Reference no: EM133021328
Question - The management of Chi Fi Fai, Inc. engaged your services for the audit of the company's financial statements for the year ended December 31, 2018. The company uses the perpetual inventory system but takes complete physical count near the end of the reporting period. You examined the records of the company and you obtained the following information:
The company applies the FIFO costing procedure but adjusts its inventory at yearend to the lower of cost and net realizable value, the difference being charged to a separate loss account.
The company took a complete physical count on December 29, 2018. Immediately after the count it adjusted its inventory control account to agree with the physical inventory by charging or crediting Cost of Sales. All items received up to December 29 have been included in the inventory and all items shipped out until the close of business on that day have been excluded.
The control account and the inventory stock cards on December 31 are in agreement with the balance of P890,000.
Other balances on December 31, 2018 trial balance are as follows:
Accounts Receivable P1,200,000
Accounts Payable 800,000
Sales 13,200,000
Cost of Sales 8,600,000
Selling and Administrative Expenses 1,800,000
Other Operating Expenses 250,000
Retained Earnings, January 1 4,500,000
Goods with billed price of P120,000 are on consignment with Chow Ming. You verified that on December 31, only P50,000 have not been sold by Chow Ming. No entry was made by Chi Fi Fai to record the shipment. The consigned goods with total cost of P80,000 were included both in the inventory list and in the stock cards. The company maintains a uniform markup rate on consigned goods.
In September 2018, the company suffered an uninsured inventory loss due to suspected contamination of a large lot of inventory. The goods were withdrawn from the market and the company wrote off the cost of P800,000, charging the same to cost of sales. Although infrequent, the loss is not considered unusual in the industry.
A shipment received by the company on December 28 has been inventoried on December 29.
The related purchase was entered in the purchase journal and in the stock card only on December 30 when the invoice was received. The goods cost P36,000.
Goods carried at the ledger at December 31, 2018 at cost of P230,000 were sold by Chi Fi Fai on January 2, 2019 for P160,000. The sales price approximate the selling price of similar goods offered by other players in the industry. Commission of P20,000 was incurred by the company on this sale.
The company also receives goods on consignment. It is the policy of the company to record the accounts payable with the supplier upon sale of the goods to Chi Fi Fai's customers. Cost of sales is charged for the difference between the actual sales price of the goods and the commission earned. Payment to consignees, net of the commission earned, is made 45 days after the sale. During the month of December the client recorded sale of consigned goods amounting to P400,000. Commission earned on these consignment sales amounted to P80,000.
No liability to the consignors has been recorded yet on December sales.
Required -
a. As a result of the goods out on consignment, the inventory is understated (overstated) by?
b. As a result of the goods out on consignment, the accounts receivable balance is understated (overstated) by?
c. As a result of the goods out on consignment, the net income is understated(overstated) by?
d. As a result of goods sold by the client for the account of the consignors, the accounts payable should be increased by?
e. What should be the effect on gross profit as a result of the sales made for consignors in December?
f. What is the correct cost of inventory before taking up decline in net realizable value, if any, as of December 31, 2018 after making adjustments for the foregoing items?
g. At what amount should the inventory be presented on the balance sheet at December 31, 2018?