Chapter 7
Inventories
PROBLEM 1: TRUE OR FALSE
1. FALSE
2. FALSE
3. FALSE
4. TRUE
5. FALSE (₱3 + ₱4 = ₱7)
6. FALSE (₱2 – the cost of the red apple)
7. FALSE (2 + 3 + 4) / 3 apples x 2 apples on hand = ₱6
8. TRUE
9. TRUE
10. FALSE (₱2 – the amount of write-down in prior periods)
PROBLEM 2: FOR CLASSROOM DISCUSSION
1. D
2. D
3. A
4. A
5. A
6. Solutions:
Scenarios:
a. FOB Destination,
Freight prepaid
b. FOB Shipping point,
Freight collect
c. FOB Destination,
Freight collect
d. FOB Shipping point,
Freight prepaid
Cost of inventory
on Dec. 31
Net cash payment
on Jan. 5
None
100,000
106,000
100,000
None
94,000
106,000
106,000
7. D
8. C – memo entry
9. D
1
10. Solution:
Unadjusted balances
(b)
(c)
(d)
(e)
Adjusted balances
Inventory
500,000
60,000
(80,000)
50,000
30,000
560,000
Accounts payable
120,000
(80,000)
50,000
90,000
11. Solution: 180,000 – 30,000 + [(18,000 + 2,000) x ½] = 160,000
12. Solution:
a. Inventory on display shelves
b. Inventory stocked in warehouse
c. Inventory sold under a bill and hold arrangement,
included in the stock of inventory in warehouse
d. Inventory purchased in installment sale, physical
possession is obtained but the seller retains legal title
to the goods until full payment of purchase price
e. Inventory pledged as collateral security for a bank loan
g. Inventory sold wherein ABC Co. is obligated to
repurchase the inventory at a future date
13.
14.
15.
16.
100,000
250,000
(20,000)
30,000
60,000
10,000
430,000
A
A
C
D
17. Solutions:
Requirement (a):
Perpetual system
(a)
Inventory
450,000
Accounts payable 450,000
Periodic system
Purchases
450,000
Accounts payable 450,000
(b)
Inventory
Freight-in
25,000
2
25,000
Cash
(c)
Accounts payable
Inventory
25,000
Cash
25,000
10,000
10,000
Accounts payable 10,000
Purchase returns 10,000
(d)
Accounts receivable 800,000
Sales
800,000
Accounts receivable 800,000
Sales
800,000
Cost of goods sold
Inventory
380,000
380,000
(e)
Sales returns
9,000
Accounts receivable
9,000
Inventory
4,275
Cost of goods sold
4,275
No entry
Sales returns
9,000
Accounts receivable 9,000
No entry
Requirement (b):
Perpetual system
Sales
Sales returns
800,000
(9,000)
Net sales
Cost of sales
791,000
(375,725)
Gross profit
415,275
Periodic system
Sales
Sales returns
800,000
(9,000)
Net sales
791,000
3
Cost of sales:
Beginning inventory
Net purchases
20,000
465,000
Total goods avail. for sale
Ending inventory
485,000
(109,275)
(375,725)
Gross profit
18.
19.
20.
21.
22.
415,275
D
B
D
D
E
23. Solution:
Purchase price, gross of trade discount
Trade discount
Non-refundable purchase tax
Freight-in (Transportation costs)
Commission to broker
Total cost of inventories
100,000
(20,000)
5,000
15,000
2,000
102,000
The advertisement costs are selling costs. These are
expensed in the period in which they are incurred.
24. Solution:
Gross method
Jan. 1, 20x1
Purchases
144,000*
Accounts payable
144,000
Net method
Purchases
136,800*
Accounts payable 136,800
*(₱200,000 x 80% x 90%)
*(₱200,000 x 80% x 90% x 95%)
Jan. 10, 20x1
Accounts payable*
Accounts payable* 68,400
72,000
4
Purchase discounts
3,600
Cash
68,400
(144,000 x ½ x 5%)
Cash**
68,400
*(144K x ½)
**(144K x ½ x 95%)
* (136.8K x ½)
Jan. 31, 20x1
Accounts payable* 72,000
Cash
72,000
Accounts payable
68,400
Purchase discount lost 3,600
Cash
72,000
*(144K x ½)
25. C
26. D
27. Solutions:
Requirement (a): FIFO Periodic
Ending inventory, in units = (3,000 + 2,250 + 10,200 – 2,700 – 7,200) = 5,550
Ending inventory in units
Allocation to latest purchases:
Jan. 26
Jan. 6 (balance)
Ending inventory in pesos
Units
5,550
Unit cost
Total cost
2,250
3,300
20.60
21.50
46,350
70,950
117,300
TGAS (58,650 + 219,300 + 46,350)
Less: Ending inventory in pesos
COGS
324,300
(117,300)
207,000
Requirement (b): FIFO Perpetual
Answers are the same with FIFO Periodic.
OR
Units
Balance at January 1, 2002
January 6, 2002
January 7, 2002
3,000
10,200
(2,700)
5
Unit
Cost
19.55
21.5
19.55
Total Cost
58,650
219,300
(52,785)
January 26, 2002
January 31, 2002
2,250
(7,200)
Ending inventory
5,550
20.6
*
117,300
*The COGS on the Jan. 31 sale is computed as follows:
Units
Unit Cost
Jan. 31 sale
Allocation:
From Jan. 1 (3,000 - 2,700)
From Jan. 6 (balance)
46,350
(154,215)*
Total Cost
7,200
300
6,900
19.55
22
5,865
148,350
154,215
COGS - Jan. 31 sale
COGS = (52,785 + 154,215) amounts taken from table above = 207,000
Requirement (c): Weighted Average Cost Periodic
TGAS in pesos
Weighted ave. unit cost =
TGAS in units
(58,650 + 219,300 + 46,350) = 324,300
Weighted ave. unit cost =
(3,000 + 10,200 + 2,250) = 15,450
Weighted ave. unit cost
20.99
=
Ending inventory in units
Multiply by: Wtd. Ave. Cost
Ending inventory in pesos
5,550
20.99
116,495
TGAS in pesos
Less: Ending inventory in pesos
COGS
324,300
(116,495)
207,805
Requirement (d): Weighted Average Cost Perpetual
Unit
Units
Cost
Balance at January 1, 2002
3,000
19.55
January 6, 2002
10,200
21.5
TGAS
13,200
21.06
January 7, 2002
(2,700)
21.06
January 26, 2002
2,250
20.6
TGAS
12,750
20.98
January 31, 2002
(7,200)
20.98
Ending inventory
5,550
6
Total Cost
58,650
219,300
277,950
(56,862)
46,350
267,438
(151,056)
116,382
COGS = (56,862 + 151,056) = 207,918
28. C
29. Solution:
Requirement (a):
Product A
100,000
12,000
112,000
Product B
250,000
30,000
280,000
Product C
300,000
36,000
336,000
Selling price
Freight-out
NRV
210,000
(10,500)
199,500
300,000
(75,000)
225,000
570,000
(11,400)
558,600
Lower
112,000
225,000
336,000
Purchase price
Freight-in
Cost
Total
673,000
Requirement (b):
Product B: (280,000 – 225,000) = 55,000
30. Solution: 200,000 – the amount of write-down in 20x1 because
the 20x2 recovery exceeds the cumulative amount of write-downs
recognized in the previous periods.
7
PROBLEM 3: EXERCISES
1. Solution:
Unadjusted balance
(a)
(b)
(c)
(d)
(e)
Correct inventory
260,000
11,000
5,000
(16,000)
20,000
(4,000)
276,000
2. Solution:
(a) Inventory (140,000 x 98%)
Accounts payable
137,200
137,200
(b) Accounts payable (137.2K x 75%)
Cash
102,900
(c) Accounts payable (137.2K x 25%)
Purchase discount lost (140K x 2% x 25%)
Cash (140,000 x 25%)
102,900
34,300
700
35,000
3. Solution:
June
11 Purchases (.98 × ₱9,000)
8,820
Accounts Payable
15 Accounts Payable (.98 × ₱1,000)
980
Purchase Returns and Allowances
30 Purchase Discounts Lost (.02 × ₱8,000)
160
Accounts Payable
4. Solution:
Requirement (a):
Purchases
Accounts Payable
196,000
196,000
8
8,820
980
160
(.98 × ₱200,000 = ₱196,000.)
Payment within the discount period:
Accounts Payable
156,800
Cash
156,800
(₱200,000 – ₱40,000 = ₱160,000 x .98 = ₱156,800.)
Payment beyond the discount period:
Accounts Payable (40K x 98%)
Purchase Discounts Lost (40K x 2%)
Cash
39,200
800
40,000
Requirement (b):
(1) Net method:
Ending inventory (200,000 x 98% x 10%)
Cost of goods sold (200,000 x 98% x 90%)
₱19,600
₱176,400
(2) Gross method:
(A) Discount is allocated only to the goods sold:
Gross amts.
Allocation of discount Net amounts
EI (200K x 10%)
20,000
-
20,000
COGS (200K x 90%)
180,000
3,200
176,800
Total
200,000
3,200
(B) Discount is prorated to both the goods sold and ending
inventory:
Gross amts.
Allocation of discount Net amounts
EI (200K x 10%)
20,000
320*
19,680
COGS (200K x 90%)
180,000
2,880*
177,120
Total
200,000
3,200
* (3,200 x 10%; 3,200 x 90%)
9
5. Solutions:
Requirement (a): FIFO periodic
 Ending inventory, in units = 1,400 – 400 + 800 – 900 + 700 – 600
= 1,000 units
In units
Unit cost
In pesos
Ending inventory
1,000
Allocation to June 24 purchase
Excess allocated to June 14
purchase
(700)
30
21,000
300
35
10,500
Ending inventory, in pesos
31,500
 TGAS, in pesos:
Date
June 1
14
24
Transaction
Balance fwd.
Purchase
Purchase
Quantity
1,400
800
700
Unit Cost
In pesos
24
35
30
33,600
28,000
21,000
TGAS, in pesos
82,600
82,600
TGAS in pesos
Ending inventory, in pesos
(31,500)
Cost of goods sold
51,100
Requirement (b): FIFO perpetual
Unit
Cost
In pesos
Date
June 1
Transaction
Balance
Quantity
1,400
24
33,600
8
Sale
400
24
(9,600)
14
Purchase
800
35
28,000
10
18
Sale
900
24
(21,600)
24
Purchase
700
30
21,000
29
Sale
600
100 from June 1
24
(2,400)
500 from June 14
35
(17,500)
Ending inventory
31,500
Cost of goods sold (9,600 + 21,600 + 2,400 + 17,500)
51,100
Requirement (c): Weighted average periodic
Weighted Ave. Unit cost = TGAS, in pesos ÷ TGAS, in units
 TGAS, in units = 1,400 + 800 + 700 = 2,900 units
Weighted Ave. Unit cost = ₱82,600 (see previous solution) ÷ 2,900
Weighted Ave. Unit cost = ₱28.48
Ending inventory = ₱28.48 x 1,000 units = 28,480
82,600
TGAS in pesos
Ending inventory, in pesos
(28,480)
Cost of goods sold
54,120
Requirement (d): Weighted average perpetual
Date
Transaction
June 1
8
Quantity
Unit Cost
In pesos
Balance forwarded
1,400
24
33,600
Sale
(400)
14
Purchase
18
Totals
Sale
11
(9,600)
800
35
28,000
1,800
(900)
28.89
52,000
(26,001)
24
Purchase
700
30
21,000
29
Totals
Sale
1,600
(600)
29.37
46,999
Ending inventory
1,000
(17,622)
29,377
Cost of goods sold (9,600 + 26,001 + 17,622)
53,223
6. Answers:
Inventory, beg.
Net purchases
Cost of sales
Inventory, end.
a.
10,000
198,000
112,000
96,000
b.
36,000
145,000
125,000
56,000
c.
15,000
58,000
64,000
9,000
d.
25,200
112,000
89,200
48,000
12
PROBLEM 4: CLASSROOM ACTIVITIES
ACTIVITY #1:
Solutions:
(a) The term of sale is FOB SHIPPING POINT. Indicator: the freight is
chargeable to ABC Co. (COD – CASH ON DELIVERY).
(b) The freight term is Freight COLLECT.
(c) Journal entry:
DATE
9/27/X1(a)
JOURNAL
ACCOUNTS
Ref.
Inventory / Purchases
Input VAT
Debit
8,689.29(b)
Credit
910.71
Accounts payable
8,500.00
Cash
1,100.00
to record the purchase of inventory
The date of the Bill of Lading – shipment date.
Purchase price net of VAT ₱7,589.29 + Freight (₱900.00 bill of lading +
₱200.00 porter fee) = ₱8,689.29 cost of purchase
(a)
(b)
ACTIVITY #2:
Solutions:
1. Compute for the following using the Specific Identification method:
a. Cost of goods sold ₱7.00 – the cost of item “broken”
b. Ending inventory ₱11.75
2.
Compute for the following using the FIFO method:
a. Cost of goods sold ₱5.75 – the cost of item “happy”
b. Ending inventory ₱13.00
3.
Compute for the following using the Weighted Average Cost method:
a. Cost of goods sold (₱5.75 + ₱6.00 + ₱7.00) ÷ 3 = ₱6.25
b. Ending inventory (₱5.75 + ₱6.00 + ₱7.00) - ₱6.25 = ₱12.50
13
PROBLEM 5: THEORY
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
B
B
B
C
B
B
D
B
A
C
D
A
D
A
A
A
A
C
C
D
14
PROBLEM 6: MULTIPLE CHOICE: COMPUTATIONAL
1. A
2.
C Net method [(80K + 100K) x 98%] = 176,000
Gross method (80K x 98%) + 100K = 178,400
3.
B 100K x 80% = 80,000
4.
C 300,000 + 7,500 – 1,500 = 306,000
A
Solution:
5.
beg.
Purchases
Inventory
160,000
10,000
530,000 465,000
215,000
Purchase Disc.
COGS (squeeze)
end.
A
Solution:
6.
beg.
Purchases
Freight-In
Inventory
30,000
40,000
5,000
5,000
4,000
51,000
15,000
C
Solution:
beg.
Purchases
Freight-In
Purchase Ret. and Allow.
Purchase Disc.
Net purchases
TGAS
Purchase Ret. and Allow.
Purchase Disc.
COGS
end.
7.
35,000
35,000
5,000
(2,000)
(4,000)
34,000
69,000
D
Solution:
TGAS
Beginning Inventory
Purchases
Purchase Returns and Allowances
Purchase Discounts
8.
15
55,000
(20,000)
(41,000)
3,000
4,000
Freight-in
1,000
C
Solution:
TGAS
COGS
Ending inventory
9.
55,000
(22,000)
33,000
10. D
Solution:
Date Balance/Transaction
Aug. 1
Inventory
7
Purchase
12
Sales
21
Purchase
22
Sales
29
Purchase
Ending inventory
Ending inventory
From Aug. 29 purchase
Balance
From Aug. 21 purchase
As allocated
Units
2,000
3,000
(3,600)
4,800
(3,800)
1,600
4,000
Units
4,000
(1,600)
2,400
(2,400)
-
Cost
₱36.00
37.2
38
38.6
Unit cost
Total cost
38.6
61,760
38
91,200
152,960
11. D Same with FIFO periodic
12. B
Solution:
Date
1-Jul
Balance/Transaction
Units
Inventory
2,000
7
Purchase
21
Purchase
29
Purchase
Total goods available for sale
3,000
5,000
1,600
11,600
Average cost = 433,376 ÷ 19,000 = 22.81
16
Cost
36.00
37.00
37.88
38.11
Total
cost
72,000
111,000
189,400
60,976
433,376
Date
1-Jul
7
12
21
22
29
Balance/Transaction
Inventory
Purchase
Sales
Purchase
Sales
Purchase
Ending inventory
Average cost
Ending inventory in pesos
Units
2,000
3,000
(3,600)
5,000
(3,800)
1,600
4,200
37.36
156,912
13. C
Solution:
Date
Transaction
1-Jul Inventory
7 Purchase
Total
12 Sales
21 Purchase
Total
22 Sales
29 Purchase
Ending inventory
Units
2,000
3,000
5,000
(3,600)
5,000
6,400
(3,800)
1,600
4,200
Cost
36.00
37.00
36.60
36.60
37.88
37.60
37.60
38.11
Total cost
72,000
111,000
183,000
(131,760)
189,400
240,640
(142,880)
60,976
158,736
14. A
Solution:
Ending inventory in units is computed as follows:
Units
beg.
10
January 6 Purchase
4
January 10 Sale
(5)
January 15 Purchase
7
January 20 Sale
(10)
January 25 Purchase
4
Ending inventory
10
Total goods available for sale in pesos is computed as follows:
Units Unit cost Total cost
beg.
10
20
200
January 6 Purchase
4
25
100
January 15 Purchase
7
30
210
17
January 25 Purchase
TGAS
4
25
30
120
630
FIFO ending inventory in pesos is computed as follows:
Units Unit cost Total cost
Ending inventory
10
From Jan. 25 purchase
(4)
30.0
120
6
Balance
From Jan. 15 purchase
(6)
30
180
300
As allocated
FIFO cost of goods sold is computed as follows:
TGAS
630
Ending inventory
(300)
COGS
330
15. A
Solution:
TGAS in pesos (see previous solution)
Divide by: TGAS in units (see previous solution)
Average unit cost
Multiply by: EI in units (see previous solution)
Average EI
TGAS in pesos (see previous solution)
Average EI
COGS
630
25
25.20
10
252.00
630
(252)
378
16. C
Solution:
Total goods available for sale is computed based on information
under LIFO as follows:
Cost of goods sold (LIFO)
195,000
Ending inventory in pesos (LIFO)
45,000
240,000
Total goods available for sale
Using the concept that total goods available for sale is the same
under both FIFO and LIFO, the FIFO cost of goods sold is simply
squeezed as follows:
TGAS in pesos
Ending inventory in pesos
LIFO
240,000
(45,000)
18
FIFO
240,000
(65,000)
extended from LIFO
given information
Cost of goods sold
195,000
175,000
squeezed
17. C No adjustment is necessary for the foregoing.


The goods are properly included in inventory because they were
shipped only on July 10, 2002, after the June 30, 2002 cut-off
date.
The goods purchased FOB destination are properly excluded
from inventory because they are not yet received as of cut-off
date.
19