ACC214A

Intermediate Accounting 1

GROUP WORK – INVENTORY COST FLOW AND LCNRV

1. Shaw Company uses the periodic inventory system.

The following information has been extracted from the records about one product:

Units Unit Cost Total Cost

Jan 1 Beginning balance 8,000 70.00 560,000
6 Purchase 3,000 70.50 211,500
Feb 5 Sale 10,000
Mar 5 Purchase 11,000 73.50 808,500
Mar 8 Purchase return 800 73.50 58,800
Apr 10 Sale 7,000
Apr 30 Sale return 300

What are the amounts for (A) Cost of Goods Sold and (B) Ending Inventory under the following
methods:
1.1 FIFO – periodic
1.2 Weighted average - periodic
1.3 Moving average
Answer:

1.1 FIFO - periodic

In Units Total Cost

Beginning Inventory 8,000 Beginning Inventory 560,000
Net purchases Add: Net purchases
(3,000 + 11,000 – 800) 13,200 (211,500 + 808,500 – 58,800) 961,200
Total Goods Available for Sale(units) 21,200 Total Goods Available for Sale 1,521,200
Good sold Less: Ending Inventory at cost (347,850)
(10,000 + 7,000 – 300) (16,700) Cost of Goods Sold 1,173,350
Ending Inventory 4,500 units

Units Unit Cost Total Cost

Ending Inventory allocated
as follows:
From Mar 5 net 10,200 73.50 749,700
purchases
(11,000 – 800)
From Jan 6 purchases (5,700) 70.50 (401,850)
(4,500 – 10,200)
Ending Inventory 4,500 347,850

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Intermediate Accounting 1

1.2 Weighted average – periodic

In Units In Pesos
Beginning Inventory 8,000 560,000 1,521,200
Weighted average cost =
21,200 𝑢𝑛𝑖𝑡𝑠
Purchases Jan 6 3,000 211,500
Weighted average cost = 71.75 / unit
Mar 5 11,000 808,500
Mar 8 (800) (58,800)
Total Goods Available for Sale 21,200 1,521,200

Total Goods Available for Sale 21,200

Less: Sold units’ net of returns
(10,000 + 7,000 – 300) (16,700)
Ending Inventory in units 4,500
Multiplied by average unit cost 71.75
Ending Inventory in pesos 322,875

Total Goods Available for Sale 1,521,200

Less: Ending Inventory (322,875)
Cost of Goods Sold 1,198,325

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1.3 Moving average

Date Transaction Units Unit Cost Total Cost

Jan 1 Beginning Inventory 8,000 70.00 560,000
Jan 6 Purchases 3,000 70.50 211,500
Jan 6 Inventory Balance 11,000 771,500
Moving average unit cost = 771,500 / 11,000
Moving average unit cost = 70.14
Feb 5 Sales (10,000) 70.14 (701,400)
Feb 5 Inventory Balance 1,000 70,100
Mar 5 Purchases 11,000 73.50 808,500
Mar 8 Purchase returns (800) 73.50 (58,800)
Mar 8 Inventory Balance 11,200 819,800
Moving average unit cost = 819,800 / 11,200
Moving average unit cost = 73.2
Apr 10 Sales (7,000) 73.2 (512,400)
Apr 30 Sales Return 300 73.2 21,960
Apr 30 Inventory Balance 4,500 329,360
Ending Inventory 4,500 329,360
Moving average unit cost = 329,360 / 4,500
Moving average unit cost = 73.19

Feb 5 Sales 701,400 Total Goods Available for Sale 1,521,200

Apr 10 Sales 512,400 Less: Ending Inventory (329,360)
Apr 30 Sales return (21,960) Total cost of Goods Sold 1,191,840
Total cost of Goods Sold 1,191,840

2. West Company had 150,000 units of product Z on hand at September 1, costing P 21 each.
Purchases of product Z during the month of September were:

Units Unit cost

September 10 200,000 22
18 250,000 23
28 100,000 24

A physical count on September 30 shows 250,000 units of product Z on hand

What is the total cost of goods sold for the period under the FIFO-perpetual method?
What is the cost of the inventory on September 30 under the FIFO-perpetual method?

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Answer:
What is the total cost of goods sold for the period under the FIFO-perpetual method?

Total Cost
Beginning Inventory 3,150,000
Add: Net purchases
(4,400,000 + 5,750,000 + 2,400,000) 12,550,000
Total Goods Available for Sale 15,700,000
Less: Ending Inventory at cost (9,850,000)
Cost of Goods Sold 5,850,000

What is the cost of the inventory on September 30 under the FIFO-perpetual method?

Date Transaction Unit Unit Cost Total Cost

Sept. 1 Beginning Inventory 150,000 21 3,150,000
Sept. 10 Purchases 200,000 22 4,400,000
Sept. 10 Inventory Balance 350,000 7,550,000
Sept. 18 Purchases 250,000 23 5,750,000
Sept. 18 Inventory Balance 600,000 13,300,000
Sept. 28 Purchases 100,000 24 2,400,000
Sept. 28 Inventory Balance 700,000 15,700,000
Sale 450,000
Sept. 30 Physical count 250,000
Allocation:
From Sept. 18 (150,000) 23 (3,450,000)
From Sept. 28 (100,000) 24 (2,400,000)
9,850,000

3. Pearl Company purchased a tract of land for P 12,000,000. The entity incurred additional cost of
P 3,000,000 during the remainder of the year in preparing the land for sale.
The tract of land was subdivided into residential lots.
Lot Class Number of lots Sales price per lot
A 100 240,000
B 100 160,000
C 200 100,000

Using the relative sales price method, what amount of cost should be allocated to each lot class?

Answer:
Product Relative sales Price Allocation Allocated cost
A 24,000,000 24M/60M x 15,000,000 6,000,000
B 16,000,000 16M/60M x 15,000,000 4,000,000
C 20,000,000 20M/60M x 15,000,000 5,000,000
60,000,000 15,000,000

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4. Winter Company provided the following inventory data at year-end:

Cost NRV
Skis 2,200,000 2,500,000
Boots 1,700,000 1,500,000
Ski equipment 700,000 800,000
Ski apparel 400,000 500,000

Answer:
What amount should be reported as inventory at year end?
LCNRV
Skis 2 200 000
Boots 1 500 000
Ski Equipment 700 000
Ski Apparel 500 000
Inventory 4 800 000

What is the amount of inventory write-down? 200,000

5. On November 15, 2019, Diamond Company entered into a commitment to purchase 10,000 ounces
of gold on February 15, 2020 at a price of P 310 per ounce.

On December 31, 2019, the market price of gold is P 270 per ounce. On February 15, 2020, the
price of gold is P 300 per ounce.

Prepare the necessary journal entries for the following dates:

December 31, 2019
February 15, 2020 (actual date of purchase)
Answer:
Nov 15, 2019 (10,000 ounces) 310/ per ounce = 3,100,000
Dec 31, 2019 270/ per ounce = 2 700 000
Feb 15, 2020 300/ per ounce = 3 000 000

Dec 31, 2019

Loss on purchase commitment 400,000
(3 100 000 – 2 700 000)
Estimated liability for purchase commitment 400,000

Feb 15, 2020

Purchases 3,000,000
Estimated Liability for purchase commitment 400,000
Accounts Payable 3,100,000
Gain on purchase commitment 300,000

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