Inventories

DISCUSSION PROBLEMS
1. Inventories are merchandise cost P73,500, and Oval received it on
a. Assets held for sale in the ordinary course of January 3.
business, in the process of production for such d. Included in inventory was merchandise received
sale, or in the form of materials or supplies to be from Owl on December 31 with an invoice price of
consumed in the production process or in the P156,300. The merchandise was shipped f.o.b
rendering of services. destination. The invoice, which has not yet
b. Properties held to earn rentals or for capital arrived, has not been recorded.
appreciation or both. e. Not included in inventory is P85,400 of
c. Tangible items that are held for use in the merchandise purchased from Oxygen Industries.
production or supply of goods or services, for The merchandise was received on December 31
rental to others, or for administrative purposes; after the inventory had been counted. The invoice
and are expected to be used during more than one was received and recorded on December 30.
period. f. Included in inventory was P104,380 of inventory
d. Identifiable non-monetary assets without physical held by Ovation on consignment from Ovoid
substance. Industries.
g. Included in inventory is merchandise sold to Kemp
f.o.b. shipping point. This merchandise was
2. La Union Company included the following items under shipped after it was counted. The invoice was
inventories: prepared and recorded as a sale for P189,000 on
Materials P1,400,000 December 31. The cost of this merchandise was
Advance for materials ordered 200,000 P105,200, and Kemp received the merchandise on
Goods in process 650,000 January 5.
Unexpired insurance on inventories 60,000 h. Excluded from inventory was carton labeled
Advertising catalogs and shipping “Please accept for credit.” This carton contains
boxes 150,000 merchandise costing P15,000 which had been sold
Finished goods in factory 2,000,000 to a customer for P25,000. No entry had been
Finished goods in company-owned made to the books to reflect the return, but none
retail stores, including 50% profit of the returned merchandise seemed damaged.
on cost 750,000 The adjusted inventory cost of Ovation Company at
Finished goods in hands of consignees December 31 should be
including 40% profit on sales 400,000 a. P2,217,620 c. P2,411,320
Finished goods in transit to customers, b. P2,396,320 d. P2,373,920
shipped FOB destination, at cost 250,000 E8-5 Kieso 11th
Finished goods out on approval, at
cost 100,000 4. The inventory on hand at December 31 for Fair
Unsalable finished goods, at cost 50,000 Company valued at a cost of P947,800. The following
Office supplies 40,000 items were not included in this inventory amount:
Materials in transit shipped FOB a. Purchased goods, in transit, shipped FOB
shipping point, excluding freight of destination invoice price P32,000 which included
P30,000 330,000 freight charges of P1,600.
Goods held on consignment, at sales b. Goods held on consignment by Fair Company at a
price, cost P150,000 200,000 sales price of P28,000, including sales commission
Compute the amount to be presented as “Inventories” of 20% of the sales price.
under current assets. c. Goods sold to Garcia Company, under terms FOB
a. P5,500,000 c. P5,650,000 destination, invoiced for P18,500 which includes
b. P5,470,000 d. P5,700,000 P1,000 freight charges to deliver the goods.
Goods are in transit.
d. Purchased goods in transit, terms FOB seller,
3. Ovation Company asks you to review its December 31 invoice price P48,000, freight cost, P3,000.
inventory values and prepare the necessary e. Goods out on consignment to Manil Company,
adjustments to the books. The following information is sales price P36,400, shipping cost of P2,000.
given to you. Assuming that the company's selling price is 140% of
a. Ovation uses the periodic method of recording inventory cost, the adjusted cost of Fair Company's
inventory. A physical count reveals P2,348,900 inventory at December 31 should be
inventory on hand at December 31. a. P1,039,300 c. P1,055,700
b. Not included in the physical count of inventory is b. P1,039,500 d. P1,037,300
P134,200 of merchandise purchased on December P65 Kimwell/rpcpa 5/90
15 from Standing. This merchandise was shipped
f.o.b. shipping point on December 29 and arrived
in January. The invoice arrived and was recorded
on December 31.

c. Included in inventory is merchandise sold to Oval

on December 30, f.o.b. destination. This
merchandise was shipped after it was counted.
The invoice was prepared and recorded as a sale
on account for P128,000 on December 31. The
5. Which statement is incorrect regarding measurement administration expenses are attributable, in equal
of inventories? proportion, to the sales and other non-production
a. Inventories should be measured at the lower of operations (eg financing, tax and corporate secretarial
cost and net realizable value. functions).
b. The cost of inventories should comprise all costs of
purchase, costs of conversion and other costs In 2016 the entity incurred the following selling expenses:
incurred in bringing the inventories to their present  Advertising costs = P30,000
location and condition.  Depreciation and maintenance of vehicles used by the
c. Trade discounts, rebates and other similar items sales staff = P10,000
are deducted in determining the costs of purchase.  Salary of the administration personnel = P600,000
d. Foreign exchange differences arising directly on
the recent acquisition of inventories invoiced in a 8. The total costs of purchase is
foreign currency are included in cost of inventories. a. P3,747,000 c. P4,100,000
b. P4,047,000 d. P4,249,000
6. Costs of purchase do not include
a. Purchase price. 9. The total costs of conversion is
b. Import duties and other non-refundable taxes. a. P1,134,000 c. P1,060,000
c. Transport, handling and other costs directly b. P1,144,000 d. P1,070,000
attributable to the acquisition of finished goods, Module 13 SME TM
materials and services.
d. Fixed and variable manufacturing overheads. 10. Buyer Co. regularly buys shirts from Vendor Company
and is allowed trade discounts of 20% and 10% from
7. Cost of inventories include the list price. Buyer purchased shirts from Vendor on
a. Storage costs. May 27 and received an invoice with a list price of
b. Abnormal amounts of wasted production costs. P100,000 and payment terms 2/10, n/30. If Buyer
c. Selling costs. uses the net method of recording purchases, the
d. Cost of designing products for specific customers. journal entry to record the payment on June 8 will
include
a. A debit to Accounts payable of P72,000.
Use the following information for the next two questions: b. A debit to Purchase Discounts Lost of P1,440.
c. A credit to Purchase Discounts of P1,440.
Roweena Corporation began operations in 2016. In 2016
d. A credit to Cash of P70,560.
it incurred the following expenditures in purchasing
RPCPA 1097 - AMP
materials for producing its product:
 Purchase price of raw materials = P3,000,000
LECTURE NOTES:
 Import duty and other non-refundable purchase taxes
= P800,000
Trade and Cash Discounts
 Refundable purchase taxes = P100,000
 Freight costs for bringing the goods from the supplier Trade Cash
to the factory raw material storeroom = P300,000
 Costs of unloading the materials into the raw material Objective Generate sales Encourage prompt
storeroom = P2,000 payment
 Packaging = P200,000
Accounting Not recorded Recorded using
On 31 December 2016 the entity received P53,000 volume separately either Gross or Net
rebate from a supplier for purchasing more than (Purchases/Sales method
P1,500,000 from the supplier during the year. net of trade
The entity incurred the following additional costs in the discount)
production run:
 Salary of the machine workers in the factory = Gross and Net method of recording purchases
P500,000
 Salary of factory supervisor = P300,000 Gross Net
 Depreciation of the factory building and equipment
used for production process = P60,000 Cash Deducted from Deducted from
 Consumables used in the production process = discounts purchases/cost of purchases/cost of
P20,000 inventory when inventory whether
 Depreciation of vehicle used to transport the goods taken taken or not
from the raw materials storeroom to the machine floor Cash Deducted from Not accounted for
= P40,000 discounts purchases/cost of separately since
 Factory electricity usage charges = P30,000 taken inventory (purchase already deducted
 Factory rental = P100,000 discounts) from purchases
 Depreciation and maintenance of the entity’s vehicle
used by the factory supervisor (50 per cent for official Cash Included in Reported as other
use and 50 per cent for personal use) = P20,000. discounts purchases/cost of expense
Private use of the vehicle is an employee benefit. not taken inventory (purchase
discounts lost)
During 2016 the entity incurred the following
administration expenses:
 Depreciation of the administration building = P50,000
 Depreciation and maintenance of vehicles used by the
administrative staff = P15,000
 Salaries of the administration personnel = P305,000

Of the administration expenses 20 per cent are attributable

to administering the factory. The rest of the
11. Catapult Corp. purchased merchandise during 2016 on
Specific identification:
credit for P200,000; terms 2/10, n/30. All of the gross
liability except P40,000 was paid within the discount Units on hand x Specific Unit Cost
period. The remainder was paid within the 30-day
term. At the end of the annual accounting period, First-in, first-out method (FIFO)
December 31, 2016, 90% of the merchandise had Units on hand x Unit Cost of latest purchases
been sold and 10% remained in inventory. The entity
has no beginning inventory. The entity uses net Weighted Average
method of recording purchases.
Units on hand x Weighted Average Unit Cost (WAUC)
If the entity used the gross method of recording WAUC = Total cost of GAS/Total units available for sale
purchases instead of the net method, the reported cost
of goods sold would have been
a. The same c. Lower by P720 Use the following information for the next two questions.
b. Higher by P720 d. P176,400
C8 Pr8-76 Kieso TB, 11th ed-AMP Maximilian uses the perpetual inventory system.
Maximilian's inventory transactions for the month of
12. Under PAS 2, the specific identification method of ac- August were as follows:
counting for inventory is required for Total
a. All inventory items. No. Unit cost cost
b. Inventory items which are interchangeable. 01 Aug. Beg. inventory 20 P4.00 P80.00
c. Inventory items that are not interchangeable and 07 Aug. Purchases 10 4.20 42.00
goods that are produced and segregated for 10 Aug. Purchases 20 4.30 86.00
specific projects. 12 Aug. Sales 15 ? ?
d. Biological (agricultural) inventories. 16 Aug. Purchases 20 4.60 92
20 Aug. Sales 40 ? ?
13. Which statement is incorrect regarding cost formulas? 28 Aug. Sales returns 3 ? ?
a. Specific identification of cost means that specific
costs are attributed to identified inventory. 16. Using the information, assume that the Maximilian
b. Under the weighted average cost formula, the cost uses the FIFO cost flow method and that the sales
of each item is determined from weighted average returns relate to the 20 August sales. The sales return
of the cost of similar items at the beginning of a should be costed back into inventory at what unit cost?
period and the cost of similar items purchased or a. P4.00 c. P4.07
produced during the period. b. P4.30 d. P4.60
c. The average cost formula may be calculated on a
periodic basis, or as each additional shipment is 17. Assuming that Maximilian uses the weighted average
received, depending upon the circumstances of the cost flow method, the 12 August sales should be
entity. costed at what unit cost?
d. The FIFO formula assumes that the items of a. P4.16 c. P4.07
inventory that were purchased or produced last are b. P4.30 d. P4.60
sold first, and consequently the items remaining in
inventory at the end of the period are those earlier
purchased or produced. Use the following information for the next two questions.
Orang Dampuan Co. wholesales bicycles. It uses the
Use the following information for the next two questions.
perpetual inventory system. The company's reporting date
Transactions for the month of June were: is 31 December. At 1 December 2016, inventory on hand
consisted of 350 bicycles at P820 each and 43 bicycles at
Purchases Units Unit cost Total cost
P850 each. During the month ended 31 December 2016,
June 1 (balance) 400 P3.20 P 1,280
the following inventory transactions took place (all
3 1,100 3.10 3,410
purchase and sales transactions are on credit):
7 600 3.30 1,980
15 900 3.40 3,060 Dec. 02 Sold 300 bicycles for P1,200 each.
22 250 3.50 875 03 Five bicycles were returned by a customer.
3,250 P10,605 They had originally cost P820 each and were
Sales sold for P1,200 each.
June 2 300 @ P5.50 09 Purchased 55 bicycles at P910 each.
6 800 @ 5.50 13 Purchased 76 bicycles at P960 each.
9 500 @ 5.50 15 Sold 86 bicycles for P1,350 each.
10 200 @ 6.00 16 Returned one damaged bicycles to the
18 700 @ 6.00 supplier. This bicycle had been purchased on
25 150 @ 6.00 9 December.
2,650 22 Sold 60 bicycles for P1,250 each.
26 Purchased 72 bicycles at P980 each.
14. Assuming that perpetual inventory records are kept in
29 Two bicycles, sold on 22 December, were
pesos, the ending inventory on a FIFO basis is
returned by a customer. The bicycles were
a. P1,900 c. P2,065
badly damaged so it was decided to write
b. P1,920 d. P2,100
them off. They had originally cost P910 each.
15. Assuming that perpetual inventory records are kept in
units only, the ending inventory on an average-cost
basis is 18. The cost of goods sold for the month of December
a. P1,980 c. P1,970 using moving average method is (Round unit costs to
b. P1,956 d. P1,995 the nearest peso)
RPCPA 5.10/K, W & W a. P367,230 c. P366,320
LECTURE NOTES: b. P365,410 d. P372,725

Computation of the cost of ending inventory

19. The cost of goods sold for the month of December
using FIFO method is 23. The closing inventory at cost of a company at 31
a. P367,230 c. P366,320 December 2016 amounted to P284,700. The following
b. P365,410 d. P372,725 items were included at cost in the total:
RPCPA 5.12/Applying IAS  400 coats, which had cost P80 each and normally
sold for P150 each. Owing to a defect in
Solution guide for question #18: manufacture, they were all sold after the reporting
Unit date at 50% of their normal price. Selling
Date Description Units Cost Total Cost expenses amounted to 5% of the proceeds.
Dec. 1 Balance 393 823 323,550  800 skirts, which had cost P20 each. These too
Dec. 2 Sale (300) 823 (246,900) were found to be defective. Remedial work in
Sales February 2017 cost P5 per skirt, and selling
Dec. 3 returns 5 823 4,115 expenses for the batch totaled P800. They were
sold for P28 each.
Balance 98 823 80,765
Dec. 9 Purchase 55 910 50,050 What should the inventory value be according to PAS 2
Dec. 13 Purchase 76 960 72,960 Inventories after considering the above items?
a. P281,200 c. P282,800
Balance 229 890 203,775
b. P282,100 d. P329,200
Dec. 15 Sale ( 86) 890 (76,540) P6.3 ACCA Paper3 2013-2014
Balance 143 890 127,235
Purchase 24. The Refenjol Corporation included the following in its
Dec. 16 returns ( 1) 910 ( 910) unadjusted trial balance as of December 31, 2016:
Balance 142 890 126,325 Inventory, 12/31/15 P 19,450,000
Dec. 22 Sale ( 60) 890 (53,400) Purchases 127,850,000
Balance 82 890 72,925 Available for sale P147,300,000
Dec. 26 Purchase 72 980 70,560 The inventory at December 31, 2016 was counted at a
Balance 154 932 143,485 cost of P14.5 million. This includes P500,000 of slow
moving inventory that is expected to be sold for a net
amount of P300,000.
20. An entity has partially-completed inventory located in its The cost of sales for the year ended December 31,
factory, to which the following estimates relate: 2016 is
Production costs incurred to date P268,000 a. P133,100,000 c. P132,800,000
Production costs to complete 20,000 b. P133,000,000 d. P132,600,000
Transport costs to customer 5,000 ACCA F7 07-08 #22C.9
Future selling costs 10,000
Selling price 300,000 25. Which statement is incorrect regarding reversal of
inventory write-down to net realizable value?
At what amount should the entity report the inventory a. When the circumstances that previously caused
on its statement of financial position? inventories to be written down below cost no
a. P280,000 c. P268,000 longer exist or when there is clear evidence of an
b. P270,000 d. P265,000 increase in net realizable value because of changed
economic circumstances, the amount of the write-
21. Net realizable value of inventories may fall below cost
down is reversed so that the new carrying amount
for a number of reasons including:
is the lower of the cost and the revised net
I. Product obsolescence. realizable value.
II. Physical deterioration of inventories. b. The reversal is limited to the amount of the
III. An increase in the expected replacement costs of original write-down.
the inventory. c. The amount of any reversal of any write-down of
IV. An increase in the estimated costs of completion. inventories, arising from an increase in net
realizable value, shall be recognized as a reduction
a. I, II and IV only c. I, III and IV only in the amount of inventories recognized as an
b. II, III and IV only d. I and II only expense in the period in which the reversal occurs.
d. All the statements are correct.
22. Which is incorrect regarding write-down of inventory to
net realizable value? 26. Alcala Company installs replacement siding, windows,
a. The practice of writing inventories down below cost
and louvered glass doors for family homes. At
to net realizable value is consistent with the view
December 31, 2016, the balance of inventory account
that assets should not be carried in excess of was P502,000, and the allowance for inventory write-
amounts expected to be realized from their sale or down was P33,000. The inventory cost and other data
use. at December 31, 2016, are as follows: (amounts in
b. Inventories are usually written down to net thousands)
realizable value item by item.
Replace
ment Sales Normal
Item Cost Cost Price NRV Profit
c. Estimates of net realizable value are based on the A P 89 P 86 P 91 P 87 P 5
most reliable evidence, available at the time the B 94 92 93 85 7
estimates are made, of the amount the inventories C 125 135 129 111 10
are expected to realize. D 194 114 205 197 20
d. Materials and other supplies held for use in the
Total P502 P427 P518 P480 P32
production of inventories are written down below
cost even if the finished products in which they will The gain on reversal of inventory write down is
be incorporated are expected to be sold at or a. P33,000 c. P8,000
above cost.
 b. P11,000 d. P 0 29. How much will be recognized as gain on purchase
commitment on March 15, 2016 if the price of the
27. Caravana Development Corporation bought a 10- material had risen to P42 per unit?
hectare land in Novaliches, to be improved, subdivided a. P1,400,000 c. P400,000
into lots, and eventually sold. Purchase price of the b. P1,000,000 d. P 0
land was P58,000,000. Taxes and documentation
expenses on the transfer of the property amounted to 30. On January 1, 2016, Pastille Corp. signed a three-year
P800,000. The lots were classified as follows: noncancelable purchase contract, which allows Pastille
Lot Number Selling price Total to purchase up to 500,000 units of a computer part
class of lots per lot clearing costs annually from Pyramid Supply Co. at P10 per unit and
A 10 P1,000,000 None guarantees a minimum annual purchase of 100,000
B 20 800,000 P1,000,000 units. During 2016, the part unexpectedly became
C 40 700,000 3,000,000 obsolete. Pastille had 250,000 units of this inventory
D 50 600,000 8,000,000 at December 31, 2016, and believes these parts can
be sold as scrap for P2 per unit. What amount of
Purchase and improvement costs allocated for class B probable loss from the purchase commitment should
lots under the relative sales value method of inventory Pastille report in its 2016 profit or loss?
valuation are a. P2,400,000 c. P1,600,000
a. P13,485,700 c. P12,200,000 b. P2,000,000 d. P 800,000
b. P10,800,000 d. P12,047,600 P23 M8 pp. 315 Wiley07-08
RPCPA 5/84, P79Kimwell 31. The following information for Bagulin Industries was
taken from the company's financial statements
Use the following information for the next two questions. (amounts in thousands):
On November 15, 2015, Socrates entered in to a 2016 2015
commitment to purchase 200,000 units of raw material X Sales P24,000 P18,000
for P8,000,000 on March 15, 2016. Socrates entered into Cost of goods sold 19,600 13,900
this purchase commitment to protect itself against the Inventory 1,400 1,200
volatility in the price of raw material X. By December 31, Accounts receivable 3,900 3,600
2015, the purchase price of material X had fallen to P35 Net income 560 320
per unit.
28. How much will be recognized as loss on purchase What is the inventory turnover for the year 2016?
commitment on March 15, 2016 if the price of the a. 15 times c. 14 times
material had fallen further to P32 per unit? b. 3 times d. 18 times
a. P1,200,000 c. P600,000
b. P1,000,000 d. P 0

ILLUSTRATIVE PROBLEM
Cost flow assumptions
The following information has been extracted from the records of Praktis Corporation about one of its products.
Date No. of Units Unit Cost Total Cost
January 1 Beginning balance 1,600 P14.00 P22,400
January 6 Purchased 600 14.10 8,460
February 5 Sold @ P24.00 per unit 2,000
March 19 Purchased 2,200 14.70 32,340
March 24 Purchase returns 160 14.70 2,352
April 10 Sold @ P24.20 per unit 1,400
June 22 Purchased 16,800 15.00 252,000
July 31 Sold @ P26.50 per unit 3,600
August 4 Sales returns @ P26.50 per unit 40
September 4 Sold @ P27.00 per unit 7,000
November 15 Purchased 1,000 16.00 16,000
December 28 Sold @ P30.00 per unit 6,200

REQUIRED:
Compute for the closing inventory under each of the following pricing methods? (Round unit costs to two decimal places.)
1. FIFO – Periodic 3. Weighted average - Periodic
2. FIFO – Perpetual 4. Weighted average – Perpetual (Moving average)

SOLUTION:

FIFO – Periodic
From November 15 purchases (1,000 units x P16.00) - P16,000
From June 22 purchases (880 units x P15.00) - 13,200
Total P29,200

FIFO – Perpetual
Purchased Sold Balance
Unit Unit Unit
Units Cost Total Cost Units Cost Total Cost Units Cost Total Cost
Jan. 1 1,600 14.00 22,400
 Purchased Sold Balance
Unit Unit Unit
Units Cost Total Cost Units Cost Total Cost Units Cost Total Cost
Jan. 6 600 14.10 8,460 1,600 14.00 22,400
600 14.10 8,460
2,200 30,860
Feb. 5 1,600 14.00 22,400
400 14.10 5,640 200 14.10 2,820
Mar. 19 2,200 14.70 32,340 200 14.10 2,820
2,200 14.70 32,340
2,400 35,160
Mar. 24 (160) 14.70 (2,352) 200 14.10 2,820
2,040 14.70 29,988
2,240 32,808
Apr. 10 200 14.10 2,820
1,200 14.70 17,640 840 14.70 12,348
Jun. 22 16,800 15.00 252,000 840 14.70 12,348
16,800 15.00 252,000
17,640 264,348
Jul. 31 840 14.70 12,348
2,760 15.00 41,400 14,040 15.00 210,600
Aug. 4 (40) 15.00 (600) 14,080 15.00 211,200
Sep. 4 7,000 15.00 105,000 7,080 15.00 106,200
Nov. 15 1,000 16.00 16,000 7,080 15.00 106,200
1,000 16.00 16,000
8,080 122,200
Dec. 28 6,200 15.00 93,000 880 15.00 13,200
1,000 16.00 16,000
1,880 29,200

Average – Periodic
Total cost (1,880 units x P14.92) - P28,050

Weighted average unit cost (P328,848/22,040 units) - P14.92

Average – Perpetual (Moving average)

Purchased Sold Balance
Unit Unit Unit
Units Cost Total Cost Units Cost Total Cost Units Cost Total Cost
Jan. 1 1,600 14.00 22,400
Jan. 6 600 14.10 8,460 1,600 14.00 22,400
600 14.10 8,460
2,200 14.03 30,860
Feb. 5 2,000 14.03 28,060 200 14.03 2,800
Mar. 19 2,200 14.70 32,340 200 14.03 2,800
2,200 14.70 32,340
2,400 14.64 35,140
Mar. 24 (160) 14.70 (2,352) 200 14.03 2,800
2,040 14.70 29,988
2,240 14.64 32,788
Apr. 10 1,400 14.64 20,496 840 14.64 12,292
Jun. 22 16,800 15.00 252,000 840 14.64 12,292
16,800 15.00 252,000
17,640 14.98 264,292
Jul. 31 3,600 14.98 53,928 14,040 14.98 210,364
Aug. 4 (40) 14.98 (599) 14,080 14.98 210,963
Sep. 4 7,000 14.98 104,860 7,080 14.98 106,103
Nov. 16 1,000 16.00 16,000 7,080 14.98 106,103
1,000 16.00 16,000
8,080 15.11 122,103
Dec. 28 6,200 15.11 93,682 1,880 15.11 28,421

 - end of P1.2102 - 