Fair Value Measurement Inventory and Biological Asset Key PDF

FAIR VALUE MEASUREMENT/INVENTORY/ BIOLOGICAL ASSET
IFRS 13 Fair Value Measurement
The objective of IFRS 13 is to provide a single source of guidance for fair value measurement, where it is required by a reporting
standard rather than being spread throughout several reporting standards. IFRS 13 will improve comparability between the many
standards that require fair value measurement or fair value disclosures.
Definition
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (i.e. an exit price)
Fair value may be required to be measured on a recurring basis or a non-recurring basis.

Recurring and non-recurring basis
Recurring basis
Fair value on a recurring basis arises when a reporting standards requires fair value to be measured on an
ongoing basis. An example of this is IAS 40 Investment Property.
Non-recurring basis
Fair value on a non-recurring basis arises when a reporting standard requires fair value to be measured at fair
value only in certain specified circumstances. This would be apply, for example, with the application of IFRS 3
Business Combination where items are measured at fair value at the date of acquisition.
Exclusions from IFRS 13

IFRS 13 does not apply to IFRS 2 Share-based payment transactions, IFRS 16 Leases or to situations where different
measurements are required, such as net realizable value (IAS 2 Inventories) or value in use (IAS 36 Impairment of assets)
which may be required by some reporting standards.
Transaction price vs Fair value at initial recognition
The transaction price is the price paid to acquire an asset or price receives to assume a liability. Transaction price is also
called the entry price.
The fair value is the price that would be receive to sell an asset or paid to transfer a liability. Fair value is also called the
exit price.
Note:
Transaction price (Entry price) Fair value (Exit price)
Asset Price paid (Buyer) Price receive (Seller)
Liability Receive to assume liability Paid to transfer liability
• Current cost and historical cost are entry values (i.e., they reflect prices in acquiring an asset or incurring a liability),
whereas fair value, value in use and fulfilment value are exit values (i.e., they reflect prices in selling or using an
asset or transferring or fulfilling a liability).
In many cases, the transaction price is equal to fair value. However, in case where the transaction price differs from the fair
value at initial recognition, the difference is recognized as gain or loss in profit or loss, unless another IFRS specifies otherwise.
Inputs based on bid and ask prices
If an asset or a liability measured at fair value has a bid price and an ask price (eg an input from a dealer market), the price
within the bid-ask spread that is most representative of fair value in the circumstances shall be used to measure fair value
regardless of where the input is categorised within the fair value hierarchy(ie Level 1, 2 or 3;). The use of bid prices for
asset positions and ask prices for liability positions is permitted, but is not required.
This IFRS does not preclude the use of mid-market pricing or other pricing conventions that are used by market participants
as a practical expedient for fair value measurements within a bid-ask spread.
Requirement on fair value measurement
PFRS 13 requires an entity to determine the following when measuring fair value:
a. The particular asset or liability being measured.
b. The market in which an orderly transaction would take place for the asset or liability.
c. The appropriate valuation technique(s) to be used in measuring fair value.
d. For a non-financial asset, the highest and best use of the asset and whether the asset is used in combination with
other assets or on a stand-alone basis.
Page 1 of 38
Fair Value Hierarchy (IFRS 13)
IFRS 13 establishes a hierarchy that categorizes the inputs to valuation techniques used to measure fair value as
follows:
• Level 1 inputs comprises quoted price (observable) in an active markets for identical assets and
liabilities at the measurement date. This is regarded as providing the most reliable evidence of fair value
and is likely to be used without adjustment.
• Level 2 inputs are observable inputs, other than those included within Level 1 above, which are
observable directly or indirectly. This may included quoted price for similar (not identical) assets or
liabilities in active markets, or prices for identical or similar assets and liabilities in inactive markets.
Typically, they are likely to require some degree of adjustment to arrive at a fair value measurement.
• Level 3 inputs are unobservable inputs for an asset or liability, based upon the best information
available, including information that may be reasonably available relating to market participants.
Note: PFRS 13 Fair Value Measurement:

Level 1 Quoted price/Active market for identical assets or liabilities
Level 2 Observable input /Active market for similar (not identical) assets or liabilities
Observable input /Inactive market for Similar or identical assets or liabilities
Level 3 Unobservable input
The market approach uses prices and other relevant information generated by market transactions involving identical or
comparable (ie similar) assets, liabilities or a group of assets and liabilities, such as a business
The cost approach reflects the amount that would be required currently to replace the service capacity of an asset (often
referred to as current replacement cost).
The income approach converts future amounts (eg cash flows or income and expenses) to a single current (ie discounted)
amount. When the income approach is used, the fair value measurement reflects current market expectations about those future
amounts.
Measurement
When measuring fair value an entity shall take into account the characteristics of the asset or liability. Such characteristics
include, for example, the following:
• The condition and location of the asset and
• Restrictions, if any, on the sale or use of the asset
An entity shall measure the fair value of an asset or a liability using the assumptions that market participants would use when
pricing the asset or liability, assuming that market participants act in their economic best interest.
The fair value of an asset or liability shall not be adjusted for transaction costs (transaction costs will be accounted for in
accordance with other IFRS Standards).
The market
Fair value measurement requires assumptions based on current market conditions. It assumes that the transaction to sell the
asset or transfer the liability takes place either:
a. In the principal market for the asset or liability or
b. In the absence of a principal market, in the most advantageous market for the asset or liability.
Principal market is the market with the greatest volume and level of activity for the asset or liability. Different entities can
have different principal markets, as the access of an entity to some market can be restricted.
The most advantageous market is the market that maximizes the amount that would be received to sell the asset or
minimizes the amount that would be paid to transfer the liability, after taking into account transaction costs and transport
costs.
Fair value measurement, inventory and biological asset - Batch May 2020 Page 2 of 38
The price
The market price (either in the principal or most advantageous market) used in measuring fair value is not adjusted for any
transaction costs, but is adjusted for any transport costs.
Fair value is computed as follows:

Market price (in principal or most advantageous market) X
Less: Transport cost (x)
Fair value X
Transaction costs are costs to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset
or liability that are directly attributable to the disposal of the asset or the transfer of the liability and meet both of the following
criteria:
a. They result directly from and are essential to that transaction.
b. They would not have been incurred by the entity had the decision to sell the asset or transfer the liability not been
made. (Similar to costs to sell as defined in IFRS 5)
Transaction costs are not characteristic of an asset or a liability; rather, they are specific to a transaction and will differ
depending on how an entity enters into a transaction for the asset or liability.
Transactions costs are similar to “cost to sell”, and are accounted for in accordance with the other IFRSs.
Transaction costs do not include transport costs. If location is a characteristic of the asset (e.g. for a commodity) the price in
the principal (or most advantageous) market is reduced by the transport costs when measuring fair value.
• Transport costs are cost that would be incurred to transport an asset from its current location to its principal (or most
advantageous) market.
Disclosure
An entity shall disclose information that helps users of its financial statements assess both of the following:
• For assets and liabilities that are measured at fair value on a recurring or non-recurring basis in the statement of
financial position after initial recognition, the valuation techniques and inputs used to develop those measurements.
• For recurring fair value measurements using significant unobservable inputs, the effect of the measurements on profit or
loss or other comprehensive income for the period.
The disclosures required by this IFRS are not required for the following:
(a) plan assets measured at fair value in accordance with IAS 19 Employee Benefits;
(b) retirement benefit plan investments measured at fair value in accordance with IAS 26 Accounting and Reporting by Retirement
Benefit Plans; and
(c) assets for which recoverable amount is fair value less costs of disposal in accordance with IAS 36.
INVENTORY
Scope
In summary, inventories include the following:

• Assets held for sale in the ordinary course of business (finished goods)
• Assets in the production process for sale in the ordinary course of business (work in process)
• Materials and supplies that are consumed in production (raw materials; factory or manufacturing supplies).
• Purchased subcomponents
• Materials or supplies to be consumed in the rendering of services
• Goods held by a trader for resale (merchandise inventory)
However, PAS 2 excludes certain inventories from its scope:

• Work in process arising under construction contracts, including directly related service contracts. (Construction
Contracts)
• Financial instruments (see IFRS 9 Financial Instruments: Recognition and Measurement)
• Biological assets and agricultural produce at point of harvest (see IAS 41 Agriculture)
Accounting for inventory
Inventories are assets that are held for sale in the ordinary business. Or, inventories are also assets in the process of
production for such sale, production of goods or rendering services.
Inventories comprise merchandise, production supplies, materials, working in progress and finished goods.
Classes of inventories
Type of business Inclusion Account used

Servicing inventories include the costs of the service, for which the Work in progress
entity has not yet recognized the related revenue
Merchandising or trading inventories include goods purchased and held for resale Merchandise inventory
Manufacturing inventories include the following: Finished goods
a. finished goods produced; Goods in process/Work
b. work in progress being produced; and in process
c. materials and supplies awaiting use in the Raw materials
production process. Factory or
manufacturing supplies
Statement of cost of goods sold – Merchandising Statement of cost of goods sold - Manufacturing
Inventory, beginning XX Raw materials inventory, beginning XX
Add Net Purchases Add Net Purchases
Purchases XX Purchases XX
Add Freight-in XX Add Freight-in XX
Gross Purchases XX Gross Purchases XX
Less: Purchase returns and allowances XX Less: Purchase returns and allowances XX
Purchase discounts XX XX Purchase discounts XX XX
Total goods available for sale XX Raw materials available for use XX
Less Inventory, end XX Less Raw materials end XX
Cost of goods sold XX Raw materials used XX
Add Direct labor XX
Factory overhead XX
Total manufacturing cost XX
Add Work in process, beginning XX
Total cost of goods placed into process XX
Less work in process, end XX
Cost of goods manufactured XX
Add Finished goods, beginning XX
Total cost of goods available for sale XX
Less Finished goods, end XX
Cost of goods sold XX
Definition of cost
Cost is the cost of bringing items of inventory to their present location and condition (including cost of purchase and cost of
conversion).
Definition of cost
Cost of purchase comprises:
• Purchase price including import duties, transport and handling costs.
• Any other directly attributable costs, less any trade rebates, discounts and subsidies.
Relative Sales Price Method

When different commodities are purchased at a lump sum, the single cost is apportioned among the commodities
based on then respective sales price. The relative sales price method is based on the philosophy that cost is
proportionate to selling price.
Cost of conversion comprises:

• Costs which are specifically attributable to units of production, e.g. direct labour, direct expenses and subcontracted
work.
• Production overheads, which must be based on the normal level of activity.
• Other overheads, if any, attributable in particular circumstances of the business to bringing the product or service to its
present location and condition.
A production process may result in more than one product being produced simultaneously. This is the case, for example, when
products are produced or where there is a main product and a by-product. When the cost 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.
Joint products are main product.
By-products are incidental product.
If the By-product is inventoriable If the By-product is not inventoriable

Joint cost (Main product) X Joint cost (Main product) X
Less: by product at NRV (x) Less: by product at NRV (zero)(do not deduct)
Balance of main product X Balance of main product X
NRV = selling price minus cost to sell
Other costs: only to the extent incurred in bringing the inventory to its present location and condition. Examples, borrowing
costs, storage costs of necessary in the production process before a further production stage (e.g, the storage costs of
partly finished goods (work in process) may be capitalized as cost of inventory/ storage cost of work in process , and non-
production overheads or cost of designing products for specific customers.
The following costs should be excluded and charged as expense of the period in which they are incurred:
• Abnormal waste
• Storage costs of raw materials and completed goods (finished goods)
• Administrative overheads which do not contribute to bringing inventories to their present location and condition
• Selling costs.
STATEMENT OF FINANCIAL POSITION PRESENTATION
In compliance with the requirement of PAS 1, items classified as inventories should be shown as one line item in the
current assets section of the entity’s statement of financial position under the caption “Inventories”. Moreover, the
details comprising the “Inventories” should be disclosed in the notes to financial statements.
Two systems of accounting for inventories
Periodic inventory system Perpetual inventory system

Use of the system Commonly used for high-volume, low value Commonly used for low-volume, high value inventory items
inventory items
Inventory account Updated only when financial statements are Updated using stock cards for every transaction affecting
prepared inventory items. With this, the entity would know inventory
on hand at a particular point in time.
Recording purchases, Recorded using nominal accounts (Purchases, Recorded directly to the inventory account. Inventory
freight-in, purchase Freight-in, Purchase returns, allowances, and account is
returns, allowances, and discounts) a. debited – Purchases and Freight-in
discounts b. Credited – Purchase returns, allowances, and discounts
Recording sales Only the sale transaction is recorded 2 entries are made:
transactions (1) sale; and (2) cost related to the sale
Objective of physical count To determine the amount of inventory and cost To determine the accuracy of accounting records
of goods sold to be reported in financial
statements
Items presented in the Inventory – beginning balance Inventory – ending balance
unadjusted trial balance Cost of goods sold
Loss on inventory shortage
Treatment of inventory shortage or overage

Periodic inventory system Perpetual inventory system
Normal losses Cost of sales Cost of sales
Abnormal losses Cost of sales Other operating expense
Journal entries
Transactions Periodic inventory system Perpetual inventory system
Purchases on account Purchases xx Inventory xx
Accounts payable Xx Accounts payable xx
Freight-in Freight-in xx Inventory xx
Accounts payable Xx Accounts payable xx
Purchase returns, Accounts payable xx Accounts payable xx
allowances and Purchase return/allowance/discount Xx Inventory xx
discounts
Sales Accounts receivable xx Accounts receivable xx
Sales Xx Sales xx
Cost of sales xx
Inventory xx
Sales returns Sales return xx Sales return xx
Accounts receivable xx Accounts receivable xx
Inventory xx
Cost of sales xx
Sales allowance and Sales allowance/discount xx Sales allowance/discount xx
discount Accounts receivable xx Accounts receivable xx
Inventory shortages No entry Loss on inventory shortage xx
(normal) Inventory xx
Closing entries Inventory, end xx No entry is necessary
related to inventory Cost of sales xx
Cost of sales xx
Purchase return/allowance/discount xx
Purchases xx
Freight-in xx
Inventory, beginning xx
Trade Discounts vs. Cash Discounts

Trade discounts Cash discounts
• Given to encourage orders in large quantities • Given to encourage prompt payment
• Deducted before the invoice price is determined • Buyer: Purchase discount
• Not recorded in the books of either the buyer or • Seller: Sales discount
seller • Deducted from the invoice price
• Recorded in the books of seller as sales discount)
Two Methods of Accounting for Purchases

Gross Method Net Method
• Purchases are recorded at the total invoice price • Purchases are recorded at the invoice price net of
• Purchase discounts are recorded only when taken – cash discounts available (whether taken or not).
purchase discounts account • Purchase discounts are recorded only when not
taken – under purchase discounts lost account.
Transactions Gross method Net method

Purchases on account Purchases (Gross*) xx Purchases (Net**) xx
Accounts payable (Gross) xx Accounts payable (Net) xx
Purchase return Accounts payable (Gross*) xx Accounts payable (Net**) xx
Purchase return (Gross) xx Purchase return (Net) xx
Payment within the Accounts payable (Gross) xx Accounts payable (Net) xx
discount period Cash (Net) xx Cash (Net) xx
Purchase discount xx
Payment beyond the Accounts payable (Gross) xx Accounts payable (Net) xx
discount period Cash (Gross) xx Purchase discount lost xx
Cash (Gross)
*Invoice price
**Invoice price, net of discount whether taken or not
MEASUREMENT
I. Initial – Inventories is measured at cost.
II. Subsequent – Inventories shall be measured at the lower of cost and net realizable value.
• Inventories are usually written down to net realisable value item by item.
• In some circumstances, however, it may be appropriate to group similar or related items. This may be the case with
items of inventory relating to the same product line that have similar purposes or end uses, are produced and marketed
in the same geographical area, and cannot be practicably evaluated separately from other items in that product line. It is
not appropriate to write inventories down on the basis of a classification of inventory, for example, finished goods, or all
the inventories in a particular operating segment. Service providers generally accumulate costs in respect of each service
for which a separate selling price is charged. Therefore, each such service is treated as a separate item.
Assets not measured under the lower of cost or net realizable value (NRV) under IAS 2
a. Inventories of producers of agricultural, forest, and mineral products measured at net realizable value in
accordance with well-established practices in those industries.
b. Inventories of commodity broker-traders measured at fair value less cost to sell.
Key definitions
The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the
inventories to their present location and condition.
Net realizable value refers to the net amount that an entity expects to realize from the sale of inventory in the ordinary course
of business. It is the estimated selling price in the ordinary course of business less the estimated costs of completion and the
estimated costs necessary to make the sale.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date
I. Initial Measurement
Cost of Inventories
The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the
inventories to their present location and condition.
A. Costs of Purchase
The costs of purchase of inventories comprise the
Purchase price
Import duties and other taxes (other than those
subsequently recoverable by the entity from the taxing
authorities)
Transport, handling and other costs directly attributable to
the acquisition of finished goods, materials and services.
Any trade discounts, rebates and other similar items are
deducted in determining the costs of purchase.
B. Costs of Conversion
C. Other Costs
Other costs are included in the cost of inventories only to the
extent that they are incurred in bringing the inventories to
their present location and condition. Examples of other
costs are as follows:
a) Borrowing costs – PAS 23 requires capitalizing interest on

inventories which take a substantial amount of time to
create. However, an entity is not required to capitalize borrowing costs for inventories that are manufactured in large
quantities on a repetitive basis.
b) Storage costs – this can be included for products that require a maturation process or substantial amount of time to
create (Storage cost for work in process).
c) Non-production overheads or costs of designing products for specific customer– this can be included in cost if
they contribute in bringing the inventories to their present condition and location.
Inventory cost should exclude:

• Abnormal amounts of wasted materials, labor, or other production costs
• Storage costs for raw materials and finished goods, outright expense. (Unless essential to the production process,
charged to inventoriable cost)
• Administrative overheads unrelated to production
• Selling costs
• Foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency
• Interest cost when inventories are purchased with deferred settlement terms.
Inventory valuation methods
IAS 2 deals with three methods of arriving at cost:

• Actual unit cost
• First in, first out (FIFO)
• Weighted average cost (AVCO)
In determining the cost of inventories, PAS 2 requires:

a. The cost of inventories that are ordinarily interchangeable shall be determined by using First-in, First-out
(FIFO) or weighted average methods.
b. The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and
segregated for specific projects shall be assigned by using specific identification of their individual costs.
Where items of inventory are not ordinarily interchangeable (e.g. used cars). IAS 2 requires the actual unit cost valuation
method to be used. Such items should be shown at their actual individual costs.
Where items are ordinarily interchangeable (e.g. tins of beans), the entity must choose between two cost formulae: the
FIFO method and the AVCO method.
The same method of arriving at cost should be used for all inventories having similar nature and use to the entity. For
inventories with a different nature or use, different cost methods may be justified.
Cost shall be measured through

1. FIFO/Periodic – the cost shall be computed as: (# Inventory on hand * Cost of latest purchases)
2. FIFO/Perpetual – the computation of cost shall be the same as FIFO/Periodic
3. AVE/Periodic (aka WEIGHTED AVERAGE): # of Inventory on hand * WA unit Cost
WA unit Cost = COGAS / # OF GAS
4. AVE/Perpetual (aka MOVING AVERAGE): The average cost in recomputed after every purchase
transaction. The last Moving average unit cost (after the last purchase transaction of the year) shall be used for
the computation of the Inventory cost at year end.
Are some other techniques of cost measurement allowed by IAS 2?
Except for weighted average or FIFO, IAS 2 allows application of standard cost and retail method techniques to
approximate costs of inventory.
Standard costs: This technique of cost measurement takes normal levels of materials and supplies, labor, efficiency and
capacity utilization into account. Standard cost shall be regularly reviewed and revised.
Retail method: This method is very often utilized in the retail industry where inventories are in large quantities and fast
moving. Here, sales value of inventory is reduced by the appropriate percentage gross margin.
LIFO (last-in-first-out) is prohibited by IAS 2.
II. SUBSEQUENT MEASUREMENT

Inventories are required to be stated at the lower of cost and net realizable value (LCNRV).
Inventories are usually written down to net realizable value item by item. In some circumstances, however, it may be
appropriate to group similar or related items.
Net realizable value refers to the net amount that an entity expects to realize from the sale of inventory in the ordinary course of
business. It is the estimated selling price in the ordinary course of business less the estimated costs of completion and the
estimated costs necessary to make the sale.
Possible causes of the inventory cost becoming not recoverable

a. Physical damage c. Decline in selling price
b. Obsolescence d. Rise of completion cost and/or selling cost
Treatment of inventory write-down and/or possible reversal of write-down

Any write-down to NRV should be recognized as an expense (often called cost of goods sold) in the period in which the
write-down occurs.
Any reversal should be recognized in the income statement as a reduction in the amount of inventories recognized as
expense in the period in which the reversal occurs. Also, the amount of reversal should not exceed the original amount of
write-down that was previously recognized
Accounting for Lower of Cost or Net Realizable Value

DIRECT METHOD ALLOWANCE METHOD
Inventory, beginning (LCNRV) xx Inventory, beginning (at cost) xx
Add: Net purchases xx Add: Net purchases xx
Total goods available for sale xx Total goods available for sale xx
Less: Inventory, end (LCNRV) xx Less: Inventory, end (at cost) xx
Cost of sales after inventory write-down xx Cost of sales before write-down xx
Add: Loss on inventory write-down xx
Less: Gain on reversal of write-down xx
Cost of sales after inventory write-down xx
Gain or loss may be computed as follows:

Inventory, end (at cost) xx
Less: Inventory, end (at LCNRV) xx
Required allowance xx
Less: Allowance for write-down, beg xx
Loss/(gain) on inventory write-down xx
Note:
Net Realizable Value (NRV)
NRV is the estimated selling price, in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to
make the sale. Net realizable value shall be:
1. Finished goods/Merchandise inventory = Est. Selling Price – Est. cost to sell
2. Work in process inventory = Est. Selling Price – Est. cost to complete – Est. cost to sell
3. Raw materials and Supplies = The NRV of raw materials shall be the Current Replacement Cost***
***The same shall be written down only if the finished goods to which they are related to are also written down. Materials and other supplies held
for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are
expected to be sold at or above cost.
Note: Difference between cost and NRV, if NRV is lower becomes the required allowance for inventory writedown (like allowances for bad debts), to
determine how much is the loss during the period, determine the increment from the unadjusted balance of account. Thus, if cost is lower the NRV,
required balance is zero/nil, any unadjusted credit balance of the account shall be recognized as gain from recovery in the income statement.
Write-Down and Reversal
Any write-down to NRV should be recognized as an expense. (i.e. added to cost of goods sold) in the period in which the write-down occurs.
Any reversal should be recognized in the income statement (i.e., deducted from cost of goods sold) in the period in which the reversal occurs.
RECOGNITION
Inventories are recognized when it satisfies the requirements of PAS 2 and/or the general criteria of asset recognition. As a rule,
goods included as part of inventory are items to which the entity has title, regardless of location.
Recognition of sales (seller) and inventory (buyer) normally takes place when title to the goods passes from the former to the latter.
This is normally evidenced by transfer of possession over the goods. In addition, it must be observed that the related risks and
rewards associated to the ownership of the goods should also be transferred.
With this, inventory recognized by the entity includes;

a. Goods owned and on hand
b. Goods owned and on hand of salesmen, distributing agents, dealers, or others for resale
c. Goods in transit and sold FOB Destination
d. Goods in transit and purchased FOB Shipping point
Cut-off problems (Sales/Purchase)

1. Identify validity of the Sales or Purchase transaction *
2. Determine whether Sales (Receivable) or Purchase (Payable) has been recorded
3. Determine whether inventories were Excluded or Included**
Thus:
• If it is a Valid Sale, the Receivable should be recorded, the Inventory should be excluded.
• If it is not a Valid Sale, the receivable should not be recorded, the Inventory should be included.
• If it is a Valid Purchase, the Payable should be recorded, the Inventory should be included.
• If it is not a Valid Purchase, the Payable should not be recorded, the Inventory should be excluded.
* In considering the validity of Sale Purchase transaction, consider the following items:
As a rule of thumb assumption, a Sale is valid upon delivery and a Purchase is valid upon receipt.
** If the problem did not indicate whether goods under consideration has been included or excluded from the count, the following
assumptions are to be made:
a. All deliveries(on sale) made on or before the count date are excluded from the count, all deliveries made after the count date
are included in the count.
b. All receipt (on purchases) of goods on or before the count date shall be included in the count, all receipts after the count date
are excluded from the count.
AUDIT OF ACCOUNTS PAYABLE AND RELATED ACCOUNTS
Guide questions in the audit of Accounts Payable and Related Accounts:

If Answer is: Then
Scenario 1
Was there a valid purchase? Yes
Was the purchase recorded? Yes No Adjusting Entry
Were the inventories Included in the count? Yes No Adjusting Entry
Scenario 2
Was there a valid purchase? Yes
Was the purchase recorded? No Dr. Purchases Cr. Accounts payable
Were the inventories Included in the count? No Dr. Inventory Cr. Cost of sales
Scenario 3
Was there a valid purchase? None Do nothing
Was the purchase recorded? No No Adjusting Entry
Were the inventories Included in the count? No No Adjusting Entry
Scenario 4
Was there a valid purchase? None Do nothing
Was the purchase recorded? Yes Dr. Accounts payable Cr. Purchases
Were the inventories Included in the count? Yes Dr. Cost of sales Cr. Inventory
Guidelines in determining whether goods are to be Included or Excluded from the inventory:
A. Goods in transit
- FOB Shipping Point/FOB Seller or Seller’s Location include as inventory
of buyer (plus freight in)
- FOB Dest./FOB Buyer or Buyer’s Location include as inventory of seller

(exclude freight out)
- Cost of insurance and freight (CIF) include as inventory of buyer upon

delivery to carrier (plus cost of insurance and freight)
- Free Alongside (FAS) the Vessel include as inventory of buyer upon

possession of the carrier (exclude freight cost to Vessel, include freight
cost from Vessel to Customer)
FOB Shipping point- include freight in FOB destination point – exclude freight out
FAS-exclude freight cost to vessel, include freight cost from vessel
to customer Ex ship-exclude freight out
CIF- include freight in No arrival, no sale- exclude freight out
FOB supplier warehouse – include freight in FOB buyer warehouse-exclude freight out
C and F – include freight in FOB jobsite – exclude freight out
FOB factory-include freight in
FOB origin-include freight in
Note:
FOB Buyer Destination
FOB Seller Shipping point
*FOB place of the buyer (buyer location) Destination
*FOB place of the seller (seller location) Shipping point
B. Special sale/Purchase agreement
Special cases for sale of goods (Lifted from PAS 18)

The following list illustrates some cases for sale of goods that deviate from the normal
timing of recognition of sale (seller) or inventory (buyer).
1. ‘Bill and hold’ sales in which delivery is delayed at the buyer’s request but the
buyer takes title and accepts billing.
Revenue is recognized when the buyer takes title, provided:

a. it is probable that delivery will be made;
b. the item is on hand, identified and ready for delivery to the buyer at
the time the sale is recognized;
c. the buyer specifically acknowledges the deferred delivery instructions; and
d. the usual payment terms apply.
NOTE: Revenue is not recognized when there is simply an intention to acquire or

manufacture the goods in time for delivery.
2. Goods shipped subject to conditions.

a. Installation and inspection.
Revenue is normally recognized when the buyer accepts delivery, and installation and inspection are complete.
However, revenue is recognized immediately upon the buyer’s acceptance of delivery when:
• the installation process is simple in nature, for example the installation of a factory tested television receiver which only
requires unpacking and connection of power and antennae; or
• the inspection is performed only for purposes of final determination of contract prices, for example, shipments of iron
ore, sugar or soya beans
b. Out on approval when the buyer has negotiated a limited right of return.
If there is uncertainty about the possibility of return, revenue is recognized when the shipment has been formally
accepted by the buyer or the goods have been delivered and the time period for rejection has elapsed.
c. Consignment sales under which the recipient (buyer) undertakes to sell the goods on behalf of the shipper (seller).
Revenue is recognized by the shipper when the goods are sold by the recipient to a third party.
d. Cash on delivery sales.

Revenue is recognized when delivery is made and cash is received by the seller or its agent.
3. Installment sales, under which the consideration is receivable in installments.

Revenue attributable to the sales price, exclusive of interest, is recognized at the date of sale.
The sale price is the present value of the consideration, determined by discounting the installments receivable at the imputed
rate of interest. The interest element is recognized as revenue as it is earned, using the effective interest method.
4. Lay away sales under which the goods are delivered only when the buyer makes the final payment in a series of installments.
Revenue from such sales is recognized when the goods are delivered. However, when experience indicates that most such
sales are consummated, revenue may be recognized when a significant deposit is received provided the goods are on
hand, identified and ready for delivery to the buyer.
5. Orders when payment (or partial payment) is received in advance of delivery for goods not presently held in inventory, for
example, the goods are still to be manufactured or will be delivered directly to the customer from a third party.
Revenue is recognized when the goods are delivered to the buyer.
6. Sale and repurchase agreements (other than swap transactions) under which the seller concurrently agrees to repurchase
the same goods at a later date, or when the seller has a call option to repurchase, or the buyer has a put option to
require the repurchase, by the seller, of the goods.
For a sale and repurchase agreement on an asset other than a financial asset, the terms of the agreement need to be
analyzed to ascertain whether, in substance, the seller has transferred the risks and rewards of ownership to the buyer and
hence revenue is recognized. When the seller has retained the risks and rewards of ownership, even though legal title has
been transferred, the transaction is a financing arrangement and does not give rise to revenue.
For a sale and repurchase agreement on a financial asset, IAS 39 Financial Instruments: Recognition and Measurement applies.
7. Subscriptions to publications and similar items.

When the items involved are of similar value in each time period, revenue is recognized on a straight-line basis over
the period in which the items are dispatched. When the items vary in value from period to period, revenue is recognized on
the basis of the sales value of the item dispatched in relation to the total estimated sales value of all items covered by the
subscription.
Other possible items that may raise issue in recognition of inventories

1. Damaged and unsalable goods
2. Inventories held and currently being used for window display
3. Inventories held or sold with right of return
4. Segregated goods in the warehouse
a. Special order goods
b. Goods held awaiting shipping instructions
Change in the method of inventory from FIFO to weighted average method or vice versa
Change in inventory method is regarded as change in accounting policy
The change should be applied retrospectively.
But because of the counterbalancing effect of the error in inventory, the effect may be computed as follows:
Ending inventory, prior year using FIFO (year prior to the date of change inventory) XX
Ending inventory, prior year using weighted average (year prior to the date of change inventory) XX
Overstated (or if negative understated) ending inventory XX
Ending inventory last year is overstated Ending inventory last year is understated
Retained earnings xx Merchandise inventory – beginning (Cost of sale) xx
Merchandise inventory – beginning (Cost of sale) xx Retained earnings xx
If the above adjusting entry is not made, the effect If the above adjusting entry is not made, the
would be: effect would be:
Last year: Ending inventory, net income, retained Last year: Ending inventory, net income,
earnings are overstated retained earnings are understated
Current year: Beginning inventory, net income Current year: Beginning inventory, net income
are understated but retained earnings would be are overstated but retained earnings would be
correct correct
INVENTORY ERRORS
Overstated (Ending Inventory) Understated (Ending Inventory)
Year 1: Cost of sales is understated, net income and Year 1: Cost of sales is overstated, net income and retained
retained earnings are overstated. earnings are understated.
Year 2: Since the ending inventory becomes the beginning Year 2: Since the ending inventory becomes the beginning
inventory in year 2, cost of sales will be overstated, net inventory of Year 2, cost of sales will be understated, net
income will be understated but the ending retained earnings income will be overstated but the ending retained earnings
will be correct. will be correct.
ACCOUNTING FOR PURCHASE COMMITMENT

Purchase commitments are non-cancelable agreement to purchase goods sometime in the future at a fixed price and
fixed quantity.
When there is a reasonable certainty that inventories purchased under purchase commitments become impaired, loss on
purchase commitment should be recognized in the period such impairment has been determined.
Any recovery may be recognized as gain but such gain to be recognized should be limited to the loss recognized
previously.
Journal entries
Date of commitment to purchase in No entry is required but existence of commitment should be disclosed in the notes to xx
the future financial statements. xx
Intervening reporting date (between Value of inventory < Exercise price (value of inventory is impaired)
commitment and acquisition dates) Loss on purchase commitment xx
Estimated liability on purchase commitment xx
Value of inventory > Exercise price

No entry is required.
Date of acquisition Additional decline in the value of inventory
Purchases (current value of inventory) xx
Loss on purchase commitment (additional decline in value) xx
Accounts payable/Cash xx
Subsequent decline in the value of inventory (from no decline)

Purchases (current value of inventory) xx
Loss on purchase commitment (additional decline in value) xx
Recovery prior to acquisition

Purchases (lower of exercise price and current value of inventory) xx
Gain on reversal of inventory write-down* xx
*Limited to the amount of loss previously recognized.
INVENTORY ESTIMATION
Approaches in Estimating the Value of Inventory

1. Gross Profit Method 2. Retail Inventory Method
Gross Profit Method

Based on the entity’s past experiences, the average gross profit rate may be used to estimate the cost of goods sold as well as the
ending inventory to be reported in the interim financial statements.
Determining the Gross Profit Rate

Aside from the basic gross profit rate based on cost and on sales, the following may also be useful in determining gross profit rate.
1. Look for possible trend.
2. If the problem states that “Average Gross Profit” would be used, then
Gross Profit Rate Year 1 + Year 2+Year n
Average Gross Profit =
Number of years
3. If the problem states that “The overall gross profit ratio for the past years was in effect during the year of fire or theft”, then
Gross Profit Year 1 + Year 2+Year n
Overall Gross Profit =
Sales Year 1 + Year 2 + Year n
Note: Use this when there is no trend on the gross profit ratios and the problem is silent as to what gross profit will be used.
• Goods available for sale minus cost of goods sold equals ending inventory
• Cost of goods sold equals net sales х cost ratio (gross profit rate based on sales) or net sales ÷ cost ratio (gross profit
based on cost)
•
• Net sales equals gross sales minus sales return or sales returns and allowances
• Ignore sales discounts and sales allowances
Depending on what is given, the following are the procedural steps in computing for estimated cost of inventory and
inventory loss (e.g. caused by fire)
1. Determine the Gross profit rate
2. Determine the Cost ratio: Cost Ratio = 100% less Gross Profit Rate
3. Compute for the Net Sales (Sales less sales returns)
4. Compute for the estimated cost of goods sold: Cost of Sales = Cost Ratio x Net Sales
In computing for inventory loss due to fire, flood or any other catastrophe, the following may be considered:
Estimated ending inventory xx
Less: Salvage or scrap values xx
Damaged goods (at NRV) xx
Undamaged goods (at Cost) xx
In-transit goods (owned by the client) xx
Inventory out on consignment xx
Other inventories owned by the client not in the warehouse during
the catastrophe xx
Inventory loss xx
Retail Inventory Method
The retail method is simply a pragmatic way of determining cost by starting with the selling price and deducting a suitable estimate
of the profit margin.
The ratio exploited using this method is not the gross profit ratio but rather the cost ratio.
Methods in Computing Cost Ratio

For the purpose of computing cost ratio, there are three methods that can be used by an entity:
a. Conservative, Conventional, or Lower of cost or market (LCM)
b. Average
c. First-in, First-out
Note: PAS 2 par. 22 requires either the average cost approach or the FIFO approach (but more particularly the average cost
approach). The standard requires that the percentage to be used in the application of the retail method should be the percentage
that has been marked down below its original selling price meaning net markdowns should be included in the determination of the
cost ratio.
Procedural approach:
1. Compute for the cost ratio using the following formula:
GAS at cost minus beg inventory at cost
FIFO =
GAS at retail minus beg inventory at retail
GAS at cost
Average =
GAS at retail
GAS at cost
Conservative =
GAS at retail excluding markdowns
Legend: GAS – Goods available for sale
Three Methods Beginning Inventory Markup Markdown

1. Conservative/Conventional/LCM Include Include Exclude
2. Average (If the problem is silent) Include Include Include
3. FIFO Exclude Include Include
2. Compute for the ending inventory at retail

Goods available for sale at retail X
Less: Net sales ( Sales minus Sales return only plus Employee discounts plus Normal (X)
shrinkage, spoilage)
Ending inventory at retail X
Note: Do not deduct if the given in the problem is “sales allowances”
3. Compute for the ending inventory at cost using the following formula:
Ending inventory at cost = Cost ratio x ending inventory at retail
4. Compute for the cost of sales using the following formula:

Goods available for sale at cost XX
Less: Ending Inventory at cost XX
Cost of Sales XX
Summary of items to be added (deducted) to cost and retail column:

Cost Retail
At cost only
Freight-in X
Purchase allowance (x)
Purchase discount (x)
At retail only
Mark-up X
Mark-up cancellation (x)
Mark-down (x)
Mark-down cancellation X
At cost and retail

Beginning inventory X X
Purchase X X
Purchase return (x) (x)
Departmental transfer in X X
(debit)
Department transfer out (x) (x)
(credit)
Abnormal losses (x) (x)
Definition of terms:
1. Original retail - is the sales price at which the goods are first offered for sale.
2. Initial markup - the original markup on the cost of goods or the amount added to the
original cost to get the original retail price.
3. Additional markup - is an increase in the sales price above the original sales price or the
amount added to the original retail price.
4. Markup cancelation - is a decrease in the sales price that does not reduce the sales
price below the original sales price.
5. Net markup - additional markup minus markup cancelation.
6. Markdown - is a decrease in the sales price below the original price.
7. Markdown cancelation - is an increase in sales price that does not raise the sales price
above the original sales price.
8. Net markdown - markdown minus markdown cancelation.
9. Maintained markup (markon) – difference between cost and sales price after adjustment
for all the above items.
FINANCIAL STATEMENT PRESENTATION

• Inventories are presented in a line item under the heading “Inventories” in the current asset section of the statement of
financial position.
Disclosure requirements
The main disclosure requirements of IAS 2 are:
• Accounting policy for inventories.
• Carrying amount, generally classified as merchandise, supplies, materials, work in progress, and finished goods. The
classifications depend on what is appropriate for the enterprise.
• Carrying amount of any inventories carried at fair value less costs to sell.
• Amount of any write-down of inventories recognized as an expense in the period.
• Amount of any reversal of a write-down to NRV and the circumstances that led to such reversal.
• Carrying amount of inventories pledged as security for liabilities.
• Cost of inventories recognized as expense (cost of goods sold). PAS 2 acknowledges that some enterprises classify income
statement expenses by nature (materials, labor, and so on) rather than by function (cost of goods sold, selling expense,
and so on). Accordingly, as an alternative to disclosing cost of goods sold expense, PAS 2 allows an enterprise to disclose
operating costs recognized during the period by nature of the cost (raw materials and consumables, labor costs, other
operating costs) and the amount of the net change in inventories for the period). This is consistent with PAS 1, Presentation
of Financial Statements, which allows presentation of expenses by function or nature.
AGRICULTURE (IAS 41)
Objective of PAS 41
The objective of PAS 41 is to prescribe the accounting treatment and disclosures related to agricultural activity.
Applicability or Scope of PAS 41

PAS 41 shall be applied to account for the following when they relate to agricultural activity:
I. biological assets;
II. agricultural produce at the point of harvest; and
III. government grants related to biological assets
Inapplicability of PAS 41
(a) Agricultural produce after the point of harvest (PAS 02 Inventories)
(b) Land related to agricultural activity (see PAS 16 Property, Plant and Equipment, PFRS 16 Leases and PAS 40 Investment
Property); and
(c) Intangible assets related to agricultural activity (see PAS 38 Intangible Assets).
(d) Agricultural activity that is not managed, such as ocean fishing or deforestation
(e) Land is not a biological asset. It is treated as a tangible non-current asset and IAS 16 Property, Plant and Equipment applies.
This means that (for example) when a forest is valued, the trees must be valued separately from the land that they grown on.
Why not Zoos?
zoo animals are outside the scope of IAS 41,

So why are zoos not included in the scope? The animals are living (or at least we hope so) but there is no management
of the transformation of the biological assets for sale. Natural breeding that takes place is not a managed activity and is
incidental to the main activity of providing a recreational facility.
Ocean farming is also not in the scope of IAS 41 as the ocean is unmanageable. Managing the growth of fish on a farm
for subsequent slaughter or sale, however, is agricultural activity within the scope of IAS 41.
What else is out of scope?

Agricultural produce, after harvested, becomes inventory and is accounted for in accordance with IAS 2, ‘Inventory’.
Land related to agricultural activity is outside the scope of IAS 41. If it is owned by the entity it will be in the scope of
IAS 16 ‘Property, Plant and Equipment’. Land rented by the entity from a third party will be a lease and therefore in the
scope of IFRS 16 ‘Leases’.
AGRICULTURAL ACTIVITY
Agricultural activity covers a diverse range of activities; for example
• raising livestock
• forestry
• annual or perennial cropping
• cultivating orchards and plantations
• floriculture
• aquaculture (including fish farming)
Certain common features exist within this diversity:

a. Capability to change. Living animals and plants are capable of biological transformation;
b. Management of change. Management facilitates biological transformation by enhancing, or at least stabilizing, conditions
necessary for the process to take place (for example, nutrient levels, moisture, temperature, fertility, and light).
Harvesting from unmanaged sources (such as ocean fishing and deforestation) is not agricultural activity; and
c. Measurement of change. The change in quality (for example, genetic merit, density, ripeness, fat cover, protein content, and
fiber strength) or quantity (for example, progeny, weight, cubic meters, fiber length or diameter, and number of buds) brought
about by biological transformation or harvest is measured and monitored as a routine management function.
BIOLOGICAL TRANSFORMATION
Biological transformation results in the following types of outcomes:
a. asset changes through the following:
i. growth (an increase in quantity or improvement in quality of an animal or plant)
ii. degeneration (a decrease in the quantity or deterioration in quality of an animal or plant)
iii. procreation (creation of additional living animals or plants); or
b. production of agricultural produce such as latex, tea leaf, wool, and milk.
Currently, IAS 41 divides biological assets into

categories: they can be a living plant or animal and
these plants or animals can be consumable or a bearer.
• Consumable assets: Consumable assets are
those which are to be harvested as agricultural
produce or sold as biological assets - that is,
once harvested they are gone (for example
wheat and cattle for beef).
• Bearer assets: Bearer assets are used to
bear produce over their productive lives (for
example dairy cows produce milk)
The table below gives examples of each.

Agricultural produce
Biological assets (Included in IAS 41 at the point of Products that are the result of
Bearer Plant (IAS 16 PPE) (IAS 41) harvest, treated as inventory after processing after harvest
that point)
Sheep Wool Yarn, carpet
Trees in a plantation forest
(timber plantation) Felled trees Logs, lumber
Dairy cattle Milk Cheese
Pigs Carcass Sausages, cured hams
Cotton Plants Cotton Thread, clothing
Sugarcane Harvested cane Sugar
Tobacco plants Picked leaves Cured tobacco
Tea bushes (Bearer plant) Picked leaves Tea
Grape vines (Bearer plant) Fruits growing on the tree Picked grapes Wine
Fruit trees (Bearer plant) Fruits growing on the tree Picked fruit Processed fruit
Oil palms (Bearer plant) Fruits growing on the tree Picked fruit Palm oil
Rubber trees (Bearer plant)** Fruits growing on the tree Harvested latex Rubber products
Agricultural produce is measured at fair value less point of cost to sell at the point of harvest. After harvest, if agriculture
produce are held for sale in the normal course of business or are processed further, inventories shall apply.
The measurement of biological assets and agricultural produce is covered by PAS 41 and the measurement of products after
harvest is covered by PAS 2 on inventories.
Bearer plants are accounted for under IAS 16 Property, plant and Equipment. However, the fruit bunches growing on the trees are
biological asset, the picked fruits are agricultural produce and the processed fruits are inventories.
Not considered bearer plants:

1. Trees grown to be harvested and sold as log or lumber are not bearer plants
2. Annual crops which do not bear produce for more than one period and are held solely to be harvested as agricultural produce such
as corn and rice are not bearer plants.
Plant with dual use

- A plant with dual use is reported as biological asset and not as bearer plant.
A plant may have a dual use, namely:
a. The plant is cultivated for bearing agricultural produce.
b. The plant itself is being sold either as a living plant or an agricultural produce.
** For example, rubber trees may be cultivated to grow rubber milk as agricultural produce and at the same time, may
be sold as living plant and cut down at the end of the productive life to be sold as lumber or wood. In this case, the
rubber trees are recognized as biological asset because of the dual use. However, the rubber trees are recognized as
bearer plants when simply cut down and sold for scrap upon maturity
Bearer plants
Bearer plants are accounted for under IAS 16 Property, Plant and Equipment rather than IAS 41 Agriculture. A bearer plant is a living plant that:
• is used in the production or supply of agricultural produce;
• is expected to bear fruit for more than one period; and
• has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.
Therefore items such as vines, tea bushes, and fruit trees may be classed as bearer plants and treated as property, plant and equipment rather than
being accounted for under the provision of IAS 41 Agriculture.
Recognition/ Measurement basis

Bearer plants in the scope of IAS 16 will be measured like a self-constructed asset. Bearer plants are initially recognised at accumulated
cost. When the asset is in the location and capable of being operated, depreciation will begin and the asset will be tested for impairment
under IAS 36. The point at which depreciation begins is subjective and is likely to depend on the type of plant. This judgment should be
clearly disclosed.
Bearer Plants (PAS 16 PPE) using either cost model or revaluation model.
Examples of Bearer Plants.

1. Rubber trees (when simply cut down and sold for scrap upon maturity) (if the problem is silent), otherwise biological asset because of
the dual use.
2. Grapevines
3. Oil Palms
4. Mango trees
5. Coconut trees
6. Tea bushes
Examples of living plants that not bearer plants

1. Annual crops (such as palay, wheat, corn, maize, sugarcane, barley, etc.)
2. Trees e.g. timber used for producing lumber
3. Plants cultivated and sold in garden centers.
Agricultural produce
At the date of harvest the produce should be recognized and measured at fair value les estimated costs to sell.
• Gain and losses on initial recognition are included in profit or loss (profit from operations) for the period.
• After produce has been harvested, IAS 41 ceases to apply. Agricultural produce becomes an item of inventory. Fair value
less costs to sell at the point of harvest is taken as cost for the purpose of IAS 2 Inventories, which is applied from then
onwards.
Note:
Transactions Accounting treatment Measurement
Bearer trees Property, plant and equipment Cost or revaluation model
Fruits growing on the trees Biological asset Fair value less cost to sell
Picked the fruits Agriculture Produce (PAS 41 Agriculture) at the point of Fair value less cost to sell at the point of
harvest harvest
Process the fruits Agriculture Produce after harvest (PAS 2 Inventories) Lower of Cost* or NRV.
*Deemed cost is the FVLCTS at the point of

harvest.
Note
Items Applicable Standard?
1. Living animal or plant PAS 41 (Biological asset)
2. Plant with dual use PAS 41 (Biological asset)
3. Bearer animals PAS 41 (Biological asset)
4. Consumable animals PAS 41 (Biological asset)
5. Animals related to recreational activities PAS 16 (PPE)
6. Bearer plants PAS 16 (PPE)
7. Consumable plants PAS 41 (Biological asset)
8. Produce growing on animals and plants PAS 41(Biological asset)
9. Unprocessed harvested product PAS 41 (Agricultural produce)
10. Processed harvested product PAS 2 (Inventory)
Biological assets
A biological asset is a living animal or plant. A biological asset should be recognized if:
• It is probable that economic benefits will flow to the entity
• The cost or fair value of the asset can be reliably measured, and
• The entity controls the asset.
Fair Value
Agriculture is fundamentally different from other type of business. Most non-current assets wear out are consumed over time and
therefore they are depreciated. Many agricultural assets grow, rather than wear out. Arguably, depreciation is irrelevant in this
situation. Therefore biological assets are measured at fair value and changes in fair value are reported as part of profit for the period.
This means that a farmer’s profit for the year reflects the increase in the value of his productive assets as a whole, as well as the profit
on any sales made during the year.
Many commentators have been wary of this departure from traditional realization concepts, claiming that it is wrong to recognize profit
before a sale has been made. Indeed, under IAS 41 profits could be recognized years before the products are even ready for sale.
However, supporters of IAS 41 claim that the opposite is true. By requiring all changes in the value of a farm to be reported openly,
farm managers will be unable to boost profits by selling off an unsustainable amount of produce.
For instance, under traditional accounting rules a forestry company could make huge short-term profits by felling all of its trees without
replacing them. Profit would reflect the sale but ignore the fall in value of the forest.
IAS 41 contains a rebuttable presumption that the fair value of a biological asset can be measured reliably. Many biological assets are
traded on an active market, so it is normally easy to determine the fair value of an asset by ascertaining the quoted price in that
market.
If there is no active market for the asset then it may be possible to estimate fair value by using:
• The most recent market price
• The market price for a similar asset
• The discounted cash flows for the asset
• Net realizable value
If there is no active market and the alternative methods of estimating fair value are clearly unreliable, then a biological asset is
measured at cost less depreciation on initial recognition until a reliable fair value can be established. For example, seedlings being
grown on a plantation will not be have any market value until they are a few years old.
Gain and losses can arise when a biological asset is first recognized. For example, a loss can arise because estimated selling costs are
deducted from fair value. A gain can arise when a new biological asset (such as a lamb or a calf) is born.
Recognition and measurement
Initial measurement is at:

• Fair value less any estimated point of sale costs.
• If there is no fair value, then the cost model should be used.
• Gain from change in fair value due to growth or price change minus loss from change in fair value due to harvest or price
change equals net gain from biological asset
• Biological asset measured at FV less Cost to sell. Cost of disposal" is the incremental cost directly attributable to the
disposal of an asset.
Cost to sell include the 1. Commission to brokers
following: 2. Levies by regulatory agencies and commodity exchanges
3. Transfer taxes and duties
Cost to sell do not include: 1. Transport cost of getting the asset to a market
2. Advertising cost
3. Income taxes
4. Interest expense
Subsequent measurement:
• Revalue to fair value less point of sale costs at year-end, taking any gain or loss to the statement of profit or loss.
Agricultural produce:
• Fair value less cost to sell of harvest is initial cost of agricultural produce and gain from agricultural produce.
• After point of harvest, classified at an inventory and measured at lower cost vs NRV.
Formula of Price and Physical Change

Old Animal
Price Change
Acquisition cost of 1 year old animal (Beg – FVLCTS - old age)
Fair Value of 1 year old animal December 31 (FVLCTS - old age) Physical Change
Fair value of 1 year old animal December 31 (End- FVLCTS - new age)
New Purchased - 1.5 years (July 1)

Price Change
Fair value of new purchased animal on July 1(Beg – FVLCTS -old age)
Fair value of new purchased animal on Dec. 31 (FVLCTS - old age)
Fair value of new purchased animal on Dec. 31(End - FVLCTS – new age)
Physical Change
Physical Change
New Born - (July 1)
Price Change
Fair value of new born animal on July 1(Beg- (Newly Born)(Upon Birth)
Fair value of new born animal on Dec. 31 (FVLCTS - old age) Physical Change
Fair value of new born animal on Dec. 31(End - FVLCTS - new age)
Summary:
Old Animal
Price change X
Physical change X
New purchase
Price change X
Physical change X
New Born
Price change X
Physical change X
Physical change (Newly Born) (Upon Birth) X
FINANCIAL STATEMENT PRESENTATION

Presentation
Biological assets and agricultural produce should be presented as separate line items under the following headings:
Statement of Financial Position

Current assets
Biological assets – would include produce to be harvested within 12 months of reporting date, livestock to be slaughtered within 12
months and annual crops eg wheat, maize
Inventories – includes the inventories produced from agricultural produce eg the Tea to be sold, produced from the tea leaves
Non-current assets
Property, Plant and Equipment – would include bearer plants
Biological assets – would include all agricultural produce to be harvested more than 12 months from the reporting date, livestock to
be held for more than 12 months and trees cultivated for lumber and fruit.
• Dairy livestock whether immature or mature, are to be presented in the non-current assets sections of the Statement
of Financial Position.
• An entity is encouraged, but not required, to provide a quantified description of each group of biological assets,
distinguishing between consumable and bearer biological assets or between mature and immature biological assets, as
appropriate. An entity discloses the basis for making any such distinctions.
Statement of Comprehensive Income

• Fair value of milk produced and gains arising from changes in fair value less cost to sell of dairy livestock shall be included
in profit for the period in which it arises.
Statement of Cash Flows

• Cash receipts from sale of milk, sale of livestock and cash paid for purchases of livestock are to be presented in the
operating activities section of the Statement of Cash Flows.
Disclosure
Extensive disclosure is required by IAS 41, including:
• the aggregate gain or loss for the period on:
– initial recognition of biological assets
– initial recognition of agricultural produce
– change in fair value less estimated costs to sell of biological assets
• a description of, and the nature of its activities involving, each group of biological assets
• non-financial measures or estimates of the physical quantities of agricultural produce output for the period and biological
assets as at the year end date
• restrictions on title, pledges and commitments in respect of biological assets
• a reconciliation of changes in the carrying amount of those biological assets between the beginning and end of the
reporting period. The reconciliation should include the gain/loss arising from changes in fair value, purchases, sales,
decreases due to harvest and other changes
For biological assets measured at cost less any accumulated depreciation and any accumulated impairment losses, the standard
requires the following additional disclosure:
• a description of those biological assets
• an explanation of why fair value cannot be measured reliably
• the range of estimates within which fair value is highly likely to lie (if possible)
• the gain or loss recognised on disposal of those biological assets
• impairment losses (if any), reversals of impairment losses (if any) and depreciation expense
• the depreciation method used
• the useful lives or the depreciation rates used
• the gross carrying amount and the accumulated depreciation at the beginning and end of the period.
In addition, if the fair value of biological assets previously measured at cost less any accumulated depreciation and any
accumulated impairment losses subsequently becomes reliably measurable, an enterprise should disclose a description of the
biological assets, an explanation of why fair value has become reliably measurable, and the effect of the change. Disclosure is
also required in respect of government grants relating to managed agricultural activity.
Government grants and biological assets
Government grants
IAS 41 applies to government grants related to a biological asset.

• Unconditional government grants received in respect of biological assets measured at fair value are reported as income
when the grant becomes receivable.
• If such a grant is conditional (including where the grant requires an entity not to engage in certain agricultural activity), the
entity recognizes it as income only when the conditioned have been met.
GOVERNMENT GRANTS RELATED TO BIOLOGICAL ASSETS
Category Characteristics Measurement
Conditional In case of non- Deferred – entire amount

compliance, entire grant and recognized as income
will be returned when conditions are met
Grant allow portion of it Deferred and will be

to be retained according amortized over the
to the time lapsed required period
------------------------------------------------------------------------------------------------------------
Unconditional Grant has become Income - entire receivable

receivable amount
Other issues
• If the asset is carried on a cost basis, PAS 20 Accounting for Government Grants and Disclosure of Government Assistance, is
applied:
Treat the grant as deferred income, or
Deduct the grant from the carrying amount of the asset
• Government grants recognized during the period should be separately identified and any unfulfilled conditions attaching to such
grants should be explained.
• An indication should be given in the financial statements where there is expected to be a decrease in the amount of government
grants receivable in future periods.
Disclosures of Government Grants

• Disclosures relating to government grants include the nature and extent of grants, unfulfilled conditions, and significant
decreases in the expected level of grants
REVIEW QUESTIONS
1. On January 1, 20x9, the entity purchased raw materials to be consumed in the production process for P550,000, including
P50,000 refundable purchase taxes. The purchase price was funded by raising a loan of P555,000 (including P5,000 loan-raising
fees). The loan is secured by inventories. Storage costs for raw materials of P10,000
During February 20x9 the entity designed the corporate gifts for the customer, the design costs included: Cost of external
designer, P7,000 and labor cost, P3,000. Storage cost for work in process of P20,000
During March 20x9, the entity’s production team developed the manufacturing technique and made further modifications
necessary to bring the inventories to the conditions specified in the agreement. The following costs were incurred in the testing
phase; material, net of P3,000 recovered from the sale of the scrapped out, P21,000; Labor, P11,000 and depreciation of plant
used to perform the modifications, P5,000.
During May 20x9 the entity incurred the following additional costs in manufacturing the customized corporate gifts; consumable
stores, P55,000; labor, P65,000 and depreciation of plant used to perform the modifications, P15,000.
The customized gifts were ready for sale on June 1, 20x9. Additional cost was incurred:
Storage costs of finished goods P180,000
Delivery to customers 40,000
No abnormal wastage occurred in the development and manufacture of the corporate gifts.
What is the cost of the finished inventory of customized gifts?

A. P682,000 B. P645,000 C. P702,000 D. P692,000
Raw materials ( P550,000 - P50,000) 500,000
Borrowing cost
External designer 7,000
Labor cost 3,000
Storage cost 20,000 30,000
Material 21,000
Labor cost 11,000
Depreciation used in modification 5,000 37,000
Consumable stores 55,000
Labor cost 65,000
Depreciation used in modification 15,000 135,000
Cost of finished inventory 702,000
a) Borrowing costs – PAS 23 requires capitalizing interest on inventories which take a substantial amount of time to
create. However, an entity is not required to capitalize borrowing costs for inventories that are manufactured in large
quantities on a repetitive basis.
b) Storage costs – this can be included for products that require a maturation process or substantial amount of time to
create.
c) Non-production overheads or costs of designing products for specific customer– this can be included in cost if
they contribute in bringing the inventories to their present condition and location.
2. The inventory on hand at December 31 for Fara Company valued at a cost of P947,800. The following items were not included
in this inventory amount:
a. Purchased goods, in transit, shipped FOB destination invoice price P32,000 which included freight charges of P1,600.
b. Goods held on consignment by Fara Company at a sales price of P28,000, including sales commission of 20% of the
sales price.
c. Goods sold to Godzilla Company, under terms FOB destination, invoice for P18,500 which includes P1,000 freight
charges to deliver the goods . Goods are in transit.
d. Purchased goods in transit, terms FOB seller, invoice price P48,000, freight cost, P3,000.
e. Goods out on consignment to Manila Company, sales price P36,400, shipping cost of P2,000.
Assuming that the company’s selling price is 140% of inventory cost, the adjusted cost of Fara Company’s inventory at
December 31 should be
A. P1,039,300 B. P1,039,500 C. P1,055,700 D. P1,037,300
Unadjusted balance 947,800

a. Purchased FOB destination -
b. Held on consignment -
c. Sold FOB destination (P18,500 - P1,000) / 1.4 12,500
d. Purchased FOB SP (P48,000 + P3,000) 51,000
e. Goods out on consignment (P36,400 /1.4) +P2,000)
(36,400/140% + 2,000) 28,000
Inventory 1,039,300
3. Marker Company uses the perpetual system for its merchandise inventory. The accounting records show a P500,000 balance in
the inventory account as of December 15, 20x9. The following information pertaining to its inward inventory transactions from
December 16 to 31:
Merchandise received through consignment P20,000
Inventory purchased with a buyback agreement 100,000
Inventory purchased but still in transit, FOB shipping point, excluding P5,000 freight cost 155,000
Inventory purchased still in transit, Free Alongside, including delivery cost alongside the Vessel of P6,000 but 250,000
excluding the cost of shipment of P3,000
Inventory purchased still in transit, CIF (excluding insurance costs and freight of P8,000) 175,000
Purchase goods with and invoice price of P200,000 still in transit. The terms were FOB Seller. Some of the costs incurred in
connection with the sale and delivery of the goods were as follows: Packaging for shipment, P2,000; Shipping, P3,000 and
special handling charges, P4,000. The company receive a P5,000 rebate in relation to the above purchases.
Purchase goods with and invoice price of P200,000 in the stock room of Marker Company. The terms were FOB Buyer. Some of
the costs incurred in connection with the sale and delivery of the goods were as follows: Packaging for shipment, P2,000;
Shipping, P3,000 and special handling charges, P4,000. The company receive a P5,000 rebate in relation to the above
purchases.
What amount should Marker Company report as value of its inventory in its 20x9 balance sheet?
A. P1,489,000 B. P1,498,000 C. P1,587,000 D. P1,567,000
Unadjusted 500,000
Merchandise received on consignment -
Inventory purchased with a buyback agreement -
FOB shipping point (P155,000 + 5,000) 160,000
FAS (P250,000 - P6,000 + P3,000) 247,000
CIF ( P175,000 + P8,000) 183,000
FOB seller (P200,000 + P2,000 + P3,000 + P4,000 - P5,000) 204,000
FOB buyer (P200,000 - P5,000) 195,000
Inventory 1,489,000
4. On October 1, 20x9, AAA Company consigned 50 freezers at a unit cost of P15,000 to BBB Company for sale at P20,000 each
and paid P20,000 in transportation cost. On December 31, 20x9, BBB reported the sale of the 25 freezers and returned 10
units. Cost paid by the consignee on the returned units was P4,000. Amount due to consignor was remitted on the same date.
Commission rate as agreed upon was 15%. What amount of inventory on consignment and net income related to the sold units,
respectively, should AAA report on December 31, 20x9?
A. P225,000 and P36,000 B. P231,000 and P32,000 C. P235,000 and P40,000 D. P375,000 and P44,000
50 Sold 25 Returned 10 Inventory consignment 15

Freight P20,000 10,000 4,000 6,000
Freezer unit cost P15,000 375,000 225,000
385,000 4,000 231,000
Sales (25 x P20,000) 500,000

Cost of sales (385,000)
Expenses (4,000)
Cost paid returned goods (4,000)
Commission 15% (75,000)
Net profit 32,000
5. On December 1, 20x9, AAA Store received 1,000 units of windbreakers on consignment from BBB Company. BBB’s cost for the
windbreakers was P1,600 each, and they were priced to sell at P2,000. Transportation cost of P2,000 was paid by AAA. As of
December 31, 50 units were returned to the consignor and 200 units are still held by the consignee. Commission rate as agreed
upon between contracting parties was 15% on all sales to be made by BBB Company. In its December 31, 20x9 balance sheet,
what amount should AAA report as payable for consigned goods?
A. P1,273,000 B. P1,320,000 C. P1,500,000 D. P2,000,000
Net remittance report

Sales (1,000 - 50 - 200) x P2,000 1,500,000
Commission @ 15% (225,000)
Reimbursable expenses (2,000)
Net remittance 1,273,000
6. On June 1, 20x9 Concord Corporation sold merchandise with a list price of P200,000 to Rain on account. Concord allowed trade
discount of 30%, 20% and 10%. Credit terms were 2/15, n/40 and the sale was made FOB shipping point. Concord prepaid
P4,000 delivery costs to Rain as an accommodation. On June 3, 20x9, Concord received from Rain returned merchandise with
an invoice price of P50,000 due to minor defects. On June 14, 20x9, Rain settled its account in full to Concord. How much net
cash remittance did Concord received?
A. P49,784 B. P53,784 C. P60,760 D. P74,088
List price 200,000

x 70% x 80% x 90%
Invoice price 100,800
Returned (50,000)
50,800
Cash discount 2% (1,016)
Freight prepaid 4,000
Cash remittance 53,784
Summary Table for Freight

Freight Terms Buyer Seller
FOB Destination Freight collect Reduction of A/P Reduction of A/R
Freight prepaid No effect No effect
FOB Shipping Point Freight collect No effect No effect
Freight prepaid Addition to A/P Addition to A/R
Formula for the computation of net collection or payment:

Invoice price of merchandise sold or purchased X
Less: Invoice price of merchandise returned (x)
Net invoice price X
Less: Sales or Purchase discount (% x Net invoice price above) (If collection or payment is within the (x)
discount period)
Net collection or payment before freight X
Less: Freight paid by the buyer – (if the term is FOB Destination, freight collect) (x)
Add: Freight paid by seller – ( if the term is FOB Shipping pint, freight prepaid) X
Total Net Cash Collection or Payment X
7. AAA Co. records purchases at net amounts. On May 5 AAA purchased merchandise on account, P640,000, terms 2/10, n/30.
AAA Co. returned P48,000 of the May 5 purchase and receive credit on account. At May 31 the balance had not been paid. By
how much should the account payable be adjusted on May 31?
A. None B. P11,840 C. P12,800 D. P13,760
Gross Method Net Method
Purchase 640,000 627,200
Return (48,000) (47,040)
592,000 580,160
Adjusting Entry
Purchase discount lost 11,840
Accounts payable 11,840
Use the following information for the next four (4) questions
At the close of its fiscal year on March 31, 20x3, the Apple Company was in the process of relocating its plant. This resulted in
some confusion relating to the inventory cut-off, as indicated by the following:
A. Merchandise on hand costing P17,940 was included in the inventory although the purchase invoice was not recorded
until April 12, 20x3.
B. Merchandise shipped on April 1, 20x3 was included in the inventory. The cost of this merchandise was P22,190, and the
sales was recorded as P31,380 on March 31, 20x3.
C. Merchandise costing P12,150 was included in the inventory although it was shipped to a customer on March 31, 20x3,
FOB shipping point. The company recorded the sale of P19,246 on that date.
D. Merchandise costing P18,200 was not counted.
E. Merchandise in transit (shipped to the company FOB destination) was recorded as a purchase as of April 2, 20x3, and
its cost of P17,287 was not included in the March 31, 20x3 inventory.
F. An invoice for P30,000, FOB shipping point, was received and recorded on April 4, 20x3. The invoice shows that the
goods had been shipped on March 28, 20x3 and the receiving report indicates that the goods had been received on
April 4, 20x3. The merchandise was excluded from inventory.
8. By how much was the inventory account of Apple Company as of March 31, 20x3overstated or understated?
A. P 36,050 understated B. P48,200 understated C. P42,150 overstated D. P46,140 overstated
9. By how much was the Purchases account of Apple Co. for the year ended March 31, 20x3 overstated or understated?
A. Not affected B. P47,787 understated C. P47,940 understated D. P65,227 understated
10. By how much was the Sales account of Apple Co. for the year ended March 31, 20x3overstated or understated?
A. P50,626 overstated B. P31,380 overstated C. P12,134 overstated D. P12,134 understated
11. By how much was the Net Income of Apple Co. for the year ended March 31, 20x3overstated or understated?
A. P7,390 overstated B. P43,270 overstated C. P60,557 overstated D. P61,740 overstated
Valid purchase Purchase book Include inventory Inventory Purchases Sales Net income
A. 17,940 Yes No Yes
Adjustment No adjustment 17,940 (17,940)
Valid sales Sales book Exclude inventory
B. 31,380 No Yes No
22,190 Adjustment No adjustment (31,380) (31,380)
Valid sales Sales book Exclude inventory
C 19,246 Yes Yes No
12,150 No adjustment Adjustment (12,150) (12,150)
Valid purchase Purchase book Include inventory
D 18,200 Yes Yes No
No adjustment Adjustment 18,200 18,200
E 17,287 Valid purchase Purchase book Include inventory
No No No
No adjustment No adjustment
Valid purchase Purchase book Include inventory
F 30,000 Yes No No 30,000 (30,000)
Adjustment Adjustment 30,000 30,000
36,050 47,940 (31,380) (43,270)
The Sunshine Company sells blankets for P30 each. The following was taken from the inventory records during July.
Date Product T Units Cost
July 3 Purchase 500 P15
July 10 Sale 300
July 17 Purchase 1,000 P17
July 20 Sale 600
July 23 Sale 300
July 30 Purchase 1,000 P20
Required: Determine the cost of sales and cost of ending inventory under each the following independent assumptions:
12. First-In-First-Out Method (periodic)
A. P19,400; P25,100 B. P21,360; P23,140 C. P19,500; P25,000 D. Not given
13. First-In-First-Out Method (perpetual)

14. Weighted-Average Method

15. Moving Average Method

1. First-in-First-out Method (periodic)
Cost of sales:
Units sold (300 + 600 + 300) = 1,200
Date Qty Unit cost Total Cost

July 10 Sale (From July 3) 300 15 4,500
July 23 Sale (From July 17) (squeeze) 300 17 5,100
Total Cost of sales 1,200 19,400
Cost of ending inventory:

Units in the Ending Inventory = 500+1,000+1,000-300-600-300 1,300
Date Qty Unit cost Total Cost

July 17 (squeeze) 300 17 5,100
July 30 1,000 20 20,000
1,300 25,100
2. FIFO (Perpetual)
Inventory Cost of Merchandise Sold
Qty Unit cost Total Cost Qty Unit cost Total Cost
July 3 Purchase 500 15 7,500
July 10 Sales (300) (300) 15 (4,500) 300 15 4,500
200 15 3,000
July 17 Purchase 1,000 17 17,000
July 20 Sale (600) (200) 15 (3,000) 200 15 3,000
(400) 17 (6,800) 400 17 6,800
600 17 10,200
July 23 Sale (300) (300) 17 (5,100) 300 17 5,100
300 17 5,100
July 30 Purchase 1,000 20 20,000
1,300 25,100 1,200 19,400
3. Weighted-Average Method
Qty Unit cost Total cost
Beginning
Purchases
July 3 500 15 7,500
July 17 1,000 17 17,000
July 30 1,000 20 20,000
2,500 17.80 44,500
Cost of sales 17.80 1,200 21,360

Cost of ending inventory 17.80 1,300 23,140
4. Moving average method

Inventory Cost of Merchandise Sold
Qty Unit cost Total Cost Qty Unit cost Total Cost
July 3 Purchase 500 15 7,500
July 10 Sales (300) (300) 15 (4,500) 300 15.00 4,500
200 15 3,000
July 17 Purchase 1,000 17 17,000
1,200 16.67 20,000
July 20 Sale (600) (600) 16.67 (10,000) 600 16.67 10,000
- - -
600 16.67 10,000
July 23 Sale (300) (300) 16.67 (5,000) 300 16.67 5,000
300 16.67 5,000
July 30 Purchase 1,000 20.00 20,000
1,300 19.23 25,000 1,200 19,500
Use the following information for the next two (2) questions
The Joanna Company sells for P30 each. The following was taken from the inventory records during August.
Date Product B Units Cost
August 1 Beginning 600 P20
August 4 Purchase 400 P24
August 12 Sale 200
August 15 Purchase 1,100 P25
August 17 Purchase return 100 P25
August 22 Sale 600
August 23 Sale 400
August 25 Sales return 100
August 31 Purchase 1,000 P30
Required: Determine the cost of sales and cost of ending inventory under each of the following assumption:
16. First-in-First-Out Method (perpetual)
1. First-In-First-Out Method (perpetual)
Purchases Cost of Merchandise sold Inventory

Date Qty Unit cost Total cost Qty Unit cost Total cost Qty Unit cost Total cost
Aug. 1 600 20 12,000
Aug. 4 400 24 9,600 400 24 9,600
Balance 1,000 21,600
Aug. 12 200 20 4,000 (200) 20 (4,000)
Balance 800 17,600
Aug. 15 1,100 25 27,500 1,100 25 27,500
Aug. 17 (100) 25 (2,500) (100) 25 (2,500)
Balance 1,800 42,600
Aug. 22 400 20 8,000 (400) 20 (8,000)
200 24 4,800 (200) 24 (4,800)
Aug. 23 200 24 4,800 (200) 24 (4,800)
200 25 5,000 (200) 25 (5,000)
Aug. 25 * (100) 25 (2,500) 100 25 2,500
Balance 900 22,500
Aug. 31 1,000 30 30,000 1,000 30 30,000
1,100 24,100 1,900 52,500
* For sales return, if there is no unit cost given, assume Last-out, First-In (i.e. Unit cost of the last sold)
Alternative computation
Inventory Cost of Merchandise sold
Date Qty Unit cost Total cost Qty Unit cost Total cost
Aug. 1 600 20 12,000
Aug. 4 400 24 9,600
Aug. 12 Sales (200 units)
From beg. Inventory (200) 20 (4,000) 200 20 4,000
Aug. 15 1,100 25 27,500
Aug. 17 (100) 25 (2,500)
Aug. 22 Sales (600 units)
From Aug. 1 purchases (400) 20 (8,000) 400 20 8,000
From Aug. 4 purchases (200) 24 (4,800) 200 24 4,800
Aug. 23 Sales
From Aug. 3 Purchase (200) 24 (4,800) 200 24 4,800
From Aug. 15 Purchase (200) 25 (5,000) 200 25 5,000
Aug. 25 Sales return 100 25 2,500 (100) 25 (2,500)
Aug. 31 Purchases 1,000 30 30,000
1,900 52,500 1,100 24,100

Purchases Cost of Merchandise sold Inventory
Date Qty Unit cost Total cost Qty Unit cost Total cost Qty Unit cost Total cost
Aug. 1 600 20.00 12,000
Aug. 4 400 24 9,600 400 24.00 9,600
Balance 1,000 21.60 21,600
Aug. 12 200 21.6 4,320 (200) 21.60 (4,320)
Balance 800 17,280
Aug. 15 1,100 25 27,500 1,100 25.00 27,500
Aug. 17 (100) 25 (2,500) (100) 25.00 (2,500)
Balance 1,800 23.49 42,280
Aug. 22 600 23.49 14,094 (600) 23.49 (14,094)
Balance 1,200 23.49 28,186
Aug. 23 400 23.49 9,396 (400) 23.49 (9,396)
BAlance 800 23.49 18,790
Aug. 25 * (100) 23.49 (2,349) 100 23.49 2,349
Balance 900 23.49 21,139
Aug. 31 1,000 30 30,000 1,000 30.00 30,000
1,100 25,461 1,900 26.92 51,139
Alternative computation
Inventory Cost of Merchandise sold
Date Qty Unit cost Total cost Qty Unit cost Total cost
Aug. 1 Beginning balance 600 20.00 12,000
Aug. 4 Purchases 400 24.00 9,600
Balance 1,000 21.60 21,600
Aug. 12 sales (200) 21.60 (4,320) 200 21.60 4,320
800 21.60 17,280
Aug. 15 Purchases 1,100 25.00 27,500
Aug. 17 Purchase return (100) 25.00 (2,500)
1,800 23.49 42,280
Aug. 22 Sales (600) 23.49 (14,094) 600 23.49 14,094
BAlance 1,200 23.49 28,186
Aug. 23 Sales (400) 23.49 (9,396) 400 23.49 9,396
Balance 800 23.49 18,790
Aug. 25 Sales return 100 23.49 2,349 (100) 23.49 (2,349)
Balance 900 23.49 21,139
Aug. 31 Purchases 1,000 30.00 30,000
1,900 26.92 51,139 1,100 25,461
18. Osa Corporation has two products in its work in process ending inventory, each accounted for at the lower of cost or net
realizable value. Specific data with respect to each product follows:
Product 1 Product 2
Selling price P60 P130
Historical cost 40 70
Cost to sell 10 26
Cost to complete 15 40
In pricing its ending inventory using the lower-cost – of net realizable value, what unit values should Osa use for products #1
and #2, respectively?
A. P35 and P64 B. P50 and P104 C. P40 and P70 D. P45 and P90
Product 1 Product 2
SP 60 130
Cost to sell (10) (26)
Cost to complete (15) (40)
NRV 35 64
Cost 40 70
35 64
JAC Company’s closing inventories as of December 31, 20x9 consists of three groups of inventory items and their respective costs
and net realizable values (NRV) are as follows:
Group1 Group 2 Group 3

Item Cost NRV Item Cost NRV Item Cost NRV
A P1,000 P1,500 D P2,000 P1,800 G P1,500 P1,200
B 2,000 2,800 E 4,000 6,000 H 2,500 2,000
C 3,000 2,600 F 3,000 4,000 I 3,000 3,400
Total P6,000 P6,900 Total P9,000 P11,800 Total P7,000 P6,600
19. What is the value of the closing inventories for December 31, 20x9 under the item by item basis?
A. P20,600 B. P22,000 C. P21,600 D. P25,300
Cost NRV Item by item

A 1,000 1,500 1,000
B 2,000 2,800 2,000
C 3,000 2,600 2,600
D 2,000 1,800 1,800
E 4,000 6,000 4,000
F 3,000 4,000 3,000
G 1,500 1,200 1,200
H 2,500 2,000 2,000
I 3,000 3,400 3,000
Inventory 20,600
20. What is the value of the closing inventories for December 31, 20x9 under the group for similar items basis?
A. P20,600 B. P22,000 C. P21,600 D. P25,300
Cost NRV By total

Group 1 6,000 6,900 6,000
Group 2 9,000 11,800 9,000
Group 3 7,000 6,600 6,600
Inventory 21,600
The following information relate to an item of raw materials of Raiborn Company as of June 30, 20x9.
Historical cost of raw materials P500,000

Replacement cost of raw materials 400,000
Conversion cost to finished product A (labor, P200,000 and production overhead P100,000)
21. What is the value of the closing raw material A if the finished product A to be produced is expected to fetch P1,000,000?
A. P400,000 B. P450,000 C. P500,000 D. P600,000
Cost NRV
RM 500,000
DL 200,000
OH 100,000 800,000 1,000,000
Therefore: RM is at cost
22. What is the value of the closing raw material A if the finished product A to be produced is expected to fetch P650,000?
A. P400,000 B. P450,000 C. P500,000 D. P600,000
Cost NRV
RM 500,000
DL 200,000
OH 100,000 800,000 650,000
Therefore: RM is at NRV
2 3 . Based on the physical inventory taken on December 31, 20x7, AAA Company has an ending inventory costing P950,000 but with
a fair value less cost to sell of P750,000. During 20x8 AAA Company has yet to sell this inventory due primarily to the nature of
the business. On December 31, 20x8 the inventory has a fair value less cost to sell of P1,100,000. In the December 31, 20x8
balance sheet, what amount should the inventory be valued?
A. P750,000 B. P900,000 C. P950,000 D. P1,100,000
20x7 20x8
Cost 950,000 950,000
NRV 750,000 1,100,000
Direct method 750,000 950,000
Allowace method
Cost 950,000 950,000
Allowance 200,000
NRV 750,000 950,000
2 4 . The following information pertains to BBB Office Company at December 31, 20x8:
Inventory, January 1 P1,400,000
Purchases during the year 6,600,000
Inventory, December 31, cost (NRV P1,000,000) 1,200,000
Before the year 20x7 application of the lower of cost or NRV rule never produced a net to write down the company’s inventory to
an amount below cost. What is the cost of goods sold assuming the company applies the lower of cost or NRV using a loss
account and valuation allowance account?
A. P6,500,000 B. P6,800,000 C. P7,000,000 D. P8,000,000
Company policy: Loss account
Beginning 1,400,000
Purchases 6,600,000
Ending (1,200,000)
CGS 6,800,000
25. The opening inventory of AAA Company on January 1, 20x8 was P5,000,000. This amount included inventory A items which
were carried at their net realizable value of P500,000, the original cost of these items was P800,000. During the current year
purchases totaled P20,000,000, transportation and other directly attributable costs incurred in bringing the inventories to
warehouse totaled P500,000. At year end December 31, 20x8, a physical inventory count was conducted and it revealed a book
amount of P7,000,000. Included in the closing inventory was P2,000,000 but the estimated realizable value was P1,200,000.
Also, inventory A items brought forward from prior year remained unsold at year end. There was an increase in the demand for
these items and it was estimated that they could be sold for P1,000,000. It is the company’s policy to include declines and
reversal in the cost of sales.
What is the amount of cost of sales during 20x8?

A. P18,200,000 B. P18,500,000 C. P19,000,000 D. P19,600,000
Company policy: charged to cost of sales

Beginning inventory 5,000,000 NRV 500,000 300,000
Cost 800,000
Purchases 20,000,000
Transportation in 500,000 Loss alllowance 500,000
Ending inventory (7,000,000) NRV 1,200,000

18,500,000 Cost 2,000,000 800,000
Loss Allowance 500,000
Adjusted cost of sales 19,000,000
26. AAA Company uses International Financial Reporting Standards (IFRS). In 20x7, AAA Company experienced a decline in the
value of its inventory resulting in a write-down of its inventory from P240,000 to P200,000. The company used the loss method
in 20x7 to record the necessary adjustment and uses an allowance account to reduce inventory to NRV. In 20x8, market
conditions have improved dramatically and AAA Company inventory increases to NRV of P216,000. Which of the following will
AAA Company record in 20x8?
A. A debit to recovery of inventory loss of P16,000
B. A credit to recovery of inventory loss for P24,000
C. A debit to allowance to reduce inventory to NRV of P16,000
D. A credit to allowance to reduce inventory to NRV of P24,000
Cost NRV
Inventory 240,000 200,000 40,000
Inventory 240,000 216,000 24,000
Recovery 16,000
27. On September 29, 20x6, Catleya Airways entered into a non-cancellable commitment to purchase 3,000 barrels of aviation fuel
for P9,000,000 on March 23, 20x7. Catleya entered into this purchase commitment to protect itself against the volatility in the
aviation fuel market. By December 31, 20x6, the purchase price of aviation fuel had increased to P3,200 per barrel. However,
by March 23, 20x7, when Catleya took delivery of the 3,000 barrels, the price of aviation fuel had fallen to P2,500 per barrel.
Required: Account for the changes in price of the purchase commitment.
1 No journal entry is necessary to be prepared
2 Increase the price (replacement cost) ignored
3 Purchases / Merchandise inventory 7,500,000

Loss on purchase commitment 1,500,000
Accounts payable 9,000,000
28. During June 30, 20x6, Bihon Company signed a non-cancellable contract to purchase 1,000 sacks of rice at P1,300 per sack
with delivery to be made in May 9, 20x7. On December 31, 20x6, the price had fallen to P1,100 per sack. On May 9, 20x7, the
company accepts delivery of rice when the price is P1,400 per sack.
Required: Account for the changes in price of the purchase commitment.
1 No journal entry is necessary to be prepared
2 Loss on purchase commitment 200,000

Estd. Liability on purchase commitment 200,000
3 Purchases / Merchandise inventory 1,300,000

Estimated liability on purchase commitment 200,000
Gain on purchase commitment 200,000
29. On February 20, 20x1, a flood completely destroyed the goods in process inventory and half the raw materials inventory of the
Climb Company. There was no damage to the finished goods inventory. A physical inventory taken after the flood indicated the
following values:
Raw materials P35,000 Finished goods P75,000
A review of the accounting records indicated the following:

Raw materials (Dec. 31, 20x0) P65,000 Raw materials purchases P20,000
Goods in process (Dec. 31, 20x0) 80,000 Direct labor cost 30,000
Finished goods (Dec. 31, 20x0) 72,000 Manufacturing overhead cost 15,000
Sales (to February 20, 20x1) 40,000 Gross profit rate (on sales) 40%
The value of the inventory destroyed by flood is

A. P113,000 B. P148,000 C. P156,000 D. P183,000
Raw materials, beginning 65,000

Net purchases 20,000
Raw materials, ending **** (70,000)
Raw material used 15,000
Direct labor 30,000
OH 15,000 60,000
BWIP 80,000
EWIP (113,000)
FG, beginning 72,000
FG, end (75,000)
Cost of goods sold (40K x 60%) 24,000
(35,000 + 113,000) 148,000
30. On September 30, 20x8, a fire at Mill Company’s only warehouse caused severe damage to its entire inventory. Based on
recent history, Mill has a gross profit of 30% of net sales. The following information is available from Mill’s records for the nine
months ended September 30, 20x8:
Inventory at January 1, 20x8 P550,000
Total purchases received and recorded from January to date of fire 3,000,000
Total freight cost of goods purchased and received 60,000
Total credit memo received on goods purchased and received 200,000
Total discounts taken on purchases 80,000
Invoice received for goods purchased but still in transit shipped on September 30, 120,000
20x8, FOB shipping point
Total sales delivered and recorded from January to date of fire 3,600,000
Unrecorded sales invoice for goods delivered 300,000
Total sale returns accounted and recorded to date of fire 160,000
Total sales discounts taken by customers on recorded sales 40,000
A physical inventory disclosed usable damaged goods which Mill estimates can be sold to a jobber for P50,000 at net realizable
value with original selling price of P70,000. On December 31, 20x8 Mill Company received P5,000,000 from the insurance
company as compensation for the damaged warehouse and P550,000 for the damaged value of merchandise inventory.
What amount of loss should the company recognize with regards to the merchandise inventory?
A. P112,000 B. P662,000 C. P782,000 D. P832,000
Beginning inventory 550,000 Sales 3,600,000
Purchases 3,000,000 Unrecorded sales 300,000
Freight-in 60,000 Sales return (160,000)
Purchase return (200,000) Net sales 3,740,000
Purchase discount (80,000) Cost ratio 70%
FOB shippping point - in transit 120,000
TGAS 3,450,000 Cost of sales 2,618,000
Cost of sales (2,618,000)
Estimated ending inventory 832,000
Damaged goods (50,000) Cash 5,000,000
Undamaged goods (120,000) Income 5,000,000
Loss 662,000
31. BBB Company pricing structure has been established to yield a gross margin of 25% based on cost. The following data pertain
to the year ended December 31, 20x8: Sales P2,200,000; Inventory, January 1, 20x8 P1,500,000; Purchases, P800,000;
Freight cost on purchases, P20,000; Freight cost on merchandise sold P30,000; Inventory inside the company’s warehouse per
actual count on December 31, 20x8, P160,000. Credit memo issued to customers for goods returned and received, P50,000;
Credit memo issued to customers for merchandise to be returned, January 2, 20x9, P40,000; Sales discount, P100,000. BBB
Company is satisfied that all sales and purchases have been fully and properly recorded. How much BBB Company reasonably
estimate as a shortage in inventory at December 31, 20x8?
A. P343,000 B. P183,000 C. P440,000 D. P155,000
Beginning inventory 1,500,000

Purchases 800,000
Freight in 20,000 Sales 2,200,000
Purchase return Sales return (50,000)
TGAS 2,320,000 2,150,000
Estimated cost of sales (1,720,000) / 1.25
Estimated inventory 600,000 1,720,000
Per physical count (160,000)
Shortage 440,000
Use the following information for the next three (3) questions:
Presented below is information taken from BBBBB, Company for the three months ended March 31, 20x3.
Cost Retail
Inventory, January 1 P300,000 P1,200,000
Purchases 6,000,000 8,500,000
Purchase returns (400,000) (800,000)
Purchase discounts (150,000) –
Purchase allowance (50,000) –
Freight-in 20,000 –
Markups – – 600,000
Markup cancellations – (50,000)
Departmental Transfer-In 600,000 1,100,000
Departmental Transfer-Out (560,000) (1,334,000)
Markdown – (500,000)
Markdown cancellations – 116,000
Sales 7,000,000 –
Sale returns (700,000) –
Sale allowance (25,000) –
Sale discount (25,000)
Normal Shrinkage 500,000 –
Determine the following: (Round off 4 decimal places e.g. (.3333)

32. What should be reported as cost of goods sold using conservative method?
A. P4,490,000 B. P4,820,000 C. P4,680,000 D. P4,800,000
33. What should be reported as cost of goods sold using FIFO method?
A. P4,800,000 B. P4,210,000 C. P4,306,307 D. P4,080,000
34. What should be reported as cost of goods sold using average method?
A. P6,800,290 B. P4,010,450 C. P3,940,830 D. P4,434,730
Cost Retail
Inventory, January 1 300,000 1,200,000
Purchases 6,000,000 8,500,000
Purchase returns (400,000) (800,000)
Purchase discounts (150,000) –
Purchase allowance (50,000) –
Freight-in 20,000 –
Markups – – 600,000
Markup cancellations – (50,000)
Departmental Transfer-In 600,000 1,100,000
Departmental Transfer-Out (560,000) (1,334,000)
Markdown – (500,000)
Markdown cancellations – 116,000
5,760,000 8,832,000
Sales 7,000,000 –
Sale returns (700,000) –
Normal Shrinkage 500,000 6,800,000
Ending inventory at retail 2,032,000
Average FIFO Conservative

5,760,000 5,760,000 5,460,000 5,760,000
8,832,000 8,832,000 7,632,000 9,216,000
0.6522 0.7154 0.6250
Ending inventory at retail 2,032,000 2,032,000 2,032,000

Ending inventory at cost 1,325,270 1,453,693 1,270,000
Average FIFO Conservative
TGAS 5,760,000 5,760,000 5,760,000
Ending inventory at cost (1,325,270) (1,453,693) (1,270,000)
Cost of goods sold 4,434,730 4,306,307 4,490,000
REVIEW QUESTIONS - GOVERNMENT GRANT AND AGRICULTURE
1. On January 2, 20x8, the local government of Manila promised Circus Company P500,000 as subsidy if it clears up the pollution in
the river near its factory in the next two years. Circus Company incurred P300,000 during 20x8 and expects to incur the same
cost in 20x9. By what amount should the profit or loss in 20x8 of Circus Company be affected by above transaction(s)?
A. Not affected B. P50,000 decrease C. P250,000 increase D. P300,000 decrease
Income (500,000 / 2years) 250,000

Expenses (300,000)
Decrease (50,000)
2. On January 2, 20x8, Triple company receives a government loan of P1,000,000 paying a coupon interest of 2% per year. The
loan is repayable at the end of year 5. Triple Company’s borrowing cost is 8% per annum. The below-market interest is
provided by the government to enable Triple Company to bear cost of 2% per annum on the nominal value of the loan. What
amount of deferred income should Triple Company recognized on December 31, 20x8?
A. P106,996 B. P154,626 C. P198,710 D. P239,563
SR 2%
ER 8%
ER 8% for 5 years 0.6806 1,000,000 680,600

3.9927 1,000,000 2% 79,854
Present value 760,454
Cash 1,000,000
Discount on notes payable 239,546
Notes payable 1,000,000
Unearned income 239,546
Interest Rec. Interest Inc. Disc. Amortization CV

Jan. 2, 20x8 760,454
Dec. 31, 20x8 20,000 60,836 40,836 801,290
Face value 1,000,000

Present value (801,290)
198,710
On January 2, 20x8 the government granted and transferred a land to Lion Company for a nominal consideration of P10,000.
The market value of the land on this date was P10,000,000. The condition attached to the grant was Lion Company shall clean
up the water pollution in the river for 10 years.
3. If Lion Company elects to measure the land at the nominal value, what amount of deferred income should be recognize on
January 2, 20x8?
A. None B. P10,000 C. P9,990,000 D. P10,000,000
4. If Lion Company elects to measure the land at its fair value, what amount of deferred income should Lion Company recognize
on January 2, 20x8?
A. None B. P10,000 C. P9,990,000 D. P10,000,000
Nominal value - amount given up only Nominal Value

Land 10,000
Cash 10,000
Fair value
Land 10,000,000
Cash 10,000
Deferred income from government grant 9,990,000
5. On January 2, 20x8, Mike Company received a grant related to a factory building. The total amount of the grant was
P18,000,000. Kenneth Company acquired the building from an industrialist identified by the government. If Mike Company did
not purchase the factory building, which was located in the slums of the city; it would have been repossessed by a government
agency. Mike Company purchase the building for P54,000,000. The useful life of the building is not considered to be more than
three years, mainly due to the fact that the previous owner did not properly maintain it. Assuming the grant is treated as a
reduction of the gross carrying amount of the asset, what is the carrying value of building in the December 31, 20x8 statement
of financial position?
A. P18,000,000 B. P24,000,000 C. P36,000,000 D. P54,000,000
Building 54,000,000
Deferred income (18,000,000)
36,000,000
x 2/3
Carrying value 24,000,000
Fantastic Company sold some of their biological assets to Graham for P200,000 on July 1, 20x8. The sale was made at
Fantastic’s Farm. However, if the biological asset are being sold at an auction they could have been sold at a higher price
because the company has to incur transportation cost of P2,000. Fantastic Company paid P6,000 commission in relation to the
sale. Graham Company incurred P3,000 as transport cost in bringing the asset to their own farm.
6. At what amount should Graham Company recognize the assets initially?

A. P192,000 B. P194,000 C. P196,000 D. P200,000
7. What amount of loss should the Graham Company recognize on initial recognition related to the asset?
A. None B. P3,000 C. P6,000 D. P9,000
Fair value is computed as follows:

Market price (in principal or most advantageous market) X
Less: Transport cost (x)
Fair value X
Price (Farm) 200,000

Est. CTS (6,000)
Initial cost (FVLCTS) 194,000
Total consideration (P200,000 + P3,000) (203,000)
Loss on initial recognition (9,000)
8. Finish Company purchase Dairy cattle at an auction/active market for P300,000 on July 1, 20x8. Cost of transporting the
cattle back to the company’s farm was P3,000 and the company would have to incur cost similar transportation cost if it was to
sell the cattle in the auction/active market, in addition an auctioneer’s fee of 2% of sales price. On December 31, 20x8, after
taking into account and location, the fair value of the biological assets had increased to P500,000 (that is, the market price
including auctioneer’s fee of P10,000 and transportation cost of P5,000). What amount of net gain or loss should the company
disclosed in the statement of comprehensive income related to the biological assets?
A. P182,000 B. P194,000 C. P196,000 D. P200,000
July 1, 20x8 Dec. 31, 20x8

Active market 300,000 500,000
Transport cost (3,000) (5,000)
Fari value 297,000 495,000
Est. CTS (2%) (6,000) (10,000)
FVLCTS 291,000 485,000 194,000
Total consideration (P300,000 + P3,000) (303,000)
Loss on initial recognition (12,000) (12,000)
Net Gain 182,000
9. The following information pertains to the bearer plant and agricultural produced of Christopher Company. On January 1, 20x8,
the cost/carrying value of the company’s bearer plant was P25,000,000 and estimated remaining life is 10 years. As of
December 31, 20x8 the company determines the following:
Fair value of the grapes before the harvest at December 31, 20x8 P5,000,000
Estimated point-of-sale costs of the grapes 100,000
Estimated point-of-sale costs of bearer plant 500,000
With the assistance of valuation experts, Christopher Company determines that the fair value of the bearer plant including the
fruit they bear as of December 31, 20x8 is P26,000,000. What total amount should Christopher Company report in its
December 31, 20x8 statement of comprehensive income in relation to the bearer plant?
A. None B. P2,000,000 C. P2,500,000 D. P4,500,000
Bearer plant 25,000,000

Depreciation (10 years) (2,500,000) 2,500,000
Carrying value 22,500,000 22,500,000
Fair value 26,000,000

Grapes (5,000,000)
CTS (500,000) 20,500,000
Impairment loss 2,000,000 (2,000,000) 2,000,000
Carrying value after impairment loss 20,500,000
Total expenses 4,500,000

Bearer plants Fruits
Fair value 21,000,000 5,000,000
CTS (500,000) (100,000)
FVLCTS 20,500,000 4,900,000
Junior Company is in business of deer farming. A herd of 100 2-year old and 50 3-year old deer are held throughout the
financial year of 20x8. The relevant data are as follows:
Fair value of a 2-year old deer at January 1, 20x8 P3,000
Fair value of a 3-year old deer at January 1, 20x8 4,000
Fair value of a 2-year old deer at December 31, 20x8 3,300
Additional information:
The relevant data pertaining to herd of 50 3-year old deer:

• Three animals were sold at January 1
• One animal were sold at December 31
• One animal died at January 1
• Two animals were died at December 31
The relevant data pertaining newly born deer:

• One animal was born on July 1,20x9
• Two animals were purchase on July 1, 20x9
• Per unit fair value less cost to sell were as follows:
July 1, 20x9
New born animal P7,000
December 31,20x9
New born animal 7,200
0.5-year old animal 8,000
10. How much is the increase in the fair value of the biological asset due to physical change?
A. P55,000 B. P52,600 C. P185,000 D. P186,600
11. How much is the increase in the fair value of the biological asset due to price change?
A. P55,000 B. P52,600 C. P185,000 D. P186,600
Beginng balance 100 3,000 300,000
Loss on death (January 1) (1) 4,000 (4,000)

Sale of biological asset (January 1) (3) 4,000 (12,000)
Sale of biological asset (December 31) (1) 5,800 (5,800)
New born - Physical change (July 1) 1 7,000 (Note already included in physical change)
Purchase new born (July 1) 2 7,000 14,000
Loss on death (December 31) (Note: FVLCTS on January 1) (Loss already included in price
and physical change) (2) 4,000 (8,000)
Price change 100 300 30,000
(Note: do not deduct sale of December (1 unit) 44 500 22,000
1 200 200
2 200 400
- 52,600
Physical change 100 1,200 120,000

44 1,300 57,200
1 7,800 7,800
2 800 1,600 186,600 239,200
Ending balance 723,400
Reconciliation:
Ending balance 100 4,500 450,000
Ending balance (50 -1-3-1-2) 43 5,800 249,400
Ending balance (New born) 1 8,000 8,000
Ending balance (Purchase) 2 8,000 16,000
723,400
-
The following information are based on the biological asset of Agri-farm Company. The following costs were incurred from
January 1, 20x14 being the time the biological assets were cultivated up to the time of initial commercial harvest being on
December 31, 20x18:
Direct labor costs (50% incurred in 20x14, 20% incurred in 20x15 and 10% each incurred in 20x16, 20x17 and P700,000
20x18
Cost of seedlings (incurred in 20x14) 60,000
Costs of fertilizers and chemicals (incurred during the first two years) 40,000
Depreciation of farm equipment, bunkhouses 100,000
Utilities 50,000
Other plantation overheads 250,000
Total P1,200,000
As of December 30, 20x19 the estimated fair value of the combined assets (bearer plants and the fruits they bear) is
P3,000,000. The estimated fair value of the fruits bearing on the plants is P400,000. The estimated costs to sell are P100,000
and P20,000 for the plants and the fruits respectively.
12. If the biological assets (plants) are considered as bearer plant with singular purpose, with an estimated life of ten years and with
an estimated salvage value of P20,000 after 10 years, what amount should be charged against income during 20x19 in relation
to the bearer plants?
A. P70,000 B. P80,000 C. P118,000 D. P150,000
1,200,000 (20,000)
10
Depreciation expense 118,000
Cost 1,200,000
Accumulated depreciation (118,000)
NBV 1,082,000
Fair value of the combined assets 3,000,000

Fair value of fruits (400,000)
Fair value of bearer plants 2,600,000
Cost to sell (100,000)
FVLCTS 2,500,000
No indication of impairment loss
13. If the biological assets (plants) are considered as bearer plants with dual purpose, what amount should be recognized as an
expense in 20x18 in relation to the bearer plants?
A. P70,000 B. P80,000 C. P118,000 D. P150,000
20x14 20x15 20x16 20x17 20x18
Direct labor cost 700,000 350,000 140,000 70,000 70,000 70,000
Cost of seedlings 60,000 60,000
Cost of fertilizers 40,000 20,000 20,000
Depreciation of farm equipment, bunkhouses 100,000 20,000 20,000 20,000 20,000 20,000
Utilities 50,000 10,000 10,000 10,000 10,000 10,000
Other plantation overheads 250,000 50,000 50,000 50,000 50,000 50,000
1,200,000 510,000 240,000 150,000 150,000 150,000
14. If the biological assets (plants) are considered as bearer plants with dual purpose, at what amount should the bearer plant be
reported in the statement of financial position for the year ended December 31, 20x19?
A. P1,082,000 B. P2,500,000 C. P2,500,000 D. P2,880,000
If already harvest Not yet harvest (note including the fruits)

Fair value of the combined assets 3,000,000 3,000,000
Fair value of fruits (400,000)
Fair value of bearer plants 2,600,000 3,000,000
Cost to sell (100,000) (120,000)
FVLCTS 2,500,000 2,880,000
15. If the biological assets (plants) are considered as bearer plant with singular purpose, what amount of agricultural produced
should the company report in the 20x19 statement of financial position?
A. None B. P190,000 C. P380,000 D. P400,000
Fruits
Fair value 400,000
CTS (20,000)
FVLTCS 380,000
If PPE, the fruits are separate from bear plants
16. A herd of ten 2-year old animals was held at January 1, 20x9. One animal (aged 2.5 years old) was purchased on July 1, 20x9
for P10,800 and one animal was born on July 1,20x9. Two 3-year old animals were sold at December 31, 20x9 for P13,500
each, the company incurring P1,500 on the sale of each. Per unit fair value less estimated point of sale costs were as follows:
January 1, 20x9
2-year old animal P10,000
July 1, 20x9
December 31,20x9
2-year old animal 10,500
3-year old animal 12,000
REQUIRED:
a. Compute for changes in fair value less point of sale costs attributable to price change and to physical change.
b. Prepare the entries for the foregoing.
c. Prepare a schedule reconciling the beginning balance with the ending balances and showing the changes during the period
due to purchase, change in fair value and sale of biological assets.
a. Price change
2 year-old animals on January 1 10 x (P10,500 – P10,000) P5,000
2.5 year-old animal on July 1 1 x (P11,100 – P10,800) 300
Animal born on July 1 1 x (P7,200 – P7,000) 200
Change in FV less CTS due to price change P5,500
Physical change
3 year-old animals on 12/31 10 x (P12,000-P10,500) P15,000
3 year-old animal on 12/31 1 x (P12,000 – P11,100) 900
Born on July 1 upon birth 7,000
On December 31 (P8,000 – P7,200) 800
Change in FV less CTS due to physical change P23,700
b. Entries
20x9
July 1 Biological assets P10,800
Cash P10,800
Purchased one animal
July 1 Biological assets 7,000

Increase in FVLCTS due to physical change 7,000
December 31 Biological asset 22,200

Increase in FVLCTS due to price change 5,500
Increase in FVLCTS due to physical change 16,700
(P23,700 – P7,000)
December 31 Cash (2 x (13,500 -1,500) 24,000
Biological assets 24,000
c.
Balance, 1/1/20x9 (10 animals x P10,000) P100,000
Purchase 10,800
Change in FV less CTS due to price change 5,500
Change in FV less CTS due to physical change (including the birth of one animal) 23,700
Sale at FVLCTS (24,000)
Balance, December 31, 20x9 P116,000
INVENTORIES – PART 1
1. AAA Company included the following items under inventories:

Materials P 1,400,000
Advance for materials ordered 200,000
Goods in process 650,000
Unexpired insurance on inventories 60,000
Advertising catalogs and shipping boxes 150,000
Finished goods in factory 2,000,000
Finished goods in company-owned retails store, including 33 1/3 profit 750,000
Finished goods in transit to customers, shipped FOB destination, at cost 250,000
Finished goods on hands of consignees including 40% profit on sales 400,000
Finished goods out on approval, at cost 100,000
Unsalable finished goods, at cost 50,000
Office supplies 40,000
Materials in transit shipped FOB shipping point, excluding freight of P30,000 330,000
Goods held on consignment, at sales price, cost P150,000 200,000
How much is the correct amount of inventories?
A. P5,610,000 B. P5,500,000 C. P5,375,000 D. P5,450,000
2. The AAA Manufacturing Company reviewed its year-end inventory and found the following items:
• A packing case containing a product costing P100,000 was standing in the shipping room when the physical inventory was
taken. It was not included in the inventory because it was marked “Hold for shipping instructions”. The customer’s order
was dated December 18, but the case was shipped and the customer billed on January 10, 20x6.
• Merchandise costing P600,000 was received on December 28, 20x5, and the invoice was recorded. The invoice was in the
hands of the purchasing agent; it was marked “On consignment”.
• Merchandise received on January 6, 20x6, costing P700,000 was entered in purchase register on January 7. The invoice
showed shipment was made FOB shipping point on December 31, 20x5. Because it was not on hand during the inventory
count, it was not included.
• A special machine costing P200,000, fabricated to order for a particular customer, was finished in the shipping room on
December 30. The customer was billed for P300,000 on that date and the machine was excluded from inventory although it
was shipped January 4, 20x6.
• Merchandise costing P200,000 was received on January 6, 20x6, and the related purchase invoice was recorded January 5.
The invoice showed the shipment was made on December 29, 20x5, FOB destination.
• Merchandise costing P150,000 was sold on an installment basis on December 15. The customer took possession of the
goods on that date. The merchandise was included in inventory because AAA still holds legal title. Historical experience
suggests that full payment on installment sale is received approximately 99% of the time.
• Goods costing P500,000 were sold and delivered on December 20. The goods were included in the inventory because the
sale was accompanied by a purchase agreement requiring AAA to buy back the inventory in February 20x6.
How much of these items should be included in the inventory balance at December 31, 20x5?
A. P1,650,000 B. P1,300,000 C. P1,050,000 D. P 800,000
3. The AAA Company counted its ending inventory on December 31. None of the following items were included when the total
amount of the company’s ending inventory was computed:
• P150,000 in goods located in AAA’s warehouse that are on consignment from another company.
• P200,000 in goods that were sold by AAA and shipped on December 30 and were in transit on December 31; the goods
were received by the customer on January 2. Terms were FOB Destination.
• P300,000 in goods were purchased by AAA and shipped on December 30 and were in transit on December 31; the goods
were received by AAA on January 2. Terms were FOB shipping point.
• P400,000 in goods were sold by AAA and shipped on December 30 and were in transit on December 31; the goods were
received by the customer on January 2. Terms were FOB shipping point.
The company’s reported inventory (before any corrections) was P2,000,000. What is the correct amount of the company’s
inventory on December 31?
A. P2,700,000 B. P2,550,000 C. P2,500,000 D. P1,950,000
4. AAA Company’s accounts payable balance at December 31, 20x5 was P8,000,000 before considering the following data:
• Goods shipped to AAA FOB shipping point on December 15, 20x5 were lost in transit. The invoice cost of P500,000 was not
recorded by AAA. On January 15, 20x6, AAA filed a P500,000 claim against the common carrier.
• On December 30, 20x5, a vendor authorized AAA to return for full credit goods shipped and billed at P200,000 on December
15, 20x5. The returned goods were shipped by AAA on December 31, 20x5. A P200,000 credit memo was received and
recorded on January 5, 20x6.
What should AAA report as accounts payable on December 31, 20x5?
A. P8,500,000 B. P8,300,000 C. P7,800,000 D. P7,500,000
5. On June 1, 20x5 AAA Company sold merchandise with a list price of P5,000,000 to ABC. AAA allowed trade discounts of 20%
and 10%. Credit terms were 5/10, n/30 and the sale was made FOB shipping point. AAA prepaid P200,000 of delivery cost for
ABC as an accommodation. On June 11, 20x5, AAA received from ABC full remittance of
A. P3,420,000 B. P3,600,000 C. P3,620,000 D. P3,800,000
6. On September 15, 20x5, AAA Company purchase goods costing P200,000. The terms were FOB Destination. Costs incurred in
connection with the sale and delivery of the goods were as follows:
Packaging for shipment P 4,000
Shipping 6,000
Special handling charges 8,000
The goods were received on September 22. In the September 30, 20x5 statement of financial position, what amount of these
goods should be included in inventory?
A. P200,000 B. P204,000 C. P210,000 D. 218,000
7. On December 1, 20x5, AAA Company received 1,000 units of gadgets on consignment from BBB Corporation. The cost of the
gadgets was P1,600 each, and they were priced to sell at P2,000. Transportation cost of P2,000 was paid by AAA. As of year-
end, 50 units were returned to the consignor and 200 units are still held by the consignee. Commission rate was agreed at 12%
on all sales to be made by BBB. In its December 31, 20x5 financial statements, what amount should AAA report as payable for
consigned goods.
A. P2,000,000 B. P1,500,000 C. P1,320,000 D. P1,318,000
8. AAA Company began operations late in 20x4. For the first quarter ended March 31, 20x5, AAA made available the following
information:
Total merchandise purchased through March 15, recorded at net P 4,900,000
Merchandise inventory at December 31, 2004, at selling price 1,500,000
All merchandise was acquired on credit and no payments have been made on accounts payable since the inception of the
company. All merchandise is marked to sell at 50% above invoice cost before time discounts of 2/10, n/30. No sales were
made in 20x5. How much cash is required to eliminate the current balance in accounts payable?
A. P6,000,000 B. P5,900,000 C. P6,400,000 D. P5,750,000
INVENTORIES – PART2
1. The Kidrock Company sells Product A. During the year, the company moved to a new location, the inventory records for Product
A were misplaced. The bookkeeper has been able to gather some information from the sales records and gives you the date
shown below:
July sales: 57,200 units at P 100
July purchases:
Date Quantity Unit Cost
July 5 10,000 P 65.00
9 12,500 62.50
12 15,000 60.00
23 14,000 62.00
On July 31, 16,000 units were on hand with a total value of P 988,000. Kidrock has always used a periodic FIFO inventory
costing system. Gross profit on sales for July was P2,058,750.
What is the total cost and unit cost, respectively, of the beginning inventory?
A. P1,345,400 and P62.00 C. P1,367,100 and P63.00
B. P1,353,538 and P62.38 D. P1,450,000 and P66.82
2. The Gold Manufacturing Company was organized in 20x2 to produce a single product. The company’s production and sales
records for the period 20x2-20x4 are summarized below:
Production Sales
No. of Units Production Costs No. of Units Sales Revenue
20x2 340,000 P 1,530,000 200,000 P 1,870,000
20x3 310,000 1,612,000 290,000 2,300,000
20x4 270,000 1,539,000 260,000 2,210,000
All units produced in a given year are assigned the same average cost. Determine the gross profit in 20x4 using FIFO cost flow.
A. P808,000 B. P832,000 C. P969,000 D. P1,402,000
3. Liberty Company is a wholesaler of scented candles. The activity for item number 1234 during June is presented below:
Date Transaction Units Cost
June 01 Inventory balance 6,000 P 20.00
04 Purchases 9,000 24.00
12 Sales 10,800
19 Purchases 14,400 26.00
22 Sales 11,400
29 Purchases 4,800 27.00
Under the FIFO periodic inventory system, how much is the ending inventory of item #1234 at June 30?
A. P278,400 B. P280,800 C. P302,400 D. P316,800
4. Gecko Company, organized in 20x1 has used the average method of inventory valuation. Net income reported under this
method is shown below:
20x1 20x2 20x3
Net income P 180,000 P 250,000 P 350,000
Inventory, end:
Average 600,000 750,000 1,000,000
FIFO 620,000 1,000,000 1,200,000
If the FIFO method of inventory valuation was used, how much would be the total net income for the three years?
A. P980,000 B. P1,000,000 C. P1,230,000 D. P1,350,000
5. CFC Co. recorded the following pertaining to raw materials during January 20x3:
Units
Date Received Cost Issued On Hand
1/1 Inventory P 8.00 3,200
1/11 Issue 1,600 1,600
1/22 Purchase 4,800 P 9.60 6,400
The moving-average cost of the raw materials inventory at January 31, 20x3 is:
A. P8.80 B. P8.96 C. P9.20 D. P9.60
6. The closing inventory of Niffer Company amounted to P 284,000 at December 31, 20x3. This total includes two inventory lines
about which the inventory taker is uncertain.
Item 1 – 500 items which had cost P 15 each and which were included at P7,500. These items were found to have been
defective at the balance sheet date. Remedial work after the balance sheet date cost P 1,800 and they were then sold for P
20 each. Selling expenses were P 400.
Item 2 – 100 items that had cost P 10 each but after the balance sheet date, these were sold for P 8 each with selling
expenses of P 150.
What figure should appear in Niffer’s statement of financial position for inventory?
A. P283,650 B. P283,950 C. P284,000 D. P284,300
7. Cecilia Company has a cost card in relation to an inventory manufactured as follows:

Materials P700,000
Storage costs of finished goods 180,000
Delivery to customers 40,000
Irrecoverable purchase 60,000
At what amount should the inventory measured?
A. P980,000 B. P940,000 C. P880,000 D. P760,000
8. Eagle Company produces a certain product. The following costs were incurred:
Direct materials and labor P180,000
Variable production overhead 25,000
Factory administrative costs 15,000
Fixed production costs 20,000
What is the correct measurement of the product?
A. P195,000 B. P205,000 C. P225,000 D. P240,000
9. The perpetual inventory records of the Park Company indicate the following transactions in the month of June:
Units Cost/Unit Units
Inventory, June 1 200 P 3.20
Purchases Sales
June 3 200 3.50 June 6 300
June 17 250 3.60 June 21 200
June 24 300 3.65 June 27 150
The cost of inventory at June 30 under the FIFO method is

A. P960 B. P990 C. P1,060 D. P1,095
10. On August 1 of the current year, Ace Company recorded purchases of inventory of P 800,000 and P 1,000,000 under credit
terms of 2/15, net 30. The payment due on the P 800,000 purchase was remitted on August 16. The payment due on the P
1,000,000 purchase was remitted on August 31. Under the net method and the gross method, these purchases should be
included at what respective amounts in the determination of cost of goods available for sale?
Net method Gross method
A. P1,784,000 P1,764,000
B. P1,764,000 P1,800,000
C. P1,764,000 P1,784,000
D. P1,800,000 P1,764,000
11. The inventory on hand on December 31, 20x3 for Inducil Company is valued at a cost of P 950,000. The following items were
not included in this inventory amount.
Item 1: Purchase goods in transit, shipped FOB destination, invoice price P30,000 which includes freight charge of
P1,500.
Item 2: Goods held on consignment by Inducil Company at a sales price of P28,000, including sales commission of 20%
of the sales price.
Item 3: Goods sold to Donato Company, under terms FOB destination, invoiced for P18,500 which includes P1,000
freight charge to deliver the goods. Goods are in transit. The entity’s selling price is 140% of cost.
Item 4: Purchased goods in transit, terms FOB shipping point, invoice price P50,000, freight cost, P2,500.
Item 5: Goods out on consignment to Manila Company, sales price P35,000, shipping cost of P 2,000.
What is the adjusted cost of the inventory on December 31, 20x3?
A. P1,040,000 B. P1,042,000 C. P1,043,000 D. P1,073,500
Use the following information for the next three (3) questions
Dads Company is a wholesale distributor of automotive replacement parts. Initial amounts taken from accounting records on
December 31, 20x2 are as follows:
Inventory on December 31 based on physical count P1,250,000
Sales 9,000,000
A. Parts held on consignment form another entity to Dads, the consignee, amounting to P 165,000, were included in the physical
count on December 31, 20x2, and in accounts payable in December 31, 20x2.
B. P 20,000 of parts which were purchased and paid for in December 20x2, were sold in the last week of 20x2 and appropriately
recorded as sales of P 28,000. The parts were included in the physical count on December 31, 20x2 because the parts were on
loading dock waiting to be picked up by the customer.
C. Parts in transit on December 31, 20x2 to customers, shipped FOB shipping point on December 28, 20x2, amounted to P 34,000.
The customers received the parts on January 6, 20x3. Sales of P 40,000 to the customers for the parts were recorded by Dads
on January 2, 20x3.
D. Retailers were holding P 210,000 at cost and P 250,000 at retail, of goods on consignment from Dads, at their stores on
December 31, 20x2.
E. Goods were in transit from a vendor to Dads on December 31, 20x2. The cost of goods was P 25,000. The goods were shipped
FOB shipping point on December 29, 20x2.
12. What is the correct amount of inventory?

A. P1,300,000 B. P1,320,000 C. P1,334,000 D. P1,090,000
13. What is the correct amount of accounts payable?

A. P960,000 B. P975,000 C. P860,000 D. P835,000
14. What is the correct amount of sales?
A. P9,000,000 B. P9,040,000 C. P9,250,000 D. P9,290,000
15. The Carmela Corp. applies the lower of cost or net realizable value (NRV) inventory. Data regarding the items in work-in-process
inventory are shown below:
Shorts Pants
Historical Cost P 56,640 P 90,000
Selling price 108,800 108,000
Estimated cost to complete 14,400 20,400
Replacement cost 50,400 95,400
Normal profit margin as a percentage of selling price 25% 10%
Under the lower of cost or NRV rule, the pants should be valued at
A. P76,800 B. P87,600 C. P90,000 D. P95,400
16. Uniliver Inc. uses the average retail inventory method to account for inventory. The following information relates to 20x3
operations:
Average
Cost Retail
Beginning inventory and Purchases P600,000 P 920,000
Net markups 40,000
Net markdowns 60,000
Sales 780,000
The amount to be reported as cost of sales for 20x3 is

A. P480,000 B. P487,500 C. P520,000 D. P525,000
17. Delta Co. sells its merchandise at a gross profit of 30%. The following figures are among those pertaining to Delta operations
for the six months ended June 30, 20x3:
Sales P 200,000
Beginning inventory 50,000
Purchases 130,000
On June 30, 20x3, Delta’s entire inventory was destroyed by fire. The estimated cost of this destroyed inventory was:
A.P120,000 B. P70,000 C. P40,000 D. P20,000
18. Alpha Company had a beginning inventory as at January 1, 20x3 of P 750,000. Purchases during the year amounted to P
3,750,000; while sales totaled P 4,800,000. Ending inventory based on a physical inventory taken on December 31, 20x3 was P
862,500. Alpha has a gross profit on sales of 25% in recent years. There were indications of inventory losses due to pilferages.
The estimated cost of inventory loss at December 31, 20x3 is

A. P337,500 B. P262,500 C. P150,000 D. P37,500
19. Conningware Corporation uses the average retail method for its merchandise inventory. Data for 20x3 indicated by the firm’s
accounting records are as follows: inventory, January 1, 20x3, P 150,250 at cost and P 375,000 at retail; net purchases, P
1,339,750 at cost and P 2,500,000 at retail; net markups, P 175,000; net markdowns, P 50,000; sales, P 2,375,000. The
estimated cost of goods sold for 20x3 is
A. P1,139,250 B. P1,179,583 C. P1,165,000 D. P1,170,000
20. During 20x3, Hi-Top Supermarket had sales of P 1.9M and made inventory purchases of P 1.34M. Inventories on January 1,
20x3 amounted to P 0.67M and inventories on December 31, 20x3 were P 0.58M. There was error made in determining the
ending inventory in 20x2 and inventory taken was overstated by P 40,000. The gross margin rate for 20x3 is:
A. 22.63% B. 24.74% C. 26.84% D. 34.21%
21. The following information appears in Cyber Company’s records for the year ended December 31, 20x3:
Inventory, January 1 P 325,000
Purchases 1,150,000
Purchase returns 40,000
Freight in 30,000
Sales 1,700,000
Sales discounts 10,000
Sales returns 15,000
On December 31, the company conducted a physical inventory which revealed that the ending inventory was only P 210,000.
Cyber’s gross profit on net sales has remained constant at 30% in recent years. Cyber suspects that some inventory may have
been pilfered by one of the company’s employees. How much is the estimated cost of missing inventory on December 31?
A. P75,500 B. P82,500 C. P210,000 D. P292,500
22. On October 15, 20x5, a fire destroyed all the stock of equipment of Banda Center in its rented stockroom. The records of the
firm show the following information:
20x4 20x3 20x2 20x1
Sales P925,000 P880,000 P790,000 P710,000
Cost of sales 758,500 739,200 679,400 624,800
Gross Profit P166,500 P140,800 P110,600 P 85,200
Inventory P 130,500
Sales, January 1 to October 16, 20x5 960,000
Sales returns and allowances 15,000
Purchases, January 1 to October 15, 20x5 890,000
Purchase returns and allowances 12,000
Cost of stock in display room, not destroyed 85,000
The estimated cost of merchandise lost in the fire of October 15, 20x5
A. P120,250 B. P148,600 C. P167,500 D. P252,500
23. On November 30, 20x3, a big flood cause severe damage to the warehouse of Cutter Company. The company suffered a big loss
on its merchandise inventory.
The following information was available from the accounting records of Cutter:
01/01/x3 to 11/30/x3 20x2
Date of Flood
Merchandise inventory, beginning P 400,000 -
Purchases 2,380,000 2,240,000
Purchase returns 60,000 40,000
Sales 3,120,000 2,400,000
Selling expenses 120,000 100,000
Depreciation charges 40,000 36,000
At the beginning of 20x3, the company changed its policy on the selling price of merchandise in order to produce a gross profit
rate 5% higher than the gross profit rate in 20x3.
Undamaged merchandise marked to sell at P 100,000 were salvaged. Damaged merchandise marked to sell at P 30,000 had an
estimated realizable value of P 8,000.
What is the estimated inventory cost lost from flood on November 30, 20x3?
A. P436,000 B. P458,000 C. P506,000 D. P536,000
24. On December 31, 20x3, a typhoon damaged a warehouse of Genevere Corporation. The entire company and many accounting
records stored in the warehouse were completely destroyed. Although the inventory was not insured, a portion could be sold for
scrap. Through the use of microfilmed records, the following data were gathered.
Inventory, January 1, P 500,000; Purchases, P 2,200,000; Cash sales, P273,600; Collection of accounts receivable
(including the amount of recovery), P 2,520,000; Accounts receivable-January 1; P 210,000; Accounts written off, P 9,600;
Recovery of accounts written off; P 3,600; Allowance for bad debts-January 1, P 10,500; Accounts receivable, December 31,
20x3, (net of required allowance); P 342,000; Sales returns, P 36,000; Sales discounts, P14,400; Purchase returns, P60,000;
Purchase discounts, P 12,000; Freight in, P 21,600; Salvage due of inventory, P 60,000; Gross profit percentage on sales,
32%. The Company consistently measures doubtful accounts in percent of account receivables.
How much is the value of inventory loss:

A. P513,600 B. P519,600 C. P538,080 D. P574,080
25. Charlotte Company uses the retail inventory method to estimate its inventory for interim statement purposes. Data relating to
the inventory computation at June 30, 20x3 are as follows:
Cost Retail
Inventory, January P 820,000 P 1,262,800
Net purchases 2,280,000 3,607,200
Net mark-ups 450,000
Net markdowns 320,000
Sales 4,350,000
Sales returns 300,000
Employee discount 100,000
Sales discount 80,000
Normal shrinkage 50,000
What is the estimated cost of June 30, 20x3 inventory using the average approach?
A. P466,000 B. P496,000 C. P616,000 D. P800,000
BIOLOGICAL ASSETS – PART 3
1. DDD Company is estimating the amount to which its biological assets with cost and market price of P830,000 and P940,000,
respectively, will be reported in the Statement of Financial Position. You were given the following information:
Necessary costs of getting such biological assets to the market P 35,000
Commissions to brokers 12,000
Levies by the local government relating to the sale 30,000
Transfer taxes 12,000
How much is the estimated cost to sell?

A. P89,000 B. P77,000 C. P54,000 D. P42,000
2. EEE Farm has a herd of cattle recognized as asset in its book at historical cost of P8,000,000. The market price of such assets in
the slaughter house is P9,500,000. The cost of transporting such assets to the market is P40,000; other costs of getting the
horde to the market amount to P15,000. Commissions to brokers and dealers relating to the sale of such assets amount to
P50,000 and levies by regulatory agencies and commodity exchanges, and transfer taxes and duties amount to P60,000. What
is the fair value of the asset of EEE Farm?
A. P9,500,000 B. P9,445,000 C. P9,390,000 D. P9,335,000
3. FFF is contemplating on obtaining additional financing in order to expand its poultry business. The bank requires FFF to submit a
Statement of Condition prepared under current GAAP as a prerequisite for the approval of its loan application. FFF’s biological
assets has a total cost of P100,000, however, it was estimated based on current market prices that the fair market value of
FFF’s assets amounted to P120,000. Cost to transport such assets to the market amounted to P5,000, inclusive of 10%
commissions to brokers. An additional P1,000 will be levied by regulatory agencies and commodities exchanges if the assets
were sold. Also, 5% of the estimated selling price will be levied as transfer tax and duties.
How much would be shown as biological assets in the financial statement of FFF’s business?
A. P109,725 B. P109,000 C. P108,000 D. P100,000
4. GGG Co. is being audited for the first time by CPAs Co. The company accountant is preparing the company’s financial
statements for the first year of operations. An asset is appropriately classified as biological asset, however, it was valued at its
original purchase price. Based on existing contract price, the value of the asset is P125,000. The value of such asset in which
buyers and sellers are willing to transact is P150,000. Cost to sell the assets is estimated at P10,000. The company’s biological
asset should be valued at
A. P115,000 B. P140,000 C. P150,000 D. Either a or b
5. Three years ago CCC Co. bought a biological asset at a total cost of P25,000. On July 1, 20x3, this biological asset gave birth to
a colt. Costs incurred as a result of the procreation amounted to P6,000. There is no reliable estimate of the colt’s fair market
value. Such colt should be valued, on initial recognition, at
A. P31,000 B. P25,000 C. P6,000 D. Zero with disclosure
6. A biological asset in HHH Co’s books is carried at a historical cost of P500,000. This asset is being traded in active markets. The
quoted prices in such markets are P510,000, P520,000 and P525,000 respectively. HHH Co. is contemplating on transacting in
the second active market. How much would be the carrying amount of the asset on year-end financial statements?
A. P525,000 B. P520,000 C. P510,000 D. P500,000
7. Taken from the records of III Co. are the following:

Cost Fair Value
Biological Assets
20x2 P 18,000 P 21,000
20x3 20,000 23,000
Costs to sell were estimated at P1,000 and P800 in 20x2 and 20x3, respectively. How much gain will be recognized in III’s 20x3
income statement?
A. P3,000 B. P2,200 C. P2,000 D. P1,800
Use the following to answer the next two questions
The following information are made available by JJJ Farms, of its dairy livestock:
Carrying amount, January 1, 20x3 P 450,000
FV less point of sale costs of livestock purchased during the period 250,000
Increase in FV less estimated point of sale cost attributable to physical changes 220,000
Increase in FV less estimated point of sale costs attributable to price change 64,000
Total selling price less point of sale costs of livestock sold during the period 290,000
8. At what amount should biological assets be carried on the statement of financial position at December 31, 20x3?
A. P1,274,000 B. P764,000 C. P694,000 D. p630,000
9. Use the same information in JJJ Farms Information, what amount shall be included in gross income of JJJ Farms as a result of
the transaction on its dairy livestock?
A. P64,000 B. P220,000 C. P284,000 D. P290,000
10. The following assets stated at historical costs were held by LLL Co.
20x3 20x2
Pigs P 560,000 P 450,000
Honey cured Ham 240,000 190,000
Maple leaf smoked bacon 380,000 420,000
Dairy livestock – immature 450,000 370,000
Dairy livestock – mature 720,000 860,000
Chicken Dung 230,000 30,000
Carcass 430,000 450,000
Salted Meat 1,200,000 1,000,000
Burned Chicken for sale 890,000 920,000
Roasted pigs 360,000 420,000
Bushes 380,000 130,000
If the market values of such assets were at 98% and 101% on December 31 20x2 and 20x3 respectively and there are no
purchases of biological assets during 20x3, how much income arising from the change in market values of biological assets will
be recognized on December 31, 20x3?
A. P360,200 B. P357,300 C. P350,600 D. P239,700
Junior Company is in business of deer farming. A herd of 100 2-year old and 50 3-year old deer are held throughout the
financial year of 20x8. The only change during the year is the increase in their physical attributes due to ageing. The relevant
data are as follows:
Fair value of a 2-year old deer at January 1, 20x8 P3,000
Fair value of a 3-year old deer at January 1, 20x8 4,000
11. How much is the increase in the fair value of the biological asset due to physical change?
A. P55,000 B. P120,000 C. P185,000 D. P240,000
12. How much is the increase in the fair value of the biological asset due to price change?
A. P55,000 B. P120,000 C. P185,000 D. P240,000
100
Jan. 1 (2-year old) 3,000 Price change 300
Dec. 31 (2-year old) 3,300
Dec. 31 (3-year old) 4,500 Physical change 1,200
50
Jan. 1 (3-year old) 4,000 Price change 500
Dec. 31 (3-year old) 4,500
Dec. 31 (4-year old) 5,800 Physical change 1,300

Price change 100 300 30,000

50 500 25,000
- 55,000
Physical change 100 1,200 120,000

50 1,300 65,000
- -
- - 185,000 240,000
Ending balance 740,000
Reconciliation:
740,000

Fair Value Measurement Inventory and Biological Asset Key PDF

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Fair Value Measurement Inventory and Biological Asset Key PDF

Uploaded by

Copyright:

Available Formats

FAIR VALUE MEASUREMENT/INVENTORY/ BIOLOGICAL ASSET

IFRS 13 Fair Value Measurement

Fair value may be required to be measured on a recurring basis or a non-recurring basis.

Exclusions from IFRS 13

Transaction price vs Fair value at initial recognition

Inputs based on bid and ask prices

Requirement on fair value measurement

Note: PFRS 13 Fair Value Measurement:

Fair value is computed as follows:

In summary, inventories include the following:

However, PAS 2 excludes certain inventories from its scope:

Type of business Inclusion Account used

Relative Sales Price Method

Cost of conversion comprises:

If the By-product is inventoriable If the By-product is not inventoriable

NRV = selling price minus cost to sell

STATEMENT OF FINANCIAL POSITION PRESENTATION

Periodic inventory system Perpetual inventory system

Treatment of inventory shortage or overage

Trade Discounts vs. Cash Discounts

Two Methods of Accounting for Purchases

Transactions Gross method Net method

a) Borrowing costs – PAS 23 requires capitalizing interest on

Inventory cost should exclude:

Inventory valuation methods

IAS 2 deals with three methods of arriving at cost:

In determining the cost of inventories, PAS 2 requires:

Cost shall be measured through

Are some other techniques of cost measurement allowed by IAS 2?

LIFO (last-in-first-out) is prohibited by IAS 2.

II. SUBSEQUENT MEASUREMENT

Possible causes of the inventory cost becoming not recoverable

Treatment of inventory write-down and/or possible reversal of write-down

Accounting for Lower of Cost or Net Realizable Value

Gain or loss may be computed as follows:

Write-Down and Reversal

With this, inventory recognized by the entity includes;

Cut-off problems (Sales/Purchase)

AUDIT OF ACCOUNTS PAYABLE AND RELATED ACCOUNTS

Guide questions in the audit of Accounts Payable and Related Accounts:

- FOB Dest./FOB Buyer or Buyer’s Location include as inventory of seller

- Cost of insurance and freight (CIF) include as inventory of buyer upon

- Free Alongside (FAS) the Vessel include as inventory of buyer upon

B. Special sale/Purchase agreement

Special cases for sale of goods (Lifted from PAS 18)

Revenue is recognized when the buyer takes title, provided:

NOTE: Revenue is not recognized when there is simply an intention to acquire or

2. Goods shipped subject to conditions.

d. Cash on delivery sales.

3. Installment sales, under which the consideration is receivable in installments.

Revenue is recognized when the goods are delivered to the buyer.

7. Subscriptions to publications and similar items.

Other possible items that may raise issue in recognition of inventories

ACCOUNTING FOR PURCHASE COMMITMENT

Value of inventory > Exercise price

Subsequent decline in the value of inventory (from no decline)

Recovery prior to acquisition

Approaches in Estimating the Value of Inventory

Gross Profit Method

Determining the Gross Profit Rate

Retail Inventory Method

Methods in Computing Cost Ratio