ACCOUNTING 102 INTERMEDIATE ACCOUNTING PART II

INVENTORIES
GROUP SEATWORK

I. THEORIES.

1. An entity shall include in its inventory all goods

a. Owned and possessed by the entity at the balance sheet date
b. Possessed but not owned by the entity at the balance sheet date
c. Owned but not possessed by the entity at the balance sheet date
d. Owned by the entity at the balance sheet date, regardless of location

2. Freight and other handling charges incurred in the transfer of goods from consignor to consignee
are
a. Inventoriable by the consignor
b. Inventoriable by the consignee
c. Expense on the part of the consignor
d. Expense on the part of the consignee

3. Which of the following is not considered as inventory under PAS 2?

a. Land and other property purchased and held for resale
b. Supplies and materials awaiting use in the production process
c. Abnormal amounts of wasted materials, labor and other production costs
d. Costs of service for which a service provider has not yet recognized the related revenue

4. Theoretically, cash discounts permitted on purchased raw materials should be

a. Added to other income, only if taken
b. Deducted from inventory, only if taken
c. Added to other income, whether taken or not
d. Deducted from inventory, whether taken or not

5. Which of the following pairs of inventory terms would NOT usually go together?
a. Perpetual inventory system <> Cost of Goods Sold account
b. Periodic inventory system <> Freight-in account
c. Gross method <> Purchase discount account
d. Net method <> Purchase discount account

6. Which costing method results in inventory being stated at the most recent acquisitions?
a. Specific identification
b. Weighted average
c. Last-In, First-Out (LIFO)
d. First-In, First-Out (FIFO)

7. 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. I, II and IV only
b. II, III and IV only

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 c. I, III and IV only
d. I and II only

8. 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. 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.
d. 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.

9. How should sales staff commission be dealt with when valuing inventories at LCNRV?
a. Ignored
b. Added to cost
c. Deducted from cost
d. Deducted in arriving at NRV

10. Which statement is incorrect regarding reversal of inventory writedown 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 write-down 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.

11. Which of the following is NOT a required note disclosure for inventories under PAS 2?
a. The amount of inventories carried at fair value less costs to sell
b. The carrying amount of inventories pledged as a security of liabilities
c. The circumstances or events that led to the writedown of inventories
d. The circumstances or events that led to reversal of a writedown of inventories

12. Under PAS 2, commodities of broker-traders are measured at

a. Cost
b. Net realizable value
c. Fair value
d. Fair value less costs to sell

13. Which of the following will NOT require inventory estimation?

a. Proof of reasonable accuracy of the physical inventory count
b. Preparation of external and internal interim financial statements
c. Inventory destroyed by major fire incident in the production facility
d. Year-end reporting for inventory shown on the face of the statement of financial position

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14. Under the gross profit method, if the gross profit rate is based on sales, the cost of sales is
computed as
a. Gross sales divided by sales ratio
b. Net sales divided by sales ratio
c. Gross sales times cost ratio
d. Net sales times cost ratio

15. Under the gross profit method, if the gross profit rate is based on cost, the cost of sales is computed
as
a. Net sales times cost ratio
b. Gross sales times cost ratio
c. Net sales divided by sales ratio
d. Gross sales divided by sales ratio

16. Under the retail inventory method, which of the following is included in the calculation of the goods
available for sale at both cost and retail?
a. Markups
b. Freight in
c. Markdowns
d. Purchase returns

II. PROBLEM-SOLVING. Please show solutions.

Problem 1

On January 2, 2018, Journal Company purchased goods from Times Company, a company in Singapore
for an invoice amount of S$100,000 if paid within the normal credit period of 10 days. However,
payment maybe deferred up to 3 months subject to a revised invoice in the amount of S$102,000. On
January 2, 2018, the exchange rate was P34.00 to S$1.00. Import duties and transport charges
amounted to P500,000 and P300,000 respectively. Journal Company paid the invoice amount on April 1,
2018.

1. On this date, the exchange rate was P35.00 to S$1.00. What amount should the goods initially be
recorded?
a. P3,400,000
b. P3,570,000
c. P4,200,000
d. P4,370,000

Problem 2

On December 20, 2018, Rolex Company purchase goods costing P100,000. The terms were FOB
destination. Some of the costs incurred in connection with the sale and delivery of the goods were as
follows: Packaging for shipment, P2,000; Shipping, P3,000 and special handling charges, P4,000. These
goods were received on December 31, 2018.

2. In the December 31, 2018 statement of financial position, what amount of these goods should be
included in inventory?
a. P100,000
b. P104,000
c. P107,000
d. P109,000

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Problem 3

Marker Company has the following information pertaining to its merchandise inventory as of December
31, 2018

Inventory on hand (including merchandise received on consignment of P20,000.) P200,000

Inventory purchased with a buyback agreement 100,000
Merchandise in transit, FOB, shipping point, excluding P5,000 freight cost 155,000
Merchandise in transit, Free Alongside, including delivery cost alongside the
Vessel of P6,000 but excluding the cost of shipment of P3,000 250,000
Merchandise in transit, CIF (excluding insurance costs and freight of P8,000) 175,000

3. What amount should Marker Company report as value of its inventory in its 2018 balance sheet
a. P749,000
b. P760,000
c. P770,000
d. P876,000

Problem 4

On October 1, 2018, Act Company consigned 50 freezers at a unit cost of P15,000 to King Company for
sale at P20,000 each and paid P20,000 in transportation cost. On December 31, 2018, King reported the
sale of the 25 freezers and returned 10 units. Cost paid by the consignee in the returned units was
P4,000. Amount due to consignor was remitted on the same date. Commission rate as agreed upon was
15%.

4. What amount of inventory on consignment and net income related to the sold units, respectively,
should Act report on December 31, 2018?
a. P225,000 and P36,000
b. P231,000 and P32,000
c. P235,000 and P40,000
d. P375,000 and P44,000

Problem 5

Ovation Company asks you to review the 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. The merchandise was shipped FOB 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, FOB 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 merchandise cost P73,500, and Oval received it
on January 3.
d. Included in inventory was merchandise received from Owl on December 31 with an invoice price
of P156,300. The merchandise was shipped FOB destination. The invoice, which has not yet
arrived, has not been recorded.
e. Not included in inventory is P85,400 of merchandise purchase 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.
f. Included in inventory was P104,380 of inventory held by Ovation on consignment from Ovoid
Industries.

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 g. Included in inventory is merchandise sold to Kemp FOB 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.
h. 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.

5. The adjusted inventory cost of Ovation Company at December 31 should be

a. P2,217,620
b. P2,396,320
c. P2,411,320
d. P2,373,920

Problem 6

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 Manila Company, sales price P36,400, shipping cost P2,000.

6. 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
b. P1,039,500
c. P1,055,700
d. P1,037,300

Problem 7

Fortune Company had 10,000 units of product A on hand at December 1, 2018, costing P40 each.
Purchases of product A during the month of January were as follows:

Units Unit Cost Cost

December 10 12,000 P42 P504,000
18 15,000 43 645,000
22 10,000 44 440,000
27 5,000 45 225,000
29 8,000 46 368,000

A physical count on December 31, 2018 shows 16,000 units of Product A on hand.

7. What is the cost of the inventory at December 31, 2018 under the FIFO?
a. P683,500
b. P698,000
c. P725,000

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 d. P736,000

Problem 8

During January 2018 Forlorn Company recorded the following information pertaining to its inventory:

Units Unit cost Total cost

January 1 balance 20,000 P10 P200,000
January 15 sales 15,000
January 18 purchase 20,000 11 220,000
January 20 purchase 15,000 12 180,000
January 25 sales 24,000
January 30 purchases 14,000 15 210,000
January 31 sales 10,000

8. Using the First In First Out method, what amount of inventory should Forlorn Company report in its
January 31, 2018 statement of financial position?
a. P240,000
b. P260,000
c. P280,000
d. P282,000

9. Using the moving average method, what amount of inventory should Forlorn Company report in its
January 31, 2018 statement of financial position?
a. P240,000
b. P260,000
c. P280,000
d. P300,000

Problem 9

On September 30, 2018, a fire at Mill Company’s only warehouse caused severe damage to its entire
inventory. Based on recent history, Mill has a gross profit 30% of net sales. The following information is
available from Mill’s records for the nine months ended September 30, 2018:

Inventory at 01/01/18 P 550,000

Total purchases received and recorded from January to date of fire 3,000,000
Total freight cost of goods purchased and received 60,000
Total credit memo received on goods purchased and received 200,000
Total discounts taken on purchases 80,000
Invoice received for good purchased but still in transit shipped
On September 30, 2018, FOB shipping point 120,000
Total sales delivered and recorded from January to date of fire 3,600,000
Unrecorded sales invoice for goods delivered 300,000
Total sales returns accounted and recorded to date of fire 160,000
Total sales discounts taken by customers on recorded sales 40,000

A physical inventory disclosed usable damaged goods which Mill estimated can be sold to a jobber for
P50,000. On December 31, 2018, Mill Company received P5,000,000 from the insurance company as
compensation for the damaged warehouse and P550,000 for the damaged value of merchandise
inventory.

10. What amount of loss should the company recognize with regards to the merchandise inventory?
a. P112,000
b. P662,000

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 c. P782,000
d. P832,000

Problem 10

Orang Dampuan Co. wholesales bicycles. It uses the perpetual inventory system. The company’s
reporting date is 31 December. At 1 December 2018, inventory on hand consisted of 350 bicycles at
P820 each and 43 bicycles at P850 each. During the month ended 31 December 2018, the following
inventory transactions took place (all purchase and sales transactions are on credit):

Dec. 02 Sold 300 bicycles for P1,200 each.

03 Five bicycles were returned by a customer. They had originally cost P820 each and
were sold for P1,200 each.
09 Purchased 55 bicycles at P910 each.
13 Purchased 76 bicycles at P960 each.
15 Sold 86 bicycles for P1,350 each.
16 Returned one damaged bicycle to the supplier. This bicycle had been purchased on 9
December.
22 Sold 60 bicycles for P1,250 each.
26 Purchased 72 bicycles at P980 each.
29 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.

11. 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
b. P365,410
c. P366,320
d. P372,725

Problem 11

An entity has partially completed inventory located in its factory, to which the following estimates
relate:

Production costs incurred to date P268,000

Production costs to complete 20,000
Transport costs to customer 5,000
Future selling costs 10,000
Selling price 300,000

12. At what amount should the entity report the inventory on its statement of financial positions?
a. P280,000
b. P270,000
c. P268,000
d. P265,000

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Problem 12

The opening inventory of Chronic Company on January 1, 2018 was P5,000,000. This amount included
inventory A items which were carried at their net realizable value of P500,000, the original cost of these
items was P800,000. During the current year purchases totaled P20,000,000, transportation and other
directly attributable costs incurred in brining the inventories to warehouse totaled P500,000. At year
ended December 31, 2018, a physical inventory count was conducted and it revealed a book amount of
P7,000,000. Included in the closing inventory was P2,000,000 but the estimated realizable value was
P1,200,000. Also, inventory A items brought forward from prior year remained unsold at year end. There
was an increase in the demand for these items and it was estimated that they could be sold for
P1,000,000. It it’s the company’s policy to include declines and reversals in the cost of sales.

13. What is the amount of cost of sales during 2018?

a. P18,200,000
b. P18,500,000
c. P19,000,000
d. P19,600,000

Problem 13

Rios, Inc. uses International Financial Reporting Standards 9IFRS). In 2017, Rios, Inc. experienced a
decline in the value of its inventory resulting in a write-down of its inventory from P240,000 to
P200,000. The company used the loss method in 2017 to record the necessary adjustment and uses an
allowance account to reduce inventory to NRV. In 2018, market conditions have improved drastically
and Rios, Inc.’s inventory increases to an NRV of P216,000.

14. Which of the following will Rios, Inc. record in 2018?

a. A debit to Recovery of Inventory Loss for P16,000.
b. A credit to Recovery of Inventory Loss for P24,000.
c. A debit to Allowance to Reduce Inventory to NRV of P16,000.
d. A credit to Allowance to Reduce Inventory to NRV of P24,000.

Problem 14

Caravana Development Corporation bought a 10-hectare 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 Number Selling price Total

class of lots per lot clearing costs
A 10 P1,000,000 None
B 20 800,000 P1,000,000
C 40 700,000 3,000,000
D 50 600,000 8,000,000

15. Purchase and improvement costs allocated for class B lots under the relative sales value method of
inventory valuation are
a. P13,485,700
b. P10,800,000
c. P12,200,000
d. P12,047,600

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Problem 15

Alcala Company installs replacement siding, windows, and louvered glass doors for family homes. At
December 31, 2018, the balance of inventory account was P502,000, and the allowance for inventory
write-down was P33,000. The inventory cost and other data at December 31, 2018, are as follows:
(amounts in thousands)

Item Replacement Sales Normal

Cost Cost Price NRV Profit
A P89 P86 P91 P87 P5
B 94 92 93 85 7
C 125 135 129 111 10
D 194 114 205 197 20
Total P502 P427 P518 P480 P32

16. The gain on reversal of inventory write down is

a. P33,000
b. P11,000
c. P8,000
d. P0

Problem 16

On November 15, 2017, Socrates entered into a commitment to purchase 200,000 units of raw material
X for P8,000,000 on March 15, 2018. Socrates entered into this purchase commitment to protect itself
against the volatility in the price of raw material X. By December 31, 2017, the purchase price of
material X had fallen to P35 per unit.

17. How much will be recognized as loss on purchase commitment on March 15, 2018 if the price of the
material had fallen further to P32 per unit?
a. P1,200,000
b. P1,000,000
c. P600,000
d. P0

18. How much will be recognized as gain on purchase commitment on March 15, 2018 if the price of the
material had risen to P42 per unit?
a. P1,400,000
b. P1,000,000
c. P400,000
d. P0

Problem 17

On January 1, 2018, 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 2018, the part unexpectedly
became obsolete. Pastille had 250,000 units of this inventory at December 31, 2018 and believes these
parts can be sold as scrap for P2 per unit.

19. What amount of probable loss from the purchase commitment should Pastille report in its 2018
profit or loss?
a. P2,400,000
b. P2,000,000
c. P1,600,000

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 d. P800,000

Problem 18

Gorgeous Co.’s pricing structure had been established to yield a gross margin of 30%. The following data
pertain to the year ended December 31, 2018: Sales, P2,200,000; Inventory, January 1, 2018,
P1,000,000; Purchases, P800,000; Freight cost on purchases, P20,000; Freight cost on merchandise sold,
P30,000; Inventory inside the company’s warehouse, per actual count on 12/31/2018, P160,000; Credit
memo issued to customers for goods returned and received, P50,000; Credit memo issued to customers
for merchandise to be returned, 01/02/19, P40,000; Sales discount, P100,000. Gorgeous is satisfied that
all sales and purchases have been fully and properly recorded.

20. How much would Gorgeous reasonably estimate as shortage in inventory at December 31, 2018?
a. P343,000
b. P183,000
c. P155,000
d. P143,000

Problem 19

The records of Morning Company show the following for the current year:

Cost Retail
Beginning inventory 340,000 640,000
Purchases 4,500,000 7,300,000
Freight in 100,000
Purchase returns 150,000 250,000
Purchase allowance 90,000
Departmental transfer in – debit 100,000 160,000
Net markup 150,000
Net markdown 500,000
Sales 6,600,000
Sales allowance 50,000
Sales returns 150,000
Employee discount 100,000
Spoilage and breakage 200,000

21. What is the amount of estimated cost of ending inventory under the conventional retail and average
cost retail, respectively?
a. P480,000; P512,000
b. P480,000; P450,000
c. P450,000; P480,000
d. P512,000; P480,000

Problem 20

Evening Company uses the first-in, first-out retail inventory method of determining the value of their
inventory. The following information is made available:

Cost Market
Inventory beginning 600,000 1,500,000
Purchases 3,048,400 5,500,000
Freight in 80,000
Purchase returns 140,000 180,000
Mark-ups 600,000
Mark-up cancellation 100,000

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 Mark-downs 1,300,000
Mark-down cancellation 300,000
Sales 4,470,000
Sales returns 150,000
Sales discounts 200,000
Employee discounts 400,000

22. What would be the estimated cost of the ending inventory?

a. P662,000
b. P774,000
c. P896,000
d. P992,000

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