Junior Philippine Institute of Accountants

University of Cebu – Banilad Chapter

INVENTORIES TEST BANK

TEST I – COMPUTATION
Problem # 1
Curley Company incurred the following costs:
Materials P 650,000
Storage costs of finished goods 163,000
Delivery to customers 37,000
Irrecoverable purchase taxes 58,000
At what amount should the inventory be measured?
Problem # 2
Taylor Company has incurred the following costs during the current year:
Cost of purchases based on vendors' invoice P7,000,000
Trade discounts on purchases already deducted from vendor's invoices 630, 000
Import duties 550,000
Freight and insurance on purchase 1,300,000
Other handling costs relating to imports 200,000
Salaries of accounting department 700,000
Brokerage commission paid to agents for arranging imports 270,000
Sales commission paid to sales agents 400,000
What is the total cost of purchases?
Problem # 3
At year-end Pearl Company purchased goods costing P800,000 FOB destination These
goods were received at year-end. The costs incurred in connection with the sale and
delivery of the goods were:
Packaging for shipment P30,000
Shipping 35,000
Special handling charges 25,000
What total costs should be included in inventory?
Problem # 4
Vanderwal Company reported inventory on December 31, 2019 at P5,000,000 based on
a physical count of goods priced at cost and before any necessary year-end adjustments
relating to the following:

 Included in the physical count were goods billed to a customer FOB shipping point
on December 30, 2019. These goods had a cost of P140,000 and were picked up by
the courier on January 14, 2020.
 Goods shipped FOB shipping point on December 28, 2019, from a vendor to
Vanderwal were received and recorded on January 10, 2020. The invoice cost was
P280,000
What amount should be reported as inventory on December 31, 2019?
Problem # 5
Zamiel Company provided the following data:
Items counted in the bodega P5,000,000
Items included in the count specifically segregated per sale contract 150,000
Items in receiving department, returned by customer, in good condition 65,000
Items ordered and in the receiving department 500,000
Items ordered, invoice received but goods not received. Freight is on
account of seller 385,000
Items shipped today, invoice mailed, FOB shipping point 340,000
Items shipped today, invoice mailed, FOB destination 200,000
Items currently being used for window display 300,000
Items on counter for sale 950,000
Items in receiving department, refused because of damage 215,000
Items included in count, damaged and unsalable 75,000
Items in the shipping department 325,000
What is the correct amount of inventory?
Problem # 6
Radleigh Company included the following in inventory at year-end:
Merchandise out on consignment at sale price, including 30%
markup on sales P1,950,000
Goods purchased in transit, shipped FOB shipping point 1,750,000
Goods held on consignment by Venice 985,000
At what amount should the inventory be reduced?
Problem # 7
Raoul Company conducted a physical count on December 31, 2019 which revealed
inventory with a cost of P3,910,00.
The following items were excluded from the physical count:
Merchandise held by Raoul on consignment P560,000
Merchandise shipped by Raoul FOB destination to a
customer on December 31, 2019 and was received by the
customer on January 7, 2019 290,000
Merchandise shipped by Raoul FOB shipping point to a
customer on December 31, 2019 and was received by the
customer on January 7, 2019 360,000
Merchandise shipped by a vendor FOB destination on
December 31, 2019 and was received by Raoul on
January 7, 2019 720,000
Merchandise purchased FOB shipping point was shipped
by the supplier on December 31, 2019 and received by
Raoul on January 7, 2019 440,000

What is the correct amount of inventory on December 31,2019?

Problem # 8

Elijah Company conducted a physical count on December 31, 2019 which showed
inventory with a total cost of P6,000,000. However, further investigation revealed that
the following items were excluded from the count

 Goods sold to a customer which are being held for the customer to call at the
customer's convenience with a cost of P300,000
  A packing case containing a product costing P700,000 standing in the shipping
room was not included in the physical count because it was marked “hold for
shipping instructions”.
 Goods in process costing P430,000 held by an outside processor for further
processing
 A special machine costing P250,000, fabricated to order for a customer, was
finished and specifically segregated at the back part of the shipping room on
December 31, 2019

The customer was billed on that date and the machine was excluded from inventory
although it was shipped on January 5, 2020.

What is the correct amount of inventory on December 31, 2019?

Problem # 9
Kajik Sportswear regularly buys sweaters from Balthazar Company and is allowed trade
discounts of 15% and 10% from the list price.

Kajik made a purchase during the year and received an invoice with a list price of P
550,000, a freight charge of P15,000 and payment terms of 2/10, n/30.

What is the cost of the purchase?

Problem # 10

Percival company provided the following for the current year:

Central warehouse Held by consignees

Beginning inventory P1,310,000 P140,000
Purchases 5,200,000 800,000
Freight in 170,000
Transportation to consignees 65,000
Freight out 360,000 97,000
Ending inventory 1,680,000 300,000

What is the cost of goods sold for the current year?

TEST II – THEORIES

1. Which of the following is correct regarding the recognition of inventories?

a. Inventories are recognized only when legal title is obtained
b. Inventories are recognized only when they meet the definition of inventory
and they qualify for recognition as assets
c. Inventories include only those that are readily available for sale in the
ordinary course of business
d. Inventories are recognized only by entities engaged in trading or
manufacturing operation
2. Inventories are classified on the statement of financial position as
a. current assets
b. non-current assets
c. financial instruments
d. intangible assets
3. The inventory account is updated for each purchase and sale of inventory under
this type of accounting system
a. Respiratory system
b. Automatic system
c. Perpetual system
d. Periodic system
4. Costs of good sold is a residual amount under this system
a. Respiratory system
b. Automatic system
c. Perpetual system
d. Periodic system
5. Which of the following may not result to the amount of cost of sales?
a. Net purchases less net increase in inventory
b. Net decrease in inventory plus net purchases
c. Total goods available for sale less net increase in inventory
d. Total goods available for sale less ending inventory
6. Who properly shoulder freight of the goods shipped?
a. The entity who owns the goods
b. The buyer
c. The seller
d. The shipper
7. Which of the following is incorrect regarding the accounting for inventories?
a. Legal title over inventories normally passes when possession over the goods
is transferred
b. Transfer of ownership over inventories may precede, coincide with, or
follow the transfer of physical possession of the goods
 c. Ownership over inventories may be transferred to the buyer even when legal
title to the goods is retained by the seller
d. Transfer of ownership over inventories may coincide with or follow but
never precedes the transfer of physical possession of the goods
8. Inventories are assets
I. held for sale in the ordinary course of business
II. in the process of production for such sale
III. in the form of materials or supplies to be consumed in the production process or
in the rendering of services
a. I and II only
b. I only
c. I, II and III
d. ll and III only
9. Net realizable value is
a. estimated selling price in the ordinary course of business
b. estimated selling price in the ordinary course of business less the estimated
costs of completion in the case of finished goods and estimated costs necessary to
make the sale in the case of work in process
c. estimated selling price in the ordinary course of business less the estimated
costs of completion in the and estimated costs necessary to make the sale.
d. is the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable willing parties in an arm's length transaction.
10. Net realizable value of inventories may fall below cost for a number of reasons
including:
I. Product obsolescence.
II. Physical deterioration of inventories
III. An increase in the expected replacement costs of the inventory,
IV. An increase in the estimated costs of completion
a. I, II and IV only
b. I, Ill and IV only
c. II, III and IV only
d. I and II only.

11. Inventories shall be measured at

a. Cost c. Lower of cost and net realizable value
b. Net realizable d. Lower of cost and market
12. The cost of inventories shall be measured using
a. FIFO
b. Weighted average method
c. LIFO
d. Either FIFO or weighted average method
13. Net realizable value is
a. Current replacement cost
b. Estimated selling price
c. Estimated selling price less estimated cost to complete
d. Estimated selling price less estimated cost to complete and estimated cost of
disposal
14. Inventories are usually written down to net realizable value
a. Item by item
b. By classification
c. By total
d. By segment
15. The amount of any write down of inventory to net realizable value and all losses of
inventory should be
a. Recognized as operating expense in the period the write-down or loss occurs
b. Recognized as other expense in the period the write-down or loss occurs.
c. Recognized as component of cost of sales in the period the write-down or loss
occurs.
d. Deferred until the related inventory is sold.
16. The failure to record a purchase of merchandise on account even though the goods
are properly included in the physical inventory results in
a. an overstatement of assets and net income.
b. an understatement of assets and net income.
c. an understatement of cost of goods sold and liabilities and an overstatement of
assets.
d. an understatement of liabilities and an overstatement of owners' equity.
17. Which of the following statements is true regarding inventory write-down and
reversal of write-down?
a. Reversal of inventory write-down is prohibited.
b. Separate reporting of reversal of inventory write-down is required.
 c. Entities are required to record write-down in a separate loss account.
d. All of the choices are correct.
18. Lower of cost and net realizable value of inventory
a. Is always either the net realizable value or cost.
b. Should always be equal to net realizable value.
c. May sometimes be less than the net realizable value.
d. Should always be equal to the estimated selling price less cost to complete.
19. Lower of cost and net realizable value
a. Gives the lowest valuation if applied to the total inventory.
b. Gives the lowest valuation if applied to major group of inventory.
c. Gives the lowest valuation if applied to individual item of inventory.
d. Must be applied to major group.
20. The costs of conversion of inventories include all of the following except:
a. Costs directly related to the units of production, such as direct labor
b. Systematic allocation of fixed production overhead
c. Systematic allocation of variable production overhead
d. Systematic allocation of administrative overhead
21. When inventory declines in value below original cost, what is the maximum
amount that the inventory can be valued at?
a. Sales price
b. Net realizable value
c. Historical cost
d. Sales price reduced by estimated cost of disposal
22. Lower of cost and net realizable value as it applies to inventory is best described as
the
a. Reporting of a loss when there is decrease in the future utility below the
original cost.
b. Method of determining cost of goods sold.
c. Assumption to determine inventory flow.
d. Change in inventory value to net realizable value.
23. Which method may be used to record a loss due to a price decline in the value of
inventory?
a. Loss method c. Cost of goods sold method
b. Sales method d. Loss method and cost of goods sold method
24. When the cost of goods sold method is used to record inventory at net realizable
value
a. There is a direct reduction in the selling price.
b. A loss is recorded directly in the inventory account by debiting loss.
c. Only the portion of the loss attributable to inventory sold is recorded.
d. The net realizable value for ending inventory is substituted for cost and the loss
is buried in cost of goods sold.
25. Which of the following financial attributed would not be used to measure
inventory?
a. Historical cost
b. Current replacement cost
c. Net realizable value
d. Present value at future cash flows
26. When determining the net realizable value of inventory, estimates must be made
of the following:
I. Estimated costs of completion.
II. Expected replacement cost.
III Expected selling price.
IV. Estimated selling price.
a. I, II, III and IV
b. I, II and Ill only
c. II and IV only
d. I, lll and IV only
27. If the inventory account at the end of the year is understated, the effect will be to
a. Overstate the gross profit on sales
b. Understate the net purchases
c. Overstate the cost of goods sold
d. Overstate the goods available for sale
28. If the selling price of inventory that has been written down to net realizable value
in a prior period.subsequently recovers the:
a. previous amount of the write-down can be reversed
b. carrying amount of the inventory cannot be adjusted;
c. value adjustment can be recognized immediately in equity
d. adjustment must be recognized in a 'provision for future inventory write-
downs' account.
29. The costs that comprises the purchase price, import duties and other taxes (other
than those subsequently recoverable by the entity from the taxing authorities), and
transport, handling and other costs directly attributable to the acquisition of
finished goods, materials and services
a. Costs of conversion
b. Costs of purchase
c. Other costs
d. All of these
30. The use of a Discounts Lost account implies that the recorded cost of a purchased
inventory item is its
a. Invoice price
b. Invoice price plus the purchase discount lost
c. Invoice price less the purchase discount taken
d. Invoice price less the purchase discount allowable whether taken or not
SOLUTIONS:
TEST I - COMPUTATION
Problem # 1
Materials P650,000
Irrecoverable purchase taxes 58,000
Total cost of inventory P708,000
Problem # 2
Cost of purchases based on vendors' invoice P7,000,000
Import duties 550,000
Freight and insurance on purchase 1,300,000
Other handling costs relating to imports 200,000
Brokerage commission paid to agents for arranging imports 270,000
Total cost of purchases P9,320,000
Problem # 3
P800,000
When goods are purchased FOB destination, the seller is responsible for costs incurred in
transporting the goods to the buyer.
Problem # 4
Physical count P5,000,000
Goods shipped FOB shipping point on December 30, 2019
to Vanderwal and received January 10, 2020 280,000
Inventory, December 31, 2019 P5,280,000
Problem # 5
Items counted in the bodega P5,000,000
Items included in the count specifically segregated per sale contract (150,000)
Items in receiving department, returned by customer, in good condition 65,000
Items ordered and in the receiving department 500,000
Items shipped today, invoice mailed, FOB destination 200,000
Items currently being used for window display 300,000
Items on counter for sale 950,000
Items included in count, damaged and unsalable (75,000)
Items in the shipping department 325,000
P7,115,000
Problem # 6
Markup on goods out on consignment (1,950,000x30%) P585,000
Goods held on consignment by Venice 985,000
Total reduction P1,570,000
Problem # 7
Physical count P3,910,000
Merchandise shipped by Raoul FOB destination to
a customer on December 31, 2019 and was received
by the customer on January 3, 2019 290,000
Merchandise purchased FOB shipping point was shipped
by the supplier on December 31, 2019 and was received
by Raoul on January 3, 2019 440,000
Adjusted inventory P4,640,000
Problem # 8
Physical count P6,000,000
Inventory marked “hold for shipping instructions” 700,000
Goods in process 430,000
Correct amount of inventory . P7,130,000
Problem # 9
List price P550,000
Trade discount (15% x 550,000) (82,500)
Balance P 467,500
Trade discount (10% x 467,500) (46,750)
Invoice price P 420,750
Freight charge 12,000
Total cost of purchase P 432,750
Problem # 10
Beginning inventory (1,310,000+140,000) P1,450,000
Purchases (5,200,000+800,000) 6,000,000
Freight in (170,000+65,000) 235,000
Goods available for sale P7,685,000
Ending inventory (1,680,000+300,000) (1,980,000)
Cost of goods sold P5,705,000
TEST II – THEORIES
1. b 16. d
2. a 17. b
3. c 18. a
4. d 19. c
5. c 20. d
6. a 21. b
7. d 22. a
8. c 23. d
9. c 24. d
10. a 25. d
11. c 26. d
12. d 27. c
13. d 28. a
14. a 29. b
15. c 30. d