Chapters *

Other Non-current Financial Assets

M. Brad Corporation'insures the life ofits president for P8,000,000,the corporation

being the beneficiary of an ordinary life policy. The premium is P200,000. The Inventories
policy is dated January 1,2017. The cash surrender value on December 31,2020
and 2021 are P60,000 and P80,000,respectively. Brad follows the calendar year
as its fiscal period. The president died on October 1, 2021 and the insurance Learning Outcomes
proceeds was collected on December Sh 2021. No premium was refunded on the
insurance settlement After reading this chapter, you should be able to:
(15) Whatis the gain on life insurance settlement? (a) understand the definition and nature of inventories;
a. P7,800,000 (b) determine the measurement basis, classification and presentation of
b. P7,870,000 inventories in the statement offinancial position;
c. P7,87S,000 (c) differentiate the perpetual and periodic inventory systems;
d. P7,890,o60 (d) understand the inventory cost allocation methods and solve relevant
problems;
N. On January 2, 2021, Anne Company entered into a lease contract with Curtis
(e) understand the valuation of inventories at the lower of cost and net realizable
value;
Company for a term of three years until December 31, 2023. The lease fee is
P100,000 per month under an agreement for an increase annually at the rate of (f) understand the inventory estimation methods;and
5%. Curtis also requires a refundable deposit of P300,000 to be paid by Anne (g) acquire proficiency and accuracy in answering theoretical questions and
Company in advance upon occupancy. The effectfve interest rate at that time is solving problems related to inventories.
10% and present value ofPI at10% for three periods is 0.7513.
Definition and Nature
• (16)Athow much will die security deposit be initially recorded on Jan uary 2,2021?
^ a. P300,000 Inventories are assets that are held for sale in the ordinary course of business, in
b. P225,390 the process of production for such sale,or in the form of materials or supplies to be
c. P10S,000 consumed in the production process or in the rendering ofservices.
d. P247,929

(17) How much is the accretion on the security depositfor the year 2021 and the Measurement
security deposit balance atDecember31,2021, respectively?
a. P22,539andP247,929
Inventories should be measured at the lower ofcost and net realizable value. Net
realizable value is the estimated selling price of an item reduced by the estimate
b. P0andP300,000 s
costs of completion and disposal.
c. P24,793andP272,722
d. cannot be determined
Cost ofInventories
O. In the December 31, 2021 trial balance of Bea Incorporated, the following of
accounts are available: > The cost of inventories should comprise all costs of purchase,
I
conversion and other costs incurred in bringing the inventories to
< Cash Surrender Value - P37,500; Investment in Subsidiary - P500,000; present location and condition.
Investment Property - P750,000; Plant Expansion Fund - P150,000; Tax Fund -
P2,S06; Sinking Fund Cash - P125,000; Accrued interest receivable on sinking > The cost of purchase of inventories comprise the purchase price,
fund securities - P12,500; Change Fund - P25,000; Sinking Fund Securities - and other taxes, and transport, handling and other costs directly attn u
to the acquisition of finished goods, materials and services.
P250,000; Advances to Related Party - P50,000.
> Trade discounts, rebates and other similar items are deducted in determining
(18) How much should be reported as.non-currentinvestments at the December 31, the costs of purchase.
2021 statementoffinancial position ofBea Incorporated?
a. P575,000 > The cost of conversion of inventories includes costs directly related to the
b. Pl,125,000 units of production.
c. Pl,862,500 /
d. P1,87S,000

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> The cost ofinventories of a service provider consists primarily of the labor and
other costs of personnel directly engaged in providing the service.
Classification and Presentation in the Statement of Financial Position
Inventories are reported under current assets, normally follo\ving trade and other
receivables.
Classes ofInventories
Merchandising Company
• Merchandise inventory or simply,Inventory
> Manufacturing Company
Finished goods inventory
Goods in process or work in process inventory
Raw materials inventory
Utility Company
'• Supplies
Inventory Systems
> Periodic Inventory System
This is generally used by enterprises maintaining numerous inventory
items with low unit costs.
Purchases of goods are recorded by debiting Purchases account. Returns
are recorded by crediting Purchase Returns account. ^ from the seller's inventory.
The inventory quantity is determined by means of a physical count at
year-end. , The quantity obtained is subtracted from the total units
available for sale to determine the units sold during the period.
> Perpetual Inventory System
This is adopted by enterprises with few lines of merchandise, usually in
small quantities and high unit costs.
Purchases of goods are debited directly to Inventory account while
returns are recorded by Crediting the Inventory account.
The entry to record the sale of goods is accompanied by an entry debiting
Cost of Goods Sold account and crediting Inventory account.
The records are maintained showing the continuous movement of goods;
thus,a physical count is not necessary to determine the inventory balance
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at year-end. However, a physical count may be taken at least once a year
to confirm inventory balance reflected in the books.
Physical Goods to be Included in Inventory
The basic criterion for including items in inventory is economic control rather
than physical possession. Economic control is usually consistent with the
possession of legal title.
> Goods in Transit
Terms of Shipment Buyer Seller
FOB shipping point Include Exclude
FOB destination Exclude Include
> Consigned Goods. Unsold consigned goods are physically In the possession of
the consignee but these goods are economically owned by the consignor.
Goods out on consignment - Include in the inventory of the consignor at
cost plus any handling and shipping costs incurred in the delivery of the
goods to the consignee.
Goods held on consignment - Though physically held by the consignee,
the goods are excluded from its inventory. The consignee simply acts as
an agent ofthe consignor.
> - Installment Sales
Despite retention of title by the seller, the substance of the transaction is
that control over the goods has already passed to the buyer, assuming a
reasonable expectation of collection in the normal course of business.
The goods are considered as sold when delivered and therefore, excluded
> ■ Goods Out on Approval
These goods are already sent to the potential customer but are continued
to be included in the seller's inventory until approval of purchase has been
received from the customer.
> Segregated Goods by Manufacturers
When the segregated goods are considered as stock items, the goods are
still included in the ending inventory of the manufacturer.
When the inventory items are considered as special order or fabricated
according to customer specifications, the goods are considered sold by
the manufacturer when they are completed and segregated; thus,
excluded in its ending inventory.
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> Goods Sold under Lay Away Plan
• Under a lay-away plan, pajnnents are made by the customer on
installment basis but the goods remain in the possession of the seller.
When full pa5rment is received, the goods are physically delivered to the
customer. Under this scheme,the seller continues to include the goods in
its inventory until actually delivered. The cash collected are advances
from customers and therefore,reported as liability.
\
> Goods Sold with Buyback Agreement
• • When a sale of goods is accompanied by a buyback agreement, it is in
effect a form of a financing arrangement The goods are sold to another
party with sni agreement to repurchase the goods at specified price,
usually including all related holding costs. The seller should report the
goods as part ofits inventoiy since the risks and rewards of ownership for
the goods retain witli them and the proceeds received from the transfer is
reported as a liability.
Cash Discounts
> Gross Price Method , to average method.
• The purchase is recorded at the gross invoice price (list price less trade
discounts}.
• The purchase discount is recorded only when payment is made within the
discount period. Purchase Discount account is reported as a deduction
from the cost of inventory purchases in the computation of cost of goods
sold.
> Net Price Method
• The purchase is recorded at its net price; that is, invoice price less
available cash discounts.
• The amduht of the discount is recorded as Purchase Discounts Lost when
the discount is not taken (payment was made beyond the discount
/period). This account is reported as an other expense in profit or loss.
Cost Allocation Methods-
> For items that are segregated for specific projects and inventories that are not
ordinarily interchangeable
• Specific Identification Method, This method requires that each unit sold
and each unit on hand be identified and that the actual costs of those units
be included in the cost ofgoods sold and ending inventory.
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For items that are ordinarily interchangeable and with large under of items in
inventory.
• First-in, First-out Method (FIFO)
o This method assumes that the items of inventory which were
purchased first are sold first, and consequently, the items remaining
in inventory at the end of the period are those most recently
purchased or produced.
o Earliest costs are charged to cost ofgoods sold.
o The cost of ending inventories are the most recent costs.
o It can be considered that a better valuation for inventory is achieved
because ending inventory is reported at their approximate
replacement costs.
o There is no proper matching of costs against revenue because old
costs are matched to current revenues.
o In periods of rising costs (inflation), FIFO method reports a lower cost
of goods sold, higher ending inventoiy and higher profit as compared
o Cost of goods sold and ending inventory amounts are always the same
under both periodic and perpetual inventory systems.
• Average Method .
This, method considers goods to be indistinguishable and are
therefore valued at an average ofthe costs incurred.
o Weighted average method is used under a periodic system where
average unit cost is determined at the end of the period, computed as
total cost of goods available for sale divided by the total units
available for sale.
o Moving average method is used under the perpetual system which
shows a running/continuing balance of the inventoiy quantity and
cost This requires a computation of a new average unit cost after
each new purchase. Issues or sales are measured at the latest
computed average unit cost.
Measurement ofInventories
> Inventories are measured at the lower of cost and net realizable value. Cost is
determined by using the specific cost formula such as first-in, first-out method,
average method or specific identification method. Net realizable value is the
estimated selling price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to make the sale.
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> Valuation at the'lower of cost'arid net realizable value is applied to individual o Markdown cancellation - an increase in the retail price after there has
inventory iteriis. been a markdown which could riot be greater than the markdown
o Net markdown - markdown less markdown cancellation
Inventory Estimation Methods
Steps in the computation of estimated ending inventory
> Gross Profit Method - .
o Compute for the goods available for sale at both cost and retail
This method is useful in the following circumstances: (beginning inventory plus purchases)
o Compute for the cost to retail ratio (Goods available for sale at cost
• It is based on an assumed relationship between gross profit and sales. divided by the goods available for sale at retail)
• This method is acceptable for interim reporting but not for year-end
reporting. o Compute for the ending inventory at retail(Goods available for sale at
Vi^en the company uses periodic system, this method is useful in retail less sales)
,. estimating the^amount of.inventory lost in catastrophe such as fire, flood, o Compute for the ending inventory at estimated cost(Ending inventory
earthquake and similar events, where physical count is impossible. at retail multiplied by the appropriate cost to retail ratio)
• This method can be used to test check the validity of amount obtained by
physical count Freight-in is an addition to cost of purchases; Purchase return is a
reduction from both cost and retail; Purchase discount and purchase
Sample computation of estimated ending inventory or estimated inventory allowance are reductions from cost of purchases.
. loss: , ■
Sales return is a reduction hom gross sales; Sales discounts and sales
Cost ofgoods available for sale XX
allowances are simply ignored.
Less estimated cost ofgoods sold* XX

Estimated ending inventory XX Transfer-in (debits) from other departments is an addition to both cost
Less: Cost of undamaged merchandise XX and retail (treated similar to purchases).
Realizable value of damaged merchandise
(but not to exceed cost) XX . XX Transfer-out (credits) to other departments is a reduction from both cost
Estimated inventory loss XX and retail.

*Estimated cost ofgoods sold may be computed in either ofthe Normal shortages and losses as well as employee discounts are treated
following: similar to sales; that is, a deduction from available for sale at retail.

(1) Gross profit(CP)rate is based on sales Abnormal shortages and losses are reductions from both cost and retail
Sales X(100% - pP rate) (included in the computation ofgoods available for sale).

, (2) Gross profit(GP)rate is based on cost Both net markups and net markdowns,as well as the beginning inventory, .
Sales-f(100% + GP rate) are included in the computa|:ion of the cost to retail ratio as prescribed in
I' I ■ ' ■■ PAS 2.
Retail Inventory Method . ,
When the retail method is used to approximate the lower of cost or net
• Terms used under the retail inyentpjy method realizable value, the net markdowns are excluded from the cost to retail
ratio computatiori.
o Additional markup - increase above the original retail price
When the retail method assumes a FIFO cost, the cost and retail amounts
o Markup cancellation - a reduction in the retail price after there has
of beginning inventory are excluded from the current cost to retail ratio
been an additional marlqip. The reduction should not be greater computation.
1 than the additional niarkup.
o Net markup- additional markup less markup cancellation The amount of eliding inventory at retail would be the same in all
computations. The cost to retail ratio or percentage applied to this
o Markdown - a dacrea^e below the original retail price aniount, however,would differ under the FIFO and average methods.

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The main issue is the diisposition of beginning inventory and net Disclosure Requirements II
markdowns in the calculation of cost to retail ratio (cost percentage). The "if
The hnancial statements shall disclose:
following table summarizes these variations in the retail method.
> accounting policies adopted in measuring inventories,including the cost
Average
method used;
I
retail FIFO Average FIFO
fPAS21 retail LCM» LCM
Beginning inventory Include Exclude Include Exclude > the total canying amount ofinventories and the carrying amountin
Net markdowns Include Include Exclude Exclude classifications appropriate to the enterprise;

* Previously termed as conventional retail method and lower of average > the total carrying amount ofinventories carried atfair value less cost to sell;
cost or market
> the amount ofinventories recognized as an expense during the period;

Effects ofInventory Differences in Profit or Loss > the amount of any y\nite down ofinventories recognized as an expense in the I
period;
> Difference in inventory figures could be due to I
> the amount of any reversal of any write down that is recognized as income in
• Difference in cost allocation methods the period and the circumstances or events that led to the reversal of a write
• Misstatement resulting from omission or mathematical errors down;

> the circumstances or events that led to the reversal of a write down of
> Misstatement in beginning inventory will have the same effect on the cost of
inventories; and
goods sold but a reverse effect on gross profit and net profit. This means that
an overstatement in beginning inventory will overstate cost of goods sold and > the carrying amount ofinventories pledged as security for liabilities.
, understate ^oss profit and net profit
> Misstatement in ending inventory will have the reverse effect on the cost of
goods sold but the same effect on gross profit and net profit This means that
an overstatement in ending inventory will understate cost of goods sold and
overstate gross profit and net profit

Purchase Commitments

Loss on purchase commitments is recognized when an entity enters into a

non-cancelable contract to purchase inventory items and when a loss is
probable, material and can be reasonably estimated.

> The loss is recorded by debiting a loss account and crediting a liability account
for an amount equal to the decline in market value of the non-cancelable
purchase commitment.

> The loss is reported in the period in which the decline takes place. Thus,
when a further decline takes place after the end of the reporting period and
before the actual purchase,loss is similarly recognized.
> When there is a partial or full recovery of the purchase price, the recovery is
recognized as gain in the period during which the recovery takes place. The
recovery, however, is limited to the loss recorded for the same purchase
commitment.

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TRUE OR FALSE QUESTIONS 17. The purchase price of inventories includes Value Added Tax paid by the buyer.

1. The cost flow assumption adopted must be consistent with the physical 18. The buyer owns the goods in transit under FOB shipping point.
movement ofthe goods.
19. Under freight collect,freight is paid in advance by the seller before shipment.
2. PFRS requires reporting inventory at net realizable value, even if above cost
whenever there is a controlled market with a quoted price applicable to all 20. Inventories include only those that are readily available ,for sale in the
quantities. ordinary course of business.

3. In the retail inventory method, abnormal shortages are deducted from both 21. PFRS prohibits the use of UFO cost flow assuihptions.
'■ ' •I *
the cost and retail amounts and reported as a loss.
22. Purchase of inventory for cash will not change the total assets.
4. - If both purchases and ending inventory are overstated by the same amount,
net income is not affected. 23. Reversal of inventory write-down is prohibited.

* 5. ' A disadvantage of the gross profit method is that it uses past percentages in 24. Freight incurred by the consignor in delivering the consigned goods to the
determining the markup. consignee forms part ofthe cost ofinventories.

6. In all cases when FIFO is used, the cost of goods sold would be the same
whether a perpetual or periodic system is used.. '
7. If the contract price on a noncancelable purchase commitment exceeds the
market price, the buyer should record any expected losses on the commitment
in the period in which the market decline takes place.
8. A manufacturing concern would report the cost of units only partially
processed as inventory in the statement of financial position.
, 9. Purchase Discounts Lost,is a financial expense and is reported in the "other
expenses and losses"section ofthe income statepienL
10. , Title to goods cannot be transferred to the buyer before shipment occurs.
11. Inventories are classified in the statement of financial position as current
assets.
25. Commodities of broker-traders are nieasured at fair value less cost of disposal.
26. The gross profit method assumes that the relationship between selling price
and cost ofgoods sold is similar to prior years.
27. When goods are sold on an installment plan, the seller retains title and
continues to include them on its balance sheet until full payment has been
received.
28. Sales staff commission is deducted when valuing inventories at LCNRV.
' . • V
29. Storage cost is included in the cost of inventoiy only when storage cost is
necessary in bringing the inventory to its intended condition and location.
30. Freight charges on goods purchased are considered a period cost and
therefore are not part ofthe cost ofthe inventory.

12. When using a perpetual inventory system,freight charges on goods purchased

are debited to Freight-In.

13. In the retail inventory method, the term markup means a markup on the
original cost ofan inventory item.

14. Ifending inventory is understated,then net income is understated.

15. In a period of falling prices, the use of FIFO inventory cost flow method would
typically result in the highest cost ofgoods sold,

16. . If a supplier ships goods f.o.b. destination, title passes to the buyer when the
supplier delivers the goods to the common carrier.

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FINANCIAL ACCOUNTING THEORY QUESTIONS Which ofthe following is a product cost as it relates to inventory?
a. Selling costs
Inventories encompass all ofthe following, except b. Interest costs
a. merchandise purchased by a retailer. c. Raw materials
b. land and other property not held for sale. d. Abnormal spoilage
c. finished goods produced.
d. materials and supplies awaiting use in the production process. Which is not a required note disclosure for inventories under PAS 2?
a. The carrying amount ofinventories pledged as security for liabilities.
The costs ofconversion ofinventories include all ofthe following, except b. The events or circumstances that led to reversal of a write-down of
a. costs directly related to the units of production,such as direct labor. inventories.
b. systematic allocation offixed production overhead. c. The accounting policy adopted in measuring inventories, including the
c. systematic allocation of variable production overhead. cost formula used.
d. systematic allocation of administrative overhead. d. The suggested retail .price of inventories stated on the face of the
statement offinancial position.
Which of the following is least likely to be included in determining the cost of
inventory? 10. For the past four years. Toy Company has used weighted average method for
a. Interest cost for amounts borrowed to finance the purchase ofinventory inventory valuation. The inventory value at the end of Year 4 was P8S,000,
b. Purchasing costs but would have been P60,500 if FIFO method had been used throughout the
c. Receiving and unpacking costs four-year period. If Toy Company had used FIFO for the entire four years,
d. Freight costs profit before income tax would be
a. P24,500 more over the four-year period.
Goods on consignment should be included in the inventory of
b. P24,500.less over the four-year period.
a. the consignor but notfhe consignee. c. P24,500 more in year 4.
b. the consignee but notthe consignor. d. P24,500 less in year 4.
c. both the consignor and the consignee.
d. neither the consignor nor the consignee. 11. Which ofthe following pairs ofinventory terms would not usually go together?
a. Periodic inventory system and Freight in account
5. A company using a periodic inventory system neglected to record a purchase b. Perpetual inventory system and Cost ofgoods sold account
of merchandise,on account at year-end. This merchandise, however, was c. Gross method and Purchase discount account
correctly included in the year-end physical count. How will these errors affect d. Net method and Purchase discount account
inventory at year-end and cost of goods sold for the year?
Inventorv Cost of goods sold 12. Net realizable value is
a. No effect Understate a. acquisition cost plus costs to complete and sell.
b. No effect Overstate b. selling price.
c. Understate Understate c. selling price plus costs to complete and sell.
d. Understate No effect d. selling price less costs to complete and sell.
Goods in transit which are shipped with terms FOB shipping point should be 13. A situation where the seller actually paid the freight charges but is not legally
a. included in the inventory ofthe seller. responsible for the same.
b. included in the inventory ofthe buyer. a. FOB destination,freight prepaid
c. included in the inventory ofthe shipping company. b. FOB destination,freight collect
d. excluded from the inventory ofthe buyer. c. FOB shipping point,freight prepaid
d. FOB shipping point,freight collect
7. Which of the following inventory costing methods report most closely the
current cost ofinventory on the statement offinancial position? 14. The costing method that is appropriate for inventories that are segregated for
a. first-in,
~ ' first-out method a specific project and inventories that are not ordinarily interchangeable is
b. specific identification method a. specihc identification method.
c. weighted average method b. standard cost.
d. last-in,first-out method
c. weighted average method.
d. moving average method.
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15. If a merchandise comiiany ended a period with a larger inventory than it had 21. An item of inventory purchased this period for P3,000 has been incorrectly
at the beginning ofthe period, which ofthe following statements must be true? written down to its current replacement cost of P2,000. It sells during the
a. The cost ofgoods sold was greater than net purchases. following period for P6,000, its normal selling price, with disposal costs of
b. Profit was greater than gross profit on sales. P6d0 and normal profit of P2,400. Which of the following statements is not
c. The cost ofgoods sold was lesser than net purchases., true?
d. - The cost of goods available for sale was smaller than the cost of goods a. The cost ofsales ofthe following year will be understated.
sold. . . b. The current year's income is understated.
c. The closing inventory ofthe current year is.understated.
16. The gross profit method ofestimating inventory would not be useful when d. Income ofthe following year will be understated.
a. a periodic system is in use and inventories are required for interim
statements. 22. If a unit of inventory has declined in value below original Cost, but the market
b. inventories have been destroyed or lost by fire, theft, or other casualty, value exceeds net realizable value, the amount to -be used for purposes of
and the specific data required for inventory valuation are not available. inventory valuation is
c. the validity ofinventory obtained by physical count is being established. a. net realizable value.
d. the relationship between gross profit and sales continues to be unstable b. original cost
overtime. - c. market value.
d. net realizable value less a normal profit margin.
17. • On Jurie 15, 2021, Rod Company accepted delivery of merchandise that it
purchased on account As of June 30, Rod had not recorded the transaction 23. In 2021, JM Manufacturing signed,a contract with a supplier to purchase raw
nor included the merchandise in its inventory. The effect of this on its materials in 2022 for P800,000. Before the December 31, 2021 balance sheet
statement offinancial position for June 30,2021 would be . date, the market price for these materials dropped to P710,000. The journal
a. assets and shareholders' equity were overstated but liabilities were not entry to record this situation at December 31, 2021 will result in a credit that
affected. should be reported
, b. shareholders'equity was the only item affected by the omission. a. as a valuation account to Inventory on the balance sheet.
c. assets,liabilities, and shareholders'equity were understated. b. as a current liability. ,
d. assets and liabilities are understated but shareholders' equity is not c. as an appropriation of retained earnings.
affected. d. on the income statement. >

18. Which statement is not tnie about the gross profit method of inventory 24. At the end of the fiscal year. Mars Airlines has an outstanding non-cancellable
valuation? purchase commitment fof the purchase of 100,000 gallons ofjet fuel at a price
a. It may be used to estimate inventories for interim statements. of P6.30 per gallon for delivery during the coming summer. The company
b. It may be used to estimate inventories for annual statements. prices its inventory at the LCNRV. If the market price for jet fiiel at the end of
. c. It may be used by auditors. the year is P6.70, how would this situation be reflected in the annual financial
d. It may be used to estimate inventory pilferages. statements?
a. Record unrealized gains of P40,000 and disclose the existence of the purchase
19. Costs that are incurred in bringing the inventories to their present location commitment
and condition are capitalized as cost of inventories and these include b. No impact.
a. costs of designing products for specific customers. c. Record unrealized losses of P40,000 and disclose the existence of the purchase
b. abnormal amount of wasted material,labor and production costs. commitment
c. storage cost not necessary in the pr;oduction process^ before a further d. Disclose the existence ofthe purchase commitment.
production stage. . , .
d. selling costs. 25. How is a significant amount of consignment inventory reported in the
statement of financial position?
20. PAS 2 Inventories requires that the lower of cost and net realizable value shall a. The inventory i^ reported separately on the consignor's balance sheet.
beapjjlied b. The inventory is combined with other inventory on the consignor's
a. to total inventories as a whole. balance sheet
b. to each class ofinventory. c. The inventory is reported separately on the consignee's balance sheet.
c. on the basis ofindustry segment , ■ \ d. The inventory is combined vyith other inventory on the consignee's
d. on an item-by-item,basis. balance sheet.

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26. Which of the following is a characteristic ofa perpetual inventory system? 32. Which ofthe following is a period cost?
a. Inventory purchases are debited to a Purchases account a. Labor costs
b. Inventoiy records are not kept for every item. b. Freight in
c. Cost ofgoods sold is recorded with each sale. c. Production costs
d. Cost of goods sold is determined as the amount of purchases less the d. Selling costs
change in inventory.
33. Which ofthe following is correct?
27. Which of the following inventories carried by a manufacturer is similar to the a. Selling costs are product costs.
merchandise inventory ofa retailer? b. Manufacturing overhead costs are product costs.
a. Raw materials. c. Interest costs for routine inventories are product costs.
b. Work-in-process. d. All ofthese statements are correct
c. Finished goods. •
d. Supplies. 34. Which of the following types of interest cost incurred in connection with the
purchase or manufacture ofinventory should be capitalized as a product cost?
28. The accountant for the Bryan Manufacturing Company is preparing the income -a. Purchase discounts lost
statement for 2021 and die balance sheet at December 31, 2021. Biyan uses b. Interest incurred during the production of discrete projects such as ships
the periodic inventory system. The January 1, 2021 merchandise inventoiy or real estate projects
balance will appear c. Interest incurred on notes payable to vendors for routine purchases made
a. only as an asset on the balance sheet on a repetitive basis
b. only in the cost ofgoods sold section ofthe income statement d. All ofthese should be capitalized.
c. as a deduction in the cost of goods sold section of the income statement /

• aiid as a current asset on the balance sheet 35. The use of a Discounts Lost account implies that the recorded cost of a
d. as an addition in the cost of goods sold section of the income statement purchased inventory item is its
and as a current asset on the balance sheet a. invoice price.
b. invoice price plus the purchase discount lost
29. If the beginning inventory for 2021 is overstated, what is the effect of this ,c. invoice price less the purchase discount taken.
error on the following: d. invoice price less the purchase discount allowable whether taken or not
Cost of Goods Sold Net Income Assets at Dec. 31. 2022
a. Overstatement Understatement Overstatement 36. When using the periodic inventory system, which of the following generally
b. Overstatement Understatement No effect would not be separately accounted for in the computation of cost of goods
c. Understatement Overstatement Overstatement sold?.
d. Understatement Overstatement No Effect a. Trade discounts applicable to purchases during the period
b. Cash (purchase] discounts taken during the period
30. Sherralyn Karen Co. received merchandise on consignment As of March 31, c. Purchase returns and allowances of merchandise during the period
Sherralyn Karen had recorded the transaction as a purchase and included the d. Cpst oftransportation-in for merchandise purchased during the period
goods in inventory. The effect of this on its financial statements for March 31
would be 37. Costs which are inventoriable include all ofthe following except
a. no effect a. costs that are directly connected with the bringing ofgoods to the place of
b. net income was correct and current assets and current liabilities were business of the buyer.
overstated. b. costs that are directly connected with the converting of goods to a salable
c. net income,current assets,and current liabilities were overstated. condition. ^
d. net income and current liabilities were overstated. c. buying costs ofa purchasing department.
d. selling costs ofa sales department.
31. What is the effect of a P30,000 overstatement of last year's inventory on
current year's ending retained earning balance?
a. Understated by P30,000.
b. No effect.
c. Overstated by P30,000.
d. Need more information to determine.

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38. In a period of rising prices, the inventory method which tends to give the PRACTICAL HNANCIAL ACCOUNTING
highest reported net income is
a. base stock. A. Venice Merchandising Company reported inventory of P345,60.0 at December
b. first-in,first-out 31, 2021. You discovered that the inventory amount, among others, included
c. last-in, first-out the following: . "
d. weighted-average.
• Goods costing P21,600 ordered by a customer on December 27, 2021,
Item Nos.39-40 are based on the following: shipped FOB destination on December 29, 2021 and received by the
customer at their warehouse on January 5,2022.
During 2021, Derek Corporation transferred inventory to Ramsey Corporation and
agreed to repurchase the merchandise early in 2022. Ramsey then used the inventory • Goods costing P14,800 on December 25, 2021 shipped to Venice FOB
as collateral to borrow from PRIA Bank,remitting the proceeds to Derek.In 2022 when destination and received January 2,2022.
Derek repurchased the inventory, Ramsey used the proceeds to repay its bank loan.
• Goods costing P19,200 held on consignment.
39. This transaction is known as afn]
• Goods costing P12,400 ordered from a supplier on December 26, 2021,
a. consignment
shipped FOB shipping point on December 28 but had not been received
b. installment sale.
c. assignment for the benefit of creditors. by December 31.
d. product financing arrangement • Goods costing P31,500 shipped by a vendor FOB seller on December 31,
2021 and received by Venice on January 5,2022.
40. On whose books should the cost of the inventory appear at the December 31,
2021 statement offinancial position? • Goods costing P12,500 whicfh was shipped FOB destination to a customer
a. Derek Corporation on December 29, 2021. The goods are still in transit and the customer
b. 1 Ramsey Corporation , expected to receive the merchandise on January 5,2022.
c. PRIA Bank . '
d. Ramsey Corporation, with Derek making appropriate note disclosure of • Goods costing ,P40,000 Shipped by a vendor FOB destination on
the transaction December 29, 2021. The related invoice was received and recorded on
December 31, 2021. The goods were received by Venice On January 4,
2022.

(1) What is the correct amount ofinventory thatshould be reported by Venice in

its December3Ij 2021 statementoffinancial position?
a. PSltSOO
b. , P290,800 '
c.. P271,600 ,
d. P259,100

B. The Berkeley Company's physicid inventory on December 31, 2021 showed that
merchandise with a cost of P364,000 was on hand at that date. Excluded from
this amount are the following items:

• Merchandise costing P30,p00 held by Berkeley on consignment.

V , . • \

• Merchandise costing P45,000 shipped FOB shipping point to a customer

on December 29, 2021. The goods are expected to be received by the
customer on January 4,2022.

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• Merchandise costing P62,000 shipped FOB destination to a customer on •. Goods held on consignment by Mezza at a sales price of P100,000,
December 31, 2021. The goods were expected to be received by the excluding a 20% commission on the sales price. Freight paid by Mezza is
customer on January 6,2022. P10,000.

• Merchandise costing P78,000 shipped by a vendor FOB destination on
December 30,2021 and received by Berkeley on January 5, 2022.
• Merchandise costing P54,000 shipped by a vendor FOB seller on
December 31,2021 and received by Berkeley on January 3, 2022.
(2) What is the correct inventory that should appear in Berkeley's statement of
financial position at December31,2021?
a. P603,000
b. P504,000
c. P487,000
d. P480,000
C. Grass Company's inventory at December 31, 2021 was P570,000 based on a
physical count of goods priced at cost and before any necessary year-end
adjustments rdating to the following:
• Included in the physical count were goods billed to a customer FOB
shipping point on December 31,2021. These goods had a cost of P15,000
and were picked up by the carrier on January 10,2017.
• Goods shipped FOB shipping point on December 28, 2021 from a vendor
to Grass Company were received on January 4, 2022. The invoice cost
was P25,000.
• Goods shipped from Grass Company to a customer, terms FOB
destination, are still in transit at December 31, 2021. The goods, with a
selling price of P120,500, were received by the customer on Januaiy 5,
2022. The company sells goods at a 25% markup on cost
• Goods sold in transit FOB destination with invoice price of P245,000
which includes freight charge ofP20,000 to deliver the goods.
• Purchases of goods still in transit FOB destination with invoice of
P300,000. Freight cost,P30,000.
• Goods out on consignment with sales price of P180,000. Shipping cost to
consignee is P15,000.
(4) Whatis the correct amountofinventory atDecember31,2021?
a. P2,380,000
b. P2,355,000
c P2,710,000
d. P2,365,000
At December 31, 2021, the accounting staff of Tender Company submitted an
inventory list that showed a total of P2,350,000. The following information
needs additional analysis to determine whether the items should be included or
excluded in inventory:
• Merchandise costing P40,000 were transferred to the delivery
department on December 28 for shipment on January 3, 2022. This
inventory was excluded from the inventoiy total.
• Supplier's invoice for P18,000 worth of merchandise dated December 27,
2021 was received through the mails on December 30, 2021. Shipment
term is FOB destination. Since the goods arrived only on January 4,2022,
the goods were not included in the year-end inventory.
c

• Goods valued at P200,000 were received from a supplier for approval and
(3) What amount should Grass Company report as inventory in its December 31, were included in the ending inventory. The company informed their
2021 statementoffinancial position? supplier by facsimile message of the acceptance of goods on January 4,
a. P715,500
2022.
b. P700,500
c. P691,400 • On December 27, 2021, an order for P25,000 worth of merchandise was
d. P676,400 placed. This was included in the year-end inventory although the goods
were received only on January 5, 2022. Seller shipped the goods FOB
destination.
D. The inventory on hand on December 31,2021 for Mezza Company is valued at a
cost of Pl,920,000. The corporation's policy on its selling price is 150% of cOst
The following items were not included in the inventory: (5) What is the correct merchandise inventory of Tender Company at December
31,2021?
• Purchases of goods still in transit, shipped FOB shipping point, with price a. P2,165,000
ofP150,000. Freight charge ofP25,000 was prepaid by the supplier. b. P2,183,000
c. P2,190,000
d. P2,350,000

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F. Thefollowing purchases were made by Bay Leaf Trading: H. Crimson reported inventory amounting to Pl,727,50b in its December 31,2021
statement of financial position. Upon verification of the inventory ledger, the
Purchase Date Item Amotint Date Paid Term following compositions'were found:
April 1 Alcohol 500,000 April 10 2/15,n30
April 5 Face Mask 350,000 April 30 1/lQ,n30 Raw materials inventory in the warehouse P350,000
April 8 Face Shield 400,000 April 23 3/15,n30 Office supplies 10,000
Work in process inventory 162,500
(6) How much is the total net purchases to be recorded by Bay Leaf using the Shipping cartons i 37,500
gross method ofaccountingfor discpunts? Newly finished, goods inventories in the factory,,"including
a. Pt224,500 goods specifically segregated per sale contract,P50,000. 550,000
b. PI,228,000 Finished goods out on appfo^^i,at cost 25,000
c. Pl,240,000 . Advances to supplier for materials ordered . 50,000
d. PI,250,000 Damaged and unsalable finished goods,at cost < 12,500
Merchandise items in the showroom at 50% profit on cost 187,500
(7) How much is the total net purchases to be recorded by Bay Leafusing the net Prepaid insurance on inventories ^ . 15,000
method ofaccountingfor discounts? Goods held on consignment,at sales price (cost P37,500) 50,000
a. Pl,224,500 Merchandise items on hand of agents including 40% profit on
b. Pl,228,000 sales 100,000
c. Pl,240,000 Merchandise inventories 'in trailisit to' customers, FOB '
d. Pl,250,000 . destination at cost ' 62,500
Raw materials in transit, FOB shipping point , 40,000
. Hepison Company is specializing on sale of printers and ^related gadgets, Goods returned by customer in good condition 15,000
Items in receiving department, personnel refused to receive
including ink cartridges. Their lines of merchandise include all brands, whether due to damage 25,000
high end or low end products, catering to both individual and institutional users Goods in the shipping department . 35,000
of the products. During the year, selected transactions relating to its purchases
follow: . . (9) .Whatis the correctamountofinventory as ofDecember31,2021?
Purchases ofBiro printers from Metro Pacific Company P836,000 a. Pl,312,500
Purchases of Howlet printers from Ayaling Corporation, ,524,500 b. 81,343,750 , -
c. 81,375,000
•Purchases ofink cartridges from Metro Pacific Company , 180^000 d. 81,385,000
Terms of Metro Pacific Company and Ayaling Corporation are as follows:
3/10,n/30 I. The following costs were incurred by I Square Company related to inventory:
Metro Pacific Company
Ayaling Corporation n/10,n/30
After sales warranty costs 750,000
Brokerage commission to agents 600,000
During the year, the company received credit memoranda for defective Deliveiy costs to customers , 120,000
merchandise returned as foll(^ws: (All returns and allowances took place within Freight . 2,000,000
five days of purchases and prior to any payment ofaccount) Handling costs relating to imports 300,000
Metro Pacific-Company P52,000 Importduties 1,200,000
Ayaling Corporation . 28,500 Insurance on inventories in transit 1,000,000
Invoice cost of merchandise Inventory purchased 15,000,000
Total cash discounts taken during the year amounted to P22,180. Salary of accountants 1,800,000
Sales commission ofsales agents 900,000
(8) How much were the discounts lost? Storage costs of finished goods 540,000
a. P38,840 VAT on importation 500,000
b. P16,660
c. P40,970
d. P18,790

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(10) How much is the correct amountofinventory?

a. PIZIOO.OOO
(J41 Tuml^gtaftl^rcoZany
What is ate inventory value
doesatnotmaintain
January 31perpetual.nven
under the average method.
b. P18,300,000
a. P27,140
c. Pl%500,000
b. P26,489
d. P20,100,000
c. P26,174
d. P24,725
J. Victoria Corporation uses the perpetual inventory method. On August 1, it
purchased P20,000 of inventoiy, terms 2/10, n/30. On August 3, Victoria M.
returned goods that cost P2,000. On August 9,Victoriia paid the supplier.
The following data pertain to a particular item sold by Gemini Company.
2,000 units at P50
August 1 - Beginning inventory
(11) On August 9, Victoria should credit 9,000 units at P52
August8- Purchases
a. purchase discountsfor P400. n \ 1,500 units at P130
August 10- Sales
b. inventoryfor P400. .3,000 units at P55
August 14- Purchases
c. purchase discountsfor P360. . 8,000 units at PI35
August 20- Sales
d. inventoryfor P360. 1,500 units at P59
August 29- Purchases

K. Green Company recorded the following data pertaining to one of its inventory (15) Using the FIFO costflow, how much is the cost ofinventory atAugust31?
items during January 2021. a. P354,000
b. P312,000
January 1 Inventory,80 units @ P2,000 c. P331,500
Januaiy 8 Sold 40 units d. P330,000
Januaiy 30 Purchased 120 units @ P2,400
(16) Using the weighted average method, how much is the gross profit during the
(12) Whatis the moving average unit cost ofthis item atJanuary 31,2021? . month ofAugust?
d. P2,200 a. P503,500
b. P2,240 b. P771,500
c. P2,300 c. P714,500
d P2,400 d. P785,000

(17) If the units sold on August 10 are specifically identified as originatingfrom

L. The following data were taken from the inventory records of Jazz Company for the beginning balance on August 1 and the August 20 sales are specifically
January relating to one ofits Inkjet printers: ■ identijied as originatingfrom August8purchase, how much is the cost ofthe
Januaiy 1, balance 24 units @ Pl,075 P2S,800
goodssold during August?
a. P491,000
Purchase,January 5 19 units @ Pl,135 21,565
Purchase,January 24 38 units @ Pl,180 b. P419,000
44,840
Sales: 22 units on January-8 and 36 units on January 30 c. P490,000
January 31,balance 23 units d. P568,000

(13) What is the inventory value at January 31 under the average method, N. The following data are extracted from the records of an entity relating to an
assuming that the company maintains perpetual inventory records? (Round inventory item.
offunit cost to nearest peso)
a. P27,140 Quantity Unit Cost Total Cost
b. P26,489 Jan. 1 Beginning balance 5,000 P200 P1,000,000
c. P26,174 10 Purchase' 5,000 250 1,250,000
d. P24,725 15 Sale 7,000
16 Sales returns 1,000
30 Purchase 16,000 150 2,400,000
31 Purchase returns 2,000 150 300,000

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Inventories Inventories

(18) Under the perpetual inventory system, what is the moving average unit cost (21) How much is the ending inventory in 2021 using the weighted average
atJanuary 31? method?
a. P165 a. Pl,060,000
b. P167 b. P 710,000 i
a. P181 c. P 360,000
d. P225 d. P 350,000

O. The inventpiy records of Field Company show the following purchases during R. Sea Company provided the following net incpme and inventories for years 2019
the first quarter operations: through 2021. '

January 15,000 units P187,500 Profit Year-end Vear-end inventory

February 20,000 units 240,000 using weighted inventory unider lindPr weighted
March 13,000 units 167,700 average method FIFO ihethod '^'average method
2019 P 750,000 P 1,400,000 ^ P 900,000
The March 31 inventory using the weighted average method is P279,000. 2020 1,000,000 2,000,000 1,600,000 .
2021 1,200,000 2,150,000 1,720,000
(19) How much is the March 31 inventory using the periodic first-in, first-out
■ method? (22) How much is the tdtdl profitforyears 2019-2021 under the FIFO basis?
a. P281,700 a. P3,380,000
b. P279,000 b. P2,950,000
c. P27Z500 c. P2,520,000
d. P275,500 d. P2,250,000

P. Mahogany Company was organized at the beginning of 2019 and used the FIFO S. A company produces arid sells the following quantities ofa product:
method of inventory cost allocation. Profit reported under this method and
inventories under both FIFO and weighted average methods are shown below: Date Number oftons Total costs
July 1' ' Opening inventory 10 P200
20211 2021 4 Productiori 8 • 176
Profit under FIFO P 720,000 P1,000,000 Pl,400,000 6 Sale , -• 9.
Inventory,end: 15 Productiori 6 ' 144
, Weighted average 2,400,000 3,000,000 4,000,000 18 Sale ( 11 '
FIFO 2,680,0.00 3,200,000 4,500,000 23 Production 4 104

(20) How much is the profit,for the years 2019, 2020 and 2021, respectively, had (23) Which statement is true?
the weighted average method been used? a. Cost ofgoods sold using FIFO is higher than cost ofgoods sdld using
a. P720,000;P1,000,000;Pl,400,000 weighted average.
b. P440,000;Pl,Q80i000;Pl,100,000 b. Profit using FIFO is higher than profit using weighted average.
c. P1,000,000;P920,000;Pl,700,000 c. Total assets at July 31 is higher using weighted average than total
d. cannot be deterrnined assets using FIFO.
Profit is not affected by the costing method used to measure inventory.
Q. The following data relate to the first three years of operations for Wind ■; I.

Company: Oasis, Inc. uses, the lower of cost and net realizable value for its products in its
ending inventory. Data pertaining tp one of its products follow:
2019 2020 2021
Profit under FIFO P300,000 P450,OOO P160,000 Historical cost - P680^ Estimated selling price - Pl,200
Profit under weighted average 120,000 320,000 120,000 Normal profit - P240 Estimated cost of coiripletion and disposal - P420
Ending inventoiy under FIFO 550,000 670,000 710,000

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(24) Whatis the inventory unit valuefor this product? Replacement Net Realizable Normal
a. P540 Item Cost Cost Sales Price Value Profit
b. P680 A P1,000,000 Pl,100,000 Pl,450.000 P 700,000 PIOO.OOO
c. P780 B 1,500,000 1,200,000 1,750,000 1,600,000 200,000
d. PtZOO C 1,700,000 1,300,000 2,000,000 1,450,000 250,000
D 800.000 1.000.000 1.300.000 950.000 250.000
Total p.q^ooo.ono P4,600,000 P6,500,000 P4.700.000 PRon.nnn
U. The Royal Palm Company has partially completed inventory located in its
factoiy to which the following information relates: (27) How much is the loss on inventory write down to be included in Flair's cost of
sales?
Production cost to date P29,000 a. P550,000
Additional expected selling costs 4.000 b. P350,000
Production costs to complete 20.000 c. P200,000
Estimated sales price 54.000 d. P100,000
Transport costs to customer 3.000

(25) Following PAS 2 Inventories, at what amount should this inventory be X. Krispy Kreme Company uses the first-in, first-out method in calculating cost of
presented in the statement offinancial position? goods sold of their three products. On Januaiy 1. 2021. the.inventory account
a. P54,000 balance was P658,500 and the allowance for inventory write down account
b. P47,000 balance was P3.000. Information on the balances and purchases of the three
c. P29,000 products are given below for the month of December.
d. P27,000
Product A Product B Product C
Units Cost Units Cost Units Cost
P0.90
V. Sugary Company has the policy of valuing inventory at the lower of cost and net 12/1 Inventory 50.000 P6.00 30,000 PIO.OO 65,000
12/1-15 Purchases 70,000 P6.50 45,000 P10.50 30.000 P1.25
realizable value. Data pertaining to its three classes ofsugar products follow:
12/16-31 Purchase^ . 30,000 P8.00
12/1-31 Sales 105,000 50,000 45,000
Splendid Regular White Muscovado 12/31 Inventory 45,000 25,000 50,000
Estimated selling price/unit P3.000 P2.000 P2.500
Estimated cost to sell/unit 600 400 500 Sales price per unit P8.00 Pli.OO P2.00
Cost per unit 2.500 1.500 1.300
Number of units(50 kilo bags) 200 500 250
On December 31, 2021, the company's suppliers reduced their prices from the
most recent purchase prifces by the following percentages: Product A, 20%;
(26) How much inventory should be shown in Sugary Company's December 31 Products,10%;Product C.8%. Accordingly. Krispy Kreme decided to reduce its
statement offinancial position? sales prices on all items by 10%. effective Januaiy 1. 2022. The entity's selling
a. Pl,555,000 cost is 10% ofsales price for all products.
b. P2,225,000
c. P3,850,000 (28) How much is the inventory reported at December 31, 2021 statement of
d. Notgiven financial position under the lower ofcost and net realizable value?
a. P595,350
b. P569,850
w. Flair Company sells a variety of items to its customers. At December 31. the c. P559,350
balance of Flair s ending inventory account was P5.000.000 and the allowance d. P543,810
for inventory write down account before any adjustment was P200.000.
Relevant information about the inventories and the breakdown of inventory
cost and market data at December 31 follows: On October 31. 2021, a flash flood caused severe damage to the warehouse of
Tuscany Company. The company's merchandise inventory was not covered by
any insurance, and thus, it suffered a significant loss on its merchandise
inventory from this flood. The following information was available from the
accounting records ofTuscany.

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1/1 to 10/31/21 2020. (33) Assuming that the company's gros^ profit rate is 30%,based on sales, what is
Merchandise inventory,beginning P 400,000 P the estimated cost ofmerchandise lost by thefire? .,
Purchases(net of returns) 2,320,000 2,200,000 a. 81,102,000
Sales 3,120,000 2,400,000 b. 8952,000
Selling expenses 420,000 390,000 c. 8750,000
General and administrative expenses 510,000 425,000 d. 8700,000
Other income 50,000 20,000
Interest expense 28,000 32,000
AA. Light Trading lost most of its inventory in a fire in Deceniber, 2021,just before
At the beginning of 2021,the company changed its policy on the selling prices of the year-end physical inventory was taken. The company's books disclosed the
the merchandise in order to produce a gross profit rate of 5% greater than the following: -
gross profit rate in 2020. Undamaged merchandise marked to sell at PI00,000
Purchases P3,900,000 Purchase return P300,00t)
were salvaged. Damaged merchandise originally marked to sell at P30,000 had
Sales 6,500,000 Sales returns 240,000
an estimated realizable value of P8,000.
Merchandise with selling price of P210,000 remain undamaged after the fire.
(29) Whatare the gross profit rates in 2020 and 2021?
a. 25% and 30%
Damaged merchandise with an original selling price of P150;000 had a net
b. 30% arid 25%.
realizable value of P53,000. A jaartial cbmpafative profit: and loss for 2020 and
c. 25% and 26.25%
2019 also disclosed the following: ,
d. 26.25% and 25% 2020 2019
Sales ; ^ PS^OOO.OOO P5.600.000
(30} How much is the estimated inventory lossfrom theflood? Cost ofgoods sold • t,

a. P536,000 Inventory,January 1 P 945,000 Pl,100,000

b. P458fi00 , Purchases (net) 3,780,000 3,177,000
C; 'P428,000 . , Inventory,.December 31 fl.700.000V f945.0001
d. P242,000 Cost of goods sold P3.025.000 P3.332.000

Gross profit P1:Q75.000 P2.268.000

(31)Assuming that the damaged merchandise originally marked to sell atP30,0d0
were only slightly damaged and had an estirnated realizable value of (34) Assuming that Light Trading had no insurance coverage, whatis the amount
P25,000. Whatis the estimated inventory lossfrom theflood on October 31? ofloss as a result ofthefire?
a. P406,000 a. 81,544,800
b. P44_5i000 b. 81,365,000
c. P458,000 c., 81,328,000 . .
d. P536,b00 d. 81,281,000 r ' .

Z. On September 30, 2021, a fire at Chateau Company's only warehouse cause BB. Lindenwood Company reported inventory of P360;00G at December 31, 2021.
severe damage to its entire ihventoiy. Based on recent history. Chateau has a The following data were gathered to confirm^ the reported inventory.
gross profit of 30% on cost. The following information is available from
Chateau's records for the nine months ended September 30,2021. Inventory, December 31,2020 - P320,000
Purchases during 2021 - iPl,410,000
Inventory, January 1 - P550,000; Purchases - P3,000,000; Net sales - Cash sales during 2021 - P350,000 '
P3,640,000. A physical inventory disclosed usable damaged goods Shipment received on December 26,2021 included in physical inventory,
which Chai:eaU estimate's can be sold to a jobber for P50,000. but not recorded as purchases- PI0,000
Deposit made with suppliers,P20,000 entered as purchases. Goods were
(32) Using the gross profit method, what is the estimated cost ofgoods soldfor the not received during 2021. .
nine months ended September30,2021?' Collections on accounts receivable during 2021 - Pl,800,000
\ a. 82,800,000 Accounts receivable, December 31,2020 - P250,000
.h. i 82,750,000 Accounts receivable, December 31,2021 - P300,000
c. 82,548,000 Gross profit percentage on sales -40%
d. 82,485,000

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(35) Whatis the estimated inventory shortage atDecember 31,2021? (38) What is the estimated cost of the ending inventory using the average retail
a. P60,000 method?
b. PS0,000 a. P400,000
c. P40,000 b. P240,000
d. P5,000 c. P220,000
d. P200,000

CC. On September 30, 2021, a fire at Avida Company's warehouse caused severe (39) Applying the lower ofcost or net realizable value, what is the estimated cost
damage to its entire inventoiy. Based on recent history, Avida has a gross profit ofthe ending inventory using the FIFO basis?
of 30% ofnet sales. A physical inventoiy disclosed usable damaged goods a. P400,000
which Avida estimates can be sold to a jobber for P50,000. The following b. P240,000 -
information is available from Avida's records for the nine months ended c. P220,000
September 30,2021. d. P200,000 '

Inventory,Januaiy 1 550,000
Total purchases received and recorded,Jan. 1 - Sept 30 3,000,000 EE. The inventory and purchases data of Illumina Company for the last quarter of
Total freight cost ofgoods purchased and received 60,000 2021 are asfollows:
Total credit memo received on goods purchased and received 200,000
Total discounts taken on purchases 80,000 Beginning inventory: At cost- P650,000; At retail - Pl,075,000
Invoice received for goods purchased but still in transit , Purchases: At cost-P2,450,000; At retail-P3,025,000
shippedSeptember 30,2021,FOB shipping point 120,000 Freight-in - P50,000
Total sales delivered and recorded,Jan.1 - Sept 30 3,600,000 Net markup - P400,000; Net markdown - P30p,000
Unrecorded sales invoice for goods delivered 300,000 Net sales during the period - P3,8B0,000
Total sales returns accounted and recorded,Jan. 1 - Sept 30 160,000
Total sales discounts taken by customers on recorded sales 40,00.0 (40) What is the ending inventory at estimated cost using the retail inventory
method?
(36) Using the gross profit method, how much is the inventory loss? a. P320,000
a. P602,000 b. P256,000
b. P662,000 c. P240,000
c. P782,000 d. P224,000
d. P832,000
(41) IfIllumina uses the first-in,first-out basis and ignores the lower ofcost and
net realizable value rule, whatis the ending inventory at estimated cost?
DD. Lafayette Company uses the first-in, first-out retail method of inventory a. P320,000 ^
valuation. The following information is available: b. P256,000
c. P240,000
Beginning inventory: PI15,000 at cost; P300,000 at retail d. P224,000
Purchases: P600,000 at cost; Pl,100,000 at retail
Net additional markups - P100,000; net markdowns - P200,000
Sales revenue - P900,000 FF. Grove Company uses the retail inventory method to estimate its inventory for
interim statement purposes. Data pertaining to the computation ofinventory at
(37) What is the estimated cost of the ending inventory using the FIFO retail June 30,2021 follows:
method?
a. P400,00d Inventory,January 1: At cost- P180,000; At retail - P250,000
b. P240,000 ' Purchases: At cost- Pl,020,000; At retail - Pl,575,000
c. P220,000 Net markups - PI75,000; Sales - Pl,705,000
d. P200,000 Estimated normal shoplifting losses - P20,000
Net markdowns - P125,000

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Chapter 9 Chapter.9
Inventories Inventories

(42) M^at is Grove Company's estimated inventory at June 30, 2021 using the ,(46) What is the amount of gain on purchase comrhitrr^ents recognized upon
retail inventory method? delivery of the 1,000 sacks on April 1, 2022 asisuming the price per sack has
a. P150,000 increased to P2,750 persack?
b. P100,000 a. P30,000
c. P96,000 b. P20,0Q0
d. P90,000 c. P10,000 ' .
d. PO .

GG. The Burgandy Company values its inventory by lising the retail method (FIFO
basis, lower of cost or net realizable value). The following information is 11. Examination of the records of Tivoli Companyifor the year ended December 31,
available for theyear 2021: . r 2021 revealed the following:

Cost Retail • During 2021, Tivoli received P40,000 as cash advance from a customer
Beginning inventory P 800,000 Pl,400,000 for merchandise to be manufactured and shipped during 2022. The
Purchases 2,970,000 4,200,000 P40,000 was credited to sales revenue."
Freight-in 40,000 • Inventoryatjanuary 1,2021 was overstated by P71,000.
Shortages 8o;ooo • lnventoryatDecember31,2021 was understated by P96,000.
Net markups 100,000 • Profit (before adjustments) reported on the .2Q21 profit or loss was
Net markdowns ; 20,000 P6S8,000.
Sales 4,000,000
Sales allowance 75,000 (47) What is the correct profitfor theyear ended December31,2021?
a. P875,000
(43)At whatamouht would the Burgandy Company repoh its ending inventory? b. P865,000
a. Pl,120,000 c. P785,000 N .
b. Pl,134,000 d. 'P53l,000
c. Pl,172,500
d. Pl,600,000
JJ. Stellar Company computed its profit for the year 2021 at P320,000 before the
discovery ofthe following errors.
HH. During 2021, Palazzo Company signed a non-cancelable contract with Crown
Milling Company to purchase 1,000, 50-kilos sacks of rice at P2,700 per sack • Its January 1, 2021 inventory did not include goods costing P20,0D0
with delivery to be made on April 1, 2022. On December 31, 2021,the price of received on January 3, 2021 and were shipped by the supplier in
rice had fallen to P2,680 per sack. On April 1, 2022, the price per sack of rice December 2020 FOB shipping point The goods were correctly recorded
further decreased to P2,670.' , ' as purchases in December 2020.

(44) In Palazzo's December 31,2021 profit and loss, how much is reported as loss • Goods costing P12,000 were counted twice in the December 31, 2021
on purchase commitments? count. ,.
a. P50,000
b. P30,000 • Goods costing P23,000, shipped to customers FOB shipping point on
c. P20,000 , , / a December 29, 2021 were billed on January 2, 2022 at P33,000. The
d. PO , '' ■ \ 'V V customers received the goods on January 2, 2022. The goods were not
included in the December 31,2021 physical count '
(45) What is the amount of loss on purchase commitments recognized upon
delivery ofthe 1,000sacks on April 1,2022? (48) WhatisthecorrectprofitofStellar Companyfor the year 2021?
a. P3b,000; ./ . a. P385,000
b. P20,000 / ■ b. P361,000
c. PIO.OOO . c. P321,000
d. PO d. P298,000

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