Chapter 5

Inventories and Related Expenses

MULTIPLE CHOICE – THEORY

1. C 2. D 3. A 4. C 5. A
6. D 7. A 8. A 9. D 10. D

Problem 1 (Goodwill Company)

Inventories 88,800
Cost of Sales 88,800
16,000 + 13,200 + 26,100 + 19,200 + 14,300 = 88,800

Accounts Payable 15,920

Cost of Sales 15,920

Inventories 13,500
Cost of Sales 13,500

Cost of Sales 13,500

Accounts Payable 13,500

Cost of Sales 4,200

Accounts Payable 4,200

Inventories 22,200
Accounts Payable 22,200
16,000 + 6,200 = 22,200
or two separate entries for purchases and inclusion in
ending inventory

Cost of Sales 85,000

Inventories 85,000

Sales 98,000
Accounts Receivable 98,000

Inventories 65,000
Cost of Sales 65,000

Cost of Sales 17,600

Inventories 17,600

Problem 2 (Victory Enterprises)

Inventory, per client P 441,800

Goods shipped to customer on Dec 31, 2010 (presumed in transit), FOB
destination 38,000
Goods in transit, shipped by a supplier FOB shipping point 51,000
Correct inventory amount, December 31 P 530,800

Inventories 89,000
Cost of Sales 89,000
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Problem 3 (Raindrops Company)

(a) Correct inventory, November 30 55,000

Purchases in November 12,000 + 14,000 26,000
Units sold (50,000 – 4,000) (46,000)
Correct inventory level, December 31 35,000

(b) Adjusting entries:

Cost of Sales (unrecorded purchases) 1,260,000

Accounts Payable 1,260,000
14,000 x 90 = P1,120,000

Sales (4,000 x 125) 500,000

Accounts Receivable 500,000

Inventories (18,000 x 90) 1,620,000

Cost of Sales 1,620,000

Inventories, November 30 55,000

Received in December 12,000
Shipped out (50,000)
Goods reported 17,000
Correct inventory level 35,000
Understatement in units 18,000

Problem 4 (Bulls Company)

(a) Net adjustment to Inventory = 21,096 net debit (See audit adjustments)

Inventory, per count P98,000

Net adjustment to inventory 21,096
Inventory, per audit P119,096

(b) Adjusting entries

Sales 15,773
Accounts Receivable 15,773
5,841 + 7,922 + 2,010

Cost of Sales / Purchases 2,183

Accounts Payable 2,183

Inventory 8,120
Cost of Sales / Income Summary 8,120

Inventory (12,700 /125%) 10,160

Cost of Sales / Income Summary 10,160

Sales 19,270
Accounts Receivable 19,270

Inventory (19,270/125%) 15,416

Cost of Sales 15,416

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Miscellaneous Receivables (from Carrier) 12,600
Inventory 11,250 + 1,350 12,600

Problem 5

Inventory Accts Payable Net Sales

Initial amounts 2,400,000 800,000 10,150,000
Adjustments:
a. (60,000)
b. 65,000 65,000
c. 50,000
d. 32,000 (45,000)
e. 61,000
f. 27,000
g. 56,000
h. 4,000 8,000
Net adjustment 239,000 129,000 (105,000)
Corrected balances P2,639,000 P929,000 P10,045,000

a. Sales 60,000
Accounts Receivable 60,000

b. Inventory 65,000
Accounts Payable 65,000

c. Inventory 50,000
Cost of Sales 50,000

d. Sales Returns and Allowances 45,000

Accounts Receivable 45,000

Inventory 32,000
Cost of Sales 32,000

e. Inventory 61,000
Cost of Sales 61,000

f. Inventory 27,000
Cost of Sales 27,000

g. Cost of Sales 56,000

Accounts Payable 56,000

h. Cost of Sales 4,000

Inventory 4,000
Accounts Payable 8,000

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Problem 6 (Firenze Fashions)

General Ledger Physical Count

Unadjusted balances P 221,020 P 212,820
Goods held on consignment ( 66,000)
Goods purchased FOB shipping point, in transit 12,000
Goods shipped out FOB destination, in transit 24,000 24,000
Goods purchased and received, but not yet recorded 27,300
Goods sold, still unrecorded (63,000)
Unsalable goods (26,500)
Balance per audit P 182,820 P 182,820

Audit Adjustments

Sales 39,000
Accounts Receivable 39,000

Inventory 24,000
Cost of Sales 24,000

Inventory 27,300
Accounts Payable 27,300

Accounts Receivable 96,000

Sales 96,000

Cost of Sales 63,000

Inventory 63,000

Loss from Inventory Obsolescence 26,500

Inventory 26,500

Problem 7

No entry on the P100,000 shipment

Inventory (75% x 80,000) 60,000

Cost of Sales 60,000

Accounts Receivable 60,000

Sales 60,000

Sales 40,000
Accounts Receivable 40,000

Inventory 30,000
Cost of Sales 30,000

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Problem 8 (Maligaya Corporation)

Overall Gross Profit Ratio

Inventory, January 1, 2011 P 660,000
Net Purchases 2011 and 2012 (2,800,000 + 2,350,000) 5,150,000
Goods available for sale P5,810,000
Less: inventory, December 31, 2012 750,000
Cost of goods sold, 2005 and 2006 P5,060,000

Sales – 2011 and 2012 (5,300,000 + 3,900,000) P9,200,000

Less: Cost of goods sold 5,060,000
Gross Profit P4,140,000

Gross Profit Ratio = 4,140,000/ 9,200,000 45%

Inventory Fire Loss

Inventory, January 1, 2013 P 750,000
Add: Purchases January 1 to April 15, 2013
January 1 to March 31 P 520,000
April 1 to 15
Paid 34,000
Unpaid 106,000
Purchase returns ( 9,500) 650,500
Total goods available for sale P1,400,500
Less; Cost of goods sold, January 1 to April 15
Accounts Receivable, April 15 P 360,000
Write off 80,000
Collections (129,500 – 9,500) 120,000
Accounts Receivable, March 31 ( 400,000)
Sales, April 1 to 15 P 160,000
Sales, January 1 to March 31 1,350,000
Sales, January 1 to April 15 P1,510,000
Cost ratio (100% - 45% ) 55% 830,500
Inventory, April 15, before the fire P 570,000
Less: undamaged goods (in transit) P 23,000
Proceeds from sale of damaged goods (lower than cost) 30,000 53,000
Inventory fire loss P 517,000

Problem 9 (Billy Corporation)

11 months ended May Year ended June 30

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Purchases per client P 6,750,000 P 8,000,000
Shipments received in May but recorded in June 75,000
Credit memoranda not recorded (10,000) (15,000)
Deposit for July purchases recorded as April purchases (20,000) (20,000)
Deposit in May, recorded as purchases (55,000) 55,000
Purchases, per audit P6,740,000 P8,020,000

(a) Inventory, July 1, 2011 P 875,000

Purchases, July 1, 2011 to May 31, 2013 6,740,000
Total goods available for sale P7,615,000
Less: Inventory, May 31, 2013 (950,000 – 55,000) 895,000
Cost of goods sold July 1, 2011 to May 31, 2013 P6,720,000

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Gross profit 8,400,000 – 6,720,000 = 1,680,000
Gross profit ratio = 1,680,000/ 8,400,000 20%

(b) Sales in June at normal selling price

(P9,600,000 – 8,400,000) – 100,000 P1,100,000
Cost ratio 80%
Cost of goods sold in June at normal selling price P 880,000
Cost of merchandise sold at cost 100,000
Cost of goods sold in June P980,000

(c) Inventory, May 31. 2012 P895,000

Purchases in June (8,020,000 – 6,740,000) 1,280,000
Goods available for sale 2,175,000
Cost of goods sold in June 980,000
Inventory, June 30 1,195,000

Inventory, July 1, 2011 875,000

Purchases July 1, 2011 – June 30, 2012 8,020,000
Total goods available for sale 8,895,000
Cost of goods sold (9,600,000 – 100,000) x 80% =7,600,000
100,000 7,700,000
Inventory, June 30, 2012 1,195,000

Problem 10 (Chi Fi Fai)

Audit Adjusting Entries:

Accounts Receivable 50,000

Sales 50,000

Cost of Sales (50,000 x 80/120) 33,333

Inventory 33,333

Other Operating Expenses – Loss from Inventory Contamination 800,000

Cost of Sales 800,000

Cost of Sales 36,000

Accounts Payable 36,000
(The company credited Cost of Sales on December 29 to adjust the stock cards inventory to
inventory list, per physical count.)

Decline in Net Realizable Value of Inventory 90,000

Allowance to Reduce Inventory to Net Realizable Value 90,000

Cost of Sales (400,000 – 80,000) 320,000

Accounts Payable 320,000

(1.) Inventory is overstated by P33,333 as a result of goods out on consignment.

(2.) The Accounts Receivable is understated by P50,000, as a result of goods out on consignment.
(3.) The net income is understated by P16,667, as a result of goods out on consignment.
(4.) The accounts payable shall be increased by P320,000.
(5.) The gross profit is increased by P80,000, which in effect is the commission income.
(6.) Inventory at cost, per audit = P890,000 – P33,333 = P856,667.
(7.) The inventory shall be presented at P766,667, which is the cost of P856,667 reduced by the allowance for decline in
net realizable value of P90,000.

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Problem 11 (Global Company)

Audit Adjustments

Selling and Administrative Expenses 16,000

Receivables from Employees 1,500
Petty Cash Fund 17,500

Cash in Banks – BDO 32,000

Value Added Tax Payable 32,000

Notes Payable – Bank 50,000

Interest Expense 18,000
Cash in Banks – Asian Bank 68,000

Selling and Administrative Expenses 200

Cash in Banks – BPI 200

Equipment Acquisition Fund 1,100,000

Cash in Banks – PNB 1,100,000

Allowance for Doubtful Accounts 168,000

Accounts Receivable (70% x 240,000) 168,000

Finished Goods Inventory 60,000

Cost of Sales 60,000
200,000 x 60% x 50% = 60,000

Sales 75,000
Accounts Receivable 60,000 / 80% 75,000

Inventory of Spoiled Goods and Scrap Materials 42,000

Cost of Sales 38,000
Work in Process Inventory 80,000

Inventory of Spoiled Goods and Scrap Materials 55,000

Cost of Sales 55,000

Selling and Administrative Expenses 152,250

Allowance for Doubtful Accounts 152,250
Accounts receivable, per client P3,400,000
Adjustments ( 168,000)
( 75,000)
Balance per audit P3,157,000
Account of Blue Ridge
240,000 – 168,000 ( 72,000)
Remaining accounts P3,085,000
Provision rate on remaining 5%
Required Allowance for D. A. P 154,250
Balance of allowance
170,000 – 168,000 ( 2,000)
Additional doubtful accounts expense P 152,250

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(1) Petty Cash Fund = P2,500
(2) Cash on deposits with Asian Bank = 400,000 – 68,000 P332,000
(3) Cash on deposits with Security Bank = 350,000 – 50,000 P300,000
(4) Cash on deposits with Banco de Oro = (12,000) + 32,000 P 20,000
(5) Cash on deposits with BPI = 200,000 – 200 P199,800
(6) Cash on deposits with PNB P1,100,000
(7) Total Cash in Bank – Current Assets = 332,000 + 300,000 + 20,000 + 199,800 = P851,800
(8) Accounts Receivable P3,157,000
(9) Allowance for Uncollectible Accounts P154,250
(10) Uncollectible Accounts Expense = 80,000 + 152,250 P232,250
(11) Finished Goods Inventory = 600,000 + 60,000 P660,000
(12) Work in Process Inventory = 1,000,000 – 80,000 P920,000
(13) Raw Materials Inventory = P400,000
(14) Inventory of Spoiled Goods and Scrap Materials = 80,000 + 42,000 + 55,000 P177,000
(15) Sales = 6.000,000 – 75,000 P5,925,000
(16) Cost of Sales = 4,200,000 – 60,000 + 38,000 – 55,000 P4,123,000
(17) Selling and Administrative Expenses = 500,000 + 16,000 + 200 + 152,250 P668,450
(18) Other Operating Income P120,000
(19) Interest Expense and Finance Costs = 200,000 + 18,000 P218,000

MULTIPLE CHOICE - PROBLEMS

1. A 7. B 13. C 19. C
2. C 8. B 14. B 20. C
3. C 9. C 15. A 21. D
4. C 10. C 16. C 22. A
5. A 11. D 17. B
6. P6,566 12. A 18. A

Solutions:

1. Cash = 240,800 – 163,650 + 90,000 P167,150

2. Accounts Receivable = 563,500 + 77,500 P641,000

3. Inventory = 1,512,500 + 68,750 + 54,375 – 159,375 + 32,500 P1,508,750

4. Accounts Payable = 1,050,250 + 93,100 + 54,375 – 43,750 P1,153,975

5. Inventory, January 1 P 450,000

Purchases 3,150,000
Goods available for sale P3,600,000
Cost of goods sold (4,000,000 x 70%) 2,800,000
Inventory, based on gross profit test P 800,000
Inventory, per count 750,000
Missing inventory P 50,000

6. Cost Retail
Inventory, January 1 P14,200 P20,100
Purchases 32,600 50,000
Additional markup 1,900
Markdown (2,200)
Goods available for sale P46,800 P69,800
Cost ratio = 46,800 / 69,800 = 67%
Sales 60,000

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Ending inventory at retail P 9,800
Cost ratio 67%
Inventory, December 31 P6,566

7. Inventory, December 31, 2011 P 320,000

Purchases 1,410,000 + 10,000 – 20,000 1,400,000
Goods available for sale P1,720,000
Cost of goods sold
Accounts receivable, December 31 P 300,000
Collections 1,800,000
Accounts receivable, January 1 ( 250,000)
Sales on account P1,850,000
Cash sales 350,000
Total sales P2,200,000
Cost ratio 60% 1,320,000
Ending inventory before shortage P400,000
Inventory, per count 360,000
Inventory shortage P 40,000

Items 8 and 9
Per audit: Per client Adjustment
Overhead = 25% x P900,000 = P225,000 P225,000 P 0
Direct labor cost = P225,000/75% 300,000 275,000 25,000
Direct materials 900,000 – 225,000 – 300,000 375,000 400,000 (25,000)
Total manufacturing cost P900,000

Let x be the ending work in process inventory

.6 x is the beginning inventory
.6x + 900,000 – x = 800,000
100,000 = .4x
x = 250,000

10. Sales per client P2,300,000

Returned goods ( 50,000)
Goods shipped in December 80,000
Goods shipped in January ( 100,000)
Correct sales P2,230,000

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Items 11 through 14

Inventory Accounts Payable Sales Effect on Cost of

Sales
Per client 1,250,000 1,000,000 9,000,000
Parts held on consignment, recorded as (155,000) (155,000) ---
purchases and included in inventory
Parts sold still included in inventory (22,000) 22,000
Parts sold FOB shipping point 40,000
Goods out on consignment 210,000 (210,000)
Goods purchased in transit, FOB 25,000 25,000
shipping point
Freight bill, unrecorded, relating to 2,000 2,000
unsold goods
Cash discounts available (5,300) (5,300)
Per audit 1,304,700 866,700 9,040,000 (188,000)

Items 15 through 18
Inventory Purchases Sales Net income
March purchases recorded in Apr P 17,940 P(17,940)
Shipments in April (31,380) (31,380)
Goods shipped on March 31 (12,150) (12,150)
Goods not counted 18,200 18,200
Understate (overstatement) P6,050 P17,940 P(31,380) P(7,390)

19. Cash balance, December 31, 2010 P353,300

Payment on accounts payable 474,700
Payment for operating expenses 220,000
Total cash available P1,048,000
Cash balance, December 31, 2009 (100,000)
Collection on notes receivable ( 25,000)
Sales P923,000
Unit sales price P 50
Units sold 18,460

20. Average cost of purchases 32.60 + 32.60 x 0.10 (11 months) P 33.15
2

Accounts payable, Beginning P 75,000

Purchases 1,500 x 12 months x P33.15 596,700
Payments on accounts payable (474,700)
Accounts payable, ending P197,000

21. Units in the beginning inventory 199,875 / 32.50 6,150

Units purchased 1,500 x 12 18,000
Units sold (18,460)
22. Units in the ending inventory 5,690

Valued as follows
1,500 x 33.70 P50,550
1,500 x 33.60 50,400
1,500 x 33.50 50,250
1,190 x 33.40 39,746
Inventory, December 31, 2012 P190,946

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TIGER CORPORATION

Per count
Coins and currencies P4,700
Checks 4,200
Petty cash vouchers
December 2012 P1,900
January 2013 500 2,400
Advances to Officers and Employees
December 2012 P 900
January 2013 300 1,200
Total per count P12,500
Cashier’s accountability
Petty cash fund P10,000
Collections
December collection P1,500
January 2006 collection 2,700 4,200 14,200
Cash shortage P1,700

Cash in Bank
Per Bank Per Books
Unadjusted Balances P252,742 P247,820
Deposits in transit 10,700
Unrecorded and undeposited collections (see above) 1,500 1,500
Unreleased checks 5,750
Stale checks 4,280
Outstanding checks (22,630 – 5,750 – 4,280) (12,600)
Uncollected note from Sergio Garcia
Principal P3,600
Interest 108 (3,708)
DAIF Check from customer (2,850)
Service charges ( 450)
Adjusted balances P252,342 P252,342

Adjusting entries

Selling and Administrative Expenses 1,900

Receivable from Officers and Employees (900 + 1,700) 2,600
Petty Cash Fund 4,500

Cash in Bank 11,530

Accounts Receivable 1,500
Accounts Payable (5,750 + 4,280) 10,030

Accounts Receivable (3,708 + 2,850) 6,558

Selling and Administrative Expenses 450
Cash in Bank 7,008

Sales 8,000
Accounts Receivable 8,000

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Inventories 7,500
Cost of Sales 7,500

Sales 10,000
Accounts Receivable 10,000

Accounts Receivable 12,000

Sales 12,000

Cost of Sales 10,200

Inventories 10,200

Allowance for Doubtful Accounts 47

Selling and Administrative Expenses 47

Accounts Receivable
Per client P328,300
Adjustments ( 1,500)
6,558
(8,000)
(10,000)
12,000
Per Audit P327,358
Provision rate for uncollectibles 5%
Required allowance P 16,368
Existing allowance 16,415
Deductions from uncollectible accounts expense P ( 47)

Notes Receivable 10,000

Notes Payable 10,000

Interest Expense 183

Interest Payable 183
10,000 x 22% x 30/360 = 183

Interest Receivable 1,415

Interest Income 1,415
20,000 x 18% x 77/360 = P770
15,000 x 20% x 59/360 = 492
8,000 x 15% x 46/360 = 153
Total P1,415

Income Tax Payable 2,930

Income Tax Expense 2,930
35,065 – 32,135 = 3,127

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Answers:

1. Petty Cash P5,500

2. Cash in bank 252.342
3. Accounts receivable 327,358
4. Allowance for doubtful accounts 16,368
5. Notes receivable 43,000
6. Interest receivable 1,415
7. Merchandise inventory 221,300
8. Receivables from officers and Employees 12,840
9. Accounts payable 397,030
10. Notes payable 73,070
11. Interest Payable 11,363
12. Income tax payable 10,162
13. Sales 1,869,000
14. Cost of sales 1,184,700
15. Selling and administrative expenses 530,300
16. Bad debts expense 12,553
17. Interest income 9,820
18. Interest expense and bank charges 56,703
19. Net income 72,838
20. Total assets 2,224,430

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