Philippine School of Business Administration
826 R. Papa St. Sampaloc, Manila
CPA REVIEW
PRACTICAL ACCOUNTING 1
HAND OUT NO. 05-37
Gutierrez/Ocampo
May 2006
ACCOUNTING FOR INVENTORIES
PROBLEM 1
FIFO and LIFO inventory methods.
During June, the following changes in inventory item 27 took place:
June 1
14
24
8
10
29
Balance
Purchased
Purchased
Sold
Sold
Sold
1,400 units @ P24
800 units @ P35
700 units @ P30
400 units @ P50
900 units @ P40
600 units @ P44
Perpetual inventories are maintained.
Instructions
What is the cost of the ending inventory for item 27 under the following methods? (Show
calculations.)
(a) FIFO.
(b) LIFO.
PROBLEM 2
Periodic LIFO and Periodic FIFO.
Seitzer Corporation sells item A as part of its product line. Information as to balances on hand,
purchases, and sales of item A are given in the following table for the first six months of 2005.
Quantities
Date
January 11
January 24
February 8
March 16
June 11
Purchased
—
1,300
—
—
600
Sold
—
—
300
760
—
Balance
300
1,600
1,300
540
1,140
Unit Price
of Purchase
P2.50
P2.60
—
—
P2.80
Instructions
(a) Compute the ending inventory at June 30 under the periodic LIFO inventory pricing method.
(b) Compute the cost of goods sold for the first six months under the periodic FIFO inventory
pricing method.
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GUTIERREZ/OCAMPO
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PROBLEM 3
Accounting for purchase discounts.
Neer Corp. purchased merchandise during 2005 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, 2005, 90% of
the merchandise had been sold and 10% remained in inventory. The company uses a periodic
system.
Instructions
(a) Assuming that the net method is used for recording purchases, prepare the entries for the
purchase and two subsequent payments.
(b) What amounts should be reported for the final inventory and cost of goods sold
under the (1) net method; (2) gross method? Assume that there was no
beginning inventory.
PROBLEM 4
Analysis of errors.
(All sales and purchases are on credit.)
Indicate in each of the spaces provided the effect of the described errors on the various elements of a
company's financial statements. Use the following codes: O = amount is overstated; U = amount is
understated; NE = no effect. Assume a periodic inventory system.
Accounts
Receivable
Accounts
Cost of
Inventory Payable Sales Goods Sold
EXAMPLE: Excluded goods in rented
warehouse from inventory
NE
U
NE
NE
O
count.
______________________________________________________________________________
1. Goods in transit shipped "f.o.b.
destination" by supplier were
recorded as a purchase but were
excluded from ending inventory.
______________________________________________________________________________
2. Goods held on consignment were
included in inventory count and
recorded as a purchase.
______________________________________________________________________________
3. Goods in transit shipped "f.o.b.
shipping point" were not recorded
as a sale and were included in
ending inventory.
______________________________________________________________________________
4. Goods were shipped and appropriately excluded from ending
inventory but sale was not
recorded.
______________________________________________________________________________
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PROBLEM 5—Inventory cut-off.
ANSON Company sells TVs. The perpetual inventory was stated as P30,500 on the books at
December 31, 2005. At the close of the year, a new approach for compiling inventory was used
and apparently a satisfactory cut-off for preparation of financial statements was not made.
Some events that occurred are as follows.
1. TVs shipped to a customer January 2, 2006, costing P5,000 were included in inventory at
December 31, 2005. The sale was recorded in 2006.
2. TVs costing P10,000 received December 30, 2005, were recorded as received on January 2,
2006.
3. TVs received during 2005 costing P4,600 were recorded twice in the inventory account.
4. TVs shipped to a customer December 28, 2005, f.o.b. shipping point, which cost P15,000, were
not received by the customer until January, 2006. The TVs were included in the ending
inventory.
5. TVs on hand that cost P6,100 were never recorded on the books.
Instructions
Compute the correct inventory at December 31, 2005.
PROBLELM 6
Lower of cost or Net Realizable Value (NRV).
At 12/31/04, the end of Dennis Company's first year of business, inventory was P3,300 and
P2,800 at cost and at market, respectively.
Following is data relative to the 12/31/05 inventory of Dennis:
Item
A
B
C
D
E
Original
Cost
Per Unit
P1.50
.90
1.45
1.60
1.80
Replacement
Cost
P .90
.80
1.60
1.30
1.70
Net
Realizable
Value
Appropriate
Inventory
Value
Selling price is P2.00/unit for items A to C and P1.80 /unit for items D and E. Disposal costs amount
to 10% of selling price and a "normal" profit is 20% of selling price. There are 1,000 units of each
item in the 12/31/05 inventory.
Instructions
(a) Prepare the entry at 12/31/04 necessary to implement the lower of cost or NRV procedure
assuming Dennis uses a contra account for its balance sheet.
(b) Complete the last two columns in the 12/31/05 schedule above based upon the lower of cost or
NRV rules.
(c) Prepare the entry(ies) necessary at 12/31/05 based on the data above.
(d) How are inventory losses disclosed on the income statement?
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PROBLEM 7
Relative sales value method.
Adler Realty Company purchased a plot of ground for P500,000 and spent P1,300,000 in
developing it for building lots. The lots were classified into Highland, Midland, and Lowland
grades, to sell at P100,000, P75,000, and P50,000 each, respectively.
Instructions
Complete the table below to allocate the cost of the lots using a relative sales value method.
No. of
Grade
Lots
Highland 20
Midland
40
Lowland 100
160
Selling
Price
P
P
P
Total
Revenue
P
% of
Total Sales
P
Apportioned Cost
Total
Per Lot
P
P
P
P
P
PROBLEM 8
Gross profit method.
An inventory taken the morning after a large theft discloses P55,000 of goods on hand as of
March 12. The following additional data is available from the books:
Inventory on hand, March 1
Purchases received, March 1 – 11
Sales (goods delivered to customers)
P 84,000
70,000
126,000
Past records indicate that sales are made at 50% above cost.
Instructions
Estimate the inventory of goods on hand at the close of business on March 11 by the gross
profit method and determine the amount of the theft loss. Show appropriate titles for all
amounts in your presentation.
PROBLEM 9
Using Gross profit method.
Reese Co. prepares monthly income statements. Inventory is counted only at year end; thus,
month-end inventories must be estimated. All sales are made on account. The rate of mark-up
on cost is 30%. The following information relates to the month of May.
Accounts receivable, May 1
Accounts receivable, May 31
Collections of accounts during May
Inventory, May 1
Purchases during May
P20,000
27,000
84,000
45,000
65,000
Instructions
Calculate the estimated cost of the inventory on May 31.
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PSBA CPA REVIEW SCHOOL
GUTIERREZ/OCAMPO
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PROBLEM 10
Retail inventory method.
When you undertook the preparation of the financial statements for Vancey Company at January 31,
2004, the following data were available:
At Cost
At Retail
Inventory, February 1, 2003
P72,800
P 98,500
Markdowns
35,000
Markups
73,000
Markdown cancellations
20,000
Markup cancellations
10,000
Purchases
219,500
294,000
Sales
325,000
Purchases returns and allowances
4,300
5,500
Sales returns and allowances
10,000
Instructions
Compute the ending inventory at cost as of January 31, 2004, using the retail method which
approximates lower of cost or market. Your solution should be in good form with amounts
clearly labeled.
MULTIPLE CHOICE PROBLEMS
Use the following information for questions 1 through 3.
Dexter, Inc. is a calendar-year corporation. Its financial statements for the years 2005 and 2004
contained errors as follows:
2005
2004
Ending inventory
P8,000 overstated
P14,000 overstated
Depreciation expense
P4,000 understated
P16,000 overstated
1.
Assume that the proper correcting entries were made at December 31, 2004. By how much
will 2005 income before taxes be overstated or understated?
a. P4,000 understated
b. P4,000 overstated
c. P8,000 overstated
d. P12,000 overstated
2.
Assume that no correcting entries were made at December 31, 2004. Ignoring income taxes,
by how much will retained earnings at December 31, 2005 be overstated or understated?
a. P4,000 understated
b. P12,000 overstated
c. P12,000 understated
d. P18,000 understated
3.
Assume that no correcting entries were made at December 31, 2004, or December 31, 2005
and that no additional errors occurred in 2006. Ignoring income taxes, by how much will
working capital at December 31, 2006 be overstated or understated?
a. P0
b. P8,000 overstated
c. P8,000 understated
d. P6,000 understated
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4. Cagayan 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 retails store, including 50% profit
on cost
Finished goods in hands on 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
How much is the correct amount of inventories?
a. P5,610,000
b. P5,500,000
P 1,400,000
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
c. P5,375,000
d. P5,450,000
5. The Abulug Manufacturing Company reviewed its year-end inventory and found the
following items:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
A packing case containing a product costing P100,000 was standing in the shipping
room when the physical inventory was taken. It was not included in the inventory
because it was marked “Hold for shipping instructions.” The customer’s order was
dated December 18, but the case was shipped and the costumer billed on January 10,
2006.
Merchandise costing P600,000 was received on December 28, 2005, and the invoice
was recorded. The invoice was in the hands of the purchasing agent; it was marked
“On consignment”.
Merchandise received on January 6, 2006, costing P700,000 was entered in
purchase register on January 7. The invoice showed shipment was made FOB
shipping point on December 31, 2005. Because it was not on hand during the
inventory count, it was not included.
A special machine costing P200,000, fabricated to order for a particular customer,
was finished in the shipping room on December 30. The customer was billed for
P300,000 on that date and the machine was excluded from inventory although it was
shipped January 4, 2006.
Merchandise costing P200,000 was received on January 6, 2006, and the related
purchase invoice was recorded January 5. The invoice showed the shipment was
made on December 29,2005, FOB destination.
Merchandise costing P150,000 was sold on an installment basis on December 15.
The customer took possession of the goods on that date. The merchandise was
included in inventory because Abulug still holds legal title. Historical experience
suggests that full payment on installment sale is received approximately 99% of the
time.
Goods costing P500,000 were sold and delivered on December 20. The goods were
included in the inventory because the sale was accompanied by a purchase
agreement requiring Abulug to buy back the inventory in February 2006.
How much of these items should be included in the inventory balance at December
31, 2005?
a. P1,300,000
c. P1,650,000
b. P 800,000
d. P1,050,000
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6. Allapacan Company had the following consignment transactions during 2005:
Inventory shipped on consignment to Benguet Company, consignee
Freight paid by Allapacan
Inventory received on consignment from Ifugao, consignor
Freight paid by Ifugao
P600,000
50,000
800,000
50,000
No sales of consigned goods were made through December 31, 2005. In its December
31, 2005 balance sheet, Allapacan should include consigned inventory of
a. P600,000
c. P 650,000
b. P700,000
d. P1,500,000
7.
The following information is available for Kerr Company for 2004:
Freight-in
Purchase returns
Selling expenses
Ending inventory
P 60,000
150,000
300,000
520,000
The cost of goods sold is equal to 300% of selling expenses. What is the cost of
goods available for sale?
a. P900,000.
b. P1,480,000.
c. P1,330,000.
d. P1,420,000.
Use the following information for questions 8 and 9.
Queen Co. records purchases at net amounts. On May 5 Queen purchased merchandise on account,
P32,000, terms 2/10, n/30. Queen returned P2,000 of the May 5 purchase and received credit on
account. At May 31 the balance had not been paid.
8.
The amount to be recorded as a purchase return is
a. P1,800.
b. P2,040.
c. P2,000.
d. P1,960.
9.
By how much should the account payable be adjusted on May 31?
a. P0.
b. P680.
c. P640.
d. P600.
10. The Alcala Company counted its ending inventory on December 31. None of the
following items were included when the total amount of the company’s ending
inventory was computed:



P150,000 in goods located in Alcala’s warehouse that are on consignment from
another company.
P200,000 in goods that were sold by Alcala and shipped on December 30 and were
in transit on December 31; the goods were received by the customer on January 2.
Terms were FOB Destination.
P300,000 in goods were purchased by Alcala and shipped on December 30 and
were in transit on December 31; the goods were received by Alcala on January 2.
Terms were FOB shipping point.
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P400,000 in goods were sold by Alcala and shipped on December 30 and were in
transit on December 31; the goods were received by the customer on January 2. Terms
were FOB shipping point.
The company’s reported inventory (before any corrections) was P2,000,000. What is
the correct amount of the company’s inventory on December 31?
a. P2,550,000
c. P2,500,000
b. P1,950,000
d. P2,700,000
Use the following information for questions 11 and 12.
The following information was available from the inventory records of Moen Company for January:
Balance at January 1
Purchases:
January 6
January 26
Sales:
January 7
January 31
Balance at January 31
Units
3,000
Unit Cost
P9.77
Total Cost
P29,310
2,000
2,700
10.30
10.71
20,600
28,917
(2,500)
(3,200)
2,000
11.
Assuming that Moen does not maintain perpetual inventory records, what should be the
inventory at January 31, using the weighted-average inventory method, rounded to the
nearest peso?
a. P21,010.
b. P20,474.
c. P20,520.
d. P20,720.
12.
Assuming that Moen maintains perpetual inventory records, what should be the inventory at
January 31, using the moving-average inventory method, rounded to the nearest peso?
a. P21,010.
b. P20,474.
c. P20,520.
d. P20,720.
Use the following information for questions 13 and 14.
James Co. has the following data related to an item of inventory:
Inventory, March 1
200 units @ P4.20
Purchase, March 7
700 units @ P4.40
Purchase, March 16
140 units @ P4.50
Inventory, March 31
300 units
13.
The value assigned to ending inventory if James uses LIFO is
a. P1,334.
b. P1,280.
c. P1,260.
d. P1,350.
14.
The value assigned to cost of goods sold if James uses FIFO is
a. P1,334.
b. P1,280.
c. P3,270.
d. P3,216.
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15.
16.
GUTIERREZ/OCAMPO
9
Baker Company has been using the LIFO method of inventory valuation for 10 years, since it
began operations. Its 2004 ending inventory was P50,000, but it would have been P100,000
if FIFO had been used. Thus, if FIFO had been used, Baker's income before income taxes
would have been
a. P50,000 greater over the 10-year period.
b. P50,000 less over the 10-year period.
c. P50,000 greater in 2004.
d. P50,000 less in 2004.
Aparri Company included the following items in its inventory on December 31, 2005:
Merchandise out on consignment, at sales price,
including 25% markup on cost
Goods purchased in transit, FOB destination
Goods held on consignment by Aparri Company
P4,000,000
2,000,000
1,000,000
By what amount should the inventory at December 31, 2005 be reduced?
a. P3,800,000
c. P1,800,000
b. P2,000,000
d. P1,000,000
17.
Lynn Corporation has two products in its ending inventory, each accounted for at the lower
of cost or market. A profit margin of 30% on selling price is considered normal for each
product. Specific data with respect to each product follows:
Historical cost
Replacement cost
Estimated cost to dispose
Estimated selling price
Product #1
P15.00
18.00
5.00
35.00
Product #2
P 30.00
27.00
13.00
60.00
In pricing its ending inventory using the lower of cost or market, what unit values should
Lynn use for products #1 and #2, respectively?
a. P15.00 and P29.00.
b. P19.50 and P29.00.
c. P19.50 and P30.00.
d. P18.00 and P27.00.
18. At a lump-sum cost of P36,000, Sealy Company recently purchased the following
items for resale:
a.
b.
c.
d.
Item
No. of Items Purchased
Resale Price Per Unit
M
6,000
P2.50
N
3,000
8.00
O
9,000
4.00
The appropriate cost per unit of inventory is:
M
N
O
P2.50
P8.00
P4.00
P1.25
P4.00
P2.00
P1.20
P3.84
P1.92
P2.00
P2.00
P2.00
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19.
GUTIERREZ/OCAMPO
10
During 2004, Stone Co., a manufacturer of chocolate candies, contracted to purchase
200,000 pounds of cocoa beans at P3.00 per pound, delivery to be made in the spring of
2005. Because a record harvest is predicted for 2005, the price per pound for cocoa beans
had fallen to P2.30 by December 31, 2004.
Of the following journal entries, the one which would properly reflect in 2004 the
effect of the commitment of Stone Co. to purchase the 200,000 pounds of cocoa
is
a. Cocoa Inventory .............................................................. 600,000
Accounts Payable ................................................
600,000
b. Cocoa Inventory .............................................................. 460,000
Loss on Purchase Commitments ..................................... 140,000
Accounts Payable ................................................
600,000
c. Estimated Loss on Purchase Commitments .................... 140,000
Estimated Liability on Purchase Commitments ...
140,000
d. No entry would be necessary in 2004.
Use the following information for questions 20 and 21.
Sloan Company, a wholesaler, budgeted the following sales for the indicated months:
Sales on account
Cash sales
Total sales
June
P5,580,000
360,000
P5,940,000
July
P5,720,000
400,000
P6,120,000
August
P5,960,000
520,000
P6,480,000
All merchandise is marked up to sell at its invoice cost plus 20%. Merchandise inventories at the
beginning of each month are at 30% of that month's projected cost of goods sold.
20.
The cost of goods sold for the month of June is anticipated to be
a. P4,464,000.
b. P4,650,000.
c. P4,712,000.
d. P4,950,000.
21.
Merchandise purchases for July are anticipated to be
a. P4,896,000.
b. P6,228,000.
c. P5,110,000.
d. P5,190,000.
22.
Lopez Company had a gross profit of P720,000, total purchases of P840,000, and an ending
inventory of P480,000 in its first year of operations as a retailer. Lopez’s sales in its first year
must have been
a. P1,080,000.
b. P1,320,000.
c. P360,000.
d. P1,200,000.
23.
A markup of 30% on cost is equivalent to what markup on selling price?
a. 23%
b. 25%
c. 30%
d. 70%
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24. Miller, Inc. estimates the cost of its physical inventory at March 31 for use in an
interim financial statement. The rate of markup on cost is 25%. The following
account balances are available:
Inventory, March 1
Purchases
Purchase returns
Sales during March
P220,000
172,000
8,000
400,000
The estimate of the cost of inventory at March 31 would be
a. P16,000.
b. P64,000.
c. P84,000.
d. P72,000.
25.
On January 1, 2004, the merchandise inventory of Biggs, Inc. was P1,400,000. During 2004
Biggs purchased P2,800,000 of merchandise and recorded sales of P3,500,000. The gross
profit rate on these sales was 25%.
What is the merchandise inventory of Biggs at December 31, 2004?
a. P700,000.
b. P875,000.
c. P1,575,000.
d. P2,625,000.
26.
For 2004, cost of goods available for sale for Vale Corporation was P1,350,000. The gross
profit rate was 30%. Sales for the year were P1,200,000. What was the amount of the ending
inventory?
a. P0.
b. P510,000.
c. P405,000.
d. P360,000.
27.
On April 15 of the current year, a fire destroyed the entire uninsured inventory of a retail
store. The following data are available:
Sales, January 1 through April 15
Inventory, January 1
Purchases, January 1 through April 15
Markup on cost
P720,000
120,000
600,000
25%
The amount of the inventory loss is estimated to be
a. P144,000.
b. P72,000.
c. P180,000.
d. P120,000.
28.
The inventory account of Lance Company at December 31, 2004, included the following
items:
Inventory Amount
Merchandise out on consignment at sales price
(including markup of 40% on selling price)
P40,000
Goods purchased, in transit (shipped f.o.b. shipping point)
24,000
Goods held on consignment by Lance
20,000
Goods out on approval (sales price P15,200, cost P12,800)
15,200
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Based on the above information, the inventory account at December 31, 2004,
should be reduced by
a. P38,400.
b. P55,200.
c. P62,400.
d. P46,400.
29. Flynn Sales Company uses the retail inventory method to value its merchandise
inventory. The following information is available for the current year:
Beginning inventory
Purchases
Freight-in
Net markups
Net markdowns
Employee discounts
Sales
Cost
P 46,000
174,000
3,000
—
—
—
—
Retail
P 65,000
240,000
—
10,200
12,000
1,200
246,000
If the ending inventory is to be valued at the lower of cost or market, what is the cost to retail
ratio?
a. P223,000 ÷ P305,000
b. P223,000 ÷ P315,200
c. P220,000 ÷ P315,000
d. P223,000 ÷ P303,200
Use the following information for questions 30 through 31.
The following data concerning the retail inventory method are taken from the financial records of
Stone Company.
Beginning inventory
Purchases
Freight-in
Net markups
Net markdowns
Sales
Cost
P119,000
448,000
12,000
—
—
—
Retail
P170,000
640,000
—
40,000
28,000
672,000
30.
The ending inventory at retail should be
a. P178,000.
b. P150,000.
c. P138,000.
d. P105,000.
31.
If the ending inventory is to be valued at approximately the lower of cost or market, the
calculation of the cost to retail ratio should be based on goods available for sale at (1) cost
and (2) retail, respectively of
a. P579,000 and P850,000.
b. P579,000 and P822,000.
c. P579,000 and P810,000.
d. P567,000 and P810,000.
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32.
If the foregoing figures are verified and a count of the ending inventory reveals that
merchandise actually on hand amounts to P135,000 at retail, the business has
a. realized a windfall gain.
b. sustained a loss.
c. no gain or loss as there is close coincidence of the inventories.
d. none of these.
33.
The 2004 financial statements of Wert Company reported a beginning inventory of P80,000,
an ending inventory of P120,000, and cost of goods sold of P800,000 for the year. Wert’s
inventory turnover ratio for 2004 is
a. 10.0 times.
b. 8.0 times.
c. 6.7 times.
d. 5.7 times.
Use the following information for questions 34 through 36.
Trent Co. uses the retail inventory method. The following information is available for the current
year.
Cost
Retail
Beginning inventory
P234,000
P 366,000
Purchases
884,000
1,246,000
Freight-in
16,000
—
Employee discounts
—
6,000
Net markups
—
44,000
Net Markdowns
—
60,000
Sales
—
1,170,000
34.
If the ending inventory is to be valued at approximately lower of average cost or market, the
calculation of the cost ratio should be based on cost and retail of
a. P900,000 and P1,290,000.
b. P900,000 and P1,284,000.
c. P1,118,000 and P1,650,000.
d. P1,134,000 and P1,656,000.
35.
The ending inventory at retail should be
a. P480,000.
b. P450,000.
c. P432,000.
d. P420,000.
36.
The approximate cost of the ending inventory by the conventional retail method is
a. P287,700.
b. P284,760.
c. P294,000.
d. P307,440.
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PSBA CPA REVIEW SCHOOL
GUTIERREZ/OCAMPO
14
Colaw Company, which uses the retail FIFO method to determine inventory cost, has provided the
following information for 2004:
Cost
Retail
Inventory, 1/1/04
P 55,000
P 80,000
Net purchases
189,000
281,000
Net markups
34,000
Net markdowns
15,000
Net sales
254,000
37.
Assuming stable prices (no change in the price index during 2004), what is the cost of
Colaw's inventory at December 31, 2004?
a. P75,600.
b. P83,980.
c. P82,600.
d. P79,380.
38. Benguet Company’s accounting records indicated the following for 2005:
Inventory, January 1
Purchases
Sales
P6,000,000
20,000,000
30,000,000
A physical inventory taken on December 31, 2005 resulted in an ending inventory of
P4,500,000. The gross profit on sales remained constant at 30% in recent years.
Benguet suspects some inventory may have been taken by a new employee. At
December 31, 2005 what is the estimated cost of missing inventory?
a. P5,000,000
c. P500,000
b. P4,500,000
d. P
0
39. The Atok Corporation was organized on January 1, 2004. On December 31, 2005,
the corporation lost most of its inventory in a warehouse fire just before the year-end
count of inventory was to take place. Data from the records disclosed the following:
Beginning inventory, January 1
Purchases
Purchases returns and allowances
Sales
Sales returns and allowances
2004
P
0
4,300,000
230,600
3,940,000
80,000
2005
P1,020,000
3,460,000
323,000
4,180,000
100,000
On January 1, 2005, the Corporation’s pricing policy was changed so that the gross
profit rate would be three percentage points higher than the one earned in 2004.
Salvaged undamaged merchandise was marked to sell at P120,000 while damaged
merchandise was marked to sell at P80,000 had an estimated realizable value of
P18,000.
How much is the inventory loss due to fire?
a. P918,200
b. P947,000
c. P856,200
d. P824,600
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PSBA CPA REVIEW SCHOOL
GUTIERREZ/OCAMPO
15
40. The work-in-process inventory of Bakun Company were completely destroyed by fire
on June 1, 2005. You were able to establish physical inventory figures as follows:
Raw materials
Work-in-process
Finished goods
January 1, 2005
P 60,000
200,000
280,000
June 1, 2005
P120,000
240,000
Sales from January 1 to May 31, were P546,750. Purchases of raw materials were
P200,000 and freight on purchases, P30,000. Direct labor during the period was
P160,000. It was agreed with insurance adjusters than an average gross profit rate of
35% based on cost be used and that direct labor cost was 160% of factory overhead.
The work in process inventory destroyed as computed by the adjuster
a. P314,612
c. P185,000
b. P366,000
d. P265,000
41. Tublay uses the retail inventory method to approximate the lower of average cost or
market. The following information is available for the current year:
Beginning inventory
Purchases
Freight in
Purchase returns
Purchase allowances
Departmental transfer in
Net markups
Net markdowns
Sales
Sales discounts
Employee discounts
Cost
P 1,300,000
18,000,000
400,000
600,000
300,000
400,000
Retail
P 2,600,000
29,200,000
1,000,000
600,000
600,000
2,000,000
24,400,000
200,000
600,000
What should be reported as the estimated cost of inventory at the end of the current
year?
a. P3,120,000
c. P3,000,000
b. P3,200,000
d. P3,840,000
42. Trinidad Company uses the average cost retail method to estimate its inventory.
Data relating to the inventory at December 31, 2005 are:
Inventory, January 1
Purchases
Net markups
Net markdowns
Sales
Estimated normal shoplifting losses
Estimated normal shrinkage is 5% of sales
Cost
P 2,000,000
10,600,000
Retail
P3,000,000
14,000,000
1,600,000
600,000
12,000,000
400,000
Trinidad’s cost of goods sold for the year ended December 31, 2004 is
a. P9,100,000
c. P8,400,000
b. P8,680,000
d. P7,700,000
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PSBA CPA REVIEW SCHOOL
GUTIERREZ/OCAMPO
16
SOLUTIONS TO PROBLEM SOLVING
Solution PROBLEM 1
(a) 700 @ P30 =
300 @ P35 =
P21,000
10,500
P31,500
(b) 800 @ P35 =
200 @ P30 =
P28,000
6,000
P34,000
Solution PROBLEM 2
(a)
300 @ P2.50 =
840 @ P2.60 =
1,140
P 750
2,184
P2,934
(b)
300 @ P2.50 =
760 @ P2.60 =
1,060
P 750
1,976
P2,726
Solution PROBLEM 3
(a) Purchases ................................................................................................. 196,000
Accounts Payable ........................................................................
(To record the purchase at net amount:
.98 × P200,000 = P196,000.)
Accounts Payable .................................................................................... 156,800
Cash .............................................................................................
(To record payment within the discount period:
P200,000 – P40,000 = P160,000; .98 × P160,000 = P156,800.)
Accounts Payable ....................................................................................
Purchase Discounts Lost .........................................................................
Cash .............................................................................................
(To record the final payment.)
(b) (1) Net method:
Purchases:
Final inventory: 10% × P196,000 =
Cost of goods sold: 90% × P196,000 =
196,000
156,800
39,200
800
40,000
P196,000
19,600
P176,400
(The P800 discount lost is reported in the other expense section of the income statement.)
(2) Gross method:
Purchases:
Less purchase discounts:
.02 × P160,000 =
Goods available
Final inventory:
10% × P196,800 =
Cost of goods sold:
90% × P196,800 =
P200,000
3,200
196,800
19,680
P177,120
(Assuming that the P3,200 discount is
prorated between the cost of goods sold,
90%, and the final inventory, 10%.)
Purchases:
Less purchase discounts:
.02 × P160,000 =
OR Goods available
Final inventory:
10% × P200,000 =
Cost of goods sold:
P196,800 – P20,000 =
P200,000
3,200
196,800
20,000
P176,800
(Assuming that the P3,200 discount is used
to reduce cost of goods sold. Final inventory
is carried at the gross amount.)
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PSBA CPA REVIEW SCHOOL
GUTIERREZ/OCAMPO
17
Solution PROBLEM 4
1.
2.
3.
4.
NE
NE
U
U
NE
O
O
NE
O
O
NE
NE
NE
NE
U
U
O
NE
U
NE
Solution PROBLEM 5
Inventory per books
Add: Shipment received 12/30/05
TVs on hand
P30,500
P10,000
6,100
Deduct: TVs recorded twice
TVs shipped 12/28/05
Correct inventory 12/31/05
16,100
46,600
4,600
15,000
19,600
P27,000
Solution PROBLEM 6
(a) Loss Due to Market Decline of Inventory ..................................
Allowance to Reduce Inventory to Market .....................
(b)
Item
A
B
C
D
E
Original
Cost
Per Unit
P1.90
.90
1.45
1.60
1.80
P7.65
Replacement
Cost
P .90
.80
1.60
1.30
1.70
500
500
Net
Realizable
Value
P1.80
1.80
1.80
1.62
1.62
Appropriate
Inventory
Value
P1.80
.90
1.45
1.60
1.62
P7.37*
*P7.37 × 1,000 = P7,370
(c) Allowance to Reduce Inventory to Market .................................
Cost of Goods Sold .........................................................
500
Loss Due to Market Decline of Inventory ..................................
Allowance to Reduce Inventory to Market .....................
(Cost of inventory at 12/31/04 = P7,250)
280
500
280
OR
Record a recovery of P220.
(d) Inventory losses can be disclosed separately (below gross profit in operating expenses) or they
can be shown as part of cost of goods sold.
Solution PROBLEM 7
P1 05-37
PSBA CPA REVIEW SCHOOL
No. of
Grade
Lots
Highland
20
Midland
40
Lowland 100
160
Selling
Price
P100,000
P75,000
P50,000
Total
Revenue
P 2,000,000
3,000,000
5,000,000
P10,000,000
% of
Total Sales
20%
30%
50%
GUTIERREZ/OCAMPO
18
Apportioned Cost
Total
Per Lot
P 360,000
P18,000
540,000
P13,500
900,000
P9,000
P1,800,000
Solution PROBLEM 8
Beginning Inventory
Purchases
Goods Available
Goods Sold (P126,000 ÷ 150%)
Estimated Ending Inventory
Physical Inventory
Theft Loss
P 84,000
70,000
154,000
84,000
70,000
55,000
P 15,000
Solution PROBLEM 9
Collections of accounts
Add accounts receivable, May 31
Deduct accounts receivable, May 1
Sales during May
P 84,000
27,000
(20,000)
P 91,000
Inventory, May 1
Purchases during May
Goods available
Cost of sales (P91,000 ÷ 130%)
Estimated cost of inventory, May 31
P 45,000
65,000
110,000
(70,000)
P 40,000
Solution PROBLEM 10
At Cost
P 72,800
P219,500
4,300
215,200
P288,000
Beginning inventory, 2/1/03
Purchases
Less purchase returns
Totals
Add markups (net)
Totals
Deduct markdowns (net)
Sales price of goods available
Sales less sales returns
Ending inventory, 1/31/04 at retail
Ending inventory at cost: Ratio of cost to retail =
P288,000 ÷ P450,000 = 64%;
P120,000 × 64% = P76,800
At Retail
P 98,500
P294,000
5,500
288,500
387,000
63,000
450,000
15,000
435,000
315,000
P120,000
P 76,800
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