Problem 11-19 (AICPA Adapted) as Space of eet tr, Deore Co a ae ear aan nae Othe vce worn, 104 wit abd it reiden cm weg ne iden Lot class Number of lots Sale price per lot nN 100 240,000 a 10 160,000, c 00 100,000 Using the relative eales value method, what amount of shoul be allocted to Class A lots? ost ‘3,000,000 8. 3,750,000 & 6,000,000 4. 7,200,000 Problem 11-20 (PHILCPA Adapted) Elixir Company bought a 10-hectare land in Novaliches to be improved, subdivided into lots and eventually sold. The purchase price of the land was P5,800,000. ‘Taxes and documentation expenses on the transfer of the property amounted to-P80,000. Lotelass Number oflote Sellingprie perlot ‘Totalclearing cost A 10 100,000 Xe a 0 30,000 100,000 é 0 70,000 300,000 80 60,000 ‘00,000 What amount should be allocated as total cost of Clase B lote under the relative sales price method? 302 CHAPTER 12 LOWER OF COST AND NET REALIZABLE VALUE, TECHNICAL KNOWLEDGE ‘To know the measurement of inventory in the statement of financial position. To explain the lower of cost and net realizable value basis of measurement. To account for inventory writedown using allowance ‘method and direct method. To know the treatment of purchase commitments in relation to lower of cost and net realizable ‘measurement.Measurement of inventory ovides tbat A ep a atten ‘The measurement of inventory at the lower of cost and ‘Tealisable value is now known aa LCNRV. a Net realizable value lye ot NRV is the estimated gelling price in the ordinary cou tralia vb of business leg the estimated oD the estimated et ota ‘The cost of inventories moy not be recoverable under the following cireumstances: 4 The inventories are dams ', The inventories have become wholly or partially obsolete, . The selling prices have destined. 4. The eimai ent oem or the sinated stot lapel han increased — ‘The practice of writing inventories down below cost to net realigable value is consistent with the view that assets shall Mo be coried in excess of amounts expected to be realize Thai sale oF use 304 petermination of net realcale value wees nal ae Seer te is nol anaropriate wo write down inventories énsad-om a. ossifcat try, fo example, rished goods oF all asec inn parca industry o geographical sR In some circumstances, however, it may he appropiate to qoup simile or relied em ‘Tis may bo the ca wit tems a inventory relating othe Tame product line that have similar purpose, are produced and ame geograptical area and cannot be ‘practically evaluated separal ed jals held for use in production are 2 down MAMI at Ue Galahad oroducte in which Ub Palcarated are expected to be Sold at OF ABOVE cost. a However, when a decline in the dicates that the cost of the reducis exceeds net Te: ‘tater ve ween VE Insuch circumstances, the replacement cot of materiels may ‘e the beat evidence of net realizable value Accounting for inventory writedown ea eee SHanen ier oeam is recogni ‘Methods of accounting for the inventory writedown ‘a. Direct method or cost of goods sold method 1. Allowance method oF Toss metnod——— eeeDirect method ‘The inventory is recorded at the lower of cost or net realizable value. ‘Tis met ilo neo stot ds ld mah” ossonnventan.tiedows not accounted for separate enh ct fen sl wv Allowance method ‘The inventory ie recorded at cost and any-loss.on inventory wanted for-soparataly-— ‘eta is accounted ‘This method is also known a ‘ss metho” because a les account writedown’ is doited and a valuation asrount "lowanee 15 in eedited Tenet eth allwanc oun in ase rd oe mac depending on he il Talim vlu ofthe inventor ot yearend tho required allowance nereses, an additonal oss recogized. Xie roid sian daca,» gi on reer of teuy ‘uritedown is recorded ——— = Hwee the ein i ined oy othe eent of he ewan bam, Preferably, the allwance method is uted in order thatthe effets cof wmtedown and reveal of wrtedown can be ceary identified Aza mitir of fc, PAS 2 pererph 9, reawirs dma _ ‘he aman of any invent wotedown and she-eoUnE U4 seaman rts 306 Illustration - Inventory data on December 81, 2019 Cost NRYLCNRV category A 110.000 1,000 100.000 B e000 = tao £80,000 c 00000 © _64cc00 600,000 Subtotal 1.400.000 1,490,000 category? D 2000000 1,900,000 1,800,000 E 1180000 1560000 1.500.000 Subtotal Category e 1,500,000 @ 40.900 Subtotal 100.000 Grand total 8.000.000 LONRYV iter by item or individual Cost Rv Category 1 1.400.000 1,490,000 Category 2 500.000 3,460,000, Category ‘uo000 3.180.000, LONRY by category Cost LONRV by total ‘The inventory is measured at the lower of cost and net retlizable applied on an item by item or individual basis. Cost December 31,2018 $000,000 Netreaizable value 7,850,000 150,000 Inventory writedown 380.000 307Direct method ‘The inventory is recorded at the lower of cost or NRV. Inventory December 3, 2019, 180,000 ‘income summary 11850,000 “The ose on iaventory writedown of P150,000 is not accounted fbr separately. — ‘The entry wil have the effect of increasing cot of gonds told because the NRV is lower than cost. Arner mad a Investor December 31,2018 1,000,000 Tacome summary 8,000,000 Jasaoninventan eredowe 150,000 emus helene Pater ae The loe-on inventors wzitsdown is inelusied in the computation af cost of foods ‘he allougnee for invent aitedown i potented ab deduction froar Oe inventory. Inventory December 31, 2018, at cost +3.00,000 ‘Alowanos for ientary weitedorn (Cas,000) [Notrealzabe value 308 Continuing illustration ‘assume on December 31, 2020, the total eostof the inventory fs P8,600,000 and the net realizable value is P8.400,000. Direct method ‘Again, under this method, the inventory is simply recorded atthe lower amount, inventory is simply resorien ‘Thus, the journal entry to record the inventory on December 31, 2020s toventary-December,2009 8.40000 ‘neuen 4000 Allowance method cont - December, 2020 .sin000 Retreats value sumo Required allowance December 3, 220 ‘pan ince ~Dseor 2019 ____1000* Decrease in allowance 00) ‘The dgereate in allowance isa reversal ofthe Tegelitn nal roordad a air on rover of wstedown- a ————————— Alowanceferisweninstadonn 0,000 Gainon revere of inventory widow —— 0,000 “The gain on reversal of inventory writedown is presented as a deduct goods old. ‘eversal cours ‘The amount f inventory recognized as an expense ofthe period is actually the cost of goods eold during the period.Another illustration coat tps —2mnsen_ Invectary-Desember: coe 6.000009 Setraabe vase sme Direct method zi Goode availabefor sale Inventory December 31 $300,000 Cota good eold Bam Note that under direct method, the inventorywhether— beginning or ending, is presanted atthe lower amount. i aed price ad ed han already been made for futre © Bisse ted See np ma gua. ‘Where the purchase commitments are or unusual it required inthe accompanying noted satenenio— ‘Any losses which are expected to arise from firm and ‘Boncancelable commitments shall be recognized. I there is te hae bea ee oe ane i period of ‘the prive-detline. — [Note that a purchase commitment must be noncancelable in frder that alos purchase commitment ean be recognizes. ‘Thus, if atthe end ofthe reporting period, the purchase nrc falls ed for asa defo Allowance method Inventory January 1, toost $000,000 Netpurchases —— 20,000,000, Goud avaiable for eal 25,0000 Inventory - December 31, atcost (6.000.000) Cost of gods sol BaToroventory writedown {essen inventory writodowa or current year Cost ofgondssad after inventory writedown Required allowance December 31 {6,00,000- 8,300,000) Required allowance ~ January 1 (5,000,000 450,000) Increase in allowance ~lossonwritedown 000,000 700.000 $00,909, 200.00 [Note that whether direct method o allowance method, the cost of ‘gods sold must be the eame. ee 310 ‘el the rnd ice he ence sex ‘Garmpathaecommtnents and nerd tosnemated aby oa Iiustration ‘The contract purchase price is PS00,000 and the replacement cost at yearend ip P450,000. The market decline of P80,000, 1 recorded as follows —- REALE aeeamatees se HITS phone Spon lied othe Toy a ae RT cae et ans ed as current Liability 50.000 Wee gas yn ed rae amar ciao set Seal ee STE orphan commitment —Somm5— aaa 00,900_" su aLONRV Adaptation a seat asta ne pater atroner e Prero ae ee neve ping Yo Hess ay Aang, ch mare pt i ee saa However, the amount of gain to be nesngniced is limited ta the las on purchase cammitnant previously recorded, sly recor ‘Thus, in the preceding illustration, ifthe replacement cost of {thepurchace commitment is P600,000 when the actual purchase {i made, the journal enry to record the actual purchase is: Purchases 0000 — Enimated baby forpurchase commitment 50.000 — ‘Acsountspaeble 00,000 — Gainon purchase commitment 20.000 — ‘The purchase is recorded at P500,000 because the purchase commitment of PS00,000 is lower than the replacement cost af 600,000, “The gan on purchase commitment i classified as other income, om phase corset nape? we ether i If the replacement coat of the purchase commitment is 480,000 w) the journal entry ‘tg record the actual purchase is Purchases wee | atimated ability fr purchase commitment 60,000 ‘Accounts payable ou Gainon purchate commitment ‘The purchase is recorded at-P480,000 only because the ‘Feplacerent corti lower than the purchase commitment of soo. ee ‘The gain on purchase commitment isthe increase in market rit fem 460,000 a yearend to 480.000 oh the date of factual purcha sin hh The corrxing amount of inventories pledged as security for liabilities. Disclosures With reapect to inventories, the financial statements all disclose the following: ah sates 1. The oesuntinlicies adapta in maasuringinvrtre, including the east forma used b Thetotat Lofinventories and the earring tout in clasbeations applet the nf — amount in classications aPBPOp Common classifications of inventories are merchandise, production supplies, goods in process and finished goods The cartes aut of Snventoriaa carried ot fair value lees eo of spo di. The omount af inventories recognized during the period. 2. The amount of any writedown of inventories recognized as as exper period. £ The amount of reversal of writedown that ie recognized asin. The Grcumetanes or evnts that le to rover of wwritedown of inventories ——_— 318 sn expense,‘Agricultural, forest and mineral products a4, provides that inventories of agricultural, ASD Ee cunara products are measured at net realizable ‘lug at certain stages of production. ‘Accordingly, egvioultursk-crope that have beenchareested or ‘Minural products that have been extracted are measured at ‘et reliable value: — fa When a sale is assured under a forward contract or government fuarantee, Wise Bamazeious mara exits and ther isa ae wa Commodities of broker-traders wvides that commodities of 1d at fair value less cost of PAS 2, paragraph broker traders are meas isposal. PERS 12, paragraph 8, defines (air value ofan asset as the price thot would be received 19 sell the asst in an orderly transaction between market participants Brokertraders are thre who uy and sell commeditien for others or on their own account. The inventories of broker-traders are principally acquired with the purpose of selling them in the near “uture and generating a profit from Ductuatons in prise or broker-traders" mary —— 34 QUESTIONS 1, What is et realizable value? 2. How isthe mensuroment at LONRV applied to inventory? ‘4, Explain the accounting fr inventory writedown. 4, Explain the two methods of accounting for inventory ‘wrtedown. 5. What are purchase commitments? 6. When is a oss on purchase commitment recognized? 7.When is a gain on purchase commitment recognized? 8. What are the necessary disclosures with respect to inventory? 8 Explainthe measurementof agricultural, forest and mineral products at certain stages of production. 10, Bxplain measurement of commodities of broker-traders. 318PROBLEMS Problem 12-1 (AA) ‘The inventory of Horny Company at the end of the earrent ear in to be recorded atthe lower of cost and net realizable value. Item Units Cost Estimated sales price Cort of A 1000120 180 a B10 0 10 2 c 120 180 Yo x D 1s 0 10 2 5 L701 0 o Required: Determine the inventory value applying the lower of co and net realizable value Problem 12-2 (AICPA Adapted) Prime Company manufactures and sells four products, the inventories of which are pried at cost or net realizable value whichever is lower. A normal profit of 30% is ust ‘maintained on each product. ‘The following information is compiled at year-end: Original Couto Batiated Normal Product St" dinpore salingpice sallog pce 1 ™ am 2: & = = i fs % oo Fy $f 1am Ey Required: Determine th uni vale for each produt applying the lower of ot and net realizable valve in measuring inventory. n6 Problem 12-3 (IAA) Winter Company provided the following inventory data at the end of first year of operations: Cot | NRV ‘Ske 2.200.000 2.500.000 Base 1700000 1.300.000 ‘Skiequpment Tmo — ‘sc0.000 Sliapparel, so000 500,000, Required: Prepare journal entries to adjust the ending inventory under: ‘a. Direct method . Allowance method Problem 12-4 (IAA) White Company carried four items in inventory. The following per-unit data relate to these items at the end of first year of operations Unite Cont Sales price Sellingcost Normal prot ‘category A %5900 105130 as 2 8 mo00 8 90 0 io Caters cdo 50s 5 5 B doo 55, 8 6 Required: Calculate the value of the inventory under the following approaches: ‘a. The LCNRV is applied to the individual inventory item b. ‘The LCNRV is applied to the inventory category €. The LCNRV is applied to the inventory as @ whole 317Problem 12-5 (AICPA Adapted) ‘Tarmac Company prepared atrial balance at year-end which included the following accounts Sales (100,000 unite at P1S0) 18,000.00 Stiedacount 1.000.000 Purchases 900,000 Parahase discount ‘oom ‘Th very purchase ding te yer var a allow: Unit Unit cot Totten Bexeigimentg. taney! 00 @ 1200 Reinet netics smo ot Taro Pane garetedeisoma” | 40009 50000) Recher Surerenedye 0 so 7 woe Pith, guneretedbeest_togon” 5) _“sooen ome iowomro ‘The accounting policy isto report inventory at the lower of cast end not realizable value applied to total inventory. Cost is determined under the Eratin, Sra-out method, ‘At the beginning of current year, the entity reported a ‘allowance for inventary writedown of P400, 000. ‘At year-end, the entity determined thatthe replacement cost of inventory was P70 por unit and the net realizable value was P12 per unit. The normal profit margin is PIO per unit. Required: 1, Prepare a schedule of cot of goods sold for the current year, 2 Prepare journal entries to reeard the ending in ee ee ig inventory and Problem 12-8 (AICPA Adapted) On December 31, 2019, Naysayer Company has outstanding purchase commitments for 10,000 gallons at P200 per gollon Erraw material to be used in the manufacturing process Required: Prepare journal entry under each of the following aestmptions The market price on December 91, 2019 is P220. bb. Itis expected that the market price will decline to PA70 in early January 2020 ce. The market price on December 81, 2019 is P170. 4, The market price on December 31, 2019 is P170. On January 31, 2020 when the 10,000’ gallon shipment is ‘reoeived, the market price is PISO. ‘The market price on December 31, 2019 is P170. On. Jenuary 31, 2020 shen the 10,000 gallon shipment is received, the market price is P21O. Problem 12-7 AA) On November 15, 2019 Yeassyer Company entered into a feommitment to purchase 100,000 barrels of aviation fuel for 56 per barrel on March 81, 2020. By December 31, 2019, the purchase price of aviation fuel hha fallen to PSO per barrel. However, by March 31, 2020, when the entity took delivery tf the 100,000 barrels the price of aviation fuel had risen to P54 per barrel . Required: Prepare journal entry on December 31, 2018 and March 31, 2020. 319Problem 128 (AICPA Adapted) deal iventory at year-end, Cherry Company aa sped the chocolate inventory on # FIFO basis at ‘elcoo.000 with a replacement cost of F2,50,000. Cherry Company estimated that, after forther pressing ext roo 00, the coma could bo sod as finished candy bara er P.000:000. The normal profit margin is 10% of sles, What amount shou be reported as chooolato inventory at year. end? a. 2800000 3.600.000, fe. 2.400.000 4 2,500,000, Problem 12-9 (IFRS) Gatekeeper Company has two producte with cost and sellin pice ne aiowss emer uae ‘Based on a ph ProductX Product ¥ 2.000.000 8,900,000, soup Eetetetee os teomso Hamden som. Seettdehasreencsr ‘eam “Sonam [At year-end, the manufacture of inventory haa been Siupicted but no eng cot has yet been incurred 1. Under LONRY by individual item, the inves ‘measured at what amount? Sanat 2. Under LONRV by total, the inve Under LONRY by ttl the inventory shall be measured 3.300000 320 Problem 12-10 (IFRS) starstruck Company ie retailer of Italian furniture and has er malor product Lines At year-end, the entity provided the following inventory date: Unite Unit cost NRV per unit ‘Sota so 1.000 1020 Doig tables 200 ‘oo 0 Bete so 1.500 1.600 eet 0 ‘30 70 Lounge chains 0 20 0 What isthe inventory at yearend using the lower of cost and net realizable value? ‘1,040,000 1.075.000 1,998,000 «4, 2,038,000 Problem 12-11 (TAA) Gem Company measured inventory at the lower of cost and het realizable value, Data regarding the items in the inventory are: Historia xct Selingprice Secao0 250000 360,000 Brimatcdcosttocomplete 8.000 60.000 68,000 Replacement ost angoo0 165000 S16 000 ‘Normal proSt margin asa ‘percentage ofselinggrice 25% 25% 10% ‘What is the measurement of the inventory? 720000 . 728000 , © 616,000 4. 694,000 aaProblem 12-12 (IAA) (On November 15, 2019, Diamond Company entered into a ae esent to purchase 10,000 ounces of gold on February 16, 2020 at a price of P910 per ounce. ‘On December 31, 2019, the market price of gold is P270 per casnOn February 15, 2020, the price of gold is P300 per 1. Whatis the losson purchase commitment tobe reognized on December 81, 20187 = 400.000 109000 «300,000 a0 2, What is the gain on purcha recognized on February 1, 2020? 2. 400,000 . 30.000 100,000 40 4. What amount should be debited to purchases on February 16, 2020? 3.00000 B. §100,000 e. 2,700,000 4. 31500,000 4. What amount should be recognized as accounts payable on February 15, 2020? a. 2.700000 300,000 commitment to be CHAPTER 13 GROSS PROFIT METHOD TECHNICAL KNOWLEDGE To identify the methods of estimating inventory value ‘To understand the rationale for making an estimate of inventory value. it method of estimating To apply the gross pro} inventory value. To understand the gross profit rate based on sales and profit rate based on cost. 323