The goods were received by the
customer on January 1,2012 with shipping term FOB destination. The sale was recorded by MLB on December
31,2011 when the invoice was sent. (The mark-up is 20% based on sale)

Required: Based on the result of your audit, determine the adjusted balance of the following as of December 31,2011:
____________1. Accounts Receivable
____________2. Accounts Payable
____________3. Net Purchases

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____________4. Net Sales
____________5. Inventory
____________6. Net Income

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