18

INVENTORY VALUATION
Problem 18-1 (AICPA Adapted)

Marsh company had 150,000 units of products A on hand at January 1, costing P21 each.
Purchases of product A during the month of January were as follows:

Units Unit cost

January 10 200,000 22
18 250,000 23
28 100,000 24

A physical count on January 31 shows 250,000 units of product A on hand.

What is the cost of the inventory on January 31 under the FIFO method?

a. 5,859,000
b. 5,550,000
c. 5,350,000
d. 5,250,000

Solution 13-1 Answer a

Units Unit cost Total cost

January 18 150,000 23 3,450,000

28 100,000 24 2,400,000

Total FIFO cost 250,000 5,850,000

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Problem 18-2 (PHILCPA Adapted)

ABC Company provided the following net income and inventory:

2009 2010

Net income using LIFO 2,750,000 3,000,000

Year-end inventory – LIFO 1,400,000 2,000,000
Year-end inventory – LIFO 900,000 1,600,000

What is the net income for 2010 using the FIFO cost flow?

a. 2,900,000
b. 2,600,000
c. 3,500,000
d. 3,100,000

Solution 18-2 Answer a

2009 2010

Net income – LIFO 2,750,000 3,000,000

Understatement inventory
2009 (1,400,000 – 900,000) 500,000 ( 500,000)
2010 (2,000,000 – 1,600,000) - 400,000
Net income – FIFO 3,250,000 2,900,000

If ending inventory is understated, net income is also understated. But the effect is
counterbalancing in the subsequent year.

Problem 18-3 (CGAC)

On April 1, 2010, Toronto Company had 6,000 units of merchandise on hand that cost P120 per
unit. During the month, Toronto had the following entries with regard to the merchandise:

April 5 Purchase on account 15,000 units at P140 per unit

8 Returned 1,000 units from the April 5 purchase.
29 Sold on account 16,000 units at P200 per unit.

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Toronto Company uses a perpetual inventory system and a FIFO cost flow. What is the cost of
goods sold for April?

a. 2,210,000
b. 2,200,000
c. 2,144,000
d. 2,080,000

Solution 18-3 Answer a

Units sold Unit cost Total cost

April 1 6,000 120 720,000

5 10,000 140 1,400,000
Total goods sold 16,000 2,120,000

Problem 18-4 (IFRS)

Rona Company uses the perpetual inventory system. The inventory transactions for August of
the current year were as follows:

Units Unit cost Total cost

April 1 Beginning 20,000 4.00 80,000

7 Purchase 10,000 4.20 42,000
10 Purchase 20,000 4.30 86,000
12 Sale 15,000 ? ?
16 Purchase 20,000 4.60 92,000
20 Sale 40,000 ? ?
28 Sale Return 3,000 ? ?

The sale return relates to the August 20 sale. If the FIFO cost flow method is used, the sale return
would be coasted back into inventory at what unit cost?

a. 4.00
b. 4.20
c. 4.30
d. 4.60

Solution 18-4 Answer d

Under the perpetual FIFO cost flow, the sale return is costed back into inventory at the latest unit
at the latest unit purchase cost of P4.60.

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Problem 18-5 (IAA)

The following information has been extracted from the records of Jayson Company about one of
its products. Jayson Company uses the perpetual system.

Units Unit cost Total cost

Jan. 1 Beginning balance 8,000 70.00 560,000

6 Purchase 3,000 70.50 211,500
Feb. 5 Sale 10,000
Mar. 5 Purchase 11,000 73.50 808,500
Mar. 8 Purchase return 800 73.50 58,000
Apr. 10 Sale 7,000
Apr. 30 Sale return 300

If the FIFO cost flow method is used, what is the cost of the inventory on April 30?

a. 330,750
b. 315,000
c. 433,876
d. 329,360

Solution 18-5 Answer a

From March 5 purchase (4,500 units x 73.50) 330,750

Whether periodic or perpetual system, the FIFO inventory is the same.

Problem 18-6 (IAA)

Mildred Company is a wholesaler of office supplies. The activity for inventory of calculators
during August is shown below:

Units Cost

August 1 Inventory 20,000 36.00

7 Purchase 30,000 37.20
12 Sale 36,000
21 Purchase 48,000 38.00
22 Sale 38,000
29 Purchase 16,000 38.60

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Mildred Company uses a FIFO periodic inventory system, what the ending inventory on
August 31?

a. 1,500,800
b. 1,501,600
c. 1,522,880
d. 1,529,600

Solution 18-6 Answer d

Beginning inventory 20,000

Purchases (36,000 + 48,000 + 16,000) 94,000
Total units available 114,000
Sales (36,000 + 38,000) ( 74,000)

Ending inventory in units 40,000

From August 21 purchase (24,000 x 38.00) 912,000
From August 29 purchase (16,000 x 38.60) 617,000

Total cost inventory, August 31 1,529,600

Problem 18-7 (IAA)

Lagoon Company accumulated the following quarterly cost data for the current year.

Raw materials- beginning inventory 90,000 units @ P7.00

Purchases 75,000 units @ P8.00
120,000 units @ P8.50
The entity transferred 195,000 units of raw materials to work in process during the year.

Work in process – beginning inventory 50,000 units @ P14.00

Direct labor 3,100,000
Manufacturing overhead 2,950,000
Work in process – ending inventory 48,000 units @ P15.00

The entity uses the FIFO method for valuing inventory. What is the cost of goods manufactured
for the current year?

a. 7,535,000
b. 8,235,000
c. 7,515,000
d. 8,280,000

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Solution 18-7 Answer a

Beginning raw materials (90,000 x 7) 630,000

Purchases (75,000 x 8 + 120,000 x 8.50) 1,620,000
Raw materials available for use 2,250,000
Ending raw materials (90,000 x 8.50) ( 765,000)

Raw materials used 1,485,000

Direct labor 3,100,000
Manufacturing overhead 2,950,000

Total manufacturing cost 7,535,000

Beginning work in process (50,000 x 14) 700,000

Total work in process 8,235,000

Ending work in process (48,000 x 15) ( 720,000)

Cost of goods Manufactured 7,515,000

Beginning raw materials of P90, 000 units plus purchases of P75, 000 and 120,000 minus
195,000 units transferred equals 90,000 ending raw materials.

Problem 18-8 (IAA)

Hilltop Company sells a new product a new product. During a move to a new location. The
inventory records for the product were misplaced. The bookkeeper has been able to gather some
information from the purchase and sales records. The July purchases are as follows:

Quantity Unit cost Total cost

July 5 10,000 65 650,000

9 12,000 63 756,000
12 15,000 60 900,000
25 14,000 62 868,000
51,000 3,174,000

On July 31, 15,000 units were on hand. The sales for July amount to P6,000,000, or 60,000 units
at P100 per unit. Hilltop has always used a periodic FIFO inventory costing system. Gross profit
on sales for July was P2, 400,000. What is the cost of inventory on July 1?

a. 1,354,000
b. 2,400,000
c. 2,826,000
d. 426,000

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Solution 18-8 Answer a

Sales 6,000,000
Gross Profit (2,400,000)
Cost of goods sold 3,600,000
Inventory – July 31 (see below) 928,000
Cost of goods available for sale 4,528,000
Purchase for July (3,174,000)
Inventory – July 1 1,354,000

Quantity Unit cost Total cost

July 12 1,000 60 60,000

25 14,000 62 868,000
FIFO inventory – 7/31 15,000 928,000

Problem 18-9 (PHILCPA Adapted)

The inventory card of Lane Company as at February 28 is as follows:

Purchase Units Balances

Price Units Used Units

Jan 10 100 20,000 20,000

31 10,000 10,000
Feb. 8 110 30,000 40,000
9 returns from factory (Jan. 10 lot) (1,000) 41,000
28 11,000 30,000

Using the weighted average method, what is the cost of inventory is the cost of inventory on
February 28?

a. 3,180,000
b. 3,150,000
c. 3,120,000
d. 3,300,000

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Solution 18-9 Answer a

Units Unit cost Total cost

January 10 20,000 100 2,000,000

February 8 30,000 110 3,300,000
50,000 5,300,000

Weighted average unit cost (5,300,000/50,000) 106

Cost of inventory (30,000 x 106) 3,180,000

Problem 18-10 (AICPA Adapted)

Anders Company uses the moving average method to determine the cost of its inventory.
During January of the current year, Anders recorded the following information pertaining to its
inventory:

Units Unit cost Total cost

Balance on January 1 40,000 50 2,000,000

Sold on January 17 35,000
Purchased on January 28 20,000 80 1,600,000

What amount of inventory should Anders report on January 31?

a. 2,000,000
b. 1,850,000
c. 1,625,000
d. 1,500,000

Solution 18-10 Answer b

Units Unit cost Total cost

January 1 40,000 50 2,000,000

January 17 (35,000) 50 (1,750,000)

Balance 5,000 50 250,000

January 26 20,000 80 1,600,000

Balance 25,000 74 1,850,000

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Problem 18-11 ( AICPA Adapted)

During January of the current year, Metro Company which maintains a perpetual inventory
system, recorded the following information pertaining to its inventory:

Units Unit cost Total cost Unit on hand

Balance on 1/1 10,000 100 1,000,000 10,000
Purchased on 1/7 6,000 300 1,000,000 16,000
Sold on 1/20 9,000 7,000
Purchased 1/25 4,000 500 2,000,000 11,000

1.Under the moving average method, what amount should Metro report as inventory on January
31?

a. 2,640,000
b. 3,225,000
c. 3,300,000
d. 3,900,000

2. Under the FIFO method, what amount should Metro report as inventory on January 31?

a. 1,300,000
b. 2,700,000
c. 3,900,000
d. 4,100,000

Solution 18-11

Question 1 Answer b
Units Unit cost Total cost

January 1 10,000 100 1,000,000

January 7 6,000 300 1,800,000
Balance (2,800,000/16,000) 16,000 175 2,800,000
January 20 sale (9,000) 175 (1,575,000)
Balance 7,000 175 1,225,000
January 25 4,000 500 2,000,000
Balance (3,225,000/11,000) 11,000 293 3,225,000

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Question 2 Answer c
 Units Unit cost Total cost

January 1 1,000 100 100,000

January 7 6,000 300 1,800,000
January 25 4,000 500 2,000,000

Total FIFO cost 11,000 3,900,000

Note again that the FIFO cost will be the same whether periodic system or perpetual system.

Problem 18-12 (AICPA Adapted)

Frey Company recorded the following data pertaining to raw material Y during January of the
current year.

Unit
Date Received Cost Issued On hand

1/1 Inventory 200 8,000

1/8 Issue 4,000 4,000
1/20 Purchase 12,000 200 16,000

What is the moving average unit cost of the inventory on January 31?

a. 220
b. 224
c. 230
d. 240

Solution 18-12 Answer c

Unit Unit cost Total cost

January 1 8,000 200 1,600,000

8 (4,000) 200 ( 800,000)
4,000 200 800,000
20 12,000 240 2,880,000
(3,680,000/16,000 = 230) 16,000 230 3,680,000

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Problem 18-13 (PHILCPA Adapted)
The following information was taken from the inventory method of Fairie Company for January
of the year:

Unit Unit cost Total cost

Balance at January 1 50,000 8.024 401,200
Purchases
January 10 20,000 8.500 170,000
January 25 48,000 8.750 420,000
Sales:
January 12 30,000
January 30 53,000

Fairie Company does not maintain perpetual inventory records.

What is the inventory on January 31 under the weighted average method?

a. 294,000
b. 294,700
c. 297,850
d. 301,880

Solution 18-13 Answer a

Weighted average unit cost (991,200/118,000 units) 8.40

Inventory - January 31 (35,000 units x 8.40) 294,000

Problem 18-14 (IAA)

Stephanie Company is a wholesaler of photography equipment. The activity for the inventory of
cameras during July is shown below:

Unit Unit cost

July 1 Inventory 20,000 36.00

7 Purchases 30,000 37.00
12 Sale 36,000
21 Purchases 50,000 47.88
22 Sale 38,000
29 Purchases 16,000 38.11

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If Stephanie Company uses that periodic average cost method to account for inventory, what is
the ending inventory on July 31?
 a. 1,534,000
b. 1,569,120
c. 1,587,360
d. 1,594,640

Solution 18-14 Answer b

Units Unit cost Total cost

July 1 Inventory 20,000 36.00 720,000

7 Purchase 30,000 37.00 1,110,000
21 Purchase 50,000 37.88 1,894,000
29 Purchase 16,000 38.11 609,000
Total goods available
(4,333,760/116,000) 116,000 37.36 4,333,760

Sales (36,000+ 38,000) (74,000)

Ending inventory 42,000 37.76 1,569,120

Problem 18-15 (IAA)

The following data are extracted from the records of an entity relating to an inventory item.

Units Unit cost Total cost

July 1 Beginning purchase 5,000 200 1,000,000

10 Purchase 5,000 250 1,250,000
15 Sale 7,000
16 Sale returns 1,000
30 Purchase 16,000 150 2,400,000
31 Purchase return 2,000 150 300,000

Under the perpetual system, what is the moving average unit cost on January 31?

a. 167
b. 165
c. 181
d. 225

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Solution 18-15 Answer a
 Unit Unit cost Total cost

Jan 1 Beginning balance 5,000 200 1,000,000

10 Purchases 5,000 250 1,250,000
Balance 10,000 225 2,250,000
15 Sale (7,000) 225 (1,575,000)
Balance 3,000 225 675,000
16 Sale return 1,000 225 225,000
Balance 4,000 225
900,000
30 Purchase 16,000 150 2,400,000
Balance 20,000 165 3,300,000
31 Purchase Return (2,000) 150 ( 300,000)
Balance 18,000 167 3,000,000

Observe that the moving average unit cost change every time there is a new purchase or a
purchase return. The moving average unit cost is not affected by a sale or sale return.

Problem 18-16 (IAA)

A flood recently destroyed many of the financial records of Yakal Company. The entity uses an
average cost inventory valuation system.

Yakal makes a physical count at the end of each month in order to determine monthly ending
inventory value.

By examining various documents, the following data are gathered:

Ending inventory at July 1 60,000 units

Total cost of units available for sale in July 1,452,000
Cost of goods sold during July 1,164,000
Cost of beginning inventory, July 1 4.00 per unit
Gross profit on sales for July 935,900

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July purchase
 Units Unit cost Total cost

July 5 55,000 5.10 280,500

11 53,000 5.00 265,000
15 45,000 5.50 247,500
16 47,000 5.30 249,100
200,000 1,042,100

1. What is the number of units on July 1?

a. 102,500
b. 140,000
c. 76,500
d. 60,000

2. How many units were sold during the month of July?

a. 242,500
b. 140,000
c. 302,500
d. 260,000

3. What is the cost of the inventory on July 31?

a. 288,000
b. 410,000
c. 312,000
d. 240,000

Solution 18-16

Question 1 Answer a

Cost of units available for sale for July

1,452,100
Purchases for July (1,042,100)

Cost of inventory – July 1 410,000

Number of units – July 1 (410,000/4) 102,000

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Question 2 answer a
July 1 Inventory 102,500
Purchases for July 200,000
Total units available for sale for July 302,000
July 31 inventory ( 60,000)
Units sold during the month of July 242,000

Question 3 answer a

Average unit cost (1,452,100/302,500) 4.80

Inventory – July 31 (60,000 x 4.80) 288,000

Another approach

Cost of units available for sale for July 1,452,100

Cost of goods sold for July (1,164,100)
Inventory – July 31 288,000

Problem 18 – 17 (PHILCPA Adapted)

Elixir Company bought a 10-hectare land in Novaliches to be improved, subdivided into lots and
eventually sold. Purchase price of the land was P 5,800,000. Taxes and documentation expenses
on the transfer to the property amounted to P80,000. The lots were classified as follows.

Lots Class Number of lots Selling price per lot Total clearing cost

A 10 100,000 None
B 20 80,000 100,000
C 40 70,000 300,000
D 50 60,000 800,000

What amount should be allocated as total cost of Class B lots under the relative sales value
method?

a. 1,176,000
b. 1,220,000
c. 1,276,000
d. 1,700,000

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Solution 18-17 Answer b

Sales price Fraction Allocated cost

A (10x 100,000) 1,000,000 10/84 700,000
B (20x 80,000) 1,600,000 16/84 1,120,000
C (40x 70,000) 2,800,000 28/84 1,960,000
D (50x 60,000) 3,000,000 30/84 2,100,000
8,400,000 5,880,000

Allocated cost of Class B 1,120,000

Clearing cost of Class B 100,000
Total cost 1,220,000

Problem 18-18 (AICPA Adapted)

On July 1, Casa Company purchased a tract of land for P12, 000,000. Casa incurred additional
cost of P3,000 000 during the reminder of the year in preparing the land for sale. The tract was
subdivided into residential lost as follows:

Lot class Number of lots Sales price per lot

A 100 240,000
B 100 160,000
C 200 100,000

Using the relative sales value method, what amount of cost should be allocated to Class A lots?

a. 3,000,000
b. 3,750,000
c. 6,000,000
d. 7,200,000

Solution 18-18 Answer c

Sales price Fraction Allocated cost

A (100 x 240,000) 24,000,000 24/60 6,000,000

B (100 x 160,000) 16,000,000 16/60 4,000,000
C (200x 100,000) 20,000,000 20/60 5,000,000
60,000,000 15,000,000

Incidentally, the cost of each class A lot is P6, 000,000 divided by 100 lots of P 60,000.

327
Problem 18 -19 (PHILCPA Adapted)
Apitong Company manufactures bath towels. The producing comprises 60% of “Class A” which
sells for P500 per dozen and 40% of “class B” which sells for P250 a dozen. During the current
year, 60,000 dozens were produced at an average cost of P350 a dozen. The inventory at the end
of the current year was as follows:

2,200 dozens “Class A” @ P360 792,000

3,000 dozens “Class B” @ P360 1,080,000
Total Inventory 1,872,000

Using the relative value method which management considers as a more equitable basis of cost
distribution, what is the measurement of the inventory?

a. 1,170,000
b. 1,665,000
c. 1,872,000
d. 2,340,000

Solution 18-19 Answer b

Units Sales Price Total

Class A (60% x 60,000) 36,000 500 18,000,000
Class B (40% x 60,000) 24,000 250 6,000,000
60,000 24,000,000

Total average cost (60,000 x 360) 21,600,000

Allocated cost:
Class A (18/24 x 21,600,000) 16,200,000
Class B ( 6/18 x 21,600,000) 5,400,000
Total average cost 21,600,000

Unit cost:
Class A (16,200,000/36,000) 450
Class B ( 5,400,000/24,000) 225

Inventory cost:
Class A (2,000 x 450) 990,000
Class B (3,000 x 225) 675,000
Total Inventory 1,665,000

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Problem 18-20 (AICPA Adapted)
Julius Company, a conglomerate, has three subsidiaries. Aye, Bee, and Cee. Aye company is in
commodity business. Inventory on January 1. 2010 totaled P240, 000. Aye Company used the
weighted average method.

Quantities on hand were 8,000 and 10,000 on January 1 and December 31, 2010 respectively.
Aye Company made purchases of 25,000 units in 2010 at a total cost of P 8116,000.

Bee Company buy and sells land. On January 1, 2010, a tract of land was bought for P10,
000,000. Costs of leveling the land amounted to P2,500,000. The lots were subdivided as
follows:

25 Class A to sell for P400,000 each

30 Class B to sell for P300,000 each
10 Class C to sell for P 100,000 each

On December 31, 2010, the unsold lots consisted of P15 Class A 6 Class B and 3 Class C.

Cee Company sells beds. The perpetual inventory was stated at P1,960,000 on December 31,
2010. At the close of the year, a new approach for compiling inventory was used and apparently
a satisfactory cutoff was not made.

Some events that occurred are as follow:

 Beds shipped FOB shipping point to a customer on January 5, 2011 costing P 200,000
were included in inventory on December 31,2010

 Beds costing P900, 000 received December 30, 2010 were recorded on January 2, 2011.

 Beds received costing P190, 000 were recorded twice.

 Beds shipped FOB shipping pint to a customer on December 28, 2010 per date shipping
invoice which cost P700, 000 were not recorded as delivered until January 2011.

 Beds on hand which cost P230, 000 were not recorded.

329
1. What is the ending inventory of Aye Company?

a. 320,000
b. 326,000
c. 300,000
d. 313,200

2. What is the ending inventory of Bee Company?

a. 3,900,000
b. 4,050,000
c. 5,062,500
d. 4,875,000

3. What is the ending inventory of Cee Company?

a. 3,090,000
b. 2,390,000
c. 2,200,000
d. 2,900,000

Solution 18-20

Question 1 Answer a
Units Cost
January 1 8,000 240,000
Purchases 25,000 816,000
Goods available for sale 33,000 1,056,000

Inventory – December 31
(1,056,000/33,000 = 32 x 10,000) 320,000

Question 2 Answer c

Sales price Fraction Cost

Class A (25 x 400,000) 10,000,000 10/20 6,250,000
Class B ( 20 x 300,000) 9,000,000 9/20 5,625,000
Class C (10 x 100,000) 1,000,000 1/20 625,000

330

Cost per lot Unsold Cost

Class A (6,250,000/25) 250,000 15 3,750,000
Class B (5,625,000/30) 187,000 6 1,125,000
Class C ( 625,000/10) 62,000 3 187,500

Total Inventory 5,062,500

Question 3 Answer c

Inventory per Book 1,960,000

Beds received December 30, 2010 recorded January 2, 2011
900,000
Beds received recorded twice ( 190,000)
Beds shipped FOB shipping point on
December 30, 2010 recorded January 2011 ( 700,000)
Beds on hand unrecorded 230,000

Correct inventory 2,200,000

Problem 18-21 (IFRS)

Chicago Company has two products in its inventory which have costs and selling prices as
follows:

Product X Product Y

Selling Price 2,000,000 3,000,000

Materials and conversion costs 1,500,000 1,800,000
General administration costs 300,000 800,000
Estimated selling costs 600,000 700,000

At the year-end, the manufacture of items of inventory has been completed but no selling cost
have yet been incurred.

What is the measurement of Product Y, respectively?

a. 1,400,000 and 2,300,000

b. 1,400,000 and 1,800,000
c. 1,500,000 and 2,300,000
d. 1,500,000 and 1,800,000

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Solution 18-21 Answer b
Inventories shall be measured at the lower of cost and net realizable value. Net realizable value is
the estimated selling price less the estimated cost to complete and the estimated cost to sell.

Product X Product Y
Materials and conversion costs 1,500,000 1,800,000

Selling price 2,000,000 3,000,000

Selling costs ( 600,000) ( 700,000)
Net realizable value 1,400,000 2,300,000

Measured at lower amount 1,400,000 1,800,000

Problem 18-22 (AICPA Adapted)

Based on a physical inventory taken on December 31,2010, Chewey Company determined its
chocolate inventory on a FIFO basis at P5,200,000 with a replacement cost of P4,000,000.
Chewey estimated that, after further processing cost of P2,400,000, the chocolate could be sold
as finished candy bars for P8,000,000. Chewey’s normal profit margin is 10% of sales. Using the
measurement at the lower of cost net realizable value, what amount should Chewey report as
chocolate inventory on December 31, 2010?

a. 5,600,000
b. 4,000,000
c. 5,200,000
d. 4,800,000

Solution 18-22 Answer c

Estimated sales price 8,000,000

Cost to complete- processing cost (2,400,000)

Net realizable value 5,600,000

The cost of P5,200,000 is the inventory valuation because it is lower than the net realizable
value.

332
Problem 18-23 (IAA)
Greece Company provided the following data for the current year:

Inventory – January 1 :
Cost 3,000,000
Net realizable value 2,800,000
Net purchases 8,000,000
Inventory – December 31;
Cost 4,000,000
Net realizable value 3,700,000

Under PAS 2, what should be reported as cost of goods sold?

a. 7,000,000
b. 7,100,000
c. 7,300,000
d. 7,200,000

Solution 18 – 23 Answer b

Inventory – January 1, at cost 3,000,000

Net purchases 8,000,000

Goods available for sale 11,000,000

Inventory – December 31, at cost (4,000,000)
Cost of Goods sold before inventory writedown 7,000,000
Loss on inventory writedown 100,000

Cost of goods sold after inventory writedown 7,100,000

Required allowance- December 31

(4,000,000-3,700,000) 300,000
Allowance for inventory writedown
(3,000,000-2,800,000) 200,000

Loss on inventory writedown 100,000

Under PAS 2, the month of any inventory writedown to net realizable value and all losses on
inventory shall be included cost of goods sold.

The amount of any reversal of inventory writedown shall be deducted from cost of goods sold.

333

Problem 18-24 (IAA)

Gracia Company uses the lower of cost or net realizable value method to value inventory. Data
regarding the items in work in process inventory are presented below.

Markers Pens Highlighters

Historical cost 240,000 188,000 300,000
Selling price 360,000 250,000 360,000
Estimated cost to complete 48,000 50,000 68,000
Replacement cost 208,000 168,000 318,000
Normal profit margin as a
Percentage of selling price 25% 25% 10%

What is the measurement of the work in process inventory?

a. 720,000
b. 728,000
c. 676,000
d. 694,000

Solution 18-24 Answer a

Historical cost NRV Value

Markers 240,000 312,000 240,000

Pens 188,000 200,000 188,000
Highlighters 300,000 292,000 292,000
720,000

The measurement at the lower of cost or net realizable value shall be applied on an individual
basis or item by item.

Problem 18025 (AICPA Adapted)

On December 31,2010, Dos Company has outstanding purchases commitments for 50,000
gallons at P20 per gallons of raw materials to be used in its manufacturing process. The entity
prices raw materials inventory at cost or net realizable value, whichever is lower.

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It is determined that the market price of the raw material has declined to P17per gallon on
December 31,2010 and it is expected to declined further to P15 in the first quarter of 2011. How
much is the loss on purchase commitment that should be recognized in 2010?
 a. 850,000
b. 150,000
c. 250,000
d. 0

Solution 18-25 Answer b

Loss on purchase commitment (50, 000 x 3) 150,000

Only the market decline that actually occurred on December 31, 2010 is recognized by
debotong loss on purchase commitment and crediting estimated liability for purchase
commitment. When the purchase is made in 2011 and the market price has actually declined
to P15, the entry is as follows:

Purchase (50,000 x 15) 750,000

Loss on purchase commitment 100,000
Estimated liability for purchase commitment 1 150,000
Accounts payable 1,000,000

Note that an additional loss on purchase commitment of P100, 000 (50,000 x 2) is recognized in
2011

Problem 18-26 (IAA)

On October 1, 210, Gorgeous Company entered into a 6-month, P5, 200,000 purchase
commitment for a supply of a special product. On December 31, 2010, the market value of this
material had fallen to P5, 000,000. On March 31, 2011, the market value of the purchase
commitment is P4, 900,000. What is the loss purchase commitment to be recognized on March
31, 2011?

a. 200,000
b. 100,000
c. 300,000
d. 0

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Solution 18-26 Answer b

Market value – December 31, 2010 5,000,000
Market value – March 31, 2011 4,900,000

Additional loss on purchase commitment in 2011 100,000

Problem 18-27 (IAA)

On November 15, 2919 Diamond Company entered into commitment to purchase 10,000 ounces
of gold on February 15,2011 at a price of P310 per ounce. On December 31, 2010, the market
price of gold is P270 per ounce. On February 15. 2011, the price of gold is P300 per ounce. What
is the gain on purchase commitment to be recognized on February 15, 2011?

a. 400,000
b. 300,000
c. 100,000
d. 0

Solution 18-27 Answer b

Entity on December 31, 2010

Loss on purchase commitment 400,000

Estimate liability for purchase commitment
(10,000 x 40) 400,000

Entry on February 15, 2011

Purchases (10,000 x 300) 3,000,000

Estimated liability for purchase commitment 400,000
Accounts payable (10,000 x 310) 3,100,000
Gain on purchase commitment 300,000

Problem 18-28 (AICPA Adapted)

On January 1,2010 Card Company signed a three-year, noncancelable purchase contract, which
allows Card to purchase company up to 5,000 units of a computer part annually from Hart
company at P100 per unit and guarantees a minimum annual purchase of P1,000 units.

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During 2010, the part unexpectedly became obsolete. Card had 2.500 units of this inventory on
December inventory on December 31, 2010, and believes these parts can be sold as scrap for P20
per unit. What amount of probable loss from the purchase commitment should Card report in its
2010 income statement.

a. 240,000
b. 200,000
c. 160,000
d. 360,000

Solution 18-28 Answer c

Remaining contract – 1,000 units each year

2011 (1,000 x P100) 100,000

2012 (1,000 x P100) 100,000

Total 200,000
Estimated realizable value (2,000 x P20) 40,000

Loss on purchase commitment 160,000

A loss on inventory writedown should also be recognized on December 31, 2010 in the amount
of P200,000 (2,500 x P80)

Problem 18-29 (IAA)

On November 15, 2010, Damascus Company entered into a commitment to purchase 100,000
barrels of aviation fuel for P55 per barrels of aviation fuel for P55 per barrel on March 31, 2011.
The entity entered into this purchase commitment to protect itself against the volatility in the
aviation fuel market. By December 31, 2010 the purchase price of aviation fuel had fallen to P40
per barrel. However, by March 31, 2011, when the entity took delivery of the 100,000 barrels the
price of aviation fuel had risen to P60 per barrel.

How much should be recognized as gain on purchase commitment for 2011?

a. 1,500,000
b. 2,000,000
c. 500,000
d. 0

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Solution 18-29 Answer a

To record the loss on December 31, 2010

Loss on purchase commitment 1,500,000

Estimated liability for purchase commitment
(10,000 x 15) 1,500,000

To record the actual purchase on March 31, 2011:

Purchases (100,000 x 55) 5,500,000

Estimated liability for purchase commitment 1,500,000
Accounts payable 5,500,000
Gain on purchase commitment 1,500,000

Actually, the recognition of a loss on purchases commitment is an adaption of the measurement

at the lower of cost or net realizable value.

Accordingly, if the market rises by the time the purchase is made, a gain on purchase
commitment is recorded. However, the gain to be recognized is limited to the loss on purchase
commitment previously recorded.

Problem 18-30 (IFRS)

An extract from Uptown Company’s unadjusted trail balance on December 31, 2010 appears
below. Uptown Company uses the perpetual method to recorded inventory transactions.

Inventory 1,900,000
Sales 6,500,000
Sales return 150,000
Cost of goods sold 4,600,000
Inventory losses 120,000

On December 24, 2010, Uptown recorded a P150,000 credit sale of goods costing P100,000.
These goods were sold on FOB destination terms and were in transit on December 31, 2010. The
goods were included in the physical count.

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The inventory on December 31, 2010 determined by physical count had a cost of P2,000,000 and
a net realizable value of P1,700,000. Any inventory writedown is not yet recorded. All inventory
writedown and losses are included in cost of goods sold.

How much should be reported as cost of goods sold for 2010?

a. 5,020,000
b. 4,500,000
c. 4,720,000
d. 4,920,000

Solution 18-30 Answer d

Physical inventory 2,000,000

Net realizable value 1,700,000

Inventory writedown 300,000

Loss on inventory writedown 300,000

Allowance for inventory writedown 300,000

Inventory 100,000
Cost of goods sold 100,000

Cost of goods sold (4,600,000 – 100,000) 4,500,000

Inventory losses 120,000
Loss on inventory writedown 300,000
Adjusted cost of goods sold 4,920,000

Problem 18-31 (AICPA Adapted)

Altis Company sells one product which it purchases from various suppliers. The trial balance on
December 31, 2010 included the following accounts:

Sales (100,000 units at P150) 15,000,000

Sales discount 1,000,000
Purchase 9,300,000
Purchase discount 400,000

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The inventory purchases during 2010 were as follows:

Units Unit cost Total cost

Beginning inventory, January 1 20,000 60 1,200,000

Purchases, quarter ended March 31 30,000 65 1,950,000
Purchases, quarter ended June 30 40,000 70 2,800,000
Purchases, quarter ended Sept. 30 50,000 75 3,750,000
Purchases, quarter ended Dec. 31 10,000 80 800,000
150,000 10,500,000

Altis’ accounting policy is to report inventory in its financial statements at the lower of cost or
net realizable value. Cost is determined under the first-out method.

Altis’ has determined that, on December 31, 2010, the replacement cost of its inventory was P70
per unit and the net realizable value was P72 per unit. The normal profit margin P10 per unit.

What should Altis report as cost of goods sold for 2010?

a. 6,500,000
b. 6,300,000
c. 6,700,000
d. 6,900,000

Solution 18-31 Answer a

September 30 (40,000 x 75) 3,000,000

December 31 (10,000 x 80) 800,000
FIFO cost 3,800,000
Net realizable value (50,000 x 72) 3,600,000

Inventory writedown 200,000

Inventory – January 1 at cost 1,200,000

Purchases 9,300,000
Purchase discount ( 400,000)
Good available for sale 10,100,000
Inventory – December 31 at cost (3,800,000)
Cost of goods sold before inventory writedown 6,300,000
Loss on inventory writedown 200,000

Cost of goods sold after inventory writedown 6,500,000

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