auditing a manufacturing wae fn itor lee ely, ipated sales Volume, Review inventory experience and trends, 2 Spa of ens 9 INET YN Ha ecko ordered as cording sls tems thatthe company retin tems that are held by customers n purposes. ing items at substantial discounts near year-end. 5 of year-end For future even ’s of warehouse personnel concerning possible of bsolete OF soy, tems provide assurance about manag MEN'S assertion a Completeness. b. Rights and obig s 4. Valuation, ‘2% ‘The accuracy of perpetual inventory records may be establl comparing perpetual inventory records with 2 Purchase requisitions . Receiving reports, b. Purchase orders d. Vendor payments, 2 The auditor tests the quanti lished, in pat, by Iy of materials charged to work in process by © Perpetual inventory records. d. Material requi ‘4 To measure how effectively aclient employs its ass inventory turnover by dividing the average inventory into: a Netsales ©. Cost of goods sol 4. Operating income. 4. Gross sales, & deeiventory tumover analysis is useful to the auditor because It may detect: Wequacies in inventory pricing Methods of avoiding cyclical holding cost d Tre cbtinum automatic reorder points 4 The existence of obsolete merchandns 356 nS EHO, Hs da mg, in ian toe em erpetual inventory systems. It also disuse . a ne PPRS os so cleristcs, co OBJECTIVES: LEARN is chapter, You shoul beset tereeerbe inventories of manufacturing companies. ang serving nies. : comPjpe the initial recognition, nfl Reavurement, derecognition and finance inventories, : 4 Mianify the situations in which period or perpetual system is sropriate, GGmpare and contrast perpetual and period inventory system, ‘Account properly purchase commitments and inventory transactions denominated in foreign currency. ‘Account properly changes in inventory method and inventory error. Calculate tine cost of inventory usi Describe Calculate Measurement, subsequent statement presentation of ie correct balance of inventory and related accounts. INVENTORIES = ‘Ts defined in PAS paragraph 6, Inventories are ase el forse me 3 for such sale or in ordinary course of business, eel teenie ce Keele the form of materials or supplies tobe consumed in ihe weieason ori the rendering of services. Therefore inventories neue eS a) Assets held for sale in the ordinary course goods) ¥) Assets in the pr : = ness (work in process} in production (ra 2 Matra nese ha ae isu ©) Purchased subcomponents ©) Goods held by a trader forresale 357Chapter 12 - Inventories INITIAL RECOGNITION “An entity should recognize an inventory only when: 2} theentty controls the aset asa result of past events, ang by itisprobale that future economic benefits wil Now ta tg ent, INITIAL MEASUREMENT: COST OF INVENTORIES The cost of inventories shall comprise all costs of purdh conversion and other costs incurred in bringing the inven present location and condition. B86 Co tories toy, Costs of Purchase ‘The costs of purchase of inventories comprise the 1) Purchase price Import duties and other taxes (other than those recoverable by the entity from the taxing authorities)" “Y>Se4uenty 3) Transport, handling and other costs directly. attibutay acquisition of finished goods, materials and services 1€ 0 the Any trade ; rebates and other similar items determining the costs of purchase, are deducted iy When an inventory is bought ona deferred credit terms, the excess of aid over the amount tobe paid under normal credit terms isco et Interest expense over the period of the financing, CT PAS 2 does not permit exchange differences ai lifferences arising directly on the re acquisition of inventories invoiced in a foreign currency to be include ‘the cost ofthe inventories. 7 Costs of Conversion Costs of conversion are a compl mn are a complex aspect of inventory measurement and nay Tequlte the use ofa sophisticated costing system 1 record the varius inputs. Costs of conversion include costs of direct labor and materials. Italso mane le costs of direct labor and materials. Ital a) Vara iC Production overheads. These are defined as those indirect Of production that vary directly, or nearly directly, with the volume of production, sucl 7 Varabe, pentction, such as indirect materials and Indirect labo mn overheads are allocated to each unit of ively constant regardless such as depreciation and maintenance of in8s and equipment, and the cost of factory management ». Fixed production overheads are allocated to each based on the normal capacity of tie production is the production expected to be achieved 358 products. Where joint products are roduced Pijon are not separately identifiable cue! 2 a thei costs of conve ty cst of eon vated between them on a rational ang es,0! “™Etsion ane ample, a wood factory produces timber seas tet Basis For s saw dust that is processed into energy pelts ee es er Cone rm inv other costs are included in the cost of inventories only tothe extent that ‘incurred in bringing the inventories to their prewat ie, they ron, Examples of other costs are as fllows: ane. cond i sts - PAS 23 Borrowing Co ) Borrowing cos ing Costs requires capita treate. However, an entity should not capitalize brewing cea fo inventories that are manufactured in large quantities ong repeetee basis. 1) Storage costs - this can be included for products that require a maturation process or substantial amount of time to create ) 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 coneition and location Excluded From Cost of Inventories ‘Abnormal amounts of wasted materials, labor, or other production costs ‘Storage costs (unless essential to the production process) Administrative overheads unrelated to production Selling costs on Foreign exchange differences arising directly on the recent aos of inventories invoiced in a foreign currency ent + Interest cost when inventories are purchased with deferred seem terms. ILLUSTRATION 1: Cost of Inventories : lel e costs set out below are those typically incurred by mat = businesses a - al Hens [3 Supplies gross price for raw materials, 150000 —— eit 2° "Materials purchased from another Suppl al ced amounting to P570,000. The price to be pai¢ a“ Soe et song FE woice price of raw materials purchased amounting * 359Chapter 12 - Inventories [Tuan discounts of 10,5 ae allowed by su Tent crc Ton a super ameemte py Te WA The company ls VAT regret ere puta are Materials purchased from a supplier amouniin eerreerabspurcase arf P15000, [Costs of to the busines: 8 0 PSi5 09, inc Premises, 555 —~ 3. Noxmal amount of wasted bor, PS7,000 {[40-"-Abnormal amount amounts of wasted iabor, P69,000-—~-~--——~ [IL Variable costs (electricity) incurred ree Ta | 10,000, eo Required: oe Identity the cost as either inventoriable or not ani be included as part of inventory. id determine the amountty SOLUTION: 7 Invenio SO sp tiable?__Amount | _ Selected Explanations | te | 50.000 FT a _————— + 2. Yes "550,000 T The amount to be recorded Ts based ob | price under normal credit term. The difference between the price under normal credit and | | excended credit term is recorded a5 interea | Soyer aarp mens overthecreditterm 3 Yes P180,000 Invoice price means the quantity discount or t -ttade discount was already deducted, to... Since itcan be claimed as an input VAT, 1 $515,000 7 Pee {5.009 | {_¥25,000 | ———_—-_-___—— +-?420,000 | ———----_-_——- 187,000 [> No nono [at Yes” | pip,gqg-- earmal waste is not invento ATION 2: Cost of Inventories ist it below are those typically i ess it ee a Hcured by mansfcaing SS, of transporting goods to customers onsale pagyg—-——_ \ erable purchase aces chagadinese 22) on-revoverable sales taxes, PLd 44g. "= *°00sal FZ | Nore tission payable 0 salesmen onthe sl oft Mt eae Commnns for bad and do e ods, PASoG Hu bs In lation tae eats canarias aga) ——————| relating to the overall matagensi oie haoe 234,000 Tiron ng stn Tn eno RST fime to create, P122,000__ EEC Storage cost for a maturing product, PS6,000 oeTing costs, 45,600 Serer ——— Ae Non-production overheads cost of designing produas’ or Heaict |B | customers, F10,000 * Storage cost of finished goods, P23,000 ee ixed administration costs/overheads (rent for office), PARO)O00 =| 14, Insurance on in transit inventories, ®17800 Freight incurred when the inventories were wetted id relive | | P34,100 | | (Te. [ Foreign exchange ferences arising directiy on the recent acquisition | ‘es invoiced in a foreign currency. The peso equivalent when | 's P567,000 and the peso equivalent ofthe merchandise when | 377,000, | as either inventoriable or not and determine the amount to be included as part of inventory. SOLUTION: IF fevers | [| Lriable? Am Hable? Ar | Sees geal ae “administrative expens®_——— aa 361 )Chapter 12 - Inventories T-7122,000 7 756,000 | 7 7, Selling expense PPHO000™ Adae 0 ventory sce is eg ot a neces | bringing the inventory to their pr and condition ‘Administrative expense SSaty cost *Sent locaign T kpensed outright Tha inefficiency. Raw material Direct Labor ————* Work in process Manufacturing e Finished goods. ——Cost of goods sold overhead Selling and admin. ——Period expenses. ——PSelling and admin | Overview of Cost Flows : The basic flow of costs in a job-order system begins by recording the costs of material, labor, and manufacturing overhead. 1, Direct material and direct labor costs are debited to the Workin Process account. Any indirect material or indirect labor costs are debited to the Manufacturing Overhead control account, along with any other actual Manufacturing meee costs incurred during the period. “uring overhead is applied to Work in Process using the | predetermined rate, = cca Te (0st of finished units is credited to Work in Process and debited to the Finished Goods inventory account. When units are sold, thei l their costs it i ds and debited Couto oe O88 ate credited to Finished Goo T-ACCOUNTS Direct Materials or Raw Materials XX [Xx Balance end XX [XX __Direct materials used ginning balance t purchases at , 42.~ Inventories rape 2 TT Workin Process XX XX Balance end Tance ane al inning erials used AXA costo gods manufactured bor por oryoverhead XX ing balance ‘Beginning vds manufactured XX [XX__Cost of goads sold Cost of 600% a Statement of Cost of Goods Manufactured and Sold aw materials inventory, beginning x ‘add: Net purchases Purchases Add: Freight-in Gross Purchases Less: Purchase returns and allowances Purchase discounts Raw materials available for use BE RER BSS BSB HBS SEBS SEBS 5 BEB BEBE rect labor ied factory overhead Total manufacturing cost ‘Add: Work in process, beginning ‘Total cost of goods placed into process Less: Work in process, end Cost of goods manufactured inished goods, beginning Tot ‘of goods available for sale Less: Finished goods, end Cost of goods sold ILLUSTRATION: ed the fllowing ‘The accounting records of Omar Company core Information for last year: Direct materials inventory Work in process inventory Finished goods inventory 365‘hapter 2 —Yventories oS ‘Manufacturing costs incurred Indirect materials ad Direct labor cast 60000 Depreciation on factory machinery 60.000 Factory rent 10.000 Indirect labor 22000 Taxes 3.900 Purchases sane Freight in 10 Purchase discount 23.000 Required: Prepare the statement of cost of goods manufactured and compute for the following, using T-accounts: and sold 1. Direct materials used 2, Total manufacturing cost 3. Cost of goods manufactured 4. Cost of goods sold SOLUTION: ‘Statement of Cost of Goods Manufactured and Sold als inventory, beginnin Add: Net purchases 7 Purchases 5: fe rep n "000 Gross Purchases 530,000 Less: Purchase returns and allowances Purchase discounts ono _szaam 610,000 —65,000 545,000 160,000 sd factory overhea : Total manufacturingcost “ea 0st of goods placed i Less: Workin processcnd Poe 1,305,000 (Cost gods manufactured ‘ose Ada: Finished goods, beginning “ann [otal cos of oods available forsale ‘esme 8s: Finished goods, end “su Cost of goods sold mos —_____Pazas.000 366, we 42 Inventories panto 2S hears overhead: ers F 300000 Indie cjation on factory machinery 10000 paetory en 12000 | fae or "ano ToS, onyoverhead ___—B 400.000 Cosa T-ACCOUNTS ent No. 1 Requirems Direct materials 65,000 Balance end 545,000 Direct materials used P610,000 Feginning balance Net purchases _ jrement No. 2 Tar P 545000 Direct materials used ‘Add: Direct labor 160,000 Factory overhead 400.000 ‘Total manufacturing cost 71,105,000 Requirement No. 3 Work in Process 100,000 Balance end 1,205,000 Cost of goods manufactured ‘Beginning balance Direct materials used Direct labor Factory overhead Requirement No. 4 Finished Goods 150,000 Balance end P 190.000) 1 45,000 Cast of goods sold Beginning balance Cost of goods manufactured Items to be Included in Inventory 1. from supplier - Goods a. FOB shipping point b. FOB destination 2 Consigned goods seller 3. Sales out on approval 367Chapter 12 - Inventories “4. Sales with buyback agreement (or rroduct financing arrangement) Seller 5. Buyer 6. Sales on in Buyer 7. Segregated goods in the warehouse a, Special-order goods Buyer upon comp} b, Hold for shipping instructions Seller Pletion Note however that addtional information should be considere whether control of the goods is transferred to the customer ne 285eSsing with PFRS 15 Revenue From Contracts With Customers, 'cordance ILLUSTRATION 1: Items to be Included in Inventory AAs part of your engagement to audit the financial st statements of Company for the year ended December 31, you have been neat uta merchandise inventory account. You found the following inert’ We included inthe merchandise inventory: oie Items counted in the warehouse (bodega) (including P32,000 ‘damaged and unsalable goods) P4000, Items included in the count specifically segregated persales °™»000 contract Goods eld onconsgnmentatsales price costP125000 Items in receiving department, returned by the customer, in : good condition 60,000 Goods out on consignment, at sales : ent at sales price, cost P150,000 00 ‘wens ordered and inthe receiving department, invoice not aii receive x tems ordered, invoice received but goods not received, ee Freight is paid by buyer. 100,000 ems on counter for sale 150,000 Of danoge "8 department, refused by the entity because ; 200,000 220,000 35,000 25,000 13.000 25,363,000 tof SOLUTION; es Items counted in th e Warehouse |732000- P0300) ehouse (bodega) (4,000,000 - "ms in receiving departmen — artment, returned by customer 60,000 368 a i = inventories ee dition 1d cor t cost 0 a onsignment at co ; Goods Mt Cod and in the receiving department invoigenat 180000 wereived ; a 30000 rected ga invoice received but goods not received, nes spa by Due sia Frei counter fr sale ae teem, in shipping department ae eg today, invoice mailed, FOB destination esate tems etrently being used for window display items 13,000 ‘otal ae 4.636.000 RATION 2: Items tobe Included in Inventory muustRsMyour engagement to audit the financial statements of Jesica éapany for the year ended December 31, you have been assigned the cerehandise inventory account. You found the following items to be jncluded in the merchandise inventory: Finished goods in factory 1,900,000 Finished goods in company-owned retail store, incudinga 50% profit on cost 375,000 Finished goods in hands of consignees including 40% proft mn sales 200,000 Finished goods in transit to customers, shipped FOB point of, shipment 130,000 inishe in transit to customers, shipped FOB “istaten " :s0000 Finished goods out on approval, at cost so0a00 Unsalable finished goods, at cost. rane Goods in process go ao0 Unexpired insurance on inventories — Advertising catalogs and shipping cartons — 9,000 39,000 1e and oil for testing finished goods a A Machine lubricants Materials purchased in transit shipped FOB shipping point’, excluding freight of P20,000 ‘99,000 Defective materials returned to suppliers for replacement =) Materials *foc000 Advance payment for materials ordered 098,000 Total Required: Compute for the correct amount of inventory: 369Chapter 12 - Inventories SOLUTION: Finished goods in factory Finished goods in company-owned retail store 1.900095 (P375,000/150%) ished goods in the hands of consignees (60% x 200,000) 280.009 Finished goods in transit to customers, shipped FOB 220,009 destination Finished goods out on approval. at cost 180009 Goods in process 6,009 Gasoline and oll for testing finished goods Lr00 009, Machine lubricants 89,009 Materials in transit shipped FOB shipping point, (P220,000 + 30,009 720,000) Materials 2.000.009 Total REPURCHASE AGREEMENTS A repurchase agreement isa contract which an ently sels ana also promises or as the option (either in the same contenet esse aed contract) to repurchase the asset. The repurchased asset may be ve” * was orginally sod to the customer, an asset that is subreatn ‘same as that asset, or another asset of which the as sold isa component. [PFRS 15 B.64] © asset that was originally Repurchase ‘agreements generally come in three forms: (3) an entity's obligation to repurchase the asset (a forward); stould account the contract I. Repurcha: < ori i PERS Te Pre < oFiginal selling price lease in accordance with fi, Repurchase price = ori i hep ‘ce ® original selling price ~ a financing arrangement fi ree sgh to repurchase the asset (a cal onan = ns the entity has the right to repurchase the asset. Since ‘ot transferr face ed to the customer, the company should account 1 Repurchase price < or PERS 16 — ling price - lease in accordance with Repurchase price (© an entity's obligation renal selling price - a financi ent ity’s obligation t rancing arrangem: (put option) ‘© repurchase the asset at the customer's request A put option is a right of Tepurchase the ascot 2,0" the customer to require the entity © asset. Since con the company should account heey (e,not transferred to the custome! 370 ee inventories ccnanter #2 astomer has significant economic incent ge in accordance with PERS 16 or finan Bromvipase price 2 origina sl warchase price > original selling price and n pehxet value ~ a/inancing arrangement purchase price > j,_ Customer has no sigoificant economic incentive to exercise fe Mccount as ifitwere sale with arightof return «ee Met Bxampl Repurchase price 2 original selling price and repuchate price < market value the repurchase agreement is a financing arrangement, the entity shall 1 eRe recngnte the asset ad alg ecogtzes Haase Ke comteonsideration received from the customer. The en ary Gifference between the amount of consideration tre romer and the amount of consideration to be paid to the customer a5 {ncerest and, if applicable, as processing or holding costs (for example, insurance). {the option lapses unexercised, an entity shall derecognize the liability and recognize revenue ive to exercise the te icing arrangement rien ILLUSTRATION: Repurchase Agreements has available financing by f its product inventory to a Financing Company. The Jane Company will buy back the inventory atthe end of ata set price of P600,000. necessary entries both on the part of Jane Company and pany. SOLUTION: mnsaction seems to be a forward since the entity is obligated to buy back the inventory after four months. Journal entries are as Follows: Transaction Jane Company Debit Credit 1. Shipment of No entry goods 2 Receiptofcash Cash 500,000 soot ‘A/P- product financing : 00,000 3. Repayment of _A/P- product financing soa.000 amount Financing cost 600,000 borrowed Cash an.Chapter 12 - Inventories ing Company SS Financing i ie Transaction = s T"Shipmentof —-Noentry Srey I] i BL | BBE TS ds 6 | Lt S ey A/R - product financing: 500,000 aia 35 | Bs ¥ 2 oe Cash 500.49 a] | | 4} — 4 y ia Receipt ofcash Cash 600,000 1) | (2 s Finance income 1009 | ale! 2 A/R~ product financing song? Z 2 . a3] 8 “ | € | 2 la} 3} sie 2 Be 5 ge lee || 2 MENT ARRANGEMENTS Z| | a a (8 |e ls Sect or ten delirred ooamnibor teers: (©. consignee) may gle | i a ise || 8 held in a consignment arrangement if that other party has ot guy |e 5 & |3 (#8 || 3 ! control ofthe product. Hel |B a 3 |S fel 3 ! Zlz| |e 4 22)5\5 1 Indicators that an arrangement sa consignment arrangement include ug s/s) 8 38 | jas \gisis Sti is are not limited to, the following: i g\8) |Z Tp ties. {@) the product is controlled by the entity until a specified event occurs, i Tle 1] | Bo RS such as the sale of the product to a customer of the dealer or unt Be I | = specified period expires; = T zl x | BSR (b) the entity is able to require the return of the product or transfer the Bl) | |) T product to a third party (such as another. dealer); and 11 dol | le (6) the dealer does not have an unconditional obligation to pay for the . i 4 2 | 5 roduct (although it might be required to pay a deposit), al (2 5 5 | [igi ig Accordingly, the consignor shall not recognize revenue upon delivery of a le 5 5 Se 3) 22 product to the consignee. In other words, the consignor shall recognize ella] je 23 g [gz (sé revenue when alglaig| 5 se | |22 22 a) the consignee sold the product to a customer; or 2286 2 | |se 3 \3i2 28 b) after an expiration of a specified period, aISlAsl |= | jae 8) |gl& '52 2 aes) 5 sl@ | 2) | le |S2 38 2 dig 32 S| | elgg) ige s| 312] |Zig | |g g) | leiagi8 | |zle| 21S | \28 | isl | [sisisie io st IF “t 32 | al |é ae 33 ee 2 g- | |e | |g | lee aes 3g a | (22 S18 | 1s. | Be | fe | bss Sie ios &|\5 | jefe se} es Ss 2 g Su & Ise 3? os 3 B60 Bezel 22 lesa \F | ake Eiglgel |g8q [88a is | igs 3 Blele & |e ° —€ SF |e B5e glgiez| | 3) |5.8) g | |S 8s Slee s| je we) |e Pe) | 3 , + SE] | lai je 373 372SSS r tems, lel] Jel] Jeleioy jetual Inventory System 8}! /8/) Isisisi Pew jow-volume, high cost ae a} isi} (sieS} Used automobiles and | i ly low value g|] |sisis ee, suchas inventory items such as inventory of 5 ems Njecause of technology | grocery stores. ry o | Heiss HLH fet eu tn ay is} |/s} 18! petigo for low value inventory Sms used aid of point-of-sale (POS) giz SLU 2 ‘connected with the ais rot y's inventory system. He ‘ory account is updated for | The inventory account is updated ZB ls ‘sale and return (Le, | only when financial statements are 82 |e ° 3/3) * return and purchase return) of | prepared. 7 s |/s| alia! | 3/8] is} e € |/3| Sls! 2/3 3) I count is performed to | Physical count is performed to | 5 3 | iB I /BI 8/3) |a8 I velermine the accuracy of the | determine the ending balance of 2 § = 1 {8 3/5) [gis | palance per records. inventory and to compute for the ge 2 1/2 8] [S/S es ISI cost of goods sold. Unlike in z t {8 /elallalzlaaieel| | ig perpetual inventory system, cost of 2 : SSeS) ey _ goods sold is aresidual amount. g & S { f Purchase returns, discounts and | Purchase retums, discounts and g. sf S| st} |gi allowances are recorded by | allowances are recorded by ae 85 =} is} f3 crediting the inventory account. crediting the appropriate purchases ze Ss | |S | 8 £& Ss Ss} ] |i account, wigee } Freight in is debited directly to the | Freight incurred when the inventory Bee 3 go 5: | eielg} |g inventory account. was purchased is debited to 2 an S| 3 | /s ry Pl Ziege eI lols} [4 "Preight-in" account. | f228s fee! mS | ‘Recount used: Inventory ‘Accounts used: Inventory e8eys & I beginning, inventory ending |_| esas aI purchases, _ freight purchase Zozeg Biz] [le ze returns, purchase allowance and BEERS 5 |g a5 purchase discount gFeses & |/g| = el es 1B |/Sa Ey ./a3) Bossy I | | 21S a] |}! | Ele gedsiey 2g) /8/ 8 B feel |g Se Be CECI ERELIERE ) fesieees Sle Sg/Sa/ley |/8 |B 3/8305 BESE2 25 2828] || Blcl 212) | 31 siel Bbacne FACIES 2 [6618/5 (5/7 Bicses “| e TF a > 375: Chapter 12 - Inventories 7 2 = Inventories —— er el TRL era ATION i, + mu veginning of January 1, Tristan Company has ‘ Bal Bl iB) Ey s in 20 per unit. The following chronological ans, ens Leshan g& ccostit year: .nspil od ingehe Yea ig Es during fed on account 3,000 units of inventory at P20. 2 | || |g J SS 1) orehescout 2500 unis of ventory for SO yer uae 2] ie i$ {Tel | [gle p A 2) Sol med on account 4000 units of inventory at 20 peru 3 | (2 a] ia] gg 3] | fags 3) Eufgon account 3000 un of inventory oP peru le] | [alsie s| [3 ic alg ct be is} | /SlaIS 3 | 22) [seiesl (Se BEE §) onDecember 3 _ ical count revealed that 3,500 units were onhand. 3) alae & | f2/5) [sie] 5/3) | 2/5) g jred: Prepare all the necessary journal entries using: Beles Jel al |Slatal (gleslel (Selec Reel inventory stem c geese |Sellg] |2)3/5) ssjsis| (Sgge/oay a Perfo Inventory system, | EES (Salis) (Ss) 4e/23) |e eee | eV" |S 2] falsle|s} (Ssleigale el “sowwTtONe el de | sl 28 L_ Perpetual Inventory System i rs BR) |) +H inventory (3,000 P20) Soo gs) | lel Is ZI alg EI [| Accounts payable ape BH a3 s| [x Fz [Accounts receivable Ta5000 i a I> 3 Sales (2,500 x P50) 725,000, Bmel iy 3 laze S| Ja Tost of goods sold San g S! | | glo 8/5/3 S| 18 Inventory (2,500 x P20) 50,000 Iz) S. is} FSISIBI eye] &| Ss |e Inventory (4,000 x P20) 30,000 i 2 8) [2/2/85 24 = (8 ‘Accounts payable 80,000 82 jel | SB Eel 18) Slo) oes ‘g| {8 4. | Accounts receivable 750,000 EERE EESCIGEEBERG z/2)8|8 3) [25] Sales (3,000 x P50) 750000 g/& (5/2 |5)3]/ 21819) 8/e/s]q) lig sl 2[5 a5] |g (ala eee 5/22] 815/35 38 Cost of goods sold. 60,000 ) : 1 J?) JF) a)" 2) 2] 5| Sl Inventory (3,000 x P20) 60,000 le — fs | No closing entries since all inventory related transaction is & |2 | g directly debited or credited to the account de lg ie E : 2 |25 [ Zz z a 6. | Loss on inventory shortage 10,000 Be eS isp |e ce ey LT inventory 10,000 ge. |feg28 |e |£e/8 5 else |EZez> lp & B/E z;| Periodic Inventory System | gs ia iiee 5 Ee za Purchases (3,000 xP20) ono | sy SE jezses |e saz 8 ‘Accounts payable ies les eT Eas ee ‘Accounts receivable | 125,000 | 00 | fe Ls ia Sales (2,500 x P50) fea 376Purchases(4,000 x P20) ‘Accounts payable | Accounts receivable Sales (3,000 x P50) 5._| Inventory, end (3,500 x P20) Cost of goods sold Purchases (?60,000 + P80,000) Inventory, beg(P20 x 2,000) —— & No journal entry. inventory shortage or overage is inca ints e cost of goods sold. Inventory end and Cost of goods under the perpetual method: Inventor Cost of Goods Sotg eg —- COGS on Sale (2000xF20) 40,000 | 50.000 2 Purchases 60.000 5 180,000 180,000 eae Seam sic neon Inventory end and Cost of goods under the periodic method, Merchandise inventory, beginning (2,000x®20) P 40.009 Add: Net purchases [(3,000 +4,000) x P20] 140,000 Total goods available for sale 180,000 Less: Ending inventory (3,500 x P20) 70,000 Cost of goods sold P_110,009 Note: Observe that the cost of go ods sold under both the perpetual and Periodic inventory system is equal. Inventory Shortage What if only 3,000 units were on hand during the count and the shortage is, considered normal in the operation? Refer to number 6 in the Solution, Computation: Merchandise inventory, beginnin units) 2,000 Add: Net purchases (units) (3006 on) 10 +4,000) Z [nits availabe forsale ; ST ss: Un (2,500+3,000) : ints that should be on hand ) Tsson ss: Actual units on hand z Storage ans —s 378 2 - Inventories raptor \d and Cost of goods under the pe ory en Petual method, er neni Costof Gem Serta 10000 ome us i 120000 _ fy 310 000 180,000, ay tm es sd ade BO, of goods sold under the periodic method and pepetay , Cost ing the inventory shortage s treated: neat ies ass SS: “fferchandise inventory, beginning (2,000.20) —¥ ange ee Re Total goods available for sale 180,000 “80,000, Less: Ending inventory units 7 a . Cost of goods sold fitan moan ‘Add: Cost of missing inventory ; (Deduct inventory overages) 7 Cost of goods sold _ f goods sold under the periodic method and perpetual method, sssuming the inventory shortage s treated ss abnormal fase Periodic Perpetual Merchandise inventory, beginning (2,000xP20) ® 40,000 40,000 Add: Net purchases [(3,000 +4,000) x P20] 440000 t4aQ0o Total goods available for sale 10,000 yom Less: Ending inventory units ~qaua—-rogan Cost of goods sold r Add: Cost o| sig ventory 7 . Deduct inventory overages — ee Costorgeodcal 2120000 211000 Loss on inventory shortage (treated as other 3 Sperating expense) one BA. rnventory per count. Ending inventory per record. 3. Inventory shortage (3,500 ~ 3,000) xP20. Note: ‘or overages areChapter 12 - Inventories inventories is charged to cost of goods Sod they are ao but if such are considered abnormal shortages dered should be treated as other ly. The management of; ly refer to a more detailed discussion on value on treatment of any losses. ‘Trade Discounts vs. Cash Discounts ¥ Trade discounts © given to encourage orders in large quantities © deducted before the invoice price is determined © not recorded in the books of either the buyer or seller Y Cash discounts given to encourage prompt payment Buyer: Purchase discount Seller: Sales discount deducted from the invoice price recorded in the books of seller as sales discount (see Net methad 0, 5, 2/10, 1/15, n/30 ‘Two Methods of Accounting for Purchases ¥ Gross Method ‘+ Purchases are recorded at the total invoice price. * Purchase discounts are recorded only when taken - under Purchase Discounts account. ¥ Net Method * Purchases are recorded at the invoice price net of cash discounts available (whether taken or not). * Purchase discounts are recorded only when not taken - under Purchase Discounts Last account. journal Entries: Gross and Net Method (Periodic Inventory: ‘Transaction Gross Method 1. Purchases Purchases (invoice price] Accounts payable 2 Purchase return | Accounts payable ae Purchase return (invoice price) 3. Payment within the Acc ts payab count discount period fase Ese tl a Purchases discount Lash 380 yond | Accounts payabi ayment beyond | Accounts payable 4 Pep uscount period [Cash °*——— 7 [ Net Method +NetMethod Purchases (Invoice price less tear discount ‘Accounts payable hae] Faeroe | Astounts pay +} Farchase retura \ccounts pay x || Purchase return (invoice prceles| bar] | cash discount) Payment within the | Accounts payable * aiscount period Cash Payment beyond | Accounts payable the discount period | Purchase discount lost Cash ILLUSTRATION: Lourilyn Manila Company specializes in the sale of IBM compatibles and software packages. It had the following transactions with one of its suppliers: “Purchases of IBM compatibles P 340,000 Purchases of commercial software packages 240,000 Returns and allowances 10,000 Purchase discounts taken 3,400 Purchases were made throughout the year on terms 2/10,n/30 Alls and allowances took place within 5 days of purchase and pr ympute for the discount lost. 57 000 Purchases of IBM compatibles Purchases of commercial software packages 580,000 Gross purchases Less: Returns and allowances Net purchases 570,000) 381= f z 3 Ss gpter 22 = lnventonss é = 2 Ie g S ai |S “ae E 3 g “ ef invoice price is computed by deducting the trae aS | iH 3 10. liscount of 20 and 28 8 is) Terms ListPrice BF cs SI 8 BR toss: Trade discount ~ 20% (P150,000 x 20%) 180,000 Bs | Ss} | SS Net —20.000 gs 85) Tess: Trade discount - 10% (P120,000 x 10%) 120,000, as 3 | eH Invoice price 7 — 12.009 25 2| Fa xe thatthe total trade discount of #42000 noe eas BR 3 a |e pooks. - ecorded inthe se Elsi lls) |S! 2, purchase dscount is computed as 3% x86 000 2s Z/5) |/8| 1/8! 3 The ash tobe pa under the ross method comptes: es S| | Is Purchases a 3 | | (8). /8) i Less: Purchase returns 86,000 gs » S13] |e) 3| |) 2)/2' of Net purchases 76000 os 2 3 se] 1/3) 5) | 3||8) al S| Less: Purchase discount $ 2. 3 elas |Sa/s | reg 2.280 gE & 2 SSS S| sells) Be Cash paid 85 F bal | [SESE ulailg ae 4, The cash tobe paid under the net metho is ompued ee, 282 S24] | [eleliciellereilaisl ||sgial) ° Pures eu 3420 22a § 2 8}/2) 81/8) 5)//3] || sell Less: Purchase returns 9700 Fee $83) LECIIARF<° Bac Cash paid Pra gs 3 . 54 setts Take note that the amount paid under the two methods should be the gto S38 pa 8]| (8l) 1S}! (88 (8 same Ssh SEE E || si] isi] isis} |g 5, Purchase discount lost is computed as 7108000 x 2%. Purchase ces EEE E || |= R}] 1g Fiscount lost is recorded as elther a financing costor other expense. g22 258 2% = £32 8585 gs} jis} 1/8 g| SUBSEQUENT MEASUREMENT OF INVENTORIES BER geez g S| lle} {SI | Inventories are required to be stated at the lower of cost and net BEE £225 3 = S| realizable value (NRV). Inventories are usually writen down to ot 222 5228618 realizable value item by item. In some ‘circumstances, however, it may be e2s £223 | [elo |Iq appropriate to group similar or related items. gies £222 | 92 Ile ima BSEE gee 9 gis} || H} |e] ealizable Value snes, ess geae ESE 4 | Pelz/ielal|y all lz] ||. NRV is the estimated selling price in the ordinary course of Dust fEEE Ege! sie /sie| [S12 (S]8] |S the estimated cost of completion and the estimated costs TET tthe geae cosas | SMEs ls eilas] 2 the sale. In other words, the following are the net real Gise ohh oe gl2i/alallais Stal 1/5 fiterene pet of inven Zi88 288 22 2/5) 8) 5|/2] 8) | Elsie] gi Raw Materials and Factory supplies for use inthe BEEESEE= Zul | (2/85 81/5) 58 £1a\ ela Rene ae tera and ther HPBLES MT oi the $8852 55 Saal le||/e\<|/<|*|[21" oHale| production of inventories are not written OTT ected tobe ee2ee2 3°65. || A finished products in which they wil be ineorPo BRSSSEES ZHE el Tol 11S g sold at or above cost. Bos asa |S 3| llsl Ile 3 es a 2] Z| |\2 Zz aa 383Chapter 12- Inventories 2) Workin process or partially completed goods Tie ing price less estimated cost of compl Estimated cost to se 3) Finished Goods Estimated selling price less estimated cost to sell tion less es Mateg Write-Down and Reversal ‘Any write-down to NRV should be recognized as an expens, re cost of goods sol Ce, addedtg the period in which the write-down oceye Any reversal should be recognized inthe income statement (i, ug from cost of goods sold) in the period in which the reversal occurg. ““UCed ‘Two Methods of Accounting for the Lower of Cost or Net Value 1 Real, .ct Method. “Merchandise inventory beginning (atLCNRV) x | pele inventory end (at LCNRV) CGS after inventory write-down Allowance Method zt Merchandise inventory beginning (at cost) Add: Net purchases Total goods available for sale Less: Merchandise inventory end (at cost) CGS before inventory write-down ‘Add: Loss on inventory write-down Less: Gain on reversal of inventory write-down CGS after inventory write-down | XX x xX a XX xX Gain or loss may be computed as follows: Merchandise inventory, end (at cost) Less: Merchandise inventory, end (at LCNRV) Required allowance wance for inventory, write-down, beg Loss (gain) on Inventory write-down ILLUSTRATION: LCNRV of Raw Materials The balance of raw materials inventory account as of December 31 of the current year of Zoroaster Company amounted to 480,000. The Feplacement cost of the raw materials is P450,000, Re "d: Compute for the jer the iia cae loss on inventory write-down und 384 Pt 2 - Inventories pape cast NOS ewes bess sorabo et ™ a ~ one ; Assume instead that the fished products in cast NO. ji ye incorporated are expected tobe soldat aM eri lower than coe soLUTION: CASE NO. 1: inventory write-down is zero, The NRV of the Loss on Pv aterials will be incorporated is expected finished products in to greater than the tonich ail CASENO,2 jals at cost 480,000 Raw miner of cost or net realizable value 450000 ve on inventory write-down P 30,000 is LONRV of Work-in-Process TUS orn process ntntr accounts fee 3h rae ators of Hilsgregor Company amounted toP480,000. The estimated toa oroe ss PA50,000 while the estimate est of completion and costo unted to P10,000 and P5,000 respectively npute for the loss on inventory write-down, cut mmounte' Work in process at cost aaage Less: Lower of cost or net realizable value feat Loss on inventory write-down i c 480,000 ost 000 Vs. NRV (P450,000-P10,000-P5,000) = 43600 Lower of cost or net realizable vale (_2435,000_ RATION: LONRV of Finished Gods an become: ‘The following data relate to Ruvy Merchandisi ‘Merchandise inventory, beginnit At cost: 60,000 T-shirts 40.000 Jackets 100,000 Total Atnet realizable value: a 1. Jackets P 90,000 Total 500,000 385Chapter 12 - Inventories —— a le ee Merchandise inventory, end: At cost: T-shirts Jackets Total ‘At net realizable value: Tshirts Jackets 100,000 80.000 F 180,000 80,000 20,000 Total P150.000 Required: Based on the data above, compute forthe following. 1. Loss on inventory write-down, 2. Cost of goods sold before inventory write-down 3. Cost of goads sold after inventory write-down 4, Assume the same data above except for the net realizabi T-shirts and jackets on December 31, which were 74,000 respectively. How much is the gain on inventory 5. Assume the same data above except for the net realizab] Tshirts and jackets on December 31, which were 90,000 respectively. How much is the gain on inventory: SOLUTION: Question Nos. 1-3 Merchandise inventory, end (at cost) Less: Merchandise inventory end (at LCNRV) T-shirt (100,000 vs 80,000) Jackets (80,000 vs 70,000) Required allowance for inventory write-down Less: Allowance for inventory write-down, beginning Loss on inventory write-down (1) Merchandise inventory, beg (at cost) Less: Merchandise inventory beg (at LCNR' T-shirt (60,000 vs 55,000) % Jacke 10 vs 35,000) Allowance for inventory wri -down, beginning Merchandise inventory, be beg (at cost) Add: Net purchases : Total goods avai Less: Merchandise inventor rend (at cost Cost of goods sold before inventory vies toom ‘Add: Loss on inventory write-down Cost of goods sold after inventory write-down ble for sale 386 le values oft 120,000 write-down? le values ofthe 150,000 and write-down? P 180,000 80,000 —Z0,.000 150,000 30,000 10.000 ‘P20,000 100,000 P 55,000 35,000 _90,000 p.10,000 P 100,000 500,001 600,000 180,000 420,000 (2) 20,000 P440,000 (3) Le Gain o” question No. 5 Merchant es COST FORMULA: “Forietermine the amount of cost to be compared ethene alate ae To shirt Jackets Required tee Gain on reversal of inventory write-down 9 = Inventories 7 cnaote! ne ae eh oon or a Me inventory, end (at cost) nanepase inventory end (at LCNRy) 700,000 vs P120,000) i 90,000 vs P74,000) 100,000 t Flowance for inventory write-down —Z400_37499 a srance for inventory wite-dovn, beg. 000 ventory write-down 10099 24.00 180,000 180,000 rdise inventory, end (at cost) werchandise inventory end (at LCNRY) (100,000 vs P150,000) (80,000 vs P90,000) allowance for inventory write-down llowance for inventory write-down, beginning 100,000 80.000 10900 0 10.000 210.000) ee ee ed (NAV), the following may be used: y) 2 ‘Specific identification of cost. The cost of inventories ofitems 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. Specific identification of cost involves tracing an item sold, or an item remaining in inventory, tothe specific item that was purchased, Its inappropriate to use ths method when there are large numbers of items of inventory that are ordinary interchangeable because selecting those items thet remain in inventories could be used to obtain predetermined effects on profit or is case, PAS 2 allows either of FIFO and Weighted Average. first-in-irst-out” or FIFO technique assumes that ay te Sold was the oldest item purchased and st eld, and therefore items remaining in inventory at the end of recently purchased or produced The FIFO maha se since it is most likely to approximate the physical resi veriod are those most od is general used ods sold, ‘mingle the costs of simil ; to measure inventories held, either on shipment © not very differe ‘e inventory turnover 5 387Chapter 12 ~ Inventories standard, weighted average means that the company ig method while the term moving average is used if perpetual method, Weighted average (Periodic Method) Total Goods Available for Sale ~~ Units Available for Sale Cost of Ending inventory = Cost of sale = Unit cost x units sold usin, the company ver, ‘eee Unit Cost = Note: PAS 2 requires that, no matter which cost method is used, Fe and us, MUst be © 10 the blankets for P30 each, The foll Fecords during July. lowing Was taken Sale 300 Purchase 1,000 P17 Sale 600 Sale 300 Purchase 1) First-In-First-Out Method (periodic) 2) First-In-First-Out Method (perpetual) 3) Weighted-Average Method 4) Moving Average Method SOLUTION: 1. First-In-First-Out Method (periodic) Cost of sales: Units sold (300+600+300) = 1,200 Unit Total Date Cost July 10 Sale-(From july3) 3001S P4500 July 20 Sale-(From July 3) 200 15 3,000 July 20 Sale-(From July 17) 400 17-6800 July 23 Sale-(Fom july 17) (squeeze) 30017 _500. Total Cost of Sales an” Tea. 388 a = Inventories st of ending inventory: co’ tis the Bing IBVENIOCY = 00,009, jl 1,000-300.600.399 =1,300 Unit 4 Quantity otal te Cost pay 17 (squeeze) 3000 pa ny 30 2000 ao a ‘otal Ln 925,100 rirst-In-First-Out Method (perpetual) 2 Cost of Merchandise Purchases: Sold — Unit Total Unit —Totar Unit Ta Cost__Cost Cox 500 PIS P 7,500 S00 PIS 7500 300 1s e400 300) 1s ason) 20015 ¥ 3000 1000 17 17,000 44000__17__ 17000 1200 Fa0ao 200 15-3000 (200) 15-000) 400 17 6800 (400) 17 30017 5100 {300 30017? 5100 1,000 20 20,000 Total 1.000 20 194001300 Costof 20000 725,00 Alternatively, the computation is as follows: — Inventory, Merchandise Sold Unit i Total Unit Total Cost_Cost. Cost _Cost 500 PIS 7,500 goo) 15 500) 300 PAS PAO i000 17 17000 3,000 Fromhiy agg) 15 2000 ms bit (400) 17 (6800) 40 = 78 ‘te cao 17 G00) 30” t ly30 1000 20 _200 Total 389Beginning inventory Purchases: July 3 500 July 17 July 30 Total Goods Available for sale Cost of sale = P17.80 x 1,200 = B21,360 Cost of ending inventory = P17.80 x 1,300 = £23,140 4. Moving Average Method Cost of Purchases ‘Merchandise Sold por 32.- Inventories er TRATION: LUST RA mpany sells blankets for P39 ‘each. The ‘The cy ventory records during August, following was taken fro } mn __———___ Product > pate Units ee Beginning gust 1 600 a Purchase 40S ‘august 12 as 200 ‘August 15 Purchase 1100 pas wea Purchaseretum “99S August 22 Sale 600 ‘August 23 Sale 400 weet 25 Sales return 100 “August 31 Purchase 1,000 39 srmine the cost of sales and cost of ending inventory under ing assumption: In-First-Out Method (perpetual) Unit Total .. Cost Cost. Cost SOLUTION: 500 PIS P7500 500 P1500 -FFeep {. First-In-First-Out Method (perpetual) 0 300 #1500 P4500 (300) “is00 “sine Costat ce 200 1500 ~P abit Purchases MerchandiseSold Inventory lay? 1000 37 17000 zou fea "at chases ‘ota = , 6. 000, ‘ost Cost a 600 16.67 P10,000 me 40024 _ 9,600 hay 23 300 P1667 P5000 (300) 16.67 (6,0 hap 400 F24 79,600 7000 P2600" nce 300 1647 P5000 lance “00)_20 (4000) July30 1,000 20 20,000 1000 20.00 20000, ‘Aug. 12 20 wad eysntd 17600 Total 20 F500 13500 19.23 —Fas.00- Balance 1400 25 27300 Alternative computation: Cost of Merchandise Sold tae Unit Total Cost___Cost_ Soo P1500 7500 (200) 15.00 (4500) 300° p15.00 P4500 2001500 —¥ 000 —100_z.00__ 17000. 12001667 —F 600) 1667 (i 6001667 —Pro.000 (300) 16.67 (5,000) 300 16.67 5,000 600 16.67 10000 Se 300 te? —F-Syg hs 4000 2000 20000 E00 P1538 925 000 00 390 Aug.15 1100 25 27,500 ‘Aug.17 (100) 25 (2,500) Balance Aug. 22 252500) ‘ug, 23 Aug. 25 Balance Aug.31 1,000 30 Total 1 Last-Out, Fit there is no unit cost given, assum Unit cost of the last sold) 391 y/“Aug. 1 Beg. inventory 600 ‘Aug 4 Purchase 400 24 ~~ 9,600 ‘Aug 12 Sales (200 units) FromBeg.inventory (200) 20 (4,000) 299 ‘AugiS Purchase 1100 25 27.509 20 ‘Aug17 Purchase retum (100) 25 (2,500) * 4009 ‘Aug 22 Sales (600 unis) From Aug Purchase (400) 20 (8,000) : 400 From ug4Purckase (200) 24 (4800) 39) 3 om Aug 23 Sales: Prd From Aug3 Purchase (200) 24 (4,800) : From Aug 15 Purchase (200) 25 O00) 300 tam ‘Aug 25 Sales return 100 25 2500 (100) 93 5t0 ‘Aug 31 Purchase 1,000 _30 : is 0 Total 1,900 P52,500__1100 Pe 2. Moving Average Method = cease ‘computation: 600 P20.00 P12600 Bi Fag toenail 4002400 "5 feet 7,000 2160” Fatenn jane 200) 21.60 3 ees fe 4320 mn soar He Len 1,100 25.00 275500 45 Purchase ‘Ni 7 Par. Return 100) 25.00 (2.500 a 1200 2200 ug. 22 Sales 23.49 (14,094) 609 2 mgt 1200249 Wasa MOM ae23 Sales 2349 (9396) 400 234 ue 73.49 18790 a Aug 25Salesreturn 100-2349 __2349 (100) 2349 2a Balance 900 23.49 P21139 _ fag aiPurchase = 10003000 30000 oi 119002692 P51,139_1100 FS Change in Inventory Method Thange in inventory method from FIFO to weighted average or vce versais regarded as change in accounting policy under PAS 8 Accounting Police, Changes in Accounting Estimates and Errors. Therefore, the change shouldbe applied retrospectively. But because of the counterbalancing effect ofthe error in inventory, the effect may be computed as follows: Purchases Merehanae Sold Unit Total — ba coxt_Cost cota Aas 400 rae 3500 fon ‘a00 "sar hips 200 2160 ras20 (200) 2180 ‘USD 25 27500 11002500 25 (2500) 100) 25.00 _ (2,500 1,800 23.49 42260 600 2349 14,094 (600) 23.49 _ (14.0%) 1,200 23.49 #28186 ‘Aug. 23 me 400 2349 9,396 (400) 2349 _ (9396) ‘Aug. 25 a0 23.49 P18970 Balance *(200) 2349 (2,349) _100_2349__2349 900 23.49 P2139 rf EB 1000 30 20000 1,000 _ 30.00 _30,000 751192 ii00 P: a 25,461 1,900 26.92 “Unit cost to be the said returns, Used for the for the Sales returns is the last available unit cost belor® 392 ventory, prior year using FIFO ior to the date of change inventory) x nntory, prior year using weighted average (year prior to the date of change inventory) x _Overstated (or if negative understated) ending invento ras overstated, net inc some and retained, Uf the ending inventory of last year w f earnings last year were overstated. Thus the ajusing ey om he at change would be: Retained earnings mw Merchandise inventory - beginning «of besiming tatemen On the date of change, the effect would be Cute ading retained inventory, net income this year Is understate earnings would be correct. 393Chapter 12 - Inventories fentory of last year is understate, ‘But if the endin retained earnings last year were understated. Thus the," Inco, the date of change would be: © adjusting ea Merchandise inventory - beginning i % Retained earnings wo On the date of change, the effect would be understate inventory this year, net income this year is overstated ‘ty Of been retained earnings would be correct since the effec fh endge ee counterbalancing. tor ILLUSTRATION: Change in Inventory Method Av the beginning of 2021, Jayshree Company decided to chan, method of inventory valuation to the weighted average fom te A Balances of Inventory under each method were a FIFO Weighted December 31, 2019 1,000,000 Poona ee December 31, 2020 120,000 December 31, 2021 4,320,000 Required: Prepare all the necessary journal entries and compute forth amount that Jayshree should report as the effect of this accounting cha i its 2021 statement of retained earnings (disregard income tax effec) SOLUTIO! Ending inventory- Weighted Average December 31, 2020 1,350,000 Ending inventory- FIFO December 31, 2020 1.200.000 Retained earnings 01/01/2021 understated 150,000 Note: ¥ The ending inventory for 2019 was disregarded in computing forthe effect on the Retained earnings on 12/31/2020 or at the beginning of 2021 because of the counterbalancing effect of the error in ending inventory. Y However, for the purpose of computing the adjusted net income in 2020, the beginning inventory balance and ending inventory balances should be taken into account as if the Weighted Average Method had been in use during those dates. Journal entry in 2021 is: Merchandise inventory - beginning 150,000 Retained earnings, 01/01/2021 150,000 394 pure ze commitment is a noncancelable fase © ae lable agreement fame in the future ata fixed price and fixed quangns © POS pals re is a reasonable certainty that invent, ymmitments become impaired, ea some ur son cde ea et hasbeen dc ch ant be me Journal Entries ‘No jourial ery (diconrectieeasemaraae taventoryinihefuture _| commitmentinthetareal sunny —— PS purchase conmitmeat —— x} —| Jarchased underthe ityon purchase commimaat D3} rehasecommitmentis etermined to have een impaired The goods are received. | Parehases(atlawer parts bax} commitnestandreacemet os) Accounts payable ash = Recovery before goods is | Lialltyonpurchaseconmiment — ‘Gainon marketrecovery x received. ILLUSTRATION 1: Purchase Commitment On September 29, 2021, Cynthia Airways entered in to 4 non-cancelible commitment to purchase 3,000 barrels of aviation fuel for P8,000,000 on March 23, 2022. Cynthia entered into this purchase commitment to prt itself against the volatility in the aviation fuel market. By December 2021, the purchase price of aviation fuel had increased to P3200 pt ba However, by March 23, 2022, when Cynthia took delver) ¢ barrels, the price of aviation fuel had fallen to P2,500 per bar sitment. Required: Account for the changes in price ofthe purchase com SOLUTION: ld bet The graphical presentation ofthe purchase commitment WO 395Chapter 12 - Inventories b/s date 29, 202 3,000 The related journal entries from the non-cancelabl le commitment are as follows: Purchase 1. On September 29, 2021, date of commitment, no journal necessary to be prepared. entry is 2. On December 31, 2021, reporting date, the increase in the pre (replacement cost) of aviation fuel to P3,200 per barrel is ignored, 3. To record the purchase of the aviation fuel on March 23, 2022, being the lower of the commitment price of P3,000 and replacement cast at the date of delivery of P2,500. Purchases / Merchandise inventory 7,500,000 Loss on purchase commitment 1,500,000 Accounts payable 9,000,000 ILLUSTRATION 2: Purchase Commitment During June 30, 2021, Bigas Company signed a non-cancelable contract 0 purchase 1,000 sacks of rice at P1,300 per sack with delivery to be made in May 9, 2022. On December 31, 2021, the price had fallen to 1,100 per sack On May 9, 2022, the comy : cai 1,400 per sack, pany accepts delivery of rice when the pri Required: Account for the changes in price of the purchase commitment 396 ass on purchase comentmept: tose 0 ~ P1200) x 1,0 = ¥200,000 ‘The related journal entries from the non-cancelable purchase commitment are as follows: ; 1 "On June 30, 2021, date of commitment, no journal entry is necessary to be prepared. 2, To record the December 31, 2021. in price (replacement cost) of the rice on Loss on purchase commitment 4200000 oo po0 std, liab. on purchase commitment y Note that the estimated liability on purchase commitment 's presented as part of current lower 3, To record the purchase ofthe rice on May 9, 2022 being ea of the commitment price of P1,300 and replaceme of delivery of P1,400. seoxo Purchases / Merchandise inventory | moO Estimated liab. on purchase commitme! ame Accounts payable ater) Gain on purchase commitment to the amount of ‘The amount to be recognized as gai s mite?! Fously recognized: {oss on purchase commitment previously Te 397Foreign Currency Inventory Transaction: Foreign currency inventory transaction i jiminated in a currency other thai pine company = and the payment is den a currency of the foreign 8" ippine Company must buy a foreign curren liabilities in foreign currency. Depending on the ci ‘may be recognized in the purchase transactions be Con ay one Teumstances,gyi.he) CAUSe Of the \ the currency exchange rate. This is known as foreign one etuage’® risk, eNey exc cy in order chang, Accounting for foreign currency transaction of inventories 1. Date of purchase. Record both the inventory and pares the spot rate on the date of transaction. © Count ap 2. Reporting date. Remeasure the monetary items (e Bact Foreign currency gain or loss is included in profit or loss AS 21 3. Settlement date. Record the amount paid using the 2 ot settlement date, Any difference between the amount pald ata recorded liability is treated as gain orloss in profit orloss,e 1 34 te ILLUSTRATION 1: Foreign currency transaction of inventory Aira Maree is preparing the financial statements for the period ending December 31, 2021. Aira Maree uses Philippine peso as its functiont currency. On September 29, 2021, Aira Maree bought goods from Zhon ie $10,000. The goods are still held by Aira Maree as part of inventory at year end. The exchange rate at September 29, 2021 was $1 = P40, the do. fate at December 31, 2021 was $1 = P35 and the average rate for 2021 was $1 = P38. The account was paid on February 14, 2022, Valentine’ Day, when the exchange rate was $1 = P43, The company uses the perpetual inventory system. Required: Account for date to settlement date. SOLUTION: The graphical Presentation of the above data would be: the foreign currency transaction from transaction 398 FoR toes ccnasing power of Peso, UPS 935) x 10,000) ‘Transaction date ‘Sept. 29, 2021, i= Pao per Related journal entries from the foreign currency transaction areas follows: se To record the purchase of merchandise on September 29,2021, Merchandise inventory 400,000 ‘Accounts payable ($10,000 x P40) 400,000 2, To record the increase in purchasing power of peso on December 31, 2021. 000 ‘Accounts payable P50) Foreign currency gain [$10,000 (35 ~P40)) 50000 monetary asset PAS 24 provides that for a foreign currency transaction, monetary and y are translated a the elosing rate while nonmosetary asset and liabilities are measured using the exchange rate at the date of transaction (Le, historical rate). Therefore, the accounts payables remeasured using the closing rate of P35 on December 3.2071 8 the inventory will continue to be reported atthe historical rate of PAO ‘The foreign currency loss of P50,000 is reported in profit or 3. To record the payment of the liabi yon Foray 4.20% 0 Accounts payable (P400,000 - P50,000) er Foreign currency loss 430,000 Cash ($10,000 x P43) ion ofinventory ILLUSTRATION 2: Foreign currency transaction 2 oot vending December statements its functional currency. OR re ds from Wings for $10,000. The tory at yearend. The exchange by Jocelle as part 0 rate at September 29, 2021 was $1 auChapter 12 - Inventories. 2021 was $1 = P43 and the average rate for 2021 was gy —~ account was paid on June 12, 2022, Independence day, ae = Pa Fate was $1 = P34 Assume that the company uses the pont Me ex, Te system. inate from trans in Required: Account for the foreign currency transaction date to settlement date. SOLUTION: ‘The graphical presentation of the above data would be: Settlement date June 12, 202 $1 = P34 ‘ORex Gain [CP34 ~ 543) x 10,000) B/S date Dec. 31, 2021 sia Related journal entries from the foreign currency transaction are as follows: 1. Torecord the purchase of merchandise on September 19, 2021. Merchandise inventory 400,000 ‘Accounts payable ($10,000 x P40) 400,000 2, To record the decrease in purchasing power of peso on December 31, 2021. Foreign currency loss P 30,000 Accounts payable [$10,000 x (P43 - P40)] P 30,000 PAS 21 provides that for a foreign currency transaction, monetary asset and liability are translated at the closing rate while nonmonetary asset and ities are measured using the exchange rate at the date of transaction (i,, historical rate). Therefore, the accounts payable remeasured using the closing rate of P43 on December 31, 2021 whle the inventory will continue to be reported at the historical rate of Pa? ‘The foreign currency loss of P30,000 is reported in profit or loss. 400 a he pay 7 to record te Payment of the lsbity on ane 12, ogy ‘counts payable (400,000 + 30,000) Aeoreign currency gain 430,000 Cash ($10,000 x P34) 4 340,000 inveNTORY ESTIMATION Zoe of Estimate in Inventory Estimation 4. The im destroyed by fire and other catastrophe or theft, " jmerchandise has occurred and the amount af inventory is ener, Insurance purposes 42, A physical count of the goods on hand is made and it is neces prove the correctness or reasonableness of such count hy making ay estimate 43, Interim financial statements are prepared and a physical count goods on hand is not necessary either because it may tae ‘same oF because only an estimate thereof is the financial position and performance of the ent ‘two Approaches in Estimating the Value of Inventory 1 Gross Profit Method 2. Retail Inventory Method GROSS PROFIT METHOD ‘e entity's past experience, the average gross profit rate may be te the cost of goods sold as well as the ending inventory to be interim financial statements. method is useful when: in use and inventories are required for interim ies have been destroyed or lost by fire, thet, or ater casual, pecific data required for inventory valuation are not aval. 3) The relationship between gross profit and sales remains stable time. However, the gross profitmethod would notbeuseilwhn athe 1) There is a significant change in the mix of prods Toy gross margin percentage changes significantly PBA TT anc 2) Estimating inventories to be reporte statements. Formulas: Gross Profit Based on Sales Sales Less: Cost of goods sold Gross profit BRE BES 401Chapter 12 ~ Inventories ros proft= GP atx Sales Gasol gods sold = Cost ratio x Sales Profit Based on Cost bie xx 125% Less: Cost of goods sold x 100% Gross profit wx 25%) GGross profit = GP rate x Sales/Sales Ratio Cost of goods sold = Sales/Sales Ratio ‘Note: In the determination of sales for the purpose of. profit method and the re ignored since although these physical quantity of inventory so cost of the items sold for whi allowances were set up. Only sales returns are deducted torn amount of sales forthe purpose of determining the gross profit using both UTive at the ratio, Determining the Gross Profit Rate 1. Look for possible trend. 2. Ifthe problem states that “Average Gross Profit” Average Gross Profit = ‘would be used, then Gross Profit Rate Year 1 + Year 2+Year n 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 Gr ‘oss Profit Year 1 + Year 2+Year n Sales Year 1 + Year 2 +Yearn Note: Use this when there is no t rend on the gross profit ratios and the Problem is silent as to what gross profit will be used. Depending on what is given, the f i wing are the procedural steps in caused bye gscy, °stimated cost of inventory and inventory loss (eg caused by fire); 1. Determine the Gross Profit Rate 2. Determine the Cost Ratio Cost Ratio = 100% less Gross Profit Rate 3: Compute forthe Net Sales (Sales less sales returns) ‘+ Compute forthe estimated cost of goods cola Cost of Sales = Cost ratio x Net Sales 5. Compute for estimated invento Merchandising Company: Total goods available for sale Less: Estimated cost of goods sold Estimated ending inventory ry by using the following formula: BREE bs a cnaptet 6 42 - Inventorles ‘eturing Company Finished Goods manta available for sale ‘Total or mated cost of goods sold bese ‘ending finished goods inventory s ing Company - Worki-Proces ae od placed into process Total Cost of goods manufactured sximated ending WI manufacturing Company ~ Direct Materials wvailable for use direct materials ‘Total pirect materials used Eetimated ending DM inventory Bice BRR BER pepending on what inventory was destroyed, compute for the inventory pel fire loss: Merchandising Company: Estimated ending inventory Less: Salvage or scrap value transit goods (owned by the client) ‘ventory out on consignment during the fire Inventory fire loss Manufacturing Company: Estimated 1 nut on consignment Wentories owned by the client but not in the e during the fire Inventory fire loss Manufacturing Company: Estimated ending inventory, work in process or scrap value vot in vee ork in process inventories owed by the clan bt the warehouse during the fire Inventory fire loss Manufacturing Company: mstertals Estimated ending inventory, direct or raw Less: Salvage or scrap value a Raw materials in transit Kone the cen warehouse Raw materials owned by the cl during the fire Inventory fire loss 403 be See BE HE BE HEH BE ® BRE SERChapter 12 - Inventories USTRATION 1: Gross Profit Method destroyed the finished goods. After the fire a ph entories pap - Inv craptet 2019 2020 2,300,000 P3,000,000 sical inventory 2018 2019 G55 Sales PLS! Less: Cost of Sales 1.230.000 _1,840,000 2,340,000 Gross Profit __ 270000 "460.000 canton Required: 1 Tow much is the cost of goods sold for the year ended December 31, 20217 'P 280,000 Balance end Cost of goods 3,775,000 manufactured 2. How much is the estimated cost of the finishe 2021 that was completely destroyed by fire? Case No, 2: Assume th d goods on December 31, '¢ following data and average gross profit to be used in2021 eee ee i 2018 2019 2020 oat =——__2018— 019 2020 Ee Sales P1500,000 2,300,000 3,000,000 28 eo Less: Cost of Sales 1.230000 _1,840,.000 _ 2.340.000 460,000 F 270000 F 460000 Fein Gross Profit 660,000 ren 10 eB s.000 Divide by: Sales misono r2angye PAMogZ 024 Required: 01g 0.20 Gross Profit Rate *+ ow much is the cost of goods sold for the year ended December 31 Se 02 rears increases by 29 each year: gross profit for the past three y 2. How much is Il be 2496. The cost fit for 2021 wil sold is {he estimated cost ofthe finished goods on December 31, thus, if the trend continues, the aromag), Therefore, te cost of goods 2021 that was completely. destroyed by fire? ratio then would be 76% (100% - js 100 thane A8sume the following data andthe insurance company agreed 4500000 that the fre loss claim should be based on the assumption that the overall Sema aa s : 2 X pan et er Oe toe pe ue ae during the curren cer casts 73,420,000,Chapter 12 - Inventories Finished Goods i ® 200,000) ® 555,000 p Beginning balance Cost of goods manufactured lance e nd. OSt oF goods ais CASE NO. 2: ‘The T-accounts for Direct Materials and Wi under Case No. 1. —GPRate:_— 20182019 Gross Profit P 270,000 P 460,000 Pepe BE Divide by: Sales 1.500.000 P2.300.000 3.000.009 Gross Profit Rate 018 0.20 0.22 ‘The GP rate in 2021 is computed as follows: Gross Profit Rate = —189%*20%6+229% = 20% The cost ratio then would be 80% (100% - 209%). Theref 00d sold is computed as follows: ). Therefore, the cost Net Sales 4,500,000 Multiply by: Cost Ratio 0.80 Cost of goods sold P3,600,000_ £3.600,000_ Finished Goods Beginning balance Cost of goods manufactured P 200,000 P 375,000 Balance end 3,600,000 Cost of goods sold 3,775,000 $3,975,000 | 3,975,000 ‘The T-accounts for D) under Case No. 1 and The gross 2021 and sozp4 2021 is computed based on the overall gross profit oF “ect Materials and Work in Process will be the same Case No, 2. Gross Profit Rate Gross Profit Rate = 406 aan «ill — Inventories coapter 32 cos: ratio then would be 79% ( Ths sol 100% - 2196). The jis computed as follows: 90. Therefore, the cost of ds goo" 4,500,000 079 z 3,555,000 Finished Goods P 200,000] P 420,000 Balance mat 3,555,000 Cost of goods sold alance Seqnnine castof goods 3,775,000 tured 7753 3,975,000 ‘TRATION 2: Gross Profit Method following: emt P 325000 ie 1150000 Parchase returns 40.000 Freight in a 1.700.000 10000 5 discounts one (On December 31, a physical inventory revealed that the ending inventoy was only P210,000. The gross profit on sles has remained constant at 30 percent in recent year. Rafie suspects that some inventory may have pilfered by one of the entity's employees. Required: Compute what is the estimated cost of missing inventory on December 317 so) Sales Less: Sales returns nam Netsales 325,000 Inventory - January 1 1,150,000 Add: Py 30,000 Less: Purchase returns satson Ags 210,000RETAIL INVENTORY METHOD lethod is simply a pragmatic way of determi —— The retail method is often used in the retal induc) inventories of large numbers of rapidly changin, for which it is impracticable to use other co, supermarkets, department stores and other retail wide variety of goods. he p concerns where gi Since the inventories are recorded at etal rice the cost of he determined by reducing te sales value ofthe inventory by sn Percentage gross margin. The percentage used taker (oye inventory that has been marked down to bel average percentage for each ret Ve ‘PD roprig ow its sens atin original selling pric il department is often used sea ‘The ratio exploited usi the costratio. Basic Formula Goods available for sale at retail ng this method isnot the gross profit ratio but thee Less: Net Sales “ Sales xx Less: Sales return only XX_XX Ending inventory at retail ~Xx™ Multiply: Cost Ratio XX Ending inventory at cost XX Methods in Computing Cost Ratio For the purpose of computing cost ratio, there are three methods that canbe wsedbyanentity; 00 Beginning Markups Markdown _ Three Methods Inventor; Include Conservative / Include Include 2. Conventional /LCM Include 2. Average conservative or lower of cost 0 under PFRS but it is used under 408 42 - Inventories ter CeegonofTermss Def cial markup ~ the original markup on the cos ' salt othe original costo get the origina retal pce” moun, Sriginal retail ~ the sales price atwhich the origina 00dS are frst offered for sale : jonal markup ~ increase in the sales price above + Midipriceorthe amount aed ote ggg 8 a up cancellation ~ a decrease in the sles pie tht dog Mae tne sales price below the orignal eae il Net markup ~ additional markup minus markup eencellaton, Markdown ~a decrease the sales price below the aight i, Markdown cancellation ~an increase in sales price that dows votre * the sales price above the original sales price, Net markdown - markdown minus markdown cancellation, Maintained markup (“markon’) - difference between cost and sales * rice after adjustment for all the above items dural approach: Frans Gente ung a ot fo GAS at cost minus beg inventory at cost FIFO ~~ Gas at retail minus beg inventory at retail GAS at cost ‘Average = GAS at etal GAS at cost Conservative 7 GAS at retail excluding net markdowns OR GAS at cost GAS at retail add markdowns=markdown cancellations GAS at re Legend: GAS ~ Goods available for sale jl using the following 2. Compute for the ending inventory at retail using formula: 7 Goods av: Less: Net Sales x Sales Xk Loss: Sales return only “xe Ending inventory at retail he toowing formule: ost using 3. Compute for the ending inventory atc Ss one xcendlng im Ending inventory at cost = Cost ratio oc owing + Compute for the cost of sales vn the fllChapter 12 - Inventories Goods available for sale at cost Less: Ending Inventory at cost Cost of Sales lek 5, Accounting treatment: + Purchase discounts - deducted from purchases at cost ony Purchase returns ~ deducted from purchases at cost ang Purchase allowances - deducted from purchases at cose ape Freight-in - addition to purchases at cost only. by. Sales discount - disregarded. Not deducted from sales, Sales allowance - disregarded. Not deducted from sales, Sales return ~ deducted from sales. If the account is“ ‘and allowance”, the same should be deducted from sales + Employee discount - added to sales. These are special disoy wherein the amount credited to the “sales revenue account ina ‘Sales retary net amount. + Normal, shrinkage, spoilage and breakage ~ this is deduce from goods a for sale at retail. Any normal shortage ¢ ‘goods sold, ‘+ Abnormal shortage, shrinkage, spoilage and breakage ~ This is deducted from goods available for sale at both cost and retail soa: istort the cost ratio. Any abnormal amount is reported separately as loss. + Departmental transfer in or debit - addition to purchases at cost and at retail + Departmental transfer out or credit ~ deduction from purchases at cost and retail, ‘Summary of items to be added (deducted) to cost and retail columns: cost RETAIL ‘At cost o1 Freight Xx Purchase allowance (xX) Purchase discount (xX) Atretail oly: Mark-up = Mark-up cancellation cog Mark-down (0) Mark-down cancellation oe Normal shrinkage, wastage et (see note 1) oo) Employee discounts (see note 1) ox) 40 eat eransferin Depa rane Ot pepartmen ses (see note 2) Notes: deducted after computing the cost ratio. 1 Tha Set sales Defoe ompting can vig deducted in arriving at the amounts ‘TION: Retail Inventory Method Pronthsended March 31: C1 Cost “nventory, Jan d ® 179,600 inventory J Tea 50,000 23,000 10000 5,000 200,000 40,000 70,000 100,000, 60,000 90,000 20000 4000 115,000 Markdown 10000 Markdown cancellations 800,000 Sales 80,000 Sale returns 120,000 Sales allowance and discounts 100,000 Normal shrinkage Required: Compute for the Ending inventory at cost am assuming 1. Conservative Method 2. First-in,First-Out Method 3. Average Method auChapter 12 - Inventories Inventory, jan 1 ¥ 179,600 pap Purchases 475,400 aoe 50,000 } : a Less: Purchase discounts 23,000 "000 Less: Purchase allowance 10,000 Add: Freightin 5,000 ‘Add: Markups Less: Markup cancellations 70,000 Less: Departmental transfer-out 60,000 Less: Abnorm —20_,000 Goods available for sale Conservative 567,000 1,050,000 Less: Markdown 115,000 ‘Add: Markdown cancellations 0.000 Goods available for sale - Average 567,000 945,909 Less: Net sales including normal shrinkage 820,000 Ending inventory at retai 2125000 1 |. Computation of cost ratio: _ ?567,000-179,600 Ho ~ ~P945,000- 200,000 52% 567.0 fem —y 7 567,000 Conservative = — T6700 ___ 45g 2. Compute for the ending inventory at retai Sales P 800,000 Sale returns (80,000) Sales allowance and discounts ignored Normal shrinkage 100,000 Net sales P 820,000 Goods available forsale at retail P 945,000 Less: Net sales 820,000 Ending inventory at retail _P125,000_ 3. Compute for the ending Inventory at cost and the Cost of Sales: Conservative: Ending Inventory at retail P 125,000 Multiply by: Cost ratio 054 412 PF pea Ga cnapte! .- 42 - Inventories ‘endinginventory at cost as 7500 Gasatcost P67 900" ess: Ending inventory at cost ae. Cost of sales ase FO Multiply by: Cost ratio eae Ending inventory at cost ram GAS at cost ® 567,000 Less: Ending inventory at cost 65000. es P 502,000 Cost of sal age _- Bading inventory at ret P 125,000 ultiply by: Cost ratio ‘060 Ending inventory at cost Tse 567,000 Less: Ending Inventory at Cost 75,000 Cost of Sales ¥ 492,000 DERECOGNITION: Recognition as an Expense ‘Whe ies are sold, the carrying amount of those inv fed as an expense in the perio. constructed property, plant or this way are recognized [PAs235] as an expense during the usefu FINANCIAL STATEMENT PRESENTATION aint ema ‘Tnventories are presented ina line item uate aa the current asset section of the statement of REQUIRED DiscLosuRES: =e Eom mt, rials, work in progress, and finished 0 Entered 3. Camying amount of any inventories ad a oes 4 Amount of any write-down of invento the period 4135. Amount of any reversal ofa write-down to NRV and gy, that led to such reverss circu 6. Carrying amount of inventories pledged as security fr 7 Costof inventories recognized as expense (cost of pond’ o hoy le; 1D Oversated | Year i: Cast of als fe mde arp retained earnings are overstated. ‘come ag Year 2: Since the ending inventory py, Beginning inventory im Year 2. con 2 SEO th overstated, net income will be understated pb | ending retained earnings will be co 7 2) Understated | Year 1: Cost of sales is overstat retained earnings are u ventory Error In an annual audit at December 31, 2021, transactions of Jezam Co. near the closing date: 1) Merchandise received on January 6, 2022, costing P70,000 was recorded as a purchase on January 7, 2022. The invoice showed shipment was made FOB supplier’s warehouse on December 31, 2021, Since it was not on hand at December 31, it was not included in inventory. A packing case containing merchandise costing P80,000 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 instructi our investigation revealed that the customer's order was dated December 18, 2021, but the case was shipped and the customer lled on January 10, 2022. lerchandise costing P60,000 received from Jean Co, consignor, 0” December 28, 2021 was included in the inventory of Jezam Co. A special article, fabricated to order for a customer, costing, P90,000 Was finished and in the shipping room on December 31, 2021. On that dat, the customer was billed amounting to P150,000 and the article WaS Sxcluded from inventory although it was shipped on January 4, 2022. The unadjusted balance of inves awe The ana ventory based on your exal you find the following 3) 4) 5 Required: Compute for the correct amount of inventory. 414 ae | Chapter 12 ~ Inventories ae sniventaties nadiesryg inventory understated = aa Die ‘in ceca ware 200 0. 2) End inventory overstate aa 3) nt ange __________ sso and elated arcounts vst acount E is: Then, cepa Then Shama te Was the purchase recorde eS NOadjuting ea the inventories wended in the count? Yes NOadjusting ent — fanswer << i is: the enario 2: _____is:_ Then, “fares avoiding? Yer 5 urchases x Wasthe purchase recorded? Wo PUA Mase. inventory xx No Cost of sales * Ifanswer No NOagjustingentry No NOatlustingentry _ineluced in the count? _— ————— eee ooo ifanswer Was there a valid purchase? None Wom aable = chases Was the purchase recorded? Yes Pures eines ries Yes ‘Mdse. inventor = the count? a d days of owing traneactions oecured dig tn the ist few days nds December 31, 2021, fp ved and Te ree ‘ 50,000, FOB shipping Point We" sacory contin 7. The shipment was Tr gin the nventor ‘The merchandise was not 5Chapter 12 - Inventories 2), An invoice for P75,000, FOB destination, was rec December 28. The shij 3) An invoice for P30,000, FOB shipping point, was S Teceived ows thatthe goods had fe December 28 and the receiving report indicates that ene ce hi and yy coy ‘d © ood Tea ceived and pa received on January 4. The merchandise was exchided freon 4) An invoice for P90,000, FOB shipping point, was do on December 15. Th received on December se not of the same quality as ordereq. re merchandise was excluded in ting 5) An invoice or P140000, FOB destination, was received and rene January 4, The receiving report indicates that the goods wer rent on December 29. The merchandise was include rentory, ve 6) Merchandise costing 20,000 was received on J Purchase invoice was recorded on January § shipment was made on December 29, 2021, FOB desti 7) Merchandise sold to a customer costing P100,00 December 29, 2021. The customer was 29, 2021. The sales invoice shows shipme! The goods were received by the customer January 3, 2022. 8) An item costing P45,000 was sold and delivere December 29, 2021. The goods were included the sale wes with a repurchase agreement that requ he Inventory on January 15, 2022. The same was recorded a 80,000, in the amount of P4,000 specifically relating to in December 2021, all of which was still ‘ory at December 31, 2021, was received on January 3, 2022. The freight bili was not included in either the inventory or in accounts payable at December 31, 2021, Inspection of the client’s balances: Inventory, P2; payable, P800,000; Net income, P900,00 Reauired: Based on the cbove information, determine the adjusted balances of the fol wing as of 1) Inventory 2) Accounts: Payable 3) Net sales records revealed the following December 31, 2021 (000,000; Accounts receivable, P900,000; Accounts * ¥6,000,000; Net purchases, P2,800,000; Net 416 a —| canted bs es er NLunder ¥ = Inventories 4 f ION ad ind |i t es Nos yer, Nand es unider, NL over; rer NL under {oo} ew ‘alee ee a 8 @® 8 @ attributable cost. Initial measurement concepts of PFR PFRS are the same. Subsequent measurement red co measure is ve s ete and s price less costs to compl m value s not used under PPRS for SME, aout less costs to complete and sell’ is the same with full PFRS, cost or estimated liable ced selling price value under inventories at lo autee ie a 238] /3.% 23|/eie g fees gs g Baldi] § SLE) 2 3 342) |298) |B ‘SUMMARY OF ACCOUNTING FOR INVENTORIES Lower of cost or NRV Financial Statements INVENTORIES 418 VF 5 Se ri price baseon vendors invoices rac son Petes eto rm 1250500 tories of accounting department 125900 es fe commission paid to agents fr arranging im 180,000 arora ojon pdt sales agents ee PO stom Se ray ca ion tmport duties 6200 per id rsuranceon purchases nn andling costs relating to in is 000 Fre naling costs relating to impor stone ‘What is the total cost of the purchases? a 91,425,000 «. PL67sa00 150,000 a. 628.000 PROBLEM 12-2 Inventoriable Cost ‘Alex Company incurred the following costs: Materials: 350,000 (rsvoverobie prchnon teats 30100 labor orother production 30800 Abnormal amounts of wasted materi costs Storage costs of finished goods 0.00 Delivery to customers 20000 Labor 120000 ‘Administrative overheads unrelated to production 15000 Variable production overhead 50,000 Factory administrative costs 15000 Fixed production costs no) Cartage in 000 Cartage out 12000 At what amount should the inventory be. measured? a. P625,000 598,000 ». P610,000 a P613000 ils thereof were as follows! 1p950,000 10,000 SROBLEM 12-3 Rebates ylen entity purchased inventory far cash, The deta [t¥eice price (no VA is charged on these goods) ‘ebate offered to the entity by the supplier a9sr 12 - Inventories 1. Assuming that the terms of the agreement made i it clear a reduction tothe invoice price ofthe inventory, what et ere inventor cost? ota en, a. P3s0,000 «. P850,000 a b e4o,000 4. P10,000 2. Assuming that the terms of the agreement made it lear tha a refund ofthe entity's empectedseling costs, what isthe ys ee yy, inventoriable cost? I smut a. 860,000 «. 850,000 wb. 840,000 4. P10,000 PROBLEM 12-4 Freight Terms & Foreign Exchange Mark Company purchases $100,000 of raw materi jals from ag ‘America. The following are the spot rates (rates of oe exchange on a 2 date) Parle Date: PHP: $1 January 1,2022 F451 February 15,2021 _P45.625:$1 March 15, 2021, ‘P46.875:$1 The goods are loaded onto the ship in New York on January 1, 2021 and are released rom the Bureau of Customs at the Port Area, Manila City on February 15, 2021. The company pays the American supplier on March 15, 2021, 1. Compute for the cost of inventory and the foreign exchange gain or lots assuming the goods are purchased FOB (Free on Board): Cost of Inventory ForEx gain (loss) a 4,500,000 (?187,500) b 4,562,500 (187,500) c 4,500,000 (P125,000) a 4,562,500 (125,000) Compute for the cost of inventory and the foreign exchange gain or loss assuming the goods are purchased CIF (Cost, Insurance and Freight): Cost of Inventory ForEx gain (loss) a 4,500,000 (P187,500) b. 4,562,500 (187,500) © 4,500,000 (P125,000) a 4,562,500 (125,000) PROBLEM 12-5 Manufacturing Cost J Data forthe December manufacturing cost of Alyson Company, a VAT regst® company is as follows: Variable cost: * 3labor hours (at ®3 per hour) and * 1 Kilogram of raw material x (at 92.24 per kg including VAT) 420 Vy papter ge xed C54 gq manufacturing cost 2 ~ Inventories ea 100,000 et pected production (units) me worm questiOMs: ove data, answer the following fet U acl rite ORO Ut hw ah da ss goods be recorded? fns228,000 €.¥1200,000 b. Pi124,000 4. P600000 pesume the actual production Is 120000 unis, how much shoud te seed goods be recorded? PL448,000 «. 1420.00 1403333 4. P1.200,000 ‘assume the actual production is 80,000 units, how much shoud the sods be recorded? sy00400 « 560200 b. 7963;333 4. P960,000 12-6 tems to be acudedin the Ivey Fra teflon cats nation ne mercado Items in the warehouse during the count ranane Items out on consignment at another company's store 10 items sold on an installment basis (bd debs canbe reasonably estimated). Y ng point that is in transit at Items purchased FOB shipping point tha said December 31 ra Freight charges on goods purchased above fn transit at Items purchased FOB destination that Is amine December 31 sp scareonbant Items sold to another company, a bus 7 neta has signed an agreement to repurchase ase Prk covers all costs related to the iaventory Tes aption merchandise is 30,000 able att items sold where large returns are predic eT 7 tems sold FOB shipping point tha 504 December 34, at cost s sold FOB des! hat is in transit at December ; Items sold FOB destination tha t 75900 ycurred to adv eld for resale 10900 J to advertise goods he held on consigament from anter company 125000 price of P150,000 and cost of sd bonds that wil Be stocks an jort-term investments iM term in ‘28