Pamantasan ng Lungsod ng Valenzuela

College of Business and Accountancy

Department of Accountancy

INTERMEDIATE ACCOUNTING 1 (FAR 3)

Accounting for Inventories

INVENTORIES
- are assets held for sale in the ordinary course of business, in the process of production for such sale in the form of materials or
supplies to be consumed in the production process or in the rendering of services.

Classes of Inventories:

 Inventories for Trading Concern

- trading concern pertains to buy and sell of goods in the same form purchased.
1. Merchandise Inventory – goods purchased and held for sale by trading businesses.

 Inventories for Manufacturing Concern

- manufacturing concern pertains to buying of goods with the intention of altering or converting it into another form before
making it available for sale.
1. Finished Goods – completed products which are ready for sale.
2. Goods in Process – partially completed products which require further process or work before they can be sold.
3. Raw Materials – goods that are to be used in the production process. No work or process has been done yet.
4. Factory or Manufacturing Supplies (Indirect Materials) – similar to raw materials but has an indirect relationship
to the end product.

Goods includible in the inventory:

(All goods to which the entity has title shall be included in the inventory regardless of location.)
a. Goods owned and on hand.
b. Goods in transit and sold FOB destination.
c. Goods in transit and purchased FOB shipping point.
d. Goods out on consignment.
e. Goods in the hands of sales or agents.
f. Goods held by customers.

FOB Terms:
 FOB destination – ownership of purchased goods is transferred only upon receipt by the buyer at the point of destination.
 FOB shipping point – ownership of the purchased goods is transferred upon shipment.
Freight Terms:
 Freight collect – freight charge on the shipped goods is not yet paid and will be actually paid by the buyer.
 Freight prepaid – freight charge on the shipped goods is already paid by the seller.
Maritime Shipping Terms:
 Free alongside (FAS) – buyer bears the cost of loading and shipment thus the title of the goods passes to the buyer when the
carrier takes possession of the goods.
 Cost, insurance and freight – the seller must pay for the cost of loading thus the title and risk of loss shall pass to the buyer
upon delivery of the goods to the carrier.
 Ex-ship – seller bears all the expenses and risk of loss until the goods are unloaded at which time titles and risk shall pass to
the buyer.

Consigned goods

Consignment is a method of marketing goods in which the owner called the consignor transfers physical possession of certain
goods to an agent called consignee who sells them on the owner’s behalf. Consigned goods shall be included in the consignor’s
inventory and excluded from the consignee’s inventory.

Problem 1:
ABC Company is a wholesale distributor of automotive replacement parts. On December 31, 2021, the entity conducted a physical
count and revealed an initial amount of inventory at P 1,250,000. Additional information are as follows:

1. Parts held on consignment from another entity to ABC Company, amounting to P 165,000 were included in the physical
count on December 31, 2021.
2. Parts in transit on December 31, 2021 to customers, shipped FOB destination on December 28, 2021, amounted to P34,000.
The customers received the parts on January 6, 2021. Sales were recorded on January 2, 2021.
3. Retailers were holding goods on consignment costing P 200,000 at their stores on December 31, 2021.
4. Goods were in transit from a vendor to ABC Company on December 31, 2021 costing P20,000. The goods were shipped
FOB shipping point on December 28, 2021.

Required:
Compute the correct amount of inventory as of December 31, 2021.

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Accounting for Trade and Other Receivables FAR 3

ACCOUNTING FOR INVENTORIES

Two systems in accounting for inventories:

1. Periodic System - calls for the physical counting of goods on hand at the end of the accounting period to determine
quantities.
- The quantities are then multiplied by the corresponding unit costs to get the inventory value for balance
sheet purposes.
2. Perpetual system – requires the maintenance of records called stock cards that usually offer running summary of the
inventory inflow and outflow.

Problem 2:
DEF Company is a wholesaler of motorcycle seatcovers along 10 th Avenue Caloocan City. Its beginning inventory consisted of 90
seatcovers, each costing P100.00. The company has the following transactions during the current year:

1. Purchased 1,000 seatcovers on account at P 100.00 each.

2. Returned 100 defective seatcovers to supplier.
3. Paid 500 of the seatcovers purchased.
4. Sold 800 seatcovers at P200.00 each of which 100 pieces is on account.
5. Received 20 seatcovers returned by credit customer in excellent condition.
6. Physical count at year-end revealed 150 units on hand.

Required:
a. Prepare the journal entries to record the above transactions assuming the company uses the periodic system and perpetual
system.
b. Give the adjusting entry to record inventory shortage or overage. (Perpetual System only)

Accounting treatment for trade discounts and cash discounts:

o Trade discounts – deductions from the list or catalog price in order to arrive at the invoice price which is the amount actually
charged to the buyer. These discounts are not recorded.
o Cash discounts – deductions from the invoice price when payment is made within the discount period. These discounts are
recorded as “purchase discount” by the buyer and sales discount by the seller.

Methods of recording purchases:

1. Gross method – purchases and accounts payable are recorded at gross.

2. Net method – purchases and accounts payable are recorded at net.

Problem 3:
DEF Company purchased 10,000 seatcovers on account at P 100.00 each less trade discounts of 10% and 5%, with credit terms of
2/10, n/30.

Required:
Given the following assumptions, provide the journal entries to record the transaction using gross and net method.
a. Purchase on account.
b. Payment made within discount period.
c. Payment made beyond discount period.
d. End of the accounting period, no payment has been made and the discount has been expired. (Net method only.)

Cost of inventories:
 Cost of purchase – comprise the purchase price, import duties and irrecoverable taxes, freight, handling and other costs
directly attributable to the acquisition of finished goods, materials and services.
 Cost of conversion – includes cost directly related to the units of production such as direct labor and systematic allocation of
fixed and variable production overhead.
o Allocation of fixed production overhead to the cost of conversion is based on the normal capacity of the production
facilities. Unallocated fixed overhead is treated as an expense during the period it is incurred.
o Variable production overhead is allocated to each unit of production on the basis of the actual use of the production
facilities.
 Other cost – included in the cost of inventories only to the extent that it is incurred in bringing the inventories to their
present location or condition.

Costs excluded from the cost of inventories.

1. Abnormal amounts of wasted materials, labor and other production costs.
2. Storage costs, unless these costs are necessary in the production process prior to a further production stage.
 Storage costs on goods in process – capitalized.
 Storage costs on finished goods – expensed.
3. Administrative overheads that do not contribute to bringing inventories to their present location and condition.
4. Distribution or selling costs.

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Accounting for Trade and Other Receivables FAR 3

Cost of inventories of service providers – consists of the labor and other costs of personnel directly engaged in providing the
service, including supervisory personnel and attributable overhead.
INVENTORY COST FORMULAS

Problem 4:
The following data pertains to an inventory item of GHI Company:

Date Particulars Units Unit Cost Total Cost Sales in units

Jan. 1 Beg. balance 900 100.00 90,000.00
11 Sale 600
20 Purchase 800 105.00 84,000
25 Purchase 650 110.00 71,500
31 Sale 750

The ending inventory is 1,000 units.

Required:
Compute for ending inventory and cost of goods sold using the following:
1. First in, First out (FIFO Method)
a. FIFO – Periodic
b. FIFO – Perpetual
2. Weighted Average
a. Weighted Average – Periodic
b. Weighted Average – Perpetual (Moving Average Method)
3. Last in, First Out (LIFO Method)
a. LIFO – Periodic
b. LIFO – Perpetual

PAS 2, par. 25, expressly provides that the cost of the inventories shall be determined by using either FIFO or weighted
average method. The standard does not permit anymore the use of the LIFO Method as an alternative formula in measuring
cost of inventories.

Problem 5:
The following data pertains to an inventory item of JKL Company:

Date Particulars Units Unit Cost Total Cost Sales in units

Jan. 1 Beg. balance 9000 100.00 900,000.00
11 Sale 8,500
20 Purchase 9000 105.00 840,000
25 Purchase 5000 110.00 550,000
27 Purchase return (1,000) 110.00 (110,000)
31 Sale 9,000

The ending inventory is 4,500 units.

Required:
Compute for ending inventory and cost of goods sold using the following:
1. First in, First out (FIFO Method)
c. FIFO – Periodic
d. FIFO – Perpetual
2. Weighted Average
c. Weighted Average – Periodic
d. Weighted Average – Perpetual (Moving Average Method)

o Specific identification – specific costs are attributed to identified items of inventory. This method is appropriate for inventories
that are segregated for a specific project and inventories that are not ordinarily interchangeable. (PAS 2, par. 23)
o Standard costs – predetermined product costs established based on normal levels of materials and supplies, labor, efficiency, and
capacity utilization. This method may be used for convenience if the results approximate cost. (PAS 2, par. 21)
o Relative Sales Price Method – allocation of common cost based on the lump sum price or basket price.

Problem 6:
MNO Company purchased product B1, B2 and B3 at a basket price of P600,000. The original sales price of the products are
P300,000, P200,000 and P150,000 for B1, B2 and B3 respectively. Compute for the cost of each product.

ACCOUNTING FOR INVENTORY WRITEDOWN

PAS 2, par. 9, provides that inventories shall be measured at “lower of cost and net realizable value” or LCNRV. The assets shall
not be carried in excess of amounts expected to be realized from their sale or use.

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Accounting for Trade and Other Receivables FAR 3

 If the cost is lower than net realizable value – inventory is measured at cost and the increase in value is not recognized.
 If the net realizable value is lower than cost – inventory is measured at net realizable value and the decrease in value is
recognized.

Note: Net realizable value = estimated selling price - estimated cost of completion and disposal.

Methods of accounting for the inventory writedown:

1. Direct Method (Cost of Goods Sold Method) – the inventory is recorded at lower of cost or net realizable value.
2. Allowance Method (Loss Method) – inventory is recorded at cost and any loss on inventory writedown is accounted
separately.

Problem 7:
Below is the inventory data of PQR Company as of December 31, 2021:

Estimated Cost of
Product Units Cost
Sales Price Sell
A 1,000 100.00 200.00 50.00
B 1,200 150.00 300.00 60.00
C 1,500 250.00 350.00 150.00
D 2,000 250.00 400.00 100.00
E 500 300.00 450.00 165.00

Required:
1. Determine the inventory value applying the LCNRV.
2. Give the journal entries under direct and allowance method.
3. Give the journal entries under direct and allowance method assuming that on December 31, 2022, the total cost of inventory
is amounted to P1,400,000 and net realizable value of P1,350,000.

PAS 2, par. 34, provides that the amount of any reversal of any writedown of inventory arising from an increase in net realizable
value shall be recognized as a reduction in the amount of inventory recognized as an expense (cost of goods sold) in the period in
which the reversal occurs.

Problem 8:
STU Company has the following inventory data as December 31, 2021:

Inventory – Jan. 1:
Cost 6,000,000
Net Realizable Value 5,500,000
Net Purchases 22,000,000
Inventory – Dec. 31:
Cost 7,000,000
Net Realizable Value 6,300,000

Required:
Compute for the cost of goods sold under direct method and allowance method.

Purchase commitments – obligations of the entity to acquire certain goods sometime in the future at a fixed price and fixed quantity.

Problem 9
VXY Company entered into a purchase commitment with Unicorn Corp. for 1,000 units of toys with a contract price of P500,000.
Purchases will be made at the end of the following year.

Required:
Prepare the appropriate journal entries for the following assumptions:
1. The replacement cost at year end is P480,000 and P450,000 during actual purchase.
2. The replacement cost at year end is P480,000 and P550,000 during actual purchase.

- END OF COURSE FILE -

References
Valix, C. T., Peralta, J. F., & Valix, C. A. (2020). Intermediate Accounting Volume One. GIC Enterprises & Co., Inc.

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Accounting for Trade and Other Receivables FAR 3

PROBLEM 1
Inventory -physical account 1,250,000.00
Consigned goods from other entity - 165,000.00
Goods shipped to customer, FOB destination 34,000.00
Consigned goods to retailers 200,000.00
Goods shipped from vendor, FOB shipping point 20,000.00
Inventory - December 31, 2021 1,339,000.00

PROBLEM 2
a. Periodic System

1 Purchases (1,000 x 100.00) 100,000.00

Accounts Payable 100,000.00

2 Accounts Payable (100 x 100.00) 10,000.00

Purchase Return 10,000.00

3 Accounts Payable (500 x 100) 50,000.00

Cash 50,000.00

4 Cash (700 x 200.00) 140,000.00

Accounts Receivable (100 x 200.00) 20,000.00
Sales 160,000.00

5 Sales Return (20 x 200.00) 4,000.00

Accounts Receivable 4,000.00

6 Merchandise inventory - end (150 x 100.00) 15,000.00

Income Summary 15,000.00

Perpetual System

1 Merchandise Inventory (1,000 x 100.00) 100,000.00

Accounts Payable 100,000.00

2 Accounts Payable (100 x 100.00) 10,000.00

Merchandise Inventory 10,000.00

3 Accounts Payable (500 x 100) 50,000.00

Cash 50,000.00

4 Cash (700 x 200.00) 140,000.00

Accounts Receivable (100 x 200.00) 20,000.00
Sales 160,000.00

Cost of Goods Sold (800 x 100) 80,000.00

Merchandise Inventory 80,000.00

5 Sales Return (20 x 200.00) 4,000.00

Accounts Receivable 4,000.00

Merchandise Inventory (20 x 100.00) 2,000.00

Cost of Goods Sold 2,000.00

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Accounting for Trade and Other Receivables FAR 3

b
. Accounting for inventory shortage/overage

6 Inventory Shortage (60 x 100.00) 6,000.00

Merchandise Inventory 6,000.00

Inventory - beginning 90
Add: Net Purchases 900 ( 1000 units - 100 units)
Total 990
Less: Net Sales 780 (800 units - 20 units)
Inventory - end (Correct) 210
Inventory - physical count 150
Inventory Shortage 60

PROBLEM 3

Computation for invoice price:

List Price ( 10,000 x 100.00) 1,000,000.00

1st trade discount (100,000 x 10%) 100,000.00

900,000.00

2nd trade discount (90,000 x 5%) 45,000.00

Invoice price 855,000.00

Gross Method
a. Purchases 855,000.00
Accounts Payable 855,000.00

b
. Accounts Payable 855,000.00
Cash ( 855,000 x 98%) 837,900.00
Purchase Discount (855,000 x 2%) 17,100.00

c. Accounts Payable 855,000.00

Cash 855,000.00

Net Method
a. Purchases 837,900.00
Accounts Payable 837,900.00

b
. Accounts payable 837,900.00
Cash 837,900.00

c. Accounts Payable 837,900.00

Purchase discount lost 17,100.00
Cash 855,000.00

d
. Purchase discount lost 17,100.00
Accounts Payable 17,100.00

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Accounting for Trade and Other Receivables FAR 3

PROBLEM 4

FIFO - Periodic
Units Unit Cost Total Cost
January 20 Purchases 350 105.00 36,750.00
January 31 Purchases 650 110.00 71,500.00
Inventory - Jan. 31 1000 108,250.00

Inventory - Jan. 1 90,000.00

Add: Net Purchases (84,000 + 71,500) 155,500.00
Total Goods Available for sale 245,500.00
Less: Inventory - Jan. 31 108,250.00
Cost of goods sold 137,250.00

FIFO -
Perpetual
Purchases Sales Balance
Date Unit
Units Unit Cost Total Cost s Unit Cost Total Cost Units Unit Cost Total Cost
Jan. 1 900 100.00 90,000.00
11 600 100.00 60,000.00 300 100.00 30,000.00
20 800 105.00 84,000.00 300 100.00 30,000.00
800 105.00 84,000.00
25 650 110.00 71,500.00 300 100.00 30,000.00
800 105.00 84,000.00
650 110.00 71,500.00
31 300 100.00 30,000.00 350 105.00 36,750.00
450 105.00 47,250.00 650 110.00 71,500.00

Inventory - Jan.
31 108,250.00

Cost of Goods Sold 137,250.00

Weighted Average - Periodic

Units Unit Cost Total Cost
Jan. 1 Beg. balance 900 100 90,000.00
20 Purchase 800 105 84,000.00
25 Purchase 650 110 71,500.00
Total goods available for sale 2350 245,500.00

Weighted Average unit cost (245,000/ 2350) 104.47

Inventory - Jan. 31 (1000 x 104.47) 104,470.00

Inventory - Jan. 1 90,000.00

Add: Net Purchases (84,000 + 71,500) 155,500.00
Total Goods Available for sale 245,500.00
Less: Inventory - Jan. 31 104,470.00
Cost of goods sold 141,030.00

Weighted Average -
Perpetual

Unit
Units Cost Total Cost
Jan. 1 Beg. balance 900 100.00 90,000.00

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Accounting for Trade and Other Receivables FAR 3

11 Sale 600 100.00 60,000.00

Balance 300 100.00 30,000.00
20 Purchase 800 105.00 84,000.00
Balance 1100 103.6364 114,000.00
25 Purchase 650 110.00 71,500.00
Balance 1750 106.00 185,500.00
31 Sale 750 106.00 79,500.00
Total 1000 106.00 106,000.00

Inventory - Jan.
31 106,000.00

Cost of Goods Sold 139,500.00

LIFO - Periodic
Units Unit Cost Total Cost
January 1 Balance 900 100.00 90,000.00
January 20 Purchases 100 105.00 10,500.00
Inventory - Jan. 31 1000 100,500.00

Inventory - Jan. 1 90,000.00

Add: Net Purchases (84,000 + 71,500) 155,500.00
Total Goods Available for sale 245,500.00
Less: Inventory - Jan. 31 100,500.00
Cost of goods sold 145,000.00

LIFO -
Perpetual
Purchases Sales Balance
Date Unit Unit
Units Unit Cost Total Cost s Unit Cost Total Cost s Unit Cost Total Cost
Jan. 1 900 100.00 90,000.00
11 600 100.00 60,000.00 300 100.00 30,000.00
20 800 105.00 84,000.00 300 100.00 30,000.00
800 105.00 84,000.00
25 650 110.00 71,500.00 300 100.00 30,000.00
800 105.00 84,000.00
650 110.00 71,500.00
31 650 110.00 71,500.00 300 100.00 30,000.00
100 105.00 10,500.00 700 105.00 71,500.00

Inventory - Jan.
31 101,500.00

Cost of Goods Sold 142,000.00

PROBLEM 5

FIFO - Periodic
Units Unit Cost Total Cost
January 20 Purchases 500 105.00 52,500.00
January 31 Purchases 4000 110.00 440,000.00
Inventory - Jan. 31 4500 492,500.00

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Accounting for Trade and Other Receivables FAR 3

Inventory - Jan. 1 900,000.00

Add: Net Purchases (945,000 + 550,000 - 110,000) 1,385,000.00
Total Goods Available for sale 2,285,000.00
Less: Inventory - Jan. 31 492,500.00
Cost of goods sold 1,792,500.00

FIFO - Perpetual
Purchases Sales Balance
Date
Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost
Jan.
1 9000 100.00 900,000.00

11 8500 100.00 850,000.00 500 100.00 50,000.00

20 9000 105.00 945,000.00 500 100.00 50,000.00

9000 105.00 945,000.00

25 5000 110.00 550,000.00 500 100.00 50,000.00

9000 105.00 945,000.00

5000 110.00 550,000.00

27 -1000 110.00 - 110,000.00 500 100.00 50,000.00

9000 105.00 945,000.00

4000 110.00 440,000.00

31 500 100.00 50,000.00

8500 105.00 892,500.00 500 105.00 52,500.00

4000 110.00 440,000.00

Inventory - Jan.
31 492,500.00
Cost of Goods
Sold 1,792,500.00

Weighted Average - Periodic

Units Unit Cost Total Cost
Jan. 1 Beg. balance 9000 100 900,000.00
20 Purchase 9000 105 945,000.00
25 Purchase 5000 110 550,000.00
27 Purchase Return -1000 110 -110,000.00
Total goods available for sale 22000 2,285,000.00

Weighted Average unit cost (2,285,000/22,000) 103.86

Inventory - Jan. 31 (4500 x
103.86) 467,370.00

Inventory - Jan. 1 900,000.00

Add: Net Purchases (945,000+550,000-110,000) 1,385,000.00
Total Goods Available for sale 2,285,000.00
Less: Inventory - Jan. 31 467,370.00

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Accounting for Trade and Other Receivables FAR 3

Cost of goods sold 1,817,630.00

Weighted Average -Perpetual

Units Unit Cost Total Cost

Jan. 1 Beg. balance 9000 100.00 900,000.00
11 Sale 8500 100.00 850,000.00
Balance 500 100.00 50,000.00
20 Purchase 9000 105.00 945,000.00
Balance 9500 104.7368 995,000.00
25 Purchase 5000 110.00 550,000.00
Balance 14500 106.55 1,545,000.00
27 Purchase Return -1000 110.00 -110,000.00

13500 106.30 1,435,000.00

31 Sale 9000 106.30 956,700.00
Total 4500 106.29 478,300.00

Inventory - Jan.
31 478,300.00
Cost of Goods Sold 1,806,700.00

PROBLEM 6
B1 300,000.00 30/65 x 600,000 276,923.08
B2 200,000.00 20/65 x 600,000 184,615.38
B3 150,000.00 15/65 x 600,000 138,461.54
650,000.00 600,000.00

PROBLEM 7
Estimated Sales Net Realizable Value Net Realizable
1 Product Units Cost Total Cost Cost of Sell LCNRV
Price (per unit) Value

A 1,000 200.00 50.00

100.00 100,000.00 150.00 150,000.00 100,000.00

B 1,200 300.00 60.00

150.00 180,000.00 240.00 288,000.00 180,000.00

C 1,500 350.00 150.00

250.00 375,000.00 200.00 300,000.00 300,000.00

D 2,000 400.00 100.00

250.00 500,000.00 300.00 600,000.00 500,000.00

E 500 450.00 165.00

300.00 150,000.00 285.00 142,500.00 142,500.00

1,305,000.00 1,480,500.00 1,222,500.00

2 Direct Method
Inventory - December 31, 2021 1,222,500.00
Income Summary 1,222,500.00

Allowance Method
Inventory - December 31, 2021 1,305,000.00
Income Summary 1,305,000.00

Loss on inventory writedown 82,500.00

Allowance for inventory writedown 82,500.00

Computation:
Inventory - December 31, 2021 1,305,000.00
Net Realizable Value 1,222,500.00
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Accounting for Trade and Other Receivables FAR 3

Inventory writedown 82,500.00

3 Direct Method
Inventory - December 31, 2022 1,350,000.00
Income Summary 1,350,000.00

Allowance Method
Inventory - December 31, 2022 1,400,000.00
Income Summary 1,400,000.00

Allowance for inventory writedown 32,500.00

Gain on reversal of inventory writedown 32,500.00

Computation:
Inventory - December 31, 2022 1,400,000.00
Net Realizable Value 1,350,000.00
Required Allowance - December 31, 2022 50,000.00
Less: Allowance balance - December 31, 2021 82,500.00
Decrease in Allowance - 32,500.00

PROBLEM 8
Direct Method

Inventory – Jan. 1: 5,500,000.00

Net Purchases 22,000,000.00
Goods Available for sale 27,500,000.00
Inventory – Dec. 31: 6,300,000.00
Cost of goods sold 21,200,000.00

Allowance Method

Inventory – Jan. 1: 6,000,000.00

Net Purchases 22,000,000.00
Goods Available for sale 28,000,000.00
Inventory – Dec. 31: 7,000,000.00
Cost of goods sold before inventory writedown 21,000,000.00
Loss on inventory writedown
200,000.00
Cost of goods sold after inventory writedown 21,200,000.00

Computation:
Required allowance - Dec. 31 (7,000,000 - 6,300,000) 700,000.00
Required allowance - Jan. 1 (6,000,000 - 5,500,000) 500,000.00
Increase in Allowance (loss on writedown) 200,000.00

PROBLEM 9
1 Loss on purchase commitment 20,000.00
Estimated liability for purchase commitment 20,000.00

Purchases 450,000.00
Loss on purchase commitment 30,000.00
Estimated Liability for purchase commitment 20,000.00
Accounts payable 500,000.00

2 Loss on purchase commitment 20,000.00

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Accounting for Trade and Other Receivables FAR 3

Estimated liability for purchase commitment 20,000.00

Purchases 500,000.00
Estimated Liability for purchase commitment 20,000.00
Accounts Payable 500,000.00
Gain on purchase commitment 20,000.00

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