CHAPTER 10 INVENTORIES TECHNICAL KNOWLEDGE To understand the meaning of inventories. To identify the major classes of inventory. To account for inventory transactions usi i cece aero ing periodic and To know the Henow the gress method and net method of recording To identify the items included in inventory cost. 244 Definition Inventories ore assets held for sale in the ordinary course of fusiness in the process of production for such sale o in the form Symaterials or supplies tobe consumed in the production process ein the rendering of services. oventories encompass goods purchased and held for qesale, for example: a. Merchandise purchased by a retailer and held for resale b, Land and other property held for resale by a subdivision entity and real ectate developer. Inventories also encompass finished goods produced, goods in process and materials and supplies awaiting use in the production process. Classes of inventories Inventories are broadly classified into two, namely inventories ofa trading concern and inventories of manufacturing concera. [Atroding concern is one that buys and sells goods in the same form purchased. ‘The term “merchandise inventory” is generally applied to goods held by a trading concern. ‘A manufacturing céncern is one that buys goods which are faltered or converted into another form before they are made available for sale. ‘The inventories of a manufneturing concern are: Finished goods Goods in process Raw materals Faston’ or manufacturing supplies pose 245Definitions Finished goods are completed produets which are ready forsale Finished goods have been assigned their full share of ‘manufacturing costs Goods in process or work in process are partially completeg products which require further process or work before the can be sold. 7 ‘Raw materials are goods that are to be used in the production process. No work or process has been done on them as yet by the inventorying them. a Broadly, raw materials cover all materials used in the ‘manufacturing operations. However, frequently raw materials tricted to mater sare restricted to mata that wl posal neared in he run of goods and which ean be traced rely tothe en the production process. ° a Facory or manufcturiti supplies re sia i are simile o raw but their relationship to the end product is indirect. oe Factory or manufacturing i Factory or manufacturing supplies may be referred to as It is indirect because they are not : s th pias ag sansa” NY oad in ‘There are other manufacturing 6 nufacturing supplies il which become part of he Snished proce AN Amd nal However, since the amounts involved are insignificant it is impractical to attemy eee Pt to allocate their costs directly to the ‘These supplies find their we Ot te malin Gnd thee way into the product cost an part 246 Goods includible in the inventory ‘Asa rule, all goods to which the entity has title hall be included jn the inventory, regardless of locatior. ‘The phrase “passing of title” is « legal language which means “she point of time at which ownership changes.” Legal test Is the entity the owner of the goods to be inventoried? Ifthe answer is inthe affirmative, the goods shall be included in the inventory. Ifthe answer isin the negative, the goods shall be excluded from the inventory. Applying the legal test, the following items are includible in inventory: a. Goods owned and on hand Goods in transit and sold FOB destination ¢, Goods in transit and purchased FOB shipping point 4. Goods out on consignment fe, Goods in the hands of salesmen or agents £ Goods held by customers on approval or on trial Exception to the legal test Installment contracts may provide for retention of title by the seller until the selling price is fully collected. Following the legal test, the goods sold on installment basis fare still the property of the seller and therefore normally ineludible in his inventory. However, in such a case, itis an accepted accounting procedure torecord the installment sale as a regular sale involving deferred income on the part of the seller and as a regular purchase on the part of the buyer. © ‘Thus, the goods sold on installment are included in the inventory of the buyer and excluded from that of the eeller, the legal test to the contrary notwithstanding. ‘This is a clear example of economic substance prevailing over legal form. 27Who is the owner of goods in transit? ‘This will depend on the terms, whether FOB destination or FOB chipping point. FOB means free on board. Under FOB destination, ownership of goods purchased is transferred only upon receipt ofthe goods by the buyer at the point of destination. ‘Thus, under FOB destination, the goods in transit are stil the property of the seller. ‘Accordingly, the seller shall legally be responsible for freight, ‘charges and other expenseo up tothe pont of destination, On the ather hand, ifthe term is FOB shipping point, ownership is transferred upon shipment of the goods and therefore, the goods in transit are the property ofthe buyer. ‘Accordingly, the buyer shall legally be responsible for freight ‘changes and other expenses from the point of shipment to the point of destination. In practice, during an accounting period, the accountant rormaily records purchases when goods are received and gales when gooda are shipped, regardless of the precise moment at which title passed. ‘This procedure is expedient and no material misstatements ‘occur in the financial statements because title usually passes in the same accounting period. However, the accountant should earefully analyze the invoice terms of goods that are in transit at the end ofthe accounting period to determine who has legal title. Accordingly, adjustments are in onde if eros are commit jin recording purchases and sales. commited 248, Freight terms ‘Freight collect ~"This means thatthe freight charge on the goods ‘Ghipped is not yet paid. The common carrier shall collect the Same from the buyer. Thus, under this, the freight charge is tctually paid by the buyer. Freight prepaid ~ This means that the freight charge on the foods shipped is alreody paid by the seller. ‘The terms "FOB destination" and "FOB shipping point” determine ownership ofthe goods in transit and the party who {s mupposed to pay the freight charge and other expences from the point of shipment to the point of destination. ‘The terms “freight collect” and “freight prepaid” determine the party who actually poid the freight charge but not the party ‘who is supposed to legally pay the freight charge. Maritime shipping terms FAS or free alongside - A seller who ships FAS must bear ‘Rhosponsss and ek involved in delivering the goods to the {Dock ext to or alongside the vessel on which the goods are tobe shipped. ‘The buyer bears the cst of loding ond shipment and thus, Title pose to the buyer when the carrier takes possesion ofthe goods. CIF or Cost, insurance and freight ~ Under ths shipping Content the buyer agres t payin slump sum the cost of the goods, insurance cont and freight charge. ‘The shipping contract may be modified as CF which means Tat the bur agrees fo payin 8 lump stm the cot of the fonds and freight charge only Theither cae, the seller mus pay for the cost of ooding. Thus, Tate Saf toes tall pee tthe buyer upon delivery of the goods to the career. Beship ~ A seller who dover the goods ex ship bears ell Beir =u lak of loc until the goods are unloaded at Siteh time ude end risk of os shall pass tothe buyer. 249Consigned goods ‘A consignment is a method of marketing goods in which the ‘owner called the consignor transfers physical possession of certain goods to an agent called the consignee who sells them ‘on the owner's behalf Consigned goods shall be included in the consignor's inventor and excluded from the consignee's inventory. ” Freight and other handling charges on goods out on consignment ‘are part of the cost of goods consigned. aa ‘When consigned goods are sold by the consignee, a report is sade to the consignor together witha cash remittance for the amount of sales minus commission and other expenses chargeable to the consignor. For example, a consignee sells consigned goods for P100,000. ‘This amount is remitted to the consignor less commission of 15,000 and advertising of P2,000. ‘The consgnr simply record the cach remittance consignee as follows: -— = 83,000 Commission ao Advertsing Sales 3000 100,000 oe — ‘Icey tsa mera yh seri Statement presentation Inventories are generally classified as current assets, postion butte deaf be arene thal te ducked inthe esa ae For example, the note hall disclose the composition inventories of « manufacturing entity as rushed wa, eosde in process, raw materials and manufacturing supehes 250 ‘Accounting for inventories ‘Two aystems are offered in asunting for inventories, namely periodic system and perpetual sytem. ‘The periodic eystem calls forthe physical counting of goods on jhand at the end ofthe accounting period to determine quantities. ‘The quantities are then multiplied by the corresponding unit costs to get the inventory value for balance sheet purposes. ‘This approach gives octual or physical inventories, side inventory procedure i generally used when the 1 evel nwentory tems have smal pes inesmet Such 25 groceries, hardware and auto parts. ‘On the other hand, the perpetual system requires the maintenance of records called stock cards that usually offer a ‘running summary of the inventory inflow and outflow. Inventory increases and decreases are reflected inthe stock {Gris and the resulting balance represents the inventory. This approach gives book or perpetual inventories. ‘The perpetual inventory procedure is commonly used where the inventory items treated individually representa relatively large pes investment suchas jewelry and cars. In an ideal perpetual system, the stock cards are kept to reflect and control both units and costs. Consequently, the entity would be able to know the inventory on hand at a particular moment in time. i ‘enabled In recent years, the widespread use of computers has practically all large trading and manufacturing entities to maintain a perpetual inventory system. With computes, the entities can conveniently and effectively tore and verieve large amount of inventory data ‘When the perpetual system is used, physical ount ofthe units on hand dhould at leas! be made once @ year to confirm the balances appearing om te stock cards. 251Mlustration ~ Periodic system L Purchase of merchandise on account, P300,000. Purchases 200, ‘Accounts payable ne Payment of freight on the purchase, P20,000, 20,000 20,000 Return of merchandise purchased to supplier, P30,000. ee 70 sony Sale of merchandise on account y at Sale 3, PA00,00, at 40% gross ‘Accounta receivable 400,000 ‘Sale 400,000 Return of merchandise sold from customer, P25,000. Sales return 25,000 “Account receivable a ‘Adjustment of ending inventory, P65,000. Merchandise inventory-end 5000 Tacome summary ony a MHustration ~ Perpetual system 1. Purchase of merchandise on account, P300,000. ‘Merchandise inventory 300,000 “accounts payable 300,000 2. Payment of freight on the purchase, 220,000, Merchandise ineentory 120,000 ‘cash 120,000 4 Return of merchandise purchased to supplier, P30,000. 30,000 Accountspavable ‘Merchandise inventory 4. Sale of merchandise on aocount, P400,000 at gress proBt of Ste The cost of merchandise sold is 60% or P240,000. 30,000 ‘Accounts receivable 400,000 ‘Sales 400,000 Costof goots cold 240,000 ‘Merchandise inventory 240,000 Under the perpetual system, the cost of merchandise sold Under mediately recorded because this is clearly determinable from the stock card. 5. Return of merchandise sold from customer, P25,000, The Goat of the merchandise returned is 60% or P15,000 25,000 Sales return “Accounts receivable 25,000 ‘Merchandise inventory 15,000 ‘Cost of goods eold 18,000, 6. Adjustment of ending inventory. not adjusted. ‘As a rule, the ending merchandise inventory is ‘The balance of the merchandise inventory ac represents the ending inventory 253 countInventory shortage or overage In the illustration, the merchandise inventory account has debit balance of P65,000. Ifat the end of the accounting period, a physical count indicates ‘a different amount, an adjustment is necessary to recognize ‘any inventory shortoge or average. For example, if the physical count shows inventory on hand of, 55,000, the following adjustment is necessary: Inventory shortage 10,000 ‘Merchandise inventory (65,000 65,000) 10,000 ‘The inventory shortage is usually closed to cost of goods sold because this is often the result of normal shrinkage and breakage in inventory. However, abnormal and material shortage shall be separately classified and presented as other expense. Trade discounts and cash discounts Trade discounts are deductions from the ls in order to arrive at the invoice price whi ‘actually charged to the buyer. ‘Thus, trade discounts are not recorded. or eatalog price is the amount, ‘The purpoce of trade discounta is to encourage trading or increase sales, Trade discounts also suggost to the buyer the price at which the goods may be resold. Cash discounts are deductions from the invoice price when payment js made within the discount period. The purpose of ach discounts is to encourage prompt payment. Cash discounts are recorded a8 purchase discount by the buyer and sales discount by the seller. . Purchase discount is deducted from purchases to arrive at net purchases and sales discount is deducted from sales tO arrive at net sales revenue. 264 Mlustration nt price of # merchandve purchased is P5OD 000 less The ae ih ree terms of 8/10, 1/30, Bean ramen tt cde oun 0 ar 10% an coh cee nape ten 1d arin uid fh pment a mae ta amount fh ce pi fe art te 10 days and within the credit period of 30 days. noe Hee dicount 0%% 800,00) 00.00 “060 8s si cut 4310800 ‘ = 360,000 SEES, cone sie pment dace su00 he ora enya he phe eda 00 san “Account payable not recorded. The Note that the trade discounts are not recorded 0s Sooeae ee wis ce ae as ‘Methods of recording purchases 1s and accounts payable are 1. Gross method ~ Purchat recorded at gross. 2 Net method ~ Purchases and socounta payable are recorded at net, 255Mlustration ~ Gross method 1. Purchases on account, P200,000, 2/10, n /0, Perches 200 Accounts payable ia 200,000 2 Aumume payment is made within the dicount pero, Aso prte 0n.00 Purchase discount to <0 3, Assume payment is made beyond the discount period Assi pate 200.00 200.000 Mlustration ~ Net method 1. Parchasos on account, P200,000, 2/10, n/30, archaea ‘Accounts payable os 000 2 Assume payment is made within the discount period count payal muntaperebe 196000 196,000 3, Assume payment is made beyond the discount period. ‘Acsnuntapayeble Purchase discount (o ard low other expense) 000 200,000 4. Assume itis the end of accounting made and the discount period has expned me Prchan dann ht Accounts payable oe 4.000 256 Gross method vs, net method ‘The cost measured under the net method represents the cash ‘Miivalent price on the date of payment and therefore the theoretically correct historical cost. However, in practice, most entities record purchases at gross invoice amount. ‘Technically, the gross method violates the matching principle ‘eenase discounte are recorded only when taken or when cash Prpaid rather than when purchases that give rise to the discounta are made. Moreover, this procedure does not allocate discounts taken between goods eold and goods on hand. Despite its theoretical shortcomings, the gross method is supported on practical grounds. ‘The gross method is more convenient than the net method from 1 bookkeeping standpoint. Moreover, if applied consistently overtime, it usually produces ro material errors in the Ginancial statements, Cost of inventories ‘The cost of inventories shall comprise: 1. Cost of purchase Cost of conversion ‘e. Other cost incurred in bringing the inventories to their present location and condition 257Cost of purchase The cot of purchase of inventories comprises the purch rc. import dities and irecoerable tes, freight. handige fnd other costs diectly attributable tothe acquisition of Gnished goods, material and services ‘Trade discounts, rebates and other similar items are deducted in determining the cast of purchase. The'cost of purchase shall not include foreign exchar differences which aise direy trom the recent noaslanee ef iveotriesinvlving foreign currency Moreover, when inventories are purchased with det settlement term. the diference between the purchase yk for normal credit tera and the amount pad is resged a8 interest expense over the period ef fnancing Cost of conversion The cos of conversion of inventories includes cost diet slated tothe unite of production suchas ice! labor ‘als incantation of fied ond aril reduction overhead that is incurred in eanverting ta into finished goods. aa | nae eee is the indirect cost of production remains relatively constant regardless of the volume fia sai tant regardless of the volume of Beale ae eorsiaton and maintenance of factory bling 2nd sauipment, and the cost of factory management and Voriabepradution overhead i the indie that varie dety withthe volume af podactog ‘Examples are indirect labor and indirect materials. 258 Allocation of fixed production overhead ‘The allocation of fixed production overhead to the cost of ‘conversion is based on the normal capacity of the production facilities. [Normal capacity is the production expected to be achieved on. average over a number of periods of seasons under normal ‘Greumstances taking nto account the loss of capacity resulting from planned maintanance. ‘The amount of fixed overhead allocated to each unit of production is not increased as consequence of low production or idle plant Unallocated fixed overhead is recognized as expense in the period in which it is incurred. Allocation of variable production overhead Voriable production overhead is allocated to each unit of production on the basis of the actual use of the production facilities. [A production process may result in more than one product being produced simultaneously. ‘This is the ease for example, when joint products are produced, for where there is a main product and a by-product. When the costs of conversion are not separately identifiable, they are allocated between the products on a rational and consistent basis, for example, on the basis of the relative sales value of each product ‘Most by-products by their nature are not material. By products are measured at net realizable value and this value is deducted from the cost of the main’ product. 259Other cost (Other cot is included in the enstof inventories only tothe extent that it is incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to include the cost of designing product for specific customers in the cost of inventories However, the following costs are excluded from the cost of inventories and recognized as expenses in the period when incurred: 4. Abnormal amounts of wasted materials, labor and other production costs b, Storage costs, unless these costs are necessary in the Production process prior to a further production stage. ‘Thus, storage costs on goods in process are capitalized but storage costs on finished goods are expensed. © Administrative overheads that do not contribute to bringing inventories to their present location and condition 4. Distribution or selling costs Cost of inventories of a service provider ‘The cost of inventories of @ service provider consiste primarily of the labor and other costs of personnel directly engaged in roving the verve, including supervisory porsil and attributable overhead, as te Labor and other costs relating to sales and general administrative personnel are not included but are recognized ‘8 expenses in the period in which they incurred, QUESTIONS 1. Define inventories. 2, Bxplain the two classes of inventory. 3, What goods are includitle in inventory? 4, What is the legal test of determining inventory inclusion? 5. Who is the owner of goods in transit? 6. Explain FOB destination 17. Explain FOB shipping point. 8, Explain freight prepaid. 9. Explain freight collet. 10. What do you understand by the maritime terms FAS, CIF, CP and Ex-ship? 11, What is consignment? 12 Who is the owner of goods on consignment? 18. Explain the statement presentation of inventories. 14, Explain the two eystems of accounting for inventories. 15, Distinguish trade discounts and cash discounts. 16. Explain the two methods of accounting for purchases. 17, What are the components of the cost of inventories? 18. Explain cost of purchase. 19, Explain cost of conversion. 20. Explain the cost of inventory of a service provider. 261PROBLEMS Problem 10-1 (IAA) Amiable Company provided the following data at year-end: Items countedin the bodega IHemsincluded inthe count specifically segregated persales contract Itemsin receiving department, returned by customer, in goed condition Itemsordered and in the receiving department, invoice not received Items ordered. invoice received but goods nat received. Freight is paid by seller. ‘tems shipped today, invoice mailed, FOB shipping point Items shipped today, invoice mailed, FOB destination Items currently being used for window display Items oncounter forsale Itemsin receiving department, refused by us because ‘ofdamage Items included incount, damaged and unsalable Items in the sipping department Require Compute the correct amount of inventory, 262 4,000,000 100,000 50.000 00,000 300,000 250,000 150,000 200.000 00,000 180,000 0.000 250,000 Problem 10-2 (LAA) [Natal Company provided the following information: Materials 1,400,000 ‘Advance for materials ordered 200,000, Goods in process 650,000 ‘Unexpired insurance on inventories 60,000 Advertising catalogs and shipping cartons 150,000 Finished goods in factory 2,000,000 Finished goods in company-owned retail store, “including 50% profiton eat 750,000 Finished goods in hands of consigneesincuding 40%sprofiton sales 400,000 Finished goods in transit to customers shipped FOB. destination at cost 50,000 Finished goods outon approval, atcost 100.000 Unselable finished goods, t cose 50,000 Office supplies 0,000 ‘Materials in transit shipped FOB shipping point, ‘excluding freight of 30,000 330,000 Goods held on consignment, atsales price, cnstP1S0,000 200,000 Required: Compute the correct amount of inventory. Problem 10-8 (IAA) Laminous Company provided the following information at ceurrent year-ent Finished goods in toreroom, atenst including overhead ‘fP400,000 2,000,000 Finished goodsin transit including freight charge of 20,000, FOB shipping point 250,000 Finished goods held by salesmen, ateling price, cost, 100,000 140,000 Goodsin process, atcostof materials and direct Iabor 720,000, Materials 1,000,000 "30,000 Materials in transit, FOB destination Defective materials returned tosuppliersforreplacement 100,000 Gackng eat fr testing ined sade vio “Machine ubsieante ‘80.000 Required: Compute cost of inventory at current yearend. 263Problem 10-4 (IAA) ‘Summer Company is a wholesaler of car seatcovers. At the beginning of the current year, the entity's inventory consisted of 90 car seateovers priced at P1,000 ench. During the current, ‘year, the following events occurred: 1. Purchased 800 car seatcovers on account at P2,000 each. 2 Returned 50 defective car seatcovers to supplier and received credit. 3 Paid 600 of the car seatcovers purchased. 4 Sold 790 car seatcovers at P2,000 each. 65, Received 20 ar seatoovers returned by a customer and gave credit. The goods were in excellent condition 16. Received cash for 680 of the car seatcovers sold. 17. Physical count at yearend revealed 60 units on hand. ‘Required: * Gerd oeamtion keog te Uecpy wept ayetem and perpetual sytem. », Determine the cost of sales under each inventory aystem. Problem 10 (ACP) Winter Company recived quotations from two enti for item of merchandise as follows ae From Company A: List price P500,000, less 20-10-10, FOB shipping point, 2/10, n/30. ‘From Company B: List price P500,000 less 35, FOB shi pane 2/10, 0/30. ene Required: For each quotation, compute the invoice amount and the amount tobe paid bythe buyer within the dicount ponod. Problem 10-6 (IAA) ‘Autumn Company provided the folowing transactions for the ‘current year, the first year of operations. Purchase of merchandise at an invoice prie of P4, 750,000 excluding freight. Terms are 2/10, n/30. Freight paid, F250 00. Tho freight is alloated to each purchase Gash payment on purchases, 3,717,000, of which P1,617,000 was paid within the discount period. Tis expected that all discounts on unpaid accounts payable will be lost. ‘On December 31, one fifth of the merchandise remains on hand. Required: a. Prepare journal entries to record the transactions using, ‘gross method and net method, seep 1. Compute inventory and cost of sales under each method. Problem 10-7 (IAA) Fall Company began operations in the current year. The entity, used perpetual inventory system. 1. During the year, Fall Company purchased merchandise having a gross invoice eost of P1,000,000. ll purchases were made under the terms 2/10, n/30, FOB destination, 2, Fall Company paid freight charge of P50,000. 3. During the year, Fall Company paid for 80% of the ‘merchandise within the discount period. 4. The remaining 20% was paid beyond the discount period. 5. Fall Company sold 70% of the merchandise it acquired for cash of P1,200,000. The other 30% remained in inventory at year-end. Required: Prepare journal entries to record the transactions using gross method and net method. 265Problem 10-8 (AICPA Adapted) Myriad Company revealed the following purchase transactions occurred during the last few days of the fiscal year, which ends December 31, and in the first few days after that date 1. An invoice for P50,000, FOB shipping point, was received and recorded on December 27. The shipment was received in satisfactory condition on January 2. The merchandise ‘wos not included in the inventory. 2. An invoice for P75,000, FOB destination, was received and recorded on December 28, The shipment was received in satisfactory condition on January 3. The merchandise twas not included in the inventory 3. An invoice for P50,000, FOB shipping point, was received land recorded on January 4. The invoice shows that the ‘toods had been shipped on December 28 and the receiving Feport indicates that the goods had been received on January 4. The merchandise was excluded from inventory, 4. An invoice for P90,000, FOB shipping point, was received on December 15. The receiving report indicates that the ‘oods were received on December 18 but across the face of the report is the notation "merchandise not of the same quality as ordered - returned for credit, December 19”, ‘The merchandise wos included in the inventory, 5 An invoice for P140,000, FOB destination, was received and recorded on January 4. The receiving report indicates that the goods were received on December 29. The ‘merchandise was included in inventory. Required: Srbare the adjustments on December 31. Books are still 266 Problem 10-9 AICPA Adapted) Hero Company reported inventory on December 31, 2019 at 6,000,000 based on a physical count of goods priced at cost, and belore any necessary year-end adjustment relating to the following: * Included in the physical count were goods billed to a ‘customer FOB chipping point on December 31, 2019. ‘These goods had a cost of P125,000 and were picked up by the carrier on January 10, 2020, * Goods shipped FOB shipping point on December 28, 2019 from a vendor to Hero Company were received on January +4, 2020, The invoice cost was P300,000. What amount should be reported as inventory on December Problem 10-10 (AICPA Adapted) Empty Company reported inventory on December 31, 2019 at 2800,000 Based on physical count priced at cot and before any necessary adjustment forthe following: * Merchandise costing P100,000, shipped FOB shipping point from a vendor on December 30, 2019 was received and reoorded on Jabuary 5, 2020. * Goods in the shipping area were excluded from inventory although shipment was not made until January 5, 2020, ‘The goods billed to the customer FOB shipping point on December 30,2019 had a ost af 400,000. What amount should be reported as inventory on December 31, 20197 ‘8. 2,500,000 . 2,600,000 © 2,900,000 . 4. 3,000,000 267Problem 10-11 (AICPA Adapted) Dignity Company had the following consignmen franeactions during the current years on RMHent Inventory chipped on consignment to cnnaignee 600.000 ‘Freght pad by Dignsty Company 20.00) Inventory receivedonsonsignaventfrom aconsignor 01000 Freight paid iy coatgnor 0000 No ales of consigned goods wore made during the current year. What amount should be reported as consigned inventory at year-end? a. 700,000 & ¢sa.000 © £50,000 4. 600,000, Problem 10-12 (AICPA Adapted) Kindness Company regularly buys aweaters and is allowed ‘trade discount of 20% and 10%, The entity ma ‘on March 20 and received an invoice with « 900,000 a teight charge of P80,000 nd payment ferme of ‘What isthe cost of the purchase? 648.000 8. 630,000 638000 & 630,000 Problem 10-13 (AICPA Adapted) une 1, 2019 Compassion Company sold merchandise vith a ise price of PLO 000 tow astern ere Tae sotty llaed trade dct f 20% and 10%. Cet terns sere ibn and the el wae ade FOB argo pot ‘The entity prepaid P50,000 of delivery cst forthe customer #8 4 ascommodation. "The customer paid in full on June 11,2019. ‘What amount is received from the customer as fl remittance? 2 684, $8400 268 Problem 10-14 (AICPA Adapted) Kew Company reported accounts payable on December 31, 2019 at 2,200,000 before considering the following data: Goods shipped to Kew FOB shipping point on December 22.2019 were lost in transit. The invoice cost of P40,000 ‘was not recorded by Kew. (On January 7, 2020, Kew fled a P40,000 claim against the common carrer, + On December 27, 2019, a vendor authorized Kew to return for full credit goods shipped and billed at P70,000 on December 15, 2019. ‘The returned goods were shipped by Kew on December 28, 2019. A P10,000 credit memo wae received end recorded by Kew on January 5, 2020 On December 31, 2019, Kew has a P500,000 debit balance in accounts payable to Ross, a supplier, resulting from ‘P500,000 advance payment for goods to be manufactured. What amount should be reported as accounts payable on December 31, 2019? 2. 2,170,000 . 21680,000 ©. 2,730,000 a. 2.670,000Problem 10-15 (AICPA Adapted) Black Company reported accounts payable on 2019 at P4.500,00 before any necessary yearend sen oa relating to the following transactions: — * On December 27, 2019, Black Company wrote and reer hecks to creditors oaling P2.000,000 causing an onecaeat of P500,000 in Black Company's bank acoount on Deceaiee 51,2019. The check were mailed out on lamtary ae * On December 28, received goods for 19, Black Company purchased ,000 terms 2/10, n /30. a Black Company records purchases and accounts payable at et amount. The invoice w fc sat ence as recorded and paid January 5 » tn 08 tn 9 Say ak ee aa On December 31, 209, what amount ported accounts payable? oe “ a. 7,575,000 b. 7,250,000 ©. 7,235,000 @. 7,553,500 270 Problem 10-16 (IAA) A physical count on December 31, 2019 revealed that Joyous Company had inventory with a cost of P4,410,000. ‘The following items were excluded from this amount: ‘© Merchandise of P610,000 is held by Joyous on consignment + Merchandise costing P380,000 was shipped by Joyous FOB destination to a customer on December 31, 2019. ‘The customer was expected to receive the goods on January 5, 2020. * Merchandise costing P460,000 was shipped by Joyous FOB shipping point toa customer on December 29, 2019. ‘The customer was expected to receive the goods on January 10, 2020. + Merchandise costing P830,000 shipped by a vendor FOB destination on December 31, 2019 was received by Joyous, on January 15, 2020. * Merchandise costing P510,000 purchased FOB shipping point was shipped by the supplier on December 31, 2019 ‘and received by Joyous on January 5, 2020. What amount of inventory should be reported on December 31, 20197 ‘5,300,000 '. 4,690,000 © 3,800,000 4. 4,920,000 271Problem 10-17 (AA) Audacity Company counted th ending Inventory o ember Si 20 and reported the amount of before any corrections. ba None of the following items wer included when the tt ‘amount of the ending inventory was computed: = * Goods located in the entity's warehouse fare on consignment from another entity 160,000 * Goods sold by the entity and shipped FOB destination were in transit on December 31, 2019 and received by the customer on January 2, 2020 200,000 * Goods purchased by the entity and shipped FOB shipping point were in transit on December 31, 2019 and received by the entity on January 2, 2020 300,000 * Goods sold by the entity and shipped FOB chipping point were in transit on December 81, 2019 and received by the ‘customer on January 2, 2020. 400,000 What amount of inventory should be sepocted on -mt 31, 20197 . ee 1 2,500,000 . 2,350,000 © 21900,000 4. 2,750,000 272 Problem 10-18 (AICPA Adapted) Reverend Company conducted a physical count on December RevGo1D which revealed merchandise with a total cost of 5,000,000. itowever, further investigation revealed that the following ‘Tome wore excluded from the count. + Goods sold to a customer which are being held fr the erate to call tthe customers convenience witha cost ‘sf P200,000. + -Apacking cae containing a product costing P500.000 was aac ee n'ehe shipping room when the physical Inventory was taken. ‘The product was not included in the inventory Because it Ms Bred “held for shipping instruction"- ‘The investigation revealed chat the customers order was Te cconier 26, 2019, but thatthe case was shipped deththe Sustmer ied on Jamvary 8, 2020. + special machine costing P250,000 fabricated to order Asmectl omer was finished and specifically for gated a the back patt of the shipping room on December 31, 2018 ‘The eusvomer was billed on that dato and the machine The cusiemged from inventory although st was shipped on January 5, 2020 + Goods in procean costing P300,000 held by an outside Srosttecr for further processing + Goode enstng 50,00 shipped by a vendor FOB seller Goods enating PAGr9 and received by the entity on STamwary 10, 2020 What is tho correct amount of Feparted on December 31, 20197 5,500,000 5,350,000 5,850,000 a. 5330,000 taventory that should be 278,Problem 10-19 (IAA) Shindig Company is preparing the 2019 year-end financial statements, Prior to any adjustments, inventory is valued at Pr.600,000, * Goods costing P250,000 were recsived from a vendor on January 5, 2020. The related invoice was received and , recorded on January 12, 2020, ‘The goods wore shipped December 31, 2019 FOB shipping point * Goods costing P850,000 were shipped on December 21, 2018 to a customer FOB shipping point. ‘The goods were included in ending inventory for 2019 even, though the sale was recorded in 2018, * A.P350,000 shipment of goods to « customer on December 531, 2019 FOB destination was not included in the year-end inventory ‘The goods cost P260,000 and were delivered tothe customer ‘onJanuary 15,2020. Th sale was properly recorded in 2020, * An invoice for goods costing P350,000 was received and recorded as a purchase on December 31, 2019. ‘The related goods shipped FAS were in transit on December 31, 2019 and received on January 6, 2020 and were not included in the physical inventory. * AP1,050,000 shipment of goods to a customer on December 30, 2019 FOB destination was recorded as a sale in 2019. ‘The goods costing P840,000 and delivered to the eustomer ‘on January 8, 2020 were not included in 2019 ending inventory. What io the correct inventory on December 31, 2019? 1 9,300,000 b. 7,610,000 ©. 8,100,000 d. 8,450,000 24 Problem 10-20 (AICPA Adapted) White Company/s usual sales terms ae net 60 days, FOB. pant Sols, not of returns end allowanos,wtaed P3.000000 fo {fe year ended December SI, 2018, btbre year-end adjustment. + OnDecember 27, 2019, White Company authorized acuterner {oreturn, fr full eet, goods sipped and bled st P5000 00 December 15, 2018 ‘The returned goods were received by White Company on ‘Tenuary 6, 202 and» PSO 000 credit memo was issued oa the same date * Goods with an invoice amount of P300,000 were billed to a ‘customer on January 10, 2020. The goods were shipped on December 31, 2018. + Goods with an invoie amount of P200.000 were bill and cored on December 30, 2018. The goods were shipped on danuery , 2020. + On January 6, 202, «customer noted White Company Shc goods Billed at 300,000 and shipped on December 31, 2019 were lost i trans ‘What amount of et ales shoul be reported forthe current yeu? a. §:050,000 (000 Problem 10-21 (AICPA Adapted) Purple Company hd sales of P4,000,000 during Deceraber atthe cucuone year Expereace has shown that merchandise wusiog 75 of sles wi be returned within 30 days end an sdditiosel $5 will be returned within 90 days. Returned fe roadily resale In addition, merchandise equaling 16% of sales will be tichange’ for merchandise of equal or grater valve What amount should be reported for net sales for the month of December? 278Problem 10-22 (AICPA Adapted) Yellow Company, a distributor of machinery, bought a whine from tHe manufacturer in November 2019 for 500,000. On December 30, 2019, the entity sold this machine for 150,000, under the following terms: 2% discount if paid woithin thirty daye, 1% discount if paid after thirty days but smthin sixty days, or payable in full within ninety days if not paid within the discount periods, However, the customer had the right to return this machine to Yellow Company if it was unable to resell the machine before expiration ofthe ninety-day payment period, in which cave the customer's obligation to Yellow Company would be canceled. Jn the net sales for the year ended December 31, 2019, what ‘amount should be included for the sale of the machine? a. 750,000 b. 735,000 742,500 a 0 Problem 10-23 (AICPA Adapted) On October 1, 2019, Indomitable Company sold 100,000 fallons of heating ol at P30 per gallon. Fifty thousand gallons were delivered on December 15, 2019, and the remaining 50,000 gallons were delivered on January 15, 2020. Peyment terms were: 60% due on October 1, 2019, 25% o8 Ae Ft delivery andthe remining 28% due on the ssand What amount of sale revenue should be recognized during $3,000,000 1,500,000 2'250,000 1,000;000, 276 4 Problem 10-24 (AICPA Adapted) Fancy Company is a wholesale distributor of automotive Jiplacement parts, The entity revealed the following initial mounts on December 31, 2019: aventory at December 1 based on physicaleount 1.260.000 ‘Aes payable 1/000,000 ‘Slee 9,000,000 Additional information |A. Parts held on consignment from another entity to Fancy Company, the consignee. amounting to P165,000, were included in the physical count on December 31, 2019, and in account payable on December 31, 2019. 'B. P20,000 of parts which were purchased and paid for in ‘December 2019, were sold in the last week of 2019 and ‘approprutely recorded as sales of P28,000. ‘The parta were included in the physical count on December 231, 2019, because the parta were on the loading dock waiting, tw be picked up by the customers, C. Parta in transit on December 31,2019 to customers, shipped FOB shipping point, on December 28, 2019, amounted to 34,000. "The customers received the parts on January 6, 2020, Sales of P40,000 to the customers for the parts were recorded by Fancy Company on January 2, 2020. D. Retailers were holding P210,000 at cost and P250,000 at retail, of goods on consignment from Fancy Company. at their stores on December 31, 2019. B. Goods were in transit from 2 vendor to Fancy Company on December 31, 2019. The cost of goods wae P25,000. ‘The goods were shipped FOB shipping point on December 29,2018, am71, What is the correct amount of inventory? a 1,300,000 b. 1:320,000 © 1,334,000 1,090,000 2 What is the correct amount of accounts payable? = 835,000 960,000 ©. 975,000 4. 860,000 8.” What is the correct amount of sales? =. 9,260,000 ». 9,290,000 ©. 9,040,000 4. 9,000,000 278 Problem 10-25 (AICPA Adapted) Quarry Companys manufacturer of small ol, provided the flowing information forthe year ended December 31,2018. Inventory at December 31 basedon physcalcount 1,780,000 ‘Aspnes payable December 31 1'300,000, Neteales ‘800,000 Additional information A. Included in the physical count were tol billed to customer FOB shipping point on December 31,2019. Those tools had a ‘eat of P25 000 and were bled at 35,000. ‘The shipment was in loading dock waiting to be picked up by the common earier. BB, Goods wero in transit from a vendor to Quarry Company on December 81, 2019, ‘The invoice cost was P50,000, and the goods wore shipped FOB shipping point on December 29, 2019. . Work in process inventory costing P20.000 was sent to an, outside prosestor for plating on December 80, 2019. D, Tools returned by customers and held pending inspection in the returned goods area on December 31, 2019 were not included in the physical count. (On January 5, 2020, the tool costing P26,000 were inspected and returned to inventory. Credit memos totaling P40,000 were issued tothe customers, fon the same date. EE, Tools shipped to a customer FOB destination on December 26, 2019, were in transit on December 31, 2019, and hed a cast of P25, 000. Upon notation of est by the customer on January 8, bn Guany Company itoued a sale invoice for PA2000 279F. Goods, with an invoice cost of P90,000, received from » vendor at 5:00 PM on December 31, 2019, were recorded ‘ona receiving report dated January 2, 2020. ‘The goods were not included in the physical count but the invoce was included in accounts payable on December 31,2018. . Goods recsived from a vendor on December 26, 2019 were included in the physical count However, the related P60,000 vendor invoice was not ineluded'in accounts payablo on December 31, 2019 because the acount payable copy ofthe resving report wae lost. 4H. On January 10, 2020, a monthly freight bill in the amount ‘of P20,000 was received. The bill specifically related to purchased in December 2019, one-half of ‘tll in the inventory on December 31, 2019. ‘The freight charge was not included in either the inventory or in accounts payable on December 31, 2019. | What is the correct amount of inventory? ‘a. 1,883,000 & 1,911,000 ‘1,885,000 © 1,925,000 2 What is the correct amount of accounts payable? 1 1,880,000 1,280,000 © 1,260,000 1,270,000 8, What is the correct amount of net sales? a. 460,000 b. 8,500,000 © 8.465,000 . 84265,000 280 CHAPTER 11 INVENTORY COST FLOW TECHNICAL KNOWLEDGE ‘To identify the cost formulas required by IFRS. ‘Toapply the FLFO cost formula. To apply the weighted average cost formula. Toapply the | moving average cost formula. Toapply the specific identifeation method. 281