Inventories 69 The cost of inventories th; vat are ordinaril interc Ne " Measenantetes ta Y interchangeable shall be assigned by using the FIFO o An entity shall use the same cost formula f for all inventories having a similar ‘Mature and use. For nt nature or use, differer ‘nt cost formulas may be justified. Differences between LERS for'SMEs and Full IFRS iain IFRS for SMEs Full IFRS Less guidance on measuring Guidance on measuring estimated selling costs less costs to complete and sell estimated selling costs | complete and sell Capitalization of borrowi not allowed Less disclosure is required less cost to ng costsis | Capitalization of borrowing costs is required More comprehensive disclosure Problem 4-1: (Cost at initi Aretaller Imported goods at a cost of P260,000, including P40,000 non-refundable import duties and P20,000 refundable purchase tates. The risks ana rewards of ownership of the imported Goods were transferred to the retailer upon collection of the goods from the harbor warehouse, The retaller was required to pay forthe goods upon collection. The retailer incurred P10,000 to transport the goods to its retail outlet and @ further P4,000 in delivering the goods to its customer. Further selling costs of P6,000 were incurred in selling the goods. fal recognition) What amount should the inve entory be valued? a) 240,000 ©) 260,000 ») 250,000 4) P270,000 Answer: B ‘Amount paid 260,000 Refundable tax ( 20,000) Transport cost 10,000 Historical cost 250,000 “2 tial recognition) egal ? oo parthaasd raw materials to be consumed in the Production Process for P5S0,000, including PS0,00 refundable purchase taxes. The purchase price wer funded by raising a loan of P555,000 (Including 5,000 loan-raising fees). The loan Is secured by the inventories. During January 2012 the entity designed the corporate gifts forthe customer, the design costs included: Cost of external designer, P7,000 and labor son 00. rng February 2012, the entity's production tem developed the manufacturing technique an ma ic cessary to bring the inventories to the. conditions specified in the pil sre" telulig st wate cued a testing phase; Material, net of P3,000 fawered fort the ede ot the scrapped output, P21,000; Labor, P11,000 and depreciation of plone ed th erica the meiheanoon: FS, During February 2012 the entity incurred the Nae earn ts in manufacturing the customized corporate gifts; consumable stores, rence national cn and depreciation of plant used to perform the modifications, P15,000. ee aries war ready fr alan March 12012. Woabiogeal wastage occurred in the ze development and manufacture of the corporate gifts.What is the cost of the finished Inventory of customized gifts? a) P555,000 ¢) P682,000 bb) 645,000 ) 692,000 Answer: ¢ Purchase price 550,000 Refundable tax (50,000) Additional costs 7,000 + 3,000 10,000 ‘Tasting costs 21,000 + 11,000 + 5,000 37,000 Additional manufacturing costs: 55,000 + 65,000 + 15,000 135,000 Total 882,000 Problem 4~3: (Cost at Initial recognition) fader was purchasing oll and entered Into a forward contract to buy the oll at a forward contracted price of P1,400,000. At the time of delivery the spot price of the oil Is, 1,500,000 and the forward contract had a fair value of P100,000. ‘At what amount should the oll be recorded Initially? @) P1,300,000 ‘¢) P2,500,000 b) P1,400,000" ) P4,600,000 ‘Answer: ¢ Forward price P2,400,000 Derivative asset 190,000 Cast of Inventory 1.390,000 If @ broker-trader had a forward contract for purchase of Inventory this contract would be ‘accounted for as a derivative under PAS 39 since it would not meet the normal purchase or sole exemption and when the contract was physically settied the inventory would likewise be shown at fair vaiue less costs to sel!. if however, an entity were not measuring inventory at fair value less cost to sell it would be subject to the measurement requirements of PAS 2 and would therefore have to record the inventory at the lower of cost and net realizable value. For an Inventory ‘acquired with a forward contract the cost should be the forward price adjusted for the derivative asset or liability. The oll would be recorded at the fair value on what is consist of the 1,500,000 payment for the inventory offset by a P100,000 receipt upon settlement of the forward contract. This Is.exactly the same result as if the entity had been required to setvle the forward contract immediately prior to, ard separate from, the physical delivery of the oil. Problem 4-4: (Correct Inventory) ‘The balance In Page Company's inventory account on December 31, 2014 was P1,225,000 before the following Information was considered: Goods shipped FOS destination, on December 20, 2014 from a vendor to Page were lost in transit, The Invoice cost of P45,000 was not recorded by Poze. On December 28, 2014, Pag@ notified the verwior of the lost shipment. °Inventories © Goods were In transit from 60,000 and th December 31, 2014, The Invoice cost was ® shipping point on December 28, 2014, Page What amount of Inventory should i position? * reported in the December 31, 2014 statement of financial a) P1,225,000 ee gusto Answer: c Balance per books P12. Goods in transit shipped FOB shippin ht ce ye Correct balance, December 31, 2914070 4.285.000 fer goods shipped FO8 Destination, 1 TtshiP Of the goods will be transferred to the buyer only en the 900d are actually receveg Therefore, no adjustment should be ‘made for the first item since the buyer as Of December 31, 2014 has not yet received the goods; in fact. the goods were reported lost in transit. The seller, being the owner of these goods, shal suffer the risk of loss Problem 4~5: (Correct inventory) Alca Company's Inventory at june 30, 2014 was P750,000 b: J or priced at cost and before any ni ment rentag toe ena eed 'scessary Year-end adjustment relating to the followin © Included In the © Goods shipped FOB Desti What amount should Alca report as Inventory In its June 30, 2014 statement of financial Position? a) P735,000 ) P750,000 b) P740,000 d) P765,000 Answer: c Balance per books/count 2250.00 No adjustment is necessary eltherforitem A or B. For item A, the company wes the seller, though the om was FOB Shipping point, shipment did not take place until the following month when the Goods were picked up by the ccrrler (point of sale is paint of delivery). Problem 4-6: (Correct Inventory) Violet compani’s Inventory at December 31, 2014 was P5,000,000 based on physical count Priced at cost and before any necessary adjustment for the following; Merchandise costing P200,000, shipped FOB shipping point from a véndor on December 30, 15. d and recorded on January 5, 201 Qa connie ing area were excluded from inventory although shipment na fet mea una tanuaey 2 2015, The ‘goods billed to the customer FOB shipping point on December 30, 2014, had a cost of P800,000.-n- Chapters eR SS SH NR NN ca What amount should Violet report 2s inventory in its December 31, 2014 statement of financial position? a) P5,000,000 «} PS,800,000 b) 5,200,000 Answer: D Inventory per count 5,000,000 Goods in transit from a vendor- shipping point 200,000 Goods in the shipping area (FOB shipping point) ~ shipped in January 800,000 Correct inventory 26,000,000 Problem 4~7: (Correct Inventory) The unadjusted physical inventory of Liberty Company at December 31, 2014 was P3,000,000. Other information follows: \o Goods were received and recorded on January 2, 2015 with cost of P180,000. Information revealed that the term of the shipment is FOB shipping point and these goods were shipped on December 29, 2014, : © Merchandise in the warehouse costing P240,000 was billed to the customer FOB shipping Point on December 29, 2014. These were excluded from inventory but these were shipped on January 3, 2015. How much should Liberty report as inventory in its December 31, 2014 statement of financial position? a) P3,000,000 ©). P3,240,000 b) P3,180,000 ¢) P3,420,000 Answer: ° Physical inventory before adjustments, 12/31/14 3,000,000 Goods in transit shipped FOB shipping point on 12/29/14 180,000 ‘Merchandise in the warehouse excluded from the physical count, shipped on 01/03/15 240,000 Inventory, as adjusted, 12/31/14 3,420,000 Although the merchandise in the warehouse costing P240,000 had been billed FOB shipping point on December 29, 2014, yet these were actually shipped on January 3, 2015 only, at which time, title of ownership was transferred to the buyer. Problem 4~8: (Correct Inventory) The inventory on hand at December 31, 2014 for Conrad Company is valued at a cost of 947,800. The following items were not included in this inventory amount: ‘A. Purchased goods in tran: freight charges of P1,600. B. Goods held on consignment by Conrad at a sales price of P28,000, including sales commission of 20% of the sales price. C. Goods sold to Ube Company, und2r terms FOB destination, invoiced for P24,400 which includes P1,000 freight charges to deliver the goods. The goods are in transit. t, shipped FOB destination. Invoice price-P32,000, which includesE PRIME Doint. tm L. Involce pai Goods out on consignment to Can Co oe mpany Markup on cost for al salas ig aps, een en ‘ince ot ron e corre: 2 wa y eae ‘ct COst of inventory to be "ePorted in Conran sno Orne ancial statements? 4) P1,078,809 Answer: c Per count hem C- goods sold in transit, destination hpiEe (P24,400 — 1,000 + 130%) item D~ purchases in transit, shipping Point a“ (P48,000+P3,000) ttem E— goods out on consignment ecard (P36,400 +130% + P2, 30,000 Correct cost of inventory a P4.046,800 A Goods purchased 08 (Free on Board) destination, which i in transi. shouldbe included in the Inventory of the seller since title passes to the buyer only when the buyer receives the goods. Conrad's inventory is not adjusted since these ‘Goods were not included in its inventory amount. Inventory is not adjusted for goods held on consignment since the consignor owns these goods, ‘even if the consignee-Conrad physically holds them, Goods sold FOB Destination that are in transit shouldbe included in the inventory of the seller point of shipment and therefore, should be included Inthe inventory ofthe buyer, The cont of the Inventory should include the purchase price and freight cost. Goods out on consignment are owned by the consiynor (Conrad) but the Inventory should be valued at cost. Selling price + 130% plus cost of transferring the inventory to the consignee. Problem 4-9: (Correct inventory) ; Power Company reviewed its year-end inventory and found the following items: A a) ‘costing P81,600 was standing in the shipping area when the Dal ventory sr cnt is wre cde Whe ety bose marked “Hold for shipping instructions”. The purchase order was dated December 19 but the package was shipped andthe custome was bled January 2, 2015. sick fabricated to order for a particular customer, was finished and in the an Frafootien bed 30, 2014. The customer was billed on that dat andthe machine was aes cory. THe ing P230,000 was shipped Jan. 2, 2014. trot wa venried ruary '5, 2015. The invoice showed the shipment was ma wolce was recor , December 29,2014, FOBdestinaton, aac 20, 2014, The sale was Goods costing P150,000 were sold an t that Power will "buyback" the inventory In accompanied by a repurchase agreement February 2015. -ember 31, 2014? How much is the inventory adjustment on Pes pu 600 increase P 81,600 increase d) P485,999 Increase 231,600 increaseAnswer: 8 ‘The following items should be added to inventory: ‘A. Since there was no shipment made as of 12/31/14 P 81,600 D. Merchandise sold with a buyback agreement should be properly Included as inventory of the seller 150,000 Increase 231,600 © When the seller still physically holds goods, they are assumed not to have been sold, unless these goods are produced on a special order or produced according to order or specification for a particular customer. © When a repurchase or buyback agreement exists at a set price ond this price covers all costs of the inventory plus related holding costs, the accounting standards now require that the inventory and related liability remain on the seller’s books. Problem 4-10: (Correct inventory) Marker Company has the following Information pertaining to its merchandise inventory as of December 31, 2014: Inventory on hand (including merchandise received on consignment of P20,000) 200,000 Inventory purchased with a buyback agreement 100,000 Merchandise in transit, FOB, shipping point, Including P5,000 freight cost 155,000 Merchandise in transit, Free alongside, including delivery cost alongside the vessel of P6,000 ‘but excluding the cost of shipment of P3,000 250,000 Merchandise in transit, CIF (Including Insurance costs and freight of P8,000) 175,000 What amount should Marker Company report as value of its inventory in its 2014 statement of financial position? a) 749,000 ©) P763,000 b) 757,000 ) P857,000 Answer: 8 Inventory on hand (P200,000 ~ P20,000) 180,000 Merchandise in transit, FOB, shipping point 155,000 Merchandise In transit, Free Alongsid {P250,000 — P6,000 + P3,000) 247,000 Merchandise in transit, CIF 175,000 Correct value of Inventory, 757.000 Problem 4~11: (Consigned Inventory) Popeye Company had the following consignment transactions during the year 2014: Inventory shipped on consignment to Olive, consignee P 600,000 Frelght paid by Popeye 40,000 Inventory received on consignment from Brutus, consignor 1,000,000 Freight paid by Brutus 100,000 No sales of consigned goods were made through December 31, 2014,financial position? : 2014 statement of 3} P600,000 ) 640,000 * oe Answer: 8 Goods on consignment should be include sent to Olive shoutg », Saint Company co, sale at P20,000 each and Paid P40,000 reported the sale of 30 sewing machine agreed 15% commission, signed 50 sewin in transportation ¢ S and remitted P5; 6 machines to Matthew Company for Sst. On December 31, 2014, Matthew 10,000. The remittance was net of the What amount should Saint recognize as Consignment sales revenue for 20142 a) P350,000 ¢) P510,000 >) 470,000 4) 600,000 Answer: D Consignment sales = Units sold x selling price = 30 x P20,000 = 509,009 or Remittance P510,000, * net of commission rate (100% - 15%) 85% Consignment Sales 1P600,000 Problem 4~ 13: (Consigned inventory) On December 1, 2014, Super Store received 3,000 leather Jackets on consignment from star rompany. Stars cost for the leather jackets was P1,600 each sry they were priced to sell at °2,000. Commission rate was 10%. 200 leather jackets remained What amount should Super Store report as Payable for consigned goods in its December 31, 2014 statement of financial position? a) P 360,000 9 P3.s00.000 *) 1,440,000 ) P1,800, Answer: B Payable to consignor is equal to the number of units sold by the consignee less any expense Paid by the consignee and less any amount due to consignee (Le., commission based on sales), Sales (2,000 units - 200 units, end P2,000) 1,600,000 Less: Commission (P1,600,000 x 10%) -160,000 Payable to consignor P1,440,000 i76 Ciapters el Problem 4~14: (Consigned Inventory) 8 Company had the following consignment transactions during December 2014, Inventory shipped on consignment to C Company P 36,000 Freight paid by B 1,800 Inventory received on consignment from D_ 24,000 Freight paid by D 1,000 No sales of cunsigned goods were made through December 31, 2014. What amount of consigned inventory should be included in B’s December 31, 2014 statement of financial position? a) P24,000 c) P36,000 b) P25,000 d) P37,800 Answer: D Inventory shipped on consignment to C Company P 36,000 Freight paid by B 1,800 Total inventory on consignment P.37,800 Goods on consignment, if still at balance sheet date, should be included in the inventory of the consignor. Freight on consigned goods, either paid by the consignor or the consignee, is an inventoriable cost and therefore, should be added to the cost of the consigned goods. If paid by the consignee, the freight shall be deducted against his future remittance. Remittance is made when the related proceeds of consignment sales are received by the consignee. If, however, proceeds are to be collected by the consignor, freight costs paid by the consignee plus any commissions accruing to the consignee are reimbursable cost against the consignor. Problem 4— 15: (Cost of Sales) Feelings Company sold selected merchandise on a consignment basis during 2014. Feelings’ 2014 accounting records show the following information: Inventory, January 1 P 244,000 Inventory on hand, December 31 280,000 Inventory on consignment, December 31 40,000 Purchases 1,080,000 Freight-in 20,000 Freight-out to customers 70,000 Freight-out to consignees 10,000 What amount should Feelings report as cost of goods sold in its 2014 statement of ‘comprehensive income? a) P1,014,000 ©) P1,094,000 b) P1,024,000 d) P1,354,000 Answer: 8 Inventory, January 1 P 244,000 Purchases 1,080,000 Freight-in Freight out to consignees Cost of goods available for saleInventories Less: Inventory, December 31, On hand O71 i P 290,000 In consignment 40, Cost of goods sold —410.000 330,000 4.024,000 aad cosines: i 7 inventoriable cost while freight-out is 0 delivery oe eemonh is tle to then ane! end includes those held by the consignees Problem 4 16: (Inventoriable Cost) On December 28, 2014, Lancelot Company purchased Goods costing P1,000,000. The terms were The following costs were incurred in Connection with the sale and delivery of the goods: Packaging for shipment : 20,000 Shipping 30,000 Special handling charges 40,000 These goods were received on December 31, 2014, In Lancelot’s December 31, 2014 statement of finan ical position, how much of these goods should be included in inventory? a) 1,000,000 ©) P1,070,000 b) 1,040,000 d) P1,090,000 Answer: A Under FOB Destination terms of shipment, all casts incurred in transporting the goods to the 'ver’s place shall be borne by the seller. Hence, only the invoice price f P1,000,000 shall be Paid by the buyer which shail be the basis of the inventory cost. Problem 4 — 17: (Inventorlable Cost) ‘The following information applies to Agony, Inc. for 2014: Merchandise purchased for resale 400,000 Freight-in 10,000 Freight-out 5,000 Purchase returns 2,000 How much is Agony’s 2014 inventoriable cost? a) P400,000 6) F08.000 >) 403,000 a) P423,000 ‘Answer: c Cost of purchases EADO.OND feat 10,000 Purchase returns {2.0001 Total inventoriable cost Pap8,000Freight out to customers is @ non-inventoriable cost since it is identified to the units sold and therefore charged outright at an expense and properly included in the distribution costs (selling expense). Problem 4~18; (Cost of Sales) The accounting records of Token Company show the following information for 2014: Inventory, December 31 P 290,000 Inventory, January 1 220,000 Purchases 960,000 Freight in 20,000 Freight out 60,000 Out on consignment Inventory, December 31 P 40,000 Inventory, January 1 24,000 Shipment from consignor 120,000 Freight out to consignees 10,000 Freight out 16,000 What would be the cost of sales of Token for 20147 a) 904,000 ¢) P1,014,000 b) 970,000 «) P4,024,000 Answer: A Inventories, January 1: Instore P 220,000 On consignment 24,000 P 244,000 Purchases P 960,000 Freight in 20,000 Freight out to consignees 10,000 Total available for sale P 1,234,000 Inventories, December 31: In store P 290,000 ‘On consignment 40,000 330, Cost of sales 904,000 Goods are normally transferred to a dealer (consignee) on a consignment basis, The shipper (consignor) retains title and includes the goods in inventory until the goods are sold/disposed by the consignee. Consigned goods should be properly reported at the sum of their costs and the ‘handling/shipping costs incurred in their transfer to the consignee. Problem 4~19: (Discount Lost) Datacore, a computer store in Virra Mall, Greenhills, specializes in the sale of IBM compatibles and software packages and had the following transactions with one of its suppliers: Purchases of IBM compatibles P 328,000 Purchases of commercial software package 90,000Inventories Returns and allowances Purchase discounts taken roughout the place within 5 days of pu; Year on terms 3/10, n/60. All returns and allowances took eo irchase and prior to, Payment of account. How much is the discount lost? a) P6; ©) P3600 b) P7,140 4) P9,840 Answer: c Purchases of IBM compatibles Purchases of commercial software Packages nae Returns and allowances we Multiply by discount rate “03 Purchase discounts available P 12,300 Purchase discounts taken 7 Discount lost 2 : on Problem 4— 20 (Cost Al On March 1, 2014, additional cost of P. ‘The land was subdi location) Sood Company purchased a tract Of land for 18,000,000. Good incurred '4,500,000 during th yemainder of year 2014 in preparing the land for sale vided into residential lots as follows: fetClass Number of Lots Sales Price per Lot 7 100 240,000 5 100 160,000 £ 200 100,000 Using the relative sales value method, how much should be allocated to Class A lot? a) 7,200,000 ©) P 9,000,000 b) 8,640,000 4d) 10,800,000 Answer: c lot Number Sales Relative Sales Gass of Lots Price Value Ratio Allocation A 100 x 240,000 = 24,000,000 24/60 = 3,000,000 8 100 x 160,000 = — 16,000,000 16/60 6,000,000 e 200 = 100,000 = —_20,000,000 20/60 = -2500,000 Total 69,000,000 22,500,000* * Total cost includes the additional cost of P4, 500,000. AS. general rule, allocation is based on the market value ratio. = thod of Recording Purchases) crate tet buys shirts from Ube Company and is allowed trade discounts of 20% and 10% from the list price. Canary purchased shirts on May 9, 2014 and received an invoice with a list price amount of P50,000 and payment terms of 2/10, n/30. Canary uses the net method of recording purchases. ‘At what amount should Canary record the purchases? ®) P3430 c) P35,280 35000 d) P36,000Answer: c ‘Method 1 List Price 50,000 Less: 1* trade discount (20% x P50,000) 10,000 Net 40,000 Less: 2 trade discount (10% x P40,000) {_ 4,000) Invoice price (basis of recording under the gross method) 36,000 Less: Cash discount (2% x P36,000) {20} Net purchases (basis of recording under the net method) P35,280 Method 2 Ust Price 50,000 Multiply by Net % (1" Trade Discount, 100% - 20%) 80% Multiply by Net % (2% Trade Discount, 100% - 10%) 90% ‘Multiply by Net cash discount (100% - 2%) — 28% Net Purchases 38,280 Problem 4~22: (Cash and Trade Discounts) Mluminations, inc., an interior light design company, offers both trade and quantity discounts. ‘Quantity discounts are shown below: ‘Quantity purchased 1-9 cans 10-19 cans: more than 20 cans Dealers also receive a 5% discount on list price per lighting fixture before any quantity discount Is given. Cash buyers receive an additional 2% of the total retail price. The retail price of each super light is P140. How much should be debited to Accounts Receivable account if Juan dela Cruz, a lighting specialist, purchases 35 pieces of super light on account? a) 4,196.90 ) 4,282.60 b) 4,263.00 d) 4,322.50 Answer: c Journal entry: Accounts receivable 1P4,282.60 Sales (35 pieces x P140 x .95 x.92) 4,282.60 Problem 4-23: (Trade and Cash Discounts) On June 1, 2014, Pitt Corp. sold merchandise with a list price of P50,000 to Bull on account. Pitt allowed trade discounts of 30%, 20% and 10%. Credit terms were 2/15, n/40 and the sale was made FOB destination. Bull paid P2,000 of delivery costs. (On June 12, 2014, how much did Pitt receive from Bull as full payment? a) 22,696 c) P26,656 b) 24,696 d) P26,696Inventories Answer: A Inve price (PS0,000 704 Net nh SeCount (25,200 2955“) 25,200 Net Less: Advance payment freight cost P2696 Remittance 2.000 When term Of ship, nt is FOB (Free on g —— point of destination, °ard) destination, this ‘means sh pment Is free up co the Problem 4~24: (Cost of Sales g Operating Profs Clothes, ne. maintains a markup a 60% based on Cost, i Sapte STAEE 30% of tales, ae’ sales were Pieanonn nt masse corporation record as its cost of seg f "000. How much should the nd Operating profit for the year? a) P864,000 P144,000 b) Pa64,000 432,000 ©) P300,000 P108,000 4) P900,000 432,000 Answer: c per 1,440,000 + Mark-up on cost Cont sae rat Sales 1,440,000 Less: Cost of Sales Gross Profit P 540,000 {288 Selling & Administrative Expenses (30% x P1,440,000) 432,000 Operating Profit B_108,009 Problem 4—25: (Cost of Sales) . Tape Company reported the following balances at December 31, 2015 and 2014; December 31, 2015, December 31, 2014 2,900,000 Inventory 2,600,000 900, Accounts Payable 750,000 500,000 ‘The company paid its suppliers P4,900,000 during the year ended December 31, 2015, How much should Tape report as cost of oods sold in its December 31, 2015 statement of comprehensive income? aps 350,000 4,950,000 4) 4,850,000 4) P5,450,000 Answer: Dee 82. Chapter 4 eR RU RN 2 EN Accounts payable, December 31, 2015 P 750,000 Payment to suppliers during 2015 4,900,000 Accounts payable, December 31, 2014 (500, 0¢ Purchases 5,150,000 Inventory, December 31, 2014 2,900,000 Inventory, December 31, 2015. (2,600,000) Cost of Goods Sold 5,450,000 Cost of goods sold = Beginning inventory plus Purchases less Ending inventory Problem 4-26: (Cost of Sales) Handmaids Company sells one product which it purchases from various suppliers. Handmaids’ trial balance at December 31, 2015 included the following items: Sales (33,000 units) 528,000 Sales discounts 7,500 Purchases 368,900 Purchase discounts 18,000 : Freight 4,800 Freight-out 411,000 Handmaids Company's inventory purchases during 2015 were as follows: Units Cost Total ‘Sold ‘Per Unit Cost Beginning inventory, Jan. 1 8,000 P8.20 P 65,600 Purchases, quarter ended, Mar. 31 12,000 8.25 99,000, Purchases, quarter ended, June 30 15,000 7.30 118,500 Purchases, quarter ended, Sept. 30 13,000 750 97,500, Purchases, quarter ended, Dec. 31 1.000 7.70 53,900 35,000 434,500 Additional Information: Handmalds’ accounting policy is to report inventory in its financial statements at the lower of cost or net realizable value, applied to total inventory. Cost is determined under the weighted average method. Handmaids had determined that at December 31, 2015, the replacement cost of its inventory was P8.20 per unit and the net realizable value was PS per unit. Handmaids’ normal profit margin is P1.05 per unit. The company uses the direct method of reporting losses from market decline of inventory. What is the total cost of sales for the year 2015? a) 241,100 ©) P252,780 b) 245,500 d) P264,200 Answer: icecb Inventory, January ‘add: Net purchases Purchases Freight in Purchase discounts Total goods available for sale Less: Inventory, December 31 (scp, Cost of sales edule 1) Schedule 1 rage units cost Total cost of goods + total units availa Average unit cost x units in inventory eng Total cost of available for sale ble for sale inventory end Inventor Cost Net realizable value (22,000¢ x Pa) Units available for sale less: units sold Units, end Pp Se eee el 55,600Light Company is a Wholesale, is presented below; Date Transaction June OL Inventory Balen cr = 04 Purchases on ro 12 Sales ieee 2400 19 Purchases 14, 22 Sales ae 24.00: 29 Purchases 48 1,800 27.00 Question 2: Under the FiF ’ #1234 at June 307 © Periodic inventory System, how much is the ending inventory of item a) P280,800 ) P302,400 ») 278,400 4) 316,800 Answer: D [otal units available for sate (beginning plus Purchases) 34,200 Less: Units sold 22.200 Number of units at the of the month 12,000 FIFO ~ upward accountability of units (Starting from latest acquisition then upward) Units Unit cost Cost From June 19 balance 7,200 x P26 P187,200 From June 29 purchases 4, x P27 129,600 inventory 42,900 216,800 formula assumes that the items of inventory that were Purchased or produced first are sold first and consequently the Items remaining the end of the period are those most recently purc! 19 in inventory at *hased or produced. Question 2: Under the weighted average cost p inventory of item #1234 at June 30? lic inventory system, how much isthe ending a) P278,400 c) P302,400 ) 294,720 d) P316,800 sae . Units ‘Cost per Unit Total Cost P20, Inventory, beginning 6,000 20.00 120,000 ates 9,000 24.00 216,000 June 19 14,400 26.00 274,400 June 29 4,800 21.00 Po Total 34,200 840,000Average unit cost 840,000 + 34,200 P2456 Total units available for sale 34,200 Less: units sold (10,800 + 11,400) 22.200 Units end 12,000 Inventory, June 30 (12,000 x P24.56) 294,720 PAS 2 paragraph 27 states that, Under the weighted average cost formula, the cost of each item 's determined from the weighted average of the cost of similar items at the beginning of a period ‘and cost of similar items purchased or produced during the period. The average may be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances of the entity. Problem 5 ~2: (Cost Flow ~ Average) During January 2014, Metro Company, which maintains a perpetual inventory system, recorded the following information pertaining to its inventory: Unit Total Units Units Cost Cost onHand Balance on 01/01/14 1,000 P40 40,000 1,000 Purchased on 01/04/14 600 P120 P72,000 1,600 Sold on 01/20/14 900 700 Purchased on 01/25/14 400 200 © P80,000 1,100 Under the moving-average method, what amount should Metro report as inventory at January 31, 2014? a) 105,600 ¢) P132,000 b) P129,000 d)P1S6,000 Answer: B Total cost prior to the sale From Beginning 40,000 Purchases 72,000 P112,000 Less: Cost of units sold (P112,000/1,600 x 900) 63,000 Balance after the sale P 49,000 Purchases, January 25, 2014 (400 x P200) 80,000 Total inventory, end 229.009 Problem 5-3: (Change in Cost Flow Method) Generic Company, organized in 2012 has used the FIFO method of inventory valuation. Net income reported under this method is shown below: 2012 2023 201s Net income 180,000 250,000 P-350,000 Inventory, end: Average 600,000 750,000 1,000,000 FIFO. 620,000 1,000,000 1,200,000 If the FIFO method of inventory valuation was used, how much would be the total net income for the three years? a) P_ 980,000 ©) P4,230,000 b) P1,000,000 4) P2,250,000ES 2 A a Arsmrbined net Income at Average (P180,000+P250,000+P350,000) aaa change (“in inventory, 2014 (P1,200,000 ~ P 1,000,000) 200,000 Net income at FIFO 280,000 The change in inventory for 2012 and 2013 no longer affects the combined Income. problem 5 —4: (Cost Flow ~ Moving Average) Focus Company recorded the following data pertaining to its raw materials during January 2014: Date Received Cost Issued Qn Hand Jan. 1, 2014—Inventory P8.00 3,200 units Jan. 11, 2014-issue 4,600 units 1,600 units Jan. 22, 2014-purchase 4,800 units 9,60 6,400 units How much Is the moving-average cost of the raw materials inventory at January 31, 2014? a) 8.80 ©) P9.20, b) P8.96 4) P9.60 Answer: c Cost Units Jan. 1, 2014 Inventory (P8 x 3,200 units) 25,600 3,200 Jan. 11, 2014 issuance (P8 x 1,600 units) (42,800 } (1,600) Balance P12,800 1,600 Jan. 22, 2014 purchase (P9.60 x 4,800 units) 46,080 4,800 Total P5B.880 6,400 Average Cost/unit cost (P58,880 + 6,400) =P9.20 Problem 5—5: (Cost Flow - Average) White Farm Supply's records for the first 3 months of its existence show purchases of ‘Commodity Aas follows: No. its Cost August 5,500 280,500 September 8,000 416,000 October 5,100 270,300 Total 18,600 £986,800 The inventory of Commodity A at the end of October using FIFO is valued at P363,900, Assuming that none of commodity A was sold during August and September, what value would beshawn at the end of October if average cost was assumed? 3) P351,900 c) P358,662 353,300 d) P365,700 Answer: c88. Chapter 5 “FIFO Cost Unit Cost Units Inventory, end 363,900 = 6,900"! Less: Oct purchases 270,300 8,100 Excess Sept purchases 93,600 + Ps2* = 1,800 * Unit cost of September = P416,000 + 8,000 units **Units in the ending inventory = Units identified from Oct. purchases (5,100) plus units Identified from Sept. purchases (1,800) = 6,900. 966,800 + 18,600 = P51.98 P6,900 x P51.98 = P358,662 Problem 5-6: (Lower of Cost or Net Realizable Value) The Savior Cotporation uses the lower of cost or net realizable value inventory. Data regarding the items in work-in-process inventory are presented below: Average unit cost Inventory,-end (Average) Markers Pens Historical cost 24,000 P18,880 Selling price 36,000 21,800 Estimated cost to complete 4,800 4,800 Replacement cdst 20,800 16,800 Normal profit margin as a percentage of selling price 25% 25% Question 1: What is the amount of markers inventory to be reported in Savior’s statement of financial position? a) P20,800 ).P24,000 b) 23,400 d) P31,200 Answer: c Cost 24,000 Net Realizable Value: Selling price 36,000 Less: Estimated cost to complete 4,800 31,200 ‘Cost is lower than NAV; therefore, inventory should be reported at cost. Net Realizable Volue (NRV) is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated cost necessary to make the sale. Question 2: What is the amount of pens inventory to be reported in Savior's statement of financial position? a) 17,000 ¢) P22,800 b) P18,880 ) P26,000 Answer: A Cost P18,880 Net realizable value: Selling price 21,800 Less: Estimated cost to complete 4,800 17,000 Since NRV is lower than cost, therefore, inventc.y should be reported at net realizable value (NRV).ym 5-7: (Lower of Cost or Net ue) ‘Moonlight Corporation applies the lower of cost or net \ Data regarding the items in work-in-process inventory are ncwn bgt os ee Shorts nts Historical cost P56,640 50, 000 selling price , , Estimated cost to complete pin es Replacement cost 50,400 ; y 95,400 Normal profit margin as a percentage of selling price 25% 10% under the lower of cost or NRV rule, the pants should be valued at — a) P76,800 aioe nh HAE ) P85,400 Answer: B Cost Net Realizable Value: 20,000 Selling price agate Less: Estimated cost to complete 20,400 Pe7.60 aS 2, paragraph 28 states that Net Realizable Value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary t0 make the sale. The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. The cost of imentories may not also be recoverable if the estimated costs of completion or the estimated costs to be incurred to make the sale have increased. The practice of writing inventories down below cost to net realizable value (NRV) is consistent with the view that assets should not be carried in excess of the amount, which can be expected to be realized from their sale or use. Problem 5—8 (Lower of Cost or Net Realizable Value) The closing inventory of Gender Company amounted to P284,000 at December 32, 2014. This total includes two inventory lines about which the inventory taker is uncertain, Item 2 - 500 items which had cost P15 each and which were included at P7,500. These items ive at the balance sheet date. Remedial work after the were found to have been defecti balance sheet date cost P1,800 and they were then sold for P20 each. Selling expenses were P400. item 2 - 100 items that had cost P10 each but after the balance sheet date, these were sold for P8 each with selling expenses of P150. What figure should appear in Gender’s statement of financial position for inventory? a) P283,650 c) P284,000 b) 283,950 d) P284,300 Answer: A Inventory per book 284,000 item one —no adjustment tem two 350) Adjusted value of inventory 283,680-90 i Chapter 5 Item 1 has a net realizable value P7,800 (500 x P20 ~ P1,800 - P400) which is higher thon the historical cost, therefore reported inventory is not adjusted. The net realizable value of item 2 is Tower than its cost by P350 (100 x PB ~ P150 = P65O vs cost of P1,000), therefore, inventory should be reduced by P350. PAS 10, paragraph 9 states in part that the receipt of information after the balance sheet date Indicating that an asset was impaired at the balance sheet dote, or that the amount of a previously recognized Impairment loss for that asset needs to be adjusted. For instance, the sale of inventories after the balance sheet date may give evidence about their net realizable at the balance sheet date is an example of adjusting events ofter the balance sheet date that require an entity to adjust the amounts recognized in its financial statements, or to recognize items that were not previously recognized: Problem 5-9 (Lower of Cost or Net Realizable Value) ‘The closing inventory of Colossal Company amounted to P116,400 excluding the following two inventory lines: Item one ~ 400 items, which had cost P40 each. All were sold after the balance sheet date for P30 each, with selling expenses of P2,000 for the batch. Item two — 200 different items, which had cost P30 each. These items were found to be defective at the balance sheet date. Rectification work after the balance sheet date amounted to P1,200, after which they were sold for P35, with selling expenses totaling P300. Which of the following figures should appear in the statement of financial position of Colossal Company? a) 116,400 ) P131,900 b) P126,400 ) P132,400 Answer: c Reported amount of inventory 116,400 Item one (lower or cost & net realizable value) Cost (400 x P40) 16,000 NAV (400 x P30 - P2,000) ‘10,000, 10,000 Item two (lower or cost & net realizable value) Cost (200 x P30) 6,000 NRV (200 x P35 -P1,200 - P300) 5,500 5,500 ‘Adjusted value of inventory pua1,900 Problem 5-10: (Lower of Cost or Net Reallzable Value) ‘The closing raw materials inventory of Webster Manufacturing Company amounted to P345,000 at December 31, 2014. This total includes an item of raw material (material Zip) with a cost of 100,000 with an estimated net realizable value of P80,000. Immediately after the balance sheet date, material Zip was applied to production and the cost of the finished product where material Zip was applied revealed that its net selling price exceeds the cost of producing the finished goods.‘As of December 31, 2014, what amount of raw materials inventory should Webster Company report? a) P245,000 c) P325,000° by P265,000 4) P345,000 Answer: D PAS 2, paragraph 32 stotes that Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated and expected to be sold at or above cost. However, when a decline in the price of materials indicates that the cost of the finished products exceeds net realizable value, the materials are written down to net realizable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realizable value. Problem 5-11: (Lower of Cost or Net Realizable Value) The closing raw materials inventory of Castle Building Manufacturing Company amounted to 1p450,000 at December 31, 2014. This total includes an item of raw material (material Zap) with @ cost of P150,000 with a replacement cost of P120,000. Immediately after the balance sheet date, material Zap was applied to production and the cost of the finished product where material 7aP ‘vas applied revealed that its net selling price is lower than the cost of producing the finished goods. ‘As of December 31, 2014, what amount of raw materials inventory should Castle Building Manufacturing Company report? a) 300,000 ©) 420,000 b) P330,000 4) P4s0,000 Answer: ic Inventory per book 450,000 Decline in value of inventory Zap 30,000 Adjusted value of inventory p420,000 PAS 2, paragraph 32 states that materials and other supplies held for use in the production of tpentories ore not written down below cost if the finished products in which they will be incorporated and expected to be sold at or above cost. However, when a decline in the price of sterile indicates that the cost of the finished products exceeds net realizable value, the materials ore written down to net realizable value. {such circumstances, the replacement cost of the materials may be the best available measure of their net realizable value. of Cost or Net Realizable Value) factures telecommunication equipment in three stages. There Is 2 product for each stage, but the company sells the completed f the cost structure of the telecommunication equipment as Problem 5-12: (Lower Prestige Company man market for the semi-finishe product. The following are details o! at December 31, 2014. Cost Selling Price Per unit Per unit Stage 1 300 240 Stage 2 ~ conversion cost 80 Total P380 Stage 3 — conversion cost 120 Total 500Assuming that the selling costs are immaterial, what is the net realizable of the semi-finished product in stage 1? a) P360 ) P40 b) 380 d) P560 Answer: A Estimated selling price of completed product 560 Less: Conversion costs — stage 3 P120 Conversion costs — stage 2 oe 200 Net realizable value 26 Although the selling price per unit at stage 1 is P240, the calculation of net realizable volue of the Work in process should consider the expected selling price of the finished products in which it will be incorporated (PAS 2 par. 32). The profit margin on the estimated cost of completion should therefore be considered when calculating the net realizable value of work In process if the entity ‘has the ability to dispose of the finished product at a price that exceeds the production costs. Problem 5 ~ 13: (Lower of Cost or Net Realizable Value) Rios, Inc. uses International Financial Reporting Standards (IFRS). In 2013, Rios, Inc. experienced a decline in the value of its inventory resulting in a write-down of its inventory from P240,000 to 200,000. The company used the oss method in 2013 to record the necessary adjustment and Uses an allowance account to reduce inventory to NRV. In 2014, market conditions have improved dramatically and Rios, Inc.'s inventory increases to an NRV of P26,000. Which of the following will Rios, Inc. record in 2014? a) Adebit to Recovery of Inventory Loss for P16,000. b) Acredit to Recovery of inventory Loss for P24,000. ¢)Adebit to Allowance to Reduce Inventory to NRV of P16,000. d) Acredit to Allowance to Reduce Inventory to NRV of P24,000. Answer: c Problem 5 ~ 14: (Cost Allocation) A confectioner, a chain of candy stores, purchases its candy in bulk from its suppliers. For 2 recent shipment, the company paid P3,000 and received 8,500 pieces of candy that are allocated among three groups. Group 1 consists of 2,500 pieces that are expected to sell for PO.25 each Group 2 consists of 5,500 pieces that are expected to sell for PO.60 each. Group 3 consists of 500 pieces that are expected to sell for P1.20 each. Using the relative sales value method, what is the cost per item in group 1? a) 0.166 ©) PO.250, b) 0.200 4) P0375 Answer: A SalesValue Ratio Allocation Group 1 2,500 x PO.2! P 625 13.81% P 414.36 Group 2 5,500 x PO.6¢ 3,300 72.93% 2,187.84 Group 3 500 x P1.2 P_600 13.26% 397.80 Total P4525, 100% 3,000.00 Group 1 unit cost = P414,36 = 2,500 units = PO.166ARVETHUTIES. WUss TW OL UTMET BASIS Problem 5 - 15: (Loss on Purchase Commitments) During 2014, Time Company signed a non-cancelable contract to purchase 1,000 sacks of rice at P900 per sack with delivery to be made in 2015. On Decemb er 31, 2014, the price of rice had fallen to P850 per sack. On May 9, 2015, the Com ipany accepts delivery of rice when the price is 880 per sack. In the December 31, 2014 statement of comprehensive income, what amount of loss on purchase commitment should be included? a) none c) P30,000 b) 20,000 d) P50,000 Answer: D Loss on purchase commitment [1,000 x (P900-P850)] —_—P50,000 Current loss recognition would not be appropriate when commitments ~ (a) can be cancelled, (b) provide for price adjustments, (c) hedging transactions prevent losses, or (d) price declines do not suggest reductions in sales price. Problem 5 ~ 16: (Computation of Inventory Beginning) The Classic Company sells Product A. During the year, the company moved to a new location, the inventory records for Product A were misplaced. The bookkeeper has been able to gather some information from the sales records and gives you the data shown below: July sales: 57,200 units at P100 July purchases: Date Quantity Unit Cost July S 10,000 65.00 9 12,500 62.50 2 15,000 60.00 23 14,000 62.00 (On July 31, 16,000 units were on hand with a total value of P988,000. Classic has always used a Periodic FIFO inventory costing system. Gross profit on sales for July was P2,058,750. What is the total cost and unit cost, respectively, of the beginning inventory? a) 1,345,400 and P62.00 ¢) P1,367,100 and P63.00 b) 1,353,538 and P62.38 4) P1,450,000 and P66.82 Answer: oTotal units sold 57,200 Add: Units at the end 16,000 Total Units Available for Sale 73,200 Less: Units Purchased (10,000+12,500+15,000+14,000) 51,500 Units, Beginning 21,200 Sales (57,200 x P100) PS,720,000 Less: Gross Profit 2,058,750 Cost of Sales 3,661,250 ‘Add: Inventory End 988,000 Total Goods Available for Sale 4,649,250 Less: Total Purchases (Schedule ) 3,199,250 Inventory beginning P1,450,000 Schedule 1 July 5 10,000 x 65,00= P 650,000 9 12,500x62.50= 781,250 2 15,000 x 60.00= 900,000 23 14,000 x 62.00= __ 868,000 Total Purchases 199,250 Unit Cost = P1,450,000+ 21,700 = p66.82 Problem 5 ~ 17: (Computation of Inventory Beginning) The Package Company sells Product B. During the year, the company moved to a new location, the inventory records for Product B were misplaced. The bookkeeper has been able to gather ‘some information from the sales records and gives you the data shown below: dune purchases: Date Quantity Unit Cost June 1 15,000 80.00 8 16,000 75.00 16 17,000 81.00 2B 18,000 82.00 Total $6,000 ‘On June 30, 20,000 units were on hand with a total value of P1,638,000. Package has always used a periodic FIFO inventory costing system. Gross profit on sales for June was P2,572,500. Gross profit on sales represents 35% of net sales. Package has consistently provided a 2% discount on all sales. Unit selling price is P125. What is the unit cost of the beginning inventory? a) P79.50 ) P86,93 b) 83.04 d) P90.82 Answer: 8Imoartories. Uus0 EUW we, Uther Basis Gross profit Be . ror Pre rate rr + Net of discount rate (100% - 296) 98% Gross sales 7,500,000 + Selling price P15 Units sold 60,000 Units, end —20,000 Total units available for sale 80,000 Less: Total units purchased 86,000 Units, beginning ——14,000 Cost of sales (P7,350,000 x 65%) 4,777,500 lnventory, end 1,638,000 Total goods available for sale 6,415,500 less: Purchases (Schedule 1) 5,253,000 Cost of inventory beginning 1,162,500 + units, beginning 14,000 Unit cost of beginning inventory B__g3.04 Schedule 1 June 1 35,000 x 80.00 = 1,200,000 8 16,000 x 75.00 = 1,200,000 16 17,000 81.00 = 1,377,000 23 18,000 82.00 = _1,476,000 Total Purchases 5,253,000 Problem 5 ~ 18; (Computation of Gross Profit) The Lizard Manufacturin, 'g Company was organized in 2012 to Produce a single product. Company's production and sales records for the wens . The © Period 2012-2014 are summarized belows Sales No. of Sales Units, ver 2012 200,000 1,870,000 2013 90,000 2,300,000 2014 260,000 2,210,000 Determine the gross profitin 2014 Using FIFO cost flow, a) P808,000 ©) P_ 969,000 ®) Pa3a2,000 4) P1,402,000 Answer: A BFO Sales - 2014 P: Less: Cost of sales (Schedule 1) 2,220,000 Gross profit - 2014 peggzcoa oeCost of Goods Manufactured 2012 1,530,000 2013 1,612,000 2014 1,539,000 Units, Beginning Units Produced Total Units Available Les: Units Sold Units, End Inventory, End 2012 = 140,000 x P4.50 2013 = 160,000 x 5.20 2014 = 170,000 x 5.70 ‘Schedule | Inventory — January 2014 {ending 2013) Costs of goods manufactured in 2014 Total goods available Less: Inventory, December 31, 2014 Cost of Sales Units Produced + 340,000 + 310,000 + 270,000 2012 2013 - 140,000 340,000 310,000 340,000 450,000 200,000 290,000 449,000 160,000 = 630,000 = P832,000 969,000 P 832,000 1,539,000 2,371,000 969,000 1,402,000 Unit Cost 4.50 5.20 5.70 201 160,000 270,000 430,000 260,000 170.000Problem 6 ~ 2: (Gross Profit Method Estimated Cost of Inventory) Barber Company prepares monthly income statements. A physical inventory Is taken only at year-end; hence, month-end inventories must be estimated. All sales are made on account. The rate of markup on cost is 50%. The following information relates to the month of June: ‘Accounts receivable, June 1 102,000 Accounts receivable, June 30 153,000 Collection of accounts receivable during June 255,000 Inventory, June 1 183,600 Purchases of inventory during June 163,200 How much is the estimated cost of June 30, inventory? a) P122,400 ) P193,800 b) 142,800 d) P224,400 Answer: 8 Inventory, June 2 Purchases 163,200 Total goods available for sale 346,800 Less: Estimated cost of sales (P306,000° + 150%) 204,000 Estimated inventory, June 30 242,800 Accounts receivable, June 30 153,000 Add: Collections _255,000 Total 408,000 Less: Receivable, June 1 102,000 Sales 'P306,000* 4 The gross profit method is used to estimate ending inventory when a physical count is not possible or feasible. It can also be used to evaluate the reasonableness in a given inventory ‘amount. 4 The gross profit method is generally not acceptable for either tax or annual financiol reporting purposes and is not in conformity with PAS (Phil. Accounting Standords). The main purpose is for interim/internal reporting. The gross profit method rests on the assumption that the gross profit percentage is relatively stable. Cost of sale is determined by applying the gross margin (profit) ratio to sales amount and deducting this from the sales to determine the cost ratio on soles. The cost ratio shall be multiplied by the omount of net sales.-98- Chapter 6 Problem 6~2: (Gross Profit Method -Inventory Loss) On the eve of June 15, 2014, a fire destroyed the entire merchandise inventory of Chronic Merchandising Corporation. The merchandise was not insured with any insurance company, The following data were gathered: Inventory, January 1 P 250,000 Purchases, January 1 to June 15 1,500,000 Sales, January 1 to June 15, 2,000,000 Markup percentage on cost 25% What is the approximate inventory loss as a result of the fire? a) 150,000 ) P312,500 b) 250,000 ) P500,000 Answer: A Inventory, January 1 P_ 250,000 Add: Purchases 41,500,000 Total Goods Available for Sale P1,750,000 Less: Estimated Cost of Sales (2,000,000 + 125%) 1,600,000 Estimated inventory, end, destroyed by fire 2_150,000 Problem 6-3: (Gross Profit Method -Estimated Cost of Inventory) The following information is available for the Cherubim Company for the three months ended ‘March 31, 2014: Inventory, January 1, 2014 P1,200,000 Purchases 4,500,000 Freight-in 300,000 Sales 6,400,000 The gross margin was 25% of sales. What is the estimated inventory balance at March 31, 2014? a) P880,000 ¢) P1,200,000 b) 933,000 4) P1,500,000 Answer: c Inventory, January 1, 2014 1,200,000 ‘Add: Gross Purchases Purchases 4,500,000 Freight-in 300,000 4,800,000 Goods available for sale 6,000,000 Less: Estimated Cost of Sales (P6,400,000 x 75%) 4,800,000 Estimated Inventory, March 31, 2014 4,200,000eve mtOTeS! TOSS TITS LALO METNOGS problem 6-4: (Gross Profit Method - Inventory Loss) On September 30, 2014, a flood at Dolphin Company's warehouse caused severe damage to its entire inventory. Based on recent history, Dolphin had a gross profit of 25% of net sales. The following data were gathered for the nine months ended September 30: Inventory, January 1, P_ 520,000; Purchases, P4,120,000; Purchase returns, P60,000; Sales, 5,600,000 and Sales discounts, P400,000. A physical inventory disclosed usable damaged items which Dolphin estimates can be sold to a jobber for P70,000. The company uses the gross profit method. How much is the estimated cost of inventory loss on September 30, 2014? a) 310,000 ) P380,000 b)P320,000 ) 450,000 Answer: Aa Inventory, January 1 P_ 520,000 ‘Add: Net Purchases: Purchases 4,120,000 Purchase returns 60,000) 4,060,000 Total Goods Available for Sale 4,580,000 Less: Estimated Cost of Sales (P5,600,000 x 75%). -4,200,000 Estimated inventory, September 30, 2014 P 380,000 Less: Net realizable value of damaged inventory 70,000 Inventory loss B_310,000 In estimating the value of ending inventory, sales discounts and sales allowances are not deducted from sales because there were no physical inflows of inventory. Problem 6 ~ 5: (Gross Profit Method - Inventory Loss) ‘The following information appears in Davila Company's records for the year ended December 31, 2014: Inventory, January 1, P 325,000; Purchases, P1,150,000; Purchase. returns, P40,000; Freight in, P30,000; Sales, P1,700,000; Sales discounts, P10,000; Sales returns, P15,000 (On December 31, the company conducted a physical inventory which revealed that the ending inventory was only P210,000. Davila’s gross profit on net sales has remained constant at 30% in recent years. Davila suspects that some inventory may have been.pilfered by one of the ‘company’s employees. How much is the estimated cost of missing inventory on December 31? a) P75,500 ‘c) P210,000 b) P82,500 ) P292,500 Answer: A-100- Chapter 6 Inventory, January 1 P 325,000 Add: Total Net Purchases: Purchases 1,150,000 Freight in 30,000 Gross purchases 1,180,000 Purchase returns {40,000} 1,140,000 Total Goods Available for Sale 1,465,000 Less: Estimated Cost of Sales Sales 1,700,000 Less: Sales returns —1s,000 Net sales 1,685,000 x Cost ratio 20% 1,179,500 Estimated inventory, December 31 F 285500 Less: Inventory, end per count —210,000 Cost of missing inventory P_78,300 Problem 6 - 6: (Gross Profit Method - Estimated Cost of Inventory) Lark Company sells its merchandise at a gross profit of 30%. The following figures are among those pertaining to Lark operations for the six months ended June 30, 2014: Sales ~ P200,000; Beginning inventory ~ P50,000; Purchases ~ P130,000. ‘On June 30, 2014, all of Lark inventory was destroyed by fire. What is the estimated cost of this destroyed inventory? a) P 20,000 ©) P 70,000 b) P 40,000 ) 120,000 Answer: 8 Beginning inventory P 50,000 Add: Purchases 130,000 Total Goods Available for Sale 180,000 Less: Cost of Gaods Sold (200,000 x 70%) 140,000 Estimated cost of destroyed inventory, representing ending inventory P.40,000 Problem 6 ~7: (Gross Profit Method - Inventory Loss) On September 14, 2014, a typhoon damaged a warehouse of Goodness Corporation. The entire company and many accounting records stored in the warehouse were completely destroyed. Although the inventory was not insured, a portion could be sold for scrap. Through the use of microfilmed records, the following data were gathered: Inventory, January 1 P 375,000 Purchases, January to September 14 1,385,000 Cash sales, January to September 14 225,000, Collection of accounts receivable, Jan. 1 to Sept. 14 2,115,000 Accounts receivable, January 1 175,000 ‘Accounts receivable, September 14 265,000 Salvage value of damaged inventory 5,000 Gross profit percentage on sales 32%Inpentonies: YTUSS NCVUye Oe RFLOL TELA How much Is the value of inventory loss? a) P102,600 ) P107,600 b) 105,600 4d) P112,600 Answer: A Inventory, January 1 P_ 375,000 ‘Add: Purchases, January to September 14 1,385,000 Total goods available for sale P1,760,000 Less: Estimated cost of sales (P2,430,000* x 68%) 1,652,400 Estimated inventory, end P 107,600 Less: Salvage value of damaged inventory 5,000 Inventory loss p_102,600 Accounts receivable, end P_ 265,000 Add: Collections of receivables 2,115,000 Total 2,380,000 Less: Accounts receivable, beginning 175, Sales on account 2,205,000 Add: Cash sales 225,000 Total sales P2,430,000° Problem 6-8: (Gross Profit Method - inventory Loss) ‘On October 15, 2014, a fire destroyed all the stock of equipment of Modern Equipment Center in Its rented stockroom. The records of the firm show the following information: 2013 2012 2011 2010 Sales 925,000 ‘880,000 790,000 P710,000 Cost of sales 758,500 739,200 679,400 624,800 Gross profit P1s6500 140,209 © P110,600P.85,200 Inventory, January 1, 2014 P 130,500 Sales, January 1 to October 15, 2014 960,000 Sales returns and allowances: 15,000 Purchases, January 1 to October 15, 2014 890,000 Purchase returns and allowances 12,000, Cost of stock in display room, not destrayed 85,000 How much is the estimated cost of merchandise lost in the fire of October 15, 2014? a) 120,250 c) P167,500 b) P148,600 d) P252,500 Answer: ec Year GrossProfit + Sales = = Gross Profit Rate 2013 166,500 925,000 18% 2012 140,800 880,000 16% 2011 110,600 730,000, 14% 2010 85,200 710,000 12% Fur 2014 the gross profit is therefore considered to be at 20% considering the trend.= 102 Chapter 6 ee ) January 1, 2014 P 130,500 purchases Tanury 204 Oetober 5, 2034 a Purchase returns and allowances (12,000) Total Goods Available for Sale 71,008,500 Less: Estimated Cost of Goods Sold (960,000-15,000 x 80%) 756,000 Estimated Inventory, end P 252,500 Less: Inventory on display (undamaged) __ 85,000 Fire Loss 162,500 Problem 6-9: (Gross Profit Method - Inventory Loss) On December 24, 2014, a fire destroyed totally the raw materials bodega of Weary Manufacturing Co. There were no purchases of raw materials from the time of the fire until December 31, 2014. Jnventorles Jan.4,2014 Dec. 31,2014 Raw materials P 180,000 ? Factory supplies 12,000 P 10,000 Goods in process 370,000 420,000 Finished goods 440,000 450,000 un Sales 2,400,000 Purchases of raw materials 800,000 Purchases of factory supplies 60,000 Freight in for raw materials 30,000 Direct labor 440,000 Manufacturing overhead, 75% of direct labor; gross profit rate, 35% of sales. ‘What is the cost of the raw materials destroyed by-the fire? a) 130,000 ©) P160,000 b) P150,000 ) 222,000 Answer: c Cost of Goods Sold (P2,400,000 x 65%) P1,560,000 Finished Goods, end ‘450,000 Finished Goods, beginning (440,000) Cost of Goods Manufactured 1,570,000 Goods In Process, end 420,000 Goods In Process, beginning (370,000) Factory Cost P1,620,000 Less: Conversion Cost Direct Labor 440,000 Overhead (P440,000 x 75%) 330,000 770,000 Direct Materials Used P 850,000 Less: Raw Materials Available for Used Raw Materials, beginning 180,000 Raw Materlals Purchased 800,000 Freight on Raw Materials 30,000 010, Estimated Raw Materials, end 2.169,000Factory Supplies are appropriately classified as part of fai separately accounted for. Problem 6 ~ 10: (Gross Profit Method - Inventory Loss) ctory overhead and should not be On September 15, 2015, a fire destroyed a significant portion of the merchandise inventory of Peso Wholesale Corporation. The following information was available from the records of the company: January 1, 2015 to Date of Fire 2014 Sales 450,200 530,180 Sales returns and allowances 5,100 5,980 Purchases 378,245 405,476 Purchase returns and allowances 10,295 11,110 Beginning inventory 105,650 120,160 The company determined the cost of inventory not damaged to be P69,738. merchandise, which cost P15,000, had an estimated realizable value of P5,000. What is the estimated fire loss on September 15, 20157 a) P51,684 ©) P66,684 b) P61,684 d) P74,738 Answer: A Net Sales - 2014(P530,180 - P5,980) Less: Cost of Sales, 2014 Beginning inventory P120,160 ‘Add: Purchases 405,476 Purchase returns & allowances 11,110) Total goods available for sale P514,526 Less: Ending inventory 105,650 Gross Profit Beginning inventory, 2015 ‘Add: Net Purchases (P378,245 -P 10,295) Total Goods Available for Sale ~ 2015 Less: Estimated Cost of Sales Net sales (P450,200 ~ P5,100) 445,100 x cost ratio 78% Estimated ending inventory at Cost Less: Undamaged Inventory 69,738 Not realizable value of damaged inventory __5,000 Estimated Fire Loss Problem 6 - 11: (Gross Profit Method - Inventory Loss) Damaged 524,200 100% 408.876, 115,324 BE P105,650 362,950 P473,600 342.178 P126,422 74,738 PSLss4 ‘On November 30, 2025, a big flood caused severe damage to the warehouse of Static Company. The Company suffered a big loss on its merchandise inventory, The following information was available from the accounting records of Static: aN — —a————= 104- 01/01/15 to 11/30/15 Date of Flood Merchandise Inventory, beginning P 400,000 Purchases 2,380,000 2,240,000 Purchase returns 60,000 40,000 sales 3,120,000 2,400,000 Selling expenses 120,000 100,000 Depreciation charges 40,000 36,000 At the beginning of 2015, the company changed its policy on the selling prices of merchandise in order to produce a gross profit rate 5% higher than the gross profit rate in 2014. Undamaged merchandise marked to sell at P100,000 were salvaged. Damaged merchandise ‘marked to sell at P30,000 had an estimated realizable value of P8,000. What Is the estimated inventory cost lost from flood on November 30, 2015? a) 436,000 ) P506,000 b) P4s8,000 - d) P536,000 Answer: 8 Sales, 2014 2,400,000 100% Cost of Sales, 2014 (P2,240,000 — 40,000 - P400,000) 1,800,000 _75% Gross Profit, 2014 P__600,000 25% Gross Profit Rate, 2015 (25% + 5%) = 30% Total Goods Available for Sale (P400,000 + P2,380,000 — P60,000) 2,720,000 Less: Estimated Cost of Sales (P3,120,000 x 70%) 2,184,000 Estimated inventory, end P 536,000 Less: Cost of Undamaged Inventory (P100,000 x 70%) 70,000 Net Realizable Value of Damaged merchandise 8,000 _78,000 Inventory Lost P-458,000 Problem 6 ~ 12: (Gross Profit Method - Inventory Loss) ‘On September 30, 2015, a fire at Mill Company's only warehouse caused severe damage to its entire Inventory. Based on recent history, Mill has a gross profit of 303% of net sales. The following Information is available from Mill's records for the nine months ended September 30, 2015: Inventory at 01/01/15 550,000 Total purchases received and recorded from January to date of fire 3,000,000 Total freight cost of goods purchased and received 60,000 Total credit memo received on goods purchased and received 200,000 Total discounts taken on purchases 80,000 Invoice received for goods purchased but still in transit shipped ‘on September 30, 2015, FOB shipping point 120,000 Total sales delivered and recorded from Jan. to date of fire 3,600,000 Unrecorded sales invoice for goods delivered 300,000 Total sales returns accounted and recorded to date of fire 160,000 Total sales discounts taken by customers on recorded sales 40,000en aeidleneetiieeanammeiiael ‘a physical inventory disclosed ustble damaged goods which Mill estimates can be sold toa jobber for P50,000. \sing the gross profit method, what amount of impairment loss on its inventory should Mill Company report in its December 31, 2015 profit or loss? a}, P602,000 ) P782,000 b) P662,000 d) P832,000 Answer: 8 Inventory, January 1, 2015 P_ 550,000 Purchases (P3,000,000 + P120,000) 3,120,000 Freight in 60,000 Purchase returns (200,000) Purchase discounts {80,000} Total Goods Available for Sale 3,450,000 Less: Estimated Cost of Sales Sales (P3,600,000 + P300,000) 3,900,000 Sales returns {_160,000) Net sales 3,740,000 x Cost ratio (100% - 30%) 70% 2,618,000 Estimated cost of inventory, end P 832,000 Less: NRV of damaged inventory P- 50,000 Cost of merchandise in transit 120,000 170, Amount of inventory lost — impairment loss 662,000 Problem 6 ~ 13: (Gross Profit Method - Inventory Loss) Gorgeous Co.'s pricing structure has been established to yield a gross margin of 30%. The following data pertain to the year ended December 31, 2014: Sales 2,200,000 Inventory, January 1, 2014 800,000 Purchases 1,200,000 Freight cost on purchases 50,000 Freight cost on merchandise sold 30,000 Inventory inside the company’s warehouse, per actual count on 12/31/14 160,000 Credit memo Issued to customers for goods returned & received 50,000 Credit memo Issued to customers for merchandise to be returned, 01/02/15 40,000 100,000 Sales discount Gorgeous Is satisfied that all sales and purchases have been fully and properly recorded. How much would Gorgeous reasonably estimate as a shortage in inventory at December 31, 20147 a) P573,000 ) P385,000 b) 413,000 d) P373,000 Answer: ¢eee Chapter 6 ts Inventory, January 1, 2014 P 800,000 Purchases 31,200,000 Frelght cost on purchases 50,000 Total Goods Available for Sale 2,050,000 Less: Estimated cost of sales: Net sales (P2,200,000-P90,000 2,110,000 x cost ratio 720% 1,477,000 Total estimated cost of inventory end P 573,000 Less: Cost-Inventory on hand & in transit Physical count P- 160,000 {In transit (P40,000 x 70%) 28,000 188,000 Amount of shortage P_ 385,000 Problem 6-14: (Gross Profit Method - Inventory Loss) On December 31, 2014, a typhoon damaged a warehouse of Shy Girl Corporation. The entire company and many accounting records stored in the warehouse were completely destroyed. Although the inventory was not insured, a portion could be sold for scrap. Through the use of microfilmed records, the following data were gathered: Inventory, January 1, P500,000; Purchases, P2,200,000; Cash sales, P273,600; Collection of accounts receivable (including the amount of recovery), P2,520,000; Accounts receivable- January 1; P210,000; Accounts written off, P9,600; Recovery of accounts written off, P3,600; Allowance for bad debts-January 1, P10,500; Accounts receivable, December 31, 2014, (net of required allowance}, P342,000; Sales returns, P36,000; Sales discounts, 14,400; Purchase returns, P60,000; Purchase discounts, P12,000; Freight in, P21,600; Salvage value of inventory, P60,000; Gross profit percentage on sales, 32%. The Company consistently measures doubtful accounts in percent of account receivables, How much is the value of inventory loss? a) P513,600 ) P538,080 b) 519,600 d) P574,080 Answer: D Allowance for bad debts, January 1 P 10,500 + Account receivable, January 1 210,000 Percent of uncollectible 5% ‘Account receivable, end (342,000 95%) P 360,000 Collection of receivable 2,520,000 Sales discount 14,400 Sales return 36,000 Write off 9,600 . Total 2,940,000 Account receivable, January 1 210,000 Recovery 3,600 213,600 Sales on account 2,726,400 Cash sales 273,600 Total sales 3,000,000 Less: sales returns 36,000ey Lee ee eg eT | OE Rael Net 2,964,000 Cost ratio x 68% Estimated cost of sales P2,015,520 Inventory, January 1 P 500,000 Purchases 2,200,000 Purchase returns (60,000) Purchase discounts (12,000) Freight in 21,600 Goods available for sale 2,649,600 Estimated cost of sales 2,015,520 Estimated cost of ending inventory P 634,080 Less: Salvage value of inventory 60,000 Inventory loss 2.574.080 Problem 6 ~ 15: (Retail Method) At December 31, 2014, the following information was available from Empire Co.'s accounting records: Cost Retall Inventory, January 1, 2014 P 220,500 P 304,500 Purchases 1,249,500 1,732,500 Additional markups -0- ——§3,000 Available for sale 1,470,000 2.100.000 Sales for the year totaled P1,659,000. Markdown amounted to P21,000. What is the cost of Empire’s inventory at December 31, 2014 under the approximate lower of average cost or market retail method? a) P294,000 ) 420,000 b) 323,400 d) 462,000 Answer: A Cost Retall Inventory, January 1, 2014 P 220500 —P-_304,500 Purchases: 1,249,500 1,732,500 Additional markups 0. 63,000 Goods available for sale P4,470,000 2,100,000 Sales 1,659,000 Markdowns 21,000 -1,680,000 Estimated ending inventory at retail P 420,000 Multiplied by cost percentage 70%* Estimated ending inventory at ave. cost B.224,000 Cost percentage = P1,470,000 + P2,100,000 = 70%* Certain industry groups may use the retail inventory method but PAS did not provide details on how to apply the method, nor did it address the variations of the technique. Retailers use the conventional retail method as a method of estimating the cost of ending inventory. The retailers can take physical inventory at retail prices or estimate the ending inventory at retail, multiply the cost to retail ratio to convert the inventory at retail to its estimated cost.the cost percentage but markdowns are excluded (2) Average - this method len by combining the beginning inventory and the net purchases (including net morkat determine a single cost to retail ratio, Problem 6 ~ 16: (Retail Method- Average ) Sultan Co. uses the retail inventory method to estimate its inventory for interim Purposes. Data relating to the inventory computation at june 30, 2014 are as follows: 08, The retall method may be used under among other assumptions (1) the lone a he et at overage est oc market - under ths method, adoltiona! markups are iacluded in the eres Puttion of ccomplishey wns) to statement cost RETAIL Inventory, January 1 P 820,000 P1,262,800 Net purchases 2,280,000 3,607,200 Net mark-ups ‘450,000 Net markdowns 320,000 Sales 4,350,000 Sales returns 300,000 Employee discount 100,000 Sales discount 80,000 Normal shrinkage 50,000 ‘What is the estimated cost of June 30, 2014 inventory using the average approach? a) P466,000 ©) P616,000 b) 496,000 ) P800,000 Answer: 8 cost. RETAIL Inventory, beginning P 820,000 1,262,200 Net purchases 2,280,000 3,607,200 Net mark-ups ‘450,000 Net markdowns £320,000) Total goods available P3,100,000 + 5,000,000 = 62% Sales 4,350,000 Sales returns { 300,000) Employee discounts 100,000 Normal shrinkage —50,000 4.200.000 Inventory, June 30 at Retail P 800,000 x cost ratio ——h2% Estimated inventory at Cost, June 30, 2014 Under the average method, it assumes that ending inventory consists of total goods available for sale. The cost-to-retail ratio is computed by dividing the cost of goods available for sale by the retail value of these goods adjusted for both net markups and net markdowns. P496,000 Problem 6 ~ 17: (Retall Method - FIFO) ‘The Bony Department Store uses a calendar year and the FIFO retail inventory method (assuming stable prices). Information relating to the computation of the inventory at December 31 Is as follows:ee a cost RETAIL Inventory, January1 —P-320,000 P 800,000 sales 5,800,000 Purchases 2,100,000 6,000,000 Freight-in 70,000 Net markups 400,000 Net markdowns 200,000 What Is the ending inventory at cost at December 31 using the FIFO retail inventory method? a) 420,000 ) 440,000 b) P430,000 d) P460,000 Answer: A Beginning inventory, January 1 “Pp 800,000 Add: Net Purchases Purchases 6,000,000 Markups ‘400,000 Markdowns 200,000) 6,200,000 Total Goods Available for Sale at Selling Price 7,000,000 Sales 5,800,000 . Estimated Inventory, end at Selling Price 1,200,000 Inventory end, at cost (P1,200,000 x 35%) 420,000 Cost Retail Ratio Inventory, beginning P 320,000 + P 800,000 = 40% Net purchases 2,170,000 + 6,200,000 = 35% When the retail inventory method is used and the estimated retail inventory end is lower than retail net purchases it means that the estimated retail inventory was from the retail net purchases. So to convert the retail inventory end to cost is to use the net purchases ratio ‘multiplied by the estimated retail inventory end. However, when estimated retail inventory end exceeds the retail net purchases, it means that no ‘amount of retail net purchases was sold and part of the retail inventory beginning are still included in the estimated retail inventory end, therefore it is necessary to determine a separate ratio of net purchases and inventory beginning. The net purchases include both net mark-ups and net markdowns. Problem 6 - 18: (Retail Method) Horseshoe Corporation uses the FIFO retail method of inventory valuation. Following are the Information available: Gost Retail P 240,000 P.600,000 Beginning inventory Purchases 1,200,000 2,200,000 Net markups 200,000 Net markdowns 400,000 1,800,000 Sales revenue-110- Chapter ¢ Ifthe lower of cost or market rue is deregarded, what would be the estimated cost of ena ng inventory? a) P 1,100,000 c) P1,280,000 b) 1,232,000 d) P1,320,000 Answer: c Cost Retall Beginning inventory P 240,000 —P_ 600,000 Purchases 1,200,000 2,200,000 Net markups 200,000 Net markdowns _ { 400,000) Total goods available for sale P1,440,000 2,600,000 Sale 400,000) Inventory at retail P2,200,000 Cost Retail Inventory, beginning P 240,000 + P 600,000 = ‘Net purchases 1,200,000 + 2,000,000 = Goods available for sale ‘1,440,000 2,600,000 Under the FIFO (retail) method, the ending inventory is composed of the latest purchases, or from ‘net purchases and from the inventory beginning. Net purchases 2,000,000 x 60% Inventory beginning P200,000 x 40% Estimated cost of inventory end When estimated retail inventory end exceeds the retail net purchases, it means that no amount of retail net purchases was sold and part of the retail inventory beginning are still included in the estimated retail inventory end, therefore it is necessary to determine @ separote ratio of net purchases and inventory beginning. The net purchases include both net mark-ups and net markdowns. Problem 6 ~ 19: (Retail Method) Presented below Is information related to Carnation, Incorporated. Cost Retail Inventory, January 1, 2014 P 250,000 P_390,000 Purchases 914,500 1,460,000 Purchase returns 60,000 80,000 Purchase discounts 18,000 0- Gross sales (after employee discounts) oO 1,260,000 Sales returns 0 97,500 (Markups 0 120,000 Markup cancellations 0- 40,000 Markdowns 0. 45,000 Markdown cancellations 0 20,000 Freight-In 73,000 0 Employee discounts granted 0 8,000 Loss from breakage 0 2,500oe eee ‘Assuming that Carnation, inc. uses the conventional retail inventory method, how much would be the cost of its ending inventory at December 31, 2014? a) 365,085 ©) P410,760 b) 391,200 d) 420,280 Answer: © Cost Inventory, January 1, 2014 250,000 P 390,000 Purchases 914,500 1,460,000 Purchase returns (60,000) (80,000) Purchase discounts (18,000) Markups 120,000 Markup cancellations ( 40,000) Markdowns (45,000) Markdown cancellations 20,000 Freight in 79,000 Total Goods available for Sale P1,165,500 1,825,000 Less: Sales 1,260,000 Sales returns (97,500) Employee discounts 8,000 Loss from breakage 2,500 1,173,000 Estimated inventory, 12/31/14 at Selling price P 652,000 x Cost Ratio _63%* Inventory,12/31/14 using conventional method P_410,760 Total Goods Available for Sale at Cost 1,165,500 + Total Goods Available for Sale at Retail/Selling Price excluding net markdowns: Total goods available at retail 1,825,000 Add: Net markdowns Markdowns 45,000 Markdown cancellation 20,000 __ 25,000 _1,850,000 Cost ratio using conventional — 63%" © The conventional or conservative approach is similar to the approximate lower of average cost or market. © If the conventional or conservative or approximate lower of average cost or market method is used, the ratio of cost to retail is determined by dividing the total cost of goods available for ‘sale (TGAS) by the total retali price of the goods ovallable for sale (excluding net markdowns). Problem 6 ~ 20: (Retail Method) Happiness Department Store uses the retail Inventory method to approximate the lower of cost or market. The following Information pertains to the month of August: Cost Retall Cost of goods available for sale 720,000 900,000 Net markups (excluded from goods available for sale) 100,000 Net markdowns (excluded from goods available for sale) 40,000 Sales 680,000Ty -112- Che ‘What was the appropriate Inventory at the lower of average cost or market at August 317 7 a) P201,600 «) P224,000 b) 210,000 d) P230,400 Answer: A Cost of goods available for sale at retail before markups & markdowns Net markups Net markdowns Cost of goods available for sale at retail Less: Sales Inventory, end at Retail/Selling Price Cost Ratio: Cost of goods available for sale at cost” + Cost of goods available for sale at Retail/Selling Price excluding net markdowns Cost ratio Inventory end at Cost (P280,000 x 72%) Problem 6~ 21: (Retail Method) Shipmark, a department store, uses the retall inventory method to estimate inventory. The following data are available for the year ended December 31, 2014: Cost Retail Inventory, January 1 61,700 105,700 Purchases 128,100 215,800 Purchase returns 2,100 3,500 Sales 236,500 Sales returns 6,200 Freight in 3,100 How much would be the inventory pilferage if the physical count revealed an ending inventory at retail of P78,0007 a) P3,880 €) P 9,700 b) P5,820 4) P10,700 Answer: 8 Gost Retail Inventory, 01/01 P 61,700 105,700, Purchases. 128,100 215,800 Purchase returns (2,100) (3,500) Freight in 3,100 Total goods available for sale 190,800 + P318,000 = 60% sales (P236,500) Sales returns 6,200 230,300 Inventory, 12/31 at retail P 87,700 Inventory, 12/31- physical count (. 78,000) Estimated inventory loss at retail P 9,700 Multiply by cost ratio __ 60% Estimated inventory loss at cost 25.820en, cle de ae Te ge pe pa problem 6-22: (Retall Method) Hopeful Trading uses the retail inventory method to estimate its inventory for interim financial statement purposes. Data relating to the inventory computation at September 30, 2014 follows: Gost Retall Inventory, July 1, 2013 P 360,000 500,000 Purchases 2,040,000 3,150,000 Net Mark-ups 350,000 Net Mark-downs 250,000 Sales 3,410,000 Normal Shoplifting Losses 40,000 What is the estimated cost of inventory under the approximate lower of average cost or market retail method? a) 180,000 c) P204,000 b)P192,000 d) P300,000 ‘Answer: A . cost ‘RETAIL Inventory, 07/01/14 P_ 360,000 P 500,000 Purchases 2,040,000 3,150,000 Net markups 350,000 Net markdowns {_250,000) Total Goods Available for sale 2,400,000 3,750,000 Less: Sales 3,410,000 Normal shoplifting losses 40,000 3,450,000 Inventory at Retail, 09/30/14 P_300,000 Goods available for sale at cost. 2,400,000 + Goods available for sale at Retail/Selling price (without deducting net markdowns (P3,750,000 + P250,000) 4,000,000 Cost ratio, 60% Inventory, 09/30/14 at Retail P 300,000 x Cost ratio Ox Inventory, 09/30/14 at Cost, P__180,000 Problem 6 ~ 23: (Retall Method) Wishful’s inventory shows the following information at December 31, 2014: Inventory, beginning: Cost P 560,000 Retail 1,400,000 Purchases: Cost 4,960,000 Retail 110,320,000 ~ Freight-in 150,000 Mark-up 1,000,000 Mark-up cancellation 120,000 Mark-down 500,000 ‘Mark-down cancellation 100,000 Sales 10,000,000 Estimated normal shrinkage 2.5% of SalesWishful uses the retail Inventory method of valuing its inventory, How much is the estimated cost of inventory in 20147 a) 460,000 b) 877,500 Answer: 6 tnventory, beginning Purchases Freight-in Net mark-up (P1,000,000 ~ P120,000) ‘Net mark-down (P500,000 ~ P100,000) Total Goods Available for Sale Less: Sales Shrinkage (2.5% x P10,000,000) Inventory End at Selling Price Inventory ‘Add: Total purchases Purchases Add: Freight in Total goods available for sale at cost ©) P_ 990,000 4d) 1,072,500 Gost P 560,000 4,960,000 150,000 5,670,000 110,000,000 250,000 4,960,000 150,000 + Total goods available for sale at retall/seling price excluding net markdowns (P12,200,000 + P400,000) Conventional cost ratio. Inventory at Cost (P1,950,000 x 45%) Retall P 1,400,000 10,320,000 880,000 5,110,000 5,670,000 12,600,000 ___ 45% P_877,500 When the problem does not specify the method to be used, then it should be the average cost, using a lower of cost or market approach. Under this method, net markdowns are not deducted in the total goods available for sale at selling price for purposes of determining cost ratio.