CHAPTER 4

INVENTORIES

PROBLEMS

Discussion Question No. 15 (Hamster Company

Include Exclude
Goods displayed in the store √
Goods stocked in the warehouse, not covered by any sales
contract √
Goods purchased, in transit, shipped FOB seller √
Goods purchased, in transit, shipped FOB destination √
Freight cost on goods received, goods are still unsold √
Goods held on consignment √
Goods out on consignment √
Goods out to customers on approval √
Goods in the hands of traveling salesmen √
Goods sold with a buyback arrangement for the full selling √
price and other costs incurred by the buyer
Unused factory supplies and indirect materials √
Goods which require additional processing √
Direct materials stocked in the warehouse √
Storage costs of goods completed √
Insurance premiums paid on stocked goods √
Goods completed, manufactured to customer’s specification,
awaiting instruction for delivery by the customer √
Freight paid on goods sold √
Unused supplies for administrative purposes √
Unused store supplies √
Goods sold with a right to return granted to buyers, amount
of return is reasonably predictable. √
Goods sold under FAS, at the port designated by the buyer √
Goods at the port, purchased CIF √

PROBLEMS

4-1. (Crossings Company)

Invoice price (150,000 x 0.80 x 0.90) P 108,000

Freight charge 2,500
Total cost of merchandise purchases P 110,500

4-2. (Jane, Inc.)

Reported units on April 30, 2013 10,200

Adjustments:
No. 1 item – Purchased FOB shipping point
still in transit not included in purchases 250
No. 3 item – Sold FOB destination still in transit not
included in inventory 500
Correct inventory quantity 10,950

4-3. (Orient Trading)

Chapter 4 - Inventories

Reported inventory P9,500,000

Merchandise in transit purchased FOB destination (420,000)
Goods held on consignment (500,000)
Mark up on goods out on consignment
Sales price 600,000
Cost (600,000÷ 1.5) 400,000 (200,000)
Merchandise in transit to customers FOB destination
400,000 x (100% - 40%) 240,000
Merchandise purchased in transit FAS 150,000
Correct inventory P8,770,000

4-4. (Tintin Company)

Physical inventory at December 31, 2015 P 172,000

Merchandise in transit shipped FOB shipping point 31,500
Merchandise sold FOB destination still in transit 12,500
Correct inventory at December 31, 2015 P 216,000

4-5. (Centerpoint, Inc.)

Reported inventory P 562,500

Adjustments:
a. Goods out on consignment 110,000
b. Goods purchased in transit FOB shipping point 27,000
c. Goods sold in transit FOB shipping point
included in inventory ( 85,000)
d. Goods sold in transit FOB destination
e. not included in inventory 26,000
g. Goods sold in transit FOB destination
not included in inventory 37,000
Correct inventory P 677,500

4-6. (Mega Company)

Cost of EI Cost of Goods Gross Profit
Sold
FIFO 3,506 4,550 1,955
Weighted average 3,333 4,726 1,779
Moving average 3,370 4,686 1,819

FIFO
Cost of ending inventory:
275 x 11.75 3,231.25
25 x 11.00 275.00 3,506.25
Cost of goods sold:
Cost of goods available for sale 8,056.25
Less ending inventory 3,506.25 4,550.00
Gross profit:
Sales 6,505.00
Less cost of goods sold 4,550.00 1,955.00

Weighted average
Cost of ending inventory:
Cost of goods available for sale 8,056.25
Number of units available for sale ÷ 725
Weighted average cost per unit 11.11
Units in ending inventory x 300 3,333.00
Cost of goods sold:
Cost of goods available for sale 8,056.25
Less ending inventory 3,330.00 4,723.25

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Gross profit:
Sales 6,505.00
Less cost of goods sold 4,723.25 1,781.75

Moving average
Cost of ending inventory:
Inventory, January 1 250 x 10.50 = 2,625.00
Purchase, March 7 200 x 11.00 = 2,200.00
Total 450 x 10.72 = 4,825.00
Sale, May 20 (120 x 10.72 = 1,286.40)
Sale, June 30 ( 55 x 10.72 = 589.60)
Balance 275 x 10.72 = 2,949.00
Purchase, July 15 275 x 11.75 = 3,231.25
Total 550 x 11.24 = 6,180.25
Sale, September 17 (250 x 11.24 = 2,810.00)
Balance 300 x 11.24 = 3,370.25

Cost of goods sold:

Cost of goods available for sale 8,056.25
Less ending inventory 3,370.25 4,686.00
Gross profit:
Sales 6,505.00
Less cost of goods sold 4,686.00 1,819.00

4-7. (Landmark Enterprises)

a. Cost of ending inventory
1/1 2,400@ 10.75 25,800
1/5 1,900@ 11.35 21,565
4,300@ 11.02 47,365
1/8 2,200@ 11.02 24,244
2,100@ 11.01 23,121
1/24 3,800@ 11.80 44,840
5,900@ 11.52 67,961
1/30 3,600@ 11.52 41,472
2,300@ 11.52 26,489
b. Cost of goods available for sale (25,800 + 21,565 + 44,840) P92,205
Number of units available for sale (2,400 + 1,900 + 3,800) ÷ 8,100
Weighted average cost per unit P 11,38
Number of units in ending inventory x 2,300
Cost of ending inventory
P26,174

4-8. (Rockwell Club, Inc.)

Amount Units
Cost of sales:
Sales (160,500 x 12) 1,926,000
Less gross profit 738,600 P1,187,400 160,500
Add ending inventory
42,000 x 7.40 310,800
3,000 x 7.20 21,600 332,400 45,000
Available for sale P1,519,800 205,500
Deduct purchases 1,150,050 154,500
Inventory, January 1 P 369,750 51,000
Average cost per unit (369,750 ÷ 51,000 units) P 7.25

4-9. (Mazda Corporation)

(a) FIFO 2013 2014 2015
Sales P12,000,000 P18,800,000 P29,400,000
Cost of goods sold 7,000,000 12,760,000 20,250,000
Gross profit P 5,000,000 P 6,040,000 P 9,150,000

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Cost of goods sold:

2013 10,000 x 700 = 7,000,000
2014 3,000 x 700 = 2,100,000
13,000 x 820 = 10,660,000 12,760,000
2015 5,000 x 820 = 4,100,000
19,000 x 850 = 16,150,000 20,250,000

(b) Weighted average 2013 2014 2015

Sales P12,000,000 P18,800,000 P29,400,000
Cost of goods sold 7,000,000 12,845,760 20,211,360
Gross profit P 5,000,000 P 5,954,240, P 9,188,640

Cost of goods sold:

2013 10,000 x 700 7,000,000
2014 (3,000 x 700) + (18,000 x 820) x 16,000* 12,845,760
21,000
2015 (5,000 x 802.86) + (25,000 x 850) x 24,000* 20,211,360
30,000
*unit costs were rounded off to nearest centavo: 802.86 and 842.14,
for 2014 and 2015, respectively.

4-10. (Sta. Lucia Company)

2013 2014 2015
Reported profit under average method P3,600,000 P5,000,000 P7,000,000
Difference in inventory using FIFO
Beginning inventory - ( 40,000) (120,000)
Ending inventory 40,000 120,000 650,000
Profit under FIFO basis P3,640,000 P5,080,000 P7,530,000

4-11. (City Company)

Cost (under FIFO basis) P26,000

Net realizable value (40,000 – 12,000) P28,000
Lower of cost and net realizable value P26,000

4-12. (Rustan’s Trading)

Product Cost NRV Lower Quantity Amount

A 102 105 102 4,000 P408,000
B 45 42 42 6,000 252,000
C 24 22 22 5,500 121,000
D 9 10 9 7,200 64,800
Total P845,800

4-13. Dechavez Company

(a) Direct Method

The profit is computed as follows:
2015 2014
Sales P3,200,000 P2,900,000
Cost of goods sold (1,280,000) (1,020,000)
Gross profit P1,920,000 P1,880,000
Selling expenses (450,000) (330,000)
General and administrative expenses (300,000) (310,000)
Profit P 1,170,000 P 1,240,000
Cost of goods sold:
Beginning inventory P 480,000 P 300,000
Purchases 1,400,000 1,200,000
Total cost of goods available for sale P1,880,000 P 1,500,000

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Ending inventory 600,000 480,000

Cost of goods sold P1,280,000 P 1,020,000
(b) Allowance method
The profit is computed as follows:
2015 2014
Sales P3,200,000 P2,900,000
Cost of goods sold (1,240,000) (1,080,000)
Gross profit P1,960,000 P1,820,000
Selling expenses (450,000) (330,000
General and administrative expenses (300,000) (310,000)
Decline in NRV (40,000
Gain on adjustment of allowance __________- 60,000
Profit P 1,170,000 P 1,240,000

Cost of goods sold:

Beginning inventory P 500,000 P 380,000
Purchases 1,400,000 1,200,000
Total cost of goods available for sale P1,900,000 P 1,580,000
Ending inventory (660,000) 500,000
Cost of goods sold P1,240,000 P 1,080,000

4-14. (Purple Company)

Cost P200,000
Net realizable value (204,000 – 10,000) 194,000
Loss 6,000

4-15. (Powder Blue Company)

Inventory, January 1 P1,400,000

Purchases during the year 6,600,000
Cost of goods available for sale P8,000,000
Less Inventory, December 31 1,200,000
Cost of goods sold P6,800,000

4-16. (Philam Grocers Company)

(a) Cost of product X and product Y

Product X Product Y
January 1 inventory 2,500 units 1,500 units
Purchases 7,400 units 4,500 units
Sold (7,000 units) (5,000
units)
December 31 inventory 2,900 units 1,000 units
Unit cost (all coming from latest purchase price, as
ending inventory is less than latest purchases) P125 P98
Ending inventory at FIFO cost P362,500 P98,000
(b)
Product X Product Y
Sales price (effective 2014) 90% x previous SP P135.00 P111.60
Estimated selling cost (13.50) (11.16)
Net realizable value P121.50 P100.44
Lower of cost and net realizable value, per unit P121.50 P98
Number of units in ending inventory 2,900 units 1,000 units
Inventory value at lower of cost and NRV P352,350 P98,000
Total inventory value at December 31, 2015 352,350+98,000 =
P450,350

(c) Cost of goods sold in the statement of comprehensive income

Product X Product Y Total
Inventory Jan. 1 P300,000 P135,000 P435,000

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Purchases 916,600 432,500 1,349,100

Goods available for sale P1,216,600 P567,500 P1,784,100
Ending inventory at cost 362,500 98,000 460,500
Cost of goods sold P1,323,600
(d) Inventory at cost P460,500
Inventory at lower of cost and NRV 450,350
Required allowance P 10,150
Existing allowance 15,000
Gain on adjustment of allowance P 4,850

(e) Inventory 460,500

Income Summary 460,500

(or using the cost of goods sold method)

Inventory, December 31 460,500
Cost of goods sold 1,323,600
Purchases 1,349,100
Inventory, January 1 435,000

Allowance to Reduce Inventory to NRV 4,850

Gain on Adjustment of Allowance to Reduce Inventory to NRV 4,850

4-17. (DEC Company)

(a) Gross profit is 40% based on sales

Merchandise inventory, January 1, 2015 P 450,000
Purchases for the year 3,150,000
Cost of goods available for sale P3,600,000
Less estimated cost of goods sold (4,200,000 x 60%) 2,520,000
Estimated cost of ending inventory P 1,080,000
Physical inventory on December 31, 2015 500,000
Estimated cost of the missing inventory P 580,000

(b) Gross profit is 40% based on cost of sales

Merchandise inventory, January 1, 2015 P 450,000
Purchases for the year 3,150,000
Cost of goods available for sale P3,600,000
Less estimated cost of goods sold (4,200,000/1.40) 3,000,000
Estimated cost of ending inventory P 600,000
Physical inventory on December 31, 2015 500,000
Estimated cost of the missing inventory P 100,000

4-18. Estimated cost of goods sold (705,000 – 18,000)/ 1.20 P572,500

Add Inventory at July 20, 2015 205,000
Cost of goods available for sale P777,500
Less net purchases for the period (650,000 – 12,000 + 6,000) 644,000
Estimated cost of June 30, 2015 inventory P133,500

4-19. (Manel’s Company)

Merchandise inventory, January 1 P2,000,000

Purchases (1,000,000 + 40,000 – 60,000) 980,000
Cost of goods available for sale P2,980,000
Estimated cost of goods sold (3,200,000 x 70%) 2,240,000
Estimated ending inventory P 740,000
Less goods undamaged located in showroom (200,000 + 80,000) 280,000
Estimated cost of merchandise destroyed by the flood P 460,000

4-20. (Herminia Company)

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Inventory, January 1 P 200,000

Purchases P5,000,000
Purchase returns (80,000)
Purchase discounts (80,000) 4,840,000
Total P5,040,000
Estimated cost of goods sold (7,380,000 – 180,000) x 60%) 4,320,000
Estimated cost of ending inventory P 720,000
Goods in transit ( 100,000)
Estimated cost of ending inventory P 620,000

4-21. (Old Rose Company)

Inventory, January 1, 2015 P1,000,000

Purchases 800,000
Freight in 20,000
Cost of goods available for sale P1,820,000
Estimated cost of goods sold (2,200,000 – 50,000) x 70%
1,505,000
Estimated cost of ending inventory P 315,000
Inventory per actual count 160,000
Shortage in inventory P 155,000

4-22. (Blazing Red Company)

Inventory, January 1, 2015 P 575,400

Purchases:
Payments to suppliers P1,950,000
Accounts Payable, 8/28/15 491,400
Accounts Payable, 1/1/15 ( 352,560) 2,088,840
Cost of goods available for sale P2,664,240
Estimated cost of goods sold:
Collections from customers P3,015,200
Accounts Receivable, 8/28/15 515,560
Accounts Receivable, 1/1/15 ( 522,360)
Sales P3,008,400
Cost percentage 70%
2,105,880
Estimated cost of ending inventory P 558,360
Less undamaged goods:
Goods out on consignment P 195,000
Goods in transit 69,500 264,500
Estimated inventory fire loss P 293,860

4-23. (Chic Department Store)

(a) (FIFO cost basis

Cost Retail
Inventory, June 1 P 355,000 P 750,000
Purchases 2,400,000 4,000,000
Available for sale P2,755,000 P4,750,000
Sales 3,500,000
Inventory, June 30 at retail P1,250,000
Cost percentage (2,400,000/4,000,000) 60%
Estimated cost of inventory P 750,000

Cost of goods available for sale P2,755,000

Less estimated cost of ending inventory
750,000
Estimated cost of goods sold P2,005,000

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(b) Average cost basis

Inventory, June 30 at retail P1,250,000
Cost percentage (2,755,000/4,750,000) 58%
Estimated cost of inventory P 725,000
Cost of goods available for sale P2,755,000
Less estimated cost of ending inventory
725,000
Estimated cost of goods sold P2,030,000

4-24. (London Company)

Average cost retail

Cost Retail
Beginning Inventory 145,000 160,000
Purchases 283,920 420,800
Additional markups 25,200
Markup cancellations (9,200)
Markdown (38,100)
Markdown cancellations 6,900
Total available for sale 428,920 565,600
Cost to retail ratio (428,920/565,600=75.8%
Sales , net of sales returns (434,800)
Ending inventory at retail 130,800
Ending inventory at average cost retail (130,800 x 75.8%) 99,146

4-25. (Alemars Drygoods, Inc.)

Retail
Beginning Inventory P1,050,000
Purchases 735,000
Markups (1,600 x 50) 80,000
Markup cancellations (300 x 50) ( 15,000)
Markdowns (105,000)
Total P1,745,000
Sales Revenue (1,050,000)
Ending Inventory, at retail P 695,000
Physical inventory on January 31, 2012 665,000
Inventory shortage at retail value P 30,000

4-26. (Uniwide Sales)

(a) (1) Average retail

Cost Retail
Beginning Inventory P185,700 P202,000
Purchases 339,380 458,000
Purchase Allowance ( 11,000)
Freight In 7,300
Departmental Transfers In 2,000 3,000
Additional Markups 12,000
Markup Cancellations ( 2,500)
Markdowns (6,000 – 4,500) _________ (1,500)
Total P523,380 P671,000
Sales (374,000)
Inventory Shortage (7,000)
Ending Inventory, at retail P290,000
Cost to retail ratio (523,380/671,000) 78%
Ending Inventory, at estimated average cost P226,200

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(2) FIFO retail (exclude the beginning inventory in computing the cost ratio)
337,680/469,000 = 72%
Ending inventory at FIFO cost 72% x P290,000 = P208,800

(b) Cost of goods sold

Average FIFO
Goods available for sale P523,380 P523,380
Ending inventory (226,200) (208,800)
Cost of goods sold P297,180 P314,580

4-27. (Grand Central, Inc.)

Profit reported for 2015 P658,000

Adjustments:
Overstatement of beginning inventory
71,000
Understatement of ending inventory 96,000
Goods still in transit shipped to customers FOB destination
recorded as sales (40% x 60,000); related cost was excluded
in ending inventory (40% x 52,000), net
(3,200) Purchases of 2014 recorded in 2015
100,000
Correct net income for 2015 P921,800

4-28. (USTFU Company)

(a)
Dec. 31, 2015
Loss on Purchase Commitments 50,000
Estimated Liability on Purchase Commitments 50,000
1,000 x (1,200 – 1,150)

Feb. 28, 2016

Purchases 1,150,000
Estimated Liability on Purchase Commitments 50,000
Accounts Payable 1,200,000

(b)
Dec. 31, 2015
Loss on Purchase Commitments 50,000
Estimated Liability on Purchase Commitments 50,000

Feb. 28, 2016

Purchases 1,100,000
Estimated Liability on Purchase Commitments 50,000
Loss on Purchase Commitments 50,000
Accounts Payable 1,200,000

(c)
Dec. 31, 2015
Loss on Purchase Commitments 50,000
Estimated Liability on Purchase Commitments 50,000

Feb. 28, 2016

Purchases 1,200,000
Estimated Liability on Purchase Commitments 50,000
Accounts Payable 1,200,000
Recovery of Loss on Purchase Commitments 50,000

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Chapter 4 - Inventories

MULTIPLE CHOICE QUESTIONS

Theory

MC1 B MC6 A MC11 C MC16 A

MC2 A MC7 A MC12 A MC17 D
MC3 D MC8 D MC13 A MC18 D
MC4 B MC9 A MC14 C MC19 C
MC5 D MC10 A MC15 D MC20 D
MC21 D

Problems

MC22 D 90,000 x .80 x ..90 = 64,800; 64,800 + 5,000 = 69,800

MC23 C 150,000 x .85 x .90 x .95 = 109,012.50
MC24 A 109,012.50 x .98 = 106,832.25
MC25 B 3,280,000 + 900,000– 80,000 = 4,100,000 x 3% =123,000; 123,000–
27,000=96,000
MC26 D 1,500,000 + 50,000 = 1,550,000
MC27 B 3,000,000 + 300,000 + 660,000 + 230,000) = 4,190,000
450,000÷1.5=300,000; 600,000+60,000=660,000; (300,000÷1.5)
+30,000=230,000
MC28 C 5,000,000 + 80,000 + 800,000 – 25,000 = 5,855,000
MC29 B 77,500 + 6,000 = 83,500
MC30 C 550,000 + 90,000 + 380,000 + 450,000 + (150,000 x .80) = 1,590,000
MC31 C 104,000 ÷ 1.3 = 80,000; 80,000 x .30 = 24,000
24,000 + 56,000 + (32,500 – 25,000) = 87,500
MC32 A (3,000 x 35) + (2,000 x 36) + (1,000 x 37) = 214,000 Sales
(4,000 x 25) + (2,000 x 26) = 152,000 CGS; 214,000 – 152,000 = 62,000
MC33 C (1,600 x 8) + (4,800 x 9.60) = 58,880; 58,880 ÷ 6,400 = 9.20
MC34 B Confidence: cost 22; NRV = 30 – 3 = 27; lower is 22
Positive attitude: cost 55; NRV = 80 – 28 = 52; lower is 52
MC35 C (1,000 x 25)+(2,000 x 36)+(3,000 x 120) +(4,000 x 18) =529,000
MC36 C 600,000 + 1,500,000 – (2,240,000 ÷ 1.4) = 500,000
MC37 C 180,000 + 2.5M – 2.4M = 280,000; 280,000 – 110,000 =170,000 short
2.55M+250,000–300,000=2.5M; 2.8M + 900,000 – 700,000 = 3M Sales;
3M ÷ 1.25 = 2.4M CGS
MC38 B CGS-2013 = 1,040,000; CGS-2014 =1.55M; total CGS (2013/2014) = 2.59M
2013/2014 sales = 1.7M + 2M = 3.7M; 2.59/3.7 = 70%
520,000+ 2.18M – (2.5M x 70%)= 950,000; 950,000–(70%x150,000)–
95,000=750,000
MC39 D 408,8976 ÷ 524,200 = 78%; 450,200 – 5,100 = 445,100; 445,100 x 78% =
347,178
105,650 + (378,245 – 10,295) = 473,600; 473,600 - 347,178 =126,422
126,422 – 69,738 – 5,000 = 51,684
MC40 C 400,000 + 1,280,000 –740,000 = 940,000 DM

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940,000 + 960,000 + (50%x 906,000) = 2,380,000 TMC;4M x 75% = 3M CGS

3M+1,310,000–1.5M=2,810,000 CGAS; 2,380,000 + 1.1M–2,810,000 = 670,000
MC41 C 617,000 + 1,281,000 – 21,000 + 31,000 = 1,908,000
1,057,000 + 2,158,000 – 35,000 = 3,180,000; 1,908,000 ÷ 3,180,000 = 60%
3,180,000–2,365,000+62,000=877,000; 877,000–780,000=97,000 x 60% =
58,200
MC42 D 47,075+213,327+3,400=263,802; 70,025+306,375=18,900–7,800–10,640 =
376,860
263,802 ÷ 376,860 = 70% x 320,500=224,350
MC43 A 376,860 – 320,500 = 56,360; 56,360 – 39,390 = 16,970; 16,970 x 70% = 11,879
MC44 C 23,000 + 120,000 = 143,000; 60,000 + 220,000 + 20,000 – 40,000 = 260,000
260,000 – 180,000 = 80,000; 143,000/260,000 = 55%; 55,000 P 80,000 =44,000
MC45 D 600,000 – 10,000 – 4,000 – 100,000 = 486,000

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