Assignment Answer Key

Additional Explanation for Chapter 4

Problem 4-1
Data relating to Material B-1 during March 2010 are given below:
March 1 Beginning Balance 150 units @ P40.00 P 6,000
6 Purchase 200 units @ P40.50 P 8,100
12 Requisition 225 units
14 Purchase 250 units @ P41.00 P10,250
17 Requisition 200 units
31 Requisition 40 units
135 units Ending inventory
Required: Use FIFO and Weighted average to compute for the ending
inventory and cost of materials used in the production.
FIFO- Periodic
 Ending Inventory:
135 units @ P41 = P 5,535

 Cost of Materials Used:

Materials, beginning P 6,000
Purchases (P8,100 + P10,250) 18,350
Total Materials Available P 24,350
Materials, ending ( 5,535)
Cost of Materials Used P 18,815
FIFO- Perpetual
Purchases Requisition Balance
Unit Total Unit Total Unit
Date
Units Cost cost Units cost cost Units Cost Total Cost
Mar.1 150 40.00 6,000.00
6 200 40.50 8,100 150 40.00 6,000.00
200 40.50 8,100.00
12 150 40.00 6,000.00
75 40.50 3,037.50 125 40.50 5,062.50
14 250 41.00 10,250 125 40.50 5,062.50
250 41.00 10,250.00
17 125 40.50 5,062.50
75 41.00 3,075.00 175 41.00 7,175.00
31 40 41.00 1,640.00 135 41.00 5,535.00

P18,815.00
Weighted Average -Periodic

Units Unit cost Total cost

Mar. 1 Beginning Balance 150 40.00 6,000
6 Purchase 200 40.50 8,100
14 Purchase 250 41.00 10,250
Total Goods Available for Sale 600 24,350

Weighted Average unit cost (24,350/600) P40.58

Inventory cost (135 x P40.58) P5,478.30
Cost of Materials Used

Inventory – January 1 P 6,000.00

Purchases 18,350.00
Materials Available P24,350.00
Inventory – January 31 ( 5,478.30)
Cost of Materials used P18,871.70
Moving Average -Perpetual
Units Unit cost Total cost
Mar. 1 Balance 150 40.00 6,000.00
6 Purchase 200 40.50 8,100.00
Total 350 40.29 14,100.00
12 Requisition (225) 40.29 ( 9,065.25)
Balance 125 40.29 5,034.75
14 Purchase 250 41.00 10,250.00
Total 375 40.76 15,284.75
17 Requisition (200) 40.76 ( 8,152.00)
Balance 175 40.76 7,132.75
31 Requisition ( 40) 40.76 (1,630.40)
Balance 135 40.76 5,502.35
Cost of Materials Used

Inventory – January 1 P 6,000.00

Purchases 18,350.00
Materials Available P24,350.00
Inventory – January 31 ( 5,502.35)
Cost of Materials used P18,847.65
 Problem 4-2
LOWER OF COST OR NRV BY ITEM

COST NRV PER VALUATION LOWER OF

MATERIAL QUANTITY PER UNIT UNIT BASIS COST OR NRV
X-1 100 P100.00 P110.00 Cost P10,000.00
X-2 200 150.00 130.00 NRV 26,000.00
X-3 120 160.00 150.00 NRV 18,000.00
A-4 120 50.00 45.00 NRV 5,400.00
A-5 110 75.00 72.50 NRV 7,975.00
A-6 25 60.00 63.00 Cost 1,500
Inventory Valuation P68,875.00
LOWER OF TOTAL COST OR TOTAL
NRV COST NRV PER TOTAL TOTAL
MATERIAL QUANTITY PER UNIT UNIT COST NRV
X-1 100 P100.00 P110.00 P10,000.00 P11,000.00
X-2 200 150.00 130.00 30,000.00 26,000.00
X-3 120 160.00 150.00 19,200.00 18,000.00
A-4 120 50.00 45.00 6,000.00 5,400.00
A-5 110 75.00 72.50 8,250.00 7,975.00
A-6 25 60.00 63.00 1,500.00 1,575.00
Total P74,950.00 P69,950.00
Inventory Valuation P69,950.00
LOWER OF TOTAL COST OR TOTAL NRV BY GROUP
COST NRV PER TOTAL TOTAL
MATERIAL QUANTIT PER UNIT UNIT COST NRV
Y
X-1 100 P100.00 P110.00 P10,000.00 P11,000.00
X-2 200 150.00 130.00 30,000.00 26,000.00
X-3 120 160.00 150.00 19,200.00 18,000.00
Total Group I P59,200.00 P55,000.00
A-4 120 50.00 45.00 6,000.00 5,400.00
A-5 110 75.00 72.50 8,250.00 7,975.00
A-6 25 60.00 63.00 1,500.00 1,575.00
Total Group II P15,750.00 P14,950.00
Summary of Inventory Valuation:

MATERIAL BASIS VALUATION

Group I NRV P55,000.00
Group II NRV 14,950.00
Inventory valuation P69,950.00
SPECIFIC IDENTIFICATION Problem 1
AMG Manufacturing Company which uses the periodic inventory system
showed the following transactions during the month of May.

Date Units Purchased Unit cost Units issued

5/1 BI 10 P15 -
5/5 20 20 -
5/15 - - 15
5/19 - - 10
5/24 15 18 -
5/30 - - 15

What is the cost of ending inventory under the specific identification method,
assuming that materials issued on 5/15 came from the 5/5 purchase, materials
issued on 5/19 came from beginning inventory, and those issued on 5/30
came from the 5/5 and 5/24 purchases?
Suggested Solution:
Cost of
Date of Issue Purchase Lot Units x Cost Materials Issued
5/15 5/5 15 x P20 = P300
5/19 BI 10 x P15 = 150
5/30 5/5 & 5/24 (5 x P20) + (10 x P18) = 280
P730
Ending inventory: 5 (from 5/24 purchase) x P18 = P90
ACCOUNTING FOR INVENTORY WRITEDOWN

 If the cost is lower than net realizable value, there is no

accounting problem because the inventory is measured at cost
and the increase in value is not recognized. (Cost < NRV)
 
 If the net realizable value is lower than the cost, the inventory is
measured at net realizable value and the decrease in value is
recognized. (Cost > NRV)
METHODS OF ACCOUNTING FOR INVENTORY
WRITEDOWN
Direct Method or Cost of goods sold method
 The inventory is recorded at the lower of cost or net realizable value.
 This method is also known as cost of goods sold method because any loss on
inventory write-down is not accounted for separately but buried in the cost of goods
sold.

Allowance method or loss method

 The inventory is at cost and any loss on inventory writedown is accounted for
separately.
 This method is also known as loss method because a loss account, “loss on
inventory write-down” is debited and a valuation account, “allowance for inventory
write-down” is credited.
Illustration:
December 31, 2019 December 31, 2020
Inventory at Cost P360,000 P420,000
Inventory at Net Realizable Value 348,000 416,000

Computation for Inventory Write-down:

Cost - December 31, 2019 360,000
Net Realizable Value 348,000
Inventory Write-down 12,000
ACCOUNTING FOR INVENTORY WRITE-DOWN
DIRECT METHOD
 The inventory is recorded at lower of cost and net realizable value at year-end.
  Inventory – December 31, 2020 348,000
Income Summary 348,000

ALLOWANCE METHOD
 The inventory is recorded at cost at year-end.
Inventory – December 31, 2020 360,000
Income Summary 360,000
 The inventory write-down is accounted for separately:
Loss on inventory write-down 12,000
Allowance for Inventory Write-down 12,000
INVENTORY MEASUREMENT (December
31,2020)
Cost
NRV
Inventory Write-down P 4,000

Allowance for Inventory WD, December 2020 P 4,000

Allowance for inventory WD, December 2019 (12,000)
Gain on reversal of inventory write-down P 8,000
Journal entry for Reversal of Inventory Write-
down

December 31, 2020:

Allowance for Inventory WD 8,000
Gain from reversal of Inventory WD 8,000
Greece Company provided the following data for the current year:
Inventory –January 1
Cost P3,000,000
Net realizable value 2,800,000 P200,000
Net Purchases 8,000,000
Inventory- December 31
Cost 4,000,000
Net realizable value 3,700,000 P300,000

What amount should be reported as cost of goods sold?

ANSWER:
DIRECT METHOD:

Inventory, January 1 P 2,800,000

Net Purchases 8,000,000
Total P10,800,000
Inventory- December 31 (3,700,000)
Cost of Goods Sold P 7,100,000
 ANSWER:
ALLOWANCE METHOD:

Inventory, January 1 P 3,000,000

Net Purchases 8,000,000
Total P11,000,000
Inventory- December 31 (4,000,000)
Cost of Goods SoldP 7,000,000
Add: Loss on Inventory WD 100,000
Actual Cost of Goods Sold P 7,100,000
Illustration 2: (Problem 4-4)
The Joy Novelty Company uses a perpetual inventory system. On April 2019, its statement of financial
position included the following items related to the materials inventory:

Materials Inventory at Cost P880,875

Less: Allowance for Inventory WD 61,980
Materials Inventory, @ LCNRV P818,895

Required:
Journal (adjusting) entries for the following assumptions:
1. After one year, on April 2020, the perpetual inventory account showed a balance of P890,220. The
net realizable value was P825,330.
2. Assume the same facts as #1, except that net realizable value was P870,165.
3. Assume the same facts as #1, except that net realizable value was P894,540.
Requirement 1:
After one year, on April 2020, the perpetual inventory account showed a balance
of P890,220. The net realizable value was P825,330.

Loss on inventory write-down 2,910

Allowance for inventory write-down 2,910
To record loss resulting from decline in Net Realizable Value of
inventory.

Computation:
Inventory @ cost P890,220
Inventory @ NRV 825,330
Inventory Write-down P 64,890 > 61,980 = 2,910
Requirement 2:
Assume the same facts as #1, except that net realizable value was P870,165.

Allowance for inventory write-down 41,925

Recovery from inventory write-down 41,925
To record recovery resulting from adjustment
of allowance account. 

Computation:
Inventory @ cost P890,220
Inventory @ NRV 870,165
Inventory Write-down P 20,055 < 61,980 = 41,925
Requirement 3:
Assume the same facts as #1, except that net realizable value was P894,540.

Allowance for inventory write-down 61,980

Recovery from inventory write-down 61,980
To record recovery resulting from adjustment
of allowance account.

Computation:
Inventory @ cost P890,220
Inventory @ NRV 894,540
Inventory Write-down 0 < 61,980 = 61,980
Illustration 3: (Problem 4-6)
Goodson Printers
Income Statement
Year Ended January 31, 2010

Sales P729,370
Sales returns and allowances 48,211
Net sales 681,159
Cost of goods sold:
Finished goods inventory, Feb. 1 P 47,910
Cost of goods manufactured 422,280
Cost goods available 470,190
Finished goods inventory, Jan 31 49,620
Total 420,570
Loss on inventory write-down 9,682 430,252
Gross profit 250,907
Operating expenses
Selling expenses 96,357
Administrative expenses 60,061 156,418
Net income before provision for income tax 94,489
Provision for income tax 28,347
Net income after income tax P 66,141
“ If people are doubting how
far you can go, go so far that
you can’t hear them
anymore.
-MICHELE RUIZ-
”
END OF PRESENTATION