Inventories

1. Inventories are P156,300. The merchandise was shipped f.o.b

a. Assets held for sale in the ordinary course of destination. The invoice, which has not yet
business, in the process of production for such arrived, has not been recorded.
sale, or in the form of materials or supplies to be e. Not included in inventory is P85,400 of
consumed in the production process or in the merchandise purchased from Oxygen Industries.
rendering of services. The merchandise was received on December 31
b. Properties held to earn rentals or for capital after the inventory had been counted. The invoice
appreciation or both. was received and recorded on December 30.
c. Tangible items that are held for use in the f. Included in inventory was P104,380 of inventory
production or supply of goods or services, for held by Ovation on consignment from Ovoid
rental to others, or for administrative purposes; Industries.
and are expected to be used during more than one g. Included in inventory is merchandise sold to Kemp
period. f.o.b. shipping point. This merchandise was
d. Identifiable non-monetary assets without physical shipped after it was counted. The invoice was
substance. prepared and recorded as a sale for P189,000 on
December 31. The cost of this merchandise was
P105,200, and Kemp received the merchandise on
2. La Union Company included the following items under January 5.
inventories: h. Excluded from inventory was carton labeled
Materials P1,400,000 “Please accept for credit.” This carton contains
Advance for materials ordered 200,000 merchandise costing P15,000 which had been sold
Goods in process 650,000 to a customer for P25,000. No entry had been
Unexpired insurance on inventories 60,000 made to the books to reflect the return, but none
Advertising catalogs and shipping of the returned merchandise seemed damaged.
boxes 150,000 The adjusted inventory cost of Ovation Company at
Finished goods in factory 2,000,000 December 31 should be
Finished goods in company-owned a. P2,217,620 c. P2,411,320
retail stores, including 50% profit b. P2,396,320 d. P2,373,920
on cost 750,000 E8-5 Kieso 11th
Finished goods in hands of consignees
including 40% profit on sales 400,000 4. The inventory on hand at December 31 for Fair
Finished goods in transit to customers, Company valued at a cost of P947,800. The following
shipped FOB destination, at cost 250,000 items were not included in this inventory amount:
Finished goods out on approval, at a. Purchased goods, in transit, shipped FOB
cost 100,000 destination invoice price P32,000 which included
Unsalable finished goods, at cost 50,000 freight charges of P1,600.
Office supplies 40,000 b. Goods held on consignment by Fair Company at a
Materials in transit shipped FOB sales price of P28,000, including sales commission
shipping point, excluding freight of of 20% of the sales price.
P30,000 330,000 c. Goods sold to Garcia Company, under terms FOB
Goods held on consignment, at sales destination, invoiced for P18,500 which includes
price, cost P150,000 200,000 P1,000 freight charges to deliver the goods.
Compute the amount to be presented as “Inventories” Goods are in transit.
under current assets. d. Purchased goods in transit, terms FOB seller,
a. P5,500,000 c. P5,650,000 invoice price P48,000, freight cost, P3,000.
b. P5,470,000 d. P5,700,000 e. Goods out on consignment to Manil Company,
sales price P36,400, shipping cost of P2,000.
Assuming that the company's selling price is 140% of
3. Ovation Company asks you to review its December 31 inventory cost, the adjusted cost of Fair Company's
inventory values and prepare the necessary inventory at December 31 should be
adjustments to the books. The following information is a. P1,039,300 c. P1,055,700
given to you. b. P1,039,500 d. P1,037,300
a. Ovation uses the periodic method of recording P65 Kimwell/rpcpa 5/90
inventory. A physical count reveals P2,348,900
inventory on hand at December 31.
b. Not included in the physical count of inventory is
P134,200 of merchandise purchased on December
15 from Standing. This merchandise was shipped
f.o.b. shipping point on December 29 and arrived
in January. The invoice arrived and was recorded
on December 31.

c. Included in inventory is merchandise sold to Oval

on December 30, f.o.b. destination. This
merchandise was shipped after it was counted.
The invoice was prepared and recorded as a sale
on account for P128,000 on December 31. The
merchandise cost P73,500, and Oval received it on
January 3.
d. Included in inventory was merchandise received
from Owl on December 31 with an invoice price of
5. Which statement is incorrect regarding measurement administration expenses are attributable, in equal
of inventories? proportion, to the sales and other non-production
a. Inventories should be measured at the lower of operations (eg financing, tax and corporate secretarial
cost and net realizable value. functions).
b. The cost of inventories should comprise all costs of
purchase, costs of conversion and other costs In 2016 the entity incurred the following selling expenses:
incurred in bringing the inventories to their present  Advertising costs = P30,000
location and condition.  Depreciation and maintenance of vehicles used by the
c. Trade discounts, rebates and other similar items sales staff = P10,000
are deducted in determining the costs of purchase.  Salary of the administration personnel = P600,000
d. Foreign exchange differences arising directly on
the recent acquisition of inventories invoiced in a 8. The total costs of purchase is
foreign currency are included in cost of inventories. a. P3,747,000 c. P4,100,000
b. P4,047,000 d. P4,249,000
6. Costs of purchase do not include
a. Purchase price. 9. The total costs of conversion is
b. Import duties and other non-refundable taxes. a. P1,134,000 c. P1,060,000
c. Transport, handling and other costs directly b. P1,144,000 d. P1,070,000
attributable to the acquisition of finished goods, Module 13 SME TM
materials and services.
d. Fixed and variable manufacturing overheads. 10. Buyer Co. regularly buys shirts from Vendor Company
and is allowed trade discounts of 20% and 10% from
7. Cost of inventories include the list price. Buyer purchased shirts from Vendor on
a. Storage costs. May 27 and received an invoice with a list price of
b. Abnormal amounts of wasted production costs. P100,000 and payment terms 2/10, n/30. If Buyer
c. Selling costs. uses the net method of recording purchases, the
d. Cost of designing products for specific customers. journal entry to record the payment on June 8 will
include
a. A debit to Accounts payable of
Use the following information for the next two questions: P72,000.
b. A debit to Purchase Discounts
Roweena Corporation began operations in 2016. In 2016
Lost of P1,440.
it incurred the following expenditures in purchasing
c. A credit to Purchase Discounts of
materials for producing its product:
P1,440.
 Purchase price of raw materials = P3,000,000
d. A credit to Cash of P70,560.
 Import duty and other non-refundable purchase taxes
RPCPA 1097 - AMP
= P800,000
 Refundable purchase taxes = P100,000
LECTURE NOTES:
 Freight costs for bringing the goods from the supplier
to the factory raw material storeroom = P300,000
Trade and Cash Discounts
 Costs of unloading the materials into the raw material
storeroom = P2,000 Trade Cash
 Packaging = P200,000
Objective Generate sales Encourage prompt
On 31 December 2016 the entity received P53,000 volume
payment
rebate from a supplier for purchasing more than
P1,500,000 from the supplier during the year. Accounting Not recorded Recorded using
The entity incurred the following additional costs in the separately either Gross or Net
production run: (Purchases/Sales method
 Salary of the machine workers in the factory = net of trade
P500,000 discount)
 Salary of factory supervisor = P300,000
 Depreciation of the factory building and equipment Gross and Net method of recording purchases
used for production process = P60,000
 Consumables used in the production process = Gross Net
P20,000
 Depreciation of vehicle used to transport the goods Cash Deducted from Deducted from
from the raw materials storeroom to the machine floor discounts purchases/cost of purchases/cost of
= P40,000 inventory when inventory whether
 Factory electricity usage charges = P30,000 taken taken or not
 Factory rental = P100,000 Cash Deducted from Not accounted for
 Depreciation and maintenance of the entity’s vehicle discounts purchases/cost of separately since
used by the factory supervisor (50 per cent for official taken inventory (purchase already deducted
use and 50 per cent for personal use) = P20,000. discounts) from purchases
Private use of the vehicle is an employee benefit.
Cash Included in Reported as other
During 2016 the entity incurred the following
discounts purchases/cost of expense
administration expenses:
not taken inventory (purchase
 Depreciation of the administration building = P50,000
discounts lost)
 Depreciation and maintenance of vehicles used by the
administrative staff = P15,000
 Salaries of the administration personnel = P305,000

Of the administration expenses 20 per cent are attributable

to administering the factory. The rest of the
11. Catapult Corp. purchased merchandise during 2016 on Computation of the cost of ending inventory
credit for P200,000; terms 2/10, n/30. All of the gross
Specific identification:
liability except P40,000 was paid within the discount
period. The remainder was paid within the 30-day Units on hand x Specific Unit Cost
term. At the end of the annual accounting period,
December 31, 2016, 90% of the merchandise had First-in, first-out method (FIFO)
been sold and 10% remained in inventory. The entity Units on hand x Unit Cost of latest purchases
has no beginning inventory. The entity uses net
method of recording purchases. Weighted Average
If the entity used the gross method of recording Units on hand x Weighted Average Unit Cost (WAUC)
purchases instead of the net method, the reported cost WAUC = Total cost of GAS/Total units available for sale
of goods sold would have been
a. The same c. Lower by P720
b. Higher by P720 d. P176,400 Use the following information for the next two questions.
C8 Pr8-76 Kieso TB, 11th ed-AMP
Maximilian uses the perpetual inventory system.
12. Under PAS 2, the specific identification method of ac- Maximilian's inventory transactions for the mon th of August
counting for inventory is required for were as follows:
a. All inventory items. Total
b. Inventory items which are interchangeable. No. Unit cost cost
c. Inventory items that are not interchangeable and 01 Aug. Beg. inventory 20 P4.00 P80.00
goods that are produced and segregated for 07 Aug. Purchases 10 4.20 42.00
specific projects. 10 Aug. Purchases 20 4.30 86.00
d. Biological (agricultural) inventories. 12 Aug. Sales 15 ? ?
16 Aug. Purchases 20 4.60 92
13. Which statement is incorrect regarding cost formulas? 20 Aug. Sales 40 ? ?
a. Specific identification of cost means that specific 28 Aug. Sales returns 3 ? ?
costs are attributed to identified inventory.
b. Under the weighted average cost formula, the cost 16. Using the information, assume that the Maximilian
of each item is determined from weighted average uses the FIFO cost flow method and that the sales
of the cost of similar items at the beginning of a returns relate to the 20 August sales. The sales return
period and the cost of similar items purchased or should be costed back into inventory at what unit cost?
produced during the period. a. P4.00 c. P4.07
c. The average cost formula may be b. P4.30 d. P4.60
calculated on a periodic basis, or as each additional
shipment is received, depending upon the 17. Assuming that Maximilian uses the weighted average
circumstances of the entity. cost flow method, the 12 August sales should be
d. The FIFO formula assumes that the items of costed at what unit cost?
inventory that were purchased or produced last are a. P4.16 c. P4.07
sold first, and consequently the items remaining in b. P4.30 d. P4.60
inventory at the end of the period are those earlier
purchased or produced.
Use the following information for the next two questions.
Use the following information for the next two questions.
Orang Dampuan Co. wholesales bicycles. It uses the
Transactions for the month of June were: perpetual inventory system. The company's reporting date
Purchases Units Unit cost Total cost is 31 December. At 1 December 2016, inventory on hand
June 1 (balance) 400 P3.20 P 1,280 consisted of 350 bicycles at P820 each and 43 bicycles at
3 1,100 3.10 3,410 P850 each. During the month ended 31 December 2016,
7 600 3.30 1,980 the following inventory transactions took place (all
15 900 3.40 3,060 purchase and sales transactions are on credit):
22 250 3.50 875 Dec. 02 Sold 300 bicycles for P1,200 each.
3,250 P10,605 03 Five bicycles were returned by a customer.
Sales They had originally cost P820 each and were
June 2 300 @ P5.50 sold for P1,200 each.
6 800 @ 5.50 09 Purchased 55 bicycles at P910 each.
9 500 @ 5.50 13 Purchased 76 bicycles at P960 each.
10 200 @ 6.00 15 Sold 86 bicycles for P1,350 each.
18 700 @ 6.00 16 Returned one damaged bicycles to the
25 150 @ 6.00 supplier. This bicycle had been purchased on
2,650 9 December.
22 Sold 60 bicycles for P1,250 each.
14. Assuming that perpetual inventory records are kept in
26 Purchased 72 bicycles at P980 each.
pesos, the ending inventory on a FIFO basis is
29 Two bicycles, sold on 22 December, were
a. P1,900 c. P2,065
returned by a customer. The bicycles were
b. P1,920 d. P2,100
badly damaged so it was decided to write
15. Assuming that perpetual inventory records are kept in them off. They had originally cost P910 each.
units only, the ending inventory on an average-cost
basis is
a. P1,980 c. P1,970 18. The cost of goods sold for the month of December
b. P1,956 d. P1,995 using moving average method is (Round unit costs to
RPCPA 5.10/K, W & W the nearest peso)
LECTURE NOTES: a. P367,230 c. P366,320
b. P365,410 d. P372,725
 be incorporated are expected to be sold at or
19. The cost of goods sold for the month of December above cost.
using FIFO method is
a. P367,230 c. P366,320 23. The closing inventory at cost of a company at 31
b. P365,410 d. P372,725 December 2016 amounted to P284,700. The following
RPCPA 5.12/Applying IAS items were included at cost in the total:
 400 coats, which had cost P80 each and normally
Solution guide for question #18: sold for P150 each. Owing to a defect in
Unit manufacture, they were all sold after the reporting
Date Description Units Cost Total Cost date at 50% of their normal price. Selling
Dec. 1 Balance 393 823 323,550 expenses amounted to 5% of the proceeds.
Dec. 2 Sale (300) 823 (246,900)  800 skirts, which had cost P20 each. These too
Sales were found to be defective. Remedial work in
Dec. 3 returns 5 823 4,115 February 2017 cost P5 per skirt, and selling
expenses for the batch totaled P800. They were
Balance 98 823 80,765
sold for P28 each.
Dec. 9 Purchase 55 910 50,050
Dec. 13 Purchase 76 960 72,960 What should the inventory value be according to PAS 2
Inventories after considering the above items?
Balance 229 890 203,775
a. P281,200 c. P282,800
Dec. 15 Sale ( 86) 890 (76,540)
b. P282,100 d. P329,200
Balance 143 890 127,235 P6.3 ACCA Paper3 2013-2014
Purchase
Dec. 16 returns ( 1) 910 ( 910) 24. The Refenjol Corporation included the following in its
Balance 142 890 126,325 unadjusted trial balance as of December 31, 2016:
Dec. 22 Sale ( 60) 890 (53,400) Inventory, 12/31/15 P 19,450,000
Balance 82 890 72,925 Purchases 127,850,000
Dec. 26 Purchase 72 980 70,560 Available for sale P147,300,000
Balance 154 932 143,485 The inventory at December 31, 2016 was counted at a
cost of P14.5 million. This includes P500,000 of slow
moving inventory that is expected to be sold for a net
20. An entity has partially-completed inventory located in its amount of P300,000.
factory, to which the following estimates relate:
The cost of sales for the year ended December 31,
Production costs incurred to date P268,000 2016 is
Production costs to complete 20,000 a. P133,100,000 c. P132,800,000
Transport costs to customer 5,000 b. P133,000,000 d. P132,600,000
Future selling costs 10,000 ACCA F7 07-08 #22C.9
Selling price 300,000
At what amount should the entity report the inventory 25. Which statement is incorrect regarding reversal of
on its statement of financial position? inventory write-down to net realizable value?
a. P280,000 c. P268,000 a. When the circumstances that previously caused
b. P270,000 d. P265,000 inventories to be written down below cost no
longer exist or when there is clear evidence of an
21. Net realizable value of inventories may fall below cost increase in net realizable value because of changed
for a number of reasons including: economic circumstances, the amount of the write-
I. Product obsolescence. down is reversed so that the new carrying amount
II. Physical deterioration of inventories. is the lower of the cost and the revised net
III. An increase in the expected replacement costs of realizable value.
the inventory. b. The reversal is limited to the amount of the
IV. An increase in the estimated costs of completion. original write-down.
c. The amount of any reversal of any write-down of
a. I, II and IV only c. I, III and IV only inventories, arising from an increase in net
b. II, III and IV only d. I and II only realizable value, shall be recognized as a reduction
in the amount of inventories recognized as an
22. Which is incorrect regarding write-down of inventory to expense in the period in which the reversal occurs.
net realizable value? d. All the statements are correct.
a. The practice of writing inventories down below cost
to net realizable value is consistent with the view 26. Alcala Company installs replacement siding, windows,
that assets should not be carried in excess of and louvered glass doors for family homes. At
amounts expected to be realized from their sale or December 31, 2016, the balance of inventory account
use. was P502,000, and the allowance for inventory write-
b. Inventories are usually written down to net down was P33,000. The inventory cost and other data
realizable value item by item. at December 31, 2016, are as follows: (amounts in
thousands)

Replace
c. Estimates of net realizable value are based on the ment Sales Normal
most reliable evidence, available at the time the Item Cost Cost Price NRV Profit
estimates are made, of the amount the inventories A P 89 P 86 P 91 P 87 P 5
are expected to realize. B 94 92 93 85 7
d. Materials and other supplies held for use in the C 125 135 129 111 10
production of inventories are written down below D 194 114 205 197 20
cost even if the finished products in which they will Total P502 P427 P518 P480 P32
 The gain on reversal of inventory write down is b. P1,000,000 d. P 0
a. P33,000 c. P8,000
b. P11,000 d. P 0 29. How much will be recognized as gain on purchase
commitment on March 15, 2016 if the price of the
27. Caravana Development Corporation bought a 10- material had risen to P42 per unit?
hectare land in Novaliches, to be improved, subdivided a. P1,400,000 c. P400,000
into lots, and eventually sold. Purchase price of the b. P1,000,000 d. P 0
land was P58,000,000. Taxes and documentation
expenses on the transfer of the property amounted to 30. On January 1, 2016, Pastille Corp. signed a three-year
P800,000. The lots were classified as follows: noncancelable purchase contract, which allows Pastille
Lot Number Selling price Total to purchase up to 500,000 units of a computer part
class of lots per lot clearing costs annually from Pyramid Supply Co. at P10 per unit and
A 10 P1,000,000 None guarantees a minimum annual purchase of 100,000
B 20 800,000 P1,000,000 units. During 2016, the part unexpectedly became
C 40 700,000 3,000,000 obsolete. Pastille had 250,000 units of this inventory
D 50 600,000 8,000,000 at December 31, 2016, and believes these parts can
be sold as scrap for P2 per unit. What amount of
Purchase and improvement costs allocated for class B probable loss from the purchase commitment should
lots under the relative sales value method of inventory Pastille report in its 2016 profit or loss?
valuation are a. P2,400,000 c. P1,600,000
a. P13,485,700 c. P12,200,000 b. P2,000,000 d. P 800,000
b. P10,800,000 d. P12,047,600 P23 M8 pp. 315 Wiley07-08
RPCPA 5/84, P79Kimwell 31. The following information for Bagulin Industries was
taken from the company's financial statements
Use the following information for the next two questions. (amounts in thousands):
On November 15, 2015, Socrates entered in to a 2016 2015
commitment to purchase 200,000 units of raw material X Sales P24,000 P18,000
for P8,000,000 on March 15, 2016. Socrates entered into Cost of goods sold 19,600 13,900
this purchase commitment to protect itself against the Inventory 1,400 1,200
volatility in the price of raw material X. By December 31, Accounts receivable 3,900 3,600
2015, the purchase price of material X had fallen to P35 Net income 560 320
per unit.
28. How much will be recognized as loss on purchase What is the inventory turnover for the year 2016?
commitment on March 15, 2016 if the price of the a. 15 times c. 14 times
material had fallen further to P32 per unit? b. 3 times d. 18 times
a. P1,200,000 c. P600,000

ILLUSTRATIVE PROBLEM
Cost flow assumptions
The following information has been extracted from the records of Praktis Corporation about one of its products.
Date No. of Units Unit Cost Total Cost
January 1 Beginning balance 1,600 P14.00 P22,400
January 6 Purchased 600 14.10 8,460
February 5 Sold @ P24.00 per unit 2,000
March 19 Purchased 2,200 14.70 32,340
March 24 Purchase returns 160 14.70 2,352
April 10 Sold @ P24.20 per unit 1,400
June 22 Purchased 16,800 15.00 252,000
July 31 Sold @ P26.50 per unit 3,600
August 4 Sales returns @ P26.50 per unit 40
September 4 Sold @ P27.00 per unit 7,000
November 15 Purchased 1,000 16.00 16,000
December 28 Sold @ P30.00 per unit 6,200

REQUIRED:
Compute for the closing inventory under each of the following pricing methods? (Round unit costs to two decimal places.)
1. FIFO – Periodic 3. Weighted average - Periodic
2. FIFO – Perpetual 4. Weighted average – Perpetual (Moving average)

SOLUTION:

FIFO – Periodic
From November 15 purchases (1,000 units x P16.00) - P16,000
From June 22 purchases (880 units x P15.00) - 13,200
Total P29,200

FIFO – Perpetual
 Purchased Sold Balance
Unit Unit Unit
Units Cost Total Cost Units Cost Total Cost Units Cost Total Cost
Jan. 1 1,600 14.00 22,400
Jan. 6 600 14.10 8,460 1,600 14.00 22,400
600 14.10 8,460
2,200 30,860
Feb. 5 1,600 14.00 22,400
400 14.10 5,640 200 14.10 2,820
Mar. 19 2,200 14.70 32,340 200 14.10 2,820
2,200 14.70 32,340
2,400 35,160
Mar. 24 (160) 14.70 (2,352) 200 14.10 2,820
2,040 14.70 29,988
2,240 32,808
Apr. 10 200 14.10 2,820
1,200 14.70 17,640 840 14.70 12,348
Jun. 22 16,800 15.00 252,000 840 14.70 12,348
16,800 15.00 252,000
17,640 264,348
Jul. 31 840 14.70 12,348
2,760 15.00 41,400 14,040 15.00 210,600
Aug. 4 (40) 15.00 (600) 14,080 15.00 211,200
Sep. 4 7,000 15.00 105,000 7,080 15.00 106,200
Nov. 15 1,000 16.00 16,000 7,080 15.00 106,200
1,000 16.00 16,000
8,080 122,200
Dec. 28 6,200 15.00 93,000 880 15.00 13,200
1,000 16.00 16,000
1,880 29,200

Average – Periodic
Total cost (1,880 units x P14.92) - P28,050

Weighted average unit cost (P328,848/22,040 units) - P14.92

Average – Perpetual (Moving average)

Purchased Sold Balance
Unit Unit Unit
Units Cost Total Cost Units Cost Total Cost Units Cost Total Cost
Jan. 1 1,600 14.00 22,400
Jan. 6 600 14.10 8,460 1,600 14.00 22,400
600 14.10 8,460
2,200 14.03 30,860
Feb. 5 2,000 14.03 28,060 200 14.03 2,800
Mar. 19 2,200 14.70 32,340 200 14.03 2,800
2,200 14.70 32,340
2,400 14.64 35,140
Mar. 24 (160) 14.70 (2,352) 200 14.03 2,800
2,040 14.70 29,988
2,240 14.64 32,788
Apr. 10 1,400 14.64 20,496 840 14.64 12,292
Jun. 22 16,800 15.00 252,000 840 14.64 12,292
16,800 15.00 252,000
17,640 14.98 264,292
Jul. 31 3,600 14.98 53,928 14,040 14.98 210,364
Aug. 4 (40) 14.98 (599) 14,080 14.98 210,963
Sep. 4 7,000 14.98 104,860 7,080 14.98 106,103
Nov. 16 1,000 16.00 16,000 7,080 14.98 106,103
1,000 16.00 16,000
8,080 15.11 122,103
Dec. 28 6,200 15.11 93,682 1,880 15.11 28,421

 - end of P1.2102 - 