Reviewer on Inventories Basic Audit Problems

JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS, INC. UNIVERSITY OF THE PHILIPPINES – VISAYAS

2013

REVIEWER IN ACCOUNTING THEORY & PRACTICE I

INVENTORIES

The following information pertained to Azur Co. for the year: Purchases $ 102,800 Purchase discounts 10,280 Freight-in 15,420 Freight-out 5,140 Beginning inventory 30,840 Ending inventory 20,560 What amount should Azur report as cost of goods sold for the year? Answer:

$ 118,220

$ 30,840 + (102,800 – 10,280 + 15,420) – 20,560

During 1994, Kam Co. began offering its goods to selected retailers on a consignment basis. The following information was derived from Kam's 1994 accounting records: Beginning inventory Purchases Freight in Transportation to consignees Freight out Ending inventory-held by Kam Ending inventory-held by consignees

$122,000 540,000 10,000 5,000 35,000 145,000 20,000

In its 1994 income statement, what amount should Kam report as cost of goods sold? Answer:

$ 512,000

Beginning inventory Add: Purchases Freight in Transport to consignees COGAS Less: Ending inventory Cost of goods sold

$ 122,000 540,000 10,000 5,000 677,000 (165,000) $ 512,000

Consignor’s ending inventory must include consigned goods in the hands of the consignee at cost plus warehousing costs before goods are transferred to consignee plus shipping costs to consignee.

The following information was obtained from Smith Co.: Sales Beginning inventory Ending inventory

$275,000 30,000 18,000

Smith's gross margin is 20%. What amount represents Smith purchases? Answer:

$ 208,000

$ 30,000 + Purchases – $ 18,000 = $ 220,000 (275,000 x 80%)

West Retailers purchased merchandise with a list price of $20,000, subject to trade discounts of 20% and 10%, with no cash discounts allowable. West should record the cost of this merchandise as: Answer:

$ 14,400

Source: Becker CPA Review

$ 20,000 x 80% x 90% Page 1 of 4

During January 1993, Metro Co., which maintains a perpetual inventory system, recorded the following information pertaining to its inventory: Units Unit Cost Total cost Units on hand Balance on 1/1/93 1,000 $1 $1,000 1,000 Purchased on 1/7/93 600 3 1,800 1,600 Sold on 1/20/93 900 700 Purchased on 1/25/93 400 5 2,000 1,100 Under the moving-average method, compute the amount of inventory at Jan 31, 1993? Answer:

$ 3,225 Balance 1/1/93 Purchased 1/7/93 Balance 1/7/93 Sold 1/20/93 Balance 1/20/93 Purchased 1/25/93 Balance 1/31/93

Units 1,000 600 1,600 (900) 700 400 1,100

Unit Cost $1.00 3.00 1.75 1.75 1.75 5.00 2.93

Total Cost $1,000 1,800 2,800 (1,575) 1,225 2,000 3,225

Anders Co. uses the moving-average method to determine the cost of its inventory. During January 1992, Anders recorded the following information pertaining to its inventory: Units Unit Cost Total Cost Balance on 1/1/92 40,000 $5 $200,000 Sold on 1/17/92 35,000 Purchased on 1/28/92 20,000 8 160,000 What amount of inventory should Anders report in its January 31, 1992, balance sheet? Answer:

$ 185,000 Balance 1/1/92 Sold 1/17/92 Balance 1/17/92 Purchased 1/28/92 Balance 1/31/92

Units Unit Cost 40,000 $5.00 (35,000) 5.00 5,000 5.00 20,000 8.00 25,000 7.40

Total Cost $200,000 (175,000) 25,000 160,000 185,000

Nomar Co. shipped inventory on consignment to Seabright Co. that cost $20,000. Seabright paid $500 for advertising that was reimbursable from Nomar. At the end of the year, 70% of the inventory was sold for $30,000. The agreement states that a commission of 20% will be provided to Seabright for all sales. What amount of net inventory on consignment remains on the balance sheet for the first year for Nomar? Answer:

$ 6,000

The cost of consigned inventory includes the cost of the inventory and any costs needed to get the inventory in place for sale. In this question, that is $20,000. The $500 paid for advertising is not included in the cost of the inventory. At the end of the year, 30% of the original inventory remains on the balance sheet.

A flash flood swept through Hat, Inc.'s warehouse on May 1. Hat's accounting records showed the following: Inventory, January 1 Purchases, January 1 through May 1 Sales, January 1 through May 1 Inventory not damaged by flood Gross profit percentage on sales

$ 35,000 200,000 250,000 30,000 40%

What amount of inventory was lost in the flood? Answer:

$ 55,000

Source: Becker CPA Review

End Inv = $35,000 + $200,000 - ($250,000 x (1-.40)) = $85,000 Inv lost in the flood = $85,000 - $30,000 = $55,000 Page 2 of 4

Trans Co. uses a periodic inventory system. The following are inventory transactions for the month of January: 1/1 Beginning inventory 1/5 Purchase 1/15 Purchase 1/20 Sales at $10 per unit

10,000 units at $3 5,000 units at $4 5,000 units at $5 10,000 units

Trans uses the average pricing method to determine the value of its inventory. What amount should Trans report as cost of goods sold on its income statement for the month of January? Answer:

$ 37,500

The average purchase price of the units available for sale is (10,000x3) + (5,000x4) + (5,000x5) / (10,000+5,000+5,000)= $3.75. Thus the cost of goods sold is 10,000 x $3.75 = $37,500.

On December 28, 1990, Kerr Manufacturing Co. purchased goods costing $50,000. The terms were F.O.B. destination. Some of the costs incurred in connection with the sale and delivery of the goods were as follows: Packaging for shipment Shipping Special handling charges

$1,000 1,500 2,000

These goods were received on December 31, 1990. In Kerr's December 31, 1990, balance sheet, what amount of cost for these goods should be included in inventory? Answer:

$50,000

F.O.B. destination means that title passes when received by the buyer, and that packaging, shipping, and handling are costs of the seller.

The following information applied to Fenn, Inc. for 1989: Merchandise purchased for resale Freight in Freight out Purchase returns

$400,000 10,000 5,000 2,000

Fenn's 1989 inventoriable cost was: Answer:

$ 408,000

$ 400,000 – 2,000 + 10,000

Rabb Co. records its purchases at gross amounts but wishes to change to recording purchases net of purchase discounts. Discounts available on purchases recorded from October 1, 1991, to September 30, 1992, totaled $2,000. Of this amount, $200 is still available in the accounts payable balance. The balances in Rabb's accounts as of and for the year ended September 30, 1992, before conversion are: Purchases Purchase discounts taken Accounts payable

$100,000 800 30,000

What is Rabb's accounts payable balance as of September 30, 1992, after the conversion? Answer:

$ 29,800

$ 30,000 – 200

The following information appeared in the accounting records of a retail store for the year ended Dec 31, 1988: Sales $ 300,000 Purchases $ 140,000 Jan 1 Inventories $ 70,000 Dec 31 Inventories $ 100,000 Sales commissions $ 10,000 The gross margin was: Answer:

$ 190,000

Source: Becker CPA Review

$ 300,000 – (70,000 + 140,000 – 100,000) Page 3 of 4

Stone Co. had the following consignment transactions during December 1991: Inventory shipped on consignment to Beta Co. $18,000 Freight paid by Stone 900 Inventory received on consignment from Alpha Co. 12,000 Freight paid by Alpha 500 No sales of consigned goods were made through December 31, 1991. Stone's December 31, 1991, balance sheet should include consigned inventory at: Answer:

$18,900

The $18,000 inventory plus $900 freight out should be included as consigned inventory since Stone is consignor for the goods sent to Beta and still holds title.

On June 1, 1989, Pitt Corp. sold merchandise with a list price of $5,000 to Burr on account. Pitt allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the sale was made FOB shipping point. Pitt prepaid $200 of delivery costs for Burr as an accommodation. On June 12, 1989, Pitt received from Burr a remittance in full payment amounting to: Answer:

$ 2,944

$ 5,000 x 70% x 80% x 98% = $ 2,744 $ 2,744 + 200 = $ 2,944

The following items were included in Opal Co.'s inventory account at December 31, 1992: Merchandise out on consignment, at sales price, Including 40% mark-up on selling price $ 40,000 Goods purchased, in transit, shipped F.O.B. shipping point 36,000 Goods held on consignment by Opal 27,000 By what amount should Opal's inventory account at December 31, 1992, be reduced? Answer:

$ 43,000

The 40% mark-up and the goods held on consignment must be eliminated to record inventory at cost. The $36,000 of goods shipped FOB shipping point should be included in inventory. 40% × $40,000 = $16,000 plus $27,000 = $43,000.

Garnett Co. shipped inventory on consignment to Hart Co. that originally cost $50,000. Hart paid $1,200 for advertising that was reimbursable from Garnett. At the end of the year, 40% of the inventory was sold for $32,000. The agreement stated that a commission of 10% will be provided to Hart for all sales. What amount should Garnett report as net income for the year? Answer:

$ 7,600

Source: Becker CPA Review

Sales $ 32,000 Cost of Sales (40% of 50,000) (20,000) Gross Profit 12,000 Selling Expense Advertising 1,200 Commission 3,200 (4,400) Net Income $ 7,600

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