Practice Set – Inventory CPAs by October 2020

Problem 1 – Inventory Reconciliation

Pacers Company, a manufacturer of small tools, provided the following information fromits accounting records
for the year ended December 31, 2006:

Inventory at December 31, 2006 (based on physical

count on December 31, 2006) P1,520,000
Accounts payable at December 31, 2006 1,200,000
Net sales (sales less sales returns) 8,150,000

Additional information follows:

a. Included in the physical count were tools billed to a customer FOB shipping point on December
31, 2006. These tools had a cost of P31,000 and were billed at P40,000.
The shipment was on Pacers’ loading dock waiting to be picked up by the common
carrier
b. Goods were in transit from a vendor to Pacers on December 31, 2006. The invoice cost was
P71,000, and the goods were shipped FOB shipping point on December 29,2006.
c. Work in process inventory costing P30,000 was sent to an outside processor for plating on
December 30, 2006.
d. Tools returned by customers and held pending inspection in the returned goods area on
December 31, 2006, were not included in the physical count. On January 8, 2007,the tools costing
P32,000 were inspected and returned to inventory. Credit memos totaling P47,000 were issued to the
customers on the same date.
e. Tools shipped to a customer FOB destination on December 26, 2006, were in transit at
December 31, 2006, and had a cost of P21,000. Upon notification of receipt by the customer on
January 2, 2007, Pacers issued a sales invoice for P42,000.
f. Goods, with an invoice cost of P27,000, received from a vendor at 5:00 p.m. on December 31,
2006, were recorded on a receiving report dated January 2, 2007. The goods were not included in the
physical count, but the invoice was included in accounts payable at December 31, 2006.
g. Goods received from a vendor on December 26, 2006, were included in the physical count.
However, the related P56,000 vendor invoice was not included in accounts payable at December 31,
2006, because the accounts payable copy of the receiving report was lost.
h. On January 3, 2007, a monthly freight bill in the amount of P6,000 was received. The bill
specifically related to merchandise purchased in December 2006, one-half of which was still in the
inventory at December 31, 2006. The freight charges were not included in either the inventory or
accounts payable at December 31, 2006.

QUESTIONS:

Based on the above and the result of your audit, answer the following:
1. The adjusted balance of Inventory as of December 31, 2006 is
P1,704,000
2. The adjusted balance of Accounts Payable as of December 31, 2006 is
P1,333,000
3. The adjusted Net Sales fro the year ended December 31, 2006 is
P8,063,000
 Practice Set – Inventory CPAs by October 2020

Problem 2 – Purchase Commitments

On November 17, 2010, Bautista Airways entered into a non-cancellable commitment to purchase 3,000
barrels of aviation fuel for ₱9,000,000 on March 31, 2011. Bautista entered into a purchase commitment to
protect itself against volatility in the aviation fuel market. By December 31, 2010, the purchase price of aviation
fuel had fallen to ₱2,200 per barrel. However, by March 31, 2011, when Bautista took delivery of the 3,000
barrels, the price of aviation fuel had risen to ₱3,100 per barrel.

Based on the above and the result of your audit, answer the following:

1. The loss on purchase commitment on December 31, 2010 is

2. The gain on purchase commitment on March 31, 2011 is

Solution:

Contract price ₱9,000,000

Market Value, 12/31/10 (3000 x ₱2,200) 6,600,000
Loss on Purchase commitment, 12/31/10 ₱2,400,000
1.

Market Value, 3/31/11 (3,000 x ₱3,100) ₱9,300,000

Market Value, 12/31/10 (3,000 x ₱2,200) 6,600,000
Increase in Market Value 2,700,000
Loss on Purchase Commitment, 12/31/10 2,400,000
Gain on purchase commitment (maximum) 2,400,000
2.

Problem 3 – Overview of Inventory Cost Flow

Feichang bang Company provided the following for the current year:

Central Warehouse Held by Consignees

Beginning inventory 1,100,000 120,000
Purchases 4,800,000 600,000
Freight-in 100,000
Transportation to consignees 50,000
Freight-out 300,000 80,000
Ending Inventory 1,450,000 200,000

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

Solution:

Beginning inventory (1,100,000 + 120,000) ₱1,220,000

Purchases (4,800,000 + 600,000) 5,400,000
Freight in (100,000 + 50,000) 150,000
Goods Available for Sale 6,770,000
Practice Set – Inventory CPAs by October 2020
Ending Inventory (1,450,000 + 200,000) (1,650,000)
Cost of Goods Sold ₱5,120,000

Problem 4 – Methods for Accounting Inventory (Perpetual / Periodic)

At the beginning of January 1, Jay Company has 2,000 inventories costing 20 per unit. The following
chronological transactions transpired during the year:

1. Purchased on Account 3,000 units of inventory at 20 per unit

2. Sold on account 2,500 units of inventory for 50 per unit
3. Purchased on account 4,000 units of inventory at 20 per unit
4. Sold on account 3,000 units of inventory for 50 per unit.
5. On December 31, physical count revealed that 3,500 units were on hand.
Question:

1. What is the ending inventory and cost of goods sold using the periodic inventory method?
2. What is the ending inventory and cost of goods sold using the perpetual inventory method?
3. Prepare all necessary journal entries using the perpetual and periodic method
Answers:

Inventory - Perpetual

B, Inv Sales
40,000 50,000 2
Purchase 60,000 5
1 60,000
Bal.
3 80,000 70,000 end
180,000 180,000

Cost of goods sold – Perpetual

COGS on Sale
2 50,000
5 60,000
Bal.
110,000 End
110,000

Inventory and COGS – Periodic

Merchandise Inventory, B (2,000x20) 40,000

Add: Net Purchases [(3,000 + 4,000) x 20 ] 140,000

Total Goods Available for Sale 180,000

Less: Ending Inventory (3,500 x 20) (70,000)

Cost of Goods Sold 110,000

 Practice Set – Inventory CPAs by October 2020

Perpetual Inventory System

1 Inventory (3,000x20) 60,000
Accounts Payable 60,000
2. Accounts Receivable 125,000
Sales (2,500x50) 125,000

Cost of goods sold 50,000

Inventory (2,500x20) 50,000

3. Inventory (4,000x20) 80,000

Accounts Payable 80,000
4. Accounts Receivable 150,000
Sales (3,000x50) 150,000

Cost of goods sold 60,000

Inventory (3,000x20) 60,000
5. No closing entries since all inventory
related transaction is directly debited or
credited to inventory account
6. Loss on inventory shortage 10,000
Inventory 10,000

Periodic Inventory System

1. Purchases (3000x20) 60,000
Accounts Payable 60,000
2. Accounts Receivable 125,000
Sales (2,500x50) 125,000
3. Purchases (4,000x20) 80,000
Accounts Payable 80,000
4. Accounts Receivable 150,000
Sales (3,000x50) 150,000
5. Inventory, End (3,500x20) 70,000
Cost of goods sold 110,000
Purchases (60,00+80,000) 140,000
Inventory, Beg. ( 2,000x20) 40,000
6. No journal entry. Inventory shortage or overage is included in the COGS

Problem 5 – Subsequent Measurement - LCNRV

A bookkeeper has provided you with the following information regarding inventory on hand at December 21,
2018, used in manufacture of two product lines: motorbikes and bicycles:
 Practice Set – Inventory CPAs by October 2020
Cost NRV: if sold ‘as NRV: if sold as a
is” completed
product
Raw Materials: ₱100,000 ₱45,000 ₱65,000
Supply of steel (used for 40,000 25,000 15,000
motorbikes)
Supply of aluminum (used for 60,000 20,000 50,000
bicycles)

Work-in-process: 80,000 80,000 65,000

Incomplete motorbikes 30,000 20,000 25,000
Incomplete bicycles 50,000 60,000 40,000

Finished Goods: 160,000 170,000

Motorbikes 80,000 N/a 60,000
Bicycles 80,000 N/a 110,000
Total 340,000

The lifecycle of both product lines is coming to an end and the company has decided that where it is more
profitable to sell a class of inventory such as raw materials ‘as is’ than to convert it into finished product, then
the class of inventory will be sold ‘as is’. Cost of sales before any adjustments to the cost of inventory was
₱450,000.

Based on the above data, answer the following:

1. How much is the inventory write-down for raw materials?

2. How much is in the inventory write-down for the work-in-process?

3. How much is the inventory write-down for the finished goods?

4. Adjusted cost of sales amounts to?

Solution:

Supply of steel (used for motorbikes) Write-down

Cost 40,000
More profitable (as’is) 25,000 15,000
Supply of aluminum (used for bicycles)
Cost 60,000
More profitable (completed products) 50,000 10,000
Total write down 25,000
1.

Incomplete motorbikes Write-down

Cost 30,000
More profitable (completed products) 25,000 5,000
Incomplete bicycles
Cost 50,000
More profitable (as’is) 60,000 -
 Practice Set – Inventory CPAs by October 2020
Total write down 5,000
2.

Motorbikes Write-down
Cost 80,000
More profitable (completed products) 60,000 20,000
Bicycles
Cost 80,000
More profitable (completed products) 110,000 -
Total write down 20,000
3.

Cost of goods sold before write down 450,000

Add. Write down
Raw materials 25,000
Work-in-process 5,000
Finished Goods 20,000
Adjusted cost of goods sold 500,000
4.

Problem 6 – Inventory Costing

Records of Mckenzhy New Products Co. show the following data relative to Product 143:

Units Unit Cost Total Cost

April 1 Balance 20,000 10 200,000
April 2 Purchase 30000 12 360,000
April 4 Sale 25000
April 10 Purchase 15000 14 210,000
April 15 Sale 21000
April 17 Sales Return 1000
April 28 Purchase 20000 16.75 335,000

Question:

Based on the above data, answer the following question:

1. Using the weighted average method, how much is the cost of the inventory at the end of April?
2. Using the weighted average method, how much is the cost of goods sold in April?
 Practice Set – Inventory CPAs by October 2020
3. Using the moving average method, how much is the cost of the inventory at the end of April?
4. Using the moving average method, how much is the cost of goods sold in April?
5. Using the perpetual FIFO method, how much is the cost of inventory at the end of April?
6. Using the perpetual FIFO method, how much is the cost of goods sold in April?
7. Using the periodic FIFO method, how much is the cost of inventory at the end of April?
8. Using the periodic FIFO method, how much is the cost of goods sold in April?

Solution:
Questions 1 and 2

Weighted average
Weighted Average unit cost = Total goods available for sale ( in peso value)
Total goods available for sale (in units)

=1,105,000/ 85,000

Weighted Average unit cost = 13/unit

1. Inventory end ( 40,000x13) = 520,000

2. Cost of Goods Sold (20,000+5,000+21,000-1,000) x13 = 585,000

Questions 3 and 4
Moving Average

Units Unit Cost Total Cost

April 1 balance 20,000 10 200,000
April 2 Purchase 30,000 12 360,000
Balance 50,000 11 560,000
April 4 Sale (25,000) 11 (280,000)
Balance 25,000 11 280,000
April 10 Purchase 15,000 14 210,000
Balance 40,000 12 490,000
April 15 Sales 21,000 12 257,250
Balance 19,000 12 232,750
April 17 Sales Return 1,000 12 12,250
April 28 Balance 20,000 245,000
April 28 Purchase 20,000 16.75 335,000
Balance 40,000 15 580,000

3. Inventory End = 580,000

4. Cost of Goods Sold (280,000 + 257,250 – 12,250) = 525,000
Question 5 and 6

FIFO

Units Unit Cost Total Cost

April 1 balance 20,000 10 200,000
April 2 Purchase 30,000 12 360,000
April 4 (25,000 units sold) From April 1 (20,000) 10 (200,000)
 Practice Set – Inventory CPAs by October 2020
From April 2 (5,000) 12 (60,000)
Balance from April 2 25,000 12 300,000
April 10 Purchase 15,000 14 210,000
April 15 (21,000 units sold) From April 2 (21,000) 12 (252,000)
Bal. from April 2 4,000 12 48,000
Bal. from April 10 15,000 14 210,000
April 17 Sales Return 1,000 12 12,000
Balance
Bal. from April 2 5,000 12 60,000
Bal. from April 10 15,000 14 210,000
April 28 Purchase 20,000 17 335,000
Total Balance 40,000 605,000

5. Inventory End = 605,000

6. Cost of goods sold (200,000+ 60,000+ 252,000 -12,000) = 500,000

Question 7 and 8

Cost of Goods Sold and Inventory under FIFO periodic and perpetual is the same.

Problem 7 - INVENTORY ESTIMATION – GROSS PROFIT RATE METHOD

On March 31, 2010 San Fabian Company had a fire which completely destroyed the factory building and inventory
of goods in process some of the equipment was saved. After the fire, a physical inventory was taken. The material was
valued at P750,000 and the finished goods at P620.000. The inventories on January 1, 2010 consisted of:

Materials P 310, 000

Goods in Process 1, 215, 000
Finished Goods 1, 700, 000
TOTAL P 3, 225, 000

2007 2008 2009

Sales P 8, 000, 000 P 7, 600, 000 P 5, 000, 000
Gross Profit 2, 400, 000 2, 215, 000 1, 776, 000
A review of the accounting records disclosed that the sales and gross profit on sales for the last three years were:

The sales for the first three months of 2010 were 3,000,000. Material purchases were P1,250,000, transportation
on purchases was P100,000 and direct labor cost for the three months was P1,000,000. For the past two years, factory
overhead cost has been 80% of direct labor cost.
 Practice Set – Inventory CPAs by October 2020
QUESTIONS:

Based on the above and the result of your audit, compute the following:

1. The most likely gross profit rate to be used in estimating the inventory of goods in process destroyed by fire.

2. Total cost of goods placed in process

3. Total cost of goods manufactured

4. Inventory of goods in process lost

Solution:

2007 2008 2009

Gross Profit 2, 400, 000 2, 215, 000 1, 776, 000
Divided by: Sales 8, 000, 000 7, 600, 000 5, 000, 000
Gross Profit 30.00% 29.14% 35.52%
Rate
Question 1:

Average Gross Profit Rate: (30%+29.14%+35.52%)/3 = 31. 55%

Questions 2-4

Raw materials, 1/1/10 P 310, 000

Purchases 1, 250, 000
Freight-in 100, 000
Raw materials available for use 1, 660, 000
Raw materials, 3/31/10 (750, 000)
Raw materials used 910, 000
Direct labor 1, 000, 000
Factory overhead (P1,000,000 x 80%) 800, 000
Total manufacturing cost 2, 710, 000
Work-in-process, 1/1/10 1, 215, 000
Total cost placed in process 3, 925, 000 (2)
Less work-in-process, 3/31/10 (squeeze) (2, 951, 500) (4)
Cost of goods manufactured 973, 500 (3)
Finished goods, 1/1/10 1, 700, 000
Total goods available for sale 2, 673, 500
Less finished goods, 3/31/10 (620, 000)
 Practice Set – Inventory CPAs by October 2020
Cost of goods sold (P3,000,000 x 68.45%) P 2, 053, 500

Problem 8 - INVENTORY ESTIMATION – Retail

Inventory Method

Presented below is information taken from BIMAZY

Company:
Practice Set – Inventory CPAs by October 2020

Question:
1. How much is the estimated cost of Ending inventory under Conventional, Average and FIFO Method?
2. How much is the Cost of Sales under Conventional, Average and FIFO Method?

Solution: