Chapter09 - answer

9-1. Substantiation of the figure for inventories is an especially challenging task because of the variety of acceptable methods of valuation. In addition, the variety of materials found in inventories calls for considerable experience and skill to do an efficient job of identifying and test-counting goods on hand. The possibilities of obsolescence and of excessive stocks also create problems. Finally, the relatively large size of inventories and their significance in the determination of net income make purposeful misstatement by the client a possibility which the auditors must guard against.

9-2. During an audit of a manufacturing company, the auditors review the cost system for the following purposes:

(1) To determine that costs are properly allocated to current and future periods and hence that cost figures used in arriving at balance sheet and income statement amounts are supported by internal records.

(2) To obtain assurance that the cost system, as an integral part of the system of internal control, provides proper accounting control over costs incurred and related inventories.

(3) To ascertain, as a service to management, that the cost system is economical and effectively provides information for reducing or controlling costs and for determining the cost and profitability of products, and other related data necessary for informed managerial decisions.

9-3. The auditors make test counts of inventory quantities during their observation of the taking of the physical inventory to ascertain that an accurate count is being made by the individuals taking the inventory. The extent of test counting will be determined by the inventory-taking procedures; for example, the number of the auditors’ test counts would be reduced if there were two teams, one verifying the other, taking the inventory. On the other hand, the auditors’ test counts would be expended if they found errors in the inventory counts.

9-4. The statement is not true. The auditors’ responsibilities with respect to inventories include not only quantities and pricing, but also the quality or condition of the goods, the accuracy of extensions, footing, and summaries, and the evaluation of internal control. Weakness in internal control may cause large

CHAPTER9 SUBSTANTIVE TESTS

OF INVENTORIES AND COST OF GOODS SOLD

9-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition

losses from excessive stockpiling, obsolescence, inaccurate cost data, and many other sources, even though the ending inventory is properly counted and priced.

9-5. The independent auditors utilize the client’s backlog of unfilled sales orders in the determination of net realizable value of finished goods and goods-in-process, and in the determination of losses, if any, on firm sales commitments for which no production has yet been undertaken.

9-6. Beed Company

Since Beed Company obtained all of its merchandise inventory from the president of the company in a related-party transaction, the auditors must determine the cost of the merchandise to the president in his operation of a similar business as a single proprietor. In this related-party transaction, the auditors must look beyond form--a total cost of P100,000 for the original stock of merchandise--to substance. Substantively, the merchandise of Beed Company should be priced, on a specific identification basis if feasible, at its cost from the suppliers of the sole proprietorship. Any difference between cost as thus determined and amounts charged by the president to Beed Company represents unamortized discount on the notes payable. The entire transaction should be fully disclosed in a note to the financial statements of Beed Company.

9-7. Jay Company

The following procedures should be undertaken:

(a) The oral evidence that the motors are on consignment should be substantiated by a review of the client’s records of consigned inventory, examination of contracts and correspondence with consignors, and confirmation of consigned stocks by direct communication with consignors.

(b) The location of the machine in the receiving department, together with the presence of the “REWORK” tag, suggests that the machine had been shipped to a customer but rejected and returned by the customer. The auditors should examine the receiving report for the machine, the accounts receivable confirmation from the customer, and records of the client’s quality control department, to ascertain who has title to the machine. If the customer has title, the machine should not be included in inventory, and a liability for rework costs should be established. If the client has title, the customer’s account should be credited for the sales return and the machine should be included in the client’s inventory at estimated realizable value.

(c) The “Material Inspection and Receiving Report” signed by the Navy Source Inspector, is evidence that title to the machine passed to the Phil. Naval Base on November 30, 2006. Accordingly, the auditors should ascertain that the sales value of the machine is included in accounts receivable, and that the

Substantive Tests of Inventories and Cost of Goods Sold 9-3

cost of the machine is not in the perpetual inventory or the physical inventory.

(d) The location of the storeroom and the dusty condition of the goods suggest that the items may be obsolete, or at least slow moving. The auditors should inspect perpetual inventory records for usage of the materials, and should inquire of production personnel whether the materials are currently useful in production. The materials may have to be valued at scrap value.

9-8. Pancho Manufacturing Corporation

(a) Consignment out.1. Obtain from the client a complete list of all consignees together with

copies of the consignment contracts.2. Evaluate the consignment contract provisions relative to the following

areas:(a) Payment of freight and other handling charges.(b) Extension of credit.(c) Rates and computation of commissions to consignees.(d) Frequency and contents of reports and remittances received from

consignees.3. Discuss with the client any variations found in the contracts which do not

seem justified by the circumstances.4. Following review of the consignment contracts, communicate directly

with the consignees to obtain complete information in writing on merchandise remaining unsold, receivables resulting from sales, unremitted proceeds, and accrued expenses and commissions, which should be reconciled with the client’s records for the period covered by the engagement.

5. Determine that merchandise on consignment with consignees is valued on the same basis as merchandise on hand, and included as part of the inventory. Ascertain that any arbitrary mark-ons are deducted and that shipping and related charges for the transfer of merchandise to the consignees are reflected as part of the inventory.

6. Ascertain that quantities of goods in hands of consignees at the close of the period under audit appear in the balance sheet and are separately designated as “Merchandise on Consignment.”

(b) Finished merchandise in public warehouse pledged as collateral for outstanding debt.1. Determine that goods pledged to obtain funds are covered by warehouse

receipts. (The examination of warehouse receipts alone is not a sufficient verification of goods stored in public warehouses.)

2. Request direct confirmation from the warehouses in which the merchandise is held.


3. If available, obtain independent accountants’ reports on a warehouses’ internal controls over custody of stored goods.

4. Review the client’s procedures for acceptance and evaluation of the performance of warehouses, and review supporting documents.

5. Review the loan agreements collateralized by warehouse receipts. These agreements usually provide for certain payments to be made by the borrower as pledged goods are sold.

6. Consider observing a physical inventory of goods stored at the public warehouses.

9-9. a. (2) b. (3) c. (2) d. (2)

e. (4) f. (2)

9-10. a. Principal problems the auditor will face are related by:

1. Verification of existence of the inventory owned by the company as against inventory belonging to the customers.

2. Proper valuation since the perpetual inventory records reflect quantities only.

b. Steps that should be undertaken to enable the auditor to render an unqualified opinion:

1. Verify postings to the perpetual ledger at the plant office for both stock owned and stock being held for customers against original cost sheet to determine amounts debited and credited to the account.

2. Require that an annual physical inventory taking be done by the client and arrangements for the presence and observation of the auditor be done.

3. Confirm with customers unclaimed merchandise still in the possession of the client as of the balance sheet date.

9-11. 1. Existence or occurrence 2. Existence or occurrence3. Valuation or allocation4. Completeness5. Completeness6. Valuation or allocation7. Completeness8. Completeness9. Existence or occurrence and completeness10. Completeness


9-12. a. When the inventory is a material item in the financial statements that the auditor is examining, observation of the taking of the physical inventory is in compliance with the auditing standard pertaining to field work that requires obtaining sufficient competent evidential matter to afford a reasonable basis for an opinion regarding the financial statements. Observation is a generally accepting auditing procedure applied in the examination of the physical inventory.

By observing the taking of the physical inventory, the CPA is seeking to satisfy himself or herself as to the effectiveness of the methods of inventory taking and the measure of reliance that can be placed on the client inventory records and their representations as to inventory quantities. The CPA must ascertain that the physical inventory actually exists, that the inventory quantities are being determined by reasonably accurate methods, and that the inventory is in a salable or usable condition.

b. The CPA makes test counts of inventory quantities during observation of the taking of the physical inventory to become satisfied that an accurate count is being made by the individuals taking the inventory. The extent of test counting will be determined by the inventory-taking procedures. For example, the number of test counts would be reduced if there were two teams taking the inventory, one checking the other. On the other hand, the CPA’s test count would be expanded if errors were found in the inventory counts.

Some test counts are recorded by the CPA for the purpose of subsequent comparison with the client’s compilation of the inventory. The comparison procedure goes beyond the mere determination that quantities have been accurately transcribed. In addition, the CPA seeks assurance that the description and condition of the inventory items are accurate for pricing purposes and that the quantity information, such as dozen, gross, and cartons, is proper.

c. 1. The CPA does not regard the inventory certificate of an outside service company as a satisfactory substitute for his or her own audit of the inventory. The service company has merely assumed the client’s function of taking the physical inventory, pricing it, and making the necessary extensions. To the extent that the service company is competent, internal control with regard to the inventory has been strengthened. Nevertheless, as under other strong systems of internal control, the CPA would investigate the system to become satisfied that it is operating in a satisfactory manner. The CPA’s investigation would necessarily entail an observation of the taking of the inventory and testing the pricing and calculation of the inventory.


2. The inventory certificate of the outside specialists would have no effect on the CPA’s report. The CPA must be satisfied that the inventory is fairly stated by observing the taking of the inventory and by testing the pricing and calculation of the inventory.

However, if the taking of the inventory was not observed and no audit tests were applied to the computation of the inventory, the CPA would be compelled to disclaim an opinion on the financial statements as a whole if the amount of the inventory is material.

If it has been impracticable or impossible for the CPA to observe the taking of the physical inventory but he or she has been satisfied by the application of other auditing procedures, the CPA would make no reference to the matter in the report.

3. The CPA would make no reference to the certificate of the outside specialists in the report. The outside specialists are serving as adjuncts of the company’s staff of permanent employees and, as such, are in somewhat the same position as temporary employees. The outside specialists are not independent in that they are not imbued with third-party interests. The CPA is compelled, under certain circumstances, to mention in the report the reports of other independent auditors, but this compulsion does not extend to the certificate of outside specialists who are not independent auditors.

9-13. a. For a client to dispose of the chemical compound in a manner that meets legal requirements is admirable. However, ethical behavior frequently calls for individual persons and companies to exhibit behavior that exceeds the minimum standards set by law. Due to the harm to cattle and the pollution that has resulted. Remote is involved in a matter that entails ethical issues.

b. Most auditors are hesitant to serve as judge and jury for clients on ethical matters. For example, declining to serve this client probably would not cause any alteration of its behavior. Further, serving the client does not facilitate any unethical behavior. Further, serving the client does not facilitate any unethical behavior. Hence, an auditor might choose to discuss the matter with the board and encourage them to act as responsible citizens.


9-14. JC

Requirement (1)

Inventory, as given.......................................................... P271,500Deduct (adjustments to cost):

50% markup in (a) [P250,000 – (P250,000 1.5)]. P83,33360% markup in (b) (P10,000 x 0.60)....................... 6,000Exclusion of (c)........................................................ 4,000Incorrect amount used in (e) (P2,500 – P1,000)...... 1,500 94,833

P176,667Add:

Freight on goods in transit in (d).............................. 800 Corrected ending inventory...................................... P177,467

Requirement (2)

Income Statementa. Ending inventory overstated (P250,000 – P177,467)............. P72,533b. Cost of goods sold understated............................................... 72,533c. Gross margin overstated......................................................... 72,533d. Pretax income overstated........................................................ 72,533e. Income taxes overstated (P72,533 x 0.40)............................. 29,013f. Net income overstated (P72,533 – P29,013).......................... 43,520

Balance Sheet:Current assets, inventory overstated............................................ 72,533Current liabilities, income taxes payable overstated.................... 29,013Retained earnings overstated........................................................ 43,520

Requirement (3)

Retained earnings (prior period adjustment)................... 43,520Income taxes payable...................................................... 29,013

Inventory.................................................................. 72,533

9-15. Beginning inventory P 38,000Purchases 19,000Cost of goods available for sale P 57,000Cost of goods sold (net sales of P51,000 1.50) 34,000Ending inventory before theft P 23,000Ending inventory after theft 15,000Inventory lost P 8,000


9-16. LRT CompanyLRT COMPANY

Computation of Value of Inventory LostFebruary 16, 2006

Sales P 40,000Less: Gross profit (40%) 16,000Cost of goods sold P 24,000Finished goods, February 16 75,000Cost of goods available for sale P 99,000Less: Finished goods, December 31, 2005 72,000Cost of goods manufactured and completed P 27,000

Raw materials, December 31, 2005 P 65,000Raw materials purchases 20,000Raw materials available for production P 85,000Raw materials before flood 70,000 (P35,000 1/2)Raw materials used P 15,000Direct labor 30,000Manufacturing overhead cost 15,000Goods in process, December 31, 2005 80,000Cost of production P 140,000Less: Cost of goods completed (from above)

27,000

Goods in process inventory lost in flood P 113,000

Total value of inventory = Raw materials lost + Goods in process lost destroyed by flood

= (P70,000 - P35,000) + P113,000

= P148,000

9-17. Y Company

a. Necessary adjustments to client’s physical inventory:

Material in Car #AR38162--received in warehouse on January 2, 2007 P 8,120

Materials stranded en route(Sales price P19,270/125%) 15,416 Total 23,536

Less unsalable inventory 1,250* Total adjustment P22,286

* If freight charges have been included in the client’s inventory, the amount would be P1,600 and the amount of the total adjustment would


be P21,936. Journal entry 6 probably would have a credit to purchases of P1,600 in this case.

b. Auditor’s worksheet adjusting entries:

1. Purchases P 2,183Accounts Payable P 2,183

To record goods in warehouse but not invoiced-received on RR 1060.

2. No entry required. Title to goods had passed.

3. Accounts receivable 12,700Sales 12,700

To record goods as sold which were loaded on December 31 and not inventories-SI 968.

4. Sales 19,270Accounts receivable 19,270

To reverse out of sales material included in both sales (SI 966) and in physical inventory (after adjustment).

5. No adjustment required.

6. Claims receivable 1,600Purchases 1,250Freight In 350

To record claim against carrier for merchandise damaged in transit.

7. Inventory 22,286Cost of goods sold 22,286

To adjust accounts for changes in physicalinventory quantities.

8. Sales 15,773Accounts receivable 15,773

To reverse out of sales invoices #969, #970,#971. The sales book was held open too long.This merchandise was in warehouse at time of physical count and so included therein.

9-18. Engine Warehouse Supply Company

a. Cutoff errors will exist for accounts payable whenever the liability for a purchase is recorded in the wrong period. The following rules should be followed for recording purchases:

1. Record as of date received when shipped FOB destination.


2. Record as of date shipped when shipped FOB origin.

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

Receiving Report

No. Amount

Date Shippe

d

Date Receive

dFOB Point

Should be Recorded in August

Was Recordedin August

679 P 860

8-29 8-31 Destination Yes Yes

680 1,211 8-27 9-01 Origin Yes Yes681 193 8-20 9-01 Origin Yes Yes682 4,674 8-27 9-01 Destination No Yes683 450 8-30 9-02 Destination No No684 106 8-30 9-02 Origin Yes No685 2,800 9-06 9-02 Origin No No686 686 8-30 9-02 Destination No No

The entry to adjust the records as of August 31 for cutoff errors in accounts payable is as follows:

Dr. Accounts payable P4,568Cr. Purchases P4,568

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

RR No. 682 P4,674RR No. 684 ( 106)

P4,568

b. Sales should be recorded as of the date shipped. The following shipping documents were dated on September 1 and recorded in August:

311 P 56312 3,194313 635314 193

P4,078

The adjusting entry will be:

Dr. Sales P4,078Cr. Accounts receivable P4,078

To adjust sales for cutoff errors at August 31.


c. 1. Inventory received near the balance sheet date should be included in inventory if it is recorded as a purchase and excluded if it is not recorded as a purchase.

2. Inventory shipped near the balance sheet date should be excluded from inventory if it is recorded as a sale and included if it has not been recorded as a sale.

These principles lead to the following analysis.

Receipt of Goods

1. Inventory for all receiving reports up to 684 are included in inventory.

2. Using the analysis in part a, column 6, inventory for all receiving reports up to 684, except 682 and 683, should be included in accounts payable and inventory.

Report No. AmountShould be Included in

Purchases and Inventory

Was Included in Inventory

679 860 Yes Yes680 1,211 Yes Yes681 193 Yes Yes

682* 4,674 No Yes 683* 450 No Yes

684 106 Yes Yes685 2,800 No No686 686 No No

* Requires removal from inventory.

3. Inventory for receiving reports 682 and 683 should therefore be removed from the physical count:

Amount682 4,674683 450

5,124

Shipment of Goods

1. Inventory for shipping documents 314 to 317 were included in inventory. All inventory for documents 313 and earlier were excluded.


2. Sales, after adjustments, were included only for shipments 310 and those preceding, as shown in the analysis in part b.

3. Inventory for shipping documents 311 to 313 should therefore be added to inventory. The amount of the cost of the inventory cannot be determined without reference to inventory costs. Presumably, cost will be less than the sales value shown in part b.

Shipping Document No.

Included in Physical

Recorded as Sale After Adjustments in Part b

310 No Yes 311* No No 312* No No 313* No No

314 Yes No315 Yes No316 Yes No317 Yes No318 Yes No

* Requires addition to inventory at cost.

ShippingDocument No.

SellingPrice

311 P 56312 3,194313 635Inventory cost 3,885(70% of selling price) 2,719

Summary

Reduction of inventory due to physical count error resulting from receipt of goods. P5,124.00

Increase of inventory due to physical count errorresulting from shipment of goods. 2,719.50

Net reduction of inventory required P2,404.50

d. The accuracy about September 1 receipts and shipments of goods could be verified by reference to bills of lading.


9-19. Green Company

Requirement (a)Green Company

Inventory12.31.06

Per AuditItem Quantity Unit Price * Amount Per Client

A – 510 720 units P 2.64 / doz. P 218.40 P 2,592.00A – 520 48 units 4.70 each 225.60 252.60A – 530 146 units 16.50 each 2,409.00 2,706.00A – 540 86 units 5.15 each 442.90 353.60A – 550 80 units 8.50 each 680.00 7,280.00A – 560 140 units 2.00 each 3,360.00 280.00A – 570 910 gross 132 gross 120,120.00 27,360.00

Total P127,455.90 P 40,824.20Add: AJE (1) __________ 86,631.70

P127,455.90 P127,455.90

* Lower of cost or market

Requirement (b)

Inventory 86,631.70Cost of sales 86,631.70

9-20.Requirement (a) Requirement (b)

1. Exclude Title to the goods passed to the client on January 3, 2007 or upon receipt because the term of shipment was FOB Destination.

2. Exclude Goods held on consignment are not owned by the client.

3. Include Regular stock item even if segregated but not actually delivered as of the end of the year is still part of the client’s inventory.


4. Include Title to the goods passed to the client on December 31, 2006 or upon shipment because the invoice showed FOB supplier’s warehouse.

5. Exclude Goods fabricated to order for a customer are considered sold as soon as completed even if not yet delivered.

9-21. Isabela Company

ISABELA COMPANYWorksheet to Correct Selected Accounts

12-31-06

Inventory Accounts Payable Sales

Initial amounts P1,250,000 P1,000,000 P9,000,000Adjustments Increase (Decrease) 1 P (155,000) P (155,000) None 2 (22,000) None None 3 None None P 40,000 4 210,000 None None 5 25,000 25,000 None 6 2,000 2,000 None 7 (5,300) (5,300)

None

Total adjustments P 54,700 P (133,300) P 40,000

Adjustment amounts P1,304,700 P 866,700 P9,040,000

9-22. Stockroom W

Stockroom WReconciliation of Inventory

OpeningInventor

yReceipt

sWithdrawal

s

EndingInventory

Balance per Accounting Department

P 22,600

P28,000 P 26,000 P 24,600

Add (Deduct) Reconciling Items1) Receipt of materials

erroneously posted by the Accounting Department to Stockroom W. 480 480

2) Correction of error in the Accounting Department. ( 600) ( 600)

3) Shortage not recorded in the


Accounting Department. _______ ______ 90 (90 )

Balance per Factory Records P 22,000

P28,480 P 25,490 P 24,990

9-23. Pinas Company

Requirement (1)

Audit Adjustments, 12.31.06

1. Retained earnings 300Purchases 300

2. Inventory, January 1, 2006 700Retained earnings 700

3. Accounts receivable 500Sales 500

4. Purchases 500Accounts payable 500

5. Inventory, Dec. 31, 2006 B/S 400Inventory, Dec. 31, 2006 I/S 400

6. a. Purchases 1,200Accounts payable 1,200

b. Inventory, Dec. 31, 2006 B/S 1,200Inventory, Dec. 31, 2006 I/S 1,200

7. Accounts payable 800Purchases 800

Requirement (2)

Pinas CompanyCost of Sales

2006

Per Adjustments PerClient Dr Cr Audit

Inventory, Jan. 1 P 3,200 P 700 (2) P 3,900Purchases 21,100 500 (4) P 300

(1)


_______ 1,200(6a)

800(7)

21,700

Total available 24,300 25,600Less: Inventory, Dec. 31

4,300 400(5)

_______ ______ 1,200 (6b) 5,900Cost of sales P 20,000 P 2,400 P 2,700 P19,700


9-24. Bers Company

Uncorrected Items for Correction CorrectedAmounts (a) (b) (c) (d) (e) Amounts

Income statement:Sales revenue............................. P90,000 – 12,000 – 15,000 P 63,000Cost of goods sold..................... 50,000 + 6,000 + 15,000 – 8,000 63,000Gross margin.............................. 40,000 0Expenses.................................... 30,000 + 7,000 37,000Income....................................... P10,000 – 7,000 – 12,000 – 6,000 – 15,000 – 7,000 P(37,000)

Balance sheet:Accounts receivable................... P42,000 – 12,000 – 15,000 P15,000Inventory.................................... 20,000 – 15,000 + 8,000 13,000Remaining assets....................... 30,000 30,000Accounts payable....................... 11,000 * + 6,000 17,000 *Remaining liabilities.................. 6,000 * + 7,000 13,000 *Share capital, ordinary............... 60,000 * 60,000 *Retained earnings †.................... 15,000 * – 7,000 – 12,000 – 6,000 – 15,000 – 7,000 (32,000)

Totals...................................... P 0 P 0

* Credits.† Retained Earnings is negative after correction.


9-25.

1. Jap Co.

P150,000 – (P150,000 X .20) = P120,000;P120,000 – (P120,000 X .10) = P108,000, cost of goods purchased

2. Fred Company

P1,100,000 + P69,000 = P1,169,000. The P69,000 of goods in transit on which title had passed on December 24 (f.o.b. shipping point) should be added to 12/31/06 inventory. The P29,000 of goods shipped (f.o.b. shipping point) on January 3, 2007, should remain part of the 12/31/06 inventory.

3. B. May Corp.

Because no date was associated with the units issued or sold, the periodic (rather than perpetual) inventory method must be assumed.

FIFO inventory cost: 1,000 units at P24 P 24,0001,100 units at 23 25,300 Total P 49,300

Average cost: 1,500 at P21 P 31,5002,000 at 22 44,0003,500 at 23 80,5001,000 at 24 24,000

Totals 8,000 P180,000

P180,000 8,000 = P22.50

Ending inventory (2,100 X P22.50) is P47,250.

4. Emmett Lopez Inc.

The inventoriable costs for 2007 are:

Merchandise purchased P909,400Add: Freight-in 22,000

931,400Deduct: Purchase returns P16,500 Purchase discounts 6,800 23,300Inventoriable cost P908,100


9-26.

(a)

(1)

8/10

Purchases 9,000Accounts Payable 9,000

8/13Accounts Payable 1,200

Purchase Returns and Allowances 1,200

8/15Purchases 12,000

Accounts Payable 12,000


Accounts Payable 15,000


Cash 12,000

(2)

Purchases—addition in cost of goods sold section of income statement.

Purchase returns and allowances—deduction from purchases in cost of goods sold section of the income statement.

Accounts payable—current liability in the current liabilities section of the balance sheet.

(b) (1)

8/10

Purchases 8,820Accounts Payable (P9,000 X .98) 8,820


Purchase Returns and Allowances 1,176 (P1,200 X .98)


Accounts Payable (P12,000 X .99) 11,880

8/25


Purchases 14,700Accounts Payable (P15,000 X .98) 14,700

8/28Accounts Payable 11,880Purchase Discounts Lost 120

Cash 12,000

(2) 8/31Purchase Discounts Lost 156

Accounts Payable (.02 X [P9,000 – P1,200]) 156

(3) Same as part (a) (2) except:

Purchase Discounts Lost—treat as financial expense in income statement.

(c)

The second method is better theoretically because it results in the inventory being carried net of purchase discounts, and purchase discounts not taken are shown as an expense. The first method is normally used, however, for practical reasons.

9-27. MAR Company

(a)

Purchases Total Units

Sales Total Units

April 1 (balance on hand) 100 April 5 300April 4 400 April 12 200April 11 300 April 27 800April 18 200 April 28 100April 26 500 Total units 1,400April 30 200Total units 1,700Total units sold 1,400Total units (ending inventory)

300

Assuming costs are not computed for each withdrawal:

(1) First-in, first-out.

Date of Invoice No. Units Unit Cost Total CostApril 30 200 P5.80 P1,160April 26 100 5.60 560

P1,720


(2) Average cost.

Cost of Part X available.

Date of Invoice No. Units Unit Cost Total Cost

April 1 100 P5.00 P 500April 4 400 5.10 2,040April 11 300 5.30 1,590April 18 200 5.35 1,070April 26 500 5.60 2,800April 30 200 5.80 1,160

Total Available 1,700 P9,160

Average cost per unit = P9,160 1,700 = P5.39.Inventory, April 30 = 300 X P5.39 = P1,617.

(b) Assuming costs are computed for each withdrawal:

(1) First-in, first out.

The inventory would be the same in amount as in part (a), P1,720.

(2) Average cost.

Purchased Sold Balance

DateNo. of units

Unit cost

No. of units

Unit cost No. of units

Unit cost* Amount

April 1 100 P5.00 100 P5.0000 P 500.00April 4 400 5.10 500 5.0800 2,540.00April 5 300 P5.0800 200 5.0800 1,016.00April 11 300 5.30 500 5.2120 2,606.00April 12 200 5.2120 300 5.2120 1,563.60April 18 200 5.35 500 5.2672 2,633.60April 26 500 5.60 1,000 5.4336 5,433.60April 27 800 5.4336 200 5.4336 1,086.72April 28 100 5.4336 100 5.4336 543.36April 30 200 5.80 300 5.6779 1,703.36

Inventory April 30 is P1,703.


*Four decimal places are used to minimize rounding errors.

9-28. Timmy Turner

Requirement (a)Merchandise on hand, January 1 P38,000

Purchases P72,000Less purchase returns and allowances 2,400Net purchases 69,600

Freight-in 3,400 73,000Total merchandise available for sale 111,000Cost of goods sold* 75,000

Ending inventory 36,000Less undamaged goods 10,900Estimated fire loss P 25,100

*Gross profit = 33 1/3% = 25% of sales.100% + 33 1/3%

Cost of goods sold = 75% of sales of P100,000 = P75,000.

Requirement (b)Cost of goods sold = 66 2/3% of sales of P100,000 = P66,667Ending inventory [P111,000 (as computed above) – P66,667] P44,333Less undamaged goods 10,900Estimated fire loss P33,433

9-29. Cosmo and Wanda Company

Beginning inventory P170,000Purchases 390,000

560,000Purchase returns (30,000)Total goods available 530,000Sales P650,000Sales returns (24,000)Net sales 626,000Less gross profit (40% X P626,000) (250,400) 375,600Estimated ending inventory (unadjusted for damage) 154,400Less goods on hand—undamaged (at cost) P21,000 X (1 – 40%) (12,600)


Less goods on hand—damaged (at net realizable value) (5,300)Fire loss on inventory P136,500

Documents

Chapter09 - answer