FAR - Quiz 2 - Receivables and Inventories - With Answers

Dagupan Accountancy Receivables and
FAR – QUIZ 2 Inventories

Review - DARe
FAR Quiz #2
FAR-1003 Receivables
1. Trade receivables are classified as current assets if they are reasonably expected to be collected
A. Within one year
B. Within the normal operating cycle
C. Within one year or within the operating cycle, whichever is shorter
D. Within one year or within the operating cycle, whichever is longer
2. Which of the following statement is true in relation to presentation of receivables in the statement of financial
position?
A. Trade receivables and nontrade receivables are shown separately
B. Nontrade receivables are presented as noncurrent assets
C. Trade accounts receivable and trade notes receivable shall be presented separately
D. Trade receivable and nontrade receivables which are currently collectible shall be presented as one line item
called “trade and other receivables”
3. Accounts receivable shall be recognized initially at
A. Face value C. Maturity value
B. Discounted value D. Current value
4. Long-term notes receivables which nominally bear no interest or an interest which is unreasonably low shall be
recognized initially at
A. Face value C. Maturity value
B. Present value D. Current value
5. Credit balances in accounts receivable shall be classified as
A. Current liabilities C. Long term liabilities
B. Part of accounts payable D. Deduction from accounts receivable
6. In the case of long-term instalments receivable (real estate installment sales) where a major portion of the
receivables will be collected beyond the normal operating cycle
A. The entire receivables are shown as current without disclosure of the amount not currently due.
B. The entire receivables are shown as noncurrent.
C. Only the portion currently due is shown as current and the balance as noncurrent
D. The entire receivables are shown as current with disclosure of the amount not currently due.
7. Which method of recording bad debt loss is consistent with accrual accounting?
A. Allowance method C. Percent of sales method
B. Direct write-off method D. Percent of accounts receivable method
8. A method of estimating bad debts that focuses on the income statement whether rather than the statement of
financial position is the allowance method based on
A. Direct write off C. Credit sales
B. Aging the trade accounts receivable D. The balance in the trade accounts receivable
9. When the allowance method of recognizing uncollectible accounts is used, the entry to record the write off of a
specific account would
A. Decrease both accounts receivable and the allowance for uncollectible accounts
B. Decrease accounts receivable and increase the allowance for uncollectible accounts.
C. Increase the allowance for uncollectible accounts and decrease net income
D. Decrease both accounts receivable and net income.
10. When an accounts receivable aging schedule is prepared, a series of computations is made to determine the
estimated uncollectible accounts. The resulting amount from this aging schedule
A. When added to the total accounts written off during the year is the desired credit balance of the allowance
for doubtful accounts at year-end.
B. Is the amount of doubtful accounts expense for the year
C. Is the amount that should be added to the beginning allowance for doubtful accounts to get the doubtful
accounts expense for the year
D. Is the amount of desired credit balance of the allowance for doubtful accounts to be reported at year-end
11. When the allowance method of recognizing bad debt expense is used, the allowance for doubtful accounts would
decrease when
A. Specific account receivable is collected
B. Account previously written off is collected
C. Account previously written off becomes collectible
D. Specific uncollectible account is written off
12. When comparing the allowance method of accounting for bad debts with the direct write off method, which of
the following is true?
A. The direct write off method is exact and also better illustrates the matching principle.
B. The allowance method is less exact but it better illustrates the matching principle
C. The direct write off method is theoretically superior
D. The direct write off method requires two separate entries to write off an uncollectible account
13. A debit balance in the allowance for doubtful accounts
A. Should never occur
1 of 10 Dagupan Accountancy Review - DARe - October 2019 CPA Exam “Dare us to bring out the best in you.”
Dagupan Accountancy Review – DARe FAR-QUIZ 2
B. Is always the result of management not providing a large enough allowance in order to manage earnings
C. May occur before the end of period adjustment for uncollectible accounts
D. May exist even after the end of the period adjustment for uncollectible accounts.
14. On October 1 of the current year, an entity received a one-year note receivable bearing interest at the market
rate. The face amount of the note receivable and the entire amount of the interest are due on September 30 of
next year. The interest receivable on December 31 of the current year would consist of an amount representing
A. Three months of accrued interest income
B. Nine months of accrued interest income
C. Twelve months of accrued interest income
D. The excess on October 1 of the present value of the note receivable over its fact amount
15. On July 1, 2012, an entity obtained a two-year 8% note receivable for services rendered. At that time, the market
rate of interest was 10%. The face amount of the note and the entire amount of interest are due on June 30, 2014.
Interest receivable on December 31, 2012 is
A. 5% of the face amount of the note
B. 4%of the face amount of the note
C. 5% of the July 1, 2012 present value of the amount due on June 30, 2014.
D. 4% of the July 1, 2012 present value of the amount due on June 30, 2014
16. An entity uses the installment sales method to recognized revenue. Customers pay the instalments notes in 24 equal
monthly amounts which include 12% interest. What is the installment notes receivable six months after the sale?
A. 75% of the original sales price
B. Less than 75% of the original sales price
C. The present value of the remaining monthly payments discounted at 12%.
D. Less than the present value of the remaining monthly payments discounted at 12%.
17. The interest on a non interest bearing note is equal to
A. The excess of the face value over the present value
B. The excess of the present value of over the face value
C. The excess of the market value over the present value
D. Zero
18. On July 1 of the current year, an entity received a one-year note receivable bearing interest at the market rate.
The face amount of the note receivable and the entire amount of the interest are due in one year. The interest
receivable account would show a balance on
A. July 1 but not December 31 C. July 1 and December 31
B. December 31 but not July 1 D. Neither July 1 nor December 31
19. In an entity’s April 30, 2012 statement of financial position a note receivable was reported as a noncurrent asset
and accrued interest for eight months was reported as a current asset. Which of the following terms would fit the
entity’s note receivable?
A. Both principal and interest are payable on August 31, 2012 and August 31, 2013
B. Principal and interest are due December 31, 2012
C. Both principal and interest are payable on December 31, 2012 and December 31, 2013
D. Principal is due August 31, 2013, and interest is due August 31, 2012 and August 31, 2013
20. The ‘’amortized cost” of loan receivable is the amount of which
A. The loan receivable is measured initially minus principal repayment, plus or minus the cumulative amortization
of any difference between the initial amount recognized and the principal maturity amount, minus reduction
for impairment.
B. The loan receivable is measured initially minus principal repayment, plus or minus amortization recognized and
the principal maturity amount.
C. The loan receivable is measured initially.
D. The loan receivable is measure initially minus principal payment.
21. On the December 31, 2014 statement of financial position of Mann Company, the receivables consisted of the
following:
Trade accounts receivable P 93,000
Allowance for uncollectible accounts ( 2,000)
Claim against shipper for goods lost in transit last November 2014 3,000
Selling price of unsold goods sent by Mann on consignment at 30% of cost (not
included in Mann's ending inventory) 26,000
Security deposit on the lease of a warehouse used for storing some inventories 30,000
Total P150,000
How much should be reported as trade and other receivables in Mann's December 31, 2014 statement of financial
position?
A. P94,000 C. P120,000
B. P68,000 D. P150,000
22. When examining the accounts of Medved Company, you ascertain that balances relating to both receivables
and payables are included in a single controlling account called receivables control that has a debit balance of
P4,850,000. An analysis of the composition of this account revealed the following:
Debit Credit
Account receivable – customers P7,800,000
Accounts receivable – officers 500,000
Debit Credit
Debit balances – creditors 300,000
Postdated checks from customers 400,000
Subscriptions receivable 800,000
Accounts payable for merchandise P4,500,000
Credit balances in customers’ accounts 200,000
Cash received in advance from customers for goods not
yet shipped 100,000
Expected bad debts 150,000
After further analysis of the aged accounts receivable, you determined that the allowance for doubtful accounts
should be P200,000. What is the correct total of B. P8,800,000
current net receivables? C. P8,600,000
A. P8,950,000 D. P8,850,000
23. On April 28, 2014 Malcom Company sold merchandise with a list price of P5,000,000 to Forbes. Malcom allowed
trade discounts of 20% and 10%. Credit terms were 5/10, n/30. The goods were shipped FOB destination, freight
collect. Total freight charges paid by the Forbes amounted to P50,000. On May 8, 2014, Malcom received from
Forbes full remittance of
A. P3,370,000 C. P3,550,000
B. P3,420,000 D. P3,600,000
24. Ilocos Company sold merchandise on credit to Norte Company for P100,000 on July 1, with terms of 2/10, net /30.
On July 6, Norte returned P20,000 worth of merchandise claiming the materials were defective. On July 8, Ilocos
received a payment from Norte and credited Accounts Receivable for P45,000. On July 24, Norte Company paid
the remaining balance on its account. What was the total cash received from Norte during July?
a. P44,100 c. P45,000
b. P79,100 d. P80,000
25. The balances of selected accounts taken from January 1, 2014 statement of financial position of Huygens
Company were as follows:
Accounts receivable P2,500,000
Allowance for doubtful accounts 60,000
The following summary of transactions affecting accounts receivable occurred during the year ended December
31, 2013.
Sales – all on account (2/10, 1/15, n/30) P7,935,000
Cash received from customers 8,000,000
The cash received includes the following:
Customer paying within the 10-day discount period 4,410,000
Customer paying within the 15-day discount period 2,475,000
Recovery of accounts written off 15,000
Customers paying beyond the discount period ?
Accounts receivable written off as worthless 55,000
Credit memoranda for sales return 30,000
The balance of accounts receivable on December 31, 2014 is
a. P2,350,000 c. P2,250,000
b. P2,235,000 d. P2,365,000
26. The December 31, 2014 balances of selected accounts of Bicolano Company and pertinent information are shown
below:
Inventory, January 1 P2,000,000
Purchases 7,500,000
Purchases returns and allowances 500,000
Sales returns and allowances 750,000
Inventory at December 31 2,800,000
Gross profit rate on net sales 20%
Gross sales for 2013 amount to
a. P7,750,000 c. P8,500,000
b. P7,000,000 d. P9,125,000
27. Gomez Company's net accounts receivable were P400,000 at December 31, 2013 and P440,000 at December 31,
2014. Net cash sales for 2014 were P260,000. The accounts receivable turnover for 2014 was 7.0. What were
Gomez's total net sales for 2014?
a. P1,820,000 c. P2,940,000
b. P3,200,000 d. P2,680,000
28. On January 1, 2014, Boy Company sold a machine to Bawang Company. Bawang signed a non-interest-bearing
note requiring payment of P30,000 annually for seven years. The first payment was made on January 1, 2014. The
prevailing rate of interest for this type of note at date of issuance was 10%. Information on present value factors is
as follows:
Present value of
Present value of ordinary annuity of
Periods 1 at 10% 1 at 10%
6 .56 4.36
7 .51 4.87
Boy should record the sale in January 2014 at
a. P107,100 c. P130,800
b. P146,100 d. P160,800
29. On July 1, 2014, Shaw Co. sold a machine costing P500,000 with accumulated depreciation of P380,000 on the
date of sale. Shaw received as consideration for the sale, a P300,000 noninterest-bearing note, due July 1, 2017.
There was no established exchange price for the equipment and the note had no ready market. The prevailing
rate of interest for a note of this type at July 1, 2014 was 12% and 13% on December 31, 2014. In relation to this
transaction, the total income to be recognized in Shaw’s 2014 profit or loss is (Round off present value factors to
four decimal places)
a. P180,000 c. P101,445
b. P119,165 d. P106,352
30. Boy Company sold a machine to Golden Corporation on January 1, 2014, for which the cash sales price was
P379,100. Golden entered into an installment sales contract with Boy, calling for annual payments of P100,000 for
five years, including interest at 10%. The first payment was due on December 31, 2014. How much interest income
should be recorded by Boy in 2015?
a. P27,910 c. P31,701
b. P37,910 d. P50,000
31. Payla Company borrowed from Gold Bank under a 10-year loan in the amount of P5,000,000 with interest rate of
6%. Payments are due monthly and are computed to be P55,500. Gold Bank incurs P200,000 of direct loan
origination cost and P50,000 of indirect loan origination cost. In addition, Gold Bank charges Payla a 5-point
nonrefundable loan origination fee. Gold Bank, the lender, has carrying amount of
a. P5,200,000 c. P4,750,000
b. P5,000,000 d. P4,950,000
32. On December 1, 2014, Money Co. gave Home Co. a P200,000, 11% loan. Money paid proceeds of P194,000 after
the deduction of a P6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly
installments of P4,310, beginning January 1, 2015. The repayments yield an effective interest rate of 11% at a present
value of P200,000 and 12.4% at a present value of P194,000. What amount of income from this loan should Money
report in its 2014 income statement?
a. P 0 c. P2,005
b. P1,833 d. P7,833
33. Bangui Company provides for doubtful accounts expense at the rate of 3 percent of credit sales. The following
data are available for last year:
Allowance for Doubtful Accounts, January 1 P 54,000
Accounts written off as uncollectible 60,000
Collection of accounts written off 15,000
Credit sales, year-ended December 31 3,000,000
The allowance for doubtful accounts balance at December 31, after adjusting entries, should be
a. P45,000 c. P90,000
b. P84,000 d. P99,000
34. Tyson, Inc. reported the following balances (after adjustment) at the end of 2014 and 2013.
12/31/14 12/31/13
Total accounts
receivable P105,000 P96,000
Net accounts receivable 102,000 94,500
During 2014, Tyson wrote off customer accounts totaling P3,200 and collected P800 on accounts written off in
previous years. Tyson's doubtful accounts expense for the year ending December 31, 2014 is
a. P1,500 c. P3,000
b. P2,400 d. P3,900
35. Alilem Company operates in an industry that has a high rate of bad debts. On December 31, 2014, before any
year-end adjustments, the accounts receivable balance was P20,000,000 and its allowance for doubtful accounts
balance was P1,500,000. The year-end balance reported for the allowance for doubtful accounts is based on the
following schedule:
Age Amount Uncollectible %
Under 30 days P10,000,000 5%
31 – 180 days 5,000,000 10%
181 -360 days 3,000,000 30%
More than 1 year 2,000,000 100%
The accounts which have been outstanding for more than one year and 100% uncollectible would be written off
immediately. What should be the doubtful accounts expense for the year ended December 31, 2014?
a. P1,900,000 c. P3,900,000
b. P2,400,000 d. P2,000,000
36. Excel Company is a leading educational institution with student population of more than 50,000. Excel continuously
maintains good quality education and a roster of qualified professors. As a result, Excel continuously produces top
graduates in several fields. As at December 31, Excel has an outstanding receivable balance of P23,250,000 broken
down into: 0-60 days outstanding, P9,000,000; 61-120 days outstanding, P6,750,000; and over 120 days outstanding,
P7,500,000. Estimated percent uncollectible of these accounts is 1%, 2% and 6%, respectively. Excel wrote off
P525,000 of its accounts receivable and recovered P50,000 from accounts previously written of in prior year. As at
January 1, Excel has an allowance for uncollectible accounts of P650,000. Based on the aging analysis, Excel
should report doubtful accounts expense for the year at
a. P675,000 c. P550,000
b. P500,000 d. P475,000
37. Cabugao Company began operations on January 1, 2013. On December 31, 2013, Cabugao provided for
uncollectible accounts based on 5% of annual credit sales. On January 1, 2014, Cabugao changed its method of
determining its allowance for uncollectible accounts to the percentage of accounts receivable. The rate of
uncollectible accounts was determined to be 15% of the ending accounts receivable balance. In addition,
Cabugao wrote off all accounts receivable that were over 1 year old. The following additional information relates
to the years ended December 31, 2013 and 2014.
2014 2013
Credit sales P8,000,000 P6,000,000
Collections (including collections on 6,950,000 4,500,000
recovery)
Accounts written off 70,000 None
Recovery in accounts previously written off 20,000 None
How much is the provision for uncollectible accounts for the year ended December 31, 2014?
a. P125,000 c. P400,000
b. P122,000 d. P 72,000
38. On December 31, 2012, Quite Chubby borrowed from Piggy Bank, signing a 5-year non-interest-bearing note for
P100,000. The note was issued to yield 10% interest. Unfortunately, during 2014, Chubby began to experience
financial difficulty. As a result, at December 31, 2014, Piggy Bank determined that it was probable that it would
receive back only P75,000 at maturity. The market rate of interest on loans of this nature is now 11%. How much
should be recognized as loan impairment loss in 2014?
a. P11,952 c. P20,292
b. P18,782 d. P 5,743
Use the following information for the next two questions.
(Round off present value factors to four decimal places)
On December 31, 2014, Merciful Bank entered into a debt restructuring agreement with Miserable Corp., which was
experiencing financial difficulties. A note for P1,000,000 and one year's accrued interest was due on this date from
Miserable. The note receivable from Miserable was restructured as follows:
 reduced the principal obligation to P700,000.
 forgave the P120,000 of accrued interest for 2014.
 extended the maturity date to December 31, 2017.
 reduced the interest rate to 8%.
Interest is payable annually on December 31, beginning 2015. In accordance with the agreement, Miserable made
payments to Merciful Bank on December 31, 2015, 2016 and 2017.
39. The loan impairment loss to be recognized in Merciful Bank’s 2014 profit or loss is
a. P477,422 c. P487,239
b. P420,000 d. P 0
40. How much interest income should Merciful Bank report for the year ended December 31, 2015?
a. P75,931 c. P56,000
b. P64,258 d. P 0
41. Cadiz, Inc., assigned P10,000 to a finance company, receiving an advance of 90% less a service charge of P400.
Later P2,000 of these receivables were collected and remitted to the finance company with an additional P200 of
interest. Given this information, which entry would not be made?
a. Cash 8,600
Assignment Service Charge expense 400
Accounts Receivable 9,000
b. Note Payable 2,000
Interest Expense 200
Cash 2,200
c. Cash 2,000
Accounts receivable Assigned 2,000
d. Accounts Receivable Assigned 10,000
Accounts Receivable 10,000
Sipalay Co. assigned P500,000 of accounts receivable to Hinigaran Finance Co. as security for a loan of P420,000.
Hinigaran charged a 2% commission on the amount of the loan; the interest rate on the note was 10%. During the first
month, Sipalay collected P110,000 on assigned accounts after deducting P380 of discounts. Sipalay accepted returns
worth P1,350 and wrote off assigned accounts totaling P3,700.
42. The amount of cash Sipalay received from Hinigaran at the time of the transfer was
a. P378,000 c. P410,000
b. P411,600 d. P420,000
43. Entries during the first month would include a
a. debit to Cash of P110,380.
b. debit to Bad Debts Expense of P3,700.
c. debit to Allowance for Doubtful Accounts of P3,700.
d. debit to Accounts Receivable of P115,430.
44. On January 1, Binal Corp. assigned P500,000 of accounts receivable to the Bagan Finance Company in a
transaction accounted for as a secured borrowing. Binal gave a 14% note for P450,000 representing 90% of the
assigned accounts and received proceeds of P432,000 after deduction of a 4% fee. On February 1, Binal remitted
P80,000 to Bagan, including interest for 1 month on the unpaid balance. Binal’s equity in the assigned accounts
receivable as after the remittance is
a. P50,000 c. P68,000
b. P44,750 d. P62,750
Seller Corp. factored P400,000 of accounts receivable with Buyer, Inc., on a without-recourse basis. The factor charge
was 1.75% of the amount of receivables, and an additional 4% was retained to cover probable adjustments. In addition
to the factor charge, a finance charge was withheld equal to 12% annually for any amounts advanced prior to the
due dates of the receivables. This charge was based on 100% of the face value. The average credit term was 30 days
from the date of transfer. According to the terms of the factoring agreement, Seller was to handle returned goods,
allowances, and shipping disputes. Buyer was to collect the cash and acknowledge sales discounts, but such discounts
were to be charged to Seller. Credit losses were to be absorbed by Buyer. Seller has not recorded any bad debt
expense related to the factored receivables. The following transactions pertain to this factoring arrangement:
Aug. 1 The receivable records were transferred to Buyer. Buyer estimated that P2,900 of the accounts will
prove to be uncollectible.
31 Buyer collected P234,000 during August after allowing for P9,000 of sales discounts. Sales returns and
allowances during August totaled P2,400.
Sept. 20 Buyer wrote off a P2,000 account after learning of the company's bankruptcy.
30 Buyer collected P151,720 during September. Sales returns and allowances during September totaled
P880.
Oct. 10 Seller and Buyer made a final cash settlement.
45. What net cash proceeds did Seller ultimately realize from the factoring?
a. P389,000 c. P380,000
b. P385,720 d. P376,720
46. What was the factor's net income from the factoring?
a. P11,000 c. P9,000
b. P 3,280 d. P2,000
47. The Hinoba-an Department Store wishes to discount two notes receivable arising from the sale of merchandise in
order to meet some maturing obligations. Both notes have a face amount of P50,000 each and are due in one
year. Note A is a non-interest bearing note while Note B is to be paid with an interest of 12%. The bank rate in
discounting notes is 12%. Assuming that the notes were discounted ten months prior to maturity, the proceeds from
both notes discounted is
a. P94,280 c. P 95,400
b. P93,280 d. P103,880
48. On October 1, 2014, Canlaon Company discounted with recourse at 12% a one-year noninterest bearing note of
P5,000,000 maturing on January 1, 2015. What amount of contingent liability for this note must Canlaon disclose in
its 2014 financial statements?
a. P5,000,000 c. P4,850,000
b. P4,400,000 d. P 0
FAR-1004 Inventories
49. Inventories are assets (choose the incorrect one)
A. Held for sale in the ordinary course of business.
B. In the process of production for sale.
C. In the form of materials or supplies to be consumed in the production process or in the rendering of services.
D. Held for use in the production or supply of goods and services.
50. The costs of purchase of inventories comprise 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. Trade discounts, rebates and other similar
items are deducted in determining the costs of purchase.
The costs of conversion of inventories include costs directly related to the units of production, such as direct labor.
They also include a systematic allocation of fixed and variable production overheads that are incurred in
converting materials into finished goods.
A. True, False C. False, True
B. True, True D. False, False
51. The following are costs excluded from the cost of inventories, except
A. abnormal amounts of wasted materials, labor or other production costs;
B. storage costs, unless those costs are necessary in the production process before a further production stage;
C. administrative overheads that do not contribute to bringing inventories to their present location and condition;
and
D. Import duties
52. Which statement is incorrect regarding cost formulas?
A. Specific identification of cost means that specific costs are attributed to identified inventory.
B. The FIFO formula assumes that the items of inventory that were purchased or produced last are sold first, and
consequently the items remaining in inventory at the end of the period are those earlier purchased or
produced.
C. Under the weighted average cost formula, the cost of each item is determined from weighted average of the
cost of similar items at the beginning of a period and the cost of similar items purchased or produced during
the period.
D. The average cost formula may be calculated on a periodic basis, or as each additional shipment is received,
depending upon the circumstances of the entity.
53. When using the moving average method of inventory valuation, a new unit cost must be computed after each
A. purchase C. purchase and issuance from inventory
B. issuance from inventory D. month-end
54. The retail inventory method is characterized by
A. the recording of sales at cost.
B. the recording of purchases at selling price.
C. the reporting of year-end inventory at retail in the financial statements.
D. the recording of markups at retail and markdowns at cost.
55. To determine an inventory valuation that using the retail method under the average method, the computation of
the cost to retail percentage should
A. include markups but not markdowns C. include markdowns but not markups
B. include markups and markdowns D. exclude markups and markdowns
56. The gross profit method of estimating ending inventory may be used for all of the following, except
A. Internal as well as external interim reports
B. Internal as well as external year-end reports
C. Estimate of inventory destroyed by fire or other casualty
D. Rough test of validity of an inventory cost determined under the periodic or perpetual system
57. The use of the gross profit method assumes
A. the amount of gross profit is the same as in prior years
B. sales and cost of goods sold have not changed from previous years
C. inventory values have not increased from previous years
D. the relationship between selling price and cost of goods sold is similar to prior years.
58. Which of the following is not a basic assumption of the gross profit method?
A. The beginning inventory plus the purchases equal the total goods available for sale
B. Goods not sold must be on hand.
C. If the sales, reduced to the cost basis, are deducted from the sum of the opening inventory plus purchases, the
result is the amount of inventory on hand.
D. The total amount of purchases and the total amount of sales remain relatively unchanged from the
comparable previous period.
59. Which of the following represents the best justification for valuing the inventories at the lower of cost and net
realizable value?
A. It is easier to keep track of market value that it is to keep track of cost as market value is available from any
supplier.
B. Cost loses its relevance for the determination of cost of goods sold if the cost of inventory has been incurred in
an earlier accounting period.
C. The balance sheet valuation of inventory is the most important consideration in the preparation of financial
statements.
D. The practice of writing inventories below cost to net realizable value is consistent with the view that assets
should not be carried in excess of amount expected to be realized from their sale or use.
60. 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; C. I, III and IV only;
B. II, III and IV only; D. I and II only.
61. Lower of cost or net realizable value
A. is most conservative if applied to the total inventory
B. is most conservative if applied to major categories of inventory
C. is most conservative if applied to individual items of inventory
D. must be applied to major categories for taxes.
62. An example of an inventory accounting policy that should be disclosed is the
A. effect of inventory profits caused by inflation.
B. classification of inventory into raw materials, work in process, and finished goods.
C. identification of major suppliers.
D. method used for inventory costing.
63. When a portion of the inventories has been pledged to secure the payment of indebtedness:
A. The fact of a portion having been pledge should be disclosed in the notes to financial statements
B. The value of the portion pledged should be deducted from the value of the inventories shown in the current
assets section of the balance sheet.
C. The value of the portion pledged should be transferred from current assets to noncurrent assets.
D. The value of the inventories shown in the current assets section of the balance sheet remains the same but the
fact of having been pledged a portion of the inventories should be disclosed in the financial statements or
notes.
64. Seller Co. is a calendar-year retailer. Its year-end physical count of inventory on hand did not consider the effects
of the following transactions:
 Goods with a cost of P50,000 were shipped by Seller FOB shipping point on December 30 and were tendered
to and accepted by the buyer on January 4.
 Goods with a cost of P40,000 were shipped FOB destination by a vendor on December 30 and were tendered
to and accepted by Seller on January 4.
 Goods were sold on the installment basis by Seller. Installment receivables representing sales of goods with a
cost of P30,000 were reported at year-end. Seller retains title to such goods until full payment is made.
 Goods with a cost of P20,000 were held on consignment for a vendor. These goods were excluded from the
count although they were sold in January.
If inventory based solely on the physical count of items on hand equaled P1 million. Seller should report inventory
at year-end of
a. P1,000,000 c. P1,040,000
b. P1,070,000 d. P1,020,000
65. The Alcala Company counted its ending inventory on December 31. None of the following items were included
when the total amount of the company’s ending inventory was computed:
 P150,000 in goods located in Alcala’s warehouse that are on consignment from another company.
 P200,000 in goods that were sold by Alcala and shipped on December 30 and were in transit on December 31;
the goods were received by the customer on January 2. Terms were FOB Destination.
 P300,000 in goods were purchased by Alcala and shipped on December 30 and were in transit on December
31; the goods were received by Alcala on January 2. Terms were FOB shipping point.
 P400,000 in goods were sold by Alcala and shipped on December 30 and were in transit on December 31; the
goods were received by the customer on January 2. Terms were FOB shipping point.
The company’s reported inventory (before any corrections) was P2,000,000. What is the correct amount of the
company’s inventory on December 31?
a. P2,550,000 c. P2,500,000
b. P1,950,000 d. P2,700,000
Miller Inc. is a wholesaler of office supplies. The activity for Model III calculators during August is shown below:
Balance/
Date Transaction Units Cost
Aug. 1 Inventory 2,000 P36.00
7 Purchase 3,000 37.20
12 Sales 3,600
21 Purchase 4,800 38.00
22 Sales 3,800
29 Purchase 1,600 38.60
66. If Miller Inc. uses a FIFO perpetual inventory system, the ending inventory of Model III calculators at August 31 is
reported as
a. P152,288 c. P150,080
b. P152,960 d. P150,160
67. If Miller Inc. uses a weighted average cost periodic inventory system, the ending inventory of Model III calculators
at August 31 is reported as
a. P150,080 c. P150,160
b. P152,960 d. P146,400
68. Yontabal Company started operations in 2012. The following data are abstracted from the company’s production
and sales records:
2012 2013 2014
Number of units produced 240,000 232,500 202,500
Number of units sold 150,000 217,500 195,000
Unit production cost 4.50 5.20 5.80
Sales revenue 1,200,000 1,800,000 1,950,000
Using the FIFO cost flow assumption, the gross profit for the year ended December 31, 2014 is
a. P819,000 c. P1,068,000
b. P882,000 d. P1,072,500
69. The trial balance of Esplanade Company showed inventories of P164,000. The inventories include some goods that
have a production cost of P18,000. These goods have a manufacturing defect that will cost P6,000 to correct. The
normal selling price for these goods would be P25,000, but after the remedial work they will be sold through an
agent as refurbished goods at a discount of 20% on the normal selling price. The agent will receive a commission
of 10% of the reduced selling price. In relation to the defective goods, the company will recognize a loss on
inventory write down of
a. P6,000 c. P1,000
b. P4,000 d. P 0
70. Caravana Development Corporation bought a 10-hectare land in Novaliches, to be improved, subdivided into
lots, and eventually sold. Purchase price of the land was P58,000,000. Taxes and documentation expenses on the
transfer of the property amounted to P800,000. The lots were classified as follows:
Lot Number Selling price Total
class of lots per lot clearing costs
A 10 P1,000,000 None
B 20 800,000 P1,000,000
C 40 700,000 3,000,000
D 50 600,000 8,000,000
Purchase and improvement costs allocated for class B lots under the relative sales value method of inventory
valuation are
a. P13,485,700 c. P12,200,000
b. P10,800,000 d. P12,047,600
71. On November 15, 2014, Socrates entered in to a commitment to purchase 200,000 units of raw material X for
P8,000,000 on March 15, 2015. Socrates entered into this purchase commitment to protect itself against the volatility
in the price of raw material X. By December 31, 2014, the purchase price of material X had fallen to P35 per unit.
However, by March 15, 2015, when Socrates took delivery of the 200,000 units, the price of the material had risen
to P42 per unit. How much will be recognized as gain on purchase commitment on March 15, 2015?
a. P1,400,000 c. P400,000
b. P1,000,000 d. P 0
72. Bautista Company’s accounting records indicated the following for 2014:
Inventory, January 1 P6,000,000
Purchases 20,000,000
Sales 30,000,000
A physical inventory taken on December 31, 2014 resulted in an ending inventory of P4,500,000. The gross profit on
sales remained constant at 30% in recent years. Bautista suspects some inventory may have been taken by a new
employee. At December 31, 2014 what is the estimated cost of missing inventory?
a. P5,000,000 c. P500,000
b. P4,500,000 d. P 0
73. Compute for the cost of inventory lost in fire using the data below:
Inventory, July 1, 2013 P 51,600
Purchases, July 1, 2013 to Jan. 19, 2014 368,000
Sales, July 1, 2013 to Jan. 19, 2014 583,000
Purchase returns 11,200
Purchase discounts taken 5,800
Freight in 3,800
Sales returns 8,600
A fire destroyed the entire inventory except for purchases in transit, FOB shipping point, of P2,000 and goods having
selling price of P4,900 that were salvaged from the fire. The average gross profit rate on net sales is 40%.
a. P59,760 c. P62,660
b. P56,940 d. P56,820
74. The Bayambang Corporation was organized on January 1, 2013. On December 31, 2014, the corporation lost most
of its inventory in a warehouse fire just before the year-end count of inventory was to take place. Data from the
records disclosed the following:
2013 2014
Beginning inventory, January 1 P 0 P1,020,000
Purchases 4,300,000 3,460,000
Purchases returns and allowances 230,600 323,000
Sales 3,940,000 4,180,000
Sales returns and allowances 80,000 100,000
On January 1, 2014, the Corporation’s pricing policy was changed so that the gross profit rate would be three
percentage points higher than the one earned in 2013.
Salvaged undamaged merchandise was marked to sell at P120,000 while damaged merchandise was marked to
sell at P80,000 had an estimated realizable value of P18,000.
How much is the inventory loss due to fire?
a. P918,200 c. P856,200
b. P947,000 d. P824,600
75. On December 24, 2014, a fire destroyed totally the raw materials bodega of Bautista Manufacturing Co. There was
no purchase of raw materials from the time of the fire until December 31, 2014.
Inventories 01/01/14 12/31/14
Raw materials P 90,000 ?
Factory supplies 6,000 P 5,000
Goods in process 185,000 210,000
Finished goods 220,000 225,000
The accounting records show the following data:
Sales P1,200,000
Purchases of raw materials 400,000
Purchases of factory supplies 30,000
Freight-in, raw materials 15,000
Direct labor 220,000
Manufacturing overhead 75% of direct labor
Gross profit rate 35% of sales
The cost of the raw materials destroyed by the fire was
a. P140,000 c. P 80,000
b. P 75,000 d. P176,000
76. The records of Binmaley’s Department Store report the following data for the month of January 2014:
Sales P7,100,000
Sales allowance 100,000
Sales returns 500,000
Employee discounts 200,000
Theft and other losses 100,000
Initial markup on purchases 2,900,000
Additional mark up 250,000
Mark up cancellations 100,000
Mark down 600,000
Mark down cancellations 100,000
Freight on purchases 100,000
Purchases at cost 4,500,000
Purchase returns at cost 240,000
Purchase returns at sales price 350,000
Beginning inventory at cost 440,000
Beginning inventory at sales price 800,000
Using the average retail inventory method, Binmaley’s ending inventory is
a. P360,000 c. P420,000
b. P384,000 d. P448,000
77. Londinium Corp. values its inventory by using the retail method (FIFO basis, lower of cost or NRV). The following
information is available for the year just ended:
Cost Retail
Beginning inventory P 80,000 P140,000
Purchases 297,000 420,000
Freight-in 4,000 -
Breakage 8,000
Markups (net) 10,000
Markdowns (net) 2,000
Sales 400,000
At what amount would Londinium report its ending inventory?
a. P112,000 c. P117,600
b. P113,400 d. P119,000
😊 END 😊

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