Chapter 5 Inventories and Related Expenses

MULTIPLE CHOICE THEORY 1. C 6. D 2. D 7. A 3. A 8. A 4. C 9. D 5. A 10. D

Problem 1 (Goodwill Company) Inventories Cost of Sales 16,000 + 13,200 + 26,100 + 19,200 + 14,300 = 88,800 Accounts Payable Cost of Sales Inventories Cost of Sales Cost of Sales Accounts Payable Cost of Sales Accounts Payable Inventories Accounts Payable 16,000 + 6,200 = 22,200 or two separate entries for purchases and inclusion in ending inventory Cost of Sales Inventories Sales Accounts Receivable Inventories Cost of Sales Cost of Sales Inventories Problem 2 (Victory Enterprises) Inventory, per client Goods shipped to customer on Dec 31, 2010 (presumed in transit), FOB destination Goods in transit, shipped by a supplier FOB shipping point Correct inventory amount, December 31 Inventories Cost of Sales 89,000

88,800 88,800 15,920 15,920 13,500 13,500 13,500 4,200 4,200 22,200 22,200 13,500

85,000 85,000 98,000 98,000 65,000 17,600 17,600 65,000

P 441,800 38,000 51,000 P 530,800 89,000

Chapter 5 Inventories and Related Expenses

Problem 3 (Raindrops Company) (a) Correct inventory, November 30 Purchases in November 12,000 + 14,000 Units sold (50,000 4,000) Correct inventory level, December 31 (b) Adjusting entries: Cost of Sales (unrecorded purchases) Accounts Payable 14,000 x 90 = P1,120,000 Sales (4,000 x 125) Accounts Receivable Inventories (18,000 x 90) Cost of Sales Inventories, November 30 Received in December Shipped out Goods reported Correct inventory level Understatement in units Problem 4 (Bulls Company) (a) Net adjustment to Inventory = 21,096 net debit (See audit adjustments) Inventory, per count Net adjustment to inventory Inventory, per audit (b) Adjusting entries Sales Accounts Receivable 5,841 + 7,922 + 2,010 Cost of Sales / Purchases Accounts Payable Inventory Cost of Sales / Income Summary 2,183 2,183 8,120 10,160 10,160 19,270 15,416 15,416 19,270 8,120 15,773 15,773 P98,000 21,096 P119,096 1,260,000 1,260,000 500,000 1,620,000 1,620,000 55,000 12,000 (50,000) 17,000 35,000 18,000 55,000 26,000 (46,000) 35,000

500,000

Inventory (12,700 /125%) Cost of Sales / Income Summary Sales Accounts Receivable

Inventory (19,270/125%) Cost of Sales

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Chapter 5 Inventories and Related Expenses

Miscellaneous Receivables (from Carrier) Inventory 11,250 + 1,350 Problem 5 Initial amounts Adjustments: a. b. c. d. e. f. g. h. Net adjustment Corrected balances a. b. c. d. Sales Accounts Receivable Inventory Inventory Cost of Sales Sales Returns and Allowances Accounts Receivable Inventory Cost of Sales e. f. g. h. Inventory Cost of Sales Inventory Cost of Sales Cost of Sales Accounts Payable Cost of Sales Inventory Accounts Payable 56,000 56,000 4,000 4,000 8,000 27,000 27,000 61,000 61,000 45,000 45,000 32,000 32,000 Accounts Payable 65,000 50,000 50,000 Inventory 2,400,000 65,000 50,000 32,000 61,000 27,000 4,000 239,000 P2,639,000 60,000 60,000 65,000 Accts Payable 800,000 65,000 (45,000) Net Sales 10,150,000 (60,000) 12,600 12,600

56,000 8,000 129,000 P929,000

(105,000) P10,045,000

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Chapter 5 Inventories and Related Expenses

Problem 6 (Firenze Fashions) Unadjusted balances Goods held on consignment Goods purchased FOB shipping point, in transit Goods shipped out FOB destination, in transit Goods purchased and received, but not yet recorded Goods sold, still unrecorded Unsalable goods Balance per audit Audit Adjustments Sales Accounts Receivable Inventory Inventory Accounts Payable Accounts Receivable Sales Cost of Sales Inventory Loss from Inventory Obsolescence Inventory Problem 7 No entry on the P100,000 shipment Inventory (75% x 80,000) Cost of Sales Accounts Receivable Sales Sales Accounts Receivable Inventory Cost of Sales 30,000 30,000 60,000 60,000 60,000 60,000 40,000 40,000 96,000 96,000 63,000 63,000 26,500 26,500 Cost of Sales 24,000 27,300 27,300 39,000 39,000 24,000 General Ledger P 221,020 24,000 27,300 (63,000) (26,500) P 182,820 Physical Count P 212,820 ( 66,000) 12,000 24,000

P 182,820

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Chapter 5 Inventories and Related Expenses

Problem 8 (Maligaya Corporation) Overall Gross Profit Ratio Inventory, January 1, 2011 Net Purchases 2011 and 2012 (2,800,000 + 2,350,000) Goods available for sale Less: inventory, December 31, 2012 Cost of goods sold, 2005 and 2006 Sales 2011 and 2012 (5,300,000 + 3,900,000) Less: Cost of goods sold Gross Profit Gross Profit Ratio = 4,140,000/ 9,200,000 Inventory Fire Loss Inventory, January 1, 2013 Add: Purchases January 1 to April 15, 2013 January 1 to March 31 April 1 to 15 Paid Unpaid Purchase returns Total goods available for sale Less; Cost of goods sold, January 1 to April 15 Accounts Receivable, April 15 Write off Collections (129,500 9,500) Accounts Receivable, March 31 Sales, April 1 to 15 Sales, January 1 to March 31 Sales, January 1 to April 15 Cost ratio (100% - 45% ) Inventory, April 15, before the fire Less: undamaged goods (in transit) Proceeds from sale of damaged goods (lower than cost) Inventory fire loss Problem 9 (Billy Corporation) 11 months ended May 31 P 6,750,000 75,000 (10,000) (20,000) (55,000) P6,740,000 P 875,000 6,740,000 P7,615,000 895,000 P6,720,000 Year ended June 30 P 8,000,000 (15,000) (20,000) 55,000 P8,020,000 P 660,000 5,150,000 P5,810,000 750,000 P5,060,000 P9,200,000 5,060,000 P4,140,000 45% P 750,000 P 520,000 34,000 106,000 ( 9,500) P 360,000 80,000 120,000 ( 400,000) P 160,000 1,350,000 P1,510,000 55% P 23,000 30,000

650,500 P1,400,500

830,500 P 570,000 53,000 P 517,000

Purchases per client Shipments received in May but recorded in June Credit memoranda not recorded Deposit for July purchases recorded as April purchases Deposit in May, recorded as purchases Purchases, per audit (a) Inventory, July 1, 2011 Purchases, July 1, 2011 to May 31, 2013 Total goods available for sale Less: Inventory, May 31, 2013 (950,000 55,000) Cost of goods sold July 1, 2011 to May 31, 2013

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Chapter 5 Inventories and Related Expenses

Gross profit 8,400,000 6,720,000 = Gross profit ratio = 1,680,000/ 8,400,000 (b) Sales in June at normal selling price (P9,600,000 8,400,000) 100,000 Cost ratio Cost of goods sold in June at normal selling price Cost of merchandise sold at cost Cost of goods sold in June Inventory, May 31. 2012 Purchases in June (8,020,000 6,740,000) Goods available for sale Cost of goods sold in June Inventory, June 30 Inventory, July 1, 2011 Purchases July 1, 2011 June 30, 2012 Total goods available for sale Cost of goods sold (9,600,000 100,000) x 80% =7,600,000 100,000 Inventory, June 30, 2012 Problem 10 (Chi Fi Fai) Audit Adjusting Entries: Accounts Receivable Sales Cost of Sales (50,000 x 80/120) Inventory Other Operating Expenses Loss from Inventory Contamination Cost of Sales 50,000 50,000 33,333 33,333 800,000 800,000 1,680,000 20% P1,100,000 80% P 880,000 100,000 P980,000 P895,000 1,280,000 2,175,000 980,000 1,195,000 875,000 8,020,000 8,895,000 7,700,000 1,195,000

(c)

Cost of Sales 36,000 Accounts Payable 36,000 (The company credited Cost of Sales on December 29 to adjust the stock cards inventory to inventory list, per physical count.) Decline in Net Realizable Value of Inventory Allowance to Reduce Inventory to Net Realizable Value Cost of Sales (400,000 80,000) Accounts Payable (1.) (2.) (3.) (4.) (5.) (6.) (7.) 90,000 90,000 320,000 320,000

Inventory is overstated by P33,333 as a result of goods out on consignment. The Accounts Receivable is understated by P50,000, as a result of goods out on consignment. The net income is understated by P16,667, as a result of goods out on consignment. The accounts payable shall be increased by P320,000. The gross profit is increased by P80,000, which in effect is the commission income. Inventory at cost, per audit = P890,000 P33,333 = P856,667. The inventory shall be presented at P766,667, which is the cost of P856,667 reduced by the allowance for decline in net realizable value of P90,000.

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Chapter 5 Inventories and Related Expenses

Problem 11 (Global Company) Audit Adjustments Selling and Administrative Expenses Receivables from Employees Petty Cash Fund Cash in Banks BDO Value Added Tax Payable Notes Payable Bank Interest Expense Cash in Banks Asian Bank Selling and Administrative Expenses Cash in Banks BPI Equipment Acquisition Fund Cash in Banks PNB Allowance for Doubtful Accounts Accounts Receivable (70% x 240,000) Finished Goods Inventory Cost of Sales 200,000 x 60% x 50% = 60,000 Sales Accounts Receivable 60,000 / 80% Inventory of Spoiled Goods and Scrap Materials Cost of Sales Work in Process Inventory Inventory of Spoiled Goods and Scrap Materials Cost of Sales Selling and Administrative Expenses Allowance for Doubtful Accounts Accounts receivable, per client Adjustments Balance per audit Account of Blue Ridge 240,000 168,000 Remaining accounts Provision rate on remaining Required Allowance for D. A. Balance of allowance 170,000 168,000 Additional doubtful accounts expense 42,000 38,000 80,000 55,000 55,000 152,250 P3,400,000 ( 168,000) ( 75,000) P3,157,000 ( 72,000) P3,085,000 5% P 154,250 ( 2,000) P 152,250 152,250 16,000 1,500 17,500 32,000 32,000 50,000 18,000 68,000 200 200 1,100,000 1,100,000 168,000 168,000 60,000 60,000 75,000 75,000

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Chapter 5 Inventories and Related Expenses

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) Petty Cash Fund = Cash on deposits with Asian Bank = 400,000 68,000 Cash on deposits with Security Bank = 350,000 50,000 Cash on deposits with Banco de Oro = (12,000) + 32,000 Cash on deposits with BPI = 200,000 200 Cash on deposits with PNB Total Cash in Bank Current Assets = 332,000 + 300,000 + 20,000 + 199,800 = Accounts Receivable Allowance for Uncollectible Accounts Uncollectible Accounts Expense = 80,000 + 152,250 Finished Goods Inventory = 600,000 + 60,000 Work in Process Inventory = 1,000,000 80,000 Raw Materials Inventory = Inventory of Spoiled Goods and Scrap Materials = 80,000 + 42,000 + 55,000 Sales = 6.000,000 75,000 Cost of Sales = 4,200,000 60,000 + 38,000 55,000 Selling and Administrative Expenses = 500,000 + 16,000 + 200 + 152,250 Other Operating Income Interest Expense and Finance Costs = 200,000 + 18,000 MULTIPLE CHOICE - PROBLEMS 1. 2. 3. 4. 5. 6. A C C C A P6,566 7. B 8. B 9. C 10. C 11. D 12. A 13. 14. 15. 16. 17. 18. C B A C B A 19. 20. 21. 22. C C D A P2,500 P332,000 P300,000 P 20,000 P199,800 P1,100,000 P851,800 P3,157,000 P154,250 P232,250 P660,000 P920,000 P400,000 P177,000 P5,925,000 P4,123,000 P668,450 P120,000 P218,000

Solutions: 1. 2. 3. 4. 5. Cash = 240,800 163,650 + 90,000 Accounts Receivable = 563,500 + 77,500 Inventory = 1,512,500 + 68,750 + 54,375 159,375 + 32,500 Accounts Payable = 1,050,250 + 93,100 + 54,375 43,750 Inventory, January 1 Purchases Goods available for sale Cost of goods sold (4,000,000 x 70%) Inventory, based on gross profit test Inventory, per count Missing inventory Inventory, January 1 Purchases Additional markup Markdown Goods available for sale Cost ratio = 46,800 / 69,800 = 67% Sales P167,150 P641,000 P1,508,750 P1,153,975 P 450,000 3,150,000 P3,600,000 2,800,000 P 800,000 750,000 P 50,000 Cost P14,200 32,600 P46,800 Retail P20,100 50,000 1,900 (2,200) P69,800 60,000

6.

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Chapter 5 Inventories and Related Expenses

Ending inventory at retail Cost ratio Inventory, December 31 P 9,800 67% P6,566

7.

Inventory, December 31, 2011 Purchases 1,410,000 + 10,000 20,000 Goods available for sale Cost of goods sold Accounts receivable, December 31 Collections Accounts receivable, January 1 Sales on account Cash sales Total sales Cost ratio Ending inventory before shortage Inventory, per count Inventory shortage

P 320,000 1,400,000 P1,720,000 P 300,000 1,800,000 ( 250,000) P1,850,000 350,000 P2,200,000 60%

1,320,000 P400,000 360,000 P 40,000

Items 8 and 9 Overhead = 25% x P900,000 = Direct labor cost = P225,000/75% Direct materials 900,000 225,000 300,000 Total manufacturing cost Let x be the ending work in process inventory .6 x is the beginning inventory .6x + 900,000 x = 800,000 100,000 = .4x x = 250,000 10. Sales per client Returned goods Goods shipped in December Goods shipped in January Correct sales P2,300,000 ( 50,000) 80,000 ( 100,000) P2,230,000 Per audit: P225,000 300,000 375,000 P900,000 Per client P225,000 275,000 400,000 Adjustment P 0 25,000 (25,000)

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Chapter 5 Inventories and Related Expenses

Items 11 through 14 Inventory Per client Parts held on consignment, recorded as purchases and included in inventory Parts sold still included in inventory Parts sold FOB shipping point Goods out on consignment Goods purchased in transit, FOB shipping point Freight bill, unrecorded, relating to unsold goods Cash discounts available Per audit Items 15 through 18 Inventory March purchases recorded in Apr Shipments in April Goods shipped on March 31 Goods not counted Understate (overstatement) 19. Cash balance, December 31, 2010 Payment on accounts payable Payment for operating expenses Total cash available Cash balance, December 31, 2009 Collection on notes receivable Sales Unit sales price Units sold Average cost of purchases 32.60 + 32.60 x 0.10 (11 months) 2 Accounts payable, Beginning Purchases 1,500 x 12 months x P33.15 Payments on accounts payable Accounts payable, ending 21. 22. Units in the beginning inventory Units purchased 1,500 x 12 Units sold Units in the ending inventory Valued as follows 1,500 x 33.70 1,500 x 33.60 1,500 x 33.50 1,190 x 33.40 Inventory, December 31, 2012 199,875 / 32.50 P 33.15 P 75,000 596,700 (474,700) P197,000 6,150 18,000 (18,460) 5,690 P50,550 50,400 50,250 39,746 P190,946 (12,150) 18,200 P6,050 Purchases P 17,940 Sales (31,380) Net income P(17,940) (31,380) (12,150) 18,200 P(7,390) 1,250,000 (155,000) (22,000) 40,000 210,000 25,000 2,000 (5,300) 1,304,700 (210,000) 25,000 2,000 (5,300) 866,700 9,040,000 (188,000) Accounts Payable 1,000,000 (155,000) Sales 9,000,000 --22,000 Effect on Cost of Sales

P17,940

P(31,380) P353,300 474,700 220,000 P1,048,000 (100,000) ( 25,000) P923,000 P 50 18,460

20.

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Chapter 5 Inventories and Related Expenses TIGER CORPORATION

Per count Coins and currencies Checks Petty cash vouchers December 2012 January 2013 Advances to Officers and Employees December 2012 January 2013 Total per count Cashiers accountability Petty cash fund Collections December collection P1,500 January 2006 collection 2,700 Cash shortage Cash in Bank Unadjusted Balances Deposits in transit Unrecorded and undeposited collections (see above) Unreleased checks Stale checks Outstanding checks (22,630 5,750 4,280) Uncollected note from Sergio Garcia Principal P3,600 Interest 108 DAIF Check from customer Service charges Adjusted balances Per Bank P252,742 10,700 1,500 (12,600) (3,708) (2,850) ( 450) P252,342 Per Books P247,820 1,500 5,750 4,280 P4,700 4,200 P1,900 500 P 900 300 P10,000 4,200 14,200 P1,700 2,400 1,200 P12,500

P252,342

Adjusting entries Selling and Administrative Expenses Receivable from Officers and Employees (900 + 1,700) Petty Cash Fund Cash in Bank Accounts Receivable Accounts Payable (5,750 + 4,280) Accounts Receivable (3,708 + 2,850) Selling and Administrative Expenses Cash in Bank Sales Accounts Receivable 1,900 2,600 4,500 11,530 1,500 10,030 6,558 450 7,008 8,000 8,000

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Chapter 5 Inventories and Related Expenses

Inventories Cost of Sales Sales Accounts Receivable Accounts Receivable Sales Cost of Sales Inventories Allowance for Doubtful Accounts Selling and Administrative Expenses Accounts Receivable Per client Adjustments 12,000 12,000 10,200 10,200 47 47 P328,300 ( 1,500) 6,558 (8,000) (10,000) 12,000 P327,358 5% P 16,368 16,415 P ( 47) 10,000 10,000 183 183 1,415 1,415 7,500 7,500 10,000 10,000

Per Audit Provision rate for uncollectibles Required allowance Existing allowance Deductions from uncollectible accounts expense Notes Receivable Notes Payable Interest Expense Interest Payable 10,000 x 22% x 30/360 = 183 Interest Receivable Interest Income 20,000 x 18% x 77/360 = P770 15,000 x 20% x 59/360 = 492 8,000 x 15% x 46/360 = 153 Total P1,415 Income Tax Payable Income Tax Expense 35,065 32,135 = 3,127

2,930 2,930

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Chapter 5 Inventories and Related Expenses

Answers:
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Petty Cash Cash in bank Accounts receivable Allowance for doubtful accounts Notes receivable Interest receivable Merchandise inventory Receivables from officers and Employees Accounts payable Notes payable Interest Payable Income tax payable Sales Cost of sales Selling and administrative expenses Bad debts expense Interest income Interest expense and bank charges Net income Total assets P5,500 252.342 327,358 16,368 43,000 1,415 221,300 12,840 397,030 73,070 11,363 10,162 1,869,000 1,184,700 530,300 12,553 9,820 56,703 72,838 2,224,430

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