University of the Philippines - Junior Philippine Institute of Accountants

Education and Research Committee 63.1

BA 114.1 Sample Quiz 3 (Inventory and Trade Payables)
Academic Year 2021-2022

Part I. Multiple Choice (10 items)

For numbers 1 to 10, choose the letter that best corresponds to the correct answer.

1. Which of the following should be included as inventory under IAS 2?

a. Shirts and pants imported by Penshoppe from China to sell in department stores
b. Sweetened pearls added by Macao Imperial Tea in its beverages
c. Wood planks used by Iconic Furniture in producing its signature tables
d. All of the above

2. According to IAS 2, which of the following items are included when measuring the cost
of inventories?

i. Net purchase price

ii. Non-refundable purchase taxes
iii. VAT incurred by VAT-registered entities
iv. Abnormal amounts of wasted materials, labor, or other production costs
v. Storage costs that are necessary to further a production process
vi. Advertising and promotion costs
vii. Fixed overheads relating to production
viii. Transport, handling, and other costs directly attributable to acquisition
ix. Administrative overheads that do not contribute to bringing inventories to their
present location and condition
x. Conversion costs

a. i, ii, iii, v, vi, vii, ix

b. I, ii, iii, v, vi, vii, viii, x
c. i, ii, v, vii, viii, x
d. None of the above

3. When costs of raw materials and merchandise are steadily increasing, which of the
following methods will give the highest amount of net income for the entity?
a. First-In, First-Out
b. Last-In, First-Out
c. Weighted Average/Moving Average
d. Specific Identification
4. The weighted-average/moving-average inventory cost flow assumption is particularly
suitable in measuring the total cost of inventories wherein:
a. Heterogeneous products are specifically segregated from one another
b. Similar products are mixed together and stored in a single location
c. Management policy underscores that latest purchases must be sold first
d. Specific items have their designated stores which are geographically apart from
one another

5. An entity uses a periodic inventory system and erroneously records twice a purchase of
merchandise on account at year-end. This merchandise was also double counted at the
physical year-end count. How will these errors affect the entity’s assets, liabilities, and
shareholders’ equity (SHE) at year-end and net income from the year?

ASSETS LIABILITIES SHE NET INCOME

a. Overstated Overstated Understated Understated

b. Overstated Overstated No Effect No Effect

c. Overstated No Effect Overstated No Effect

d. No Effect Overstated Understated Understated

6. Manggahan Corp. harvested 150 kilos of mangoes on December 29, 2021. The fair value
of mangoes on this day is P167/kilo. The cost to sell mangoes is at P1/kilo. On
December 31, 2021, the net realizable value of mangoes was P165/kilo. Of the harvested
mangoes, 38 kilos were sold at P169/kilo during the year. 112 kilos remain in
Manggahan Corp.’s inventory. Which of the following statements is true?
a. On the 2021 statement of financial position, the mangoes inventory is measured
at P 166/kilo.
b. On the 2021 statement of financial position, the mangoes inventory is measured
at P167/kilo.
c. On the 2021 statement of financial position, the mangoes inventory is measured
at P169/kilo.
d. On the 2021 statement of financial position, the mangoes inventory is measured
at P165/kilo.

7. When using the periodic inventory method, which of the following generally would not be
separately accounted for in the computation of cost of goods sold?
a. Trade discounts applicable to purchases during the period
b. Cost of freight incurred by buyer in purchasing merchandise during the period
c. Purchase returns and allowances of merchandise during the period
d. Cash discounts taken during the period
8. According to IAS 2, which of the following disclosures must be made in the entity’s
financial statements?

i. The accounting policies adopted for inventories, including cost formula used
ii. Any significant volume purchases of inventories during the period
iii. The amount of inventories recognized as an expense during the period
iv. Amounts of write-down reversals for inventories held by the entity
v. The carrying amount of inventories pledged as security for liabilities
vi. A shortlist of major suppliers and discounted purchase prices that are offered
vii. The carrying amount of inventories carried at fair value plus costs to sell
viii. Circumstances that led to the reversal of inventory write-downs during the period
ix. The total carrying amount of inventories
x. The carrying amount broken down in classifications appropriate to the entity

a. i, ii, iii, v, vi, vii, vii, ix

b. I, ii, iii, iv, v, vi, vii, viii, x
c. i, iii, iv, v, viii, ix, x
d. None of the above

9. Under these shipping terms, the seller pays for the freight, which legally must be borne
by the buyer.
a. FOB Destination, Freight Prepaid
b. FOB Destination, Freight Collect
c. FOB Shipping Point, Freight Prepaid
d. FOB Shipping Point, Freight Collect

10. Which of the following statements are true regarding the perpetual inventory method?

i. Purchases are recorded as debits to the inventory account

ii. The entry to record a sale includes a debit to cost of goods sold and a credit to
inventory
iii. After a physical inventory count, inventory is credited for any missing inventory
iv. Purchase returns are recorded by debiting accounts payable and crediting
purchase returns and allowances

a. i, ii, iii
b. i only
c. i, ii
d. ii, iii
Part II. Morse Type (10 items)
For numbers 11 to 20, choose among the following choices:
A - If only statement 1 is true
B - If only statement 2 is true
C - If both statements are true
D - If both statements are false

11.
Statement 1: The costs of storing inventory is always capitalized to the Inventory
account.

Statement 2: Agricultural produce harvested from an entity’s biological assets shall be

measured at its fair value at the point of harvest. Such measurement is the cost at that
date when applying IAS 2 Inventories or another applicable Standard.

12.
Statement 1: The shipment of raw materials to the company's warehouse is an
inventoriable cost.

Statement 2: When inventories are sold, the carrying amount of those inventories shall
be recognised as a revenue in the period in which the related expense is recognised.

13.
Statement 1: The salaries of administrative personnel is excluded from the computation
of inventory costs.

Statement 2: The wages of assembly line workers are considered inventoriable costs.

14.
Statement 1: The cost of inventories, other than those dealt with in paragraph 23 of IAS
2, shall be assigned by using the specific identification or weighted average cost
formula.

Statement 2: Inventories shall be measured at the lower of cost and net realisable value.

15.
Statement 1: The use of a purchase discount lost account implies that the net method of
recording purchases is used.

Statement 2: Goods held on consignment are included in the inventory of the consignee,
but not of the consignor.

16.
 Statement 1: Recording purchases at their invoice price less offered cash discounts
immediately indicates that the gross method of recording purchases is used.

Statement 2: The seller is the one legally responsible for the freight charges under the
freight term FOB shipping point.

17.
Statement 1: Purchase commitments are contracts that state a fixed quantity to be
delivered by the seller and purchased by the buyer at an agreed-upon price that will be
delivered at a specific future time.

Statement 2: Whenever consignment is done by a seller, the consignor retains control

over the consigned goods until these items are sold to customers.

18.
Statement 1: Net realizable value 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.

Statement 2: A gain or loss arising on initial recognition of agricultural produce at fair

value less costs to sell shall be treated as a direct adjustment to retained earnings for
the period in which it arises.

19.
Statement 1: Like inventory, purchase commitment is subject to the measurement rules
of IAS 2. If the agreed upon price is lower, a loss from purchase commitment is
recognized immediately.

Statement 2: A foreign currency transaction shall be recorded, on initial recognition, by

applying to the foreign currency amount the spot exchange rate between the functional
currency and the foreign currency at the date of the transaction.

20.
Statement 1: Techniques for the measurement of the cost of inventories, such as the
standard cost method or the retail method, are not permitted by IAS 2 even if the results
approximate cost.

Statement 2: When an entity changes an accounting policy upon initial application of an

IFRS or changes an accounting policy voluntarily, it shall apply the change prospectively.
Part III. Problems (11 items)

Assume the requirements are independent from one another, unless otherwise stated.

1. Clint Barton Co. has incurred the following costs in connection with its purchase of inventory

Purchase price based on vendors’ invoices P1,130,000

Trade discounts already deducted on invoices 37,000

Salaries of marketing department 242,000

Mandatory brokerage commission paid to 59,000

agents for arranging imports

Sales fees paid to sales agents 84,000

After-sales warranty costs 65,000

Nonrefundable import duties 140,000

Freight and insurance on purchases (legal 212,000

responsibility rests with buyer)

Other necessary handling costs relating to 23,000

imports

REQUIREMENT:
What is the total cost of the merchandise inventory/purchases?

2. You have been hired to independently assess Peter Parker Corp.’s financial information to
help them create certain managerial reports for the period. The following information regarding
the entity has been provided to you for the year 2021:

Sales Revenue (mark-up is 63% based on 5,620,340

sales)

Raw Materials Purchased 65% of costs placed in production

Costs Placed in Production 1,539,146.40

Finished Goods, January 1 1/3 of cost of goods available for sale

Raw Materials, December 31 60% of raw materials purchased

Cost of Goods Available for Sale 4,646,496

 Direct Labor 80% of raw materials used

Manufacturing Overhead 1.21 times of direct labor

REQUIREMENTS:
a. How much is Raw Materials, beg. in 2021?
b. How much is the Cost of Goods Manufactured in 2021?
c. How much is Finished Goods, end. in 2021?

3. Natasha Romanoff Co. had the following items in its accounting records for December 31,
2021:

Inventories in the warehouse per physical count on P???

12/31/2021:
● Goods completed and ready for sale: P1,000,000
● Raw materials: P800,000
● Goods partially processed but not yet completed:
P1,200,000

Goods sold in transit under FOB shipping point 375,340

Goods sold in transit under FOB destination 934,000

Goods purchased in transit under FOB shipping point 241,750

Goods purchased in transit under FOB destination 345,900

Insurance paid on materials purchased on transit 12,300

Goods being used for window display 31,250

Goods in the counter for sale 43,080

Office supplies 20,230

Advertising supplies 30,930

Goods held by salesmen, at selling price (mark-up is 252,000

40% on cost)

Goods held on consignment, at cost (mark-up is 60% on 675,000

sales)

Goods out on consignment, excluding shipping cost of 249,030

P10,000 paid by the entity

Unsalable finished goods, excluded in the physical count 200,000

 above

Raw materials held by the receiving department for 50,380

return to supplier due to significant defects

Goods sold on installment basis (legal title has not been 450,000
passed yet)

REQUIREMENTS:
a. What is the total amount of inventory to be reported on the 2021 statement of financial
position?
b. What is the total amount of items that should not be included in determining the correct
inventory balance as of 2021 year-end?

4. The bookkeeper of Thor Odinson Bikes has provided you with the following information
regarding inventory on hand as of December 31, 2021, used in the entity’s two product lines:
motorbikes and bicycles.

Cost Estimated Estimated Estimated Fair value

selling price costs to sell costs of
completion

Line 1: Motorbikes

Motorbike ABC P40 000 P45,000 P1,000 P6,000 P39,000

Motorbike DEF 30,000 53,000 3,000 5,000 29,000

Motorbike GHI 80,000 76,000 2,000 4,000 79,000

Line 2: Bicycles

Bicycle 123 60,000 55,000 4,000 3,000 59,000

Bicycle 456 50,000 58,000 6,000 2,000 49,000

Bicycle 789 80,000 82,000 5,000 1,000 79,000

REQUIREMENTS:
a. What is the amount of inventory at year-end if the entity applies LCNRV on an
item-to-item basis?
b. In relation to (a), what is the amount of inventory write-down recognized for 2021?
c. What is the amount of inventory at year-end if the entity applies LCNRV on a product line
basis?
 d. In relation to (c), what is the amount of inventory write-down recognized for 2021?
e. What is the amount of inventory at year-end if the entity applies LCNRV to inventory as a
whole?
f. In relation to (e), what is the amount of inventory write-down recognized for 2021?

5. Stephen Strange’s New Products Co. show the following data relative to Product 616:

UNITS UNIT COST TOTAL COST

March 1 balance 20,000 P10 P200,000

Mar. 2 Purchase 30,000 12 360,000

Mar. 4 Sale 25,000

Mar. 10 Purchase 15,000 14 210,000

Mar. 15 Sale 21,000

Mar. 17 Sales return 1,000

(related to Mar.
15 sale)

Mar. 28 Purchase 20,000 16.75 335,000

REQUIREMENTS:
a. Under the periodic weighted average method, how much is the cost of inventory at the
end of March?
b. Under the perpetual moving average method, how much is the cost of goods sold in
March?
c. Under the periodic FIFO method, how much is the cost of goods sold in March?
d. Under the perpetual FIFO method, how much is the cost of inventory at the end of
March?

6. Scott Lang & Co. is a Philippine-based merchandising company that operates on a fiscal year
basis. Its statements of financial position for the past years are always labeled with “As of
August 31, 20XX”.

Scott Lang & Co. ordered 1,500 shirts for resale from Hope Pym Corp. on July 21, 20X1. The
goods arrived in the warehouse of Scott Lang & Co. on August 23, 20X1. Based on the receipt of
the bulk purchase, the invoice totaled to an amount of 2,750,000 JPY. Scott Lang & Co. settled
its corresponding liability on September 11, 20X1.

The accountant of Scott Lang & Co. determined the following exchange rates to be relevant::
 Date 1 JPY to USD 1 PHP to USD

July 21, 20X1 $ 0.0077 $ 0.0163

August 23, 30X1 $ 0.0088 $ 0.0204

August 31, 20X1 $ 0.0091 $ 0.0271

September 11, 20X1 $ 0.0085 $ 0.0243

REQUIREMENTS:
a. How much is the foreign exchange gain or loss for the fiscal year ended August 31,
20X1?
b. How much should the corresponding liability be carried on the statement of financial
position as of August 31, 20X1?
c. How much is the foreign exchange gain or loss recognized on September 11, 20X1?

7. On October 17, 2021, Tony Stark Airways entered into a non-cancelable commitment to
purchase 4,550 barrels of aviation fuel for P10,010,000 on February 27, 2022. The entity entered
into this purchase commitment to protect itself against the volatility in the aviation fuel market.
By December 31, 2021, the purchase price of aviation fuel had increased to P2,320 per barrel.
However, by February 27, 2022, when the entity received the 4,550 barrels, the price of aviation
fuel fell to P2,170 per barrel.

REQUIREMENTS:
a. How much should the barrels involved in the purchase commitment be shown in the
2021 statement of financial position?
b. Determine the P/L account recognized on February 27, 2022, the amount involved, and
whether such account is credited or debited.
c. Disregard the purchase price of fuel on December 31, 2021. Assume instead that on this
date, the entity recognized a provision for purchase commitment of P500,500. What is
the market price or cost per barrel on this date?
d. Continuing from letter (c), assume that on February 27, 2022, the cost per barrel rose to
P2,240. How much is the inventory recorded on this date?
e. Continuing from letter (c), assume that on February 27, 2022, the cost per barrel rose to
P2,150. How much is the inventory recorded on this date?

8. Wanda Maximoff Inc., owner of a trading company, engaged in your services as auditor. There
is a discrepancy between the company’s income and the sales volume. The owner suspects that
the staff is committing theft. You are to determine whether or not this is true. Your
investigations revealed the following:
● Year-end physical inventory count under your observation showed that the cost was
P265,000. The inventory on January 1, 2021 showed a cost of P390,000.
 ● The average gross profit rate was 60%.
● The accounts receivable ledger balance as of January 1, 2021 was P135,000. During
2021, accounts receivable written off amounted to P10,000. The accounts receivable
ledger balance as of December 31, 2021 was P375,000.
● Outstanding purchase invoices amounted to P300,000 at the end of 2021. At the
beginning of 2021, it was P375,000.
● Receipts from customers during 2021 amounted to P3,000,000.
● Disbursements to merchandise creditors amounted to P2,000,000.

REQUIREMENTS:
a. What is the total sales in 2021?
b. What is the amount of total purchases in 2021?
c. If the GP rate was based on sales, what is the amount of inventory shortage for 2021?
d. If the GP rate was based on cost, what is the amount of inventory shortage for 2021?

9. Carol Danvers, Inc. has the following information related to its inventory:

COST RETAIL

Inventory, 1/1/2021 P250,000 390,000

Purchases 950,500 1,460,000

Purchase returns 60,000 80,000

Gross sales (after employee - 1,260,000

discounts)

Sales returns - 97,500

Markups - 120,000

Markup cancellations - 40,000

Markdowns - 45,000

Markdown cancellations - 20,000

Freight-In 80,000 -

Employee discounts granted - 8,000

Loss from breakage - 2,500

REQUIREMENTS:
 a. If the entity uses the LCNRV/conventional retail method, how much would be its ending
inventory on 12/31/21?
b. If the entity uses the average retail method, how much would be its ending inventory on
12/31/21?
c. If the entity uses the FIFO retail method, how much would be its ending inventory on
12/31/21?

10. Steven Rogers Company’s financial statements show the following accounts and balances
for the year ended December 31:

2021 2020
Cost of Goods Sold P847,000 P715,000
Net Income 275,000 220,000
Total Current Assets 1,265,000 1,155,000
Retained Earnings 5,000,000

The entity recently discovered that in making physical counts of inventory, it made the following
errors:
(1) Inventory on December 31, 2020 was understated by P66,000.
(2) Inventory on December 31, 2021 was overstated by P30,000.

REQUIREMENTS:
a. What is the correct net income for 2020?
b. What is the correct cost of goods sold for 2021?
c. What is the correct net income for 2021?
d. What is the correct RE, end as of 2020?
e. What is the cumulative effect of the errors on RE, end as of 2021?

11. Bruce Banner, Inc. has been using the FIFO method of inventory valuation since it began
operations in 2018. It then decided to change to the Weighted Average method for determining
inventory costs at the beginning of 2021. The following schedule shows the year-end inventory
balances under the FIFO and Weighted Average methods:

Year FIFO WAVE

2018 P4,500,000 P5,400,000

2019 7,800,000 7,100,000

2020 8,300,000 7,800,000

REQUIREMENTS:
What is the cumulative effect of the change on 2021’s Retained Earnings, beg.?

Best of luck on your 3rd BA 114.1 Quiz! #LaBAAn!