Exercises and Problems Links:

Chapter 7 Exercise 1
Exercise 2
Exercise 3
Chapter 8 Exercise 1
Exercise 2
Exercise 3
Exercise 4
Chapter 13 Exercise 2
Exercise 3
Exercise 5
Problem 1
Problem 2
Problem 3
Exercise 1 checks totaling P9,370 had been outstanding for more than one year.Concluding that
that several
these checks would never be presented for payment, Martin prepared a check for P9,370 payable to
himself, forged the treasurer’s signature and cashed the check. Martin made no entry in the

Requirement:
1.Identify the weaknesses in Star Corporation's internal control.

Answer:
The primary problem in the internal control is that there is no proper segregation of duties. The
person who records cash disbursements and prepares checks for signature also prepares bank
reconciliations. Henry Martin would not have been capable of concealing the presence of the forged
check if another employee had reconciled bank statements. An employee with no other responsibility
for cash transactions should perform bank reconciliations.
The fact that checks are permitted to remain unpaid for
an extended period of time is another weakness in internal control. The list of outstanding checks
should be checked on a regular basis, and when a check has been unpaid for more than a fair
amount of time—typically 90 days—payment should be stopped.

2.Explain several audit procedures that might disclose the fraudulent disbursement.

Answer:

The first audit procedure that might reveal fraudulent payments involves testing the controls of the
client's periodic bank reconciliation. Second through fourth procedures are frequently related to the
test period covered by a proof of cash, wherein second is a verification of all checks paid by the
bank during a test period, third is accounting for serial numbers of all checks issued, and fourth is
confirming that all checks listed as outstanding at the start of a test period were either paid during
the period or still listed as outstanding at the end of the period.
You are the auditor in charge of the audit of Circle Corporation. In the audit of investments, you have just been give
Schedule of Marketable Securities
December 31, 20X3
Market Value December 31
10,000 shares of Diamond Corp. P599,100
6,000 shares of Square Corp. 216,500
8,000 shares
400 Line of Rectangle
Corporation 7.5% Corporation
Convertible (not publicly traded)
Bonds 555,000

Required:
Identify the potential audit problems that may be indicated by the schedule.
Answer: Upon observation of the problem given, two potential audit problems can arise with the given schedule. Fir

To value the shares of Rectangle Corporation, management has employed a securities valuation firm. Explain the a
Answer: Rectangle Corporation as mentioned is not publicly traded thus there is no active market for it. Sin
nvestments, you have just been given the following list of securities held by Circle Corporation at December 31, 20X3.

an arise with the given schedule. Firstly, the 8,000 shares of Rectangle Corporation are said to be not publicly traded and so, it

ecurities valuation firm. Explain the audit considerations involved in auditing the value developed by the valuation firm.
here is no active market for it. Since there is no market, it is difficult to identify the fair value of the securities. In line w
ember 31, 20X3.

publicly traded and so, its market value as of December 31 is unknown. In line with this, since there’s no active market for the

e valuation firm.
f the securities. In line with this, the management can procure an appraisal of fair value from a securities valuation firm
s no active market for the securities, determining its fair value would be difficult and will require the use of a valuation model– w

a securities valuation firm to estimate the current worth of the securities. The auditor must consult auditing standards
e of a valuation model– which are used to determine the present or expected worth of an asset, stock, or security– or possibly

nsult auditing standards on employing the specialist, which call on them to take into account the appraiser's professio
, or security– or possibly a consultation with a specialist. Secondly, the given states that Line Corporation has 7.5% convertible

he appraiser's professional qualification and independence as well as to acquire the techniques and presumptions util
ation has 7.5% convertible bonds, which are considered embedded derivatives. An embedded derivative is a provision incorpora

s and presumptions utilized. In assessing the fair value of the security using the valuation method, the auditors shoul
ve is a provision incorporated in a contract, called the host contract, that affects a contract's cash flow by making it reliant on so

thod, the auditors should evaluate the appropriateness and reasonableness of the model and ensure that the model ta
w by making it reliant on some underlying measurement. The host contract is the contract or instrument to which an embedded

ensure that the model takes into account all potential risks, including but not limited to the risk of unfavorable change
nt to which an embedded derivative is added. Together, they constitute a hybrid instrument. This conversion option for Line Cor

k of unfavorable changes in market factors and the risk of losses due to legal intervention. He must also take into con
ersion option for Line Corporation’s bonds is considered an embedded derivative. Thus, this security of Line Corporation is a d

must also take into consideration the reasonableness of the underlying assumptions that were made based on the va
of Line Corporation is a derivative security for the value of the convertible bonds will depend on the value of the underlying stoc

e made based on the valuation model.

alue of the underlying stock. The management needs to consider this conversion option separately. To do this, it will be necess
o do this, it will be necessary to use valuation models to ascertain the values of the bonds and options. It's advisable to consult
s. It's advisable to consult a specialist for this as well.
Items a through l represent possible errors and fraud that you suspect may be present at Rex Company. The accom
to gather evidence concerning possible errors and fraud. For each item, select one or two procedures, as indicated, that the au
The procedures on the list may be selected once, more than once, or not at all.

LIST OF AUDITING PROCEDURES

A. Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips.
L. Examine the entity’s shipping documents to verify that the merchandise that produced the receivable was actuall
B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors’ invoices and management’s
M. Inspect the entity’s correspondence files for indications of customer disputes for evidence that certain shipments
C. Perform analytical procedures that compare documented authorized pay rates to the entity’s budget and forecas
N. Perform edit checks of data on the payroll transaction tapes.
D. Obtain the cutoff bank statement and compare the cleared checks to the year-end bank reconciliation.
O. Inspect payroll check endorsements for similar handwriting.
E. Prepare bank transfer schedule.
P. Observe payroll check distribution on a surprise basis.
F. Inspect the entity’s deeds to its real estate.
Q. Vouch data in the payroll register to documented authorized pay rates in the human resources department’s files
G. Make inquiries of the entity’s attorney concerning the details of real estate transactions.
R. Reconcile the payroll checking account and determine if there were unusual time lags between the issuance and
H. Confirm the terms of borrowing arrangements with the lender.
S. Inspect the file of prenumbered vouchers for consecutive numbering and proper approval by an appropriate emp
I. Examine selected equipment repair orders and supporting documentation to determine the propriety of the charge
T. Determine that the details of selected pre numbered vouchers match the related vendors’ invoices.
J. Send requests to confirm the entity’s account receivable on a surprise basis at an interim date.
U. Examine the supporting purchase orders and receiving reports for selected paid vouchers.
K. Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable cred

Possible Misstatements Due to Errors and Fraud

The auditor suspects that a kiting scheme exists because an accounting department employee who can issue and r
Answer: E. Prepare bank transfer schedule.

An auditor suspects that the controller wrote several checks and recorded the cash disbursements just before year-
Answer: D. Obtain the cutoff bank statement and compare the cleared checks to the year-end bank rec

The entity borrowed funds from the financial institution. Although the transaction was properly recorded, the auditor
Answer: H. Confirm the terms of borrowing arrangements with the lender

The auditor discovered an unusually large receivable from one of the entity’s new customers. The auditor suspects
Answer: (1) K. Send a second request for confirmation of the receivable to the customer and make inquiries of a re
(2) L. Examine the entity’s shipping documents to verify that the merchandise that produced the receivable was actually sent to
The auditor suspects that fictitious employees have been placed on the payroll by the entity’s payroll supervisor, wh
Answer: P. Observe payroll check distribution on a surpris

The auditor suspects that selected employees of the entity received unauthorized raises from the entity’s payroll su
Answer: Q. Vouch data in the payroll register to documented authorized pay rates in the human resources departm

The entity’s cash receipts of the first few days of the subsequent year were properly deposited in its general operati
Answer: A. Compare the details of the cash receipts journal entries with the details of the corresponding daily depo

The auditor suspects that vouchers were prepared and processed by an accounting department employee for merc
Answer: U. Examine the supporting purchase orders and receiving reports for selected

The details of invoices for equipment repairs were not clearly identified or explained to the accounting department e
Answer: B. Scan the debits to the fixed asset accounts and vouch selected amounts to vendors’ invoices and mana

The auditor suspects that a lapping scheme exists because an accounting department employee who has access to
Answer: (1) A. Compare the details of the cash receipts journal entries with the details of the corresponding daily de

The auditor suspects that the entity is inappropriately increasing the cash reported in its balance sheet by drawing a
Answer: E. Prepare bank transfer schedule.

The auditor suspects that the entity’s controller has overstated sales and accounts receivable by recording fictitious
Answer: (1) J. Send requests to confirm the entity’s account receivable on a surprise basis at an inter
(2) L. Examine the entity’s shipping documents to verify that the merchandise that produced the receivable was actually sent to
Rex Company. The accompanying List of Auditing Procedures represents procedures that the auditor would consider performin
res, as indicated, that the auditor most likely would perform to gather evidence in support of that item.

nding daily deposit slips.

he receivable was actually sent to the customer.
voices and management’s authorization.
nce that certain shipments were on consignment.
ntity’s budget and forecast.

k reconciliation.

sources department’s files.

between the issuance and payment of payroll checks.

val by an appropriate employee.

the propriety of the charges.
rs’ invoices.

quiries of a reputable credit agency concerning the customer’s creditworthiness.

oyee who can issue and record checks seems to be leading an unusually luxurious lifestyle. (Select only 1 procedure)

sements just before year-end but did not mail the checks until after the first week of the subsequent year. (Select only 1 proced

erly recorded, the auditor suspects that the loan created a lien on the entity’s real estate that is not disclosed in its financial sta

ers. The auditor suspects that the receivable may be fictitious because the auditor has never heard of the customer and becaus
and make inquiries of a reputable credit agency concerning the custom
ceivable was actually sent to the customer.
 ty’s payroll supervisor, who has access to payroll records and to the paychecks. (Select only 1 procedure)

rom the entity’s payroll supervisor, who has access to payroll records. (Select only 1 procedure)
uman resources department

sited in its general operating account after the year-end. However, the auditor suspects that the entity recorded the cash receip
corresponding daily deposit

rtment employee for merchandise that was either ordered nor received by the entity. (Select only 1 procedure)

e accounting department employees. The auditor suspects that the bookkeeper incorrectly recorded the repairs as fixed assets.
ndors’ invoices and management’s author

mployee who has access to cash receipts also maintains the accounts receivable ledger and refuses to take any vacation or sick
he corresponding daily deposit slips. (2) J. Send requests to confirm the entity’s account receivable on a surprise

alance sheet by drawing a check on one account and not recording it as an outstanding check on that account and simultaneou

able by recording fictitious sales to regular customers in the entity’s books. (Select only 2 procedures)

ceivable was actually sent to the customer.

 would consider performing

only 1 procedure)

year. (Select only 1 procedure)

sclosed in its financial statements. (Select only 1 procedure)

the customer and because the auditor’s initial attempt to confirm the receivable has been ignored by the customer. (Select onl
 recorded the cash receipts in its books during the last week of the year under audit. (Select only 1 procedure)

he repairs as fixed assets. (Select only 1 procedure)

o take any vacation or sick days. (Select only 2 procedures)

t account and simultaneously recording it as a deposit in a second account. (Select only 1 procedure)
the customer. (Select only 2 procedures)
The following questions related to payroll are included on the internal control questionnaire for Mama Company:
Does payroll require written authorization to add an employee to the payroll?
Do employees use a time clock for recording time worked?
Does a supervisor approve time cards before they are sent to payroll?
Are payroll checks distributed by someone other than the people involved in supervising employees, personnel, pa
Are pre-numbered checks used and accounted for?
Is the payroll bank account reconciled by a person independent of the payroll function?
Required:
For each of the six proceeding questions, provide the following information about Mama’s Company’s internal contr
Identify the financial assertion related to the control addressed in each questions
Identify a potential misstatement that could arise from the absence of the control you identified in part A.
Identify the tests of controls an auditor might perform for the controls you identified in part A.
Indicate the substantive tests of transactions an auditor might perform after the test of control is ineffective.

Answer:
1 A. Existence or Occurrence
B. Payroll may include fictitious or former employees
C. Examine approval signatures
D. For selected entries, examine signed authorizations for hiring and compare signature on paid check to signa
2 A. Rights and Obligations
B. Employees may be paid for more hours than they work
C. Examine signature on cards
D. Reconcile time charged to jobs to total hours worked
3 A. Rights and Obligations
B. Employees may be paid for more hours than they work
C. Examine signature on cards
D. Reconcile time charged on cards to total charged to jobs
4 A. Existence or Occurrence
B. Payroll may include fictitious or former employees
C. Observe separation of duties
D. For selected entries, examine signed authorization for hiring, pay rates and deductions and compare signatu
5 A. Completeness
B. Paychecks may be issued but not recorded
C. Observe whether paychecks are pre-numbered and determine whether the bank reconciliation is prepared b
D. Test or prepare a bank reconciliation
6 A. Completeness
B. Paycheck may be issued but not recorded
C. Observe whether a bank reconciliation is prepared by a person independent of the payroll function
D. Test or prepare a bank reconciliation
uestionnaire for Mama Company:

pervising employees, personnel, payroll preparation and check signing?

ut Mama’s Company’s internal control:

ol you identified in part A.

fied in part A.
test of control is ineffective.

are signature on paid check to signature on job application

and deductions and compare signature on paid check to signature on application or distribute paychecks in a surprise payoff.

he bank reconciliation is prepared by a person independent of the payroll function

dent of the payroll function

cks in a surprise payoff.
Exercise 2
Match the audit objectives listed on the left with the best audit procedure from the list on the right. Use the audit pro

D. Perform cut-off tests to verify that

1. The entity has legal rights to
2. Recorded inventory inventory purchases are recorded in
items included in inventory. C.
represents assets that actually theReconcile inventory tags gathered
proper period.
3. Inventory is properly valued during inventory listing.
exist at the balance sheet date.at A. Foot the client’s inventory listing.
the balance sheet date.
right. Use the audit procedures only once.
EXERCISE 3 - Bagcatin

An auditor discovered the following matters while performing tests of controls:

1 The production supervisor believes he has good judgment about what customers will buy. He surpris
2 Raw materials were transferred to production but were not transferred in the accounting records.
3 Salaries of the sales department were charged to manufacturing overhead
4 The materials-usage variance is unusually large because materials issued to product development w
5 The work-in-process account is overstated because goods were not transferred out when they were
6 The labor cost on one job is high because an employee completed a duplicate labor ticket.

Required:
a. What control would have prevented or detected each of the errors or irregularities
b. What tests should the auditor perform to test each control?
c. To which financial statement assertion does each error or irregularity relate?

Error or
Irregularities (a) authorizing
production order (b)
Examine signature on
1 personnel to and
prenumbered undertake work.
accounted for production orders
account for a sequence of
2 by an accounting clerk
should be assigned by one person materials
payroll requisitions.
register for signature
3 and
should bechecked
assigned byby
another.
one person indicating verification.
authorized price lists and
4 and checked by another.
periodically evaluated, underlyingsequence
numerical schedules of
5 Mathematical
Time chargedaccuracy is tested.
on labor tickets is production orders
6 reconciled to employee time cards Observe procedure.
customers will buy. He surprised the sales manager with a new product that was produced on December 24.
n the accounting records.

ued to product development were charged to production.

nsferred out when they were completed
uplicate labor ticket.

irregularities

©
Rights and obligations
Completeness
Valuation & Allocation
Valuation & Allocation
Valuation & Allocation

Completeness
December 24.
Exercise 4 - Bagcatin

An auditor discovered the following errors and irregularities while performing tests of controls:

1 An auditor discovered the following errors and irregularities while performing tests of controls:
2 Goods received on June 3 were never placed in the storeroom but instead were taken to the receivin
3 Raw materials issued on July 15 were never recorded as issued from the storeroom.
4 Inventory damaged by rain remains in inventory at full cost.
5 While storeroom personnel are at lunch, production employees come into the storeroom to get the m
6 Sometimes the storeroom issues raw materials to production without obtaining a signature on a mate

Required:
a. What control would have prevented or detected each of the errors or irregularities?
b. What tests should the auditor perform to test each control?
c. To which financial statement assertion does the error or irregularity relate?

Error and
Irregularities goods transferred (a) to the storage Observe procedure (b) and examine
1 accounted forarea.by an accounting signatures on receiving
receiving reports reports.
to determine
2 by officials clerk.
and adjusted as that they all about
Inquire have been recorded.
review for
3 necessary.
be limited to personnel responsible obsolescence
4 for its
after counting custody.
goods transferred to ObserveObserve procedures.
procedure and examine
5 production. signature on requisition
ng tests of controls:

ng tests of controls:
d were taken to the receiving clerk's home.

the storeroom to get the materials they need. They always complete and sign the requisition forms.
ning a signature on a materials requisition.

egularities?

©
Rights and obligations
Completeness
Valuation of
Completeness
inventory/issuances.
Rights & Obligation
EXERCISE 2
A processor of frozen foods carries an inventory of finished products consisting of 50 different types o
About P750,000 of this value represents stock produced by the company and billed to customers prio
the customers at amonthly rental charge until they request shipment and is not separated from the co

The company maintains separate perpetual ledgers at the plant office for both stock owned and stoc
The cost department also perpetual record of stock owned. Theabove perpetual records reflect quan

The company does not take a complete physical inventory at any time during the year, since thetemp
too low to allow one to spend more than 15 minutes inside ata time. It is not considered practical to m
storage facilities forthe purpose of taking a physical inventory. Due to these circumstances, it is impra
completely verifying specific items. The company considers as its inventoryvaluation at year-end the
perpetual record of stock owned that is maintained at the plant office, priced at the lower of cost of m

REQUIRED:
1.What are the two principal problems facing the auditor in the audit of the inventory? Discuss briefly
2.Outline the audit steps that you would take to enable you to render an unqualified opinion withrespe

1.What are the two principal problems facing the auditor in the audit of the inventory? Discuss briefl
a. Inability to take count due to business conditions.
- The conditions surrounding the inventory are such that the auditor will find it near to impossible to ta
actual count of any inventory item because of the cold temperature and due to the sensitivity of the p
b. There is no solid reference to cross check.
- With the action of the company of not being able to do a complete inventory check at any time durin
the auditor will find it hard to cross check by calculating the inventory as of date through the means o
calculation like adding sales and reducing purchases and determine match ups.

2. Outline the audit steps that you would take to enable you to render an unqualified opinion w
a. During the date of inventory, the auditor should perform a detailed calculation of closing inventory
reverse calculation like adding sales and reducing purchases and determine match ups. Preferably fr
to arrive at the inventory value of a prior date.
b. As maintained in records, the auditor should reconcile the value obtained with the value of invento
down any discrepancy discovered.
c. To satisfy the records and the tally of physical inventory with each other, the auditor should inquire
been recently counted and attempt reverse calculation of the present inventory.
d. To ensure that no inventory is left out for the entire year and is properly counted, the auditor shoul
observation of the inspection done by the company and analyze the pattern.
e. Since the company did not do a complete inventory, the auditor has to depend on records and vou
to come at the count of inventory at the date of audit.
sting of 50 different types of items valued at approximately P2 million.
nd billed to customers prior to the audit date. This stock is being held for
not separated from the company's inventory.

oth stock owned and stockbeing held for customers. maintains a

etual records reflect quantities only.

ng the year, since thetemperature in the cold storage facilities is

t considered practical to move items outside or to defreeze the cold
circumstances, it is impractical to test countquantities to the extent of
valuation at year-end the aggregate of the quantities reflected by the
d at the lower of cost of market.

inventory? Discuss briefly.

qualified opinion withrespect to the inventory.

e inventory? Discuss briefly.

d it near to impossible to take an

e to the sensitivity of the products.

ry check at any time during the year,

date through the means of reverse

an unqualified opinion withrespect to the inventory.

ation of closing inventory through the means of
e match ups. Preferably from bills

d with the value of inventory in records and note

the auditor should inquire the items that have

counted, the auditor should conduct a personal

epend on records and vouchers

EXERCISE 3
The following are audit procedures related to inventory.
1. Observe the client counting inventory
2. Confirm the inventory stored in public warehouse
3. Foot the Inventory Listing
4. Trace Test counts to inventory listing
5. Account for Inventory Tags
6. Determine whether inventory has been valued at the lower of cost or market
7. Tour the inventory area to determine that all inventory items have been tagged
8. Obtain the receiving report for the last goods received.
9. Test perpetual records for inventory, using records-to-floor and floor-to-records test.
10. Review the client's inventory written procedures.

Identify the assertion that each audit procedure would attest

ANSWER Audit Procedure

1. Observe the client counting inventory
2. Confirm the inventory stored in public warehouse
3. Foot the Inventory Listing
4. Trace Test counts to inventory listing
5. Account for Inventory Tags
6. Determine whether inventory has been valued at the lower of cost or mar
7. Tour the inventory area to determine that all inventory items have been t
8. Obtain the receiving report for the last goods received.
9. Test perpetual records for inventory, using records-to-floor and floor-to-re
10. Review the client's inventory written procedures.
cost or market
ave been tagged

d floor-to-records test.

Assertion Tested Explanation

Existence or Occurence Inventory properly exists and is counted
Existence or Occurence Inventory is existing and is properly stored in the warehouse
Existence or Occurence Inventory Listing is mathematically/clerically accurate
Completeness Trace test counts of inventory items from the floor to the client's inventory listing- to ensur
Completeness Account for inventory tags and count sheets- to verify the inventory has been accounted f
Valuation or Allocation Inventory balances truly reflect its economic value.
Presentation and DisclosureInventory is properly presented, classified. and sufficiently disclosed.
Rights and Obligation Confirmation if the inventory existing really belongs to the company.
Existence or Occurence Count the actual inventory on hand to make sure they match with the record.
Presentation and DisclosureDetermine that the inventories and COGS are classified in accordance to PFRS
 Explanation
counted
erly stored in the warehouse
ally/clerically accurate
ems from the floor to the client's inventory listing- to ensure all items of inventory have been counted and in
count sheets- to verify the inventory has been accounted for completely
ts economic value.
classified. and sufficiently disclosed.
sting really belongs to the company.
and to make sure they match with the record.
and COGS are classified in accordance to PFRS
Requirement 1:
JC Worldwide

a. Merchandise inventory in Store (at 50% above cost)

b. Merchandise out on consignment at sales price (including mark
c. Goods held on consignment from Davis Electronics at sales pr
d. Goods purchased, in transit (shipped FOB shipping point, estim
e. Goods out on approval, cost
Total Inventory, Corrected

Requirement 2:
Statement of Financial Position Accounts Affected:
Inventory - overstate
Income Tax Payable - overstated
Retained Earnings - overtstated

Statement of Other Comprehensive Income Account Affected:

Income Tax Expense - overstated by 29,013.33
Net Income - overtstated by 43,520.00
Cost of Goods Sold - understated by 72,533.33
Pretax Income - overstated by 72,533.33

Requirement 3:
Correcting Entry:
Retained Earnings 43,520
Income Tax Payable 29,013.33
Inventory 72,533.33
 Inventory on Dec 31, 20X6
166,666.67 -- 250000 / 150%
4,000.00 -- 10,000 * 40%
- Consigned goods are included in the inventory of the consignor, not the consignee
5,800.00 -- 5000 + 800
1,000 cost; not selling price
177,466.67

-- 250,000 - 177,466.67
--- 72,533.33 x 40%
-- 72,533.33 - 29,013.33

nt Affected:
erstated by 29,013.33
ertstated by 43,520.00
derstated by 72,533.33
erstated by 72,533.33

72,533.33
e consignor, not the consignee
Requirement:
a. Compute the adjustments that should be made to the client’s physical inventory at December 31, 20x7.

b. Prepare the auditor’s worksheet adjusting entries that are required as of December 31, 20x7.

Y Company
Adjustment to the Physical Inventory
December 31, 20x7

3 (a) Goods received per RR # 1063 P 8,120.00

4 Goods sold per SI # 966. (19,270/125%) 15,416.00
6 Cost of damaged chemicals -1,250.00
Amount to be added to the Physical Inventory P 22,286

PAJE 1 Sales ₱15,773

Accounts Receivable ₱15,773
To adjust for unshipped goods

PAJE 2Purchases ₱2,183

Accounts Payable ₱2,183
To take up cost of chemicals purchased and received per RR #1060 but not recorded.

PAJE 4Inventory ₱12,700

Cost of Sales ₱12,700
To include in the EI the cost of merchandise sold per SI # 968

PAJE 5Sales ₱19,270

Accounts Receivable ₱19,270
To reverse entry made on SI # 966; ( goods in transit sold FOB destination).

PAJE 6Claim Receivable – Trucking Company ₱1,600

Purchases ₱1,250
Freight in ₱350
To set up claim for unsaleable chemicals from the truckingcompany .

PAJE 7Inventory ###

Cost of goods sold ###
To adjust accounts for changes in physical inventory quantities
ventory at December 31, 20x7.

December 31, 20x7.

RR #1060 but not recorded.

d FOB destination).
Required:

Assume that the information you have obtained about the September 1 receipts and shipments is accurate:

Prepare all adjustments for cutoff errors in accounts payable, assuming no acquisitions are made for cash and for e
What is the amount of the client’s error in inventory assuming a periodic inventory method and no adjustment in par

Answer:

Whenever the liability for a purchase is recorded in the incorrect period, cutoff errors will exist for accounts payable

Record as of date received when shipped FOB destination.

Record as of date shipped FOB origin.

On this basis, the receiving reports would be evaluated as follows:

Receiving Date Date Recorded in Recorded in
Report No. Amount Shipped Received FOB Point August August
679 P 860 8-29 8-31 Destination Yes Yes
680 1,211 8-27 09-01 Origin Yes Yes
681 193 8-20 09-01 Origin Yes Yes
682 4,674 8-27 09-01 Destination No Yes
683 450 8-30 09-02 Destination No No
684 106 8-30 09-02 Origin Yes No
685 2,800 09-06 09-02 Origin No No
686 686 8-30 09-02 Destination No No

The entry to adjust the records as of August 31 for cutoff errors in accounts payable is as follows:
PAJE 1
Dr. Accounts Payable P 4,568
Cr. Purchases P4,568

To adjust accounts payable for cutoff errors in recording inventory purchases:

RR No. 682 P 4,674
RR No. 684 (106)
Net adjustment for Accounts Payable P4,568

b. Sales should be recorded as of the date shipped. The following shipping documents were dated on September 1
311 P 56
312 3,194
313 635
314 193
Total Adjustments P 4,078

The adjusting entry will be:

PAJE 2
Dr. Sales P 4,078
Cr. Accounts Receivable P 4,078

To adjust sales for cutoff errors on August 31.

Erroneous Physical Count of Inventory

RR No. 682 P4,674

RR No. 683 450 5,124
Less: Increase of
Inventory due to
error from shipping document

SD No. 311 56
SD No. 312 3194

SD No. 313 635 3,885

Inventory Cost *70% -2,719.50
Adjustment (net reduction) P 2,404.50
ments is accurate:

e made for cash and for errors in sales.

and no adjustment in part (a) affected inventory? For retail sales, assume the gross margin is approximately 30%.

exist for accounts payable. For recording purchases, abide by the following guidelines:

ere dated on September 1 and recorded in August:

ximately 30%.
Adjustments:
1. Reduce in Inventory by P155,000 and Reduce in Accounts Payable by P155,000
2. Reduce in Inventory by P22,000
3. Increase in Sales by P40,000
4. Increase in Inventory by P210,000
5. Increase in Inventory by P25,000 and increase in Accounts Payable by P25,000
6. Increase in Inventory by P2,000 and increase in accounts payable by P2,000
7. Reduce in Inventory by 5,300 and reduce Accounts Payable by 5,300

Isabela Company
Adjustments to Initial Amount
As of December 31,20X7
Initial Amounts Inventory Payable Sales
Adjustments 1,250,000 1,000,000 9,000,000 GL
1 (155,000.00) (155,000.00) NONE PAJE 1
2 (22,000.00) NONE NONE PAJE 2
3 NONE NONE 40,000.00 PAJE 3
4 210,000.00 NONE NONE PAJE 4
5 25,000.00 25,000.00 NONE PAJE 5
6 2,000.00 2,000.00 NONE PAJE 6
7 (5,300.00) (5,300.00) NONE PAJE 7
Total Adjustments ₱ 54,700.00 (133,300.00) ₱ 40,000.00
Adjusted Amounts ₱ ₱ 866,700.00 ₱
1,304,700.00 9,040,000.00

PAJE 1
Accounts Payable ₱155,000.00
Merchandise Inventory ₱155,000.00

PAJE 2
Cost of Goods Sold ₱22,000.00
Merchandise Inventory ₱22,000.00

PAJE 3
Merchandise Inventory ₱210,000.00
Finished Goods ₱210,000.00

PAJE 4
Accounts Receivable ₱40,000.00
Sales ₱40,000.00
PAJE 5
Merchandise Inventory ₱25,000.00
Accounts Payable ₱25,000.00

PAJE 6
Merchandise Inventory ₱2,000.00
Accounts Payable ₱2,000.00

PAJE 7
Accounts Payable ₱5,300.00
Merchandise Inventory ₱5,300.00

Prepared by:

GRP 4 3/23/23
ble by P155,000

able by P25,000
ble by P2,000