26563 91062 FEUHO1 AuditofInventories 2017

November 24, 2017 | Author: Gladys Socia | Category: Cost Of Goods Sold, Inventory, Accounts Payable, Invoice, Trade
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FAR EASTERN UNIVERSITY INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE

APPLIED AUDITING | PRACTICAL AUDITING HANDOUT NO. 1 AUDIT OF INVENTORIES Problem 1 – Computation of Inventories and Related Accounts Emmet Company, a manufacturer of bicycle parts, provided the following information from its accounting records for the year ended December 31, 2017 Inventory at December 31, 2017 (based on physical count on Dec. 31, 2017) Accounts payable at December 31, 2017 Net sales (sales less sales returns)

P245,000 146,500 2,512,000

Additional information follows: a) Goods held on consignment from Lilibeth to Emmet amounting to P2,250, were included in the physical count of goods in Emmet’s warehouse on December 31, 2017, and in accounts payable at December 31, 2017. b) Retailers were holding P12,500, at cost, of goods on consignment from Emmet, at their stores on December 31, 2017. c) Included in the physical count were goods billed to a customer FOB shipping point on December 31, 2017. These goods had a cost of P7,750 and were billed at P10,000. The shipment was on Emmet’s loading dock waiting to be picked up by the common carrier. d) P3,750 worth of parts which were purchased from Ace Co. and paid for in December 2017 were sold in the last week of 2017 and appropriately recorded as sales of P5,250. The parts were included in the physical count on December 31, 2017, because the parts were on the loading dock waiting to be picked up by the customer. e) Goods were in transit from a vendor to Emmet on December 31, 2017. The invoice cost was P17,750, and the goods were shipped FOB shipping point on December 29, 2017. f) Work in process inventory costing P7,500 was sent to an outside processor for plating on December 30, 2017. g) Goods returned by customers and held pending inspection in the returned goods area on December 31, 2017, were not included in the physical count. On January 8, 2018, the parts costing P8,000 were inspected and returned to inventory. Credit memos totaling P11,750 were issued to the customers on the same date. h) Goods shipped to a customer FOB destination on December 26, 2017, were in transit at December 31, 2017, and had a cost of P5,250. Upon notification of receipt by the customer on January 2, 2018, Emmet issued a sales invoice for P10,500. i) Goods, with an invoice cost of P6,750, received from a vendor at 5:00 p.m. or December 31, 2017, were recorded on a receiving report dated January 2, 2018. The goods were not included in the physical count, but the invoice was included in accounts payable at December 31, 2017. j) Goods received from a vendor on December 26, 2017, were included in the physical count. However, the related P14,000 vendor invoice was not included in accounts, payable at December 31, 2017, because the accounts payable copy of the receiving report was lost. k) On January 3, 2018, a monthly freight bill in the amount of P1,500 was received. The bill specifically related to merchandise purchased in December 2017, one-third of which was still in the inventory at December 31, 2017. The freight charges were not included in either the inventory or accounts payable at December 31, 2017. Requirements: 1. Determine. the following as of and for-the year ended December 31, 2017: a. Inventory b. Accounts payable c. Net sales 2. Adjusting entries as of December 31, 2017

Problem 2 – Sales and Purchase Cut-off Tests You were engaged by Kat-Pat Corporation for the audit of the company's financial statements for the year ended December 31, 2017. The company is engaged in the wholesale business and makes all sales at 25% over cost. The following were gathered from the client's accounting records: (Note: SI = Sales Invoice RR = Receiving Report) SALES Date Balance forwarded Dec. 27 Dec. 28 Dec. 28 Dec. 31 Dec. 31 Dec. 31 Dec. 31

Ref. SI No. 481 SI No, 482 SI No. 483 SI No. 485 SI No. 486 SI No. 487 Closing entry

PURCHASES Date Balance forwarded Dec. 27 Dec. 28 Dec. 29 Dec. 30 Dec. 31 Dec. 31 Dec. 31

Amount P1,495,000 11,500 43,125 2,875 13,225 19,550 4,600 (1,589,875) P 1

Ref. RR No. 529 RR No. 527 RR No. 530 RR No. 531 RR No. 532 RR No. 533 Closing entry

Amount P776,250 10,063 18,688 6,900 20,124 12,075 18,400 (862,500) P -

Inventory Accounts receivable Accounts payable

P172,500 143,750 115,000

You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was properly taken. When performing sales and purchases cut-off tests, you found that at December 31, the last Receiving Report which had been used was No. 533 and that no shipments had been made on any Sales Invoices whose number is larger than No. 484. You also obtained the following additional information: a)

Included in the warehouse physical inventory at December 31 had been purchased and received on Receiving Report No. 528 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. 533. The freight was paid by the vendor. • Truck No. ARS 069 was loaded and sealed on December 31 but leave the company premises on January 2. This order was sold for P28,750 per Sales Invoice No. 484. c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to Text Trading Corporation. Text Trading received the goods, which were sold on Sales Invoice No, 482 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. 534, The goods were shipped FOB Destination, and freight of P575 was paid by the client. However, the freight was deducted from the purchase price of P230,000. Requirements: 1. Determine the following as of and for the year ended December 31, 2017 a. Sales b. Accounts receivable c. Inventory d. Accounts payable e. Purchases 2.

Adjusting entries as of December 31, 2017

Problem 3 – Cost Flow Assumptions The following information has been extracted from the records of Sta. Rosa Corporation about one of its products. Date January 1 January 6 February 5 March 19 March 24 April 10 June 22 July 31 August 4 September 4 November 15 December 28

No. of Units 1,600 600 2,000 2,200 160 1,400 16,800 3,600 40 7,000 1,000 6,200

Beginning balance Purchased Sold @ P24.00 per unit Purchased Purchase returns Sold @ P24.20 per unit Purchased Sold @ P26.50 per unit Sales returns @ P26.50 per unit Sold @ P27.00 per unit Purchased Sold @ P30.00 per unit

Unit Cost P14.00 14.10

Total Cost P22,400 8,460

14.70 14.70

32,340 2,352

15.00

252,000

16.00

16,000

Requirements: Compute for the closing inventory under each of the following pricing methods? (Round unit costs to two decimal places.) 1. FIFO - Periodic 2. FIFO - Perpetual 3. Weighted average - Periodic 4. Weighted average - Perpetual

Problem 4 – Test of Lower of Cost and Net Realizable Value Liberty Sales Company uses the first-in, first-out method in calculating cost of goods sold for the three products that the company handles. Inventories and purchase information concerning the three products are given for the month of January. (Round unit costs and NRV per unit to two decimal places. Round total costs and final answers to the nearest peso.) Jan. 1 Jan. 1-15 Jan. 16-31 Jan. 1-31 Jan. 31

Inventory Purchases Purchases Sales Sales price per unit

Columbia 45,000 units at P60.00 70,000 units at P65.00 30,000 units at P75.00 85,000 units P90.00 2

Puerto Rica 40,000 units at P115.00 45,000 units at P105.00

Arabica 60,000 units at P95.00 35,000 units at P125.00

40,000 units P125.00

25,000 units P210.00

On January 31, the company’s suppliers reduced their prices from the most recent purchase prices by the following percentages: product C, 20%; product P, 10%; product A, 8%. Accordingly, Liberty decided to reduce its sales prices on Columbia by 10%, and Puerto Rica and Arabica both by 12%, effective February 1. Liberty’s selling cost is 10% of sales price. Products Columbia and Puerto Rica have a normal profit (after selling costs) of 30% on sales prices, while the normal profit on product Arabica (after selling cost) is 15% of sales price. Requirements: 1. 2. 3. 4. 5.

What is the cost of the ending inventory as of January 31? What is the amount of inventory to be reported on the company’s balance sheet at January 31? What is the balance of the allowance for inventory write down as at January 31? What is the amount of loss on inventory write down for the month of January? What is the amount of cost of sales, after loss on inventory write down, for the month of January?

Problem 5 – Inventory Estimation (Gross Profit Method) The Chestnut Company is an importer and wholesaler. Its merchandise is purchased from a number of suppliers and is warehoused until sold to customers. In conducting his audit for the year ended December 31, 2017, the company’s CPA determined that the system of internal control was good. Accordingly, he observed the physical inventory at an interim date, November 30, 2017, instead of at year end. The following information was obtained from the general ledger: Inventory, January 1, 2017 Inventory, November 30, 2017 Sales for 11 months ended November 30, 2017 Sales for year ended December 31, 2017 Purchase for 11 months ended November 30, 2017 (before audit adjustments) Purchase for year ended December 31, 2017 (before audit adjustments)

P 90,000 225,000 800,000 950,000 720,000 810,000

Additional information is as follows: A. Goods received on November 28 but recorded as purchases in December B. Deposits made in October 2017 for purchases to be made in 2018 but charged to Purchases C. Defective merchandise returned to suppliers: a. Total at November 30, 2017 b. Total at December 31, 2017, excluding November items The returns have not been recorded pending receipt of credit memos from the suppliers. The defective goods were not included in the inventory. D. Goods shipped in November under FOB destination and received in December were recorded as purchases in November E. Through the carelessness of the client’s warehouseman, certain goods were damaged in December and sold in the same month at its cost F. Audit of the client’s November inventory summary revealed the following: a. Items duplicated b. Purchase in Transit: i. Under FOB shipping point ii. Under FOB destination c. Items counted but not included in the inventory summary d. Errors in extension that overstated the inventory items Requirements: 6. The correct amount of net purchases up to November 30, 2017, is? 7. The correct amount of net purchases up to December 31, 2017, is? 8. The correct inventory on November 30, 2017, is? 9. What is the cost of sales ratio for 11 months ended November 30, 2017? 10. What is the estimated inventory on December 31, 2017?

Problem 6 – Inventory Estimation (Retail Inventory Method) Shenzhen uses the retail inventory method. The following information is available for the current year:

Beginning inventory Purchases Freight in Purchase returns Purchase allowances

Cost P 1,300,000 18,000,000 400,000 600,000 300,000

Retail P 2,600,000 29,200,000 1,000,000 3

P10,000 14,000 P5,000 7,000

P18,500 P20,000 P3,000 12,000 18,500 7,000 4,000

Departmental transfer in Net markups Net markdowns Sales Sales returns Sales discounts Employee discounts Loss from breakage

400,000

600,000 600,000 2,000,000 24,700,000 350,000 200,000 600,000 50,000

Requirements: 1. The estimated cost of inventory at the end of the current year using the conventional (lower of cost or market) retail inventory method is? 2. The estimated cost of inventory at the end of the current year using the average retail inventory method is? 3. The estimated cost of inventory at the end of the current year using the FIFO retail inventory method is?

Problem 7 – Biological Assets A herd of 10 2 year old animals was held at January 1 of the current period. On July 1, one animal aged 2.5 years was purchased for 108 and one animal was born. No animals were sold or disposed of during the period. Per-unit fair values less costs to sell were as follows: 2 - year old animal on January 1 Newborn animal at July 1 2.5 - year old animal on July 1 New born animal on December 31 0.5 - year old animal on December 31 2 - year old animal on December 31 2.5 - year old animal on December 31 3 - year old animal on December 31 1. 2. 3.

100 70 108 72 80 105 111 120

The carrying amount of biological assets as of December 31 is The increase in fair value of biological assets in the current period due to price change is The increase in fair value of biological assets in the current period due to physical change is

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