Your audit team was assigned to make an interim audit for a client that has recently experienced loss of inventory due to fire.

The entity reported merchandise inventory of P6,500,000 at the end of December 31, 2021 and has been using a consistent gross profit rate of 25% in selling its merchandise. It also reported accounts receivable and accounts payable of P3,000,000 and P1,600,000 at the end of December 31, 2021 respectively. All purchases and sales are made on account with a reasonable credit period for settlement.

On January 25, 2022, a fire damaged the office and warehouse of the entity. The entity was so concerned about the extent of the damage brought about by the unfortunate event and as part of the accounting department, you were tasked to do an estimation of the loss. You were able to gather the following information:

(a)The entity reported outstanding accounts receivable and accounts payable of P3,700,000 and P2,000,000 as of the date of fire.

(b) The cash records for January showed receipts from customers of P900,000 and payments to suppliers of P500,000.

(c) Damaged goods costing P150,000 were found after the fire but this could be sold for just P50,000 because of the defect.

(d) Goods costing P550,000 were sent to a consignee the morning of January 25, prior to the unfortunate incident.

(e) There were goods purchased in transit worth P120,000 during January which were expected to be received in the first week of February. These goods were shipped in January 20 under the terms FOB shipping point and were properly recorded as purchases in January.

Required:

Prepare an audit working paper for the interim period showing computations for the

(a) cost of sales based on the gross profit method

(b) total value of inventory destroyed by fire