Intermediate Accounting Volume 1 Inventories by Valix

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Intermediate Accounting Volume 1 (Inventories) by Valix
Accountancy (Laguna University)
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Intermediate Accounting 1 | BSA-2201
CHAPTER 10
INVENTORIES
INVENTORIES
 assets held for sale in the extraordinary course of business, in the process of production
for such sale or in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
 encompass goods purchased and held for resale, for example:
a. Merchandise purchased by a retailer and held for resale.
b. Land and other property held for resale by a subdivision entity and real estate
developer.
 also encompass finished goods produced, goods in process and materials and supplies
awaiting use in the production process.
CLASSES OF INVENTORIES
1. Inventories of a trading concern
 one that buys and sells goods in the same form purchased
 “Merchandise Inventory” is the term generally applied to goods held by a trading
concern.
2. Inventories of manufacturing concern
 one that buys goods which are altered or converted into another form before they are
made available for sale
INVENTORIES OF A MANUFACTURING CONCERN

1. Finished Goods
 completed products which are ready for sale
 have been assigned their full share of manufacturing costs
2. Goods in Process (Work in Process)
 partially completed products which require further process or work before they can be
sold
3. Raw Materials
1 |Chapter 10 – Inventories

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 goods that are to be used in the production process

4. Factory or Manufacturing Supplies
 similar to raw materials but their relationship to the end product is indirect
 may be referred to as “Indirect Materials” because they are not physically
incorporated in the products being manufactured
 these supplies find their way into the product cost as part of the manufacturing
overhead
GOODS INCLUDIBLE IN THE INVENTORY

RULE: all goods to which the entity has title shall be included in the inventory, regardless of the
location.
”PASSING OF TITLE” – a phrase that is a legal language which means “the point of time at
which ownership changes”.
LEGAL TEST
Is the entity the owner of the goods to be inventoried? If the answer is:
 affirmative, the goods shall be included in the inventory.
 negative, the goods shall be excluded in the inventory.
Applying the legal test, the following items are includible in inventory:
a. Goods owned and on hand
b. Goods in transit and sold FOB destination
c. Goods in transit and purchased FOB shipping point
d. Goods out on consignment
e. Goods in the hands of salesman or agents
f. Goods held by customers on approval or on trial
WHO IS THE OWER OF GOODS IN TRANSIT?

FOB – free on board
1. FOB destination
 ownership of goods purchased is transferred only upon receipt of goods by the buyer
at the point of destination

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 thus, the goods in transit are still the property of the seller
 accordingly, the seller shall legally be responsible for freight charges and other
expenses up to the point of destination
2. FOB shipping point
 ownership is transferred upon shipment of the goods
 therefore, the goods in transit are the property of the buyer
 accordingly, the buyer shall legally be responsible for freight charges and other
expenses from the point of shipment to the point of destination
FREIGHT TERMS
1. Freight collect
 freight charge on the goods shipped is not yet paid
 common carrier shall collect the same from the buyer
 thus, the freight charge is actually paid by the buyer
2. Freight prepaid
 freight charge on the goods shipped is already paid by the seller
FOB destination and FOB shipping point Freight collect and Freight prepaid
 determine the ownership of the  determine the party who actually
goods in transit and the party who paid the freight charge but not the
is supposed to pay the freight party who is supposed to legally
charge and other expenses from the pay the freight charge
point of shipment to the point of
destination
Who Shoulders the Who Pays the

Freight Terms
Transportation Costs? Shipper?
FOB destination, Freight prepaid seller seller
FOB shipping point, Freight collect buyer buyer
FOB destination, Freight collect seller buyer
FOB shipping point, Freight prepaid buyer seller
MARITIME SHIPPING TERMS

1. FAS or Free alongside

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 A seller who ships FAS must bear all expenses and risks involved in delivering the
goods to the dock next to or alongside the vessel on which the goods are to be
shipped.
 The buyer bears the cost of loading and shipment and thus, title passes to the buyer
when the carrier takes possession of the goods.
2. CIF or Cost, insurance and freight
 The buyer agrees to pay in a lump sum the cost of the goods, insurance and freight
charge.
 The shipping contract may be modified as CF which means that the buyer agrees to
pay in lump sum the cost of the goods and freight charge only.
 The seller must pay for the cost of loading. Thus, title and risk of loss shall pass to the
buyer upon delivery of the goods to the carrier.
3. Ex-ship
 A seller who delivers the goods ex-ship bears all expenses and risk of loss until the
goods are unloaded at which time title and risk of loss shall pass to the buyer,
CONSIGNED GOODS
A consignment is a method of marketing goods in which the owner called the consignor transfers
physical possession of certain goods to an agent called the consignee who sells them on the
owner’s behalf.
Consigned goods shall be included in the consignor’s inventory and excluded from the
consignee’s inventory.
Freight and other handling charges on goods out of consignment are part of the cost of goods
consigned.
When consigned goods are sold by the consignee, a report is made to the consignor together with
a cash remittance for the amount of sales minus commission and other expenses chargeable to
the consignor.
STATEMENT PRESENTATION
Inventories are generally classified as current assets.

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The inventories shall be presented as one line item in the statement of financial position but the
details of the inventories shall be disclosed in the notes to financial statements.
ACCOUNTING FOR INVENTORIES

1. Periodic System
 calls for the physical counting of goods on hand at the end of the accounting period to
determine quantities
 The quantities are then multiplied by the corresponding unit costs to get the inventory
value for balance sheet purposes.
 This approach gives actual or physical inventories.
 this procedure is generally used when the individual inventory items have small peso
investment
2. Perpetual System
 requires the maintenance of records called stock cards that usually offer a running
summary of the inventory inflow and outflow
 Inventory increases and decreases are reflected in the stock cards and the resulting
balance represents the inventory.
 This approach gives book or perpetual inventories.
 this procedure is commonly used where the inventory items treated individually
represent a relatively large peso investment
 when used, a physical count of the units on hand should at least be made once a year
to confirm the balances appearing on the stock cards
ILLUSTRATION
Periodic System Perpetual System
Purchase of
Purchases xxx Merchandise inventory xxx
merchandise on
Accounts payable xxx Accounts payable xxx
account
Freight in xxx Payment of freight Merchandise inventory xxx

Cash xxx on the purchase Cash xxx

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Return of
Accounts payable xxx merchandise Accounts payable xxx
Purchase return xxx purchased to Merchandise inventory xxx
supplier
Accounts receivable xxx

Sale of Sales xxx
merchandise on
Sales xxx
account Cost of goods sold xxx
Merchandise inventory xxx
Sales return xxx

Return of Accounts receivable xxx
Sales return xxx
merchandise sold
from customer Merchandise inventory xxx
Cost of goods sold xxx
RULE: the ending balance is not

adjusted.
Merchandise inventory-end xxx Adjustment of
The balance of the merchandise
Income summary xxx ending inventory
inventory account represents the
ending inventory.
INVENTORY SHORTAGE OR OVERAGE

If at the end of the accounting period, a physical count indicates a different amount, an
adjustment is necessary to recognize any inventory shortage of overage.
The inventory shortage is usually closed to cost of goods sold because this is often the result of
normal shrinkage and breakage in inventory.
However, abnormal and material shortage shall be separately classified and presented as other
expense.
TRADE DISCOUNTS AND CASH DISCOUNTS

1. Trade discounts
 deductions from the list or catalog price in order to arrive at the invoice price which is
the amount actually charged to the buyer

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 thus, not recorded

 its purpose is to encourage trading or increase sales
 also suggest to the buyer the price at which the goods may be resold
2. Cash discounts
 deductions from the invoice price when payment is made within the discount period
 its purpose is to encourage prompt payment
 recorded as purchase discount by the buyer and sales discount by the seller
- Purchase discount is deducted from the purchases to arrive at net purchases.
- Sales discount is deducted from sales to arrive at net sales revenue.
METHODS OF RECORDING PURCHASES

1. Gross method
 purchases and accounts payable are recorded at gross
 in practice, most entities record purchases at gross invoice amount
 technically, this violates the matching principle because discounts are recorded only
when taken or when cash is paid rather than when purchases that give rise to the
discounts are made
 this procedure does not allocate discounts taken between goods sold and goods on
hand
 despite theoretical shortcomings, this is supported on practical grounds
 more convenient than the net method from a bookkeeping standpoint
 if applied consistently over time, it usually produces no material errors in the
financial statements
2. Net method
 purchases and accounts payable are recorded at net
 cost measured represents the cash equivalent price on the date of payment and
therefore the theoretically correct historical cost
ILLUSTRATION
Gross Method Net Method
Purchases 200,000 Purchases 196,000

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Accounts Payable 200,000 Purchase on Accounts Payable 196,000

account, P200,000,
2/10, n/30.
Assume payment
Accounts payable 200,000
is made between Accounts payable 196,000
Cash 196,000
within the Cash 196,000
Purchase discount 4,000
discount period.
Assume payment
Accounts payable 196,000
Accounts payable 200,000 is made beyond
Purchase disc. lost 4,000
Cash 200,000 the discount
Cash 200,000
period,
Assume at the end

of accounting
period, no Purchase disc. lost 4,000
-
payment is made Cash 4,000
and the discount
period has
expired.
COST OF INVENTORIES
a. Cost of Purchase
 comprises the purchase price, import duties and irrecoverable taxes, freight, handling
and other costs directly attributable to the acquisition of finished goods, materials and
services
 trade discounts, rebates and other similar items are deducted
 shall not include foreign exchange differences which arise directly from the recent
acquisition of inventories involving a foreign currency
 when inventories are purchased with deferred settlement terms, the difference
between the purchase price for normal credit terms and the amount paid is recognized
as interest expense over the period of financing
a. Cost of Conversion
 includes cost directly related to the units of production such as direct labor

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 also includes a systematic allocation of fixed and variable production overhead that is
incurred in converting materials into finished goods.
a. Fixed production overhead – the indirect cost of production that remains
relatively constant regardless of the volume of production.
EXAMPLES: depreciation and maintenance of factory building and equipment,
and administration.
b. Variable production overhead – the indirect cost of production that varies directly
with the volume of production.
EXAMPLES: indirect labor and indirect materials.
Allocation of fixed production overhead Allocation of variable production overhead

 to cost of conversion, is based on  allocated to each unit of production
normal capacity of the production on the basis of the actual use of the
facilities production facilities
Normal Capacity – is the production expected  A production process may result in
to be achieved on average over a number of more than one product being
periods or seasons under normal circumstances produced simultaneously.
taking into account the loss of capacity EXAMPLE CASE: when joint products are
resulting from planned maintenance. produced or where there is a main product and
 the amount to each unit of a by-product.
production is not increased as  When the costs of conversion are
consequence of low production or not separately identifiable, they are
idle plant allocated between the products on a
Unallocated fixed overhead – is recognized as rational and consistent basis.
expense in the period in which it is incurred.  Most by-products by their nature
are not material.
By-products – are measured at net realizable
value and this value is deducted from the cost
of the main product.
3. Other Cost
 included in the cost of inventories only to the extent that it is incurred in bringing the
inventories to their present location and condition
 For example, it may be appropriate to include the cost of designing product for
specific customers in the cost of inventories.
 However, the following costs are excluded from the cost of inventories and
recognized as expenses in the period when incurred:

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a. Abnormal amounts of wasted materials, labor and other production costs.

b. Storage costs, unless these costs are necessary in the production process prior to a
further production stage.
Thus, storage costs on goods in process are capitalized but storage costs on
finished goods are expensed.
c. Administrative overheads that do not contribute to bringing inventories to their
present location and condition.
d. Distribution or selling costs
COST OF INVENTORIES OF A SERVICE PROVIDER
 consists primarily of the labor and other costs of personnel directly engaged in
providing the service, including supervisory personnel and attributable overhead
 Labor and other costs relating to sales and general administrative personnel are not
included but are recognized as expenses in the period in which they are incurred.

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PROBLEMS
Problem 10-9 (AICPA Adapted)
Hero Company reported inventory on December 31, 2020 at P6,000,000 based on a physical
count of goods priced at cost, and before any necessary year-end adjustment relating to the
following:
 Included in the physical count were goods billed to a customer FOB shipping point on
December 31, 2020.
These goods had a cost of P125,000 and were picked up by the carrier on January 10,
2021.
 Goods shipped FOB shipping point on December 28, 2020 from a vendor to Hero
Company were received on January 4, 2021. The invoice cost was P300,000.
What amount should be reported as inventory on December 31, 2020?
a. 5,875,000
b. 6,000,000
c. 6,175,000
d. 6,300,000
Empty Company reported inventory on December 31, 2020 at P2,500,000 based on physical
count priced at cost and before any necessary adjustment for the following;

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 Merchandise costing P100,000, shipped FOB shipping point from a vendor on December
30, 2020 was received and recorded on January 5, 2021.
 Goods in the shipping area were excluded from inventory although shipment was not
made until January 5, 2021.
The goods billed to the customer FOB shipping point on December 30, 2020 had a cost
of P400,000.
What amount should be reported as inventory on December 31, 2020?
a. 2,500,000
b. 2,600,000
c. 2,900,000
d. 3,000,000
Dignity Company had the following consignment transactions during the current year:
Inventory shipped on consignment to a consignee 600,000
Freight paid by Dignity Company 50,000
Inventory received on consignment from a consignor 800,000
Freight prepaid by consignor 50,000
No sales of consigned goods were made during the current year.
What amount should be reported as consigned inventory at year-end?
a. 700,000
b. 650,000
c. 850,000

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d. 600,000
Kindness Company regularly buys sweaters and is allowed a trade discount of 20% and 10%.
The entity made a purchase on March 20 and received an invoice with a list price of P900,000, a
freight charge of P50,000, and payment terms of net 30 days.
What is the cost of the purchase?
a. 648,000
b. 630,000
c. 698,000
d. 680,000
On June 1, Compassion Company sold merchandise with a list price of P1,000,000 to a

customer.
The entity allowed trade discounts of 20% and 10%. Credit terms were 5/10, n/30 and the sale
was made FOB shipping point.
The entity prepaid P50,000 of delivery cost for the customer as an accommodation. The
customer paid in full on June 11.
What amount is received from the customer as full remittance?
a. 684,000
b. 734,000

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c. 720,000
d. 770,000
Kew Company reported accounts payable on December 31, 2020 at P2,200,000 before
considering the following data:
 Goods shipped to Kew FOB shipping point on December 22, 2020 were lost in transit.
The invoice cost of P40,000 was not recorded by Kew.
On January 7, 2021, Kew filed a P40,000 claim against the common carrier.
 On December 27, 2020, a vendor authorized Kew to return for full credit goods shipped
and billed at P70,000 on December 15, 2020.
The returned goods were shipped by Kew on December 28, 2020. A P70,000 credit
memo was received by Kew on January 5, 2021.
 On December 31, 2020, Kew has a P500,000 debit balance in accounts payable to Ross, a
supplier, resulting from a P500,000 advance payment for goods to be manufactured.
What amount should be reported as accounts payable on December 31, 2020?
a. 2,170,000
b. 2,680,000
c. 2,730,000
d. 2,670,000

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Black Company reported accounts payable on December 31, 2020 at P4,500,000 before any
necessary year-end adjustments relating to the following transactions:
 On December 27, 2020, Black Company wrote and recorded checks to creditors totaling
P2,000,000 causing an overdraft of P500,000 in Black Company’s bank account on
December 31, 2020. The checks were mailed out on January 10, 2021.
 On December 28, 2020, Black Company purchased and received goods for P750,000
terms 2/10, n/30.
Black Company records purchases and accounts payable at net amount. The invoice was
recorded and paid January 5, 2021.
 Goods shipped FOB destination, 5/10, n/30 on December 20, 2020 from a vendor to
Black Company were received January 15, 2021. The invoice cost was P325,000.
On December 31, 2020, what amount should be reported as accounts payable?
a. 7,575,000
b. 7,250,000
c. 7,235,000
d. 7,553,000
Problem 10-16 (IAA)
A physical count on December 31, 2020 revealed that Joyous Company had inventory with a
cost of P4,410,000.
The following items were excluded from the amount:
 Merchandise of P610,000 is held by Joyous on consignment.

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 Merchandise costing P380,000 was shipped by Joyous FOB destination to a customer on

December 31, 2020.
The customer was expected to receive the goods on January 5, 2021.
 Merchandise costing P460,000 was shipped by Joyous FOB shipping point to a customer
on December 29, 2020.
The customer was expected to receive the goods on January 10, 2021.
 Merchandise costing P830,000 shipped by vendor FOB destination on December 31,

2020 was received by Joyous on January 15, 2021.
 Merchandise costing P510,000 purchased FOB shipping point was shipped by the
supplier on December 31, 2020 and received by Joyous on January 5, 2021.
What amount of inventory should be reported on December 31, 2020?
a. 5,300,000
b. 4,690,000
c. 3,800,000
d. 4,920,000
Problem 10-17 (IAA)
Audacity Company counted the ending inventory on December 31, 2020 and reported the
amount of P2,000,000 before any corrections.
None of the following items were included when the total amount of the ending inventory was
computed:

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 Goods located in the entity’s warehouse are on consignment from another

entity 150,000
 Goods sold by the entity is shipped FOB destination were in transit on

December 31, 2020 and received by the customer on January 2, 2021 200,000
 Goods purchased by the entity and shipped FOB shipping point were in
transit on December 31, 2020 and received by the entity on January 2, 2021 300,000
 Goods sold by the entity and shipped FOB shipping point were in transit on
400,000
December 31, 2020 and received by the customer on January 2, 2021
What amount of inventory should be reported on December 31, 2020?
a. 2,500,000
b. 2,350,000
c. 2,900,000
d. 2,750,000
Reverend Company conducted a physical count on December 31, 2020 which revealed
merchandise with a total cost of P5,000,000.
However, further investigation revealed that the following items were excluded from the count.
 Goods sold to a customer which are being held for the customer to call at the customer’s
convenience with a cost of P200,000.
 A packing case containing a product costing P500,000 was standing in the shipping room
when the physical inventory was taken.

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The product was not included in the inventory because it was marked “hold for shipping
instructions”.
The investigation revealed that the customer’s order was dated December 28, 2020, but
that the case was shipped and the other customer billed on January 5, 2021.
 A special machine costing P250,000 fabricated to order for a customer was finished and
specifically segregated at the back part of the shipping room on December 31, 2020.
The customer was billed on that date and the machine was excluded from inventory
although it was shipped on January 5, 2021.
 Goods in process costing P300,000 held by an outside processor for further processing.
 Goods costing P50,000 shipped by a vendor FOB seller on December 31, 2020 and
received by the entity on January 10, 2021.
What is the correct amount of inventory that should be reported on December 31, 2020?
a. 5,500,000
b. 5,550,000
c. 5,850,000
d. 5,800,000
Problem 10-19 (IAA)
Sundown Company is preparing the 2020 year-end financial statements. Prior to any
adjustments, inventory is valued at P7,600,000.

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 Goods costing P250,000 were received from a vendor on January 5, 2021. The related
invoice was received and recorded on January 12, 2021.
The goods were shipped December 31, 202 FOB shipping point.
 Goods costing P850,000 were shipped on December 31, 2020 to a customer FOB
shipping point.
The goods were included in ending inventory for 2020 even though the sale was recorded
in 2020.
 A P350,000 shipment of goods to a customer on December 31, 2020 FOB destination

was not included in the year-end inventory.
The goods cost P260,000 and were delivered to the customer on January 15, 2021. The
sale was properly recorded in 2021.
 An invoice for goods costing P350,000 was received and recorded as purchase on
December 31, 2020.
The related goods shipped FAS were in transit on December 31, 2020 and received on
January 5, 2021 and were not included in the physical inventory.
 A P1,050,000 shipment of goods to a customer on December 30, 2020 FOB destination

was recorded as a sale in 2020.
The goods costing P840,000 and delivered to the customer on January 5, 2021 were not
included in 2020 ending inventory.
What is the correct inventory on December 31, 2020?

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a. 9,300,000
b. 7,610,000
c. 8,100,000
d. 8,450,000
White Company’s usual sales terms are net 60 days, FOB shipping point. Sales, net of returns
and allowances, totaled P5,000,000 for the year ended December 31, 2020, before year-end
adjustment.
 On December 27, 2020, White Company authorized a customer to return, for full credit,
goods shipped and billed at P50,000 on December 15, 2020.
The returned goods were received by White Company on January 5, 2021, and a P50,000
credit memo was issued on the same date.
 Goods with an invoice amount of P300,000 were billed to a customer on January 10,
2021. The goods were shipped on December 31, 2020.
 Goods with an invoice amount of P200,000 were billed and recorded on December 30,
2020. The goods were hipped on January 5, 2021.
 On January 5, 2021, a customer notified White Company that goods billed at P500,000
and shipped on December 31, 2020 were lost in transit.
What amount of net sales should be reported for the current year?
a. 5,050,000
b. 5,550,000
c. 4,550,000
d. 4,450,000

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Purple Company had sales of P4,000,000 during December of the current year. Experience has
shown that merchandise equaling 7% of sales will be returned within 30 days and an additional
3% will be returned within 90 days. Returned merchandise is readily resalable.
In addition, merchandise equaling 15% of sales will be exchanged for merchandise of equal or
greater value.
What amount should be reported for net sales for the month of December?
a. 3,600,000
b. 3,400,000
c. 3,120,000
d. 3,000,000
Yellow Company, a distributor of machinery, bought a machine from the manufacturer in

November 2020 for P500,000.
On December 30, 2020, the entity sold this machine for P750,000 under the following terms: 2%
discount if paid within 30 days, 1% discount if paid after 30 days, or payable in full within ninety
days if not paid within the discount periods.
However, the customer had the right to return this machine to Yellow Company if it was unable
to resell the machine before the expiration of the ninety-day payment period, in which case the
customer’s obligation to Yellow Company would be canceled.

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In the net sales for the year ended December 31, 2020, what amount should be included for the
sale of machine?
a. 750,000
b. 735,000
c. 742,500
d. 0

On October 1, 2020, Indomitable Company sold 100,000 gallons of heating oil at P30 per gallon.
Fifty thousand gallons were delivered on December 15, 2020, and the remaining 50,000 gallons
were delivered on January 15, 2021.
Payment terms were: 50% due on October 1, 2020, 25% on the first delivery, and the remaining
25% due on the second delivery.
What amount of sales revenue should be recognized during 2020?
a. 3,000,000
b. 1,500,000
c. 2,250,000
d. 1,000,000
Fancy Company is a wholesale distributor of automotive replacement parts. The entity revealed
the following initial amounts on December 31, 2020:
Inventory at December 31 based on physical count 1,250,000

Accounts payable 1,000,000
Sales 9,000,000

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Additional information
A. Parts held on consignment from another entity to Fancy Company, the consignee,
amounting to P165,000, were included in the physical count on December 31, 2020, and
in accounts payable on December 31, 2020.
B. P20,000 of parts which were purchased and paid for on December 2020, were sold in the
last week of 2020 and appropriately recorded as sales of P28,000.
The parts were included in the physical count on December 31, 2020 because the parts
were on the loading dock waiting to be picked up by the customers.
C. Parts in transit on December 31, 2020 to customers, shipped FOB shipping point, on
December 28, 2020, amounted to P34,000.
The customers received the parts on January 6, 2021. Sales of P40,000 to the customers
for the parts were recorded by Fancy Company on January 2, 2021.
D. Retailers were holding P210,000 at cost and P250,000 at retail, of goods on consignment
from Fancy Company, at their stores on December 31, 2020.
E. Goods were in transit from a vendor to Fancy Company on December 31, 2020. The ciat
of goods was P25,000.
The goods were shipped FOB shipping point on December 29, 2020.
1. What is the correct amount of inventory?
a. 1,300,000
b. 1,320,000

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c. 1,334,000
d. 1,090,000
2. What is the correct amount of accounts payable?
a. 835,000
b. 960,000
c. 975,000
d. 860,000
3. What is the correct amount of sales?
a. 9,250,000
b. 9,290,000
c. 9,040,000
d. 9,000,000
Quarry Company, a manufacturer of small tools, provided the following information for the year
ended December 31, 2020.
Inventory at December 31 based on physical count 1,750,000

Accounts payable at December 31 1.200,000
Net sales 8,500,000
Additional information
A. Included in the physical count were tools billed to a customer FOB shipping point on
December 31, 2020. These tools had a cost of P28,000 and were billed at P35,000.

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The shipment was in loading dock waiting to be picked up by the common carrier.
B. Goods were in transit from a vendor to Quarry Company on December 31, 2020.
The invoice cost was P50,000, and the goods were shipped FOB shipping point on
December 29, 2020.
C. Work in process inventory costing P20,000 was sent to an outside processor for plating
on December 30, 2020.
D. Tools returned by customers and held pending inspection in the returned goods area on
December 31, 2020 were not included in the physical count.
On January 5, 2021, the tools costing P26,000 were inspected and returned to inventory.
Credit memos totaling P40,000 were issued to the customers on the same date.
E. Tools shipped to a customer FOB destination on December 26, 2020, were in transit on
December 31, 2020, and had a cost of P25,000.
Upon notification of receipt by the customer on January 5, 2021, Quarry Company issued
the sales invoice for P42,000.
F. Goods, with an invoice cost of P30,000, received from a vendor at 5:00 P.M. on
December 31, 2020 were recorded on a receiving report dated January 2, 2021.
The goods were not included in the physical count but the invoice was included in
accounts payable on December 31, 2020.
G. Goods received from a vendor on December 26, 2020 were included in the physical
count.

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However, the related P60,000 vendor invoice was not included in accounts payable on
December 31, 2020 because the accounts payable copy of the receiving report was lost.
H. On January 10, 2021, a monthly freight bill in the amount of P20,000 was received. The
bill specifically related to merchandise purchased in December 31, 2020, one-half of
which was still in the inventory on December 31, 2020.
The freight charge was not included in either the inventory or in accounts payable on
December 31, 2020.
1 What is the correct amount of inventory?
a. 1,883,000
b. 1,911,000
c. 1,885,000
d. 1,925,000
2 What is the correct amount of accounts payable?
a. 1,330,000
b. 1,280,000
c. 1,250,000
d. 1,270,000
3 What is the correct amount of net sales?
a. 8,460,000
b. 8,500,000
c. 8,465,000
d. 8,425,000

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SOLUTIONS AND ANSWERS
Problem 10-9
ANSWER: D
Merchandise Inventory
6,000,000
3,000,000
P6,300,000 P2,670,000
Physical count P6,000,000

Goods shipped FOB shipping point on December 28, 2020 from a vendor 3,000,000
Inventory, December 31, 2020 P6,300,000
Problem 10-10
ANSWER: D
2,500,000
100,000
400,000
P3,000,000 P2,670,000

Merchandise shipped FOB shipping point from a vendor on December 30, 2020 100,000
Goods billed to the customer FOB shipping point on December 30, 2020 400,000
Problem 10-11
ANSWER: B
Inventory shipped on consignment to consignee P 600,000
Freight paid by Dignity Company 50,000
Consigned inventory P 650,000

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Problem 10-12
ANSWER: C
List price P 900,000
Trade discounts 20% x 900,000 (180,000)
P 720,000
10% x 720,000 (72,000)
Invoice price P 648,000
Freight charge 50,000
Cost of purchase P 698,000
Problem 10-13
ANSWER: B
List price P1,000,000
Trade discounts 20% x 1,000,000 (200,000)
P 800,000
10% x 800,000 (80,000)
Invoice price P 720,000
Cash discount (5% x 720,000) (36,000)
Net amount P 684,000
Freight charge 50,000
Total remittance P 734,000
Problem 10-14
ANSWER: D
Accounts Payable
2,200,000
40,000
70,000
500,000
P2,670,000

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Accounts payable per book P2,200,000

Goods shipped lost in transit 40,000
Purchase return (70,000)
Advance payment erroneously debited to accounts payable 500,000
Adjusted accounts payable P2,670,000
Problem 10-15
ANSWER: C
Accounts Payable
4,500,000
2,000,000
70,000 735,000
P 7,235,000
Accounts payable per book P4,500,000

Undelivered checks 2,000,000
Unrecorded purchases on December 28, 2020 (750,000 x 98%) 735,000
Adjusted accounts payable P7,235,000
Problem 10-16
ANSWER: A
4,410,000
380,000
510,000
P5,300,000 P2,670,000

Merchandise sold in transit, FOB destination 380,000
Merchandise purchased in transit, FOB shipping point 510,000
Problem 10-17

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ANSWER: A
2,000,000
200,000
300,000
P2,500,000 P2,670,000
Reported inventory P2,000,000

Goods sold in transit, FOB destination 200,000
Goods purchased in transit, FOB shipping point 300,000
Problem 10-18
ANSWER: C
5,000,000
500,000
300,000
50,000
P5,850,000 P2,670,000

Inventory marked, ”hold for shipping instruction” 500,000
Goods in process 300.000
Goods shipped by a vendor, FOB seller 50,000
Problem 10-19
ANSWER: D
7,600,000
250,000
850,000

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260,000
350,000
840,000
P8,450,000
Inventory before adjustments P7,600,000

Goods purchased FOB shipping point 250,000
Goods sold FOB shipping point (850,000)
Goods sold FOB destination 260,000
Goods purchased FAS 350,000
Goods sold FOB destination 840,000
Problem 10-20
ANSWER: A
Net sales per book P5,000,000
Sales return (50,000)
Goods shipped on December 31, 2020 300,000
Goods shipped on January 5, 2021 recorded on December 30, 2020 (200,000)
Adjusted net sales P5,050,000
Problem 10-21
ANSWER: A
Gross sales P4,000,000
Estimated sales return (10% x 4,000,000) (400,000)
Net sales P3,600,000
Problem 10-22
ANSWER: D
Zero because according to the “conservatism principle; Do not count your chickens before they
are hatched”. Thus, no sales should be recorded yet until it’s paid.

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Problem 10-23
ANSWER: B
50 000 gallons x P30 = P1,500,000 (whichever are successfully delivered during the year will be
recognized as sales revenue)
Problem 10-24
QUESTION 1 ANSWER: A
QUESTION 2 ANSWER: D
QUESTION 3 ANSWER: C
Inventory Accounts Payable Net sales
Unadjusted P1,250,000 P1,000,000 P9,000,000
A ( 165,000) ( 165,000) -
B ( 20,000) - -
C - - 40,000
D 210,000 - -
E 25,000 25,000 -
Adjusted P1,300,000 P 860,000 P9,040,000
Problem 10-25
QUESTION 1 ANSWER: B
QUESTION 2 ANSWER: A
QUESTION 3 ANSWER: D
Inventory Accounts Payable Net sales
Unadjusted P1,750,000 P1,200,000 P8,500,000
A - - ( 35,0000)
B 50,000 50,000 -
C 20,000 - -
D 26,000 - ( 40,000)
E 25,000 - -
F 30,000 - -
G - 60,000 -
H 10,000 20,000 -
Adjusted P1,911,000 P1,330,000 P8.425,000

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Intermediate Accounting Volume 1 (Inventories) by Valix

Accountancy (Laguna University)

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Intermediate Accounting 1 | BSA-2201

INVENTORIES OF A MANUFACTURING CONCERN

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 goods that are to be used in the production process

GOODS INCLUDIBLE IN THE INVENTORY

WHO IS THE OWER OF GOODS IN TRANSIT?

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Intermediate Accounting 1 | BSA-2201

Who Shoulders the Who Pays the

MARITIME SHIPPING TERMS

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Intermediate Accounting 1 | BSA-2201

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Intermediate Accounting 1 | BSA-2201

ACCOUNTING FOR INVENTORIES

Freight in xxx Payment of freight Merchandise inventory xxx

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Intermediate Accounting 1 | BSA-2201

Accounts receivable xxx

Sales return xxx

RULE: the ending balance is not

INVENTORY SHORTAGE OR OVERAGE

TRADE DISCOUNTS AND CASH DISCOUNTS

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Intermediate Accounting 1 | BSA-2201

 thus, not recorded

METHODS OF RECORDING PURCHASES

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Intermediate Accounting 1 | BSA-2201

Accounts Payable 200,000 Purchase on Accounts Payable 196,000

Assume at the end

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Intermediate Accounting 1 | BSA-2201

Allocation of fixed production overhead Allocation of variable production overhead

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Intermediate Accounting 1 | BSA-2201

a. Abnormal amounts of wasted materials, labor and other production costs.

COST OF INVENTORIES OF A SERVICE PROVIDER

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Problem 10-9 (AICPA Adapted)

What amount should be reported as inventory on December 31, 2020?

Problem 10-10 (AICPA Adapted)

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Intermediate Accounting 1 | BSA-2201

What amount should be reported as inventory on December 31, 2020?

Problem 10-11 (AICPA Adapted)

No sales of consigned goods were made during the current year.

What amount should be reported as consigned inventory at year-end?

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Problem 10-12 (AICPA Adapted)

What is the cost of the purchase?

Problem 10-13 (AICPA Adapted)

On June 1, Compassion Company sold merchandise with a list price of P1,000,000 to a

What amount is received from the customer as full remittance?

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Intermediate Accounting 1 | BSA-2201