Chapter 7

Inventories

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. FALSE
3. FALSE
4. TRUE
5. FALSE (₱3 + ₱4 = ₱7)
6. FALSE (₱2 – the cost of the red apple)
7. FALSE (2 + 3 + 4) / 3 apples x 2 apples on hand = ₱6
8. TRUE
9. TRUE
10. FALSE (₱2 – the amount of write-down in prior periods)

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. D
2. D
3. A
4. A
5. A

6. Solutions:
Cost of inventory Net cash payment
Scenarios: on Dec. 31 on Jan. 5
a. FOB Destination,
Freight prepaid None 100,000
b. FOB Shipping point,
Freight collect 106,000 100,000
c. FOB Destination,
Freight collect None 94,000
d. FOB Shipping point,
Freight prepaid 106,000 106,000

7. D
8. C – memo entry
9. D

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10. Solution:

Inventory Accounts payable

Unadjusted balances 500,000 120,000
(b) 60,000 -
(c) (80,000) (80,000)
(d) 50,000 50,000
(e) 30,000 -
Adjusted balances 560,000 90,000

11. Solution: 180,000 – 30,000 + [(18,000 + 2,000) x ½] = 160,000

12. Solution:
a. Inventory on display shelves 100,000
b. Inventory stocked in warehouse 250,000
c. Inventory sold under a bill and hold arrangement,
included in the stock of inventory in warehouse (20,000)
d. Inventory purchased in installment sale, physical
possession is obtained but the seller retains legal title
to the goods until full payment of purchase price 30,000
e. Inventory pledged as collateral security for a bank loan 60,000
g. Inventory sold wherein ABC Co. is obligated to
repurchase the inventory at a future date 10,000
430,000

13. A
14. A
15. C
16. D

17. Solutions:

Requirement (a):

Perpetual system Periodic system

(a)
Inventory 450,000 Purchases 450,000
Accounts payable 450,000 Accounts payable 450,000

(b)
Inventory 25,000 Freight-in 25,000

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 Cash 25,000 Cash 25,000

(c)
Accounts payable 10,000 Accounts payable 10,000
Inventory 10,000 Purchase returns 10,000

(d)
Accounts receivable 800,000 Accounts receivable 800,000
Sales 800,000 Sales 800,000

Cost of goods sold 380,000 No entry

Inventory 380,000

(e)
Sales returns 9,000 Sales returns 9,000
Accounts receivable 9,000 Accounts receivable 9,000

Inventory 4,275 No entry

Cost of goods sold 4,275

Requirement (b):

Perpetual system

Sales 800,000
Sales returns (9,000)
Net sales 791,000
Cost of sales (375,725)
Gross profit 415,275

Periodic system

Sales 800,000
Sales returns (9,000)
Net sales 791,000

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Cost of sales:
Beginning inventory 20,000
Net purchases 465,000
Total goods avail. for sale 485,000
Ending inventory (109,275) (375,725)
Gross profit 415,275

18. D
19. B
20. D
21. D
22. E

23. Solution:

Purchase price, gross of trade discount 100,000

Trade discount (20,000)
Non-refundable purchase tax 5,000
Freight-in (Transportation costs) 15,000
Commission to broker 2,000
Total cost of inventories 102,000

The advertisement costs are selling costs. These are

expensed in the period in which they are incurred.

24. Solution:

Gross method Net method

Jan. 1, 20x1
Purchases 144,000* Purchases 136,800*
Accounts payable 144,000 Accounts payable 136,800

*(₱200,000 x 80% x 90%) *(₱200,000 x 80% x 90% x 95%)

Jan. 10, 20x1

Accounts payable* 72,000 Accounts payable* 68,400

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 Purchase discounts 3,600 Cash 68,400
(144,000 x ½ x 5%)
Cash** 68,400

*(144K x ½) * (136.8K x ½)
**(144K x ½ x 95%)

Jan. 31, 20x1

Accounts payable* 72,000 Accounts payable 68,400
Cash 72,000 Purchase discount lost 3,600
Cash 72,000
*(144K x ½)

25. C
26. D

27. Solutions:

Requirement (a): FIFO Periodic

Ending inventory, in units = (3,000 + 2,250 + 10,200 – 2,700 – 7,200) = 5,550

Units Unit cost Total cost

Ending inventory in units 5,550
Allocation to latest purchases:
Jan. 26 2,250 20.60 46,350
Jan. 6 (balance) 3,300 21.50 70,950
Ending inventory in pesos 117,300

TGAS (58,650 + 219,300 + 46,350) 324,300

Less: Ending inventory in pesos (117,300)
COGS 207,000

Requirement (b): FIFO Perpetual

Answers are the same with FIFO Periodic.

OR
Unit
Units Total Cost
Cost
Balance at January 1, 2002 3,000 19.55 58,650
January 6, 2002 10,200 21.5 219,300
January 7, 2002 (2,700) 19.55 (52,785)

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 January 26, 2002 2,250 20.6 46,350
January 31, 2002 (7,200) * (154,215)*
Ending inventory 5,550 117,300

*The COGS on the Jan. 31 sale is computed as follows:

Units Unit Cost Total Cost
Jan. 31 sale 7,200
Allocation:
From Jan. 1 (3,000 - 2,700) 300 19.55 5,865
From Jan. 6 (balance) 6,900 22 148,350
COGS - Jan. 31 sale 154,215

COGS = (52,785 + 154,215) amounts taken from table above = 207,000

Requirement (c): Weighted Average Cost Periodic

TGAS in pesos
Weighted ave. unit cost =
TGAS in units
(58,650 + 219,300 + 46,350) = 324,300
Weighted ave. unit cost =
(3,000 + 10,200 + 2,250) = 15,450

Weighted ave. unit cost = 20.99

Ending inventory in units 5,550

Multiply by: Wtd. Ave. Cost 20.99
Ending inventory in pesos 116,495

TGAS in pesos 324,300

Less: Ending inventory in pesos (116,495)
COGS 207,805

Requirement (d): Weighted Average Cost Perpetual

Unit
Units Total Cost
Cost
Balance at January 1, 2002 3,000 19.55 58,650
January 6, 2002 10,200 21.5 219,300
TGAS 13,200 21.06 277,950
January 7, 2002 (2,700) 21.06 (56,862)
January 26, 2002 2,250 20.6 46,350
TGAS 12,750 20.98 267,438
January 31, 2002 (7,200) 20.98 (151,056)
Ending inventory 5,550 116,382

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COGS = (56,862 + 151,056) = 207,918

28. C

29. Solution:
Requirement (a):
Product A Product B Product C Total
Purchase price 100,000 250,000 300,000
Freight-in 12,000 30,000 36,000
Cost 112,000 280,000 336,000

Selling price 210,000 300,000 570,000

Freight-out (10,500) (75,000) (11,400)
NRV 199,500 225,000 558,600

Lower 112,000 225,000 336,000 673,000

Requirement (b):
Product B: (280,000 – 225,000) = 55,000

30. Solution: 200,000 – the amount of write-down in 20x1 because

the 20x2 recovery exceeds the cumulative amount of write-downs
recognized in the previous periods.

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PROBLEM 3: EXERCISES

1. Solution:
Unadjusted balance 260,000
(a) 11,000
(b) 5,000
(c) (16,000)
(d) 20,000
(e) (4,000)
Correct inventory 276,000

2. Solution:
(a) Inventory (140,000 x 98%) 137,200
Accounts payable 137,200

(b) Accounts payable (137.2K x 75%) 102,900

Cash 102,900

(c) Accounts payable (137.2K x 25%) 34,300

Purchase discount lost (140K x 2% x 25%) 700
Cash (140,000 x 25%) 35,000

3. Solution:
June 11 Purchases (.98 × ₱9,000) 8,820
Accounts Payable 8,820
15 Accounts Payable (.98 × ₱1,000) 980
Purchase Returns and Allowances 980
30 Purchase Discounts Lost (.02 × ₱8,000) 160
Accounts Payable 160

4. Solution:
Requirement (a):
Purchases 196,000
Accounts Payable 196,000

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 (.98 × ₱200,000 = ₱196,000.)

Payment within the discount period:

Accounts Payable 156,800
Cash 156,800

(₱200,000 – ₱40,000 = ₱160,000 x .98 = ₱156,800.)

Payment beyond the discount period:

Accounts Payable (40K x 98%) 39,200
Purchase Discounts Lost (40K x 2%) 800
Cash 40,000

Requirement (b):

(1) Net method:

Ending inventory (200,000 x 98% x 10%) ₱19,600
Cost of goods sold (200,000 x 98% x 90%) ₱176,400

(2) Gross method:

(A) Discount is allocated only to the goods sold:

Gross amts. Allocation of discount Net amounts

EI (200K x 10%) 20,000 - 20,000
COGS (200K x 90%) 180,000 3,200 176,800
Total 200,000 3,200

(B) Discount is prorated to both the goods sold and ending

inventory:

Gross amts. Allocation of discount Net amounts

EI (200K x 10%) 20,000 320* 19,680
COGS (200K x 90%) 180,000 2,880* 177,120
Total 200,000 3,200

* (3,200 x 10%; 3,200 x 90%)

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5. Solutions:

Requirement (a): FIFO periodic

➢ Ending inventory, in units = 1,400 – 400 + 800 – 900 + 700 – 600
= 1,000 units

In units Unit cost In pesos

Ending inventory 1,000
Allocation to June 24 purchase (700) 30 21,000
Excess allocated to June 14
purchase 300 35 10,500
Ending inventory, in pesos 31,500

➢ TGAS, in pesos:
Date Transaction Quantity Unit Cost In pesos
June 1 Balance fwd. 1,400 24 33,600
14 Purchase 800 35 28,000
24 Purchase 700 30 21,000
TGAS, in pesos 82,600

TGAS in pesos 82,600

Ending inventory, in pesos (31,500)
Cost of goods sold 51,100

Requirement (b): FIFO perpetual

Unit
Date Transaction Quantity Cost In pesos
June 1 Balance 1,400 24 33,600
8 Sale 400 24 (9,600)
14 Purchase 800 35 28,000
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 18 Sale 900 24 (21,600)
24 Purchase 700 30 21,000
29 Sale 600
100 from June 1 24 (2,400)
500 from June 14 35 (17,500)
Ending inventory 31,500

Cost of goods sold (9,600 + 21,600 + 2,400 + 17,500) 51,100

Requirement (c): Weighted average periodic

Weighted Ave. Unit cost = TGAS, in pesos ÷ TGAS, in units

➢ TGAS, in units = 1,400 + 800 + 700 = 2,900 units

Weighted Ave. Unit cost = ₱82,600 (see previous solution) ÷ 2,900

Weighted Ave. Unit cost = ₱28.48

Ending inventory = ₱28.48 x 1,000 units = 28,480

TGAS in pesos 82,600

Ending inventory, in pesos (28,480)
Cost of goods sold 54,120

Requirement (d): Weighted average perpetual

Date Transaction Quantity Unit Cost In pesos

June 1 Balance forwarded 1,400 24 33,600
8 Sale (400) (9,600)
14 Purchase 800 35 28,000
Totals 1,800 28.89 52,000
18 Sale (900) (26,001)

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 24 Purchase 700 30 21,000
Totals 1,600 29.37 46,999
29 Sale (600) (17,622)
Ending inventory 1,000 29,377

Cost of goods sold (9,600 + 26,001 + 17,622) 53,223

6. Answers:
Inventory, beg. Net purchases Cost of sales Inventory, end.
a. 10,000 198,000 112,000 96,000
b. 36,000 145,000 125,000 56,000
c. 15,000 58,000 64,000 9,000
d. 25,200 112,000 89,200 48,000

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PROBLEM 4: CLASSROOM ACTIVITIES

ACTIVITY #1:
Solutions:
(a) The term of sale is FOB SHIPPING POINT. Indicator: the freight is
chargeable to ABC Co. (COD – CASH ON DELIVERY).

(b) The freight term is Freight COLLECT.

(c) Journal entry:

JOURNAL
DATE ACCOUNTS Ref. Debit Credit
9/27/X1(a) Inventory / Purchases 8,689.29(b)
Input VAT 910.71
Accounts payable 8,500.00
Cash 1,100.00
to record the purchase of inventory

The date of the Bill of Lading – shipment date.

(a)

Purchase price net of VAT ₱7,589.29 + Freight (₱900.00 bill of lading +

(b)

₱200.00 porter fee) = ₱8,689.29 cost of purchase

ACTIVITY #2:
Solutions:
1. Compute for the following using the Specific Identification method:
a. Cost of goods sold ₱7.00 – the cost of item “broken”
b. Ending inventory ₱11.75

2. Compute for the following using the FIFO method:

a. Cost of goods sold ₱5.75 – the cost of item “happy”
b. Ending inventory ₱13.00

3. Compute for the following using the Weighted Average Cost method:
a. Cost of goods sold (₱5.75 + ₱6.00 + ₱7.00) ÷ 3 = ₱6.25
b. Ending inventory (₱5.75 + ₱6.00 + ₱7.00) - ₱6.25 = ₱12.50

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PROBLEM 5: THEORY

1. B
2. B
3. B
4. C
5. B
6. B
7. D
8. B
9. A
10. C
11. D
12. A
13. D
14. A
15. A
16. A
17. A
18. C
19. C
20. D

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PROBLEM 6: MULTIPLE CHOICE: COMPUTATIONAL
1. A

2. C Net method [(80K + 100K) x 98%] = 176,000

Gross method (80K x 98%) + 100K = 178,400

3. B 100K x 80% = 80,000

4. C 300,000 + 7,500 – 1,500 = 306,000

5. A
Solution:
Inventory
beg. 160,000 10,000 Purchase Disc.
Purchases 530,000 465,000 COGS (squeeze)
215,000 end.
6. A
Solution:
Inventory
beg. 30,000
Purchases 40,000 5,000 Purchase Ret. and Allow.
Freight-In 5,000 4,000 Purchase Disc.
51,000 COGS
15,000 end.

7. C
Solution:
beg. 35,000
Purchases 35,000
Freight-In 5,000
Purchase Ret. and Allow. (2,000)
Purchase Disc. (4,000)
Net purchases 34,000
TGAS 69,000

8. D
Solution:
TGAS 55,000
Beginning Inventory (20,000)
Purchases (41,000)
Purchase Returns and Allowances 3,000
Purchase Discounts 4,000

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 Freight-in 1,000

9. C
Solution:
TGAS 55,000
COGS (22,000)
Ending inventory 33,000

10. D
Solution:
Date Balance/Transaction Units Cost
Aug. 1 Inventory 2,000 ₱36.00
7 Purchase 3,000 37.2
12 Sales (3,600)
21 Purchase 4,800 38
22 Sales (3,800)
29 Purchase 1,600 38.6
Ending inventory 4,000

Units Unit cost Total cost

Ending inventory 4,000
From Aug. 29 purchase (1,600) 38.6 61,760
Balance 2,400
From Aug. 21 purchase (2,400) 38 91,200
As allocated - 152,960

11. D Same with FIFO periodic

12. B
Solution:
Total
Date Balance/Transaction Units Cost
cost
1-Jul Inventory 2,000 72,000
36.00
7 Purchase 3,000 37.00 111,000
21 Purchase 5,000 37.88 189,400
29 Purchase 1,600 38.11 60,976
Total goods available for sale 11,600 433,376
Average cost = 433,376 ÷ 19,000 = 22.81

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 Date Balance/Transaction Units
1-Jul Inventory 2,000
7 Purchase 3,000
12 Sales (3,600)
21 Purchase 5,000
22 Sales (3,800)
29 Purchase 1,600
Ending inventory 4,200
Average cost 37.36
Ending inventory in pesos 156,912

13. C
Solution:
Date Transaction Units Cost Total cost
1-Jul Inventory 2,000 36.00 72,000
7 Purchase 3,000 37.00 111,000
Total 5,000 36.60 183,000
12 Sales (3,600) 36.60 (131,760)
21 Purchase 5,000 37.88 189,400
Total 6,400 37.60 240,640
22 Sales (3,800) 37.60 (142,880)
29 Purchase 1,600 38.11 60,976
Ending inventory 4,200 158,736

14. A
Solution:
Ending inventory in units is computed as follows:
Units
beg. 10
January 6 Purchase 4
January 10 Sale (5)
January 15 Purchase 7
January 20 Sale (10)
January 25 Purchase 4
Ending inventory 10

Total goods available for sale in pesos is computed as follows:

Units Unit cost Total cost
beg. 10 20 200
January 6 Purchase 4 25 100
January 15 Purchase 7 30 210

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 January 25 Purchase 4 30 120
TGAS 25 630

FIFO ending inventory in pesos is computed as follows:

Units Unit cost Total cost
Ending inventory 10
From Jan. 25 purchase (4) 30.0 120
Balance 6
From Jan. 15 purchase (6) 30 180
As allocated - 300

FIFO cost of goods sold is computed as follows:

TGAS 630
Ending inventory (300)
COGS 330

15. A
Solution:
TGAS in pesos (see previous solution) 630
Divide by: TGAS in units (see previous solution) 25
Average unit cost 25.20
Multiply by: EI in units (see previous solution) 10
Average EI 252.00

TGAS in pesos (see previous solution) 630

Average EI (252)
COGS 378

16. C
Solution:
Total goods available for sale is computed based on information
under LIFO as follows:
Cost of goods sold (LIFO) 195,000
Ending inventory in pesos (LIFO) 45,000
Total goods available for sale 240,000

Using the concept that total goods available for sale is the same
under both FIFO and LIFO, the FIFO cost of goods sold is simply
squeezed as follows:
LIFO FIFO
TGAS in pesos 240,000 240,000 extended from LIFO
Ending inventory in pesos (45,000) (65,000) given information

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Cost of goods sold 195,000 175,000 squeezed

17. C No adjustment is necessary for the foregoing.

• The goods are properly included in inventory because they were
shipped only on July 10, 2002, after the June 30, 2002 cut-off
date.
• The goods purchased FOB destination are properly excluded
from inventory because they are not yet received as of cut-off
date.

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