Inventories
DISCUSSION PROBLEMS
1. Inventories are
a. Assets held for sale in the ordinary course of
business, in the process of production for such
sale, or in the form of materials or supplies to be
consumed in the production process or in the
rendering of services.
b. Properties held to earn rentals or for capital
appreciation or both.
c. Tangible items that are held for use in the
production or supply of goods or services, for
rental to others, or for administrative purposes;
and are expected to be used during more than one
period.
d. Identifiable non-monetary assets without physical
substance.
d.
e.
f.
g.
2. La Union Company included the following items under
inventories:
Materials
Advance for materials ordered
Goods in process
Unexpired insurance on inventories
Advertising catalogs and shipping
boxes
Finished goods in factory
Finished goods in company-owned
retail stores, including 50% profit
on cost
Finished goods in hands of consignees
including 40% profit on sales
Finished goods in transit to customers,
shipped FOB destination, at cost
Finished goods out on approval, at
cost
Unsalable finished goods, at cost
Office supplies
Materials in transit shipped FOB
shipping point, excluding freight of
P30,000
Goods held on consignment, at sales
price, cost P150,000
P1,400,000
200,000
650,000
60,000
150,000
2,000,000
750,000
400,000
250,000
100,000
50,000
40,000
330,000
200,000
Compute the amount to be presented as “Inventories”
under current assets.
a. P5,500,000
c. P5,650,000
b. P5,470,000
d. P5,700,000
3. Ovation Company asks you to review its December 31
inventory
values
and
prepare
the
necessary
adjustments to the books. The following information is
given to you.
a. Ovation uses the periodic method of recording
inventory. A physical count reveals P2,348,900
inventory on hand at December 31.
b. Not included in the physical count of inventory is
P134,200 of merchandise purchased on December
15 from Standing. This merchandise was shipped
f.o.b. shipping point on December 29 and arrived
in January. The invoice arrived and was recorded
on December 31.
c.
Included in inventory is merchandise sold to Oval
on December 30, f.o.b. destination.
This
merchandise was shipped after it was counted.
The invoice was prepared and recorded as a sale
on account for P128,000 on December 31. The
h.
merchandise cost P73,500, and Oval received it on
January 3.
Included in inventory was merchandise received
from Owl on December 31 with an invoice price of
P156,300. The merchandise was shipped f.o.b
destination.
The invoice, which has not yet
arrived, has not been recorded.
Not included in inventory is P85,400 of
merchandise purchased from Oxygen Industries.
The merchandise was received on December 31
after the inventory had been counted. The invoice
was received and recorded on December 30.
Included in inventory was P104,380 of inventory
held by Ovation on consignment from Ovoid
Industries.
Included in inventory is merchandise sold to Kemp
f.o.b. shipping point.
This merchandise was
shipped after it was counted. The invoice was
prepared and recorded as a sale for P189,000 on
December 31. The cost of this merchandise was
P105,200, and Kemp received the merchandise on
January 5.
Excluded from inventory was carton labeled
“Please accept for credit.” This carton contains
merchandise costing P15,000 which had been sold
to a customer for P25,000. No entry had been
made to the books to reflect the return, but none
of the returned merchandise seemed damaged.
The adjusted inventory cost of Ovation Company at
December 31 should be
a. P2,217,620
c. P2,411,320
b. P2,396,320
d. P2,373,920
E8-5 Kieso 11th
4. The inventory on hand at December 31 for Fair
Company valued at a cost of P947,800. The following
items were not included in this inventory amount:
a. Purchased goods, in transit, shipped FOB
destination invoice price P32,000 which included
freight charges of P1,600.
b. Goods held on consignment by Fair Company at a
sales price of P28,000, including sales commission
of 20% of the sales price.
c. Goods sold to Garcia Company, under terms FOB
destination, invoiced for P18,500 which includes
P1,000 freight charges to deliver the goods.
Goods are in transit.
d. Purchased goods in transit, terms FOB seller,
invoice price P48,000, freight cost, P3,000.
e. Goods out on consignment to Manil Company,
sales price P36,400, shipping cost of P2,000.
Assuming that the company's selling price is 140% of
inventory cost, the adjusted cost of Fair Company's
inventory at December 31 should be
a. P1,039,300
c. P1,055,700
b. P1,039,500
d. P1,037,300
P65 Kimwell/rpcpa 5/90
5. Which statement is incorrect regarding measurement
of inventories?
a. Inventories should be measured at the lower of
cost and net realizable value.
b. The cost of inventories should comprise all costs of
purchase, costs of conversion and other costs
incurred in bringing the inventories to their present
location and condition.
c. Trade discounts, rebates and other similar items
are deducted in determining the costs of purchase.
d. Foreign exchange differences arising directly on
the recent acquisition of inventories invoiced in a
foreign currency are included in cost of inventories.
6. Costs of purchase do not include
a. Purchase price.
b. Import duties and other non-refundable taxes.
c. Transport, handling and other costs directly
attributable to the acquisition of finished goods,
materials and services.
d. Fixed and variable manufacturing overheads.
7. Cost of inventories include
a. Storage costs.
b. Abnormal amounts of wasted production costs.
c. Selling costs.
d. Cost of designing products for specific customers.
Use the following information for the next two questions:
Roweena Corporation began operations in 2016. In 2016
it incurred the following expenditures in purchasing
materials for producing its product:

Purchase price of raw materials = P3,000,000

Import duty and other non-refundable purchase taxes
= P800,000

Refundable purchase taxes = P100,000

Freight costs for bringing the goods from the supplier
to the factory raw material storeroom = P300,000

Costs of unloading the materials into the raw material
storeroom = P2,000

Packaging = P200,000
On 31 December 2016 the entity received P53,000 volume
rebate from a supplier for purchasing more than
P1,500,000 from the supplier during the year.
The entity incurred the following additional costs in the
production run:

Salary of the machine workers in the factory =
P500,000

Salary of factory supervisor = P300,000

Depreciation of the factory building and equipment
used for production process = P60,000

Consumables used in the production process =
P20,000

Depreciation of vehicle used to transport the goods
from the raw materials storeroom to the machine floor
= P40,000

Factory electricity usage charges = P30,000

Factory rental = P100,000

Depreciation and maintenance of the entity’s vehicle
used by the factory supervisor (50 per cent for official
use and 50 per cent for personal use) = P20,000.
Private use of the vehicle is an employee benefit.
During
2016
the
entity
incurred
the
following
administration expenses:

Depreciation of the administration building = P50,000

Depreciation and maintenance of vehicles used by the
administrative staff = P15,000

Salaries of the administration personnel = P305,000
Of the administration expenses 20 per cent are attributable
to administering the factory.
The rest of the
administration expenses are attributable, in equal
proportion, to the sales and other non-production
operations (eg financing, tax and corporate secretarial
functions).
In 2016 the entity incurred the following selling expenses:

Advertising costs = P30,000

Depreciation and maintenance of vehicles used by the
sales staff = P10,000

Salary of the administration personnel = P600,000
8. The total costs of purchase is
a. P3,747,000
b. P4,047,000
9. The total costs of conversion is
a. P1,134,000
b. P1,144,000
c. P4,100,000
d. P4,249,000
c. P1,060,000
d. P1,070,000
Module 13 SME TM
10. Buyer Co. regularly buys shirts from Vendor Company
and is allowed trade discounts of 20% and 10% from
the list price. Buyer purchased shirts from Vendor on
May 27 and received an invoice with a list price of
P100,000 and payment terms 2/10, n/30. If Buyer
uses the net method of recording purchases, the
journal entry to record the payment on June 8 will
include
a. A debit to Accounts payable of P72,000.
b. A debit to Purchase Discounts Lost of P1,440.
c. A credit to Purchase Discounts of P1,440.
d. A credit to Cash of P70,560.
RPCPA 1097 - AMP
LECTURE NOTES:
Trade and Cash Discounts
Trade
Cash
Objective
Generate sales
Encourage prompt
payment
Accounting
Not recorded
separately
(Purchases/Sales
net of trade
discount)
Recorded using
either Gross or Net
method
Gross and Net method of recording purchases
Gross
Net
Cash
discounts
Deducted from
purchases/cost of
inventory when
taken
Deducted from
purchases/cost of
inventory whether
taken or not
Cash
discounts
taken
Deducted from
purchases/cost of
inventory (purchase
discounts)
Not accounted for
separately since
already deducted
from purchases
Cash
discounts
not taken
Included in
purchases/cost of
inventory
Reported as other
expense
(purchase
discounts lost)
11. Catapult Corp. purchased merchandise during 2016 on
credit for P200,000; terms 2/10, n/30. All of the gross
liability except P40,000 was paid within the discount
period. The remainder was paid within the 30-day
term. At the end of the annual accounting period,
December 31, 2016, 90% of the merchandise had
been sold and 10% remained in inventory. The entity
has no beginning inventory.
The entity uses net
method of recording purchases.
If the entity used the gross method of recording
purchases instead of the net method, the reported cost
of goods sold would have been
a. The same
c. Lower by P720
b. Higher by P720
d. P176,400
C8 Pr8-76 Kieso TB, 11th ed-AMP
12. Under PAS 2, the specific identification method of accounting for inventory is required for
a. All inventory items.
b. Inventory items which are interchangeable.
c. Inventory items that are not interchangeable and
goods that are produced and segregated for
specific projects.
d. Biological (agricultural) inventories.
13. Which statement is incorrect regarding cost formulas?
a. Specific identification of cost means that specific
costs are attributed to identified inventory.
b. Under the weighted average cost formula, the cost
of each item is determined from weighted average
of the cost of similar items at the beginning of a
period and the cost of similar items purchased or
produced during the period.
c. The average cost formula may be calculated on a
periodic basis, or as each additional shipment is
received, depending upon the circumstances of the
entity.
d. The FIFO formula assumes that the items of
inventory that were purchased or produced last are
sold first, and consequently the items remaining in
inventory at the end of the period are those earlier
purchased or produced.
Use the following information for the next two questions.
Transactions for the month of June were:
Purchases
June 1 (balance)
3
7
15
22
Sales
June 2
6
9
10
18
25
Units
400
1,100
600
900
250
3,250
300
800
500
200
700
150
2,650
Unit cost
P3.20
3.10
3.30
3.40
3.50
Total cost
P 1,280
3,410
1,980
3,060
875
P10,605
@ P5.50
@ 5.50
@ 5.50
@ 6.00
@ 6.00
@ 6.00
14. Assuming that perpetual inventory records are kept in
pesos, the ending inventory on a FIFO basis is
a. P1,900
c. P2,065
b. P1,920
d. P2,100
15. Assuming that perpetual inventory records are kept in
units only, the ending inventory on an average-cost
basis is
a. P1,980
c. P1,970
b. P1,956
d. P1,995
RPCPA 5.10/K, W & W
LECTURE NOTES:
Computation of the cost of ending inventory
Specific identification:
Units on hand x Specific Unit Cost
First-in, first-out method (FIFO)
Units on hand x Unit Cost of latest purchases
Weighted Average
Units on hand x Weighted Average Unit Cost (WAUC)
WAUC = Total cost of GAS/Total units available for sale
Use the following information for the next two questions.
Maximilian uses the perpetual inventory system.
Maximilian's inventory transactions for the month of
August were as follows:
Total
No.
Unit cost
cost
01 Aug.
Beg. inventory
20
P4.00
P80.00
07 Aug.
Purchases
10
4.20
42.00
10 Aug.
Purchases
20
4.30
86.00
12 Aug.
Sales
15
?
?
16 Aug.
Purchases
20
4.60
92
20 Aug.
Sales
40
?
?
28 Aug.
Sales returns
3
?
?
16. Using the information, assume that the Maximilian
uses the FIFO cost flow method and that the sales
returns relate to the 20 August sales. The sales return
should be costed back into inventory at what unit cost?
a. P4.00
c. P4.07
b. P4.30
d. P4.60
17. Assuming that Maximilian uses the weighted average
cost flow method, the 12 August sales should be
costed at what unit cost?
a. P4.16
c. P4.07
b. P4.30
d. P4.60
Use the following information for the next two questions.
Orang Dampuan Co. wholesales bicycles. It uses the
perpetual inventory system. The company's reporting date
is 31 December. At 1 December 2016, inventory on hand
consisted of 350 bicycles at P820 each and 43 bicycles at
P850 each. During the month ended 31 December 2016,
the following inventory transactions took place (all
purchase and sales transactions are on credit):
Dec. 02
03
09
13
15
16
22
26
29
Sold 300 bicycles for P1,200 each.
Five bicycles were returned by a customer.
They had originally cost P820 each and were
sold for P1,200 each.
Purchased 55 bicycles at P910 each.
Purchased 76 bicycles at P960 each.
Sold 86 bicycles for P1,350 each.
Returned one damaged bicycles to the
supplier. This bicycle had been purchased on
9 December.
Sold 60 bicycles for P1,250 each.
Purchased 72 bicycles at P980 each.
Two bicycles, sold on 22 December, were
returned by a customer. The bicycles were
badly damaged so it was decided to write
them off. They had originally cost P910 each.
18. The cost of goods sold for the month of December
using moving average method is (Round unit costs to
the nearest peso)
a. P367,230
c. P366,320
b. P365,410
d. P372,725
19. The cost of goods sold for the month of December
using FIFO method is
a. P367,230
c. P366,320
b. P365,410
d. P372,725
RPCPA 5.12/Applying IAS
Solution guide for question #18:
Date
Dec. 1
Dec. 2
Dec. 3
Balance
Dec. 9
Dec. 13
Balance
Dec. 15
Balance
Dec. 16
Balance
Dec. 22
Balance
Dec. 26
Description
Balance
Sale
Sales
returns
Purchase
Purchase
Sale
Purchase
returns
Sale
Purchase
Balance
Units
393
(300)
Unit
Cost
823
823
Total Cost
323,550
(246,900)
5
98
55
76
229
( 86)
143
823
823
910
960
890
890
890
4,115
80,765
50,050
72,960
203,775
(76,540)
127,235
( 1)
142
( 60)
82
72
910
890
890
890
980
(
910)
126,325
(53,400)
72,925
70,560
154
932
143,485
20. An entity has partially-completed inventory located in its
factory, to which the following estimates relate:
Production costs incurred to date
Production costs to complete
Transport costs to customer
Future selling costs
Selling price
P268,000
20,000
5,000
10,000
300,000
At what amount should the entity report the inventory
on its statement of financial position?
a. P280,000
c. P268,000
b. P270,000
d. P265,000
21. Net realizable value of inventories may fall below cost
for a number of reasons including:
I. Product obsolescence.
II. Physical deterioration of inventories.
III. An increase in the expected replacement costs of
the inventory.
IV. An increase in the estimated costs of completion.
a.
b.
I, II and IV only
II, III and IV only
c. I, III and IV only
d. I and II only
22. Which is incorrect regarding write-down of inventory to
net realizable value?
a. The practice of writing inventories down below cost
to net realizable value is consistent with the view
that assets should not be carried in excess of
amounts expected to be realized from their sale or
use.
b. Inventories are usually written down to net
realizable value item by item.
c.
d.
Estimates of net realizable value are based on the
most reliable evidence, available at the time the
estimates are made, of the amount the inventories
are expected to realize.
Materials and other supplies held for use in the
production of inventories are written down below
cost even if the finished products in which they will
be incorporated are expected to be sold at or
above cost.
23. The closing inventory at cost of a company at 31
December 2016 amounted to P284,700. The following
items were included at cost in the total:
 400 coats, which had cost P80 each and normally
sold for P150 each.
Owing to a defect in
manufacture, they were all sold after the reporting
date at 50% of their normal price.
Selling
expenses amounted to 5% of the proceeds.
 800 skirts, which had cost P20 each. These too
were found to be defective. Remedial work in
February 2017 cost P5 per skirt, and selling
expenses for the batch totaled P800. They were
sold for P28 each.
What should the inventory value be according to PAS 2
Inventories after considering the above items?
a. P281,200
c. P282,800
b. P282,100
d. P329,200
P6.3 ACCA Paper3 2013-2014
24. The Refenjol Corporation included the following in its
unadjusted trial balance as of December 31, 2016:
Inventory, 12/31/15
Purchases
Available for sale
P 19,450,000
127,850,000
P147,300,000
The inventory at December 31, 2016 was counted at a
cost of P14.5 million. This includes P500,000 of slow
moving inventory that is expected to be sold for a net
amount of P300,000.
The cost of sales for the year ended December 31,
2016 is
a. P133,100,000
c. P132,800,000
b. P133,000,000
d. P132,600,000
ACCA F7 07-08 #22C.9
25. Which statement is incorrect regarding reversal of
inventory write-down to net realizable value?
a. When the circumstances that previously caused
inventories to be written down below cost no
longer exist or when there is clear evidence of an
increase in net realizable value because of changed
economic circumstances, the amount of the writedown is reversed so that the new carrying amount
is the lower of the cost and the revised net
realizable value.
b. The reversal is limited to the amount of the
original write-down.
c. The amount of any reversal of any write-down of
inventories, arising from an increase in net
realizable value, shall be recognized as a reduction
in the amount of inventories recognized as an
expense in the period in which the reversal occurs.
d. All the statements are correct.
26. Alcala Company installs replacement siding, windows,
and louvered glass doors for family homes.
At
December 31, 2016, the balance of inventory account
was P502,000, and the allowance for inventory writedown was P33,000. The inventory cost and other data
at December 31, 2016, are as follows: (amounts in
thousands)
Item
A
B
C
D
Total
Cost
P 89
94
125
194
P502
Replace
ment
Cost
P 86
92
135
114
P427
Sales
Price
P 91
93
129
205
P518
NRV
P 87
85
111
197
P480
The gain on reversal of inventory write down is
a. P33,000
c. P8,000
Normal
Profit
P 5
7
10
20
P32
b.
P11,000
d.
P
0
27. Caravana Development Corporation bought a 10hectare land in Novaliches, to be improved, subdivided
into lots, and eventually sold. Purchase price of the
land was P58,000,000.
Taxes and documentation
expenses on the transfer of the property amounted to
P800,000. The lots were classified as follows:
Lot
class
A
B
C
D
Number
of lots
10
20
40
50
Selling price
per lot
P1,000,000
800,000
700,000
600,000
Total
clearing costs
None
P1,000,000
3,000,000
8,000,000
Purchase and improvement costs allocated for class B
lots under the relative sales value method of inventory
valuation are
a. P13,485,700
c. P12,200,000
b. P10,800,000
d. P12,047,600
RPCPA 5/84, P79Kimwell
Use the following information for the next two questions.
29. How much will be recognized as gain on purchase
commitment on March 15, 2016 if the price of the
material had risen to P42 per unit?
a. P1,400,000
c. P400,000
b. P1,000,000
d. P
0
30. On January 1, 2016, Pastille Corp. signed a three-year
noncancelable purchase contract, which allows Pastille
to purchase up to 500,000 units of a computer part
annually from Pyramid Supply Co. at P10 per unit and
guarantees a minimum annual purchase of 100,000
units. During 2016, the part unexpectedly became
obsolete. Pastille had 250,000 units of this inventory
at December 31, 2016, and believes these parts can
be sold as scrap for P2 per unit. What amount of
probable loss from the purchase commitment should
Pastille report in its 2016 profit or loss?
a. P2,400,000
c. P1,600,000
b. P2,000,000
d. P 800,000
P23 M8 pp. 315 Wiley07-08
31. The following information for Bagulin Industries was
taken from the company's financial statements
(amounts in thousands):
On November 15, 2015, Socrates entered in to a
commitment to purchase 200,000 units of raw material X
for P8,000,000 on March 15, 2016. Socrates entered into
this purchase commitment to protect itself against the
volatility in the price of raw material X. By December 31,
2015, the purchase price of material X had fallen to P35
per unit.
28. How much will be recognized as loss on purchase
commitment on March 15, 2016 if the price of the
material had fallen further to P32 per unit?
a. P1,200,000
c. P600,000
b. P1,000,000
d. P
0
Sales
Cost of goods sold
Inventory
Accounts receivable
Net income
2016
P24,000
19,600
1,400
3,900
560
2015
P18,000
13,900
1,200
3,600
320
What is the inventory turnover for the year 2016?
a. 15 times
c. 14 times
b.
3 times
d. 18 times
ILLUSTRATIVE PROBLEM
Cost flow assumptions
The following information has been extracted from the records of Praktis Corporation about one of its products.
Date
January 1
January 6
February 5
March 19
March 24
April 10
June 22
July 31
August 4
September 4
November 15
December 28
Beginning balance
Purchased
Sold @ P24.00 per unit
Purchased
Purchase returns
Sold @ P24.20 per unit
Purchased
Sold @ P26.50 per unit
Sales returns @ P26.50 per unit
Sold @ P27.00 per unit
Purchased
Sold @ P30.00 per unit
No. of Units
1,600
600
2,000
2,200
160
1,400
16,800
3,600
40
7,000
1,000
6,200
Unit Cost
P14.00
14.10
Total Cost
P22,400
8,460
14.70
14.70
32,340
2,352
15.00
252,000
16.00
16,000
REQUIRED:
Compute for the closing inventory under each of the following pricing methods? (Round unit costs to two decimal places.)
1. FIFO – Periodic
3. Weighted average - Periodic
2. FIFO – Perpetual
4. Weighted average – Perpetual (Moving average)
SOLUTION:
FIFO – Periodic
From November 15 purchases (1,000 units x P16.00)
From June 22 purchases (880 units x P15.00)
Total
- P16,000
- 13,200
P29,200
FIFO – Perpetual
Units
Jan. 1
Purchased
Unit
Cost
Total Cost
Units
Sold
Unit
Cost
Total Cost
Units
1,600
Balance
Unit
Cost
Total Cost
14.00
22,400
Jan. 6
Units
600
Purchased
Unit
Cost
Total Cost
14.10
8,460
Feb. 5
Mar. 19
2,200
14.70
32,340
Mar. 24
(160)
14.70
(2,352)
Apr. 10
Jun. 22
16,800
15.00
1,000
16.00
1,600
400
14.00
14.10
22,400
5,640
200
1,200
14.10
14.70
2,820
17,640
840
2,760
(40)
7,000
14.70
15.00
15.00
15.00
12,348
41,400
(600)
105,000
252,000
Jul. 31
Aug. 4
Sep. 4
Nov. 15
Units
Sold
Unit
Cost
Total Cost
16,000
Dec. 28
6,200
15.00
93,000
Units
1,600
600
2,200
Balance
Unit
Cost
Total Cost
14.00
22,400
14.10
8,460
30,860
200
200
2,200
2,400
200
2,040
2,240
14.10
14.10
14.70
840
840
16,800
17,640
14.70
14.70
15.00
12,348
12,348
252,000
264,348
14,040
14,080
7,080
7,080
15.00
15.00
15.00
15.00
210,600
211,200
106,200
106,200
1,000
8,080
880
1,000
1,880
16.00
16,000
122,200
13,200
16,000
29,200
14.10
14.70
15.00
16.00
2,820
2,820
32,340
35,160
2,820
29,988
32,808
Average – Periodic
Total cost (1,880 units x P14.92)
-
P28,050
Weighted average unit cost (P328,848/22,040 units)
-
P14.92
Average – Perpetual (Moving average)
Purchased
Unit
Units
Cost
Total Cost
Jan. 1
Jan. 6
600
14.10
8,460
Feb. 5
Mar. 19
2,200
14.70
32,340
Mar. 24
(160)
14.70
(2,352)
252,000
2,040
2,240
840
840
14.70
14.64
14.64
14.64
29,988
32,788
12,292
12,292
16,000
16,800
17,640
14,040
14,080
7,080
7,080
15.00
14.98
14.98
14.98
14.98
14.98
252,000
264,292
210,364
210,963
106,103
106,103
1,000
8,080
1,880
16.00
15.11
15.11
16,000
122,103
28,421
Jul. 31
Aug. 4
Sep. 4
Nov. 16
Dec. 28
2,000
1,400
16,800
15.00
3,600
(40)
7,000
1,000
16.00
6,200
14.03
14.64
14.98
14.98
14.98
15.11
Total Cost
Balance
Unit
Cost
Total Cost
14.00
22,400
14.00
22,400
14.10
8,460
14.03
30,860
14.03
2,800
14.03
2,800
14.70
32,340
14.64
35,140
14.03
2,800
Units
1,600
1,600
600
2,200
200
200
2,200
2,400
200
Apr. 10
Jun. 22
Units
Sold
Unit
Cost
28,060
20,496
53,928
(599)
104,860
93,682
 - end of P1.2102 - 