Chapter 12: Inventories

CHAPTER 12: INVENTORIES

PROBLEM 12-1 Cost of Purchase
Purchase price based on vendors’ invoices 1,250,000
Brokerage commission paid to agents for arranging imports 50,000
Import duties 100,000
Freight and insurance on purchases 250,000
Other handling costs relating to imports 25,000
Total cost of purchase (B) P1,675,000
Note that the trade discount was already deducted in arriving at the vendor’s
invoice.

PROBLEM 12-2 Inventoriable Cost

Materials ₱ 350,000
Irrecoverable purchase taxes 30,000
Labor 120,000
Variable production overhead 50,000
Fixed production costs 40,000
Cartage in 8,000
Total (C) ₱598,000

PROBLEM 12-3 Rebates

Question No. 1
Invoice price (no VAT is charged on these goods) ₱ 850,000
Less: Rebate offered to the entity by the supplier 10,000
Inventoriable cost (B) ₱ 840,000

Question No. 2
Inventoriable cost (C) ₱ 850,000

PROBLEM 12-4 FREIGHT TERMS & FOREIGN EXCHANGE

Question No. 1 Free on Board
Cost of inventory ($100,000 x ₱45) ₱4,500,000
ForEx loss (₱46.875 - ₱45) x 100,000 (A) 187,500

Question No. 2 Cost, Insurance and Freight

Cost of inventory ($100,000 x ₱45.625) ₱4,562,500
ForEx loss (₱46.875 - ₱45.625) x 100,000 (D) 125,000

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PROBLEM 12-5 MANUFACTURING COST

Question No. 1
Variable cost:
Direct labor (₱3 x 3 DLH x 100,000 units) ₱ 900,000
Direct materials (₱2 excluding VAT x 100,000 units) 200,000
Fixed Cost (₱100,000 / 100,000 normal capacity) x 100,000 actual 100,000
Total cost (C) ₱1,200,000

Question No. 2
Variable cost:
Direct labor (₱3 x 3 DLH x 120,000 units) ₱1,080,000
Direct materials (₱2 excluding VAT x 120,000 units) 200,000
Fixed Cost (₱100,000 / 120,000 actual capacity) x 100,000 actual 100,000
Total cost (E) ₱1,420,000

Question No. 3
Variable cost:
Direct labor (₱3 x 3 DLH x 80,000 units) ₱ 720,000
Direct materials (₱2 excluding VAT x 80,000 units) 160,000
Fixed Cost (₱100,000 / 100,000 normal capacity) x 80,000 actual 80,000
Total cost (E) ₱ 960,000

PROBLEM 12-6 Items to be Included in the Inventory

1 Items in the warehouse during the count P1,090,000
2 Items out on consignment at another company's store 70,000
Items purchased FOB shipping point that are in transit at
4 December 31 500,000
5 Freight charges on goods purchased above 13,000
Items sold to another company, for which our company
has signed an agreement to repurchase at a set price that
covers all costs related to the inventory. Total cost of
7 merchandise is 200,000
Items sold FOB destination that are in transit at December
10 31, at cost 75,000
14 Items currently being used for window display 100,000
15 Items on counter for sale 400,000
17 Items included in the count, damaged and unsalable (150,000)
Items in receiving dept., returned by customer, in good
18 condition (not included in the count) 50,000
19 Merchandise inventories out on approval, at cost 100,000
Finished special article goods, made to order (included in
20 the count) (78,000)
Total (A) P2,370,000

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The following items would not be reported as inventory:

3 Cost of goods sold in the income statement 40,000
6 Not reported in the financial statements 300,000
8 Cost of goods sold in the income statement 30,000
9 Cost of goods sold in the income statement 50,000
11 Advertising exp. In the income statement 10,000
12 Not reported in the financial statements 100,000
13 Temporary investments in the current
assets section of the balance sheet 125,000
16 Not reported in the financial statements 360,000
21 Office supplies in the current asset
section of the balance sheet 40,000

PROBLEM 12-7 Accounts Payable

Unadjusted balance 1,800,000
Goods acquired in transit, FOB shipping point 100,000
Goods lost in transit 50,000
Adjusted Accounts Payable (A) P1,950,000
The journal entry on item 2 would include the following:
Purchases / Inventory 50,000
Accounts Payable 50,000
To record the purchase on December 20.
Query: For F/S presentation on December 31, is the goods lost in transit be
presented as part of inventory?
Answer: No, since the inventories were lost in transit and it is improper to
report inventories that is not existing (i.e. it violates the existence assertion).
Thus the journal entry at December 31 if no claim was filed and the common
carrier has yet to acknowledge the claim may include a:
Loss on goods lost in transit (preferably presented as 50,000
other expense and not as cost of goods sold)
Inventory / Purchases 50,000
And on the next year (January 5), when the claim was filed and acknowledged
by the common carrier, the journal entry will be:
Claims from common carrier 50,000
Gain on reimbursement of lost inventory 50,000
To record the claim against common carrier on January 5.

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PROBLEM 12-8 Consigned Goods

Inventory shipped on consignment to Lomasoc 360,000
Freight by Desiree to Lomasoc 18,000
Total Inventoriable cost (D) P 378,000

PROBLEM 12-9 Items to Be Included In the Inventory

Note to the professor: Use the following guide questions in answering this
question:
1. Was there a valid sale?
2. Was the sale recorded?
3. Were the inventories EXCLUDED in the count?
Guide Sales Inventories
Unadjusted balances Questions 700,000 150,000
100 Yes, Yes, Yes - -
101 No, No, Yes - 2,000
102 No, Yes, Yes (1,800) 1,200
103 Yes, Yes, Yes - -
104 Yes, No, Yes 9,200 -
105 No, Yes, No (6,500) -
106 No, No, No - -
107 Yes, No, Yes 3,900 -
108 No, Yes, No (8,600) -
109 No, No, No - -
Adjusted balances 696,200 153,200
(A) (A)
SUMMARY OF ANSWERS:
1. A 2. A

PROBLEM 12-10 Gross method vs. Net method

CASE NO 1: Gross method
Date Accounts Debit Credit
01/02 Purchases (100,000 x [1-20%]) 80,000
Accounts payable 80,000
01/12 Accounts payable 80,000
Cash (80,000 x [1-98%]) 78,400
Purchase discount 1,600
01/14 Accounts payable 80,000
Cash 80,000

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CASE NO 2: Net method

Date Accounts Debit Credit
01/02 Purchases (100,000 x [1-20%]
x [1-2%]) 78,400
Accounts payable 78,400
01/12 Accounts payable 78,400
Cash (80,000 x [1-98%]) 78,400
01/14 Accounts payable 78,400
Purchase discount lost 1,600
Cash 80,000

SUMMARY OF ANSWERS:
CASE NO. 1 CASE NO. 2
1. B 5. C
2. C 6. C
3. D 7. A
4. A 8. D

PROBLEM 12-11 Cost Formulas - Different Methods

Note to professor: The unit cost on April 28 should be P16.75 and not P17.
Question Nos. 1 and 2
Weighted average
Weighted average Total goods available for sale (in peso value)
=
unit cost Total goods available for sale (in units)
Weighted average 1,105,000
=
unit cost 85,000
Weighted average unit cost = P13/unit
Inventory end (40,000 x 13) = P520,000 (C)
Cost of goods sold (20,000+5,000+21,000–1,000) x 13 = P585,000 (C)

Question Nos. 3 and 4

Moving average
Units Unit cost Total cost
April 1 balance 20,000 10 200,000
Apr. 2 Purchase 30,000 12 360,000
Balance 50,000 11 560,000
Apr. 4 Sale (25,000) 11 (280,000)
Balance 25,000 11 280,000
Apr. 10 Purchase 15,000 14 210,000
Balance 40,000 12 490,000
Apr. 15 Sales (21,000) 12 (257,250)
Balance 19,000 12 232,750

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Apr. 17 Sales return 1,000 12 12,250

Apr. 28 Balance 20,000 245,000
Apr. 28 Purchase 20,000 16.75 335,000
Balance 40,000 15 580,000

Inventory end = P580,000 (A)

Cost of goods sold (280,000 + 257,250 – 12,250) = P525,000 (A)

Question Nos. 5 and 6

FIFO
Units Unit cost Total cost
April 1 balance 20,000 10 200,000
Apr. 2 Purchase 30,000 12 360,000
Apr. 4 (25,000 units sold) From Apr. 1 (20,000) 10 (200,000)
From Apr. 2 (5,000) 12 (60,000)
Balance from Apr. 2 25,000 12 300,000
Apr. 10 Purchase 15,000 14 210,000
Apr. 15 (21,000 units sold) From Apr. 2 (21,000) 12 (252,000)
Balance from April 2 4,000 12 48,000
Balance from April 10 15,000 14 210,000
Apr. 17 Sales return 1,000 12 12,000
Balance
Balance from April 2 5,000 12 60,000
Balance from April 10 15,000 14 210,000
Apr. 28 Purchase 20,000 17 335,000
Total Balance 40,000 605,000

Inventory end = P605,000 (B)

Cost of goods sold (200,000 + 60,000 + 252,000 – 12,000) = P500,000 (B)
Question Nos. 7 and 8
Note that inventory and cost of goods sold under FIFO periodic and perpetual is
the same.
SUMMARY OF ANSWERS:
1. C 2. C 3. A 4. A 5. B 6. B 7. B 8. B

PROBLEM 12-12 Lower of Cost or Net Realizable Value

Question Nos. 1 to 3
Markers Pens Highlighters
Historical cost 120,000 94,400 150,000
Selling price 180,000 180,000 180,000
Less: Estimated cost to complete 24,000 24,000 34,000
Net realizable value 156,000 156,000 146,000
Lower of cost-or-NRV 120,000 94,400 146,000
SUMMARY OF ANSWERS:
1. C 2. D 3. B

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PROBLEM 12-13 Lower of Cost or Net Realizable Value

Question No. 1 Raw Materials

Supply of steel (used for motorbikes) Write-down
Cost ₱ 40,000
More profitable (as is) 25,000 ₱ 15,000
Supply of aluminum (used for bicycles)
Cost ₱ 60,000
More profitable (completed product) 50,000 10,000
Total write-down (C) ₱ 25,000

Question No. 2 Work-in-process

Incomplete motorbikes Write-down
Cost ₱ 30,000
More profitable (completed product) 25,000 ₱ 5,000
Incomplete bicycles
Cost ₱ 50,000
More profitable (as is) 60,000 -
Total write-down (D) ₱ 5,000

Question No. 3 Finished goods

Motorbikes Write-down
Cost ₱ 80,000
More profitable (completed product) 60,000 ₱ 20,000
Bicycles
Cost ₱ 80,000
More profitable (completed product) 110,000 -
Total write-down (C) ₱ 20,000

Question No. 4 Adjusted COGS

Cost of goods sold before write-down ₱450,000
Add: Write-down
Raw materials 25,000
Work-in-process 5,000
Finished goods 20,000
Adjusted cost of goods sold (C) ₱500,000

PROBLEM 12-14 Purchase Commitment

CASE NO. 1
Date Accounts Debit Credit
11/15 No entry
12/31 Loss on purchase commitment (20,000 x [25-20]) 100,000
Estimated liability for purchase commitment 100,000

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03/15 Purchases (25,000 x 25) 500,000

Estimated liability for purchase commitment 100,000
Accounts payable/Cash 500,000
Gain on purchase commitment 100,000
CASE NO. 2
Date Accounts Debit Credit
11/15 No entry
12/31 No entry
03/15 Purchases (25,000 x 25) 500,000
Accounts payable/Cash 500,000

PROBLEM 12-15 Purchase Commitment

Date Accounts Debit Credit
3/31 No entry
12/31 Loss on purchase commitment (1,200,000-1,000,000) 200,000
Estimated liability for purchase commitment 200,000
04/30 Purchases 1,200,000
Estimated liability for purchase commitment 200,000
Accounts payable/Cash 1,200,000
Gain on purchase commitment 200,000

SUMMARY OF ANSWERS:
1. B 2. A

PROBLEM 12-16 Purchase Commitment

Gain on purchase commitment [50,000 x (55 - 40)] = P750,000 (A)
To record the actual purchase on March 31, 2016:
Purchases (50,000 x 55) 2,750,000
Estimated liability for purchase commitment 750,000
Accounts payable/Cash 2,750,000
Gain on purchase commitment 750,000
The gain to be recognized is limited to the loss on purchase commitment
previously recorded.

PROBLEM 12-17 Purchase Commitment

Question No. 1
Remaining contract – minimum of 500 units each year
2016 (500 x 100) P 50,000
2017 (500 x 100) 50,000
Total P 100,000
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Less: Estimated realizable value (1,000 x 20) 20,000

Probable loss from purchase commitment (C) P 80,000
Question No. 2
A loss in inventory writedown should also be recognized on December 31, 2011
in the amount of P100,000 (1,250 units x [P100-P20]). (B)
SUMMARY OF ANSWERS:
1. C 2. B

PROBLEM 12-18 Inventory Estimation - Gross Profit Rate Method

Sales 3,400,000
Less: Sales returns (30,000)
Net Sales excluding Sales discount 3,370,000
Multiply by: Cost ratio (1-30%) 70%
Cost of Goods sold 2,359,000

Inventory, January 1 650,000

Add: Net Purchases
Purchases 2,300,000
Add: Freight-in 60,000
Less: Purchase returns (80,000) 2,280,000
Total Goods available for sale 2,930,000
Less: Cost of goods sold (2,359,000)
Merchandise inventory that should be on hand 571,000
Less: Actual merchandise inventory on hand (420,000)
Cost of Missing inventory (A) 151,000

PROBLEM 12-19 Inventory Estimation - Gross Profit Rate Method

CASE NO. 1
Sales 1,552,000
Divide by: Sales ratio 125.00%
Cost of Sales 1,241,600
Inventory, January 1 160,000
Purchases, January 1 through April 19 1,120,000
Total goods available for sale 1,280,000
Less: Cost of sales 1,241,600
Cost of Missing inventory P 38,400 (A)

CASE NO. 2
Sales 1,552,000
Multiply by: Cost ratio 75%
Cost of Sales 1,164,000

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Inventory, January 1 160,000

Purchases, January 1 through April 19 1,120,000
Total goods available for sale 1,280,000
Less: Cost of sales 1,164,000
Cost of Missing inventory P 116,000 (D)

SUMMARY OF ANSWERS:
1. A 2. D

PROBLEM 12-20 Inventory Estimation: LCM - Retail Method

Computation of cost ratio:
Cost Retail
Inventory at January 1 640,000 1,600,000
Purchases 1,100,000 2,000,000
Freight-in 152,000 -
Net markups - 800,000
Totals 1,892,000 4,400,000
Cost ratio (1,892,000 / 4,400,000) = 43%
Computation of Inventory end at retail
Balance up to markups (see above computation) 4,400,000
Less: Markdowns 400,000
Sales 1,600,000
Inventory end at retail P2,400,000
Multiply: Cost ratio 43%
Inventory end at cost (C) P1,032,000

PROBLEM 12-21 Inventory Estimation: Average Method - Retail Method

Computation of cost ratio:
Cost Retail
Inventory at January 1 250,000 375,000
Purchases 1,325,000 1,750,000
Net markups - 200,000
Net markdowns - (75,000)
Totals 1,575,000 2,250,000
Cost ratio (1,575,000 / 2,250,000) = 70%
Computation of Inventory end at retail
Balance up to markdowns (see above computation) 2,250,000
Less: Sales 1,500,000
Estimated normal shrinkage (1,500,000 x 5%) 75,000
Estimated normal shoplifting losses 50,000

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Inventory end at retail P 625,000

Computation of Cost of goods sold
Total goods available for sale at cost 1,575,000
Less: Inventory end at cost (625,000 x 70%) 437,500
Cost of Sales (B) 1,137,500

PROBLEM 12-22 Inventory Estimation: FIFO Method - Retail Method

Computation of cost ratio:
Cost Retail
Purchases 292,500 400,000
Net markups - 75,000
Net markdowns - (25,000)
Totals 292,500 450,000
Cost ratio (292,500 / 450,000) = 65%
Computation of Inventory end at retail
Balance up to markdowns (see above computation) 450,000
Add: Inventory beginning 100,000
Less: Sales 375,000
Inventory end at retail P 175,000
Multiply: Cost ratio 65%
Inventory end at cost (A) P113,750

PROBLEM 12-23

Question No. 1
Direct materials inventory
Beg. Balance 9,000 7,000 Balance end
DM purchased (squeeze) 70,000 72,000 Direct materials used
(B)
Total 79,000 79,000

Question No. 2
Total cost added to work in process (72,000+80,000+24,000) = P176,000 (C)

Question No. 3
Applied overhead to job 3 (24,000/10,000 x 120 hours) = P288 (D)

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Question No. 4
Work in process inventory
Beg. Balance 17,000 31,000 Balance end
DM used 72,000 162,000 Cost of goods
Direct labor 80,000 (B) manufacture
Factory overhead 24,000 (squeeze)

Total 193,000 193,000

SUMMARY OF ANSWERS:
1. B 2. C 3. D 4. B

PROBLEM 12-24
Question No. 1
A EI over (P129-P119) x 4,000 40,000
B EI under (70,000)
C EI over 100,000
Overstatement of ending inventory 70,000 (C)
Question No. 2
D. Ending inventory understated (140,000) (B)
Question Nos. 3 and 4
2015 2016
Unadjusted balance 1,000,000 1,200,000
A. EI over, NI over (P129-P119) x 4,000 (40,000) 40,000
B. EI under, NI under 70,000 (70,000)
C. EI over, NI over (100,000) 100,000
D. EI under, NI under 140,000
Adjusted balances 930,000 1,410,000
(A) (C)
Question No. 5
Unadjusted net income (1,000,000+1,200,000) 2,200,000
Less: Adjusted net income (930,000+1,410,000) 2,340,000
Net adjustment to income-understated (140,000) (D)
SUMMARY OF ANSWERS:
1. C 2. B 3. A 4. C 5. D

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PROBLEM 12-25
Question Nos. 1 and 2
Ledger Physical
Balance Count
Balances prior to adjustment P 314,800 P 293,600
Add: Goods in transit sold, FOB destination 3,200 3,200
Less: unrecorded sale ( 8,400) -
Less: unrecorded purchase returns ( 6,000) -
Less: goods held on consignment - ( 8,800)
Add: unrecorded purchase 3,640- -
Add: Goods in transit purchased, FOB shipping point 1,600
Add: Goods out on consignment - 14,800
Adjusted balances P 307,240 P 304,400
(A) (C)
Question No. 3
Adjusted balances, per ledger P 307,240
Adjusted balances, physical count 304,400
Inventory shortage P 2,840 (B)

SUMMARY OF ANSWERS:
1. A 2. C 3. B

PROBLEM 12-26
Accounts
Inventory Payable Sales
Unadjusted balances P 800,000 P335,000 P5,000,000
1 Parts held on consignment ( 18,000) ( 18,000)
2 Parts sold included in the count ( 30,000)
3 Parts in transit to customers,
FOB shipping pt. 22,000
4 Parts on conditional sale - - -
5 Goods out on consignment 100,000
6 Parts in transit purchased,
FOB shipping pt. 16,000 16,000
7 Mdse. Hold for shipping inst.
excluded in the count 160,000
8 Finished special article, incl.
in the count and sale not rec. ( 30,000) - 50,000
Adjusted balances P1,020,000 P333,000 P5,050,000
(A) (A) (B)

SUMMARY OF ANSWERS:
1. A 2. A 3. B

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PROBLEM 12-27
Note to the professor: Use the following guide questions in answering this
question:
1. Accounts Payable and related accounts
Was there a valid purchase?
Was the purchase recorded?
Were the inventories INCLUDED in the count?
2. Accounts Receivable and related accounts
Was there a valid sale?
Was the sale recorded?
Were the inventories EXCLUDED in the count?

SOLUTION:
Ending Net
Inventory Sales Purchases AP Income
Unadjusted balances 550,000 1,000,000 600,000 450,000 120,000
679
680
681
682 Purch over, COS over, NI
under (46,740) (46,740) (46,740)
EI over, COS under, NI
over (46,740) 46,740
683 EI over, COS under, NI
over (4,500) (4,500)
684 Purch under, NI over 1,060 1,060 (1,060)
685 No, No, No
686 No, No, No
310 Yes, Yes, Yes
311 Sales over, NI over (560) (560)
EI under, NI under (560 x
70%) 392 392
312 Sales over, NI over (31,940) (31,940)
EI under, NI under (31,940
x 70%) 22,358 22,358
313 Sales over, NI over (6,350) (6,350)
EI under, NI under (6,350
x 70%) 4,445 4,445
314 Sales over, NI over (1,930) (1,930)
315 No, No, No
316 No, No, No
317 No, No, No
318
Net adjustment (24,045) (40,780) (45,680) (45,680) (19,145)
Adjusted balances 525,955 959,220 554,320 404,320 100,855
(A) (A) (A) (A) (D)

SUMMARY OF ANSWERS:
1. A 2. A 3. A 4. A 5. D

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PROBLEM 12-28
Ending Accounts Accounts
inventory receivable payable Sales Net income
Unadjusted
balance P220,000 P104,000 P138,000 P1,010,000 P180,400
A (20,000) 20,000
B (10,000) (10,000)
C 50,000 (64,000) (64,000) (14,000)
D 14,000 (16,000) (16,000) (2,000)
E ( 24,000) ( 24,000)
Adjusted P 250,000 P24,000 P108,000 P930,000 P160,400
(A) (C) (D) (D) (A)
SUMMARY OF ANSWERS:
1. A 2. C 3. D 4. D 5. A

PROBLEM 12-29
Accounts Accounts Net
Inventory payable Receivable Net Sales Purchases Net income
Unadjusted
balances 250,000 400,000 1,000,000 4,000,000 2,500,000 600,000
A - - - - - -
B 35,000 - - - - 35,000
C 4,000 4,000 - - 4,000 -
D (25,000) - 40,000 40,000 - 15,000
E 10,000 - - - - 10,000
F - - (30,000) (30,000) - (30,000)
G 34,000 - (68,000) (68,000) - (34,000)
H - - (10,000) (10,000) - (10,000)
I - - - (90,000) - (90,000)
J 60,000 60,000 - - 60,000 -
Adjusted
balances 368,000 464,000 932,000 3,842,000 2,564,000 496,000

SUMMARY OF ANSWERS:
1. C 2. C 3. A 4. A 5. D 6. D

PROBLEM 12-30

Accounts Accounts Net Net

Inventory payable Receivable Net Sales Purchases income
Unadj.
bal 500,000 800,000 2,000,000 8,000,000 5,000,000 1,200,000
A -
B 25,000 25,000
C 80,000 80,000 90,000
10,000 10,000
D 60,000 60,000
E (5,000) 5,000

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F 400,000 400,000 400,000 -

(50,000) 50,000
G (100,000) (100,000) (100,000)
H (60,000) (60,000)
Total 1,075,000 1,225,000 1,900,000 7,840,000 5,490,000 1,190,000
1. A 2. (E) 3. A 4. B 5. A 6. (E)

SUMMARY OF ANSWERS:
1. A 2. E 3. A 4. B 5. A 6. E

PROBLEM 12-31

Unadj. Accounts Cost of

Inventory Receivable Sales Purchases goods sold
bal 560,000 300,000 2,500,000 1,100,000 840,000
a (10,000) 10,000
b 880 (2,000) (2,000) (880)
*(1,200)
c (5,000) (5,000) -
d (20,000) (20,000) -
e (50,000) (50,000) -
f 30,000 30,000 -
g -
h (27,500) 40,000 40,000 27,500
Add'l 2 (75,000) (75,000)
523,380 291,800 2,493,000 1,025,000 801,620
1. A 2. D 3. D 4. A 5. C
*Commission [(₱200 x 40) - ₱6,800 remittance]

SUMMARY OF ANSWERS:
1. A 2. D 3. D 4. A 5. C

PROBLEM 12-32
Questions No. 1 to 5
R/E Sales EI A/P CGS
2016 Purchases under, CGS 36,000
under, NI over, RE over
2017 Purchases over, CGS 36,000
over
2016 EI under, NI under, RE (32,000)
under
2017 BI under, CGS under (32,000)
Sales under (20,000)
Purchases under, CGS under (24,000) (24,000)
EI under, CGS over (8,000) 8,000

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Purchases under, CGS under (4,000) (4,000)

EI under, CGS over (4,000) 4,000
Total 4,000 (20,000) (12,000) (28,000) (12,000)

Legend:
BI - Beginning inventory
EI - Ending inventory
NI - Net Income
CGS - Cost of goods sold
RE - Retained earnings – 12/31/2016 or 01/01/2017
4,000 – overstated
(4,000) – understated
Note: The effect of errors on December 2016 and January 2017 has no effect on
the ending balance of the accounts payable on December 31, 2017 since the
payable is expected to be settled before the end of the year.

SUMMARY OF ANSWERS:
1. C 2. B 3. B 4. D 5. C

PROBLEM 12-33
Question No. 1
Sales (475,000/80%) P593,750 100%
Less: Cost of sales 475,000 80%
Gross profit 118,750 20%
Inventory (in units)
Beg. Balance (60,000/P3) 20,000 25,000 Balance end (squeeze) or
(125,000/5)
Purchases 100,000 95,000 Cost of sales (475,000/5)
Total 120,000 120,000

Inventory (in peso amount)

Beg. Balance (squeeze) 60,000 125,000 Balance end (squeeze)
Purchases 540,000 475,000 Cost of sales
Total 600,000 600,000

Weighted average unit cost = TGAS (peso) / TGAS (units)

Weighted average unit cost (P600,000/120,000) = P5/unit
SUMMARY OF ANSWERS:
1. A 2. A 3. B 4. A 5. B

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PROBLEM 12-34
Question No. 1
The cumulative effect on change in accounting policy on January 1, 2016 or
December 31, 2015 Retained Earnings is understatement of 100,000, which is
the understatement of Ending Inventory on December 31, 2015. (B)

Question No. 2
Net income – weighted average P3,250,000
Beginning inventory under, CGS under, Net income over (150,000)
Ending inventory under, CGS over, Net income under 100,000
Adjusted net income – FIFO (B) P3,200,000

Question No. 3
Computation of units sold:
Beginning inventory – units 10,000
Add: Total purchases – units 100,000
Total goods available for sale – units 110,000
Less: Units sold (P6,400,000 / P80/unit) 80,000
Ending inventory in units 30,000
The 30,000 ending inventory comes from the last two purchases as follows:
Units Unit cost Total cost
From 4th quarter purchases 10,000 68 680,000
From 3rd quarter purchases 20,000 66 1,320,000
Total 30,000 (B) 2,000,000

Question No. 4
Cost (refer to no. 3) 2,000,000
Net realizable value [(P70 – P5) x 30,000] 1,950,000
Loss on inventory write-down (B) 50,000

Question No. 5
Beginning inventory – FIFO 500,000
Add: Net Purchases (P6,480,000 – 980,000) 5,500,000
Total goods available for sale 6,100,000
Less: Ending inventory at cost (see no. 3) 2,000,000
Cost of goods sold at cost 4,100,000
Add: Loss on inventory write-down (see no. 4) 50,000
Cost of goods sold after inventory write-down (A) 4,150,000

SUMMARY OF ANSWERS:
1. B 2. B 3. B 4. B 5. A

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PROBLEM 12-35

Question No. 1
Marked price including VAT 605,000
Less: VAT (605,000/1.14 x 14%) 74,298
Marked price excluding VAT 530,702
Less: Trade discount (8% x 530,702) 42,456
Less: Settlement discounts 4,200
Total cost of Raw Materials 484,086
Multiply by: Unused portion 20%
Raw materials, end (A) 96,809

Question No. 2
Work in process beginning 0
Raw materials used (484,086 x 80%) 387,269
Salaries and wages (500,000 x 55%) 275,000
Variable overheads (100,000 x 70%) 70,000
Fixed manufacturing overhead (1,100 x P151.278)* 166,406
Packing materials (685,000/7 x 9 x 75%) 660,536
Less: Work in process ending 0
Cost of goods manufactured (B) 1,559,179

Fixed manufacturing overhead

Rent and insurance – factory (140,000 / 12) 11,667
Rent – warehouse 30,000
Other fixed manufacturing overhead (285,000 x 65%) 185,250
Total actual FMO for January 226,917
Divide by; Normal units per month (18,000 / 12) 1,500
Fixed manufacturing overhead per unit 151.278

Question No. 3 and 4

Beginning finished goods 0
Add: Cost of goods manufactured 1,559,179
Less: Finished goods ending (1,559,179 x 20%) (B) 311,836
Cost of goods sold (A) 1,247,343

Question No. 5
Cost 311,836
Net realizable value (400,000 – 90,000 – 15,000) 295,000
Loss on inventory write-down (B) 16,436

SUMMARY OF ANSWERS:
1. A 2. B 3. B 4. A 5. B

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PROBLEM 12-36
Question No. 1
(10,500 - 1,000 + 3,000) = 12,000 units
No. of units Unit cost Total
3,000 14 P 42,000
2,000 13 26,000
4,000 15 60,000
3,000 16 48,000
12,000 P 176,000 (A)

Question No. 2
(4,500+700+600)=5,800 units
No. of units Unit cost Total
1,800 19 P 34,200
1,800 20 36,000
1,200 21 25,200
1,000 22 22,000
5,800 P 117,400 (A)
Question No. 3
T-shirts:
Net realizable value NRV Cost Lower
(12,000 x (P16-(10% x P16)) P172,800 P176,000 P 172,800
Jackets:
(5,800 x (P22-(10%xP22) 114,840 117,400 114,840
Lower of cost or NRV P287,640 P 293,400 P 287,640
Question No. 4
Total cost (see no. 3) P 293,400
Less: Lower of cost or NRV (see no. 3) 287,640
Loss on inventory write-down (B) P 5,760
Question No. 5
Beginning inventories:
T-shirts (9,000 x P11) P 99,000
Jackets (5,000 x P15) 75,000 P 174,000
Add:*Total purchases (299,500 + 183,900) 483,400
Total goods available for sale P 657,400
Less: Merchandise inventory at cost 293,400
Cost of sales before inventory write-down P 364,000
Add: Loss on inventory write-down 5,760
Cost of sales after inventory write-down (B) P369,760
*T-shirts
4,000 P12 P 48,000
3,000 12 36,000
2,500 13 32,500
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3,500 14 49,000
2,000 13 26,000
4,000 15 60,000
3,000 16 48,000
22,000 P 299,500

Jackets
900 P16 P 14,400
1,100 18 19,800
1,500 19 28,500
2,000 19 38,000
1,800 20 36,000
1,200 21 25,200
1,000 22 22,000
9,500 P 183,900

SUMMARY OF ANSWERS:
1. A 2. A 3. A 4. B 5. B

PROBLEM 12-37
This T-Account of Raw Materials will be the same under the three different
cases:
Raw Materials
Beginning balance 600,000 1,200,000 Balance end
Net Purchases 2,200,000 1,600,000 Direct materials used
Total 2,800,000 2,800,000

CASE NO. 1
Question No. 1
GP Rate: 2013 2014 2015 2016
Gross Profit 2,000,000 3,500,000 4,000,000
Divide by: Sales 1,700,000 2,800,000 3,000,000
Gross Profit Rate 0.15 0.20 0.25 0.30
The trend of gross profit for the past three years increases by 5% each year;
thus, if the trend continues, the gross profit for 2016 will be 30%. The cost ratio
then would be 70% (100% - 30%). Therefore, the cost of goods sold is
computed as follows:
Sales 6,000,000
Multiply by: Cost Ratio 0.70
Cost of goods sold 4,200,000 (B)

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Question No. 2
Finished Goods
Beginning balance 2,800,000 2,000,000 Balance end
Cost of goods 4,200,000 Cost of goods sold
manufactured 3,400,000
Total 6,200,000 6,200,000

Work in Process
Beginning balance 2,000,000 2,600,000 Balance end (A)
Direct materials used 1,600,000 Cost of goods
Direct labor 1,600,000 3,400,000 manufactured
Factory overhead 800,000
Total 6,000,000 6,000,000

Computation of factory overhead:

Direct labor cost 1,600,000
Multiply by: Predetermined rate 50%
Factory overhead 800,000

CASE NO. 2:
Question No. 3
GP Rate: 2013 2014 2015 2016
Gross Profit 340,000 630,000 1,000,000
Divide by: Sales 2,000,000 3,500,000 4,000,000
Gross Profit Rate 0.17 0.18 0.25 0.20
The GP rate in 2016 is computed as follows:
16% + 18% + 25%
Gross Profit Rate =
3
= 20%
The cost ratio then would be 80% (100% - 20%). Therefore, the cost of goods
sold is computed as follows:
Sales 6,000,000
Multiply by: Cost Ratio 0.80
Cost of goods sold 4,800,000 (B)
Question No. 4
Finished Goods
Beginning balance 2,800,000 2,000,000 Balance end
Cost of goods 4,800,000 Cost of goods sold
manufactured 4,000,000
Total 6,800,000 6,800,000

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Work in Process
Beginning balance 2,000,000 2,000,000 Balance end (A)
Direct materials used 1,600,000 Cost of goods
Direct labor 1,600,000 4,000,000 manufactured
Factory overhead 800,000
Total 6,000,000 6,000,000

CASE NO. 3:
Question No. 5
The gross profit for 2016 is computed based on the overall gross profit for 2014
and 2015:
800,000 + 1,000,000
Gross Profit Rate =
3,500,000 + 4,000,000
1,800,000
=
7,500,000
Gross Profit Rate = 24%
The cost ratio then would be 76% (100% - 24%). Therefore, the cost of goods
sold is computed as follows:
Sales 6,000,000
Multiply by: Cost Ratio 0.76
Cost of goods sold 4,560,000 (A)
Question No. 6
Finished Goods
Beginning balance 2,800,000 2,000,000 Balance end
Cost of goods 4,560,000 Cost of goods sold
manufactured 3,760,000
Total 6,560,000 6,560,000

Work in Process
Beginning balance 2,000,000 2,240,000 Balance end (A)
Direct materials used 1,600,000 Cost of goods
Direct labor 1,600,000 3,760,000 manufactured
Factory overhead 800,000
Total 6,000,000 6,000,000

SUMMARY OF ANSWERS:
1. B 2. A 3. B 4. A 5. A 6. A

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PROBLEM 12-38
Question No. 1
Accounts payable
Balance end 250,000 555,000 Beg. Balance
Purchase ret. and allow. 70,000 3,000,000 Purchases
Purchase discounts 80,000 100,000 Freight-in
Payments to supplier 3,255,000
(squeeze)
Total 3,655,000 3,655,000

Question No. 2
Direct materials inventory
Beg. Balance 200,000 320,000 Balance end
Net purchases 2,950,000 2,830,000 Direct materials used
Total 3,150,000 3,150,000

Purchases 3,000,000
Add: Freight-in 100,000
Gross Purchases 3,100,000
Less: Purchase returns and allow 70,000
Purchase discounts 80,000
Net Purchases 2,950,000
Question No. 3
Work in process
Beg. Balance 250,000 280,000 Balance end
Direct materials used 2,950,000 4,375,000 Cost of goods
Direct labor 900,000 manufactured
Factory overhead 675,000
Total 4,655,000 4,655,000

Question No. 4
Sales P5,100,000 120%
Less: Cost of sales (5,000,000/120%) 4,250,000 100%
Gross profit 850,000 20%
Note: Do not deduct sales discount from the gross sales since sales discount
does not constitute actual return of merchandise.
Question No. 5
Finished goods
Beg. Balance 400,000 525,000 Balance end
Cost of goods 4,375,000 4,250,000 Cost of goods sold

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manufactured
Total 4,775,000 4,775,000

Estimated finished goods 525,000

Less: Cost of goods out on consignment 20,000
Salvage value 10,000
Inventory fire loss 495,000

Question No. 6
Cost of goods sold (80% x P5,100,000) = P4,080,000

Question No. 7
Sales (5,100,000-100,000) P5,000,000 100%
Less: Cost of sales (80% x P5,100,000) 4,080,000 80%
Gross profit 1,000,000 20%

Finished goods
Beg. Balance 400,000 695,000 Balance end
Cost of goods 4,375,000 4,080,000 Cost of goods sold
manufactured
Total 4,775,000 4,775,000

Estimated finished goods 695,000

Less: Cost of goods out on consignment 20,000
Salvage value 10,000
Inventory fire loss 665,000

SUMMARY OF ANSWERS:
1. A 2. A 3. A 4. B 5. B 6. A 7. A

PROBLEM 12-39
Question No. 1
Accounts payable, March 31 2,370,000
Less: Payment in April 300,000
Total 2,070,000
Accounts payable for April Purchases
Total purchases 600,000
Less: Payment in April 200,000 400,000
Total (B) 2,470,000

Question No. 2
Purchases, as of March 31 4,200,000
Add: Purchases in April 600,000
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Gross purchases 4,800,000

Less: Purchase returns 12,000
Net purchases (B) 4,788,000

Question No. 3
Accounts receivable
Beg. Balance 2,700,000 3,000,000 Bal. end
Collections including
Sales on account 1,488,000 938,000 recoveries
Recoveries 0 250,000 Writeoff
0 Sales returns
4,188,000 4,188,000

Net Sales
Sales as of March 31 9,040,000
April Sales 1,488,000
Less: Sales return 100,000 1,388,000
Net Sales (C) 10,428,000

Question No. 4
Net Sales 10,428,000
Multiply by: Cost ratio 60%
Cost of Sales (C) 6,256,800

Cost of Sales 9,000,000 10,500,000

Divide by: Gross Profit 9,000,000 4,500,000
50.000% 30.000%
Average gross profit = (50%+30%)/2 = 40%
Cost ratio = 100% - 40% = 60%

Question No. 5
Estimated inventory 3,031,200
Less: Shipment in transit 40,000
Undamaged goods at cost 120,000
Salvage value 25,000
Inventory fire loss (C) 2,846,200

SUMMARY OF ANSWERS:
1. B 2. B 3. C 4. C 5. C

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PROBLEM 12-40
Questions No. 1 and 2
Purchases ending
11 mos 12 mos
Unadjusted balance 1,350,000 1,600,000
Shipment in Nov. included in December purchases 15,000 -
Unsalable shipments received (2,000) (3,000)
Deposits in October shipped February (4,000) (4,000)
Deposits made vendor in November (11,000) -
Adjusted balance 1,348,000 1,593,000
1. (D) 2. (D)

Question No. 3
Beginning inventory – January 1, 2015 175,000
Add: Purchases for 11 months (see No. 1) 1,348,000
Less: Ending inventory – Nov. 30, 2015 (180,000- 179,000
11,000 + 10,000)
Cost of sales 1,344,000 (A)
Cost ratio (2,688,000 / 3,360,000) = 80%

Question No. 4
Sales ending December 31, 2015 1,920,000
Less: Sales ending Nov. 30, 2015 (1.7M-20,000) 1,680,000
Sales – December 2015 240,000
Less: Sales at cost 20,000
Sales in December 2015 made at a profit 220,000
Multiply: Cost ratio (2,688,000 / 3,360,000) 80%
Cost of sales made at profit 176,000
Add: Cost of sales made at cost 20,000
Total Cost of Sales -December 196,000 (A)

Question No. 5
Beginning inventory – Nov. 30, 2015 179,000
Add: Purchases for December (1,593,000 – 1,348,000) 245,000
Less: Cost of Sales – December 196,000
Ending inventory – December 31, 2015 228,000 (A)
SUMMARY OF ANSWERS:
1. D 2. D 3. A 4. A 5. A

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PROBLEM 12-41
Cost Retail
Inventory, Jan 1 300,000 1,200,000
Purchases 6,000,000 8,500,000
Purchase returns (400,000) (800,000)
Purchase discounts (150,000) -
Purchase allowance (50,000) -
Freight-in 20,000 -
Departmental Transfer-In 600,000 1,100,000
Departmental Transfer-Out (560,000) (1,334,000)
Totals 5,760,000 8,666,000

Basis of computation of cost ratios

Totals 5,760,000 8,666,000
Markups 600,000
Markup cancellations (50,000)
Basis of computation (conservative) 5,760,000 9,216,000
Markdown (316,000)
Markdown cancellations 100,000
Basis of computation (average) 5,760,000 9,000,000

Cost ratios:
Conservative
5,760,000
Cost ratio =
9,216,000
Cost ratio = 62,50%

Average
5,760,000
Cost ratio =
9,000,000
Cost ratio = 64%

FIFO
5,760,000 – 300,000
Cost ratio =
9,000,000 – 1,200,000
Cost ratio = 70%

Estimated ending inventory @ retail – for all methods

TGAS @ retail under average method 9,000,000
Sales (7,000,000)
Sale returns 700,000
Normal Shrinkage (500,000)
Estimated ending inventory @ retail 2,200,000

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Question Nos. 1 to 6
Ending inventory at cost Cost of goods sold
Cost method (EI @ retail x cost ratio) (TGAS @cost – EI @cost)
Conservative (62.5%) P 1,375,000 4,385,000
FIFO (70%) 1,540,000 4,220,000
Average (64%) 1,408,000 4,352,000

SUMMARY OF ANSWERS:
1. A 2. B 3. B 4. C 5. C 6. D

PROBLEM 12-42
Question No. 1
Subsidiary General
Ledger Ledger
Unadjusted bal. P 760,000 P 1,020,000
Undelivered sales ( 100,000)
Valid Sales 60,000
Sales FOB destination ( 100,000)
NSF check 50,000 50,000
Collection by the bank ( 60,000) ( 60,000)
Sales in 2015 recorded in 2016 DR No. 38740 3,360 3,360
Receivable ins. Co DR No. 38741 ( 10,080) ( 10,080)
Sales in 2016 recorded in 2015 DR No. 38743 ( 19,200) ( 19,200)
Adjusted balance (D) P 784,080 P 784,080
Question No. 2
Current:
Unadjusted beginning Balance 97,500
Add: Valid Sales in 2015 (60,000 + 3,360) 63,360
Total 160,860
Less: Receivable ins. Co (DR # 38741) 10,080
Sales in 2016 recorded in 2015 (DR # 38743) 19,200
Current Accounts Receivable balance 131,580
Past Due:
Adjusted Accounts Receivable balance (see no. 1) 784,080
Less: Current Accounts Receivable balance 131,580
Past due Accounts Receivable *652,500
*or (662,500+50,000-60,000)
Age classification Amount Percentage Total

Current 131,580 6 7,894.80

Past due 652,500 10 65,250.00
Allowance for doubtful accounts (A) 73,144.80

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Question No. 3
Allowance for doubtful accounts, beginning 7,000.00
Less: Accounts written off -
Less: Allowance for doubtful accounts, ending 73,144.80
Doubtful accounts expense (A) 66,144.80
Question No. 4
Unadjusted Merchandise Inventory, ending 316,000
Add: Cost of merchandise sold of DR # 38743(19,200/120%) 16,000
Doubtful accounts expense (B) 332,000
Question No. 5
Unadjusted Net Sales balance P 3,000,000
Undelivered sales ( 100,000)
Sales FOB destination ( 100,000)
Sales in 2015 recorded in 2016 DR No. 38740 3,360
Sales in 2016 recorded in 2015 DR No. 38743 ( 19,200)
Adjusted balance (B) P 2,784,160

SUMMARY OF ANSWERS:
1. D 2. A 3. A 4. B 5. B

PROBLEM 12-43
Mdse. Pre- Accounts Notes
Cash AR, net invty payments payable payable
Unadj.
Bal. 150,000 228,000 380,000 42,000 220,000 250,000
1 - - 60,000 - 60,000 -
2 - - 4,000 - 4,000 -
3 - 28,000 - - - -
4 - (68,000) 34,000 - - -
5 (40,000) 40,000 - - - -
6 50,000 (50,000) - - - -
7 65,000 - - - 65,000 -
8 - - - (8,500) - -
9 - (26,000) 20,000 - - -
10 - (40,000) - - - -
Adj.
Bal. 225,000 112,000 498,000 33,500 349,000 250,000
1. D 2. A 3. D 4. D

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Question No. 5
Cash 225,000
Accounts receivable, net 112,000
Merchandise inventory 498,000
Prepayments 33,500
Total current assets 868,500
Accounts payable 349,000
Notes payable 250,000
Working capital (E) 269,500

SUMMARY OF ANSWERS:
1. D 2. A 3. D 4. D 5. E

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