PROBLEM NO.

1
Presented below is a list of items that may or may not reported as inventory in a company’s
December 31 balance sheet.

1. Goods out on consignment at another company’s store P800,000

2. Goods sold on installment basis 100,000
3. Goods purchased f.o.b. shipping point that are in transit
at December 31 120,000
4. Goods purchased f.o.b. destination that are in transit at
December 31 200,000
5. Goods sold to another company, for which our company
has signed an agreement to repurchase at a set price that
covers all costs related to the inventory 300,000
6. Goods sold where large returns are predictable 280,000
7. Goods sold f.o.b. shipping point that are in transit
December 31 120,000
8. Freight charges on goods purchased 80,000
9. Factory labor costs incurred on goods still unsold 50,000
10. Interest cost incurred for inventories that are routinely
manufactured 40,000
11. Costs incurred to advertise goods held for resale 20,000
12. Materials on hand not yet placed into production 350,000
13. Office supplies 10,000
14. Raw materials on which the company has started
production, but which are not completely processed 280,000
15. Factory supplies 20,000
16. Goods held on consignment from another company 450,000
17. Costs identified with units completed but not yet sold 260,000
18. Goods sold f.o.b. destination that are in transit at
December 31 40,000
19. Temporary investment in stocks and bonds that will be
resold in the near future 500,000

Question:
How much of these items would typically be reported as inventory in the financial statements?

PROBLEM NO. 2
In connection with your audit of the Mama Manufacturing Company, you reviewed its inventory as
of December 31, 2022 and found the following items:
(a) A packing case containing a product costing P100,000 was standing in the shipping room when
the physical inventory was taken. It was not included in the inventory because it was marked
“Hold for shipping instructions.” The customer’s order was dated December 18, but the case
was shipped and the costumer billed on January 10, 2023.

(b) Merchandise costing P600,000 was received on December 28, 2022, and the invoice was
recorded. The invoice was in the hands of the purchasing agent; it was marked “On
consignment”.

(c) Merchandise received on January 6, 2023, costing P700,000 was entered in purchase register
on January 7. The invoice showed shipment was made FOB shipping point on December 31,
2022. Because it was not on hand during the inventory count, it was not included.

(d) A special machine costing P200,000, fabricated to order for a particular customer, was finished
in the shipping room on December 30. The customer was billed for P300,000 on that date and
the machine was excluded from inventory although it was shipped January 4, 2023.

(e) Merchandise costing P200,000 was received on January 6, 2023, and the related purchase
invoice was recorded January 5. The invoice showed the shipment was made on December 29,
2022, FOB destination.

(f) Merchandise costing P150,000 was sold on an installment basis on December 15. The customer
took possession of the goods on that date. The merchandise was included in inventory because
Alcala still holds legal title. Historical experience suggests that full payment on installment sale
is received approximately 99% of the time.

(g) Goods costing P500,000 were sold and delivered on December 20. The goods were included in
the inventory because the sale was accompanied by a purchase agreement requiring Alcala to
buy back the inventory in February 2023.

Question:
Based on the information, how much of these items should be included in the inventory balance at
December 31, 2022?
PROBLEM NO. 3
The Sigma Company is on a calendar year basis. The following data were found during your audit:
a. Goods in transit shipped FOB destination by a supplier, in the amount of P100,000, had been
excluded from the inventory, and further testing revealed that the purchase had been recorded.

b. Goods costing P50,000 had been received, included in inventory, and recorded as a purchase.
However, upon your inspection the goods were found to be defective and would be immediately
returned.

c. Materials costing P250,000 and billed on December 30 at a selling price of P320,000, had been
segregated in the warehouse for shipment to a customer. The materials had been excluded from
inventory as a signed purchase order had been received from the customer. Terms, FOB
destination.

d. Goods costing P70,000 was out on consignment with Hermie Company. Since the monthly
statement from Hermie Company listed those materials as on hand, the items had been
excluded from the final inventory and invoiced on December 31 at P80,000.

e. The sale of P150,000 worth of materials and costing P120,000 had been shipped FOB point of
shipment on December 31. However, this inventory was found to be included in the final
inventory. The sale was properly recorded in 2021.

f. Goods costing P100,000 and selling for P140,000 had been segregated, but not shipped at
December 31, and were not included in the inventory. A review of the customer’s purchase
order set forth terms as FOB destination. The sale had not been recorded.

g. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not
arrived as yet. However, these materials costing P170,000 had been included in the inventory
count, but no entry had been made for their purchase.

h. Merchandise costing P200,000 had been recorded as a purchase but not included as inventory.
Terms of sale are FOB shipping point according to the supplier’s invoice which had arrived at
December 31.

Further inspection of the client’s records revealed the following December 31, 2022 balances:
Inventory, P1,100,000; Accounts receivable, P580,000; Accounts payable, P690,000; Net sales,
P5,050,000; Net purchases, P2,300,000; Net income, P510,000.

QUESTIONS:
Based on the above information, determine the adjusted balances of following as of December 31,
2022:
1. Inventory
2. Accounts payable
3. Net sales
4. Net purchases
5. Net income

PROBLEM NO. 4
You were engaged by Banana Corporation for the audit of the company’s financial statements for
the year ended December 31, 2022. 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:

SALES PURCHASES
Date Reference Amount Date Reference Amount
Balance forwarded P7,800,000 Balance forwarded P4,200,000
12/27 SI No. 965 60,000 12/28 RR #1059 36,000
12/28 SI No. 966 225,000 12/30 RR #1061 105,000
12/28 SI No. 967 15,000 12/31 RR #1062 63,000
12/31 SI No. 969 69,000 12/31 RR #1063 96,000
12/31 SI No. 970 102,000 12/31 Closing entry
(4,500,000)
12/31 SI No. 971 24,000 P -
12/31 Closing entry
(8,295,000)
P -

Note: SI = Sales Invoice RR = Receiving Report

Accounts receivable P750,000

Inventory 900,000
Accounts payable 600,000

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. 1063 and that no shipments had been made on any
Sales Invoices whose number is larger than No. 968. You also obtained the following additional
information:
a) Included in the warehouse physical inventory at December 31 were goods which had been
purchased and received on Receiving Report No. 1060 but for which the invoice was not received
until the following year. Cost was P27,000.
b) On the evening of December 31, there were two trucks in the company siding:
 Truck No. XXX 888 was unloaded on January 2 of the following year and received on
Receiving Report No. 1063. The freight was paid by the vendor.
 Truck No. MGM 357 was loaded and sealed on December 31 but leave the company
premises on January 2. This order was sold for P150,000 per Sales Invoice No. 968.
c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to
ABC Trading Corporation. ABC received the goods, which were sold on Sales Invoice No. 966
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. 1064. The goods were shipped FOB Destination, and freight of P2,000 was paid by
the client. However, the freight was deducted from the purchase price of P800,000.
QUESTIONS:
Based on the above information, determine the following:
1. Sales for the year ended December 31, 2022
2. Purchases for the year ended December 31, 2022
3. Accounts receivable as of December 31, 2022
4. Inventory as of December 31, 2022
5. Accounts payable as of December 31, 2022

PROBLEM NO. 5
Choco Company engaged you to examine its books and records for the fiscal year ended June 30,
2022. The company’s accountant has furnished you not only the copy of trial balance as of June
30, 2022 but also the copy of company’s balance sheet and income statement as at said date. The
following data appears in the cost of goods sold section of the income statement:
Inventory, July 1, 2021 P 500,000
Add Purchases 3,600,000
Total goods available for sale 4,100,000
Less Inventory, June 30, 2022 700,000
Cost of goods sold P3,400,000

The beginning and ending inventories of the year were ascertained thru physical count except that
no reconciling items were considered. Even though the books have been closed, your working paper
trial balance show all account with activity during the year. All purchases are FOB shipping point.
The company is on a periodic inventory basis.

In your examination of inventory cut-offs at the beginning and end of the year, you took note of the
following:
July 1, 2021
a. June invoices totaling to P130,000 were entered in the voucher register in June. The
corresponding goods not received until July.
b. Invoices totaling P54,000 were entered in the voucher register in July but the goods received
during June.
June 30, 2022
c. Invoices with an aggregate value of P186,000 were entered in the voucher register in July, and
the goods were received in July. The invoices, however, were date June.
d. June invoices totaling P74,000 were entered in the voucher register in June but the goods were
not received until July.
e. Invoices totaling P108,000 (the corresponding goods for which were received in June) were
entered the voucher register, July.
f. Sales on account in the total amount of P176,000 were made on June 30 and the goods
delivered at that time. Book entries relating to the sales were made in June.
QUESTIONS:
Based on the above and the result of your cut-off tests, answer the following:
1. How much is the adjusted Inventory as of July 1, 2021?
2. How much is the adjusted Purchases for the fiscal year ended June 30, 2022?
3. How much is the adjusted Inventory as of June 30, 2022?
4. How much is the adjusted Cost of Goods Sold for the fiscal year ended June 30, 2022?
5. The necessary compound adjusting journal entry as of June 30, 2022 would include a net
adjustment to Retained Earnings of