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PROBLEM NO. 1 Corporation.

Brooks received the goods, which were sold on


You were engaged by Andy Corporation for the audit of the Sales Invoice No. 966 terms FOB Destination, the next day.
companys financial statements for the year ended December 31,
2017. The company is engaged in the wholesale business and d) Enroute to the client on December 31 was a truckload of
makes all sales at 25% over cost. goods, which was received on Receiving Report No. 1064.
The goods were shipped FOB Destination, and freight of
The following were gathered from the clients accounting records: P2,000 was paid by the client. However, the freight was
deducted from the purchase price of P800,000.
SALES PURCHASES
Date Ref Amount Date Ref Amount QUESTIONS:
Bal. Forwarded P5,200,000 Bal. Forwarded P2,700,000 Based on the above and the result of your audit, determine the
12/27 SI #965 40,000 12/27 RR #1057 35,000 following:
12/28 SI #966 150,000 12/28 RR #1058 65,000 1. Sales for the year ended December 31, 2017
12/28 SI #967 10,000 12/29 RR #1059 24,000
2. Purchases for the year ended December 31, 2017
12/31 SI #969 46,000 12/30 RR #1061 70,000
12/31 SI #970 68,000 12/31 RR #1062 42,000 3. Inventory as of December 31, 2017
12/31 SI #971 16,000 12/31 RR #1063 64,000 4. Accounts Receivable as of December 31, 2017
Closing Closing 5. Accounts Payable as of December 31, 2017
12/31 Entry (5,530,000) 12/31 Entry (3,000,000)
P - P - PROBLEM NO. 2
During your audit of the Trisha Corporation for the year ended
Note: SI = Sales Invoice RR = Receiving Report December 31, 2017, you found the following information relating
to certain inventory transactions from your observation of the
Inventory P 600,000 clients physical count and review of sales and purchases cutoff:
Accounts Receivable 500,000
Accounts Payable 400,000 a. Goods costing P180,000 were received from a vendor on
January 3, 2018. The goods were not included in the physical
You observed the physical inventory of goods in the warehouse count. The related invoice was received and recorded on
on December 31 and were satisfied that it was properly taken. December 30, 2017. The goods were shipped on December
31, 2017, terms FOB shipping point.
When performing sales and purchases cut-off tests, you found that
at December 31 and were satisfied that it was properly taken. b. Goods costing P200,000 sold for P300,000, were shipped on
December 31, 2017, and were received by the customer on
When performing sales and purchases cut-off tests, you found that January 2, 2018. The terms of the invoice were FOB shipping
at December 31, the last Receiving Report which had been used point. The goods were included in the ending inventory for
was No. 1063 and that no shipments had been made on any Sales 2017 and the sale was recorded in 2018.
Invoices whose number is larger than No. 968. You also obtained
the following additional information: c. The invoice for goods costing P150,000 was received and
recorded as a purchase on December 31, 2017. The related
a) Included in the warehouse physical inventory at December 31 goods, shipped FOB destination were received on January 2,
were goods which had been purchased and received on 2018, but were included in the physical inventory as goods in
Receiving Report No. 1060 but for which the invoice was not transit.
received until the following year. Cost was P 18,000.
d. A P600,000 shipment of goods to a customer on December
b) On the evening of December 31, there were two trucks in the 30, 2017, terms FOB Destination, was recorded as a sale
company siding: upon shipment. The goods, costing P400,000 and delivered
Truck No. CPA 123 was unloaded on January 2 of the to the customer on January 6, 2018, were not included in the
following year and received on Receiving Report No. 2017 ending inventory.
1063. The freight was paid by the vendor.
Truck No. ILU 143 was loaded and sealed on December e. Goods valued at P250,000 are on consignment from a
31 but leave the company premises on January 2. This vendor. These goods are included in the physical inventory.
order was sold for P100,000 per Sales Invoice No. 968.
c) Temporarily stranded at December 31 at the railroad siding
were two delivery trucks enroute to Brooks Trading

A.Y. 2017-2018
f. Goods valued at P160,000 are on consignment with a purchases in November, 2017. Product was
customer. These goods are not included in the physical shipped FOB destination, on Nov. 29, 2017 and
inventory. was included in November 30, 2017 physical
inventory as goods in transit.
QUESTIONS: 82,500
Based on the above and the result of your audit, answer the e) Through the carelessness of the receiving
following: department, shipment in early December 2017
1. The inventory as of December 31, 2017 is understated by was damaged by rain. This shipment was later
2. The cost of sales for the year ended December 31, 2017 is sold in the last week of December at cost. 150,000
overstated by
3. The profit for the year ended December 31, 2017 is misstated REQUIRED:
by 1. Gross profit rate for 11 months ended November 30, 2017
4. The working capital as of December 31, 2017 is misstated by 2. Cost of goods sold during the month of December 2017 using
the gross profit method.
PROBLEM NO. 3 3. December 31, 2017 inventory using the gross profit method.
Your client, Lorna Company, is an importer and wholesaler. Its
merchandise is purchased from several suppliers and is PROBLEM NO. 4
warehoused until sold to customers. On April 21, 2017, a fire damaged the office and warehouse of
Divina Company. The only accounting record saved was the
In conducting your audit for the year ended December 31, 2017, general ledger, from which the trial balance below was prepared.
you were satisfied that the system of internal control was good.
Accordingly, you observed the physical inventory at an interim Divina Company
date, November 30, 2017 instead of at year end. You obtained the Trial Balance
following information from your clients general ledger: March 31, 2017

Inventory, January 1, 2017 P 1,312,500 DEBIT CREDIT


Physical inventory, November 30, 2017 1,425,000 Cash P 180,000
Sales for 11 months ended Nov. 30, 2017 12,600,000 Accounts Receivable 400,000
Sales for the year ended Dec. 31, 2017 14,400,000 Inventory, Dec. 31 750,000
Purchases for 11 months ended Nov. 30, Land 350,000
2017 (before audit adjustments) 10,125,000 Building 1,100,000
Purchases for the year ended Dec. 31, 2017 Acc. Depreciation P 413,000
(before audit adjustments) 12,000,000 Other Assets 6,000
Accounts Payable 237,000
Your audit disclosed the following information: Accrued Expenses 180,000
Share Capital, P100 par 1,000,000
a) Shipments received in November and included Retained Earnings 520,000
in the physical inventory but recorded as Sales 1,350,000
December purchases P 112,500 Purchases 520,000
Operating Expenses . 344,000 . .
b) Shipments received in unsalable condition and Totals P 3,700,000 P 3,700,000
excluded from physical inventory. Credit
memos had not been received nor The following data and information have been gathered:
chargebacks to vendors been recorded: a. The companys year-end is December 31.
Total at November 30, 2017 15,000 b. An examination of the April bank statement and cancelled
Total at December 31, 2017 (including checks revealed that checks written during the period April 1
the Nov unrecorded chargebacks) 22,500 to 21 totaled P130,000: P57,000 paid to accounts payable as
of March 31, P34,000 for April merchandise purchases, and
c) Deposit made with vendor and charged to P39,000 paid for other expenses. Deposits during the same
purchases in October, 2017. Product was period amounted to P129,500, which consisted of receipts on
shipped in January, 2018. 30,000 account from customers with the exception of a P9,500 refund
from a vendor for merchandise returned in April.
d) Deposit made with vendor and charged to

A.Y. 2017-2018
c. Correspondence with suppliers revealed unrecorded The companys physical inventory revealed that the book
obligations at April 21 of P106,000 for April merchandise inventory of P1,695,960 was understated by P84,000. To avoid
purchases, including P23,000 for shipments in transit on that delay in completing its monthly financial statements, the company
date. decided not to adjust the book inventory until year-end except for
d. Customers acknowledged indebtness of P360,000 at April 21, obsolete inventory items.
2017. It was also estimated that customers owed another
P80,000 that will never be acknowledged or recovered. Of the Your examination disclosed the following information regarding
acknowledged indebtedness, P6,000 will probably be the November 30 inventory:
uncollectible. a. Pricing tests showed that the physical inventory was
e. The insurance company agreed that the fire loss claim should overstated by P61,600.
be based on the assumption that the overall gross profit ratio b. An understatement of the physical inventory by P4, 200 due
for the past two years was in effect during the current year. to errors in footings and extensions.
The companys audited financial statements disclosed the c. Direct labor included in the inventory amounted to P280,000.
following information: Overhead was included at the rate of 200% of direct labor.
2016 2015 You have ascertained that the amount of direct labor was
Net Sales P 5,300,000 P 3,900,000 correct and that the overhead rate was proper.
Net Purchases 2,800,000 2,350,000 d. The physical inventory included obsolete materials with a total
Beginning Inventory 500,000 660,000 cost of P7,000. During December, the obsolete materials
Ending Inventory 750,000 500,000 were written off by a charge to cost of sales.

f. Inventory with a cost of P70,000 was salvaged and sold for Your audit also disclosed the following information about the
P35,000. The balance of the inventory was a total loss. December 31 inventory:
a. Total debits to the following accounts during December were:
QUESTIONS: Cost of sales P 1,920,800
Based on the above and the result of your audit, answer the Direct Labor 338,800
following: Purchases 691,600
1. How much is the adjusted balance of Accounts Receivable as b. The cost of sales of P1,920,800 included direct labor of
of April 21, 2017? P386,400.
2. How much is the sales for the period January 1 to April 21,
2017? QUESTIONS:
3. How much is the adjusted balance of Accounts Payable as of Based on the above and the result of your audit, determine the
April 21, 2017? following:
4. How much is the net purchases for the period January 1 to 1. Adjusted amount of physical inventory at November 30, 2017
April 21, 2017? 2. Adjusted amount of inventory at December 31, 2017
5. How much is the cost of sales for the period January 1 to April 3. Cost of materials on hand, and materials included in work in
21, 2017? process as of December 31, 2017
6. How much is the estimated inventory on April 21, 2017? 4. The amount of direct labor included in work in process as of
7. How much is the estimated inventory fire loss? December 31, 2017
5. The amount of factory overhead included in work in process
PROBLEM NO. 5 as of December 31, 2017
You are engaged in the regular annual examination of the
accounts and records of Smartmatic Manufacturing Co. for the
year ended December 31, 2017. To reduce the workload at year
end, the company, upon your recommendation, took its annual
physical inventory on November 30, 2017. You observed the
taking of the inventory and made tests of the inventory count and
the inventory records.

The companys inventory accounts, which includes raw materials


and work-in-process is on perpetual basis. Inventories are valued
at cost, first-in, first-out method. There is no finished goods
inventory.

A.Y. 2017-2018